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Part D : company law
Changes relating to Company Law for the period November 15,
2010 to December 15, 2010.
38. Suggestions on issues related to Convergence of Indian
Accounting Standards with IFRS.
The Ministry of Corporate Affairs has invited suggestions on
issues related to Convergence of Indian Accounting Standards with IFRS to be
submitted by 20th December 2010.
Part D : company law
Changes relating to Company Law for the period November 15,
2010 to December 15, 2010.
36. Reopening/revision of annual accounts after their
adoption in the annual general meeting — General Circular No. 5/2010, dated
2-11-2010.
The Ministry, vide General Circular Number 1/2003 (F.No.
17/75/2002), dated 13-1-2003 had directed the grounds and manner in which
accounts can be re-opened/revised by companies and thereafter adopted by
shareholders.
It has now come to the notice of the Ministry that few
companies have been filing their annual accounts u/s.220 more than once
resulting into filing/availability of more than one such accounts in the
Registry for a particular financial year.
The matter has been examined in the Ministry in detail and it
has been concluded that keeping in view the provisions of S. 220 of the Act read
with the Ministry’s General Circular 1/2003, a Company cannot lay more than one
set of annual accounts for a particular financial year, unless it has
reopened/revised such annual accounts after their adoption in the Annual General
Meeting on the grounds specified in Ministry’s Circular No. 1/2003.
Accordingly, it is hereby directed that ROCs should keep a
watch on such kinds of repeat filings of annual accounts and such accounts
should not be accepted except in accordance with provisions of S. 220 read with
Ministry’s General Circular 1/2003.
Part D : company law
Changes relating to Company Law for the period November 15,
2010 to December 15, 2010.
35. The MCA has revised Form DIN1 and Form DIN3 vide
Notification GSR 849(E) dated 15-10-2010.
Part D : company law
Changes relating to Company Law for the period November 15,
2010 to December 15, 2010.
34. The MCA has revised Form 1 and Form 32 vide Notification
GSR 848(E) dated 15-10-2010.
46 (2011) TIOL 113 ITAT-Mum.
Mphasis Software & Services (India) Pvt. Ltd. v. ACIT
ITA Nos. 704 & 705/Bang./2010
A.Ys. : 2003-2004 & 2004-2005. Dated : 31-1-2011
Income-tax Act, 1961 — Section 10A, section 155(11A)
— Once the assessee has complied with all formalities and the request of the
assessee for extension of time is not rejected, it could be presumed that after
reasonable time, the extension of time has been granted in respect of the amount
realised and brought into India in convertible foreign exchange. Assessee is
entitled to deduction u/s.10A on the amount which was not realised within the
due date of filing of income-tax return but for which an application was made to
the prescribed authorities and the amount was realised before the assessment was
made. Powers conferred upon an AO by section 155(11A) w.e.f. 13-7-2006 do not
refer to any particular assessment year and the AO can w.e.f. this date amend
the assessment for any assessment year, provided the assessee applies within a
period of four years from the end of the previous year in which the export
proceeds are received in India.
Facts:
For A.Y. 2003-2004 (for A.Y. 2004-05 facts were identical and
hence not given here). The assessee-company, engaged in the business of
providing software development and call-centre services, had set up units at
Mumbai and Pune which were registered as Software Technology Park (STP units).
In respect of these units, the assessee was eligible for exemption u/s.10A. For
A.Y. 2003-04, the assessee filed return of income on 25-11-2003 declaring a
total income of Rs.3,89,69,030 after claiming relief u/s.10A amounting to
Rs.8,46,49,114. While computing the claim u/s.10A the assessee had considered
unrealised export revenue of Rs.14,44,50,338 as part of export turnover. Out of
Rs total unrealised export proceeds of Rs.14,44,50,338 an amount of
Rs.6,72,97,027 was realised subsequent to 30th September, 2003 till the
completion of the assessment. The balance unrealised export proceeds of
Rs.7,71,53,311 were not considered by the AO as part of export turnover while
calculating deduction u/s.10A on the ground that the assessee had not been able
to furnish the approval of the competent authority granting extension of time.
Aggrieved the assessee preferred an appeal to the CIT(A) and
contended that in view of the ratio of the Mumbai Bench of the ITAT in the case
of Morgan Stanley Advantage Services (P) Ltd. v. ITO, 30 SOT 1, approval
for extension shall be deemed to have been granted if communication
accepting/rejecting the application was not received after a reasonable time and
in view of the provisions of section 155(11A), the order passed by AO needs to
be rectified by considering the export proceeds realised by the assessee as
export turnover. The CIT(A) did not adjudicate upon the first contention and
rejected the second contention on the ground that the assessment years under
consideration are for a period prior to insertion of section 155(11A).
Aggrieved the assessee preferred an appeal to the Tribunal.
Held:
The Tribunal noted that the assessee complied with all the
formalities and had applied for extension to competent authority vide letters
dated 2-9-2003 and 5-11-2003. It held that once the assessee has complied with
all formalities and the request of the assessee for extension of time is not
rejected, it could be presumed that after reasonable time, the extension of time
has been granted in respect of the amount realised and brought into India in
convertible foreign exchange. It observed that section 155(11A) was introduced
to enable rectification of assessments. It held that section 15(11A) is a
provision which permits amendment of assessments already completed due to
subsequent developments taking place and power was given to the AO to carry out
such amendments w.e.f. 13-7-2006. The Tribunal held that in the view nature of
things, this date (13-7-2006) cannot refer to any particular assessment year and
the power having been conferred upon the AO from this date, the assessment for
any assessment year can be amended provided the assessee applies within a period
of four years from the end of the previous year in which the export proceeds are
received in India. The Tribunal noted the findings of the Bangalore Bench of the
ITAT in the case of Nous Info-systems (P) Ltd. v. ACIT, (2009 TIOL 14
ITAT-Bang.).
The Tribunal remitted the matter back to the AO to determine
the amount realised in convertible foreign exchange and to grant the benefit of
deduction in respect of the sum so realised and recomputed the deduction u/s.10A
of the Act.
45 (2011) TIOL 91 ITAT-Mum.
Multiscreen Media Pvt. Ltd. v. ACIT
ITA No. 6602/Mum./2008
A.Y. : 1999-2000. Dated : 19-11-2010
Income-tax Act, 1961 — Section 244A — Assessee is entitled to
interest on delayed payment of interest. Whenever there is a delay in granting
refund to the assessee, the Department has to pay compensation by way of
interest for the delay in payment of amount lawfully due to the assessee, which
are withheld wrongly and contrary to law.
Facts:
The Tribunal vide its order dated 4-3-2004 decided the appeal
filed by the assessee and granted certain reliefs to the assessee. The AO on
23-4-2004 passed an order giving effect to the order of the ITAT and determined
the amount of refund due to the assessee at Rs.3,26,48,225 (this included
interest of Rs.18,22,490). A part of the refund due to the assessee was adjusted
against the demand for A.Y. 2001-02 in July 2004 and the balance amount of
Rs.1,34,70,662 was paid to the assessee in August 2004. The assessee vide letter
dated 21-9-2004 moved an application u/s.154 of the Act on the ground that
computation of interest u/s.244A was erroneous and there was a short grant of
interest to the extent of approx Rs.42 lakh. On 26-9-2006, the AO passed an order u/s.154 and determined the balance refund due
to the assessee at Rs.42,15,279 and a further sum of Rs.13,16,576 was determined
as due to the assessee on account of MAT credit brought forward from A.Y.
1998-1999. Of the total amount of Rs.55,31,855 due to the assessee Rs.1,77,531
was adjusted against demand for A.Y. 2001-02 and balance Rs.53,54,324 was
adjusted on 4-12-2006 against demand for A.Y. 2003-04.
The assessee vide letter dated 9-11-2006 requested the AO to
rectify the mistake of short grant of interest on refund and for grant of
further interest on delayed payment of interest of Rs.42,15,279 for the period
from September 2004 to December 2006. The AO vide letter dated 3-1-2007 rejected
the contention of the assessee on the ground that there is no provision in the
Act for granting interest on delayed payment of interest.
Aggrieved the assessee preferred an appeal to the CIT(A) who
held that Sandvik Asia is a case where there was an inordinate delay and the SC
had taken serious exceptions to such delay. The case of Sandvik Asia was an
exceptional case and the ratio of the said decision would apply to such
exceptional cases. He was of the opinion that the case of the assessee did not
fall in the category of the Sandvik Asia case. He dismissed the appeal filed by
the assessee.
Aggrieved the assessee preferred an appeal to the Tribunal.
Held:
The Tribunal noted the ratio of the decision of the Apex
Court in the case of Sandvik Asia (280 ITR 643) (SC) and did not find any merit
in the observations of the CIT(A) that the case of Sandvik Asia is an
exceptional case and the said decision would apply only to such exceptional
cases. It held that whenever there is a delay in granting refund to the
assessee, the Department has to pay compensation by way of interest for the
delay in payment of amount lawfully due to the assessee, which is withheld
wrongly and contrary to law. The Tribunal held that the assessee is entitled to
interest u/s.244A on delayed refund of Rs.42,15,279 for the period from
September 2004 to December 2006. It directed the AO to pay interest u/s.244A to
the assessee as per law.
The appeal filed by the assessee on this ground was allowed.
44 (2011) TIOL 87 ITAT-Mum.
S. Ganesh v. ACIT
ITA No. 527/Mum./2010
A.Y. : 2006-2007. Dated : 8-12-2010
Income-tax Act, 1961 — In the absence of any contrary
material brought by the Revenue Authorities that the assessee has received
professional fees more than what has been declared by him, no addition should
have been made by the AO on account of non-furnishing of partywise details of
professional fees received during the year and non-reconciliation of
professional fees received with AIR information.
Addition on account of unexplained investment cannot be made
in the hands of the assessee, on the basis of AIR information, when the assessee
was only the second owner of the units of mutual funds and the identity of the
first owner was established and they are assessed to income-tax.
Facts:
The Assessing Officer asked the assessee to furnish partywise
details of professional fees received during the year and also to reconcile the
professional fees received by him with AIR information. The assessee in his
reply stated that all professional fees are received by way of cheques and all
such cheques received are deposited in one bank account only; professional
receipts disclosed by the assessee are more than the receipts shown in AIR
information and accordingly, there is no discrepancy. He also expressed his
inability to furnish partywise details of professional fees received during the
year under consideration. The AO added a sum of Rs.47,37,000 to the total income
of the assessee. This sum represented 40 items of receipts which, in the opinion
of the AO, were not disclosed by the assessee.
Aggrieved the assessee preferred an appeal to the CIT(A) who
sustained the addition of Rs.47,37,000 made by the AO on account of
non-reconciliation of professional fees with AIR information. He decided this
ground against the assessee.
Aggrieved the assessee preferred an appeal to the Tribunal.
Held:
The Tribunal noted that the submissions of the assessee were
not controverted by the AO and that the professional income declared by the
assessee far exceeded the professional fees as per AIR information. The Tribunal
held that in the absence of any contrary material brought by the Revenue
Authorities that the assessee has received amount more than the professional
fees than what has been declared by him, no addition should have been made. It
observed that there may be so many reasons such as low deduction of tax,
non-deduction of tax, deduction on account of reimbursement of expenses, etc.,
for which the figure of AIR may not tally with the income declared by the
assessee on account of professional fees from various clients. It also noted
that the categorical statement of the assessee viz. that it was not practically
possible to give detailed party-wise break-up of fees received was accepted in
the past in scrutiny assessment and no addition made. It deleted the addition
made by the AO and sustained by the CIT(A).
The appeal filed by the assessee on this ground was allowed.
Facts II:
The AO asked the assessee to reconcile the source of
investments in mutual funds and reconcile the same with AIR information as well
as co-relate the payments with the assessee’s bank account. The AO held that the
assessee failed to explain the source of investment in units of mutual funds
totalling Rs.4.75 crores. He added this amount to the total income of the
assessee as unexplained investment.
Aggrieved the assessee filed an appeal to the CIT(A) where he
filed additional evidence in the form of further statements got by him from
mutual funds. The AO in the remand report accepted Rs.4 crores as explained and
submitted that the two amounts aggregating to Rs.75 lakh remained unexplained.
The CIT(A) reduced the addition of unexplained investment from Rs.4.75 crores to
Rs.75 lakh.
Aggrieved the assessee preferred an appeal to the Tribunal.
Held II:
In respect of the two amounts of Rs.50 lakh and Rs.25 lakh
regarded as unexplained investment of the assessee, the Tribunal noted that the
investment of Rs.50 lakh was in the name of the father of the assessee as the
first holder and assessee was the second holder. Similarly the investment of
Rs.25 lakh was in the name of the mother of the assessee as the first holder and
the assessee was the second holder. The Tribunal also noted that both these
persons were assessed to tax and the AO had written to the AO having
jurisdiction over these persons to take necessary action at their end. The
Tribunal was of the view that since the identity of these persons is established
and they are assessed to income-tax, therefore, addition, if any, could have
been made in their hands only on account of unexplained investment and not in
the hands of the assessee. The Tribunal set aside the order of the CIT(A) on
this ground and directed the AO to delete the addition of Rs.75 lakh.
The appeal filed by the assessee on this ground was allowed.
43 (2011) TIOL 38 ITAT-Mum.
Chang Hing Tannery v. DCIT
ITA No. 1921/Kol./2009
A.Y. : 2006-07. Dated : 16-12-2010
Income-tax Act, 1961 — Section 40(a)(ia), section 194C — The
provisions of section 194C are not applicable to a case where the transporters
are hired by the vendors of the goods, who directly made supplies to the factory
of the assessee and charged the amount of transportation separately in their
bill to the assessee.
Facts:
The assessee purchased raw material consisting of hide and
chemicals with the understanding that goods will be delivered at the factory of
the assessee by the supplier. Freight charges were to be paid by the assessee in
some cases against bill raised by the supplier of goods along with the value of
goods and in some cases separately on production of bills by the transporters.
There was no agreement between the assessee and the transporters as the
transporters were arranged by the suppliers themselves. The Assessing Officer
(AO) disallowed, u/s.40(a)(ia), a sum of Rs.23,70,881 out of freight charges on
the ground that the assessee failed to deduct TDS u/s.194C.
Aggrieved the assessee preferred an appeal to the CIT(A) who
dismissed the appeal filed by the assessee.
Aggrieved the assessee preferred an appeal to the Tribunal.
Held:
The Tribunal found that the submissions of the assessee viz.
that the goods were supplied by the suppliers at the factory of the assessee was
not disputed by the Revenue. The Tribunal held that there could not have been
any agreement either written or oral between the assessee and the transporters
as transporters were arranged by the suppliers themselves to bring the goods at
destination. The Revenue did not bring anything on record to suggest the
contrary. Since there was no contract between the assessee and the transporters,
provisions of section 194C of the Act were held to be not applicable and
consequently the assessee was held to be not liable to deduct tax on such
payments u/s.194C. The addition made by the AO and sustained by the CIT(A) was
deleted.
The appeal filed by the assessee was allowed.
42 (2010) 127 ITD 164 (Delhi)
O. P. Jindal Global University v. CIT, Rohtak
Dated : 28-5-2010
Section 2(31) read with section 12AA :
1. University established and adopted by Assembly of State
and with the character of a body corporate as per the relevant Act, will fall
within the definition of person in
section 2(31)(vii).2. University charging high fees from the students and not
meant for the benefit of people at large, however satisfying the conditions of
section 2(15) of imparting education i.e., systematic instruction, schooling
or training given to the youth to prepare them for works of life is eligible
for registration as a charitable institution u/s.12AA.
Facts:
The assessee was a university incorporated under the Haryana
Universities Act, 2006. As per the relevant Section of the Haryana Universities
Act, the assessee shall be a body corporate and shall have perpetual succession
and common seal. It shall have the power to sue and to be sued in its name.
However, it is not registered u/s.25 of the Companies Act and also not
registered under the Cooperative Societies Act. The assessee had applied for
registration u/s.12AA of the Act as a charitable institution.
The Ld. D.R. argued that, based on the facts, the university
was not a separate entity and was just an activity carried on by the sponsoring
body and therefore would not constitute a person u/s.2(31)(vii).
Held:
It was held by the Tribunal that the university established
and adopted by Assembly of State and with the character of a body corporate as
per the relevant Act, though not registered u/s.25 of the Companies Act or
though not registered under the Co-operative Societies Act, will fall within the
definition of person in section 2(31)(vii) i.e., an artificial juridical person.
Facts:
The next question after being satisfied that the
assessee-university is person u/s.2(31)(vii) is whether it qualifies for
registration as a charitable institution u/s.12AA.
The Ld. A.R. argued that the assessee-university was engaged
in imparting education in the field of law and administration. Objects of the
assessee-university were primarily aimed at awarding diplomas and degrees
granting fellowships and scholarships.
The definition of charitable purpose which existed at the
relevant point of time was in an inclusive manner to include education as one of
the many activities. The Ld. A.R. also relied on the decision of the Supreme
Court in the case of Sole Trustee Loka Shikshana Trust, which restricted the
meaning of education to impart instruction, schooling and training to prepare
the youth for the works of life.
The Commissioner argued that the assessee university was
charging higher fees and was not meant for the benefit of people at large.
Held:
The University satisfied the condition of imparting education
and should be thus granted registration u/s.12AA. If the purpose is education,
the requirement will be fully satisfied even if an activity for profit is
carried on in the course of actual carrying out the primary purpose.
Note : The other issues, being minor ones, have been ignored
while reporting the above decision.
41 (2010) 127 ITD 153 (Mum.)
Spaco Carburettors (I) (P.) Ltd. v. Addl. CIT,
Range 5(3) Mum.
A.Y. : 2003-2004. Dated : 16-3-2009
Section 4 — Compensation awarded for loss of income earning
apparatus is in the nature of capital receipt. However interest awarded on delay
in receipt of compensation is revenue in nature and is to be treated as income.
Facts:
1. The assessee-company was engaged in the business of
manufacturing different types of carburettors. It entered in a Technical
Collaboration Agreement (TCA) with a Japanese company. As per the relevant
clause of the TCA, the assessee was entitled to use any improvement made in
technology of carburettors by the Japanese company. The Japanese company
developed a new product, in respect of which they refused to give any advice
to the assessee company.2. Subsequently the matter was referred to the
International Court of Arbitration and the said Court awarded compensation and
interest in favour of the assessee-company.3. The assessee-company claimed the same as capital receipt
and therefore not taxable. However the Assessing Officer treated the same as
revenue and charged to tax.4. On appeal, the CIT(A) held that the compensation was in
the nature of capital receipt, hence out of the purview of tax. However
interest received on the compensation is revenue in nature and therefore
chargeable to tax.5. The Ld. AR of the assessee submitted before the Tribunal
that the compensation awarded was in respect of the extinction of a source of
income and profit-earning apparatus and was not awarded for breach of a
contract of revenue nature. Hence it was capital in nature. Similarly interest
on compensation received by the assessee-company was attached to the
compensation awarded by the Court, hence it partakes the character of the
compensation.6. Whereas Ld. DR argued that compensation was awarded for
non-existing income i.e., for future loss which is nothing but revenue in
nature.
Held:
1. The Tribunal upheld the decision of the CIT(A) in
respect of the compensation awarded to the assessee-company and treated the
same as capital receipt.2. In respect of interest, the Tribunal held that it is a
well-settled principle that interest always bears the character of revenue
unless it is awarded as profit. Since interest received is for the loss to the
assessee for delay in receipt of compensation which the assessee was entitled
to receive in the year in which the breach occurred, it was of revenue nature
and consequently the Tribunal upheld the decision of the CIT(A) in respect of
interest on compensation.
40 (2010) 127 ITD 127 (Delhi)
Moral Trading & Investment Ltd. v. DCIT
A.Y.: 2006-2007. Dated: 30-4-2010
Section 48 — Actual value of sale consideration cannot be
substituted by fair market value without any evidence.
Facts:
The assessee acquired 8,91,181 shares of Hotel HQR in 2002
for a consideration of Rs.12.82 crore (i.e., for Rs.143. 85 per share).
Subsequently, a further subscription of shares was made by the assessee in 2004
and 2005 for Rs.10 per share. All the shares were then transferred to Shri R. P.
Mittal (a majority shareholder in the assessee company) at the rate of Rs.20 per
share. The AO held that transfer of shares was a colourable device to mitigate
tax. He further worked out fair market value of the shares at Rs.185.68 per
share. Capital gains was worked out on the basis of this amount as sale
consideration.
Held:
The hotel was not functional and was under repairs since
quite a long time. As per the valuation done by authorised valuer, the value per
share was coming to Rs.3.19. The Department has not brought any evidence to
rebut the valuation by the authorised valuer. Further, for the shares acquired
in 2004 and 2005 at Rs.10 per share, the assessee had earned profit. Hence, sale
of shares by the assessee to its majority shareholder is not a colourable device
to avoid tax. Hence, the actual value of sale consideration cannot be
substituted by some presumed fair market value.
Note : The other issues, being minor ones, have been ignored
while reporting the above decision.
39 (2011) 49 DTR (Mum.) (Trib) 202
Godrej Properties Ltd. v. Additional CIT
A.Y. : 2006-2007. Dated : 3-12-2010
Medical reimbursement does not constitute fringe benefit as defined in
section 115WB.
Facts :
The assessee-company filed its return of fringe benefit
declaring the value of fringe benefit at Rs. 14,48,890. The Assessing Officer,
however, assessed the value of fringe benefit by holding that salary paid to
employee in form of medical reimbursement was liable to Fringe Benefit Tax
(FBT). The CIT(A) held the same to be a perquisite liable to FBT on the ground
that in the given case the amounts of expenditure reimbursed to the employee
were not part of salary package and were in the nature of reimbursement.
Held:
The proviso clause (v) of section 17(2) treats expenditure
actually incurred by the employee on medical treatment for himself or his family
and which is paid by the employer in excess of Rs.15,000 as perquisite taxable
as salary. Thus, reimbursement of medical expense is not taxable as perquisite
if amount does not exceed Rs.15,000 per annum. section 115WB(3) explicitly
excludes perquisites in respect of which tax is paid or payable by the employee.
In the Memorandum explaining the Provisions to the Finance bill it was stated
that perquisites directly attributed to the employees will continue to be taxed
in their hands in accordance with provisions of section 17(2). Also, the Budget
Speech (Paragraph 160 — 194 Taxman 1) categorically stated that ‘At present
where the benefits are fully attributable to the employee, they are taxed in the
hands of the employee; that position will continue’.
From the above, it was held that where benefits which are
fully attributable to employee and are taxed in their hands, would be continued
to be taxed u/s.17(2). Only in case where the benefits are enjoyed collectively
by employees and cannot be attributed individually shall be taxed in employers
hands.
In the case on hand, only where bills have been produced by
the employee to the employer it was a case of reimbursement and to the extent of
the benefit given in section 17(2) proviso (v) the employee need not pay tax.
This is not a case where the attribution of personal benefits directly to an
employee poses problem or a case where it is not feasible to tax the benefit in
question in the hands of the employee. It is only a case where a benefit above a
certain specified amount only is liable to be taxed in the hands of employee.
Such case does not constitute fringe benefit as defined in section 115WB of the
Act.
38 (2011) 49 DTR (Chennai) (SB) (Trib.) 1
Zylog Systems Ltd. v. ITO
A.Y.: 2003-2004. Dated: 2-11-2010
Exemption u/s.10B — Expenses incurred on on-site development
of computer software outside India cannot be excluded from the export turnover
for computing deduction u/s.10B — Export proceeds retained abroad in accordance
with RBI guidelines is to be included while computing deduction u/s.10B.
Facts:
The assessee was a company engaged in the business of
development of software both by way of on-site development and offshore
development and it has a branch in the USA. It being 100% EOU, had claimed
deduction u/s.10B in respect of the exports of software made. During the
assessment proceedings, the AO had observed that the assessee had total export
turnover of Rs.28.61 crores and out of this amount, the assessee had utilised
the export proceeds to the tune of Rs.15.14 crores in the USA for the purpose of
carrying on export activities. The AO was of the view that since the said amount
had not been received in convertible foreign exchange in India within the
prescribed time u/s.10B(3), the said amount utilised in the USA cannot be
treated as a part of export turnover for computing deduction u/s.10B.
Further, the assessee had incurred expenses of Rs.3.33 crores
in foreign currency on account of payroll, etc., which were claimed to have been
incurred in connection with staff of the foreign branch in foreign country. The
AO also excluded Rs.3.33 crores incurred by the assessee outside India in
foreign exchange considering it as expenses in providing technical services,
while computing deduction u/s.10B. The AO placed reliance on the definition of
‘export turnover’ given in
Explanation 2(iii) to section 10B which excludes expenses incurred in foreign
exchange in providing technical services outside India from export turnover.
The first Appellate Authority allowed the asses-see’s appeal
in respect of inclusion of Rs.15.14 crores in export turnover for computing
deduction u/s.10B, whereas he rejected the claim of the assessee in respect of
inclusion of Rs.3.33 crores incurred by the assessee outside India in providing
technical services.
Held:
The Department had not brought anything on record to show
during the hearing, that the assessee-company was involved in rendering any
managerial consultancy services at foreign country. Also it was not brought on
record that the company was involved in providing the technical services to
other personnel or any outside agency. All the services rendered by the company
were to its staff located at New Jersy for the fulfilment of objects, namely,
development of software. A person cannot provide services to self. Whatever
expenditure has been incurred on foreign soil in a sum of Rs.3.33 crores was
incurred in connection with development of software by the employees of the
assessee-company at foreign branch and nothing has been incurred on managerial
or technical services rendered to outsider in foreign soil and therefore, the
same cannot be excluded from the export turnover.
Regarding the export proceeds of Rs.15.14 crores retained
abroad, the decision of the Supreme Court in the case of J. B. Boda & Co. (P)
Ltd. 223 ITR 271 would apply to this case also, even though the said
decision was on section 80-O wherein it was held that “two-way traffic of
receiving foreign exchange here and sending it back is a ritual which is
unnecessary”.
37 (2010) 42 SOT 457 (Mum.) (SB)
Sulzer India Ltd. v. Jt. CIT
ITA Nos. 2944 & 2871 (Mum.) of 2007 &
1317 (Pn.) of 2007
A.Ys.: 2003-2004 & 2004-05. Dated: 10-11-2010
Section 41(1) of the Income-tax Act, 1961 — Deferred sales
tax liability being difference between payment of net present value and future
liability credited by assessee to capital reserve account in its books of
account would be a capital receipt and cannot be termed as remission/cessation
of liability and, consequently, no benefit would arise to assessee in terms of
section 41(1)(a).
The assessee obtained incentive by way of sales tax deferral
scheme under the package scheme of incentive 1983 (the 1983 scheme) and the
package scheme of incentive 1988 (the 1988 scheme) notified by the Government of
Maharashtra. The aggregate deferral amount under 1983 and 1988 schemes was
Rs.752.01 lakh. The total amount of sales tax collected by the assessee for 7
years from 1-11-1989 to 31-10-1996 was to be paid after 12 years in 6 annual
instalments. However, by an amendment to the Bombay Sales Tax Act in 2002, if
the Net Present Value (NPV) of deferred tax as prescribed was paid, then the
deferred tax was deemed, in public interest, to have been fully paid. The
assessee, following the aforesaid amendment, made repayment of Rs.337.13 lakh on
30-12-2002 as per NPV of the deferred tax as prescribed under Circular No. 39T
of 2002 of Trade Circular dated 12-12-2002. The assessee claimed Rs.414.87 lakh,
being the difference between the deferred sales tax Rs.752.01 lakh and its net
present value amounting to Rs.337.13 lakh, as capital receipt and credited it in
the books of account of the assessee to the capital reserve account. However,
the Assessing Officer, keeping in view that the assessee had obtained the
benefit of payment of whole amount of Rs.752.01 lakh as deduction u/s.43B (in
view of CBDT’s Circular No. 496, dated 25-9-1987) brought the difference of
Rs.414.87 lakh to tax u/s.41(1). The CIT(A) upheld the addition made by the
Assessing Officer.
The Special Bench deleted the addition. The Special Bench
noted as under :
(2) As per the amendment of 2002 to the Bombay Sales Tax Act, 1959, the assessee was allowed to prematurely pay the entire amount of the deferred sales tax at the Net Present Value (NPV) as prescribed and, on making such payment, the deferred tax shall be deemed to have been fully paid.
(3) The amount paid by the assessee was determined and prescribed by SICOM (which was the implementing agency of the State Government.).
(4) The amount paid by the assessee represented the NPV of the future sum and there had been no remission or cessation of liability by the State Government.
(5) Had the State Government accepted a lesser amount after 12 years or reduced the number or amount of the annual instalments, then it could have been a case of remission or cessation.
(6) Therefore, such payment of net present value of a future liability could not be classified as remission or cessation of the liability so as to attract the provisions of section 41(1)(a) since no benefit arose to the assessee in terms of section 41(1)(a).
36 (2010) 134 TTJ 457 (Del.)
S. M. Wahi v. Asst. DIT
(International Taxation)
ITA No. 2779 (Delhi) of 2008
A.Y.: 2007-2008. Dated: 30-4-2009
Section 234B of the Income-tax Act, 1961 — Once assessee’s
bank account was put under attachment, the amount therein is to be considered to
be lying with the Department which would indicate constructive payment of
advance tax and, therefore, interest u/s.234B is not chargeable.
For the relevant assessment year, the Assessing Officer
charged interest u/s.234B. The assessee submitted that a sum of Rs.4 crores was
received by the assessee on 3rd January 2007. His bank account was attached on
12th January 2007. The amount was lying with the Department. In such
circumstances, the assessee cannot make the payment of advance tax and interest
u/s.234B cannot be imposed upon him. He relied upon the judgment of the Delhi
High Court in the case of CIT v. K K Marketing, (2005) 196 CTR (Del.)
611/(2005) 278 ITR 596 (Del). The CIT(A) held that charging of interest u/s.234B
is mandatory. The Assessing Officer has no discretion to charge or not to charge
the interest. He further observed that the assessee did not apply to the
Assessing Officer for permitting him to limited operation of bank account for
payment of advance tax.
The Tribunal, following the Delhi High Court’s decision in
the above-referred case, held that in the present case, for all practical
purposes the amount of Rs.4 crores was considered to be lying with the
Department which would indicate constructive payment of advance tax. Therefore,
interest u/s.234B cannot be imposed.
35 (2010) 42 SOT 48 (Ahd.)
Dy. CIT v. Dr. Satish B. Gupta
ITA No. 1482 (Ahd.) of 2010
A.Y.: 2006-2007. Dated: 6-8-2010
Section 271(1)(c) of the Income-tax Act, 1961 — Penalty
u/s.271(1)(c) would arise only when return of income is scrutinised by the
Assessing Officer and he finds some more items of income or additional income
over and above what is declared in return.
A survey u/s.133A was carried out at the premises of the
assessee who was a practising doctor. During the course of the search he
declared unaccounted income of Rs.32.84 lakh. Thereafter, he filed a return of
income declaring income of Rs.37.57 lakh wherein, apparently, the assessee
disclosed unaccounted income of Rs.32.84 lakh which was declared by him during
the course of survey. The assessment was finally completed on an income of
Rs.38.12 lakh after making minor additions. The Assessing Officer also levied
penalty u/s.271(1)(c) in respect of the sum of Rs.32.84 lakh declared during the
course of survey. On appeal, the CIT(A) set aside the penalty order.
The Tribunal, following the decision of the Allahabad High
Court in the case of Smt. Govinda Devi v. CIT, (2008) 304 ITR 340/173
Taxman 370, upheld the CIT(A)’s order deleting the penalty. The Tribunal noted
as under:
(2) Since, in the instant case, the Assessing Officer had not made any addition to the returned income, the question of working out any tax sought to be evaded would not arise.
(3) In general, where a case does not fall within clause (a) or clause (b) of Explanation 4 to section 271(1)(c) there cannot be any ‘tax sought to be evaded’ if there is no addition to the returned income.
(4) The assessee would be liable for an action u/s.271(1)(c) in respect of such items only which are discovered by the Assessing Officer on the scrutiny of return of income or after carrying out an investigation and discovering some more items of income not found declared or mentioned in the return of income. Prior to the filing of return of income there is no concept of concealment or furnishing inaccurate particulars of income.
(5) ‘Proceedings’ as used in section 271(1)(c) are statutory proceedings initiated against the assessee either by the issuance of a statutory notice or after filing of return of income. Survey u/s.133A or a search u/s.132 or issuance of a notice u/s.133(6), for example, are only means of collecting evidence against the assessee and are not equivalent to statutory proceedings. Another criterion for finding out whether a particular action is a statutory proceeding or not is to see whether it can be brought to a legal conclusion against the assessee by determining his right to liability.
(6) Merely carrying out a survey u/s.133A does not create any liability against the assessee which is created only through assessment proceedings or through penalty proceedings. Therefore, the Revenue was not correct in its submission that the survey was a ‘proceeding’ and the Assessing Officer having discovered concealment during survey, the assessee would be liable for penalty u/s.271(1)(c).
(7) The act of concealment or furnishing of inaccurate particulars should be viewed by the Assessing Officer as done with respect to return of income. The omission or commission or contumacious conduct has to be viewed from the return of income and if certain thing has not been disclosed or has not been furnished therein, only then it can be said that the assessee has concealed the particulars of his income or furnished inaccurate particulars of his income. Prior to this the assessee cannot be said to have done any contumacious conduct on which penalty could be levied.
(8) Merely because certain receipts were not recorded in the books of account or receipts were not issued to the patients, but income therefrom was finally declared in the return of income, there would be no contumacious conduct. For not maintaining books of account or not issuing receipts to the patients for the amount received by the assessee, at best, the books can be rejected by invoking provisions of section 145(3) and income can be estimated in accordance with section 144. Where, however, the Assessing Officer had accepted the income declared in the return of income, then the assessee could not be charged for any contumacious conduct.
Full texts of
relevant Notifications, Circulars and Forms are available on the BCAS website :
www.bcasonline.org
68 Income limits for assigning cases to Deputy
Commissioners/Assistant Commissioners, Income-tax officers increased, applicable
with effect from 1-4-2011 — Instruction No. 1/2011, dated 31-1-2011.
Metros charges for the
above purpose would be Ahmedabad, Bangalore, Chennai, Delhi, Kolkata,
Hyderabad, Mumbai and Pune.
Full texts of
relevant Notifications, Circulars and Forms are available on the BCAS website :
www.bcasonline.org
67 Instruction No. 3/2011 (F. No. 279/MISC. 142/2007-ITJ)
dated 9-2-2011 — Appeals and Revision of monetary limits for filing of appeals
by the Department before Income-tax Appellate Tribunal, High Courts and Supreme
Court — Section 268A of the Income-tax Act, 1961 — Measures for reducing
litigation (reproduced)
Reference is Invited to Board’s instruction No. 5/2008, dated
15-5-2008 wherein monetary limits and other conditions for filing Departmental
appeals (in income-tax matters) before the Appellate Tribunal, High Courts and
Supreme Court were specified.
2. In supersession of the above instruction, it has been
decided by the Board that Departmental appeals may be filed on merits before the
Appellate Tribunal, High Courts and Supreme Court keeping in view the monetary
limits and conditions specified below.
3. Henceforth appeals shall not be filed in cases where the
tax effect does not exceed the monetary limits given hereunder :
| Sr. No. | Appeals in income-tax matters | Monetary limit (in Rs.) |
| 1. | Appeal before Appellate Tribunal |
3,00,000 |
| 2. | Appeal u/s.260A before High Court |
10,00,000 |
| 3. | Appeal before Supreme Court |
25,00,000 |
It is clarified that an appeal should not be filed merely
because the tax effect in a case exceeds the monetary limits prescribed above.
Filing of appeal in such cases is to be decided on merits of the case.
4. For this purpose, ‘tax effect’ means the difference
between the tax on the total income assessed and the tax that would have been
chargeable had such total income been reduced by the amount of income in respect
of the issues against which appeal is intended to be filed (hereinafter referred
to as ‘disputed issues’). However, the tax will not include any interest
thereon, except where chargeability of interest itself is in dispute. In case
the chargeability of interest is the issue under dispute, the amount of interest
shall be the tax effect. In cases where returned loss is reduced or assessed as
income, the tax effect would include notional tax on disputed additions. In case
of penalty orders, the tax effect will mean quantum of penalty deleted or
reduced in the order to be appealed against.
5. The Assessing Officer shall calculate the tax effect
separately for every assessment year in respect of the disputed issues in the
case of every assessee. If, in the case of an assessee, the disputed issues
arise in more than one assessment year, appeal can be filed in respect of such
assessment year or years in which the tax effect in respect of the disputed
issues exceeds the monetary limit specified in paragraph 3. No appeal shall be
filed in respect of an assessment year or years in which the tax effect is less
than the monetary limit specified in paragraph 3. In other words, henceforth,
appeals can be filed only with reference to the tax effect in the relevant
assessment year. However, in case of a composite order of any High Court or
Appellate Authority, which involves more than one assessment year and common
issues in more than one assessment year, appeal shall be filed in respect of all
such assessment years even if the ‘tax effect’ is less than the prescribed
monetary limits in any of the year(s), if it is decided to file appeal in
respect of the year(s) in which ‘tax effect’ exceeds the monetary limit
prescribed. In case where a composite order/judgment involves more than one
assessee, each assessee shall be dealt with separately.
6. In a case where an appeal before a Tribunal or a Court is
not filed only on account of the tax effect being less than the monetary limit
specified above, the Commissioner of the Income Tax shall specifically record
that “even though the decision is not acceptable, appeal is not being filed only
on the consideration that the tax effect is less than the monetary limit
specified in this instruction”. Further, in such cases, there will be no
presumption that the Income Tax Department has acquiesced in the decision on the
disputed issues. The Income Tax Department shall not be precluded from filing an
appeal against the disputed issues in the case of the same assessee for any
other assessment year, or in the case of any other assessee for the same or any
other assessment year, if the tax effect exceeds the specified monetary limits.
7. In the past, a number of instances have come to the notice
of the Board, whereby an assessee has claimed relief from the Tribunal or the
Court only on the ground that the Department has implicitly accepted the
decision of the Tribunal or Court in the case of the assessee for any other
assessment year or in the case of any other assessee for the same or any other
assessment year, by not filing an appeal on the same disputed issues. The
Departmental representatives/counsels must make every effort to bring to the
notice of the Tribunal or the Court that the appeal in such cases was not filed
or not admitted only for the reason of the tax effect being less than the
specified monetary limit and, therefore, no inference should be drawn that the
decisions rendered therein were acceptable to the Department. Accordingly, they
should impress upon the Tribunal or the Court that such cases do not have any
precedent value. As the evidence of not filing appeal due to this instruction
may have to be produced in Courts, the judicial folders in the office of CsIT
must be maintained in a systemic manner for easy retrieval.
8. Adverse judgments relating to the following issues should
be contested on merits notwithstanding that the tax effect entailed is less than
the monetary limits specified in paragraph 3 above or there is no tax effect:
a) Where the Constitutional validity of the provi-sions of an Act or Rule are under challenge, or
b) Where Board’s order, Notification, Instruction or Circular has been held to be illegal or ultra vires, or
c) Where Revenue Audit objection in the case has been accepted by the Department.
9. The proposal for filing Special Leave Petition under Article 136 of the Constitution before the Supreme Court should, in all cases, be sent to the Directorate of Income-tax (Legal & Research), New Delhi and the decision to file Special Leave Petition shall be in consultation with the Ministry of Law and Justice.
10. The monetary limits specified in paragraph 3 above shall not apply to writ matters and direct tax matters other than Income-tax, filing of appeals in other direct tax matters shall continue to be governed by relevant provisions of the statute and rules. Further, filing of appeal in cases of Income-tax, where the tax effect is not quantifiable or not involved, such as the case of registration of trusts or institutions u/s.12A of the Income-tax Act, 1961, shall not be governed by the limits specified in para 3 above and decision to file appeal in such cases may be taken on merits of a particular case.
This instruction will apply to appeals filed on or after?………?2011*. However, the cases where appeals have been filed before?…….?2011* will be governed by the instructions on this subject, operative at the time when such appeal was filed.
This issues u/s.268A(1) of the Income-tax Act,1961.
*As clarified subsequently, these instructions will apply to appeals filed on or after 9th February, 2011.
Full texts of
relevant Notifications, Circulars and Forms are available on the BCAS website :
www.bcasonline.org
66 Instructions No. 2/2011 (F.No. 225/25/2010/ITA-II), dated
9-2-2011 — Processing of returns of A.Y. 2010-11 — Section 143 of the Income-tax
Act, 1961 — Steps to —
(reproduced)
The issue of processing of returns for A.Y. 2010-11 and
giving credit for TDS has been considered by the Board. In order to clear the
backlog of returns, the following decisions have been taken :
(i) In all returns (ITR-1 to ITR-6), where the difference
between the TDS claim and matching TDS amount reported in AS-26 data does not
exceed Rs.1 lakh, the TDS claim may be accepted without verification.(ii) Where there is zero TDS matching, TDS credit shall be
allowed only after due verification. However, in case of returns of ITR-1 and
ITR-2, credit may be allowed in full, even if there is zero matching, if the
total TDS claimed is Rs. five thousand or lower.(iii) Where there are TDS claims with invalid TAN, TDS
credit for such claims is not to be allowed.(iv) In all other cases TDS credit shall be allowed after
due verification.
Full texts of
relevant Notifications, Circulars and Forms are available on the BCAS website :
www.bcasonline.org
65 Press Release : Central Board of Direct Taxes — No.
402/92/2006-MC (04 of 2011), dated 12-2-2011.
India has entered into a Tax Information Exchange Agreement
(TIEA) with the Bahamas for sharing information, including exchange of banking
and ownership information. The Agreement was signed on 11th February 2011.
Full texts of
relevant Notifications, Circulars and Forms are available on the BCAS website :
www.bcasonline.org
64 CBDT Instructions No. F. No. 225/25/2010/ITA.II, dated
10-2-2010 regarding extension of time limit for filing ITR-V forms.
CBDT has extended the time limit for filing ITR-V forms
relating to income-tax returns for A.Y. 2010-11 filed electronically (without
digital signature) on or after 1st April, 2010. These ITR-V forms can now be
filed up to 31st July, 2011 or within a period of 120 days from the date of
uploading of the electronic return data, whichever is later.
Part B : INDIRECT TAXES
74 Set-off on Import Licences, etc. — Notification No.
VAT.1510/CR.109-A/Taxation-1, dated 20-12-2010.
Rule 54(f)(i) has been amended and set-off has been allowed
on Import Licences including Special Import Licences, Duty-Free Advance Licences
and any other Scrips issued under the Foreign Trade Policy, from time to time
under the Foreign Trade Development & Regulation Act, 1992 described in Entry 3
and on Export Permit or licence or quota described in Entry 4 of Notification
under Schedule Entry C-39.
Part B : INDIRECT TAXES
73 Schedule Entry C-39 to include import licences —
Notification No. VAT.1510/CR.109/Taxation-1, dated 20-12-2010.
Vide this Notification, Notified List in Schedule Entry C-39
for goods of incorporeal nature or intangible character, has been amended. Entry
3 has been substituted by Import Licences including Special Import Licence,
Duty-Free Advance Licence and any other Scrips issued under the Foreign Trade
Policy, from time to time under the Foreign Trade Development & Regulation Act,
1992. Entry No. 6 for credit of Duty Entitlement Pass Book, Entry No. 13 for
credit of Duty-Free Replenishment Certificate and Entry No. 14 for credits of
Duty Free Import Authorisation (DFIA) have been deleted w.e.f. 1-1-2011.
Part B : INDIRECT TAXES
72 E-payment — Notification No. VAT.1510/CR.165/Taxation-1,
dated 20-12-2010.
Every registered dealer liable to file six-monthly returns
shall make payment electronically w.e.f. 31-3-2011 under the MVAT Act, 2002.
Part B : INDIRECT TAXES
MVAT UPDATE
71 Due date for submission of Audit Report for 2009-10
extended — Trade Circular 3T of 2011, dated 31-1-2011.
Due date for submission of MVAT Audit Report in Form 704 for
the period 2009-10 has been extended from 31st January, 2011 to 15th February,
2011 and due date for statement of submission of audit report in Form 704 along
with required documents would be 25th February, 2011.
Part B : INDIRECT TAXES
70 Fumigation of Export Cargo not a taxable service —
Circular No. 132/1/2011-ST, dated 12-1-2011.
By this Circular, it has been clarified that Fumigation of
Export cargo is not a taxable service under ‘Cleaning Service’ as this service
does not satisfy the statutory definition of ‘Cleaning Activity’ u/s.65(24b).
Further this exclusion is also substantiated by earlier Notification No.
41/2007-ST, dated 6th October 2007 as amended by Notification No. 42/2007, dated
29th November 2007.
Part B : INDIRECT TAXES
SERVICE TAX UPDATE
69 Janata Personal Accident Policy not liable to service tax
— Circular No. 133/2/2011-ST, dated 18-1-2011.
By this Circular it has been clarified that the Janata
Personal Accident Policy is exempt from service tax as this is customised group
insurance scheme floated as per the specifications of State Government to extend
risk cover to target population and to fulfil rural or social sector obligations
prescribed by IRDA.
26. (2010) 127 ITD
386(Chennai)
DCIT Circle (VI)
Vs
Paterson Securities (P) Ltd
A.Y.2004-05
Date: 26/12/2010
Trading in
derivatives-Derivatives are not a contract for purchase and sale- Consequently
trading in derivatives not speculative in terms of section 43(5)-Therefore
set-off of loss of derivative trading against gains of share trading
permissible.
Facts :
The assessee was a member of
the NSE and was engaged in purchase and sale of shares on his own account as
well as on behalf of constituents. The assessee filed a return claiming a set
off of the loss suffered on derivative transactions against profit from sale of
shares. The assessing officer was of the view that trading in derivatives was a
speculative transaction and therefore the loss suffered being in the nature of a
speculative loss could not be set off against other business income and was to
be carried forward.
Held :
A speculative transaction in
terms of section 43(5) is that transaction in which the contract for purchase or
sale is ultimately settled otherwise than by delivery. A derivative can be
traded on the exchange. But it is not a trade in share or stock. A derivative is
not a contract for purchase or sale of share, stock or commodity. A derivative
can be traded on the value of the underlying share or stock but is not a trade
in any actual share or stock. The definition of derivative in section 2(ac) of
the Securities Contract (Regulation) Act can also be referred to. The
transactions in derivatives are therefore not speculative transactions within
the meaning of section 43(5). The loss from these transactions had to be set off
against other income.
25. (2010) 46 DTR (Bang.)
(Trib.) 41
JSW Steel Ltd. v. ACIT
A.Y. : 2005-06. Dated :
31-5-2010
Interest u/s.234B was not
payable on advance tax liability due to sum payable on account of retrospective
amendment.
Facts :
The assessee, a public
limited company, in A.Y 2005-06 was not required to add back the amount set
aside for deferred tax liability to the net profits u/s.115JB. As such deferred
tax liability did not fall under any of the adjustments permitted in the first
part of the Explanation to S. 115JB. But the Finance Act, 2008 made a
retrospective amendment (from A.Y. 2001-02) whereby the book profit is required
to be increased by an amount of deferred tax and provision thereof. Interest
u/s. 234B was levied on the amount of tax payable u/s.115JB. However, the
assessee opposed such levy contending that when such retrospective amendment was
brought in, the impugned assessment year was already over and there arose no
occasion to provide for advance tax in case of deferred tax liability.
Held :
By the time the
retrospective amendment was made, the financial years 2004-05 to 2007-08 have
already been passed and hence the assessee had no occasion to add back the
deferred tax provision to compute the book profits u/s.115JB. Even though a
retrospective amendment is possible, a retrospective physical payment of advance
tax is not possible. The acclaimed principle lex non cogit ad impossibilia (law
does not command to do which is impossible to do) holds true.
Thus as the statutory
mandate to add back the deferred tax provision to the book profits u/s. 115JB
was unknown during the relevant previous year 2004-05, the levy of interest
u/s.234B on the incremental amount of tax computed u/.s115JB is not justified.
24. (2010) 46 DTR (Pune)
(Trib.) 157
Brihan Maharashtra Sugar
Syndicate Ltd. v.
DCIT
A.Y. : 2006-07. Dated :
23-7-2010
Interest on loan taken for
purchase of motor cars — In the absence of a specific provision in clause (H) of
S. 115WB(2), the expenditure on payment of interest on loan taken for purchase
of motor cars cannot be included to compute fringe benefits.
Facts :
The assessee had incurred
Rs.54,28,382 as expenditure on running and maintenance of motor cars, which was
certified by the auditor. However, in the return of fringe benefits the assessee
had, from the aforementioned expense, excluded Rs.3,11,580 which pertained to
interest paid on loans taken for purchase of motor cars. The AO was of the view
that the words ‘repairs’, ‘running’ and ‘maintenance of motor cars’ shall cover
every expenses connected with use of motor cars in the business activities of
the assessee. Upon further appeal, the CIT(A) upheld the order of the AO.
Held :
In absence of specific
provision laid down u/s. 115WB(2)(H), the expenditure on payment of interest on
loan taken for purchase of motor cars cannot be included to compute fringe
benefits. Every required related expenses like repairs, running (including
fuel), maintenance of motor cars and amount of depreciation thereon have been
mentioned in specific wordings in the provision. Therefore, the interest paid on
loan taken for purchase of motor cars is not liable to Fringe Benefit Tax.
23. (2010) 126 ITD 448
(Mum.)
DDIT v. Chohung Bank
A.Ys. : 1997-98, 1999-2000
to 2003-04
Dated : 25-6-2009
S. 28(i) — Business Loss v.
Capital Loss — securities held as current asset should be treated as
stock-in-trade. The loss incurred on the same should be treated as business
loss.
S. 145 — Method followed by
the assessee was cost or market price whichever is less — accordingly loss
should be recognised but appreciation in the value should not be booked.
Facts :
The assessee is a
non-resident banking company. It incurred a loss of Rs.77,000 on sale of
Government securities held as ‘current investments’. The Assessing Officer
treated the same as capital loss stated. The assessee contended that the
securities were as ‘current asset’ in the balance sheet as per the norms laid
down by the RBI. It was further contended that buying and selling of securities
was a normal business activity of a banking company and the current investments
were thus stock-in-trade.
Held :
As per the guidelines issued
by the RBI, the securities are to be divided into (i) permanent investments and
(ii) current investments. Permanent investments are the securities purchased
with the intention of retaining them while the current investments are the
securities purchased with an intention of trading to take advantage of
short-term price. Thus the securities in the nature of current investments
automatically become the stock-in-trade of the assessee and not investment. The
loss incurred is thus on account of stock-in-trade which is referred as current
investments by the assessee.
Facts :
The assessee had revalued
certain securities being a part of closing stock and incurred loss of Rs.45,000.
The same was debited to the profit and loss account. The Assessing Officer
observed during the course of assessment proceedings that the assessee had also
revalued certain other securities forming part of the closing stock and incurred
profit of Rs.15,43,400 on the same. This profit was not offered to tax. The
Assessing Officer held that the assessee incurred loss on revaluation of one
portion of the closing stock and profit on revaluation of the another portion of
the same closing stock. While the loss was claimed as deduction, the profit was
not offered to tax. The AO held that the assessee could not be allowed to follow
different methods for valuing different portions of stock. Accordingly, an
addition of Rs.15,43,400 was made.
Held :
1. The method ‘cost or
market price’ whichever is less is a recognised method of valuation of
closing stock. The logic behind this method is that the loss in the value be
recognised without recognising unduly the appreciation in the value of
stock.
2. The Circular issued
by the RBI for valuation and classification of investments states that the
valuation is to be done scripwise and further any appreciation in the value
should not be booked.
3. Further, this method
is being consistently followed by the assessee. Going by the method adopted
by the assessee as ‘cost or market price whichever is less’, there can be no
addition of appreciation on account of revaluation.
Note :
The other issues being minor, have been ignored
for the purpose of above gist.
22. (2010) 126 ITD 416
(Ahd.)
Gruh Finance Ltd. v. ACIT
A.Y. : 1998-99. Dated :
16-5-2008
S. 271(1)(c) — A mere
addition made by the Assessing Officer cannot be a ground to levy penalty.
Facts :
For the year under
consideration, the assessee had claimed deduction u/s.36(1)(viii) to the tune of
Rs.1,55,75,000. The Assessing Officer recomputed the deduction to the extent of
Rs.84,24,228 and levied penalty u/s.271(1)(c).
Held :
Assessment proceedings and
penalty proceedings are both different. Explanation 1 to S. 271(1)(c) states
that amount added or disallowed in computing the total income shall be deemed to
be income in respect of which particulars have concealed. This deeming provision
is not an absolute one. The presumption is rebuttable and not conclusive. The
assessee in this case has duly submitted required explanation and other
documents. No material has been brought on record to show that the assessee has
concealed the income or has not provided sufficient explanation. A mere addition
made by the Assessing Officer cannot be a ground to levy penalty.
21. (2010) 126 ITD 289
(Delhi)
Royal Jordanian Airlines v.
DDIT
(Intl. taxation)
A.Ys. : 1995-96 to 1998-99
and 2000-01
Dated : 29-8-2008
S. 44BBA — provisions of
presumptive taxation cannot bring to tax notional income when actually there is
loss incurred by the assessee.
Facts :
The assessee is a
corporation established in Jordan and is engaged in the business of operation of
aircraft in international traffic. It filed nil returns for the relevant
assessment years. It was claimed that for these assessment years the assessee
had incurred losses both in its Indian and global operations and so no tax was
chargeable while computing income under the provisions of S. 44BBA.
The Assessing Officer on the
other hand contended that the assessee is governed by the provisions of S. 44BBA
and so 5% of the gross receipts should be chargeable to tax. The Revenue further
contended that S. 44BBA does not provide for computation at lower rate of profit
as provided in S. 44AD, S. 44AF, S. 44BB, etc.
Held :
1. Time and again
various courts have held that ‘income tax’ is a tax on income. S. 4 and S. 5
are the charging Sections and the pre-requisite of these Sections is
existence of income. Chapter IV is attracted for the purpose of computation
of income. Hence, unless and until there is income u/s.4 and u/s.5 there
cannot be computation of income. Chapter IV-D is a machinery provision and
S. 28 or Chapter IV-D itself does not create a charge.
2. Even though there is
no specific mention in S. 44BBA for computing tax at lower rate, in case of
losses, the provisions should be understood to have an inbuilt option for
the assessee to compute income at a lower sum.
3. The deeming provision
of S. 44BBA only deems 5% of certain receipts as income, however it does not
deem that every person is deemed to have earned income.
4. When there are
losses, the presumptive section cannot bring to charge what is otherwise not
chargeable to tax.
Part B : INDIRECT
TAXES
SERVICE TAX UPDATE
50 Certain general insurance
business services exempted — Notification No. 58/2010-ST, dated 21-12-2010.
By this Notification,
taxable services in relation to general insurance business provided under the
Weather-based Crop Insurance Scheme or the Modified National Agricultural
Insurance Scheme, approved by the Government of India and implemented by the
Ministry of Agriculture, have been exempted.
Part B : INDIRECT
TAXES
SERVICE TAX UPDATE
49 Transport services
provided by Government Railways exempted — Notifications Nos. 55/2010-ST,
56/2010-ST & 57/2010-ST, all dated 21-12-2010.
By these Notifications, levy
of service tax on taxable services as referred in S. 65(105)(zzzp) provided by
Government Railways to any person in relation to transport of goods by rail has
been deferred to 1st April 2011.
Part B : INDIRECT
TAXES
SERVICE TAX UPDATE
48 Further amendments to
Notification No. 24/2009-ST, dated 27-7-2009 — Notification No. 54/2010-ST,
dated 21-12-2010.
By this Notification,
earlier Notification No. 24/2009-ST, dated 27th July, 2009 has been further
amended whereby the exemption to taxable services of management, maintenance or
repair of roads is extended to management, maintenance or repair of bridges,
tunnels, dams, airports, railways and transport terminals.
Part B : INDIRECT
TAXES
SERVICE TAX UPDATE
47 Taxable service of
packaged or canned software exempted — Notification No. 53/2010-ST, dated
21-12-2010.
By this Notification, the
Central Government has exempted the taxable service referred to in item (v) of
S. 65(105)(zzzze) in respect of packaged or canned software, subject to the
following conditions :
(1) value of the said
goods domestically produced or imported for the purpose of levy of central
excise duty or additional duty of customs as the case may be has been
determined u/s.4A of the Central Excise Act, 1944 and(2) (a) appropriate duties
of excise have been paid by manufacturer, duplicator or the person holding
copyright to software manufactured in India; or(b) appropriate duties of
customs including the additional duty of customs have been paid by the
importer in respect of the software imported into India(3) a declaration is made
by the service provider on the invoice that no amount in excess of the retail
sale price has been recovered from the customer.
Part B : INDIRECT
TAXES
SERVICE TAX UPDATE
46 Notifications Nos.
02/2010-ST and 17/2010-ST, both dated 27-2-2010 rescinded — Notification No.
51/2010-ST and 52/2010-ST, both dated 21-12-2010.
By these Notifications, the
Central Govt. has rescinded the earlier Notifications Nos. 02/2010-ST &
17/2010-ST, both dated 27th February, 2010 which exempted the right to use
packaged or canned software, subject to specified conditions.
Part B : INDIRECT
TAXES
SERVICE TAX UPDATE
45 Hire charges on
installation of electricity meter in consumer’s premises exempted — Notification
No. 131/13/2010-ST, dated 7-12-2010.
By this Notification, it has
been clarified that hire charges collected by electricity
transmission/distribution companies towards installation of electricity meters
at the premises of the consumers are exempt from service tax, since supply of
electricity meters is an essential activity having direct and close nexus with
transmission and distribution of electricity and that such service is covered by
the exemption Notification No. 11/2010-ST, dated 27-2-2010 and/or 32/2010-ST,
dated 22-6-2010.
Part B : INDIRECT
TAXES
MVAT UPDATE
44 Amendment to Central
Sales Tax Act, 1956 —Trade Circular 2T of 2011, dated 17-1-2011.
By this Circular salient
features of the amendments made by the Finance Act, 14 of 2010 to S. 6A of the
CST Act, 1956 have been explained.
Provisions of S. 6A(2) allow
the Assessing Authority to be satisied that no interstate sale has been
effected, apart from verifying the correctness of particulars furnished in Form
F before allowing claims of Branch Transfer.
New Ss.(3) has been added to
provide that the cases of interstate transfer of goods otherwise than by way of
sale can be reopened in the event of discovery of new facts for re-assessment by
the Assessing Authority or for revision by higher authority on the ground that
findings of the Assessing Authority are contrary to the law.
S. 18A of newly inserted
Chapter VA allows a person aggrieved by an order made u/s.6A(2) or (3) to appeal
to the highest Appellate Authority of the State against such an order.
The Ss.(1) of S. 20 has been
amended to provide for appeal to the Central Sales Tax Appellate Authority
against the Tribunal order in respect of issues relating to stock transfer or
consignment of goods insofar as it involves a dispute of inter-state nature.
The Ss.(1A) of S. 22 has
been amended to allow filing of appeal to the Appellate Authority under CST Act,
1956 without pre-deposit of amount that was required under earlier provisions.
New Ss.(1B) is inserted in
S. 22 empowering the Central Sales Tax Appellate Authority to issue directions
for refund of tax not due to that State or alternatively direct the State to
transfer refundable amount to the State to which CST is due.
Proviso to Ss.(2) of S. 25
is deleted so that the highest Appellate Authority shall not forward the cases
to first Appellate Authority.
Part B : INDIRECT
TAXES
MVAT UPDATE
43 Mandatory e-returns for
employers registered under Profession Tax Act, 1975 —Trade Circular 1T of 2011
under Profession Tax, dated 14-1-2011.
By this Circular, e-service
of filing e-returns for registered employers (PTRC holders) has been introduced.
By Notification issued on
26-11-2010 it was provided that from 1-2-2011, every PTRC holder whose tax
liability during the previous year was rupees twenty thousand or more shall
mandatorily file electronic return.
PTRC holders, eligible to
file quarterly or annual returns, may get themselves enrolled and file e-returns
voluntarily.
Detailed procedures for
enrolment for PTRC e-services and procedure for uploading PTRC e-returns are
explained in the Circular.
42 Amendment in S. 80IB(10)
to be with effect from A.Y. 2005-06 onwards — Notification No. 2/2011, dated
5-1-2011.
The CBDT had issued a
Notification No. 67, dated
3-8-2010 wherein the a particular Slum Redevelopment Scheme contained in
Regulation 33(10) of the Development Control Regulation of Greater Mumbai, 1999
was notified as eligible scheme under aforesaid Section with effect from
3-8-2010. However the provisions of S. 80IB(10) exempting the profits apply to
such projects approved between 1-4-2004 and 31-3-2008, the earlier Notification
has been amended to apply to housing projects approved within the aforesaid
period.
41 Slum Redevelopment Scheme
notified u/s. 80(IB)(10) — Notification 1/2011, dated 5-1-2011.
For the purpose of S.
80IB(10) of the Act, the CBDT notifies the scheme for redevelopment prepared by
the Maharashtra Govt. u/s.2 of Ss.37 of the Maharashtra Regional Town Planning
Act, 1966 (Maharashtra XXXVII of 1966) and published vide Notification No. TPS/1893/973/CR-49/93A/UD
13, dated 26-2-2004 as the eligible scheme subject to the condition that any
amendment to this scheme needs re-notification from the CBDT. This Notification
shall apply to projects approved by the local authority between 1-4-2004 and
31-3-2008.
34 (2010) 127 ITD 116
(Delhi)
Rajan Nanda v. Dy. CIT,
Central Cir. 3,
New Delhi
A.Ys. : 2003-04, 2004-05.
Dated : 15-5-2009
S. 271(1)(c) r.w. S. 2(24)
and S. 10(10D) — Taxability of assignment of Keyman Insurance Policy based on
surrender value was highly debatable as to the year of taxability and also as to
the amount of taxability, so it was held that penalty is not leviable
u/s.271(1)(c).
Facts :
1. Keyman Insurance Policy
taken on the assessee by the employer company was assigned to him in the year
subsequent to the year of the policy at a much lower value.
2. However the value was
paid by the assessee in a different year and the policy was assigned to him in a
different year. The case of assessee subsequently went to the Tribunal so as to
decide the year of taxability and amount of taxable benefits.
3. The Tribunal held that
the surrender value of the policy less value paid by the assignee to the
assignor and less subsequent premium paid will be the benefits accruing to the
assessee. The decision of the Tribunal was, in a way, against the assessee.
4. The AO subsequently
initiated penalty proceedings u/s.271(1)(c) for concealment of income.
5. Also in A.Y. 2004-05 the
assessee received Rs.2.85 crore on maturity, which he claimed as exempt
u/s.10(10D) for an amount equal to 2.51 crore. The AO disallowed the exemption
and also initiated penalty proceedings for entering wrong amount and also for
concealment of income.
6. The above actions of the
AO was upheld by the learned CIT(A).
Held :
1. The assessee had
disclosed complete facts to the Department during the course of hearing and the
addition was entirely due the difference of opinion between the assessee and the
AO.
2. Since the year in which
the amount paid by the assessee to the assignor was different from the year in
which the policy was assigned to him, the issue was a matter of considerable
debate and discussion.
3. It was held that the
explanation tendered by the assessee was bona fide notwithstanding the fact that
sketchy disclosure was made in the return of income and the whole issue of
taxation of the amount was highly debatable.
4. Also for the A.Y. 2004-05
the issue of taxability of sum received on maturity of erstwhile Keyman
Insurance Policy, from the LIC was highly debatable.
5. Hence penalty
u/s.271(1)(c) was not leviable.
Part A: Reported
Decisions
33 (2010) 127 ITD 94 (Bang.)
Asha Housing Enterprises v.
DCIT
A.Y. 2003-04. Dated :
31-3-2010
S. 45 r.w. S. 28(i) —
Assessee was in the business of real estate — Land was held as investment —
Agreement of sale entered in F.Y. 2002-03 — Full sale consideration received by
F.Y. 2004-05 — Long-term capital gains offered to tax in A.Y. 2005-06 — AO held
it as business income for A.Y. 2003-04 — Held : Land to be treated as investment
and transfer is said to be complete in F.Y. 2004-05.
Facts :
The assessee firm was
engaged in real estate business. It had purchased land in the year 1992. On
22-6-2002, the assessee had entered into agreement of sale with A Developers for
Rs.12.25 crores. On the date of agreement, the assessee received a part payment
of Rs.5.25 crores. Thereafter, sale consideration was received in piecemeal in
the F.Ys. 2002-03, 2003-04 and 2004-05. The assessee offered to tax the income
arising out of this transaction as long-term capital gains in the A.Y. 2005-06.
The Assessing Officer
assessed the income as business income arising in A.Y. 2003-04. The AO observed
that general power of attorney (GPOA) in the favour of developers was executed
in F.Y. 2002-03 and therefore transfer had taken place in A.Y. 2003-04.
Held :
1. The execution of GPOA
cannot be construed as transfer of property.
2. The AO was not having any
conclusive evidence to show that possession of property was indeed handed over
to the developers.
3. The agreement of sale
clearly stated that the vendor shall deliver the possession of property on the
date of sale and against payment of entire sale consideration. The supplemental
agreement also had stated that the vendors at request of purchasers have
permitted by way of licence to enter upon the property to do the work of
property and that the licence granted to the purchasers was on specific
condition that the same shall not be construed as possession u/s.53A of the
Transfer of Property Act.
4. The assessee had held the
said land as investment right from the time the land was purchased. In the F.Y.
2000-01, the assessee had sold a portion of property and treated the gain out of
the same as long-term capital gain. The Department had accepted the same. The
Department cannot now treat the land as stock-in-trade. A firm involved in real
estate business can hold land as investment and/or stock-in-trade.
5. In view of the above, the
assessee had correctly offered income as long-term capital gains for A.Y.
2005-06.
32 (2010) 126 ITD 145 (AGRA)
(TM)
Avnish Kumar Singh v. ITO
A.Y. 2002-03. Dated :
30-4-2009
S. 68 — Provisions of S. 68
cannot be invoked when source of the gift is properly explained and also when
the donor himself appears before the Assessing Officer (AO), confirming the gift
made.
Facts :
1. The assessee received an
amount of Rs.2,50,000 as a gift from Mr. Rakesh Walia (donor), a resident of
Delhi. The donor was friend of the assessee’s father, and had received some help
from the assesse’s father earlier. So he had made a gift to the assessee.
2. The assessee, during
assessment, produced before the AO copy of deed of declaration of gift dated
24-1-2002 executed by the donor, his affidavit confirming the gift with his
complete address, a copy of his PAN Card and proof that he is an old income
tax-assessee, a photocopy of his ration card, a copy of accounts of the donor in
the books of Balaji Trading Corporation, Delhi (Balaji) and his Balance Sheet as
on 31-3-2001. Also the donor himself was produced before the AO and he confirmed
the gift and also gave reasons to the AO for giving the gift.
3. The AO observed that the
donor himself was a person of low financial status having monthly income of
Rs.5,000. He has no fixed assets of his own including any immovable property or
fixed deposits. He had a deposit of Rs.1,25,000 with Balaji, from which he
received Rs.2,46,000 which he forwarded to the assessee as gift. However the
reason of deposit with Balaji was not explained.
4. The Assessing Officer was
satisfied with the identity of the owner, however he was not satisfied with the
source of the income. So he invoked the provisions of S. 68 which was upheld by
the CIT(A).
Held :
1. The ITAT observed that
there could be two possibilities of the situation :
Possibility 1 :
Genuiness of the gifts
stands to be proved in the lights of all the evidences brought on record by the
assessee (in the favour of the assessee).
Possibility 2 :
Considering the
creditworthiness and capacity of the donor and closeness and natural love and
affection between the donor and the donee, the source of the gift is doubtful
(in the favour of Revenue).
2. S. 68 provides for
charging the sum credited in the books of the assessee as the income of the
assessee, if the assessee offers no explanation as to the nature and source of
the same.
3. Since the assessee has
explained the nature and sources of the credit by way of a gift, which
satisfactorily explains the genuineness of the gift, it cannot be added to the
income of the assessee as unexplained income u/s.68.
Part A: Reported
Decisions
31 (2010) TIOL 765 ITAT-Ahm.
Shri Kanubhai Ramji Makwana
v. ITO
ITA No. 3983/Ahd./2008
A.Y. : 2005-06. Dated :
3-12-2010
Income-tax Act, 1961 — S.
40(a)(ia) — Provisions of S. 40(a)(ia) as amended by the Finance Act, 2010 w.e.f.
1-4-2010 are clarificatory in nature and therefore to be treated as
retrospective w.e.f. 1-4-2005, the date on which S. 40(a)(ia) has been inserted
by the Finance (No. 2) Act, 2004.
Facts :
The assessee, a contractor,
was required to get work done through sub-contractors. While assessing the total
income of the assessee, the AO disallowed a sum of Rs.1,16,58,614 u/s.40(a)(ia)
of the Act on the ground that the amount of tax deducted at source was not
deposited before the last day of the previous year.
Aggrieved by the order of
the AO the assessee preferred an appeal to the CIT(A) who observed that the AO
has disallowed the amounts based on unamended provisions of S. 40(a)(ia). The
CIT(A) observed that the provisions of S. 40(a)(ia) have been amended by the
Finance Act, 2008 w.e.f. 1-4-2005, and the amended provisions provide that tax
deducted in the last month of the previous year can be deposited before due date
specified u/s.139(1) of the Act for furnishing return of income. Accordingly, he
granted relief to the extent of payments aggregating to Rs.53,02,227 in respect
of which tax was deducted in the month of March 2004 and was paid on 19-7-2005
i.e., before the due date of filing return of income.
Aggrieved the assessee
preferred an appeal to the Tribunal where it contended that the amendment made
by the Finance Act, 2010 to provisions of
S. 40(a)(ia) w.e.f. 1-4-2010 is clarificatory in nature and since the tax
deducted has been deposited before the due date of filing return of income, no
disallowance u/s.40(a)(ia) is called for.
Held :
The Tribunal after going
through the history of the provisions of S. 40(a)(ia) observed that the
amendments brought out in S. 40(a)(ia) of the Act from time to time were
clarificatory and when an amendment is declaratory and clarificatory in nature,
the presumption against its retrospectivity is not applicable and amendments of
this kind only declare. It observed that it is no doubt true that, ordinarily, a
statute, and particularly when the same has been made applicable with effect
from a particular date should be construed prospectively and not
retrospectively. But this principle will not be applicable in a case where the
provision construed is merely explanatory, clarificatory or declaratory.
The Tribunal held that the
provisions of S. 40(a)(ia) as amended by the Finance Act, 2010 w.e.f. 1-4-2010,
which has newly been inserted by the Finance (No. 2) Act, 2004, w.e.f. 1-4-2005
to S. 40 of the Act is remedial in nature, designed to eliminate unintended
consequences which may cause undue hardship to the taxpayers and which made the
provision unworkable or unjust in a specific situation, and is of clarificatory
nature and, therefore, has to be treated as retrospective with effect from 1st
April, 2005, the date on which S. 40(a)(ia) has been inserted by The Finance
(No. 2) Act, 2004.
The Tribunal allowed the
appeal filed by the assessee.
30 (2010) TIOL 760 ITAT-Bang.
Addl. CIT v. Vijaya Bank
ITA No. 105/Bang./2009
A.Y. : 2002-03. Dated :
30-9-2010
Income-tax Act, 1961 — S. 244A — Interest on excess payment of self-assessment
tax becomes due from the date of payment of self-assessment tax.
Facts :
The assessment of total
income of the assessee, a nationalised bank, was completed u/s.143(3) of the
Act. Aggrieved by the additions made by the Assessing Officer (AO) the assessee
preferred an appeal to the CIT(A) who partly allowed the appeal of the assessee.
While giving effect to the order passed by the CIT(A) the AO did not grant
interest u/s.244A on the self-assessment tax, amounting to Rs.15.50 crores, paid
by the assessee. The AO declined to pay interest on self-assessment tax on the
ground that there is no provision for allowing interest u/s.244A on the
self-assessment tax.
Aggrieved by the order of
the AO refusing to grant interest on self-assessment tax paid, the assessee
preferred an appeal to the CIT(A) who allowed the appeal filed by the assessee.
The AO pursuant to the CIT(A)’s order granted interest on self-assessment tax
paid from the date of regular assessment, as against the claim of the assessee
that the interest ought to have been calculated from the date of payment of
self-assessment tax.
Aggrieved by the order of
the AO granting interest on self-assessment tax paid from the date of regular
assessment, the assessee preferred an appeal to the CIT(A) who held that the
assessee is entitled to interest u/s.244A on the excess payment of
self-assessment tax with effect from the date on which it was paid by the
assessee and directed the AO to grant interest u/s.244A to the assessee
accordingly. He also held that the assessee is entitled to interest on interest
u/s.244A of the Act by following the decision of the SC in the case of Sandvik
Asia v. CIT, (280 ITR 643).
Aggrieved, the Revenue
preferred an appeal to the Tribunal.
Held :
The Tribunal having
considered the Circular No. 549, dated 31st October, 1989 and also the decision
of the Delhi High Court in the case of CIT v. Sutlej Industries Ltd., (325 ITR
331) (Del.), which decision follows the decision of the Madras High Court in the
case of Cholamandalam Investment and Finance Co. Ltd., 294 ITR 438, upheld the
decision of the CIT(A) that the assessee is entitled to interest u/s.244A on
excess payment of self-assessment tax with effect from the date of payment of
self-assessment tax. The Tribunal held that the decision of the jurisdictional
High Court in the case of CIT v. MICO, (ITA No. 419 of 2003 dated 9th July,
2008), on which reliance was placed by the Revenue, is distinguishable on facts
since in that case the Court was dealing with payment of interest u/s.244A on
excess payment of advance tax, unlike the present case where interest is being
claimed on excess payment of self-assessment tax paid u/s.140A of the Act.
Part A: Reported
Decisions
29 (2010) TIOL 751 ITAT-Del.
The Executive Engineer,
Haryana State
Agricultural Marketing Board
v. ITO
ITA No. 2011 to
2014/Del./2010
A.Ys. : 2006-07 to 2009-10.
Dated : 10-9-2010
Income-tax Act, 1961 — S.
201(1) and S. 201(1A) — In a case where deductees have paid their taxes, the
assessee cannot be held liable to make good the short deduction of tax. Interest
cannot be levied after the date on which the tax has been actually paid by the
deductees.
Facts :
The assessee, an autonomous
body controlled by the Government of Haryana, short deducted tax at source. The
Assessing Officer (AO) issued a notice of demand for the amount of tax short
deducted by the assessee. He also levied interest u/s.201(1A).
Aggrieved the assessee
preferred an appeal to CIT(A) and contended that since the deductees have paid
their tax dues, the tax cannot be recovered from the assessee. Proof with regard
to some of the deductees was sought to be filed before the CIT(A) but the
assessee could not explain why the same was not filed before the AO. The CIT(A)
did not take into consideration the said evidence filed by the assessee and
rejected the appeals filed by the assessee.
Aggrieved, the assessee
preferred an appeal to the Tribunal where it was contended that the short
deduction was due to the fact that the assessee being government-controlled body
did not have provision of engaging private consultant and the staff being not
conversant with the provisions of the Act could not deduct proper TDS, deductees
have paid the taxes due from them, interest cannot be levied for a period after
the date when the deductees have paid their taxes and in respect of delay in
depositing TDS interest be levied up to the date of tender of the cheque and not
up to the date of its encashment.
Held :
The Tribunal held this to be
a case of genuine hardship faced by the assessee and observed that if such
payment is made by the assessee, then from whom the payment can be recovered as
the deductees are stated to have already paid the taxes and have submitted their
returns.
The Tribunal restored the
matter back to the file of the AO with a direction to verify the contention of
the assessee that deductees having paid their taxes, the assessee cannot be held
liable to make good the short deduction of tax. It also held that interest
cannot be levied after the date on which the tax has actually been paid by the
deductees. The AO was directed to give reasonable opportunity to the assessee to
place the evidence on record and thereafter re-compute the liability of the
assessee u/s.201 and u/s.201(1A).
As regards interest on
belated payments, following the decision of the Supreme Court in the case of CIT
v. Ogala Glass Works Ltd., (25 ITR 529) (SC), the Tribunal directed the AO that,
for computing interest u/s.201(1A), date of tendering of cheque be taken into
consideration and if the cheque is tendered within the due date and has also not
been dishonoured, then no interest be charged on the assessee for belated
payment on account of late encashment of cheques.
The appeal filed by the
assessee was allowed.
Part A: Reported
Decisions
28 (2010) 47 DTR (Pune)
(Trib) 513
Anil Ramgopal Mali (HUF) v.
ACIT
A.Y. : 2006-07. Dated :
31-12-2009
S. 44AE — Even when an
assessee is engaged in the composite business employing both own as well as the
hired vehicles from others, provisions of S. 44AE can be applied with respect to
business carried on through own vehicles.
Facts :
The assessee conducted
transportation business not only with two light commercial vehicles (LCVs) owned
by the assessee but also hired vehicles owned by others. The annual gross
receipts were Rs.91,33,192. The break-up of the turnover was : (a) on account of
two LCVs owned : Rs.63,93,234 and (b) other vehicles : 27,39,958. The Assessing
Officer levied penalty u/s.271B for not getting the books of accounts audited.
The CIT(A) also confirmed the order of penalty on the ground that the assessee,
who is engaged with the composite business employing both own as well as the
hired vehicles from others, is outside the ambit of S. 44AE.
Held :
The assessees with multiple
businesses are not barred entirely from availing the benefits of the provisions
of S. 44AE. The assessee with multiple businesses, which include the business of
plying etc. with their own goods carriage, are not only entitled to the benefits
of S. 44AE but also for the exclusion of the relevant turnover from the total
turnover of all the businesses of the assessee for the purpose of computation of
monetary limits for S. 44AB of the Act in view of the existence of S. 44AE(5).
Part A: Reported
Decisions
27 (2010) 47 DTR (Del.) (Trib.)
33
ITO v. Naseman Farms (P)
Ltd.
A.Y. : 2001-02. Dated :
14-9-2010
S. 292BB — The
jurisdictional defect of the notice having been issued by an AO not having
jurisdiction over the assessee, as such, is not a mere irregularity, but an
incurable illegality and is incapable of being cured by seeking recourse to the
provisions of S. 292BB.
Facts :
The assessee company,
registered with RoC, Delhi, was having its office at Delhi and it had filed its
tax returns for A.Y. 1998-99 to 2000-01 in Delhi. On the basis of enquiry
conducted by the Investigation Wing of the IT Department, reassessment
proceedings were initiated against the assessee for A.Y. 2001-02 by issuance of
notice u/s.148 by the AO at Agra. Then subsequently the case was transferred to
the AO at Delhi for completion of assessment, it having been found by the AO at
Agra that the return had been filed with AO at Delhi. The CIT(A) annulled the
reassessment on the ground that reassessment notice issued from Agra was without
any jurisdiction.
Held :
It is only an AO within the
meaning of S. 2(7A) of the Act, who can assess or reassess any escaped income
u/s.147 of the Act, of an assessee. It is only an AO within the meaning of S.
2(7A) of the Act, who can serve a notice u/s.148 of the Act on an assessee.
Herein, the AO at Agra not being the AO qua the assessee, he could not have
assessed or reassessed any escaped income of the assessee and he could not have
served the assessee with a notice u/s.148 of the Act.
S. 292BB seeks to deem an
action as provided under the Act, to have been done in accordance with the
provisions of the Act. But when, as in the present case, the notice itself was
not in accordance with the provisions of the Act, it was a jurisdictional
defect, which the provisions of S. 292BB of the Act cannot, by any stretch of
imagination, be canvassed to cure.
A ‘proceeding’ as envisaged
by S. 292BB has to be a legally valid proceeding which here it is not, since the
notice for reassessment is bad in law. This also goes for the ‘inquiry’
mentioned in S. 292BB. The assessee, therefore, never appeared in any
proceeding, nor co-operated in any inquiry as required u/s.292BB and so S. 292BB
does not at all come into play.
Further, in the present
case, the assessee is nowhere aggrieved of any of the three situations i.e., (1)
that the notice has not been served on him, or (2) it has not been served on him
in time, or (3) it has been served on him in an improper manner. Rather, the
grievance of the assessee is that the notice served on him was not issued by an
AO having jurisdiction over him. Now this is a jurisdictional issue which goes
to the very root of the matter.
The jurisdictional defect of
the notice having been issued by an AO not having jurisdiction over the assessee,
as such, is not a mere irregularity, but an incurable illegality and is
incapable of being cured by seeking recourse to the provisions of S. 292BB.
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.)
12 D. K. Construction v. ITO
ITAT Indore Bench, Indore
Before Joginder Singh (JM)
and
R. C. Sharma (AM)
ITA No. 243/Ind./2010
A.Y. : 2006-07. Decided on :
6-12-2010
Counsel for assessee/revenue
:
M. K. Sharma/P. K. Mitra
S. 80IB(10) of the
Income-tax Act, 1961 — Deduction in respect of profits and gains arising from
development of housing project — Date of completion of the housing project —
Relevant date is not the date of issuance of the completion certificate by the
local authority but the date of completion as mentioned in the certificate.
Per R. C. Sharma :
Facts :
The assessee was engaged in
the business of civil construction, building and developing housing project. It
claimed deduction of Rs.36.63 lacs u/s. 80IB(10) of the Act. According to the
AO, the housing project was not completed prior to the prescribed date of
31-3-2008. The contention of the assessee was that it had completed the project
before the prescribed date and the local authority was duly informed of the fact
vide its letter dated 21-3-2008. According to the assessee, merely because the
completion certificate was not issued by the local authority, over which the
assessee had no control, the same could not be made a basis for denial of claim.
However, according to the AO, the availability of the completion certificate
before the date prescribed was a must for the allowance of deduction
u/s.80IB(10). Therefore, he rejected the assessee’s claim for deduction. On
appeal, the CIT(A) confirmed the disallowance.
Held :
According to the Tribunal,
what is crucial is not the date of issue of letter by the local authority, but
the date mentioned in the letter certifying completion of the project.
Therefore, it rejected the contention of the Revenue to the effect that the date
of completion shall be taken as the date on which the certificate is physically
issued by the local authority.
Introduction :
Under the Income-tax Act, 1961 (the Act), charitable trusts
are eligible for exemption from tax liability in terms of section 10 and section
11 to section 13. One of the pre-conditions for section 11 to
section 13 is that it should obtain registration from the Commissioner of
Income-tax u/s.12AA. Of late, there is a tendency in the Income Tax Department
to create hurdles in availing any exemption or other tax reliefs. e.g.,
exemptions/deductions u/s.10A, u/s.10B, u/s.80IA, u/s.80IB, etc. Truly speaking,
registration u/s.12AA in itself does not grant exemption. It is only a basic
procedural requirement. Yet, it is experienced that obtaining the registration
has become a task in itself.
Grounds for rejection :
The objections being currently raised by the CITs are
difficult to comprehend, let alone justify. Some of the objections raised are
discussed below:
It is common that people settled in Mumbai, hailing from a
common village place have an affinity towards their native place. They may want
to set up a school or a hospital in that village. The source of funds is
obviously in cities like Mumbai. It is convenient to register and administer the
trust in Mumbai although the actual activity i.e., construction of
school/hospital, etc., is at a distant place.
The CIT’s objection is, how can be monitor the activity !
Needless to state that the Charity Commissioner has registered the trust with
the complete information on the record. Strictly speaking, the Charity
Commissioner is the regulating authority. How is the CIT concerned with
subsequent regulation/monitoring? Ultimately, the Department will always be in
a position to examine the accounts and records.
In this regard, reference can be drawn to the Karnataka High
Court decision in the case of DIT v. Garden City Education Trust, (191
Taxman 238) wherein it was held that at the time of granting registration, the
CIT is not concerned with the manner of application of funds. He is only required to examine the nature and objects of
the trust as deduced in the trust deed. The question of application of funds is
to be decided by the AO while granting exemption u/s.11.
Sometimes, the CIT refuses to register the trust unless there
is some activity! It is like a chicken and egg syndrome.
One of the objections was as to what is the evidence that it
is meant truly for the public ? i.e., how the activities are publicised ?
Another common question is how will the multiple objects of
the trust be achieved with a meagre initial corpus ! The explanation is quite
obvious. The institution first gets registered with a small amount. After it
obtains approval u/s.80G, only then the donations would flow in.
Possible reasons for negative attitude :
I visualise the following probable reasons :
(a) First and foremost, the typical bureaucratic attitude
is negative thinking.
(b) Ego or other interests.
(c) Revenue targets.
(d) Fear that good and positive attitude may be
misconstrued in the Department itself.
(e) Genuine experience about misuse of exemptions and
concessions. This gives rise to prejudices.
(f) Since the requirement of renewal of approval u/s.80G
has been done away with, extra caution while granting it for the first time.
Conclusion :
Instructions may be issued for a soft and liberal approach.
It may be noted that the Special Bench (Delhi) in the case of Bhagwad Swarup
Shri Shri Devraha Baba Memorial Shri Hari Parmarth Dham Trust v. CIT, has
held that in a case where the CIT does not pass the order granting or refusing
registration of trust within the period laid down in section 12AA(2)
registration would be deemed to have been granted to the trust or institution
automatically on expiry of the period specified in section 12AA(2) of the Act.
Returns for first two to three years may be scrutinised to ensure that the
functioning is on a desired track.
On this basis, various surveys were undertaken on numerous corporates by the Department and huge amounts of tax were recovered on the ground that TDS should have been deducted at 10% u/s.194-I instead of 2% u/s.194C.
This controversial issue was litigated by corporates in the Tribunal and Court, which ultimately provided relief to the taxpayers.
In order to find out what the Tax Department has done or is doing in a similar transaction, entered with the transport contractors, an application under the Right to Information Act, 2005 (‘RTI’) was made. The following information was asked in the application :
1. Under which Section of the Act, does the Income-tax Department deduct tax while making payment to transport contractors for transportation services? Please provide your answer in respect of services received from transport contractor,
2. Could you please let me know the reasons in brief for deducting TDS under the relevant Sections of the Act?
In reply to the application, the Department accepted that, tax had been deducted at 2.06% u/s. 194C of the Act even after 13th July 2006 and not u/s.194-I.
This clearly shows even after the amendment, the Department was deducting tax at source at 2.06%, while on the other hand pressuring the corporate to deduct at an higher rate u/s.194-I (on identical type of services and agreements) so as to increase the tax collection.
Is such double standard adopted by the Department acceptable and fair?
Is it fair to the taxpayer, who is providing an honorary service of collecting taxes by deducting tax at source to the Government/tax-office?
The CBDT should issue a circular to stop this unfair practice of harassing taxpayers.
1. Banking and other financial services:
Whether the service tax is leviable on equipment leasing and hire-purchase finance activities?
Association of Leasing & Financial Service Companies v. Union of India, 2010 (20) STR 417 (SC)
The issue before the Apex Court was whether hire-purchase and leasing transactions involved any element of service, in order for the service tax to apply, or such transactions were explicitly chargeable to VAT, being a tax in relation to goods.
The appellants, members are engaged in the business of hire-purchase and leasing. 46th Amendment to the Constitution of India had inserted Article 366(29A) whereby a set of six transactions were enumerated therein to be deemed as sale of goods. These six transactions included the transfer of the right to use any goods for any purpose as well as hire-purchase transactions. Consequently, the entire amount paid to the hirer/lessor by way of instalments was chargeable to VAT. It was further argued that once the subject matter of hire-purchase and leasing was constitutionally characterised as a ‘deemed sale’, the transaction could not be taxed by the Central Government.
The Supreme Court took note of this contention and concluded that the taxable service category ‘banking and other financial services’ under service tax, included within it hire-purchase and leasing transactions.
The appellant’s members are non-banking financial companies (‘NBFC’). Certain NBFCs undertake activities of equipment leasing and hire-purchase financing in addition to giving loans. The concept of ‘banking and other financial services’ has been clarified with relevant explanations:
(a) Funding or financing the transaction covers two different and distinct transactions i.e., the financing transaction and the equipment leasing/hire-purchase transaction. While the former is exigible to service tax, the latter is exigible to local sales tax/VAT.
(b) There is a difference between a ‘finance lease’ and an ‘operating lease’. In the case of hire purchase agreement, the periodical payments made by the hirer is made up of (a) consideration for hire and (b) payment on account of purchase.
(c) The taxable event is the rendition of service. The tax is not on material or sale; it is on activity/service rendered by the service provider to its customer. Therefore, the Centre undoubtedly had legislative competence to charge the tax on the above service.
The Supreme Court upheld the charge of service tax on hire-purchase and leasing transactions, if forming part of financial leasing services under service tax law, notwithstanding that the same transactions were chargeable to VAT. There was no double taxation of one transaction to two taxes in this instance, as per the Supreme Court, even though both taxes were chargeable on the same base. It also noted that the service tax was, in fact, chargeable only on 10% of the finance or leasing charge.
II. HIGH COURT:
2. Admissibility of CENVAT credit of service tax:
Whether the services of repair, maintenance and civil construction used in residential colony for employees qualifies for input service?
Commissioner of Central Excise, Nagpur v. Manikgarh Cement, 2010 (20) STR 456 (Bom.)
The respondent-assessee engaged in the manufacture of cement was disallowed the credit of service tax paid on repairs, maintenance and civil construction, etc. as the services were used in their residential colony on the ground that the said services were not covered under the definition of input service and hence ineligible as input service.
According to the Revenue, as per decision of the Apex Court in the case of Maruti Suzuki Ltd. v. Commissioner of Central Excise, Delhi, 2009 (240) ELT 641 (SC), it must be held that the CESTAT was wrong in holding that the assessee was entitled to credit of service tax paid on services of repair, maintenance and civil construction used in the residential colony, whereas as per the assessee, establishing a residential colony was indirectly connected with the manufacturing activity in question related to the business and therefore, the Tribunal was justified in holding that they were entitled to the credit.
The High Court observed that establishing a residential colony for the employees and rendering taxable services in that residential colony may be a welfare activity undertaken while carrying on the business. However, to qualify as an input service, the activity must have nexus with the business of the assessee. The expression ‘relating to business’ in Rule 2(l) of the CENVAT Credit Rules, 2004 refers to activities which are integral to the business activity and not welfare activities undertaken by them.
The High Court held that unless the nexus is established between the services rendered and the business carried on by the assessee, the benefit cannot be allowed. In the present case, rendering taxable services at the residential colony established by the assessee for the benefit of the employees is not an activity integrally connected with their business and therefore, the Tribunal was not justified in holding that the services such as repairs, maintenance and civil construction rendered at the residential colony constitutes ‘input service’ for claiming credit.
3. Information Technology Service: Service tax:
Should information technology software be considered goods or services?
Infotech Software Dealers Association v. Union of India, 2010 (20) STR 289 (Mad.)
The petitioner, an association of software resellers prayed for a writ to declare S. 65(105)(zzzze) of Chapter V of the Finance Act, 1994 as null and void, ultra vires and unconstitutional of provisions of Article 245, Entries 92C and 97 of List I and Entry 54 of List II and contended as follows:
The respondents put forth the following claims:
Though Entry 92C is inserted, the same is not given effect to and therefore the residual Entry 97 empowers Union to enact the law.
The Court made the following observations:
(a) Through Master End-user Licence Agreement, normally the developer grants right to use and the copyrights of the software are kept with developer in case of all types of software i.e., canned, packaged or customised.
(b) Further, through that Master End-user Licence Agreement, the members of the association enter into an End-user Licence Agreement. ‘End user’ is the one who uses the product/ service but he does not have any contact with the developer.
(c) Therefore, the transaction is not sale of software as such, but is sale of contents of the data stored in the software, which would amount to service. Only when there is a transfer of right to use any ‘goods’, it would be considered deemed sale under Article 366(29A).
4. Outdoor catering service — Service tax v. sales tax:
Whether food and beverages supplied to passengers on board trains is leviable to VAT or not?
Indian Railways C. & T. Corp. Ltd. v. Govt. of NCT of Delhi, 2010 (20) STR 437 (Delhi)
The petitioner, a Government company provided catering services on board trains run by the Indian Railways. The consideration for these services is included in the fare charged by the Indian Railways collected from the passengers, and then paid to the company by Indian Railways. They had paid service tax on 50% of the value, availing abatement provided under the law, however, no VAT was paid thereon by them.
The issue before the Court was whether the petitioner was liable to VAT. The Court observed as follows:
It was held that the transaction between the petitioner and the Indian Railways does not amount to a contract of providing outdoor catering service but is a transaction of sale of food and beverages by the petitioner-company to the Indian Railways.
5. Recovery of dues:
Are directors personally liable for arrears of State and Central Sales Tax dues from the Company?? Om Prakash Walecha v. State of Haryana, 2010 (20) STR 384 (P & H)
The question before the High Court was whether the directors can be made personally liable to pay arrears of Central and State Sales Tax dues of a company. The Department contended that u/s.18 of the Central Sales Tax Act 1956, if the Company is wound up then the arrears of State and Central Sales Tax can be recovered from any person who was director for the period when the tax became due. However, in the present case, the company was not wound up or formally liquidated and other judgments on the subject-matter were not disputed by the Department. Therefore, the High Court allowed the writ petition.
III. TRIBUNAL:
6. Appeal:
Whether Committee of Commissioners can review the order already reviewed by the previous Committee of Commissioners?
Commissioner of C. Ex., Surat-II v. Gujarat Borosil Ltd., 2010 (20) STR 377 (Tri.-Ahmd.)
The Committee of Commissioners reviewed the order passed in favour of the respondents and found the same in accordance with the law and decided not to file appeal against it. The respondents applied for refund as a consequential relief and the same was rejected by the Department.
Thereafter, the Committee of Commissioners again reviewed the earlier order and filed an appeal with application for condonation of delay of 440 days. The Department contended that the length of delay was not relevant and what really matters is ‘sufficient cause’ for delay and that the Tribunal should liberally construe the phrase ‘sufficient cause’. The order was passed without considering the Supreme Court’s decision in the case of CCE, Allahabad v. Hindustan Safety Glass Works Ltd., (2005 (181) ELT 178).
The assessee contended that the Committee of Commissioners did not have power to review earlier order of the Committee of Commissioners and the case relied upon by the Department was not applicable to the fact of their case.
The Tribunal observed that the Committee had taken a conscious decision of not filing the appeal. Moreover, the said decision of Hindustan Safety Glass Works was available at the time of passing the order and also at the time of review. Therefore, it could not be considered as ‘sufficient cause’ for condonation of delay. Further, subsequent Committee of Commissioners cannot again review the order passed by the precedent Committee of Commissioners, since the matter had attained finality. The appeal was thus dismissed.
7. CENVAT credit:
(i) Whether service tax paid on C & F services is allowed as CENVAT credit to a 100% EOU?
Adani Pharmachem (P) Ltd. v. Commissioner of C. Ex., Rajkot, 2010 (20) STR 386 (Tri.-Ahmd.)
The Department contended that the order passed by the Commissioner (Appeals) was based on the Tribunal’s decision in the case of Gujarat Ambuja Cement Ltd. v. CCE, Ludhiana 2007 (212) ELT 410 wherein it was held that the appellants were not eligible for CENVAT credit. However, the appellants relied on the Departmental Circular and the Tribunal’s decision in case of CCE, Rajkot v. 6 respondents including appellants.
The Tribunal allowed the CENVAT credit of service tax?paid?on C&F services to the appellants who are 100% EOU for the reason that the place of removal in case of C&F or FOB exports is load port.
(ii) Whether various services used by the appellants qualify to be input services in terms of Rule 2(l) of the CENVAT Credit Rules, 2004?
Commissioner of Cus. & C. Ex., Raipur v. H. E. G. Ltd., 2010 (20) STR 312 (Tri.-Del.)
Since the steam and electricity generated was not liable to excise duty and therefore, service utilised in relation thereto was not available as CENVAT credit in Department’s view. However, since the issue was decided in favour of the assessee in case of Sanghi Industries Ltd. v. CCE, Rajkot (2009(13) STR 167) and the services were used within the factory premises, CENVAT credit was held as allowed.
The Department contended that excise duty paid on cars was not allowed as CENVAT credit and therefore, car insurance was also not allowed. However, the respondents submitted that repairs and maintenance of car was allowed as credit in case of CCE, Jaipur-II v. J. K. Cement Works, (2009(14)STR 538). The Tribunal allowed credit treating insurance as maintenance activity.
The Department contended that this was not used in or in relation to manufacture of final product. However, the activity was undertaken within the factory premises and it had nexus with the business activity and therefore was allowed.
Since the direct nexus with activities relating to manufacture was not established, the Tribunal remanded back the matter to the original authority.
The services were utilised by executives in relation to procurement of raw material, sale of finished goods and therefore, the same was held as connected to the business activity and was allowed. Reliance was placed on Ace Glass Containers Ltd. v. CCE, Meerut-II, [2010 (250) ELT 110].
Commission paid in relation to procurement of orders and consequently for business activity was held as allowable.
Following the Gujarat High Court’s decision in the case of CCE v. Excel Crop Care Ltd., [2008 (12) STR 436], this was allowed.
(iii) Does the activity of commission agent for sales promotion fall under the definition of
‘input service’?
Commissioner of C.Ex., Jallandhar v. Ambika Over-seas, 2010 (20) STR 514 (Tri.-Delhi)
A manufacturer-exporter of tools appointed an overseas commission agent for sales promotion activities in the overseas market. They paid service tax along with interest on the commission as recipients and took eligible credit of the same, treating the services of agents as ‘input service’. This was challenged by the Department holding that services rendered by them cannot be held to be utilised in the manufacture of final products and therefore, cannot be treated as inputs services. The activity of a commission agent was considered a post removal activity.
Since the definition of ‘inputs services’ included any services used in relation to ‘sales promotion’, the activities of overseas commission agents were clearly part of sales promotion activities, the case was decided in favour of the respondents.
(iv) In case of closure of factory, can cash refund of CENVAT credit be claimed?
Commissioner of C. Ex., Ludhiana v. Manish Spinning Mills (P) Ltd., 2010 (20) STR 540 (Tri.-Delhi)
The assessee’s finished goods were destroyed in a fire. They applied for remission to the Commissioner. The Assistant Commissioner granted refund in the form of CENVAT credit. The Commissioner (Appeals) had accepted the plea of the assessee for cash refund. Relying on the case of Slovak India Trading Co. P. Ltd. v. CCE, Bangalore, 2006 (205) ELT 956 (Tri.-Bang.) upheld by the Karnataka High Court in 2006 (201) ELT 559 (Kar.) wherein it was held that Rule 5 of the CENVAT Credit Rules, 2002 did not expressly prohibit cash refund of unutilised credit, the Tribunal held that the ratio of the decision was applicable to the present case and therefore Revenue’s appeal against cash refund was rejected.
8. Manufacturer: Service tax under commis-sioning and installation service:
Whether service tax is leviable on erection, commissioning and installation services rendered by a manufacturer on which excise duty is already paid by including the same in the assessable value?
Alidhara Texspin Engineers v. Commissioner of C. Ex. & Customs, Vapi, 2010 (20) STR 315 (Tri.-Ahmd.)
The appellants were engaged in the manufacturing of textile machineries. The appellants were entering into a composite contract for sale and supply of such machineries in fully installed, commissioned and in operational condition. Moreover, gross amount charged was inclusive of installation and commissioning charges and excise duty was levied on the same. Further, such work was sub-contracted and the sub-contractor was paying service tax on the same. The Department held that the appellants were engaged in providing erection, installation and commissioning services u/s.65(39a) of the Finance Act, 1994 and it levied service tax on the whole gross amount charged in absence of segregation of quantum of such service charged received by the appellants. It was held that S. 65(39a) of the Finance Act, 1994 covered commissioning and installation agencies, whereas the appellants were a manufacturing unit and had paid excise duty on the same treating the process as incidental to comple-tion of manufactured product. Relying on various judgments, the appeal was allowed.
9. Stock broker’s service:
Whether the sub-broker is liable to pay service tax when the stock broker has paid service tax on the same transaction?
Vijay Sharma & Co. v. Commissioner of C. Ex., Chandigarh, 2010 (20) STR 309 (Tri.-LB)
The Revenue submitted that the sub-brokers reg-istered with SEBI or made application for registration under SEBI Act, 1992, were covered within the definition of stock broker u/s.65(101) of the Finance Act, 1994 with effect from September 10, 2004. Further, the services provided by sub-brokers or stock -brokers in relation to sale or purchase of listed securities are taxable services and sub-brokers were liable for service tax. The appellants contended that they paid service tax to the main broker who ultimately has discharged the same on behalf of the sub-broker. A sub-broker provides services to a stock-broker who in turn provides services to its clients. Therefore, sub-brokers are not liable to service tax since sub-brokers and stock- brokers are agent and principal and this would amount to double taxation.
There being conflicting judgments of the Tribunal for the issue, the High Court referred the matter to the Larger Bench for deciding the same afresh in view of the amendment in the law.
The Larger Bench observed that sub-brokers were covered in the definition of stock-broker with effect from September 10, 2004. However, service being event of levy of tax, same service cannot be taxed twice. Therefore, the sub-brokers and the stock-brokers being agent and principal, the same transaction shall not be liable to double taxation. In the present case, the matters were remanded back for verification of payment of service tax by stock brokers. ?If?found that the stock-broker had paid service tax on behalf of the sub-broker, then the Department was directed to reduce the sub-broker’s demand.
10. Waiver of penalty:
Whether delay in obtaining registration and pay-ment of service tax amounts to evasion?
Star Energy Systems v. Commissioner of Service Tax, Ahmedabad, 2010 (20) STR 479 (Tri.-Ahmd.)
The appellant is a proprietor providing erection, commissioning and installation services. The category came into effect on 1-7-2003, however the appellant got itself registered on 26-10-2004 and voluntarily paid service tax with interest for the period 1-7-2003 to 26-10-2004 and on filing the returns, the Department began proceedings. Thereafter, with the introduction of Notification No. 18/2003-ST exemption benefit was claimed by the appellant whereby individuals providing commissioning and installation services were provided exemption. The appellant did not challenge the liability of service tax or seek refund of the same, but requested for waiver of penalties. It was held that an individual to be treated as a commercial concern cannot be accepted. In spite of the fact that the appellant could have challenged the liability, he did not even seek refund of voluntarily paid service tax and interest. Therefore, it cannot be said that there was an intention to evade tax and the appeal was allowed.
I. High Court :
Renting of Immovable property service :
Constitutional validity of levy of service tax on commercial
renting and retrospective amendment, w.e.f., 1-6-2007.
Shubh Timb Steels
Limited v. Union of India, 2010 (20) STR 737 (P & H)
The petitioner, owner of commercial immovable property, let
it out to business entities on rental basis. The petitioner challenged the levy
of service tax on renting of immovable property covered u/s.65(90a) and S.
(65)(105)(zzzz) of the Finance Act, 1994 and its retrospective amendment under
the said category as ultra vires the legislative competence of the Parliament.
The gist of contentions of the petitioner was that the matter of levy of service
tax on providing service of renting of immovable property was covered by Entry
49 of List II and not by Entry 92C or 97 of List I, and retrospective levy was
beyond legislative competence. Further, the transfer of property without any
value addition by way of service could not be covered by the levy of service tax
as renting of a building was a transaction of land & building covered by Entries
18, 45 and 49 of List II in respect of which exclusive jurisdiction to legislate
under Article 246(3) was vested in the State Legislature. Leasing was a transfer
of rights and not a service and was, therefore, not covered by Entry 92C of List
I. Reliance was placed on the decision of the Delhi High Court in the case of
Home Solution Retail India Limited v. Union of India and Others, 2009 (14) STR
433 (Del.), wherein it was held that service was to be provided in relation to
the renting of property and the property by itself could not be regarded as
service as it did not involve any value addition. As against this, the Revenue
contended that under Article 246(1), the Parliament had exclusive power to make
laws in respect of matters covered under List I including residue entry and that
the amendment with retrospective effect was only clarificatory in nature, such
levy was already provided under unamended provisions. The scope of Entry 49 List
II was limited to direct tax on property and not on activity in relation to
property. In any case, Entry 49 List II had to be read subject to Entries 92C
and 97 of List I. It was further argued that the judgment of the Delhi High
Court [Home Solution Retail India Ltd. v. Union of India and Others (supra)] did
not involve the issue of validity of the levy but involved question of validity
of the Notification and the Circular to recover service tax from the lessors of
property on the proceeds of renting out of property. The retrospective amendment
made the renting of immovable property itself a service covered by the
definition of taxable service.
The Court held as follows:
Based on the above, the petition was dismissed holding that renting of immovable property for commercial purposes is a service having a value for the service receiver and therefore, service tax is leviable on the renting of immovable property as being covered under Entry 92C read with Entry 97 of List I on the value of taxable services referred to in S. 65(105)(zzzz) read with S. 65(90a) of the Finance Act, 1994. Further, the retrospective amendment retrospectively with effect from 1-6-2007 was also upheld.
II. Tribunal:
2. CENVAT credit:
(a) Can CENVAT credit be availed on the strength of debit notes?
Godrej Consumer Products Ltd. v. Commissioner of C.Ex., Indore, 2010 (20) STR 609 (Tri.-Delhi)
The appellants took CENVAT credit of Rs.7,327 based on debit notes and the credit was denied. Penalty of Rs.20,000 was imposed on the appellants for wrong availment of credit.
Rule 9(1) of the CENVAT Credit Rules, 2004 mentions the documents on the basis of which CENVAT credit can be availed. Such documents are invoice, challans, supplementary invoice and bills of entry. Therefore credit was denied by the departmental authorities considering debit notes as ineligible document for availing CENVAT credit. Rule 15 of the CENVAT Credit Rules, 2004 prescribes penalty for wrong availment of CENVAT credit at Rs.2,000 or amount of service tax, whichever is higher, at the discretion of the authority. The appellant was levied penalty of Rs.20,000 and no finding was given for levying such penalty. Considering the amount of penalty arbitrary, it was reduced to Rs.2,000 and as such the appeal was partially allowed.
(b) Can CENVAT credit be taken on service tax paid on repair and maintenance service for residential staff colony?
Commissioner of C. Ex., Trichy v. Madras Cements Ltd., 2010 (20) STR 672 (Tri.-Chennai)
The respondents paid service tax on repair and maintenance service for residential staff colony of workers. It was held that nexus is required between the services and the manufacture or clearance of excisable goods before the benefit of CENVAT credit could be taken in respect of such services. The assessees failed to establish any such nexus between the services which were considered by them to be input services and therefore, benefit of CENVAT credit was not allowed.
(c) Whether CENVAT credit of telephone installed in residential premises of chief executive and CHA service for clearance of import and export goods is allowable?
Mileen Engineers v. Commissioner of C. Ex., Mumbai-III, 2010 (20) STR 668 (Tri.-Mumbai)
The appellants availed the facility of CENVAT credit of duty paid on the inputs as well as service tax paid on the services of CHA and the telephone installed in the residential premises of the Chief Executive. The same was denied by the lower authorities as per the CENVAT Credit Rules, 2004. The Tribunal allowed CENVAT credit on CHA service but denied in case of telephone installed in the residential premises and held that credit is admissible only in case of exclusive use of telephone for business purpose.
3. Export of service:
Whether services for procuring purchase orders in India for foreign suppliers satisfy conditions under Export of Services Rules, 2005?
Em Jay Engineers v. Commissioner of Central Excise, Mumbai, 2010 (20) STR 821 (Tri.-Mumbai)
The appellant filed a refund claim of Rs.6,71,439 on the ground that their activities are considered as export of service and exempted from payment of service tax. After scrutiny of the claim, a show-cause notice was issued and the Adjudicating Authority sanctioned the refund claim partially rejecting an amount of Rs.1,40,268 on the ground that the claim was not admissible as per Notification 2/2007-ST.
This Notification provided that the two conditions needed to be fulfilled for considering any taxable service as export of service, viz.: service is provided from India and used outside India, and payment for such service provided outside India is received by the service provider in convertible foreign exchange. The appellant received commission from their foreign principal in foreign currency for introducing the Indian clients to the foreign suppliers. The foreign principal used these services outside India and exported those goods to the buyers in India and directly collected payments from the buyers. The appellants were not required to pay service tax and were entitled for refund. The appellant claimed rebate of service tax under Rule 5 of the Export of Service Rules, 2005. It was held that refund was allowable.
4. Input service:
In respect of overseas commission paid, whether input service has connection with manufacture or sale?
Commissioner of C. Ex., Jalandhar v. Ambika Forgings, 2010 (20) STR 662 (Tri.-Delhi)
A manufacturer sold the goods to foreign buyers and paid commission to overseas parties. This commission was considered by the assessee as ‘input service’. The question that arose is whether the commission had nexus with manufacture or sale. Credit was denied relying on the meaning of ‘promotion’ as in the dictionary. As per Rule 2(l)(ii) of the CENVAT Credit Rules, broad activities which are having nexus to business and are integrally connected to business fall under the definition of ‘input service’. It was observed that once legislative mandate is apparent, no technical meaning need to be assigned to deny credit. As per common business parlance, business promotion adds to revenue of the seller/manufacturer. If business promotion adds to the revenue, it would have nexus with the sale activities. Therefore, the respondent would take credit of input service on overseas commission paid and excise duty payable on manufacturing activity. The case of the Department was thus dismissed and the manufacturer was allowed credit.
5. Principle of natural justice:
Is it justified to deny CENVAT credit to the assessee when documents relied upon while denying the credit were not made available to the assessee by the Authority?
Idea Mobile Communication Ltd. v. Commissioner of C.Ex., Meerut-I, 2010 (20) STR 775 (Tri.-Delhi)
Rule 9(2) of the ‘CCR’, provides discretion to the adjudication authority to give concession to the assessee in relation to procedural irregularity regarding maintenance of documents, on the basis of which CENVAT credit can be availed. In the instant case even before ascertaining the liability of the assessee and applying its mind, the authority arrived at final conclusion and passed the order denying credit. The matter was remanded to the Adjudicating Authority for fresh decision. The assessee produced all original invoices for verification before the Authority. However, the Revenue failed to take notice of the same and no reply was issued to the letter addressed to the Superintendent. The Adjudicating Authority relied on certain documents which the assessee was not aware of. It was held that the principle of natural justice was denied to the assessee as the document on which the order relied upon were not disclosed to the assessee. The Tribunal allowed the appeal and remanded the case back to the lower authority for fresh adjudication.
6. Penalty:
(a) Whether penalty can be imposed in case there is ignorance for payment of tax
Sri Krishna Smelters Ltd. v. Commissioner of Central Excise, Salem, 2010 (20) STR 780 (Tri.-Chennai)
The assessee was held for non-payment of service tax and penalty was imposed u/s.78 of the Finance Act, 1994 and contended that the assessee cannot be held responsible for non -payment of service tax as there was no intention to evade payment of tax, as the entire amount of tax was available by way of credit. It was further held that S. 78 was invoked on the ground that the assessee failed to file the returns. The Tribunal held that failure to file returns was not sufficient to hold the assessee guilty of suppression and considering that the entire amount of tax was available as credit, there was no intention to evade payment of tax. Hence, the penalty imposed u/s.78 was set aside.
(b) Whether penalty can be imposed u/s.76 and u/s.78 if service tax has been paid along with interest willingly?
Idial Security Organisation v. Commissioner of S.T., Ahmedabad, 2010 (20) STR 787 (Tri.-Ahmd.)
The appellant was providing security agency services. Penalties under various Sections of the Finance Act, 1994 were also imposed. On coming to know of the liability, immediately full amount of service tax along with interest was deposited. The appellant did not pay the service tax only because he was not aware of the law. It was a one -man show and he had not collected service tax from the customers. Even though it can be said that ignorance of law cannot be an excuse, it is one of the factors while considering imposition of penalty. Considering this a fit case for waiver of penalty, S. 80 of the Finance Act, 1994 was extended and the appeal was allowed.
(c) Whether penalty is imposable in case of ad-justment of excess tax of a particular month in subsequent months?
Chettinad Cement Corporation Ltd. v. Commissioner of Central Excise, Trichy, 2010 (20) STR 815 (Tri.-Chennai)
The appellant intended to adjust excess service tax paid for the month of March towards subsequent month’s liability. This not being a case of delayed payment of service tax or failure to pay service tax and in way it could be said to be tax paid in advance, it was held that the assessee could not be penalised u/s.76 of the Finance Act, 1994 which is applicable in case of failure to pay tax. However, u/s.77, penalty of Rs.1000 was imposed and the appeal was allowed.
7. Valuation : Sales tax paid on materials:
A. N. Palaniappan v. Commissioner of Central Excise, Trichy, 2010 (20) STR 781 (Tri.-Chennai)
Materials consumed during the course of carrying out the activity of retreading of tyres under the service head ‘Maintenance and Repair Services’ could take benefit of Notification No. 12/2003-ST, dated 20 -6-2003. As per this Notification, so much of the value of taxable services, which is equal to the value of goods and materials sold by the service provider to the service recipient, is exempted from payment of service tax. In the instant case, the assessee was paying sales tax on the materials consumed and hence, the order levying service tax on such material component was set aside.
Our lives are conditioned by the accumulations of the past
and expectations of the future. We have been taught to live in destiny,
pre-conditioned as it is, it prevents us from breaking out of the cocoon or the
shell. We try to console ourselves for the misfortunes or the tragedies that
befall us in our lives, and meekly blame it on our destinies. From there on and
to everything in our lives, there is a deep-rooted conditioning, by building a
fort or a wall around us to conclude that all else other than the accumulated
impressions are false. To be unconditioned simply means to be un-caged.
Religiosity and spirituality help one to discover the true nature of life and it
is the quintessence of being totally free.
What needs to be done to get us out of the shackles of
conditioning ? A mind of deep contemplation and a sensitive approach to natural
instincts that have weathered out from us, over centuries, on account of
materialistic desires. A religious and spiritual bent of mind to understand the
subtle forces that prevail in nature are the hallmarks of an unconditioned mind.
But let us be clear that religiosity does not mean rituals and dogmas, but
something beyond it.
The superficial mind is momentary, conditioned and
artificial. Delving deep into the inner self, the serious mind begets questions
all about life and not willing to be conditioned by conflicts about the
externalities of living. Contemplation leads to frugal living and less of
desires, it prompts seriousness in every walk of life, be it with respect to
work or in relationship. It is only the deeper mind that can experience total
silence and blissfulness whatever may be the state of ones being. There is no
craving for ‘becoming’, but it is always a state of ‘being’.
All our lives we have lived with what we have gathered and
what we have accumulated. We have lived by what others have told us. It is a
beaten path. Delving a little deeper, we would be able to see much more than
what we have been told and what we have been taught or seen. By searching for
it, the human mind gathers a lot of composure, it will respond without conflict
or tension. To live, will become more meaningful even without seeking for it.
Tragedies in life are taken at strides without having to bother about such
consequences, for they are natural part of our life process. A meaningful leaf
can be taken from ‘The Road Not Taken, by Robert Frost’.
‘Somewhere ages and ages hence :
Two roads diverged in a wood, and I —
I took the one less travelled by,
And that has made all the difference’.
To be in the state of receptivity or in the state of a subtle
mind, always requires a serious approach and an earnest effort, irrespective of
what subject we are dealing with. There is a sense of divinity and all
pervasiveness in such an approach and at such stages the mind does not and will
not hanker for results.
Jiddu Krishnamurthy, the world philosopher, has dealt
exhaustively on the unconditioned mind; for him it was the unconditioned mind
that could seek the absolute truth. Glimpses of what he has got to say on the
unconditioned mind are here for the readers to experience :
‘He thought that the mind was conditioned by reason and the
expectations of our society, culture, and personal needs. He held that having a
conditioned mind is an obstacle that needs to be overcome through insight
in order for an individual to move to a higher state of consciousness. He talked
in multiple ways about the conditioned mind. One of these ways is through the
analogy of the pendulum. He used this analogy to show that normal consciousness
swings from past to future, and then reverses. Humans are always in one of the
two states, either the past which consists of memories, or the future which
consists of expectations. He claimed that at the centre of the pendulum swing,
the present exists, and it is at this infinitesimal moment when a preconscious
state of mind can be cultivated. By training the mind to ‘live’ in the
present, it can be emptied of all contents in order to facilitate a true
awareness of what is. Awareness of ‘what is’ comes through insight and signifies
the development of the religious mind.’
The aim should be to get to the ‘centre of the pendulum’ and
enjoy the present.
Part II
In the first part of the article published in December 2010
issue of BCAJ, we discussed broadly the issues which arise while making payments
for designs and drawings acquired from foreign entities for diverse business
purposes, definitions of the terms Royalty and Fees for Technical Services (FTS)
under the Income-tax Act, 1961 (the ACT), under Model Conventions and under some
important Indian DTAAs. We also discussed meaning of the terms ‘design’,
technical and plan, as per various dictionaries.
In this part, we will discuss taxability of the payment for
technical plans and technical design with reference to various judicial
pronouncements with a view to understand how the case law has developed over the
years and to cull out guiding principles.
Taxation of Payment for Technical Plan or
Technical Design as explained in various judicial
pronouncements :
Taxation of Payments for Technical Plan or Technical Design
has been examined, explained and applied by various judicial authorities in
India
A gist of relevant cases is given below. It is important to
note that in the gist of cases given below, we have only considered and analysed
the aspect relating to taxation of payments for Technical Plan or Technical
Design. Other aspects relating to royalty, FTS, PE, etc. have not been discussed
or analysed here. For this, the reader should consider and refer the text of the
decisions.
1. CIT v. Davy Ashmore India Ltd. (Cal.)
(1991) 190 ITR 626 (India-UK DTAA) :
Nature of payment :
Import of concept designs and drawings for enabling the
assessee to prepare the detailed manufacturing drawings for purposes of
manufacture of the terminal equipments which were required to be supplied by the
assessee.
Issue :
Whether the payment made to the non-resident company were in
the nature of royalty within the meaning of Explanation 2 to S. 9(1)(vi) ?
Held :
That the non-resident did not retain the property in the
designs and drawings. The designs and drawings were imported under the import
policy with the approval of the RBI on the basis of the letter of intent. The
import of the designs and drawings postulated an out and out transfer or sale of
such designs and drawings. The consideration paid for the transfer was not
assessable as royalty.
2. CIT v. Klayman Porcelains Ltd. (AP)
(1998) 229 ITR 735 (India-Germany DTAA) :
Nature of payment :
Under the agreement, consideration was paid for
construction/installation of a kiln. The amount paid under that memorandum by
the Indian company to the non-resident company was payment for technical
drawings towards engineering for the kiln.
Issue :
Whether the lump sum payment made by the resident company to
the non-resident company for supply of designs and drawings (engineering for the
kiln) did not constitute ‘income’ by way of royalty of the non-resident company,
within the meaning of the provisions of S. 9(1)(vi) ?
Held :
The Tribunal on construing the relevant portion of the
agreement recorded the finding that this was a case of a foreign company
undertaking to supply, erect and commission a kiln in India, the only service
rendered in India being that of supervision by an expert deputed by the foreign
company. The amount was not paid for imparting any information concerning the
working of, or the use of, a patent, invention, model, design, secret formula or
process or trade mark or similar property falling under clause (ii) of
Explanation 2 to S. 9(1)(vi) or for imparting of any information concerning
technical, industrial, commercial or scientific knowledge, experience or skill
within the meaning of clause (iv) of Explanation 2. A close reading of the
second type of work as well as the other items of the memorandum showed that the
consideration was paid for construction/installation of the kiln. Therefore, the
payment made by the assessee to the non-resident company did not constitute
‘income’ by way of royalty of the non-resident company, within the meaning of
the provisions of S. 9(1)(vi) of the Act.
3. Leonhardt Andra Und Partner, GmbH v. CIT
(2001) 249 ITR 418 (Old India-Germany DTAA) :
Nature of payment :
Payment was made to the German company in connection with the
design of the bridge to be built.
Issues :
1. Whether the sums received by the assessee for design and
technical services for the construction work are chargeable to income-tax under
the Act ?
2. Whether the transfer of the drawings, designs and
technical services under the collaboration agreement constituted an out and out
transfer of such rights and as such the sums received therefor could be treated
as royalty for the purpose of the Indo-German DTAA and liable to Indian
Income-tax ?
3. Whether, the sum received by the assessee for the supply
of designs, drawings and technical services constituted ‘industrial and
commercial profits’ for the purpose of the Indo-German DTAA and, as such, the
same is assessable under the Act ?
Held:
Royalty was not defined in the old India-Germany DTAA and was
not included within the term ‘industrial and commercial profits’. The term
‘royalty’ not being defined in the DTAA, the definition in the Act would
prevail. Therefore, the sums received by the assessee for design and technical
services for the construction work were in the nature of royalty within the
meaning of the term in S. 9(1)(vi) of the Act, which was taxable and did not
constitute industrial and commercial profits. The fact that the assessee had no
permanent establishment in India was of little consequence.
Note :
CIT v. Davy Ashmore India Ltd., (1991) 190 ITR 626 (Cal.) was distinguished on the ground that as royalty was not defined in the Old India-Germany DTAA and as such the statutory provision will prevail.
4. Munjal Showa Ltd. v. ITO, (2001) 117
Taxman 185 (Delhi) (Mag.) (India-Japan DTAA)
Nature of payment:
The Japanese company undertook to provide to assessee technical know-how and services in connection with manufacture of shock absorbers. The assessee sought drawings and designs of equipments in order to fabricate plant and machinery in India and the Japanese company charged a sum towards cost of supplying the same.
Issue:
Whether such supply of drawings and designs was an outright sale in the Japanese company’s hands and purchase in the assessee’s hands, and, accordingly, consideration paid was commercial profit of Japanese company within meaning of Article III(1) of DTAA?
Held:
The ITAT held that:
5. Pro-Quip Corporation — AAR
(2002) 255 ITR 354 (India-USA DTAA):
Nature of payment:
Linde Process Technologies (India) Ltd. (LPT) received a purchase order from another Indian company for design, engineering technical know-how and erection and commissioning of hydrogen generation plant. As part of execution of the project, LPT was required to obtain and supply the engineering drawings and designs for the setting up of the plant.
The engineering drawings and designs were available with?Pro-Quip?Corporation, USA, the applicant. LPT placed a purchase order with the applicant for the purpose of specified engineering drawings and designs for the construction of hydrogen generation plant for the Indian company.
Issue:
Whether the applicant is liable to tax on the amount received from Linde Process Technologies (India) Ltd. towards consideration for the sale of engineering, drawings and designs received under purchase order of Linde Process Technologies (India) Ltd.?
Held:
The AAR held that:
6. Gentex Merchants (P.) Ltd. v. DDIT(IT)
(2005) 94 ITD 211 (Kol.) (India-USA DTAA):
Nature of payment:
The assessee-company entered into an agreement with a US company for development of water features at premises owned by it. Under this agreement, the US company was not only to provide schematic ideas but also to provide technical designs, drawings and information, on basis of which the assessee was to execute and install water features. Moreover, the US company was to ensure that features executed by contractors at site conformed to drawings, designs specifications provided by it.
Issue:
Whether since the US company was required to deliver technical designs or plan for sole use by the assessee-company in India, payments effected under agreement squarely fell within definition of ‘fees for technical services’ mentioned in Article 12(4)(b) of India-USA DTAA?
Held:
The ITAT held that:
7. Indian Hotels Company Ltd. v. CIT [IT Appeal No. 553 (Mum.) of 2000, dated 14-12-2005] India-Singapore DTAA:
[Decision not yet reported. However, the same has been cited with approval in the case of Abhisek Developers v. ITO, (2008) 24 SOT 45 (Bang.) (URO).] The relevant portion cited in the decision of Abhisek Developers is reproduced below. “The facts of the case on hand are identical with the facts of the case dealt by the Mumbai ‘B’ Bench of the Tribunal in IT Appeal No. 553 (Mum.) of 2000, order dated 14-12-2005 in the case of Indian Hotels Co. Ltd. v. ITO, wherein at para 7 it is held as follows: “A careful reading of the above clauses of the agreement between the assessee company and M/s. HBA clearly shows that the fees payable to M/s. HBA are neither fees paid for technical services nor are in the nature of royalty as defined in various articles of the DTAA between India and Singapore. As per the various clauses of the said agreement it is clear that?M/s. HBA has to hand over and transfer all layout plans and interior concepts in regard to the areas defined in the agreement and all the interior design, drawings and presentation material shall become the property of the assessee-company. All design work submitted by M/s. HBA is for the use solely on this project and cannot be used as part of any other design and the transfer of property in the interior design, drawing, presentation material shall take place in Singapore. It is specifically provided in clause 4.5 of the agreement that all interior design, drawing and specifications shall become the property of the client and the same shall be used for any other purpose other than that covered by this agreement by the interior designer. The services were only to create ‘design’ and title in the design, etc. has passed in this case to the assessee-company. In these facts of the case, we hold that the fee payable to M/s. HBA is not a fee for technical services and is not in the nature of royalty as per the articles of DTAA between India and Singapore and therefore, the assessee was not liable to deduct tax from remittances to M/s. HBA (P.) Ltd. The assessee-company has purchased and acquired interior design and drawing from M/s. HBA and the property therein has in fact passed to the assessee-company. In this view of the matter, the issue is decided in favour of the assessee and the grounds of appeal of the assessee are allowed.”
8. DCIT v. All Russia Scientific Research
Institute of Cable Industry, Moscow
(2006) 98 ITD 69 (Mum.)
(India-Russian Federation DTAA):
Nature of payment:
The assessee, a Russian company, possess-ing knowledge and experience in the field of manufacturing technique of a particular product, entered into an agreement with IPL, an Indian company under which the assessee-company was to provide to IPL a “non-exclusive right to use the ‘know-how’ for the purpose of realisation of the process and the technical process and the special process in the territory and sell the licensed product and the special product in the territory and zone of non-exclusive right”. Under this arrangement, the assessee was, upon a request from the IPL, to render ‘technical assistance’.
Issue:
Whether or not the payment in consideration of supply of technical documentation, on the facts of this case, is to be treated as ‘royalty’ or not?
Held:
The ITAT held that:
In the next part of the Article, we shall discuss some more judicial decisions on the subject.
Death had snatched away Shri Haribhai Kothari from us. But we
can tell death ‘Do not be proud’ — You cannot really take him away from us. To
live in hearts of people is not to die. Haribhai will live for ever in our
hearts.
Let us all then do Namaskar to this great soul and pray that
the God Almighty give him eternal peace.
Haribhai has been addressing us under the auspices of Amita
Memorial Trust since past 14 years. He was scheduled to speak to us for the 15th
time on 31st January 2011. But this was not to be. He passed away on 5th January
2011.
During our life we come across various people who are good
thinkers, who are good speakers. But very rarely do we come across a person
whose thinking, speaking and living are totally aligned. Haribhai taught what he
believed in and practised in his life. He walked his talk. He was truly a saint.
Haribhai was easy to get along with. In arranging all the 14
lectures, never had I to even write a letter to him. Even selection of the topic
was done on phone. To lend us comfort he would come 15 minutes ahead of the
appointed time of the lecture, to ensure that we were not put to any uneasy
feeling. He came on his own, and went on his own. No arrangements were required
to take him back to his residence in Mulund.
Haribhai was a great exponent of ‘Bhagvad Gita’. He
repeatedly taught us that one should not grieve at the death of someone. Quoting
Bhagwad Gita :
Just as we cast off old clothes and put on new clothes, the
soul gives up the old body and acquires a new one. The soul is neither born nor
does it die. Why should then one grieve ?
My mind goes back to my childhood. As a small boy, I along
with my grandfather, had an occasion to visit an Ashram in Songadh in Saurashtra.
In the morning when we were to leave, a person was singing a bhajan in a
melodious voice to the strains of a sarangi. He was blind and he was also
playing the sarangi. I remember the bhajan that he was singing written by
Anandghanji :
During the last month of his life he uttered these prophetic
word “He only is afraid of that who has done things which he should not do or
not done things which he should have done. I have always done what I should have
done and never done things I should not have done. Why then should I fear
death ?”
Let us learn from the life of Haribhai how to live, so that
we do not fear death. Let us spend our time doing things that we should live. As
expressed in the Upanishads “Better a moment of glow than a lifetime of smoke.”
Let Haribhai’s noble life be a guiding torch to enable us to live a better life
that will be our true Namaskar to the great soul.
“We live in deeds, not years;
In thoughts, not breaths;
We should count time by heartthrobs.
He most lives, who thinks most.
Feels the noblest, acts the best”
— Philips James Bailey
S. 297, S. 299 and S. 300 of the Companies Act, 1956
(hereinafter referred to as ‘the Act’) embody and codify the principles
regarding fiduciary duties of directors of a company. S. 299 of the Act enjoins
upon the directors a statutory duty to make disclosure of interest in the
contract or arrangement in which they are interested. S. 300 of the Act debars
interested directors in certain cases from being counted for the purpose of
quorum and voting. S. 297 of the Act provides for the consent of Board of
Directors of a company and in certain cases approval of the Central Government,
to certain contracts in which directors are interested.
We are attempting to throw light on two aspects of S. 297 of
the Act in this article :
(a) Is it fair to exclude foreign companies/bodies
corporate from the provisions of S. 297 of the Act ?
(b) Is it fair to keep exemption amount provided under the
proviso to S. 297(2)(b) to Rs 5,000 only ?
Parties u/s.297 of the Act :
We will first look at the parties which are covered u/s.297
of the Act. Ss.(1) of S. 297 specifies parties and types of contracts to which
the Section applies. The provisions of S. 297 applies, when out of two parties
to the contract, one is a company (say ‘A’) and other is any one of the
following :
(a) Any director of the company A;
(b) Any relative of the director of the company A;
(c) Any partnership firm in which the director of the
company A is a partner;
(d) Any partnership firm in which any relative of the
director of the company A is a partner;
(e) Any partner of the partnership firm in which the
director of the company A is a partner;
(f) Any partner of the partnership firm in which any
relative of the director of the company A is a partner;
(g) Any private limited company in which the director of
the company is a member;
(h) Any private limited company in which the director of
the company is a director.
Types of contracts to which this Section applies are as
follows :
(a) for the sale, purchase or supply of any goods,
material or services; or
(b) for underwriting the subscription of any shares in,
or debentures of, the company.
If we look at the above, we will come to know that the term
‘bodies corporate’ is not used in the parties covered U/ss.(1) of S. 297 of the
Act.
Transactions between foreign subsidiaries/joint venture with
entities abroad :
In the current scenario of the industry and due to
liberalisation of the Foreign Direct Investment Policy, many foreign entities
prefer India to expand their businesses.
Such foreign entities form subsidiaries or enter into joint
venture with Indian partners. These companies’ import/export/provide
goods/materials/services to their parent companies or group companies outside
India or vice versa.
They require technical support/consultancy from their parent
company or a joint venture partner in the initial stages or sometimes on a
regular basis. Such contracts/transactions between Indian company and a foreign
company fall under the purview of contracts mentioned u/s.297(1) of the Act.
Applicability of S. 297 of the Act in above case :
As foreign companies are bodies corporate, they are excluded
from the applicability of S. 297 of the Act. Hence, S. 297 does not apply to
such contracts or transactions between an Indian company and a Foreign Company
though directors are interested as stated under the Section. Further, no
approval of the Central Government is needed in such cases as the Section itself
is not applicable.
It means, any director of an Indian company who is director
or member of a foreign company with which the Indian company is
transacting/entering into a contract, need not obtain approval of the Board of
Directors and the Central Government.
Position of an Indian company transacting with an Indian
company :
If the above transactions would have been entered between two
Indian private limited companies covered under the parties to the contract, the
situation would have been reversed. It means where directors are interested as
stated in S. 297(1) of the Act entering into transactions falling under that
Section, approval of the Board of Directors and the Central Government in
certain cases would be required.
It means in case of two Indian companies where paid-up
capital exceeds the criteria laid down under the proviso to S. 297(1) approval
of the Central Government is required if :
(a) the transaction or contract is between the parties
covered u/s.297(1), and
(b) the transaction or contract is covered u/s. 297(1).
Is it fair to exclude foreign companies from the ambit of S.
297 when the same is applicable in the case of Indian companies ?
Now we will examine the exemption provided u/s.297(2)(b) of
the Act :
S. 297(2)(b) reads as follows :
“(b) any contract or contracts between the company on one side and any such director, relative, firm, partner or private company on the other for sale, purchase or — supply of any goods, materials and services in which either the company or the director, relative, firm, partner or private company, as the case may be, regularly trades or does business.
Provided that such contract or contracts do not relate to goods and materials the value of which, or services the cost of which, exceeds Rs 5,000 in the aggregate in any year comprised in the period of the contract or contracts;”
The provisions of S. 297 of the Act are not applicable if the above conditions are fulfilled i.e.,
(a) the parties to the contract regularly trade or do business
(b) the cost of such contract(s) does not exceed rupees five thousand in the aggregate in any year comprised in the period of contract(s).
The said Ss.(2) was substituted by the Amendment Act, 1960. This figure of Rs 5000 is unchanged since at least 1960 (50 years?!). In spite of so many amendments to the Act, surprisingly this proviso has not been amended. We know basic economics — value of a rupee is diminishing day by day. The inflation rate on many occasions is intwo digits. Is it not funny to keep such unrealistic figure in the exemption? Is there any possibility that a company in a year will trade or provide services restricting it to Rs 5000?
Conclusion:
S. 297 is not applicable to transactions or contracts entered by an Indian company with a foreign company. But it is applicable in case of two Indian companies. This is unfair towards Indian companies. To make the law fair:
(a) the Section may be amended for treating both Indian as well as foreign companies at par; or
(b) the term ‘body corporate’ can be inserted in the list of parties stated u/s.297(1) of the Act. The limit of Rs 5000 may be increased or eleminated alotgether.
1. Introduction :
Risk — we have been using this word frequently these days (or
more precisely in the last decade) particularly after the corporate scandals in
the early 2000. The word has legion synonyms and is perhaps one of the few words
in English taxonomy to have so many twins. Call it uncertainty, randomness,
chaos, entropy, volatility, catastrophe, threat, complexity, vulnerability or
‘black swans’ (a word coined by Nicholas Taleb in his book Black Swan to refer
to the impact of highly improbable events); or simply call it risk, the list is
long. Interestingly its thesaurus list is just as long as is the list of its
definitions. The avalanche in the definitions of ‘risk’ and ‘risk management’,
by different theorists, epistemologists, institutes, text books and consultants
makes ‘risk’ and ‘risk management’ one of the most debated concepts of
management literature. Ironically, the confusion and differences in the
understanding of this subject also makes it a lucrative business option for
consultants to leverage upon.
The debate is not restricted to the management hemisphere.
Even the physicists are busy doing auto-psy of this term (albeit in different
context) for more than half a century to find the answers of origin of this
universe and thereby refining our Weltanschauung. The Heisenberg’s Uncertainty
Principle, which is frequently used by Einstein in explaining ‘General
Relativity’, has for decades created a similar anxiety among physicists as it
has among the management literates. Stephen Hawkings, a renowned physicists and
noble laureate, quotes the following words in his book ‘A Brief History of Time
: From Big Bang to Black Holes’ in explaining the ‘uncertainty’ principle :
“Quantum mechanics does not predict a single definite result
for an observation. Instead, it predicts a number of different possible outcomes
and tells us how likely each of these is. That is to say, if one made the same
measurement on a large number of similar systems, each of which started off in
the same way, one would find that the result of the measurement would be A in
certain number of cases, B in different number and so on. One could predict the
approximate number of times that the result would be A or B, but one could not
predict the specific result of an individual measurement. Quantum mechanics
therefore introduces an unavoidable element of unpredictability or randomness
into science. Einstein objected this very strongly, despite the important role
he had played in the development of these ideas. Einstein was awarded the Nobel
Prize for his contribution to quantum theory. Nevertheless, Einstein never
accepted that the universe was governed by chance; his feelings were summed up
in his famous statement — God does not play dice.”
According to me, ‘risk’ is more a subject of behavioural
science and psychology than a subject of organisational management. This is
because each individual has its own definition of risk and has its own approach
of practising risk. We all have different risk appetites or risk taking
abilities. And this in turn is the function of the manner in which we have
grown, the environment to which we have been exposed to and myriad events that
have shaped our lives. Our society, beliefs, perceptions, value system and
culture have an equal role to play. It is not only that the risk taking ability
differs from individual to individual, but for one individual also it keeps
varying from time to time. Risk is not a word that is discussed only at board
and executive level; we have been frequently using this word or its twin even in
our day-to-day life to refer to different events that shape our ‘risk appetite’.
Not mooting as to what constitutes precise definition of risk
and narrowing its application to the theory of business organisation, this
article tries to initiate a discourse and provoke thought process on the
following two aspects of risk management :
- Integrated assessment of risk that considers interplay and interdependencies
of risks, and
- Significance of behavioural and group dynamics in risk management process that
may dilute the likely benefits from risk management exercise.
2. Risk Management :
Committee of Sponsored Organisation (‘COSO’) of Treadway
Commission, published a technical paper on risk management titled ‘Enterprise
Risk Management — Integrated Framework’, wherein it has extensively detailed the
approach, methodology and framework for managing risk across the enterprise.
Ever since its publication, the framework has been incorporated into policy,
rule, and regulation, and used by thousands of enterprises to improvise their
governance and risk management processes. According to the paper, the threads of
risk management include — Internal environment, objective setting, event
identification, risk assessment, risk response, control activities, information
and communication and monitoring.
Amongst the above, one of the most difficult thread to
implement is ‘risk assessment’. The paper provides a different perspective and
also a technique, to assess risk, be it in quality or quantity terms. While
quantification of risk is still in its nascent stage, the enterprises have been
largely assessing risk in quality terms based on the parameters of impact and
likelihood. While quantification of risk in numbers has its own advantages, it
is against the management wisdom that says that one should manage ‘business’ and
not ‘numbers’. Further, quantification has its limitations as it is subject to
number of assumptions and hypothesis, which may again become a matter of debate.
Due to its simplicity and pragmatism and its advantage of providing better
perspective of risk, qualitative risk assessment is more favoured by risk
experts and business executives (sparing the banking and financial industry)
over quantitative risk assessment. The qualitative assessment score, when
plotted on 2 x 2 graph, assists in concocting risk response strategies.
Akin to any other decision-making activity, risk management is also a group and consensus seeking exercise, wherein the intelligence of many is preferred over wisdom of an individual. There are many social, behavioural and psychological factors that operate behind any such group exercise that can exacerbate it or invigorate it. The identification of risks and its assessments are culmination of ratings of different executives, divisional and functional managers (alias process owners or risk champions). As a corollary, the risk management exercise is also vulnerable to symptoms of behavioural decision-making, which in majority of cases in real world tends to dilute the real benefit that is purportedly expected from risk management exercise. This paper also discusses some of these symptoms, which a risk manager should be cautious of, for effective traction of benefits of risk management.
2.1 Risk Assessment: Measuring the Domino Effect of Risk:
In real world, risks seldom operate in isolation. A particular risk interacts with various other risks with varying intensities; these interactions further keep varying at different point of time and so does their intensities. The complexity, dynamism and frequency of change of the systems in real world, be it ecological system or financial system or economic system or company’s internal control system, contribute to these very characteristic, making accurate risk assessment an utopia.
This characteristic of risk is also colloquially referred to as domino effect of risk. The physicists also refer to it as the butterfly effect or chain effect and allusion of which is also reflected in Edward Lorenz Chaos Theory. The domino effect is a chain reaction that occurs when a small change causes a similar change nearby, either on linear trajectory or in skewed manner.
The integration of global financial and commodity markets, urge of world economies to adopt the capitalist framework, avalanche of cross-border acquisitions, spree of local companies to go global, emergence of black swan known to be cloud computing and information technology and various similar other black swans, increases the domino effect in an exponential manner, making the understanding of risk (in right spirit) similar to arranging of desks on a sinking Titanic. There can be myriad instances that can be quoted to exemplify the domino effect of risks:
The combined effect of such interdependent risks, which although individually may be of low magnitude (low impact and low likelihood), may create apocalyptic massacre for a company. And rectifying such injury may either become impossible or would necessitate a complex surgery.
The following words of Nicholas Taleb from his book ‘The Black Swan — Impact of Highly Improbable Events’, are apt to exemplify the domino effect of risk, particularly in era of globalisation:
“Globalisation creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words, it creates devastating Black Swans. We have never lived before under the threat of a global collapse. Financial Institutions have been merging into a smaller number of very large banks. Almost all banks are interrelated. So the financial ecology is swelling into gigantic, incestuous, bureaucratic banks — when one fails, they all fall. The increased concentration among banks seems to have the effect of making financial crises less likely, but when they happen, they are more global in scale and hit us very hard. We have moved from a diversified ecology of small banks, with varied lending policies, to a more homogeneous framework of firms that all resemble one another. True, we now have fewer failures, but when they occur . . . . I shiver at the thought.
Banks hire dull people and train them to be even more dull. If they look conservative, it’s only because their loans go bust on rare, very rare occasions. But (. . .) bankers are not conservative at all. They are just phenomenally skilled at self-deception by burying the possibility of a large, devastating loss under the rug. The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry : their large staff of scientists deemed these events ‘unlikely’ ”.
The COSO framework categorically emphasises that looking at interrelationships of risk likelihood and impact is an important management responsibility, since it can significantly impact company’s perspective of risks. However, the framework does not explicitly discern the techniques to measure and assess the interplay of risk, as it does for assessment of individual risks. In practice, consideration of risk interplay becomes a paper exercise and is seldom implemented while performing risk assessments. Due to limited guidance on the measurement of risk interactions, risk assessments are often performed for individual risks only, which in all probability is likely to give deluding picture of risk, if not incorrect.
This domino effect can be measured using statistical tool viz. correlation coefficient (r). This would, of course, envisage the following additional threads in addition to those in existing COSO framework.
Identification of Risk Baskets :
Identifying interrelated risks (i.e., the risks that are interdependent on each other) and creating risk baskets or risk portfolios.
Measuring Risk Correlation
Measuring the correlation between the risks within a risk basket. For establishing such correlation, individual risk scores for reasonable period in the past would be necessitated. Using the historical individual risk scores and establishing the trend in their manoeuvrability, we can measure strength of nexus between risks in the risk baskets.
Assessment Matrix and Risk Response Strategy:
Plotting of consolidated scores of a risk basket and its correlation coefficient on a 2 x 2 matrix, provides better perspective of entity’s risk exposure and also assists in prioritising risks and strategising risk responses. Such prioritisation of risk baskets based on correlation coefficient can lead to different risk strategies, as against prioritisation of individual risks without measuring their interrelation.
Allusion is drawn to an article on risk management published by Wharton on the cloud (www.knowledge.wharton.upenn.edu)
“. . . . Risk management has no silver bullet. As a result, many companies need to develop a more integrated view of risk. ‘We have seen a tendency to separate risks into rigid silos — operational risk, market risk, credit risk and so on,’ says Wharton’s Herring. ‘But what we have found is that major shocks and problems do not come that way. For instance, in the financial world, you would see trading desks staffed with people who were experts in market risk, but they were trading instruments that were laden with credit risk. The skills you need to think about each of those kinds of risk are very distinctive, and unless you have an integrated view of risk, you could encounter major problems.’ . . .
. . . Historic data does not shape the future anymore, given how rapidly the world is changing. We usually look at the known issues and make a nice diagram with probability on one axis and impact on the other. That’s Risk Management 1.0. Risk Management 2.0 is (going) beyond the known issues to look at the links and interdependencies. You can no longer look at the risks independently of each other …”
2.2 Breaking the Abilene Paradox:
The Abilene anecdote goes something like this:
On a hot afternoon visiting in Coleman, Texas, the family is comfortably playing dominoes on a porch, until the father-in-law suggests that they take a trip to Abilene (53 miles north) for dinner. The wife says, ‘Sounds like a great idea.’ The husband, despite having reservations because the drive is long and hot, thinks that his preferences must be out-of-step with the group and says, ‘Sounds good to me. I just hope your mother wants to go.’ The mother-in-law then says, ‘Of course I want to go. I haven’t been to Abilene in a long time.’
The drive is hot, dusty, and long. When they arrive at the cafeteria, the food is as bad as the drive. They arrive back home four hours later, exhausted.
One of them dishonestly says, ‘It was a great trip, wasn’t it?’ The mother-in-law says that, actually, she would rather have stayed home, but went along since the other three were so enthusiastic. The husband says, ‘I wasn’t delighted to be doing what we were doing. I only went to satisfy the rest of you.’ The wife says, ‘I just went along to keep you happy. I would have had to be crazy to want to go out in the heat like that.’ The father-in-law then says that he only suggested it because he thought the others might be bored.
The group sits back, perplexed that they together decided to take a trip which none of them wanted. They each would have preferred to sit comfortably, but did not admit to it when they still had time to enjoy the afternoon …”
The Abilene paradox is a paradox in which a group of people collectively decide on a course of action that is counter to the preferences of any of the individuals in the group. It involves a common breakdown of group communication in which each member mistakenly believes that their own preferences are counter to the group’s and, therefore, does not raise objections. A common phrase relating to the Abilene paradox is a desire to not ‘rock the boat’.
This is what typically happens in any management meet, particularly when it is discussing intricate subject such as risk. A risk, which each individual process owners may perceive as high, may get rated as low or medium as each process owner may think that his/her risk perception is counter to that of the group. The paradox may also be contagious during risk identification and risk mitigation threads, rendering the exercise to be fragile. The snowballing effect of such Abilene’s assumption may significantly dilute the benefits of risk management exercise, keeping the board & executives under self-deluding folly of having effective risk management framework.
2.3 Handling Delphi carefully:
Qualitative risk assessment is essentially based on average score of risk ratings perceived by each process owner, within risk management team. The scores (be it in terms of 1 to 5 rating scale or in terms of high, medium or low) by selected process owners are consolidated and averaged out to derive singular risk rating.
This technique, which is theoretically termed as Delphi technique, is widely used in any group decision-making process. However, a major limitation of Delphi which can rob all its benefits is that it tacitly tends to avoid the extremes and mild the ratings of a risk, which purportedly was a black swan. The resultant risk score and big picture becomes distorted. It brings in a myopic and conservative sense of ‘All is well’, when in fact the company is boarding on sinking Titanic. It blinds the management from potential and actual black swans, satiating them with complacency syndrome. Delphi tends management to satisfy itself with non-existence of black swan and then landing them with surprise of ‘How did we, suddenly, landed in such complex situation?’, when potential black swan triggers.
While Delphi continues to gain favours of risk managers, it should be used with caution of its tendency to preclude traction of extremes.
2.4 Avoiding GroupThink syndrome:
GroupThink is yet another syndrome that carries with it the bacteria, similar to Abilene & Delphi and has potential to brittle risk management process. The term was first coined by Irvis Janis in early seventies and occurs when a group makes faulty decisions because group pressures lead to a deterioration of mental efficiency, reality testing, and moral judgment. Groups affected by GroupThink ignore alternatives and tend to take irrational actions. A group is especially vulnerable to groupthink when its members are similar in background, when the group is insulated from outside opinions, and when there are no clear rules for decision-making. The psychologist has prescribed following symptoms of GroupThink, which a risk manager must be aware of:
GroupThink occurs when groups are highly cohesive and when they are under considerable pressure to make a quality decision. When pressures for unanimity seem overwhelming, members are less motivated to realistically appraise the alternative courses of action available to them. This leads to carelessness and irrational thinking.
A risk group is also often diagnosed of the above GroupThink symptoms, which a risk manager and risk group should be careful about.
3. Conclusion:
Following cues can be drawn from the above:
Risk management, like any other science of management, is function of intuition, imagination, pragmatism and leadership. There is greater need to change the organisation mindset and culture towards risk, rather than change systems and adopt new models and frameworks, which many times may be appealing and glittering but are seldom gold.
God not only plays dice, but He also sometimes throws the dice where they cannot be seen . . . . He still has few tricks up His sleeves.
— Professor Stephen W. Hawking
The existentialist dilemma before Indian democracy is stark :
it cannot co-exist with financial honesty. It does not matter if you are
personally incorruptible; you have to be institutionally corrupt in order to
engage in the business of democracy. The moral code of elections is
uncomplicated : Don’t ask. Don’t tell. And for God’s sake don’t get caught.
— M. J. Akbar
in India Today, dated 10-1-2011
59 FDI’s free fall
Falling FDI in both absolute and relative terms indicates a
lack of investor confidence. It should jolt politicians back to governance and
building on the 1991 reforms. A UN report on FDI in 2010 makes this point
sharply. Though global FDI flows increased by a percentage point over the last
year, developing economies’ share jumped 10%. For the first time ever, more than
half of global FDI travelled to emerging markets. However, FDI inflows into
India declined by a whopping 31.5%. And that’s not in relative but in absolute
terms. In other words, it’s not just that India is getting a smaller share of a
bigger pie — indicating its relative uncompetitiveness among emerging markets.
It’s that the size of the pie itself has shrunk for India – by almost a third.
That ought to be enough to set alarm bells clanging for our economic managers.
(Source : The Times of India, dated 25-1-2011)
The existentialist dilemma before Indian democracy is stark :
it cannot co-exist with financial honesty. It does not matter if you are
personally incorruptible; you have to be institutionally corrupt in order to
engage in the business of democracy. The moral code of elections is
uncomplicated : Don’t ask. Don’t tell. And for God’s sake don’t get caught.
— M. J. Akbar
in India Today, dated 10-1-2011
58 Infosys plans to stem MBA-MTECH attrition
Infosys, the country’s second largest information technology
services firm, is aggressively planning to increase the number of its business
consultants by re-skilling many of its engineers.
“Every quarter, a lot of people leave us for higher courses
like MBA and MTech. We have seen a rise in the interest level of our employees
for consulting work. To tame this and provide growth opportunity for engineers,
we are planning to introduce a new initiative as part of our iRace (Infosys Role
and Career Enhancement) programme,” said Mohandas Pai.
In-house CAT : In-house engineers with over two years of
experience can opt for this programme. The company is expected to do a pilot
test soon and to implement the programme next year. “We will conduct a test for
the employees and if they pass the test, they can join our consulting team,” Pai
added.
(Source : Business Standard, dated 21-1-2011)
(Comment : Our profession needs a similar programme)
The existentialist dilemma before Indian democracy is stark :
it cannot co-exist with financial honesty. It does not matter if you are
personally incorruptible; you have to be institutionally corrupt in order to
engage in the business of democracy. The moral code of elections is
uncomplicated : Don’t ask. Don’t tell. And for God’s sake don’t get caught.
— M. J. Akbar
in India Today, dated 10-1-2011
57 RBI promises parity if foreign banks form arms
The Reserve Bank of India (RBI) is dangling the carrot of
near level-playing field to foreign banks such as Citigroup and HSBC, if they
convert into wholly-owned subsidiaries which is essential for systemic safety,
instead of functioning as parents’ branches, leaving room for instability.
MNC banks would be allowed to set up branches at their will
in smaller cities, barring some security-sensitive regions, and list their
shares on stock exchanges with at least 25% Indian holding, said a central bank
discussion paper on Presence of Foreign Banks in India.
Global banks would have a minimum capital adequacy ratio of
10% and lower priority sector lending target than domestic private peers.
There are 34 foreign banks operating in India as branches,
accounting for 7.65% of total banking assets as on March 31, 2010, up from 9.03%
a year ago. If credit equivalent of off-balance sheet assets are included, their
share was 10.52%. The share of top five foreign banks alone was 7.12%.
(Source : The Economic Times, dated 22-1-2011)
The existentialist dilemma before Indian democracy is stark :
it cannot co-exist with financial honesty. It does not matter if you are
personally incorruptible; you have to be institutionally corrupt in order to
engage in the business of democracy. The moral code of elections is
uncomplicated : Don’t ask. Don’t tell. And for God’s sake don’t get caught.
— M. J. Akbar
in India Today, dated 10-1-2011
56 SC blames own verdicts for declining standards
The Supreme Court reprimanded governments for abuse of
discretionary land allotment powers before turning reflective and admitting that
some of its judgments have contributed to the all-round falling standards.
The Bench’s remarks came during the hearing of a petition,
which accused the Madhya Pradesh Government of allotting 20 acres of prime land
at a throwaway price to the Kushabhau Thakre Trust, which has BJP leaders L. K.
Advani and Venkaiah Naidu as trustees. Before reserving verdict, the Court said
: “Discretionary power was to be used in public good. In the last 50 years, this
is exercised just for the opposite. The man who abides by law feels he is a
fool. Every state, not only Madhya Pradesh, who has got discretionary power has
abused it.
(Source : The Times of India, dated 19-1-2011)
The existentialist dilemma before Indian democracy is stark :
it cannot co-exist with financial honesty. It does not matter if you are
personally incorruptible; you have to be institutionally corrupt in order to
engage in the business of democracy. The moral code of elections is
uncomplicated : Don’t ask. Don’t tell. And for God’s sake don’t get caught.
— M. J. Akbar
in India Today, dated 10-1-2011
55 Political governance — End the drift
Decision-making isn’t a synonym for governance. Even so, it’s
a good pointer to a ruling dispensation’s ability to be on its toes. On that
score, data shows UPA-II fared badly in 2010. The cabinet’s record on number of
decisions taken in 2010 compared to earlier was below par. Between 2005-08
during the Congress-led coalition’s first tenure, the cabinet took an average of
242.5 decisions yearly. The annual average since 2005 is 183. In 2010, however,
the Cabinet managed consensus on just 112 decisions, the lowest single-year
figure since the UPA came to power. Amazingly, decision-making actually
decelerated post-2009, when the Left was no longer around to ambush it !
(Source : The Times of India, dated 18-1-2011)
The existentialist dilemma before Indian democracy is stark :
it cannot co-exist with financial honesty. It does not matter if you are
personally incorruptible; you have to be institutionally corrupt in order to
engage in the business of democracy. The moral code of elections is
uncomplicated : Don’t ask. Don’t tell. And for God’s sake don’t get caught.
— M. J. Akbar
in India Today, dated 10-1-2011
54 Fuel Pricing — Death by policy
The new Union minister for petroleum and natural gas Jaipal
Reddy can implement the brightest ideas from the smartest bureaucrats and yet
the root of the problem that resulted in the murder of Mr. Yashwant Sonawane, a
district official in Maharashtra who sought to curb the adulteration of petrol
by the kerosene mixing mafia, will not be touched unless India’s fuel pricing
policy is shaped by the logic of simple economics. Various estimates have been
provided in the past few days of the size of the domestic black market in
kerosene. Some put it upwards of Rs.16,000 crore annually. This is a huge amount
of money that can finance large and even globally powerful mafias, not to
mention two-bit gangsters like the ones who killed Mr. Sonawane. There was a
time when Mumbai was in the grip of smugglers. With some simple policy steps
like lower tariffs, liberalisation of gold imports and such like these
all-powerful mafias were marginalised and largely confined to Bollywood movies.
In the case of kerosene and diesel an export smugglers mafia has been created
with India’s lower priced fuels smuggled to Nepal and Bangladesh.
The only way in which mafias get eliminated is by the
elimination of the economic basis for their existence. It is not prohibition
that finally ended the power and wealth of bootleggers and illicit liquor mafia,
but a liberal policy that allowed the sale of properly priced alcohol.
As a first step, the Government must reduce the price
differential between diesel, kerosene and petrol. This will not only have the
positive effect of reducing the fiscal burden of the humungous oil subsidy, but
also encourage a more rational use of both diesel and kerosene. The
under-pricing of these two fuels has encouraged the growth of highly
energy-inefficient and environmentally dangerous means of power generation and
fuel utilisation. Moreover, for an import-dependent country like India
subsidised fuel increases the trade deficit and contributes to external payments
problems.
(Source : Business Standard, dated 31-1-2011)
The existentialist dilemma before Indian democracy is stark :
it cannot co-exist with financial honesty. It does not matter if you are
personally incorruptible; you have to be institutionally corrupt in order to
engage in the business of democracy. The moral code of elections is
uncomplicated : Don’t ask. Don’t tell. And for God’s sake don’t get caught.
— M. J. Akbar
in India Today, dated 10-1-2011
(Source : Business Standard, dated 15-2-2011)
53 SC : No govt. wants a strong judiciary
The Supreme Court said no government wants a strong judiciary
and added that meagre budgetary allocations by the Centre and states came in the
way of setting up of courts and infrastructure to speed up the justice delivery
system.
It said : “No government wants a strong judiciary . . .
Budgetary allocation to judiciary is less than 1% by the governments. This shows
their commitment towards judiciary.” The remark from a Bench of Justices G. S.
Singhvi and A. K. Ganguly came when it was told that only one witness has been
examined in the last four years in the Amar Singh phone-tapping case, which has
been marred by adjournments.
(Source : The Times of India, dated 12-2-2011)
The existentialist dilemma before Indian democracy is stark :
it cannot co-exist with financial honesty. It does not matter if you are
personally incorruptible; you have to be institutionally corrupt in order to
engage in the business of democracy. The moral code of elections is
uncomplicated : Don’t ask. Don’t tell. And for God’s sake don’t get caught.
— M. J. Akbar
in India Today, dated 10-1-2011
52 Taxing wealth — Has the time come for the super-rich to
pay more taxes ?
One of the high points of economic and fiscal reform in India
in the past two decades has been the progressive moderation of direct tax rates.
Thanks to this, the ratio of direct to indirect taxes has risen, a sign of
greater progressiveness and equity in India’s taxation system. Direct taxes are
not easily passed on, as indirect taxes tend to be, and so their incidence is
more directly on the individual or firm paying the tax. While this has been a
positive trend, the ratio of total tax revenues to national income has, in fact,
come down in recent years and remains below 12%. India has a very low tax/GDP
ratio by world standards. Apart from widespread tax evasion and avoidance, the
complete exemption of certain types of income from taxation, like agricultural
income, has made it that much more difficult for the tax authorities to capture
all taxable incomes.
The wealth of just 657 BS billionaires has been estimated to
be Rs.16 lakh crore. Taxing away just 0.1% of that would yield a revenue of
Rs.16,000 crore. A 10% long-term capital gains tax, with the securities
transactions tax dumped, and a death duty or inheritance tax can easily generate
another Rs.10,000 crore, netting a cool Rs.26,000 crore of additional direct tax
revenue, without hurting the middle class. Not only would this help Mr.
Mukherjee in his fiscal house-keeping but it would give his party a talking
point at a time when it is being accused of corruption and currying favour with
corporates. Some, including the stock market, would cry foul and the Government
must factor that negative response in. But many would cheer a Government dipping
into the deep pockets of the super-rich.
(Source : Business Standard, dated 15-2-2011)
An interesting debate arises in light of the recent
controversy between the Tata Group and Greenpeace, India (‘Greenpeace’). The
facts leading to the controversy and a recent judgment of the Delhi High Court
were that Greenpeace, a non-profit organisation that seeks to promote
environmental causes, had started a campaign protesting the building of a port
in the Bhadruk District in Orissa. It was Greenpeace’s view, that the building
of the port would dishouse the Olive Ridley turtles found in the area as also
disturb the marine life in the vicinity. The Tata Group resisted the said
campaigning and asserted that they had already secured all necessary approvals
and permissions. Hence, in order to raise awareness about the plight of the
turtles, Greenpeace India, inter alia, hosted a game on their website known as
‘Turtle v. Tata1.’ The game is a pac man style game wherein
the role of the pac man is portrayed by a turtle and the demons are the symbol
of Tata chasing the turtle. It was in this context that Tata filed a claim in
the Delhi High Court on two grounds, firstly that the acts of Greenpeace were
defamatory in nature; and secondly, that by using the name Tata and the symbol
of Tata, Greenpeace had infringed the registered trade marks of Tata.
For the purposes of the present article, we are concerned
only with the second aspect of the claim, i.e., trade mark infringement and
whether such ‘parodic’ use of a trade mark would amount to infringement thereof.
The issue is a delicate one since it involves the balancing of two competing
private rights as also two competing public interests. The private rights are
obvious, one being the right to free speech and the other being the right in
property of the trade mark owner. The public interests, though may not be
evident immediately, do exist. The right to free speech is a fundamental right
guaranteed to every citizen under Article 19 of the Constitution of India, and
it is imperative in public interest that this fundamental right is not
restricted except to the limited extent as envisaged under the said Article
itself. On the other hand trade mark law apart from protecting the rights of an
individual in his property, does a more important function that of preventing
public confusion. Trade mark law seeks to protect the general public from the
confusion that may arise in case identical and/or deceptively similar marks are
used by different traders upon their goods in the market. Such confusion, if not
protected against, could lead to disastrous consequences — for example, where a
medicine for lowering blood pressure and a medicine for increasing blood
pressure are sold under identical and/or deceptively similar trade marks. Public
confusion in such a case could even be fatal.
It is in light of the above, that I propose to examine the
law relating to use of trade marks in parodies and to what extent can a
citizen’s right to free speech be extended, can it be allowed even if it
violates someone else’s property rights or must it be curtailed as being a
reasonable restriction and/or to put it differently does a trade mark
registration prevent all further usage of the trade mark by any other person.
In order to examine this issue, reference may be made to
Article 19 of the Constitution of India and section 29 of the Trade marks Act,
1999, each of which, inter alia, provide as under:
Constitution :
“19. Protection of certain rights regarding freedom of
speech, etc.
(1) All citizens shall have the right
(a) to freedom of speech and expression;
(b) – (g) xxxxxx
(2) Nothing in sub-clause (a) of clause (1) shall affect
the operation of any existing law, or prevent the State from making any law,
in-so-far as such law imposes reasonable restrictions on the exercise of the
right conferred by the said sub-clause in the interests of the sovereignty
and integrity of India, the security of the State, friendly relations with
foreign States, public order, decency or morality or in relation to contempt
of court, defamation or incitement to an offence.”
Trade marks Act, 1999:
“29. Infringement of registered trade marks. —
(1) A registered trade mark is infringed by a person who,
not being a registered proprietor or a person using by way of permitted use,
uses in the course of trade, a mark which is identical with, or deceptively
similar to, the trade mark in relation to goods or services in respect of
which the trade mark is registered, and in such manner as to render the use
of the mark likely to be taken as being used as a trade mark.
(4) A registered trade mark is infringed by
a person who, not being a registered proprietor or a person using by way of
permitted use, uses in the course of trade, a mark which —
(a) is identical with or similar to the registered
trade mark; and
(b) is used in relation to goods or services which are
not similar to those for which the trade mark is registered; and
(c) the registered trade mark has a reputation in India
and the use of the mark without due cause, takes unfair advantage of or is
detrimental to, the distinctive character or repute of the registered
trade mark.”
A bare reading of section 29 would show that use of a
registered trade mark as a trade mark by any person other than the registered
proprietor of a trade mark without the consent of the owner would amount to an
infringement thereof. Hence, in the instant case, it was argued by the Tata
Group that use of their registered trade mark and symbol by Greenpeace was in
violation of their rights and amounted to infringement of registered trade
marks. Greenpeace took the defence that the use of the trade marks was merely in
a parodic sense and not for any other purpose. Greenpeace urged that the use of
a trade mark in a parody would fall within section 29(4) of the Trade marks Act,
1999 and hence, would not amount to an infringement. Greenpeace contended that
their use was not ‘without due cause’ and hence, they had not infringed the
registered trade marks.
At this juncture, before alluding to the ratio decidendi of
the Delhi High Court in the above matter, I would like to, as a background,
explain what is a parody and draw attention to a few judgments of the American
Courts, wherein the issue of use of a trade mark in a parodic sense has been
considered and dealt with.
It may be appreciated that in the USA the right to freedom of speech guaranteed under the First Amendment to the American Constitution is absolute as compared to the conditional right to freedom of speech granted under the Indian Constitution2. Hence, the considerations weighing with the American Courts vis-à-vis the freedom of speech would not be entirely analogous.
A parody as defined by Wikipedia is “is a work created to mock, comment on, or make fun at an original work, its subject, author, style, or some other target, by means of humorous, satiric or ironic imitation.3”
The Second Circuit has in the case of Cliff Notes Inc. v. Bantam Doubleday Dell Publishing Group Inc.4 succinctly explained the purpose of a parody as being “A parody must convey two simultaneous and contradictory messages: that it is the original but also that it is not the original and is instead a parody.” The Second Circuit also pointed out that if a parody which only performed the first function, it would be subject to trade mark law since it could lead to consumer confusion. The Court held that the principal issue that ought to be decided in such a case was how to strike a balance between the two competing considerations of allowing artistic expression and preventing consumer confusion.
Music International5, the Ninth Circuit dealt with a claim by Mattel for the use of its trade mark ‘Barbie’ by the music group Aqua in their song entitled ‘Barbie Girl.’ The lyrics of the song made references to the trade mark ‘Barbie’ and it was this use of the trade mark ‘Barbie’ which was considered, inter alia, an infringement by Mattel. The Ninth Circuit, after considering the manner of use and the nature of the use of the trade mark in the song, held that there was no infringement. The Ninth Circuit made several interesting observations with respect to the conflict between the rights granted under the First Amendment (right to free speech) and to the rights of a trade mark owner. The Ninth Circuit observed, inter alia, as under:
“The First Amendment may offer little protection for a competitor who labels its commercial goods with a confusingly similar mark, but trade mark rights do not entitle the owner to quash an unauthorised use of the mark by another who is communicating ideas or expressing points of view. Were we to ignore the expressive value that some marks assume, trade mark rights would grow to encroach upon the zone protected by the First Amendment. When unauthorised use of another’s mark is part of a communicative message and not a source identifier, the First Amendment is implicated in opposition to the trade mark right. Simply put, the trade mark owner does not have the right to control public discourse whenever the public imbues his mark with a meaning beyond its source identifying function. It is the source identifying function which trade mark law protects, and nothing more.”
The Ninth Circuit, in order to adjudicate the dis-pute, applied the test as to whether the use of the trade mark was misleading to the source or content of the work or did it have artistic relevance to the underlying work. The Court held that the use of ‘Barbie’ by the defendants was not misleading as to the source and hence, no case for infringement was made out.
One more interesting judgment of the American Courts in this regard is the case of Mutual of Omaha Insurance Co. v. Novak6 wherein the alleged infringing acts were the use by Novak of the trade marks of Mutual of Omaha Insurance Co. on T-shirts. The registered trade mark of the Mutual of Omaha Co. was ‘Mutual of Omaha’, used in respect of its insurance services. Novak started using a similar design with the trade mark ‘Mutant of Omaha’ and a sign below that which read as ‘Nuclear Holocaust Insurance.’ In this case, the defence of parodic use was negated by the majority on the grounds that the protection af-forded by the First Amendment does not give a licence to infringe someone else’s property rights; and that since there were several other avenues of communication available to Novak, such as an editorial parody in a book, magazine or film, such use in violation of the rights of Mutual of Omaha Insurance Co. must be injuncted. Justice Heaney, however, dissented and considered that the majority judgment had failed to recognise and protect the rights of Novak under the First Amendment.
In India, on the other hand, there have not been too many judicial pronouncements on parody as a defence in a trade mark infringement action. One of the few earlier judgments is in the case of Pepsico Inc v. Hindustan Coca Cola Ltd.7, wherein the Delhi High Court recognised in passing that a parody would not be an infringement and held that, “Similarly, use of the phrase in the commer-cial advertisement “Yeh Dil Mange No More” can at best be mocking or parodying in the context it is used, but does not amount to infringement of trade mark of the appellant.”
However, now Justice Ravindra Bhat has in his judgment in Tata Sons Ltd. v. Greenpeace 8 dealt with and discussed the subject of parodies in some detail. Justice Bhat based his judgment primarily on the judgment of the South African Constitutional Court in case of Laugh It off Promotions CC v. Freedom of Expression Institute9, which was a case where the Defendant had sought to market T-shirts bearing parodied images of trade marks of several corporate giants. This was objected to by South African Breweries, one of the corporate giants whose trade marks had been parodied upon on the defendant’s T-shirts. It was in these facts that the Court was pleased to hold as under:
“76. Parody is inherently paradoxical. Good parody is both original and parasitic, simultaneously creative and derivative. The relationship between the trade mark and the parody is that if the parody does not take enough from the original trade mark, the audience will not be able to recognise the trade mark and therefore, not be able to understand the humour. Conversely, if the parody takes too much it could be considered infringing based upon the fact that there is too much theft and too little originality, regardless of how funny the parody is.
Parody is appropriation and imitation, but of a kind involving a deliberate dislocation. Above all, parody presumes the authority and currency of the object work or form. It keeps the image of the original in the eye of the beholder and relies on the ability of the audience to recognise, with whatever degree of precision, the parodied work or text, and to interpret or ‘decode’ the allusion; in this sense the audience shares in a variety of ways the creation of the parody with the parodist. Unlike the plagiarist whose intention is to deceive, the parodist relies on the audience’s awareness of the target work or genre; in turn, the complicity of the audience is a sine qua non of its enjoyment.
The question to be asked is whether, looking at the facts as a whole, and analysing them in their specific context, an independent observer who is sensitive to both the free speech values of the Constitution and the property protection objectives of trade mark law, would say that the harm done by the parody to the property interests of the trade mark owner outweighs the free speech interests involved. The balancing of interests must be based on the evidence on record, supplemented by such knowledge of how the world works as every judge may be presumed to have. Furthermore, although the parody will be evaluated in the austere atmosphere of the Court, the text concerned (whether visual or verbal or both) should be analysed in terms of its significance and impact it had (or was likely to have), in the actual setting in which it was communicated.
It seems to me that what is in issue is not the limitation of a right, but the balancing of competing rights. The present case does not require us to make any determinations on that matter. But it would appear once all the relevant facts are established, it should not make any difference in principle whether the case is seen as a property rights limitation on free speech, or a free speech limitation on property rights. At the end of the day this will be an area where nuanced and proportionate balancing in a context specific and fact-sensitive character will be decisive, and not formal classification based on bright lines.
In sum, while a defendant’s use of a parody as a mark does not support a ‘fair se’ defence, it may be considered in determining whether the Plaintiff-owner of a famous mark has proved its claim that the defendant’s use of a parody mark is likely to impair the distinctiveness of the famous mark.”
It was based on the above reasoning and in light of the facts that Justice Bhat was pleased to hold that Greenpeace’s actions did not amount to an infringement and held, inter alia, as under:
“42. The above analysis would show that the use of a trade mark, as the object of a critical comment, or even attack, does not necessarily result in infringement. Sometimes the same mark may be used, as in Esso; sometimes it may be a parody (like in Laugh it Off and Louis Vuitton). If the user’s intention is to focus on some activity of the trade mark owners, and is ‘denominative’, drawing attention of the reader or viewer to the activity, such use can prima facie constitute ‘due cause’ u/s.29(4), which would disentitle the Plaintiff to a temporary injunction, as in this case. The use of TATA, and the `T’ device or logo, is clearly denominative. Similarly, describing the Tatas as having demonic attributes is hyperbolic and parodic. Through the medium of the game, the defendants seek to convey their concern and criticism of the project and its perceived impact on the turtles habitat. The Court cannot annoint itself as a literary critic, to judge the efficacy of use of such medium, nor can it don the robes of a censor. It merely patrols the boundaries of free speech, and in exceptional cases, issues injunctions by applying Bonnard principle.”
I firmly believe that Justice Bhat’s judgment is a step forward in the right direction. However, each case would have to be judged on its own merits. A perusal of the above judgments reveals as to how Courts have so far sought to balance the two competing interests in cases of parodies involving registered trade marks. In my opinion, this is a very sensitive matter and the line of distinction very fine between the two competing public interests. Courts will need to exercise their judicial discretion in every case to determine whether the use of a trade mark in a parody is promoting public interest in terms of establishing free speech or would it be reasonable to restrict the same since it is in fact harming public interest by causing public confusion as also violating the rights of an individual trade mark owner.
One cannot overemphasise the importance and relevance of the present issue, since it involves a balancing act between two competing public interests and not just private interests. Admittedly, the case when filed by a trade mark owner would be to protect his own private interest in property but the underlying fact is that Courts will be called upon to consider and/or must consider the public interests involved. The freedom of speech as against the disastrous consequences which could arise out of public confusion need to be assessed and balanced in each case. Hence, it is essential that an effective rule and/or law is developed to guide the Courts in such matters. An official recognition to parodies would also be beneficial. The Copyright Act, 1957 does protect work published for the purpose of fair comment and criticism. I think it would be advisable to introduce a suitably moulded provision in the Trade marks Act, 1999 as well.
‘Know your judge before you know law’ it sounds very simple.
Obviously, it has direct relevance to legal proceedings. It deals with the
mindset of the person in the chair of judge. My friend Herambha Shastri once
elaborated this adage when we were deliberating an income-tax case. Let me share
with you Herambha’s interesting musings over this issue.
‘First we should make an ‘amendment’ to this maxim for the
purpose of proceedings under the income tax law as ‘Know your Assessing Officer
before you know Income-tax law’. You know the facts. You know the law. You know
the case law. But alas! If you don’t know the AO, then you suffer.
How do you know the AO? For that matter first you should
imagine and be in the AO’s shoes. Given the discretionary powers under the
Income Tax Act, think how you can exercise those powers ‘irrationally and
illogically’. It is said that ‘facts come first and law comes next’. But mind
you, under the income-tax proceedings the discretionary powers of the AO come
first, facts come next and then the law follows (if at all, by the time you
reach the Appellate stage).
Never show that you know the income-tax law more than the AO,
since there is ‘a deeming fiction’, though unwritten, that the AO is always
well-versed with the law he implements. His knowledge about case laws is
state-of-the-art as if he has delivered all those judgments. So please don’t
flaunt your knowledge of law and the case law. This is all about what you should
have in mind before you enter the AO’s office.
The moment you knock the door to enter the cabin be careful
about observing the protocol established in the British era (say, ‘May I come in
Sir, I am so sorry to bother you’ etc. ). A slight mistake may vitiate the
atmosphere and hence the proceedings even before they begin.
Having entered the cabin, don’t occupy the chair till the AO
asks you to sit. Normally, he lets you in but will not attend to you till you
feel awkward and uneasy. You keep looking around aimlessly. What you find is a
medium-size dusty framed photograph of Mahatma Gandhi on the wall, then a
calendar, obviously given by one of the taxpayers (maybe wanting to impress the
AO), a shelf stacked with files and papers full of dust, a steel cupboard with
topped with bundles of some more files in red cloth, a ceiling fan rattling over
the head of the AO along with humming of the air-conditioner and old books on
Income-tax Act and Rules, and ready reckoners which appears never to have been
touched.
Give the AO sufficient time to complete his conversation on
the phone if he happens to be on the line with the higher-ups or some friend.
Don’t stretch your hand for a shake-hand for your introduction. Unfortunately,
this British cutom is somewhat despised in the Income-tax Department. I don’t
know why? When the AO finishes his conversation or his work on hand, he will
stare at you and wave at you with his hand indicating you to sit (as if he is
very considerate to you). When you settle in the chair, don’t bother to
introduce yourself, that is of no consequence till it is time to sign the order
sheet. Only indicate the assessee’s name.
The AO would then become active and start the search for the
file on the ‘hit list’. Normally, he finds it instantly in that mess if he wants
to. I wonder how? But unfortunately he can never locate the copy of the notice
sent by him. His assistant also fails in that pursuit. This is the first
opportunity to begin co-operating with the Department, don’t lose it, so take
out the copy of the notice from your file and hand it over to the AO but be
placid. The AO would just chuckle.
Consider the AO as a dormant volcano. Sometimes he would
place in your hand a printed questionnaire or dictate questions orally depending
upon the stakes (obviously government’s stake) involved in and his homework of
the case. Normally, he starts his ‘homework’ after your submissions. Thereafter,
you start feeling the ‘heat’ of his discretionary powers till your position
becomes vulnerable and non-negotiable. You become paranoid about what would be
the AO’s perspective. If the AO is a direct recruit he will be more stern,
studious and innovative about the compliance of tax laws. If he is promoted as
an AO from within the Department he will be more concerned about procedural
matters. If he is on the verge of retirement he will be lenient and
understanding, compared to a younger AO. A lady AO will, probably, be more
professional.
Here my friend Herambha stopped his elaboration. But he made
a very subtle remark, ‘Keep in mind, there is no penalty for ‘concealment of
satisfaction’ by the AO under the income-tax law’. May be CPE programmes should
have a course in psychology as well.
It is said that the scam largest in terms of magnitude is
unknown and still to happen. Why ? You can’t put limit to the human greed. Don’t
forget this gospel truth. In the recent past we heard about 2 G Spectrum scam,
the largest ever in the Indian economy which suggests that Indian economy is
growing by leaps and bounds. No problem. Then we had the CWG scam which showed
that it is just ‘a sport’ for people in power to indulge in corruption. People
out of power, media, public interest litigants and RTI activists, who should now
be recognised as ‘the Fifth Estate’ in the Indian democracy, act as ‘the
whistle-blowers’ for the people. Having heard about the magnitude and
high-profile persons involved in scams, our ears flood with spicy news and
piquant rumours of premature investigation results by various agencies right
from JPC, CAG, CBI to local police in an effort to bring the perpetrators of
scams to the justice. With the passage of time we all forget about those scams,
because we get instantly engrossed in fresh scams.
Be that as may be. Once I was deliberating these issues with
my friend Herambha Shastri a genius in his own right. As everyone does, he
condemned the corruption. However, he was more critical about bringing the
perpetrators of scams to justice. Why ? According to him the process of justice
was a mockery of justice itself. To prove his point of view he told me a very
interesting story.
Once upon a time, there was a gang of forty thieves headed by
Alibaba. All those forty thieves were loyal to Alibaba and to each other. Their
honesty and integrity was impeccable. It is said that people in the underworld
always operate and interact in ‘good faith’, since they have no written laws.
They would burgle houses indiscriminately at the wee hours, whatever they would
rob, would be contributed to the common kitty with Alibaba. Thereafter, Alibaba
would do its distribution according to the risk taken by each thief in burglary
operations. This practice went on for years together. They could not be
apprehended by the soldiers of the King.
One night Alibaba decided to target Radhanagari, the capital
city of the kingdom. They burgled a house and looted jewellery and valuable
articles. One of the thieves snatched a gold necklace from the lady of the
house. The lady shouted loudly. Some thieves overheard her shouting in the
commotion. In the hustle and bustle the thief’s mask slipped and he was face to
face with the lady. She saw his face clearly. The thief gave her an angry look.
Quickly the thief covered his face with mask and disappeared in the darkness of
the night, of course, with the gold necklace.
After this successful burglary the thieves returned to their
den. The next day the chief, Alibaba asked all the thieves to surrender the
booty on the table. The thief who had snatched the gold necklace decided not to
give the necklace. So he put few currency notes he had stolen on the table, but
not the necklace.
As Alibaba was observing the loot somebody whispered, what
about the gold necklace ? The whisper echoed in the den. Yes, somebody stole the
necklace, but it’s not being seen on the table. What happened to it ? The thief
who stole it also whispered the same doubt. Very cunning move indeed ! No one
could doubt him. Alibaba raised his voice, “Silence, silence, what’s the
matter ?” Dead silence fell in the den.
The cunning thief moved forward and declared, “Sardar, we
know somebody stole a gold necklace, but has not surrendered it”.
“Who is that traitor ?” Alibaba roared. Everyone was
squinting at each other with the million-dollar question in mind “Are you the
traitor ?” No one yielded. How to figure out the culprit ?
Alibaba was in deep thought. He hit on a very simple
solution. He ordered the cunning thief, as luck would have it, to revisit the
house they burgled the previous night and bring the lady to identify the
culprit.
The cunning thief after a couple of nights revisited the
house and kidnapped the lady and fled into the forest. Midway he halted his
horse, dismounted with the lady and removed his mask. The lady recognised him
immediately; he was the thief who had snatched her gold necklace. The lady was
scared and trembling. The thief said “I know, you saw me that night. You will be
asked to identify, who stole your gold necklace, but you will not identify me.
If you do identify me I warn you — I will slaughter your young son. Don’t even
glance at me when we reach the den”.
The lady was in utter confusion. It was a nightmare for her.
Still she gathered courage and asked the thief, “If your sardar threatens my
life if I fail to tell the truth, then what should I do ?”
The cunning thief thought over for a while and said, “In that
case you tell him that you could not see the face of the thief as it was covered
with the mask. We all cover our faces with masks during burglary. So you don’t
need to tell the truth and then I will not kill your son. But if you tell the
truth, Alibaba will not return the gold necklace, but you will lose your son. So
better not tell the truth. Is that clear to you ?”
Herambha Shastri stopped his narrative here. Looking at me curiously he said,
“I don’t need to tell the end of the story. But, think for yourself, who is
doing the justice in the story, think of what is being justified, think how the
culprit controls the process of justice, how the witness is being treated, and
how truth is sabotaged. That is why I say the whole process of justice itself is
a mockery of justice in the present scenario.”
51 Neta-builder nexus will sell
Mumbai : Maharashtra CM
Maharashtra chief minister
Prithviraj Chavan said that there was a “dirty nexus among government officials,
politicians and builders in Mumbai,” and that these forces have the intention to
‘sell’ the city.
(Source : Times of India, dated 10-1-2011)
49 Inflation and reforms —
You can’t fight inflation by dithering on reform
The common man’s headache
just got bigger. Food inflation spiked to 18.32% for the week ended December 25.
Worse, non-food prices seem northbound as well, including for petrol and
consumer durables. Borrowing costs too are up. Fears about the double whammy of
price rise and possible RBI rate hikes made the sensex nosedive last week, FIIs
exiting massively on the assumption of dented corporate earnings. Balancing the
persisting need to push growth with concerns on generalised inflation, RBI and
the government will have to take a tough call soon on more aggressive hardening
of monetary and fiscal policy, as IMF suggests.
(Source : Times of India, dated 10-1-2011)
50 Why food is costlier
Twenty years ago, a Maruti
800, with an air-conditioner fitted, cost a little less than Rs.2 lakh. Today it
costs about Rs.2.5 lakh. Twenty years ago, a branded 1.5 tonne window
air-conditioner cost about Rs.30,000; today, you can get a split AC unit for
that price. Then, Videocon was offering large refrigerators for more than
Rs.30,000; you can get better units today for much less. TV prices have crashed
too, and one can go on with this list. In a period when salaries in the
corporate sector have gone up by about 15% annually, and inflation-adjusted per
capita income has roughly trebled, consumer durables of virtually every hue have
become infinitely more affordable.
Why has that not happened
with onions ? In 1980, Indira Gandhi swept back to power on the back of an
election campaign that talked of onions costing the then stratospheric sum of
Rs.5 per kg. Now it is Rs.70. Home-grown apples (not the ones from Down Under)
cost over Rs.100 in Delhi, and lentils of various sorts have also hit
triple-digits. These price increases far outdo income increases, rapid though
they have been for most people, and it is simply not enough to seek palliatives
in short-term measures like raising interest rates. Nor is it enough to say that
there has been demand growth for proteins because of higher incomes. There has
been comparable demand growth for eggs, but they have not seen similar price
inflation. Nor is it good enough to argue that there are global shortages in
commodities — both cyclical (as in sugar) and structural (lentils).
The truth is that we face
inflation in agricultural products, on a scale that we don’t see in manufactured
products, because agriculture has not been reformed, whereas industry has. There
is talk of collusion in onion prices — which raises the question of reforming
trade. Everyone knows that the difference between farmgate and retail prices is
unusually high in India, in part because of multiple intermediaries. But the
country has not been able to benefit from supply chain efficiencies because
organised retail has not been allowed to grow, and to link producer and consumer
prices more closely by squeezing out middlemen. Politicians who for two decades
have opposed reforms in both agriculture and trade will be loath to own up
responsibility for today’s food price inflation; they should know that the
situation will get worse if reforms are not introduced even at this late stage.
The prime minister should do
for agriculture and domestic trade what he did for industry and export trade 20
years ago.
(Source : Business Standard, dated 8-1-2011)
48 Visa, MasterCard business
model threatened
Visa Inc and MasterCard Inc
may face permanent damage to the fastest-growing part of their business after
the US Federal Reserve proposed rules that could cut debit-card transaction fees
by 90%.
The Fed proposed capping
so-called interchange fees at 12% each. Currently, the networks charge merchants
an average of 1% of the purchase price, regardless of cost, and pass that money
along to card-issuing banks.
The change, if approved by
the Fed after a public comment period, would wipe out most of an estimated $ 15
billion in annual revenue for US lenders that issue Visa and MasterCard debit
cards, including Bank of America, JPMorgan Chase & Co and Wells Fargo & Co.
(Source : Business Standard, dated 18-12-2010)
47 Other banks in firing line :
The Deutsche Bank settlement
is part of a wider US drive to crack down on banks that help wealthy Americans
evade taxes and could herald similar settlements with other banks.
(Source : Business
Standard, dated 23-12-2010)
(Comment : What are
the authorities in India doing ? What is the outcome ?)
46 Deutsche Bank settles US
Tax case for $ 553 million
Deutsche Bank admitted
criminal wrongdoing for taking part in fraudulent tax shelters that let clients
hide billions of dollars, and agreed to pay $ 553.6 million to settle the case,
US prosecutors said on Tuesday.
The settlement is part of a
larger US government effort to crack down on banks that help wealthy Americans
evade taxes. Prosecutors last year settled with Swiss bank UBS, which paid $780
million in fines for helping clients with roughly $20 billion in assets hide
their accounts from the US Internal Revenue Service.
45 Binayak Sen — Political
dissent isn’t sedition, that’s the law
The judgment of the
Chhattisgarh trial court, sentencing Binayak Sen to life imprisonment on charges
of sedition and conspiracy, isn’t just shocking due to the concerned judge’s
apparent waiver of the gaps in the prosecution’s case. In a wider context, it
posits the spectre of intolerance against critics of state policy. The intent
behind the law on sedition in the Indian Penal Code, as introduced by the
British, was to enable the colonial state to deal with the fundamental
contradiction between the illegitimacy of its rule and its attempt to try and
legitimise that rule by criminalising those who sought to underline that
contradiction. That rupture between the state and the people it governs
disappeared, in principle, with Independence. And so the Supreme Court in 1962
defined S. 124A (on sedition) as being applicable only when there was a clear
incitement to violence or armed rebellion. Implicit in that definition is the
recognition of the Constitutional right to free speech, and political activity,
as long as it does not violate that red line of violent disaffection against the
state.
(Source : Economic
Times, dated 28-12-2010)
(Comment : Should not
we jettison the British legacy of law in such matters ?)
44 Nitish’s move to scrap
LAD fund may find more takers
As expected, the Cabinet
formally approved the proposal to abolish the Local Area Development (LAD) fund
meant for the legislators, a decision which other states may emulate. “Some
alternative arrangement will we worked out which will enable the legislators to
have a say in the approval of the schemes,” the Principal Secretary, Cabinet
Coordination department Afzal Amanullah said.
All along the Nitish
government in its previous tenure harped on the credo of good governance and in
keeping with what it promised earlier, the Cabinet formally approved a detailed
agenda for good governance. “The core issues of good governance and what the
government proposed to do in this connection have now been spelt out in the
17-page document which was placed before the Cabinet meeting,” the principal
secretary said, adding there will be zero tolerance on corruption “Already armed
with stringent laws, the government will now bring a legislation — Right to
Service Bill — to weed out corruption in the delivery of the public utility
service,” he said.
(Source : Economic Times, dated 15-12-2010)
43 E&Y
sued for hiding Lehman fraud for 7 years
New York attorney general
Andrew Cuomo sued Ernst & Young, accusing the firm of facilitating a ‘major
accounting fraud’ by helping Lehman Brothers deceive the public about its
financial condition.
For more than seven years
before Lehman declared bankruptcy in 2008, the investment bank engaged in
transactions approved by E&Y whose purpose was to move debt off its balance
sheet and make it appear less leveraged, Cuomo said. This was done through what
are known as ‘Repo 105’ transactions. “This practice was a house-of-cards
business model designed to hide billions in liabilities in the years before
Lehman collapsed,” Cuomo said on Wednesday in one of his last cases as attorney
general. “Just as troubling, a global accounting firm, tasked with auditing
Lehman’s financial statements, helped hide this crucial information from the
investing public.” The state seeks to recover more than $ 150 million in fees
collected by E&Y for performing Lehman’s work between 2001 and 2008, plus
investor damages and equitable relief, Cuomo said.
(Source : Times of India, dated 23-12-2010)
42 Finance
Ministry probes overseas deals for tax evasion
The finance
ministry has begun its maiden investigation into over 100 offshore ‘financial
structuring deals’, undertaken by Indian business entities in foreign tax havens
to allegedly evade the taxman’s net.
The multi-pronged
probe has been undertaken by the international taxation wing of the Income Tax
department and the foreign taxation unit in the Central Board of Direct Taxes
(CBDT).
A number of
investments and deals to the tune of hundreds of crores of rupees have already
been executed in tax havens like the Mauritius, Isle of Man, Cyprus, British
Virgin Islands and Bermuda, among others.
The finance
ministry is already working to finalise Tax Information Exchange Agreements
(TIEAs) with countries like the UAE, Kuwait, Oman, Saudi Arabia, Qatar, Jordan,
Syria, China, Indonesia, Israel, Japan, Malaysia, Mongolia, South Korea and
Vietnam.
Furthermore,
Double Taxation Avoidance Agreements (DTAAs) with more than 70 countries are
being finetuned.
The I-T department
is also looking into evasion of Tax Deducted at Source (TDS) by some companies
while making payments to purchase overseas shares, but sources declined to name
the entities involved.
(Source :
Business Standard, dated 13-12-2010)
(Comment : People
shall eagerly await the tangible outcome of the probes !)
Background in brief :
Services in relation to construction activity are covered in
the service tax law under the three main categories of services in the Finance
Act, 1994 (the Act) viz.
Commercial or
industrial construction [S. 65(105)(zzq)]
Construction of
residential complex [S. 65(105)(zzzzh)]
Works contract service [S. 65(105)(zzzza)]
These taxing entries were introduced in the service tax law
at different times during 2004 to 2007.
A tremendous amount of controversy has been generated
recently on account of insertion of the following explanation in the sub-clause
(zzzzh) of S. 65(105) of the Act by the Finance Act, 2010 with effect from
1-7-2010 :
“Explanation — For the purposes of this sub-clause,
construction of a complex which is intended for sale, wholly or partly, by a
builder or any person authorised by the builder before, during or after
construction (except in cases for which no sum is received from or on behalf of
the prospective buyer by the builder or a person authorised by the builder
before the grant of completion certificate by the authority competent to issue
such certificate under any law for the time being in force} shall be deemed to
be service provided by the builder to the buyer.”
(A similar explanation is also inserted in sub-clause (zzq)
of the Act).
Consequent upon the Tribunal decision in the case of Daelim
Industrial Co. Ltd. v. Commissioner, 2006 (3) STR 124 (Trib.-Del.) and later
dismissal of Special Leave Petition filed by the department against the above
decision, already a debate was generated as to whether or not construction
services provided under any works contract were at all liable for service tax
prior to 1-6-2007 i.e. at the time of introduction of works contract service in
the service tax law.
To add to this controversy, the Supreme Court’s decision in
the case of K. Raheja Development Corporation v. State of Karnataka, 2006 (3)
STR 337 (SC) and ruling of the Authority for Advance Rulings in Re : Hare
Krishna Developers 2008 (10) STR 341 (AAR) created a controversy as regards
service tax applicability to builder/developer in cases where construction was
undertaken by a builder for a prospective customer under an agreement for sale.
The issue remained contentious on account of various clarifications and judicial
pronouncements although it was almost settled when the Board issued a
clarification vide its Circular No. 108/2/2009-ST dated 29-1-2009 inter alia
that the activity of a builder amounted to ‘self service’ and would not be
subject to service tax.
However, with the insertion of the above explanation in the
two cited sub-sections of the Act, the issue has resurfaced with even greater
force. The Government vide its Circular DOF No. 334/1/2010-TRU dated 26-2-2010
clarified the nature, background and reasons for the imposition of service tax
on the activity of sale of unit of commercial/industrial or residential complex.
An extract from the same is reproduced below :
“8.5 These different patterns of execution, terms of payment
and legal formalities have given rise to confusion, disputes and discrimination
in terms of service tax payment.
8.6 In order to achieve the legislative intent and bring in
parity in tax treatment, an Explanation is being inserted to provide that unless
the entire payment for the property is paid by the prospective buyer or on his
behalf after the completion of construction (including its certification by the
local authorities), the activity of construction would be deemed to be a taxable
service provided by the builder/promoter/developer to the prospective buyer and
the service tax would be charged accordingly. This would only expand the scope
of the existing service, which otherwise remains unchanged”.
The insertion of the explanation in both the categories of
services of construction has given rise to a number of issues as the explanation
seemingly has created a deeming fiction whereby money received by a builder or
developer for units under construction is considered a receipt towards taxable
service of construction even though the money is received towards the sale of
such unit for the reasons stated in the above circular. Assuming for the time
being that builders are liable for service tax unless they have sold the fully
completed residential or commercial unit, some important issues that emerge in
the scenario are discussed below :
It is required to note that the scope of definitions of
taxable services is extended only in respect of commercial or industrial
construction and construction of residential complex and not in the definition
of ‘works contract’ which also specifically includes contracts for construction
of commercial/industrial buildings or civil structure and contracts for
construction of new residential complex. Therefore, the question that arises is
whether intentionally no explanation was inserted under the works contract
service based on the reasoning that contracts entered into by the builders with
flat purchases are not works contracts.
Whether construction service provided for personal use of
buyer is taxable on account of the new explanation ?
The definition of the term ‘residential complex’ in S. 65(91a) of the Act specifically excludes a complex which is constructed by a person directly engaging any other person for designing/planning/ construction and is intended for personal use as residence by such person. The definition further provides that personal use includes permitting use of such property as residence by another person on rent or even without consideration. At this point, it is also relevant to note that applying criterion of personal use, CBEC in a clarification provided in respect of construction contract awarded by Government to NBCC contended to the effect that the Government buying property for its personal use from a builder viz. NBCC, the transaction of sale would not be covered by service tax. If one extends the interpretation to the situation of buying property for one’s personal use from a developer/builder, isn’t it in the fitness of things to contend that every person buying a residential unit for ‘personal use’ in terms of the definition of ‘residential complex’ inherently falls out of the purview of service tax in terms of the definition of ‘residential complex’ itself? A clarification from CBEC would put to rest the uncertainty over the vital and contentious issue at least in the case of builders of residential units to a large extent. The issue however as to the units bought for other than personal use and commercial or industrial properties still would remain open.
On going contracts as on July 01, 2010:
As the deeming provision vide Explanation is effective from 1-7-2010, services provided from this date only would be leviable to service tax. In case of ongoing construction of buildings as on this date, the issue of calculation of service tax liability arises as a number of permutations and combinations of situations are possible; such as construction completed partially, construction completed but completion certificate not received, bookings made and advances received partially and of different amount, in respect of different units etc. Further complications may arise on account of receipt of full amount in case of completed construction in respect of some units and partial receipt in respect of other units in the same building as on 1-7-2010. Further, in the same complex, some units may be only partially completed as on 1-7-2010 and therefore service as well as payment of money would be completed only after 1-7-2010. The builders/developers therefore would require proper accounts and records to facilitate such bifurcation. Typically all civil contractors issue running bills but builders/developers do not issue ‘running bills’ on prospective buyers as they only book units or flats to be sold to prospective purchasers. However, in any scenario, the ‘taxable event’ arising only on provision of service. Therefore, services provided before 1-7-2010 are not liable for service tax in case of liability arising out of deeming provisions. To ascertain the extent and stage of completion, one may have to obtain a certificate from an architect or a chartered engineer. The explanation has referred to ‘authority competent to issue completion certificate’. Vide order No. 1/2010 dated 22-6-2010, the Government has issued Service Tax (Removal of Difficulty) order, 2010 whereby it is provided that besides any Government authority, the following persons are authorised to issue a completion certificate for the purposes of sub-clauses (zzq) and (zzzzh) of S. 65(105) of the Act:
Any of the above persons thus may issue a completion certificate in respect of residential or commercial or industrial complex as a pre-condition for its occupation.
Service tax liability on advances:
When any advance is received towards a taxable service, service tax is liable to be paid. Accordingly, in normal course, advance received for services provided post July 01, 2010, the service tax liability would have arisen. However, Notification No. 36/2010 dated 28 -6-2010 has been issued to provide exemption to any amount of advance re-ceived prior to 1-7-2010 for various taxable services provided on or after 1-7-2010. The said Notification inter alia also applies to construction services in respect of residential and commercial/industrial construction services. Therefore, the entire sum of money received as advance from prospective purchasers towards any unit in a building by a builder or a developer prior to 1-7-2010 is not liable for service tax in case of construction services remaining pending to be provided in the period post 1-7-2010.
Valuation of element of ‘service’ for a builder/ developer:
Builders and developers have the options available under the law for determining their service tax liability.
[Note: In both the above options, while determining the ‘gross value’, value of goods and material supplied, provided or used is required to be added as per the condition laid down in Notification 1/2006-ST. Therefore, if the customer has supplied any material, its value will have to be added to the ‘gross value’ before working out 25% or 33% as the case may be. Further, no CENVAT credit is available, if any of the above options is selected].
Whether constitutional validity of the provision challengeable?
The above deeming provision applicable to build-ers/developers was challenged by them before various High Courts. The Bombay High Court in the case of Maharashtra Chamber of Housing and Industry v. UOI, (2010 TIOL 526 HC Mum.-ST) granted an interim stay to the petitioners. The Madras High Court also granted an interim stay in the case of A. P. Ravi v. UOI, (2010 TIOL 604 HC Mad.-ST).
However, recently in the case of G. S. Promoters v. UOI, 2011 (21) STR 100, Punjab & Haryana High Court has pronounced its judgment and upheld the validity of the Explanation inserted in S. 65(105) (zzzzh) . In this case, the petitioner sought to declare the Explanation to S. (105)(zzzzh) of the Act and CBEC Circular No. 334/3/2010 -TRU dated 1-7-2010 as unconstitutional. According to the peti-tioner, the Explanation enlarged the scope of the levy beyond the concept of service by including therein sale. It was pleaded that sale and purchase was beyond the legislative competence of the Union legislature. If construction activity is not undertaken by a builder, then the builder cannot be considered to be a service provider in relation to services of construction activities. The petitioner relied upon the stay granted by the Bombay High Court on this issue. They also placed reliance on the decision in the case of Magus Construction P. Ltd. v. UOI, 2008 TIOL 321 HC wherein it was held that if construction activity is not undertaken by a builder, the builder cannot be considered a service provider of construction service.
The High Court did not accept the contentions of the petitioner and made the following observations:
In terms of the above observations made by the High Court, it was held that the contention that there is no element of service of construction involved in a builder selling a flat cannot be accepted. Whether there is a service or not has to be obtained not only from builder’s angle but also from the recipient’s angle. Only service in relation to construction is sought to be taxed and it is definitely involved when construction is carried out or before construction and before flat is sold and therefore the levy could not be held unconstitutional.
The judgment being the first final ruling by a High Court on the issue of constitutional validity has generated sharp reactions among legal fraternity on account of various issues in addition to the legal or technical issue of relevance of Article 268A of the Constitution of India and insertion of Entry 92C in the Union List as the Court has referred to it as ‘legal back-up’. Leaving this aspect aside for the time being, the other issues that arise are:
Conclusion:
In view of the above, it appears almost certain that the decision would be challenged before the Hon. Supreme Court. Further, there may not be any consequence of the judgment in the jurisdiction of the Bombay High Court and the Madras High Court as they have granted the interim stay in the matter. Yet elsewhere uncertain and untoward situation for the builders as well as flat buyers may continue as attempt by the department for the recovery of service tax may be made. The issue being highly complex and contentious, judicial testing seems inevitable.
[Note: Readers may note that the subject being complex, only preliminary issues are discussed above. A few other issues including a vital issue relating to builders involved in redevelopment activity would be discussed in subsequent issue of BCAJ.]
41 PM-Seize the Moment
So the country is in a mess,
our institutions stand tarnished in the public eye, and the government faces a
credibility crisis. People are right to be both disillusioned and worried about
where matters are headed. The transition from unreal optimism to cynical gloom
in just a few weeks is breathtaking. This is a time for leadership, not
vacillation and hiding in corners.
What are the issues to be
addressed ? First is the quite incredible paralysis of Parliament, with
belief in the efficacy of its functioning so low that there is no discernible
public response to the loss of a whole session; what kind of democracy do we
have that it does not matter if Parliament is non-functional ? Second is
the growth of crony capitalism into a national cancer that corrupts any and
everything in sight. The third is linked to the second, namely the shady
sourcing of election funds — which, in turn, has become a cover story for
unchecked loot on an unprecedented scale. Fourth is the chaotic style
that has come to mark coalition governments, whereby each minister thinks he is
a law unto himself. And fifth is the state of affairs in the judiciary,
with even the Supreme Court and former chief justices coming under a cloud.
There is a second set of
five troubling issues. One is the steady emaciation and co-option, if not
downright subversion, of supposedly autonomous institutions that could keep the
rich and powerful in check, like the Central Bureau of Investigation, the Lok
Ayuktas, the Central Vigilance Commission . . . .; the result is not only that
the country’s rulers are effectively above the law, but also that they can
invade the privacy of private citizens through gross actions like telephone
tapping. Two, there is the suborning of the bureaucracy, which now mostly
comprises willing accomplices in the shenanigans of political masters, and which
asserts itself only to corner privileges for itself. Third is the defence brass,
whose reputation and image have taken a severe knock after the Adarsh scandal,
not to mention the general assumption of its involvement in corrupt purchase
deals. Fourth is the media, whose credibility has reached its lowest point ever,
in the wake of paid news scandals and now the Radia tapes which show up some
leading media personages as completely compromised individuals. And last, there
is the growing feeling that the state’s capacity to deliver is fundamentally
deficient, at a time when the state is being asked to do ever more.
These 10 overlapping crises
— involving politicians, civil servants, judges, businessmen, armed service
officers, journalists and publishers — have boiled over at the end of a long
process of deterioration in efficacy levels and standards of probity. It has
reached the point where business cannot go on as usual; the system must be
rescued because it is at risk — many countries that seemed on a rapid growth
track have been arrested in mid-stride by corrosion from within, resulting in
violent implosion. Think Indonesia.
But with such a daunting
list of challenges, you could be forgiven for asking where one begins. In fact,
though, the task is not very difficult. All that the prime minister and other
leaders need to do is to tap the latent desire for a change from today’s
dreadful situation. If they are seen doing that, there will be a groundswell of
support that itself creates an environment which facilitates other corrective
action. The specific steps are in themselves not difficult to design. If our
leaders cannot or will not take these steps, then they deserve to go. The
country deserves better.
(Source : Business Standard, dated 18-12-2010)
40 Vision
When you can clearly see
where you’re going, you greatly improve your chances of getting there. The more
clearly you can visualise your goals, the more likely you are to reach them.
It’s slow and difficult to make any progress, and even when you arrive you may
not know you are there. Yet when goals are clear, specific, and filled with rich
details, all kinds of great opportunities for moving towards them will continue
to come in view. —
Anonymous
To
believe in the things you can see and touch is no belief at all. But to believe
in the unseen is both a triumph and a blessing. — Bob Proctor
Vision without action is a dream. Action without vision is simply passing time.
Action with vision is making a positive difference. — Joel Barker
The existentialist dilemma before Indian democracy is stark :
it cannot co-exist with financial honesty. It does not matter if you are
personally incorruptible; you have to be institutionally corrupt in order to
engage in the business of democracy. The moral code of elections is
uncomplicated : Don’t ask. Don’t tell. And for God’s sake don’t get caught.
— M. J. Akbar
in India Today, dated 10-1-2011
51 Centre forms task force to curb misuse of subsidies
To curb the misuse of subsidised kerosene, cooking gas (LPG)
and fertilisers, the Centre has constituted an inter-ministerial task force
under Unique Identification Authority of India (UIDAI) Chairman Nandan Nilekani.
The team of experts will work to evolve a mechanism for
direct subsidy transfer and give its interim report within four months. Several
Government committees in the past, including the Kirit Parikh committee, had
recommended direct transfer of subsidies. States such as Haryana and Madhya
Pradesh are close to implementing a direct subsidy transfer for grains.
The Government had formed the task force in light of the
‘overwhelming evidence’ that the present policy of giving subsidy on kerosene
was resulting in ‘waste, leakage, adulteration and inefficiency’, the statement
said. The Government provides kerosene at subsidised prices to below-poverty
line families under the Public Distribution System. “Therefore, it is imperative
that the system of delivering the subsidised kerosene be reformed urgently,” it
added.
“Similarly, the system of provision and delivery of
subsidised LPG to intended beneficiaries needs to be reformed. The current
subsidy on kerosene is Rs.20.56 per litre while the same on domestic LPG is
Rs.356 per cylinder. This leaves a massive scope for black marketing in these
essential commodities,” the statement said.
(Source : Business Standard, dated 15-2-2011)
(In this Article, we continue with our study of the
Bombay Tenancy and Agricultural Lands Act, 1948 (‘Act’) which deals with
certain aspects of the law relating to agricultural lands in the State of
Maharashtra.)
Transfers to non-agriculturists :
U/s.63 of the Act, any transfer, i.e., sale, gift,
exchange, lease, mortgage with possession of agricultural land in favour of any
non-agriculturist is not be valid unless it is in accordance with the provisions
of the Act. The terms sale, gift, exchange and mortgage are not defined in this
Act and hence, the definitions given under the Transfer of Property Act, 1882
would apply.
This section could be regarded as one of the most vital
provisions of this Act since it regulates transactions of agricultural land
involving non-agriculturists. Even if a person is an agriculturist of another
State, say Punjab, and he wishes to buy agricultural land in Maharashtra, then
section 63 would apply. An important exception to the provisions of section 63
would be in the case of succession to agricultural land by a non-agriculturist.
Thus, if the legal heirs of an agriculturist are non-agriculturists or if the
legatees under his will are non-agriculturists, even then the succession/bequest
in their favour would be valid. In law, succession to property cannot lie in a
vacuum and the BTALA would not override succession laws [refer Ghanshyambhai
v. State of Gujarat, (1999) 2 Guj. LR 1061].
Similarly, any transfer in favour of an agriculturist of any
land exceeding the ceilings fixed under the Maharashtra Agricultural Lands
(Ceiling on Holdings) Act, 1961 (which we would be examining in subsequent
Articles) is not valid unless it is in accordance with the provisions of the
Act.
The above transfers can be done with the prior permission of
the Collector, subject to such conditions as he deems fit. However, he would not
grant such a permission if the buyer is a non-agriculturist and his income from
other sources is more than Rs.5,000 per year.
Some of the conditions under which the Collector would grant
permission for the transfer of an agricultural land are as follows :
(i) the land is required for non-agricultural purposes; or
(ii) the land is required for the benefit of an
industrial/commercial/educational/charitable undertaking; or(iii) the land is being sold in execution of a decree of a
Civil Court for arrears of land revenue; or(iv) the land is being gifted by way of a trust or
otherwise bona fide by the owner in favour of his family member.
Once the permission has been granted by the Collector it must
be acted upon within one year, unless extended by the Collector up to a maximum
period of five years.
If a land is transferred in violation of section 63, then
u/s.84C the transfer becomes invalid on an Order so made by the Mamlatdar. If
the parties give an undertaking that they would restore the land to its original
position within three months, then the transfer does not become invalid.
Once such an Order is passed by the Mamlatdar, the land vests
in the State Government. The amount received by the transferor for selling the
land shall be deemed to be forfeited in favour of the State. Further, the
Mamlatdar would determine the reasonable price of the land and grant the land on
a new tenure on payment of occupancy price equal to the reasonable price so
determined. The reasonable price would not be lower than 20 times the land
assessment and not more than 200 times the land assessment. Further, it would
include, the value of any structures, wells, permanent fixtures, etc., on the
land.
Transfer of land to non-agriculturists for bona fide
industrial use :
U/s.63-1A of the Act, transfer of land in favour of a
non-agriculturist without the Collector’s permission is permissible in the
following two cases :
(i) it is for a bona fide industrial use; or
(ii) it is for a special township project.
The other conditions for the above are that :
(a) the Development Control Regulations permits such an
industrial use; or
(b) the land is located within an industrial zone under
any plan prepared under the Maharashtra Regional & Town Planning Act, 1966
or any other applicable similar law; or
(c) the land is located within the area taken over by a
private developer for a special township project.
In case the total area of the land so proposed to be used
exceeds 10 hectares/25 acres, then the prior permission of the Development
Commissioner (Industries) would be required. Thus, if the purchaser of the
agricultural land is a company which desires to undertake a special township
project and it wants Foreign Direct Investment (FDI) for the same, then it would
have to ensure that the size of the plot is 25 acres or more. In such a case, it
would need the prior approval of the Development Commissioner of Industries for
first acquiring such an agricultural land.
The purchaser of the land for the above purposes must put it
to the industrial use within 15 years from the date of purchase or else the
seller has the right to repurchase the land at the price at which he sold it.
Till 2004, the limit was five years and it was extended to 15 years by the
Maharashtra Tenancy and Agricultural Laws (Amendment) Act, 2004. If the
purchaser was holding the land in 2004 and had failed to put it to use within
five years of purchase, then he can put it to industrial use within the
remaining period out of 15 years, subject to payment of certain non-agricultural
tax.
Bona fide industrial use :
Agricultural land can be purchased without approval if it is
for a bona fide industrial use which has been defined under the Act to
mean the following :
Special township project:
Agricultural land can also be purchased without the approval of the Collector if it is for constructing a special township project as per the Rules framed under the Maharashtra Regional and Town Planning Act, 1966. Although, in such cases apart from the permission of the Collector, special township projects require a host of other regulatory clearances, as high as 30- 35 approvals. Some of the key requirements for a special township project are as follows:
Construction and real estate development other than what is specified above is not covered. Thus, the Collector’s permission would be required for the same.
A special township project is eligible for various sops and benefits under the Maharashtra Housing Policy. Some of the benefits are as follows:
In addition, special township projects are also eligible for external commercial borrowings under the FEMA Regulations.
Significance of Act:
This Act is very important to industry at large since it lays down the circumstances under which company/non-agriculturist can buy agricultural land. The management of companies dealing with or in agricultural land would be well advised to pay heed to the provisions of this Act or else they face the risk of losing the land altogether.
(In this Article, we continue our examination of the Maharashtra Land Revenue Code, 1966 (‘Code’) which deals with the law relating to agricultural land and land revenue in the State of Maharashtra.)
1. Uses of land:
1.1 The holder of any land which is assessed or held for agricultural purposes is entitled to himself or through his agents to erect farm buildings, wells, or make any other improvements for better cultivation of the land. Interestingly, the Code does not define the term ‘agricultural’. Reference may be made to the definition under various other Land Laws. Activities such as, horticulture, crop farming, grazing, dairy farming, poultry farming, livestock breeding, etc., would generally be covered under this definition. It is a matter of fact whether a particular land can be said to be used for agricultural operations or not.
1.2 Before commencing construction or renovation of any farm building on lands located in cities, certain types of municipal corporations, etc., the holder requires the prior permission of the Collector for such work. The permission is granted subject to certain conditions.
1.3 Without the prior permission of the Collector:
(a) No land which is used for agricultural purpose can be used for any non-agricultural purpose;
(b) No land which is used for one non-agricultural purpose can be used for any other non-agricultural purpose;
(c) No land which is used for one non-agricultural purpose can be used for the same purpose but in relaxation of any conditions imposed;
Land which is used for non-agricultural purpose is popularly known as ‘N.A. Land’. The Maharashtra Land Revenue (Conversion of Use of Land and Non-Agricultural Assessment) Rules, 1969 need to be complied with for converting an Agricultural Land into NA Land.
1.4 Procedure for conversion into N.A. Land:
(a) An applicant who desires to convert agricultural land into N.A. Land must make an application to the Collector for permission in the prescribed form and in the prescribed manner.
(b) The Collector must acknowledge the application within 7 days.
(c) The Collector may refuse the permission or grant it on such terms and conditions as he deems fit.
(d) In cases where the Collector fails to take any action within 90 days of the acknowledge-ment or within 90 days of receipt (if no acknowledgement is also granted, then the permission applied for is deemed to be granted).
(e) Once the permission is granted, the applicant must inform the Tahsildar about the change of user of the land within 30 days in the prescribed format.
(f) Once the land is permitted to be made into N.A., a sanad is granted by the Collector to the holder of the land.
(g) Once permission is granted for N.A. use, such use must be commenced within one year of the date of the Collector’s Order.
(h) Where permission is granted for construction of a structure to be used for a non-agricultural purpose, then the provisions of the Maharashtra Land Revenue (Conversion of Use of Land and Non-Agricultural Assessment) Rules, 1969 need to be complied with in this respect. These include provisions on the minimum open space to be maintained, the number of storeys to be constructed, the size of the building, the plinth area, the dimensions of a room used for residential purposes, types of building material to be used, construction of cess-pools, stables, privies, etc.
In the case of Jamunabai P. Shah v. Bajirao Kalbor, 1995 (1) Mah. LJ 143, it was held that NA use commences from the date on which the land is in fact put to non-agricultural use and not from the date of permission by the Collector.
1.5 Bona fide Industrial Use of Land:
1.5.1 In the following cases prior permission is not required for conversion of the use of agricultural land:
(a) If land is situated within the industrial zone of a development plan prepared under the Maharashtra Regional and Town Planning Act, 1966; or
(b) If the land is situated within the area where no plan exists for a bona fide industrial use; or
(c) If the land is situated within the area undertaken by a private developer for a special township project.
When land is so used, a sanad shall be granted in the prescribed form.
1.5.2 The conditions to be complied in this respect are as follows:
(a) The user has clear and proper access to such land
(b) The land should not be reserved for any public purpose
(c) The bona fide industrial use/township project does not conflict with any development plan of the State
(d) It is not a land notified for acquisition by the State
(e) The industry/project is not within 30 metres of any railway line or 15 metres of any high voltage transmission line.
(f) No Central/State/Local laws are being contravened.
1.5.3 The following activities are treated as being of bona fide industrial purpose:
Ancillary industrial usages like:
1.5.4 A special township project means one which is framed under the Regulations for Development of Special Township under the MRTP Act, 1966.
1.5.5 Whenever any agricultural land is converted into N.A. Land or is used for a bona fide industrial use, then the holder is liable to pay a Conversion Tax. This tax is equal to 5 times the non-agricultural assessment of the land.
1.5.6 Any person who contravenes the provision of change of use of land would be liable to pay non-agricultural assessment. Further, he would be liable to such fine as the Collector determines. He would also be liable to restore the land to its original use or carry out such actions as the Collector determines in respect to the land. In certain circumstances, the Collector has power to regularise unauthorised use of land, subject to the following conditions :
(a) the holder pays the applicable Conversion Tax.
(b) the holder pays the N.A. assessment with reference to the altered use since commencement of that use.
(c) he pays such fine not exceeding 40 times the N.A. assessment as the Collector may determine.
(d) he abides by all conditions imposed by the Collector.
It may also be noted that under the Foreign Ex-change Management Act and Regulations issued thereunder, an Indian company cannot raise Foreign Direct Investment for acquiring agricultural lands with an intention of subsequently making them N.A. Lands. Recently, a large real estate developer was questioned by the Enforcement Directorate/RBI for using FDI proceeds for buying agricultural lands.
2. Land revenue:
2.1 All agricultural and non-agricultural land is subject to land revenue.
2.2 Land revenue is assessed with reference to the use of the land:
(a) for the purpose of agriculture,
(b) for the purpose of residence,
(c) for the purpose of industry,
(d) for the purpose of commerce,
(e) for any other purpose.
2.3 Non-agricultural assessment of lands :
2.3.1 N.A. assessment of lands is determined with reference to the use which such land is put to and whether it is situated in urban or non-urban areas.
2.3.2 The Collector would classify the villages in non-urban areas into Class-I and Class-II after considering the market values of the land, their situation, the non-agricultural purpose for which they are used, their advantages, disadvantages, etc. Class-I N.A. lands are assessable at a rate not exceeding 10 paise per square metre per year, while for Class -II N.A. lands the rate is not exceeding 5 paise per square metre per year.
2.3.3 In the case of N.A. assessment in urban areas, the Collector would divide them into blocks on the basis of the market value of lands, their N.A. use, advantages, disadvantages, etc. The N.A. assessment of such lands cannot exceed 3% of the full market value. The term full market value means:
Market Value of the Land
+ Capitalised Assessment
Capitalised Assessment means an amount equal to 16 times the assessment on the land for the time being in force. The full market value is estimated on the basis of sales, leases, land acquisition awards, etc., which have taken place in a period of five years immediately preceding the year in which the standard rate for N.A. assessment is being fixed (see para 6.3.4 below).
2.3.4 The Collector has powers to fix the rate of N.A. assessment per square metre of land in each block or urban area. Such rate is called the ‘the standard rate of non-agricultural assessment’ and is fixed as a percentage of the full market value. Each standard rate remains in force for a block of five years. In the year 2002, the Code was amended to provide that the non-agricultural assessment for the guaranteed period of five years commencing from 1st August 2001 shall not exceed:
(a) thrice the non-agricultural assessment rate of 1991 for land in a municipality and twice such rate for other lands in cases which are already assessed for non-agricultural purposes; and
(b) six times the non-agricultural assessment rate of 1991 for land in a municipality and four times such rate for other lands for cases to be assessed for non-agricultural purposes.
The rate of assessment, depending upon the type of land use, is as follows:
2.3.5 The method of computing the standard rate is as follows:
(a) The Collector first estimates the full market value of non-agricultural land in each block of land separately for each of the five years immediately preceding the year for which standard rate is being worked out.
(b) He then determines the full market value per square metre of land in each block of land.
(c) The standard rate of non-agricultural assessment per square metre of land in each block = 3% of the full market value per square metre of land.
(d) These rates are to be approved by the State Government. They are then published in the Official Gazette and they come into force from the date of publication.
3. Recovery of land revenue:
3.1 Chapter XI of the Code is a very important Chapter since it provides for the manner of recovery of land revenue. The claims of the State Government have precedence over all other debts, claims, etc., against any land. If the land revenue due is not paid by the prescribed dates, then it becomes an arrear of land revenue and the person responsible for its payment becomes a defaulter. In several Acts one comes across the phrase ‘all sums required to be paid under this Act may be recovered as an arrear of land revenue’. For instance, S. 46 of the Bombay Stamp Act, 1958 empowers the Collector to recover any duties or sums due under that Act as if they were an arrear of land revenue. Hence, it is important to understand what is the process prescribed for the recovery of land revenue under the Code.
3.2 The process of recovery of land revenue specified u/s.176 of the Code may be briefly described as follows:
(a) by serving a written notice on the defaulter
(b) by forfeiture of his occupancy
(c) by selling his movable property, other than certain necessary personal effects, tools of an artisan, articles for religious endowments
(d) by attaching and selling his immovable property, other than houses belonging to an agriculturist and occupied by him
(e) by arresting and imprisoning him. The arrest process would be stayed if the defaulter furnishes adequate security to the Collector.
(To be continued)
(a) Bombay Tenancy and Agricultural Lands Act, 1948 (‘BTALA’)
(b) Maharashtra Agricultural Lands (Ceiling on Holdings) Act, 1961.
This Article gives a bird’s-eye view of the BTALA (also ‘the Act’). This Act is relevant to companies since it lays down the situations under which an agricultural land can be transferred to a non-agriculturist. This would be relevant to ascertain how and when can a company acquire agricultural land. If a Company acquires agricultural land in contravention of the Act, it can have serious consequences. The prohibition on companies acquiring agricultural land is also found under other laws. For instance, sometime ago, the Enforcement Directorate raided the offices of a large real estate developer company since it had acquired agricultural land with the proceeds of Foreign Direct Investment.
2. Applicability:
2.1 The Act is applicable to the Bombay Area of the State of Maharashtra. The Bombay Re-organisation Act, 1960 divided the State of Bombay into two parts, namely, Maharashtra and Gujarat. Thus, the BTALA is in force in the whole of Maharashtra except the Marathwada (Latur, Nanded, Aurangabad) and Vidarbha (Nagpur, Akola, etc.) regions.
2.2 The Act seeks to govern the relationships between tenants and landlords of agricultural lands. Further, it lays down the law in respect to fixation of rent, rights of tenants, etc. Thus, it is similar to the Maharashtra Rent Control Act, 1999.
3. Definitions:
3.1 The Act defines the term ‘agriculture’ to include the following :
(a) horticulture
(b) raising of crops, grass or garden produce
(c) the use by an agriculturist of his land for cattle grazing
(d) the use of any land for the purposes of rab manure
However, it states that the following are not agriculture :
(a) allied pursuits
(b) cutting of wood alone
Since the definition is an inclusive one, it retains its common parlance meaning as well as something more — Official Asssignee v. Maheshri Firm of Chandulal, 71 IC 657.
This is a definition which has been the series of a spate of controversies. Even under other Acts such as the Income-tax Act, there are several decisions on what constitutes agriculture. The decision of the Supreme Court in the case of CIT v. Benoy Kumar Sahas Roy, AIR 1957 SC 768 is relevant in this respect. It held that the term agriculture cannot be disassociated from the primary significance thereof, which is cultivation of the land and even though it can be extended in the manner both in regard to the process of agriculture and the products which are raised upon the land, there is no warrant for extending it to the land.
The expression emphasises the cultivation of land. Any operation which has something to do with the land, any operation which helps the land to yield the fruits or its crops, any operation which proves the natural produce of the land, may come within the expression — N. G. Desai v. State of Bombay, 57 Bom. LR 199.
3.2 The term ‘agriculturist’ is defined to mean someone who cultivates land personally.
4. Tenant:
4.1 A tenant is defined to mean a person who holds land on lease and includes :
(a) A person who is deemed to be a tenant u/s.4
(b) A person who is a protected tenant; and
(c) A person who is a permanent tenant
4.2 A permanent tenant means one who was considered accordingly prior to 1955 or someone whose commencement or duration of tenancy cannot be satisfactorily proved by reason of antiquity.
4.3 Deemed tenant:
4.3.1 A person lawfully cultivating any land belonging to another person is deemed to be a tenant if such land is not cultivated personally by the owner. Further, such a person should not be a part of the owner’s family or be his servant or be a mortgagee in possession.
4.3.2 Lawful cultivation is of prime importance and hence, the landlord must have placed his tenant in lawful possession of the land. If a litigation is pending in respect of the title to the land, cultivation on that land would not be lawful.
4.3.3 Land is said to be cultivated personally if a land is cultivated on one’s own account by :
(a) one’s own labour. An agriculturist lady continues to be so even after her marriage and she can continue her occupation as an agriculturist — Babib Doshi v. Dy. Collector, 1986 CLH 845. The cultivation must not be as an agent of the owner.
(b) by labour of family members, i.e., spouse, children or siblings in case of a joint family. A joint family is defined to mean an HUF and in case of other communities, a group or unit the members of which are by custom joint in estate or residence. In one case, even a married sister living with her husband has been regarded as a part of the family — Case No. 8953 O/154 of 1954.
(c) by hired servants or workers under personal supervision.
(d) cultivation through an agency on behalf of the juristic person does not come within the meaning of the words to cultivate personally in S. 2(b). An idol or juridical person is not capable of cultivating personally
— Shri Kalanka Devi Sansthan Patur v. Pandu Marotti, 1963 Mah LJ 249
4.3.4 A relative of a landlord does not automatically become a deemed tenant unless the relationship of landlord and tenant is proved — Smt. Amtibai Jesangbai v. Patel Purshottamdas, AIR 1983 (Guj.) 84.
4.3.5 The onus is on the person who alleges that he is a tenant to demonstrate that he is a tenant. All persons other than those specifically excluded and who are lawfully cultivating land belonging to others are deemed to be tenants.
4.3.6 If a person is cultivating a land under an Agreement of Sale he does not become a deemed tenant
— Ambalal v. Mangalbai, (1978) 19 GLR 799.
4.4 A protected tenant means one who has been afforded such protection under the earlier Tenancy Act of 1939.
5. Ceiling Area:
5.1 Ceiling Area means the area of land fixed as ceiling area u/s.5 or u/s.7 in relation to land held as an owner or a tenant. It may be noted that this ceiling is different and separate from the ceiling fixed under the Maharashtra Agricultural Lands (Ceiling on Holdings) Act, 1961. The objective of fixing a ceiling is to give each family a fair amount of subsistence, secondly to arrive at the economic unit or cultivation and thirdly to enable larger cultivation areas to those who can afford them in-sofar as it does not hamper equitable distribution of land.
5.2 The ceiling, depending upon the type of land, is as follows:
1 acre of perennially irrigated land = 2 acres of seasonally irrigated land/paddy land = 4 acres of jirayat land
Warkas land, i.e., land used for rab manure for rice cultivation is to be excluded. Further, potkahraba land, i.e., one which is not fit for cultivation is not to be included in computing the land.
5.3 The Economic Holding is as follows:
If the land consists of a combination of the above, then the ceiling shall be determined as specified for ceiling computation.
While people should be allowed to own land to the maximum extent possible, the cultivators must be given enough to at least maintain themselves and their family’s proper standard of living. This is taken care of by economic holding.
6. Rent control and tenancy protection:
6.1 The Act contains provisions for the following:
(a) Fixing the minimum and maximum rent for agricultural land
(b) Fixing the rent by the mamltadar for different classes of land situate in a village
(c) Liability of tenant to pay land revenue, irrigation cess and certain other cesses
(d) Termination of tenancy under certain cases, such as, non-payment of rent, unlawful assignment/sub-letting, permanently damaging the land, etc.
(e) Surrender of tenancy by the landlord
(f) Provisions for dwelling houses of tenants
(g) Tenants right to certain trees planted by him and produce thereon
(h) Prohibition on a tenant from sub-dividing, sub-letting or assigning the land
(i) The landlord is entitled to recover possession of the land if he requires it bona fide for cultivation personally or for any non-agricultural purpose. However, the landlord needs to give a notice to the tenant for the same.
39. Chinese restaurant has
robots as waitresses !
A new restaurant has opened
in Shandong province of China which has robots as waitresses. The Dalu Robot
Restaurant, in Jinan, has six robot waitresses and can cater to up to 100
diners. The website Orange reported that the restaurant’s 21 tables are set in
circles and the robots follow a fixed route to serve diners in rotation. After
serving, the robots return to the kitchen to refill their carts for the next
round. Restaurant spokeswoman Wang Xianwei said all of the waiting on tables is
done by robots. However, the food is prepared by humans, and people are also
employed to welcome customers.
(Source : The Economic
Times, dated 11-12-2010)
“Many bought into the idea
that America could go from a technology-based, export-oriented powerhouse to a
services-led, consumption-based economy — and somehow still expect to
prosper . . . . That idea was flat wrong . . . . Our economy tilted instead
toward the quicker profits of financial services.”
— Jeffrey R. Immelt, Chairman
and Chief Executive, GE.
“Even if you’re doing a good
job, it doesn’t always get reported that way.”
— Steven A. Ballmer, Chief
Executive, Microsoft.
It takes about 1,000 litres
of water to produce a kg of grain, while it takes over 100,000 litres to produce
a kg of beef.
37. Intel-Tech giant plans
creating ‘Sub-Atom’ chip In India
Efforts to take PCs to the
masses in India hasn’t had a great record. Yet, Intel is taking new initiatives
in that direction.
The company’s chief
technology officer, Justin Rattner, said that he’s starting what he calls a
‘frugal engineering’ effort at its India facility. “It’s intended to bring high
technology to these huge populations, to those whom our products for the most
part do not touch today. And India seemed to be the perfect place to do that
kind of work,” he said.
Rattner said his lab was
‘kicking around ideas’ in the space. “We want to do very low-cost PCs, very
power efficient, very robust in the face of unreliable power sources. So we are
moving from a US/European audience, with hundreds of millions of customers, to
an audience of a billion or two billion. Give them online reach, but at a price
point that is unprecedented,” he said.
For this, he is even looking
at developing a new processor, a ‘Sub-Atom’ as he called it. Atom is currently
Intel’s cheapest processor and is used for netbooks, net tops, smartphones and
the company’s smart TV platform.
Rattner expects the India
lab to do a lot of rethinking on how to provide various functions on a chip.
“The India lab is currently working on absolutely leading-edge technologies, now
moving from 32 nanometre chips to 22 nm ones. What if we backed off, and used
chips of two generations back, say 65 nm ? Now, those plants are fully
depreciated, so the wafer costs are dramatically lower. But for a very high
volume, low-cost product, that technology may be sufficient. It’s a big mental
shift for Intel”, he said.
(Source : Extracts from
an article written by Mr. Sujit John in The Times of India, dated 13-12-2010)
38. Cell towers likely sources
of radiation, disease : Study of DoT says India should tighten norms
Cellphone operators have
long denied their transmitting towers atop buildings or on highways have any
adverse bearing on the health of humans or animals, despite several studies
across the world concluding the contrary. Now a report for the Department of
Telecommunication by a faculty of the Indian Institute of Technology, Powai,
reinforces what scientists have long held : that areas around cellphone towers
are high-radiation and consequently high-risk zones. Moreover, it recommends
that India, which has very ‘relaxed radiation norms’, must raise the safety bar.
Girish Kumar, professor,
electrical engineering department of the Powai institute, said : “These towers
transmit radiation 24×7, so people living nearby will receive 10,000 to
10,000,000 times stronger signal than required for mobile communication. In
India, crores of people reside in these high radiation zones.”
Kumar noted that the cell
phone industry was becoming “another cigarette industry, which for long kept
claiming smoking is not harmful. In fact, cellphone/tower radiation is worse
than smoking as one cannot see it or smell it, and its effect on health is noted
after a long period of exposure. Unfortunately, all of us are absorbing this
slow poison unknowingly.”
Cell shocking :
(1)
Cancer risk :
Use of mobile phones for
more than years poses a risk of brain cancer. Children and teenagers are five
times more susceptible as their brain is not fully developed and radiation
penetration is much deeper.
(2)
Infertility :
Studies confirm cell phone
radiation can drastically affect male fertility. Studies have found 30% sperm
decrease in intensive mobile phone users, in addition to damage of sperms.
(3)
Neurodegenerative diseases :
People living near mobile
phone base stations are also at risk of developing neuropsychiatric problems
as headache, memory loss, nausea, dizziness, tremors, muscle spasms, numbness,
tingling, altered reflexes, muscle and joint paint, leg/foot pain, depression,
and sleep disturbance. More severe reactions include seizures, paralysis,
psychosis and stroke.
(4)
Skin damage :
Radiation from cell towers
and mobile phones affects human skin. It can result in an increase in mast
cells, leading to the clinical symptoms of itch, pain, edema and erythema. It
also may be instrumental in higher concentration of the transtyretin protein,
which has an important role in causing nerves diseases like Alzheimers.
(5)
Interference with other gadgets :
Radio frequency exposure
from cellular phone base antennas and mobiles can affect patients with
pacemakers, implantable cardiovascular defibrillators and impulse generators.
(6)
Melatonin reduction :
Melatonin, a vital
neurohormone, regulates our circadian rhythm. Studies with animals show a
reduction in melatonin levels following radio frequency radiation exposure
from cell phones and cell towers. Turning off transmitters resulted in a
significant increased melatonin levels within few days.
(7)
Ear & eye damage :
Radiation emitted by
mobiles may damage the delicate workings of the inner ear, and long-term and
intensive use for more than four years and for longer than 30 minutes a day
creates high risk of irreversible hearing loss. Frequent use of mobiles can
also damage the visual system.
(8)
Sleep disorders :
Use of handsets before
going to bed delays and reduces sleep, and causes headaches, confusion and
depression. The findings are especially alarming for children and teenagers as
they use cell phones at night and keep the phone next to their head, it may
lead to mood and personality changes, depression, lack of concentration and
poor academic performance.
(Source : The Times of
India, dated 7-12-2010)
36. Not the worst of times
As 2010 draws to a close,
the opening lines of Dickens’ A Tale of Two Cities seem appropriate. What we see
is an unusual combination of bad headlines and good economic data — not just in
India but the world as a whole. The headlines talk of Europe being in a
debt-cum-currency crisis, and President Obama battling slow growth and high
unemployment. What the headlines don’t catch is that the International Monetary
Fund has upped its global growth forecast for (calendar) 2010, from 4.2% in
April to 4.8% in October. That is not very far from the average of about 5%
growth achieved in the three years from 2005 to 2007, before the Great Recession
hit. Note also that all talk of a double-dip recession has evaporated.
This combination, of
negative headlines masking good economic data, is evident in India too. The
Government is in crisis, corruption scandals rock the nation, and Parliament is
non-functional. But the economy chugs along, with GDP growth in April-September
at 8.9% — higher than forecast. The full year could see a return to 9% growth,
buoyed by a bumper kharif harvest. Tax revenue is doing well, the foreign
exchange reserves continue to climb, and the inflation curve is dipping. As Jack
Nicholson might say, this is as good as it gets.
If the macro-economic
numbers are so good, what explains the general sense of crisis ? The answer in
the West is that the problem is not growth per se, but its distribution.
While India and China grow at 9% to 10%, the developed economies are managing
barely 2% — not fast enough to reduce the unemployment numbers that surged
during the recession of 2009. The bigger worry is that many of the rich
economies, having piled up massive debt, fear a decade of slow growth as they
pay off the debt; in other words, there will be no quick exit — not just for
Greece and Ireland but also for Britain and others.
In India, the issues that
dominate the headlines can be licked more easily, provided one decides that
every crisis can be made into an opportunity. The Raja scandal can be used to
clean up the telecom rules once and for all. The mining and land acquisition
scandals have already provoked new Bills to clean up policies in these
problem-ridden sectors. All that one needs then is for the Government to decide
that, if it is willing to have the Supreme Court oversee the investigation of
the telecom scandal, it can live with a fully independent Central Bureau of
Investigation. Manmohan Singh must see that it is not enough for him to be
honest, his Government must be honest too. The only way he can ensure that is by
having an effective crime investigation agency that is immune to political
influence.
(Source : Extracts from
an article written by Mr. T. N. Ninan in Business Standard, dated 11-12-2010)
35. Short of judges, govt.
to start 2 IAS-like services
The Centre is finalising the
creation of two all India services Indian Judicial Service (IJS) and Indian
Legal Service (ILS) to fulfil its promise to create 15,000 additional courts by
2012 and meet the demand for services of legal professionals from various
departments of the Union and State governments.
We will create two all-India
services IJS and ILS mainly aimed at capacity building at the lower levels of
the judiciary and to provide professional legal advice to various departments,
Law Minister M. Veerappa Moily told TOI.
Though he was tight-lipped
about the time frame of the plan, the Minister said the IJS would help attract
talent from all over the country for
appointment at the sessions judge level.
The ministry’s Vision
Document prepared last year had promised the creation of 15,000 posts of judges
for two years to tackle the backlog of nearly 2.5 crore cases in the trial
courts. But with that apparently not working out, the Government is keen to add
to the number of nearly 17,000 trial court judges by creating the IJS.
Law leash on lawyers conduct
likely soon :
The Government has proposed
a law, the Legal Practitioners (Regulations and Maintenance of Standards in
Professions, Protecting the Interest of Clients and Promoting the Rule of Law)
Act, 2010, to oversee the conduct of more than one million legal professionals
and supervise legal education. It also envisages a Legal Services Board that
will establish a panel to represent the interests of clients of legal
professionals.
(Source : The Times of
India, dated 5-11-2010)
34. Govt. proposes super
regulator for lawyers
The Centre came out with a
proposed legislation to create a super regulatory body to oversee the ethics and
conduct of more than one million advocates and legal professionals as well
supervise the legal education system.
Given the flexing of muscle
by the Bar Council of India (BCI) in the recent past by being the sole
regulatory body for advocates, the ministry’s move is seen by experts as one
that would clip the wings of BCI.
Importantly, the proposed
law Legal Practitioners (Regulations and Maintenance of Standards in
Professions, Protecting the Interest of Clients and Promoting the Rule of Law)
Act, 2010 aims to control the conduct of legal professionals solicitors not
appearing in courts, those appearing in tribunals or even representing clients
in departmental inquiries who had not been within the ambit of the regulatory
mechanism of BCI.
It aims to protect clients
from harassment at the hands of those legal professionals who are not covered
under the Advocates Act, 1961, having not been registered by the concerned State
Bar Councils. The ministry has sought comments on the proposed law from the
public and the legal fraternity.
In addition, the Legal
Services Board (LSB), proposed to be set up under the Act in line with the one
functioning in the UK, would establish and maintain a panel of persons to be
known as consumer panel to represent the interests of consumers and clients of
the legal professionals. This move is meant to check exploitation of litigants
and clients by legal professionals, including advocates. The consumer panel
shall have a fair degree of representation of both the consumers/clients of the
legal professionals and those who are using or may be contemplating using the
services of the legal professionals as consumers/clients, the proposed law
mentioned.
(Source : The Times of
India, dated 5-11-2010)
33. The right to privacy
For a government that has
been busy granting the people of India rights to employment, education and food,
the United Progress Alliance has been lackadaisical in protecting the citizens’
right to privacy. Industrialist Ratan Tata was, therefore, right to seek the
protection of the Supreme Court in the matter relating to leaked tapes of
telephone tapping undertaken by the Union Government’s tax authorities. After
finishing its internal investigations, the Government must tell the Parliament
as to why the Income-tax Department ordered the tapping of the telephone of
public relations professional Niira Radia, what relevant information was
procured and what action taken and, most importantly, how those secret tapes got
leaked. A government has the right to gather information about illegal and
anti-national activities of a citizen, provided due procedure is followed. Even
so, there can be no justification for leaking such tapes to the media and making
private conversations public. If the tapes have revealed any act of criminality,
illegality and such like penal offences, the Government is duty-bound to take
action against such offenders. However, no government should allow its
intelligence arms to be used to play favourites with corporate houses, the media
or political rivals.
When conversations taped are
purely private in nature, perhaps malevolent, perhaps in bad taste, perhaps
revealing a lack of integrity or judgement on the part of the interlocutors, but
not pointing to any criminal misconduct, agencies of the Government have no
business to go public. The Government has correctly decided to probe the leak of
these tapes and the guilty ought to be punished.
The leaking of the tapes
has, of course, contributed to some soul-searching within the media and the
corporate world, and that is a good thing. A positive consequence of the ongoing
controversies could be that new norms of corporate, political, governmental and
media conduct will be adopted by all concerned. While the consequences of an
illegal act, namely the leaking of the tapes, have been positive both for the
media and public life, the act itself should not go unchallenged. There have
been far too many instances of a breach of privacy and governmental intrusion
into a citizen’s private life in recent months. An atmosphere of fear is being
generated. People worry if they are being spied upon and their privacy intruded.
What’s troubling is that rather than any national interest, such investigations
seem to serve political and corporate interests. There has to be a greater
degree of transparency in the functioning of revenue and intelligence agencies.
These agencies should not be seen as handmaidens of vested interests and those
in power. Shades of the ignominious Emergency Era are being painted, with
detractors of the ruling dispensation finding themselves in difficult
situations. These tendencies should be nipped in the bud. Hopefully, the Supreme
Court will do its bit to empower the citizen, defending the right to privacy
without in any way coming in the way of the normal functioning of various arms
of the Government. For their part, both the media and the corporate world have
their lessons to learn.
(Source : The Business
Standard, dated 1-12-2010)
32. Bihar : Victory for hope
Governance trumps caste
politics as NDA sweeps Bihar. One hopes that political parties across all
colours pay heed to development agenda and jettison caste-based politics.
In this season of scams, the
Bihar assembly election outcome comes as welcome relief. The massive endorsement
given to Nitish Kumar, who sought a fresh mandate for his record in office and
emphasised a politics of governance over caste and communal paradigms, has
far-reaching implications not just in Bihar but also for the rest of the
country. A better-governed Bihar, one of India’s most populated and
underdeveloped states, will have a positive impact on the social and economic
profile of the country.
The Bihar verdict is
extraordinary for a variety of reasons. The scale of the result itself is
astounding because no political party or coalition has swept assembly elections
in Bihar in this manner in recent times. The success of the Janata Dal (United)-BJP
combine is comprehensive. The wins have come from across the state, and a
three-fourths majority could not have been possible but for support cutting
across caste and communal divides. Clearly, Nitish Kumar’s tenure as chief
minister has been a departure from the chaos under Lalu Prasad and Rabri Devi.
Nitish didn’t radically
transform Bihar, but gave Biharis hope of a better future. The turnaround in the
law and order situation, a prerequisite for state building, was the first step
towards realising that. A beginning was made in building infrastructure in the
state. Roads, bridges and culverts were built which made it possible for people
to travel and made small businesses viable. School education got a fillip with
massive recruitment of teachers, while school-going girls were given uniforms
and bicycles. The rise in enrolment figures and fall in school dropout rates
indicate that these interventions have succeeded. Women have been major
beneficiaries of these interventions and they voted in large numbers, presumably
for Nitish and allies.
The challenge now is to
deliver on the mandate. The current consensus in Bihar is for social peace and
economic development. Hopefully, the opposition in Bihar too will take the cue
from the election results and reorient its politics accordingly.
(Source : Times of
India, dated 25-11-2010)
(Comment : One hopes
that political parties across all colours pay heed to development agenda and
jettison caste-based politics)
31. What will India do with UNSC membership ?
Now that India has been
elected as a non-permanent member of the United Nations Security Council (UNSC),
for a two-year term, the Government and India’s diplomatic and strategic policy
community have to decide what to do with it. There is no doubt that India has
come a long way from the ignominious defeat of 1996, when India lost the UNSC
Asian seat to Japan 40 : 142 votes, winning this time 187 : 5 votes. India’s
economic rise in the past decade and its new strategic relationships with
several major and rising powers have all contributed to this impressive vote in
its favour. However, getting into the Security Council is only the first step.
India’s problem is that on many vital global and regional issues, there is no
genuine national consensus at home. Given the weakness of inherently fractious
and myopic coalition politics, there is always the danger that on vital issues,
the Government may find its hands and feet tied when it comes to taking a
position at the UNSC.
Hence, now that India is a
UNSC member, the Government should pro-actively seek to build a national
consensus on foreign policy issues of vital concern to India. In a democracy,
there will always be some critics of Government. That is both a necessary and
valuable aspect of a democracy. However, within the national mainstream, there
has to be some consensus on important international and regional issues where
India would be required to articulate its views at the UNSC. Apart from building
political consensus on international issues, the Government must also revitalise
and strengthen its foreign policy machinery. India has one of the smallest
foreign offices among major and rising powers. Its institutional capacity and
capability for diplomacy has not kept pace with the challenges of the new
post-Cold War and increasingly multipolar world that India now deals with.
Increasing recruitment at the entry level will not suffice. India needs a
quantum increase in manpower and intellectual capability in its foreign policy
machinery in a short period of time. This can only come from lateral entry of
professionals from other walks of life into diplomatic service. This challenge
will become even more pressing once India takes over the UNSC Asia seat from
Japan.
(Source : The Business
Standard, dated 14-10-2010)
(Comment : We also
need lateral entry of professionals in other areas of policy making !).
Promoters of listed companies may have cause both for some
relief and some worry with the recent and almost quiet notification of the
directions relating to Core Investment Companies (CICs) by the Reserve Bank of
India. Essentially, investment companies fulfilling certain conditions of size
and outside borrowings are now specifically required to be registered as
non-banking financial companies (NBFCs).
It is worth discussing first a short background here.
Promoters of listed companies (and even others) often hold shares of such listed
companies through investment companies for various reasons. In 1997, the Reserve
Bank of India Act was amended and it was required that NBFCs, as defined, should
be registered. There have been two views whether pure investment companies,
which just hold securities and do not deal in them, were also required to be
registered. Thus, several such companies did not register on this ground.
Further, on a case-to-case basis, several such companies were even exempted by
the Reserve Bank of India. On the other hand, numerous investment companies, it
appears, just neglected or defaulted in applying for registration. Now, the
Reserve Bank of India has defined such investment companies as Core Investment
Companies, and requires them to be registered even if they were earlier granted
exemption by the Reserve Bank of India.
The Core Investment Companies (Reserve Bank) Directions, 2011
were notified on 5th January 2011. Certain related notifications were also
issued. Important provisions of these Directions are discussed in the following
paragraphs.
What are CICs ?
The Directions define CICs. CICs are essentially companies
that carry on the business of acquiring securities and further satisfy certain
conditions. Firstly, at least 90% of their total assets should consist of
shares, debentures, loans, etc., in ‘group companies’. Secondly of the total
assets, at least 60% should consist of either equity shares or debentures,
compulsorily convertible into equity shares within 10 years of issue, of ‘group
companies’. Thirdly such companies should not trade in securities except through
block sales of securities in the specified manner. Finally, they should not
carry on any other financial activity except investment in bank deposits, money
market instruments, etc.
Which CICs are required to be registered ?
A CIC is required to be registered if, firstly, it has total
assets of at least Rs. 100 crores. Secondly, it should have raised or should be
holding ‘public funds’. Public funds are inclusively defined and particularly
include debentures, public deposits, inter-corporate deposits and bank finance.
However, debentures compulsorily convertible into equity shares within 10 years
of issue are not included. Such CICs are called systemically important CICs
(referred to herein as CICs only).
It is important to note that even the separate assets of
other ‘companies in the group’, as defined, are to be considered while
determining whether the CIC has the required minimum Rs.100 crores of total
assets or not. Thus, effectively, the aggregate assets of group companies are to
be counted to determine whether the concerned investment company is a CIC or
not.
Separate category of such CICs:
Such CICs are known by a separate category now, viz.,
CIC-ND-SI.
When is application for such registration required to be made ?
Existing CICs are required to apply within a period of six
months from the date of notification of the Directions. Till their applications
are disposed of by the Reserve Bank of India, they can continue to carry on
their business as CIC. Companies that become CICs after the date of the
Directions are required to apply within three months of becoming a CIC.
Minimum net owned funds :
NBFCs are required to have and maintain a minimum amount of
net owned funds as defined in the Reserve Bank of India Act. However, the
formula for calculation of net owned funds (NOF) is such that for holding
investment companies, the NOF often cannot be attained. This is particularly
because of an inherent feature of such investment companies that they, by
definition, invest in ‘group companies’, while the formula for calculating net
owned funds require deduction of most part of such group investments from the
‘net owned funds’. In fact, it is often found that by this calculation, even a
high positive net worth company has negative ‘net owned funds’. It is now
notified and clarified that such CICs shall not be required to have the NOF.
Minimum capital requirements :
An important reason for bringing even
non-deposit-accepting large NBFCs into the requirement of registration and
supervision is that such companies should not leverage too much and put
themselves and perhaps the market at risk. Thus, a minimum capital adequacy
requirement has been prescribed. As regards CICs, it is required that they
should have a minimum adjusted net worth that is at least 30% of the
risk-weighted on-balance sheet and specified off-balance sheet assets.
The definition of terms such as ‘adjusted net worth’ and the
formula for calculation of risk-weighted assets have been prescribed.
Essentially, the adjusted net worth includes the ‘owned funds’ but adjusted by
100% of unrealised depreciation/50% of unrealised appreciation in the book value
of quoted investments calculated in the specified manner.
Maximum debt-equity ratio :
CICs are required to have and maintain a maximum debt-equity
ratio of 2.5 as calculated in the specified manner. Essentially stated, this is
the ratio of outside liabilities to adjusted net worth, both terms as
elaborately defined in the Directions.
Outside liabilities for this purpose mean the total
liabilities appearing on the liabilities side of the balance sheet, but exclude
the following :
(i) Paid up capital
(ii) Reserves and surplus
(iii) Instruments compulsorily convertible into equity
shares within a period not exceeding 10 years from the date of issue.
However, it is to be noted that all forms of debt and
obligations having the characteristics of debt are included. In particular,
guarantees issued, whether appearing on the balance sheet or not, are also
included.
This term is thus to be contrasted with the other similar
term, though used for a different purpose, and that is ‘public funds’.
Annual auditors’ compliance certificate :
CICs are required to submit annually a certificate from their
statutory auditors of compliance with the Directions. This certificate has to be
submitted within one month of the finalisation of the balance sheet of the CIC.
What are group companies?
As stated earlier, the assets of companies in the group are also to be considered for determining whether the minimum size of total assets of Rs. 100 crores has been reached or not. The term ‘companies in the group’ has been very widely defined and thus includes the following:
i) Subsidiary-parent (defined in terms of AS-21)
ii) Joint ventures (defined in terms of AS-27)
iii) Associates (defined in terms of AS-23)
iv) Promoter-promotee [as provided in the SEBI (Acquisition of Shares and Takeover) Regulations, 1997] for listed companies,
v) related parties (defined in terms of AS-18)
vi) Companies having common brand name
vii) Having investment in equity shares of 20% and above.
Some areas requiring clarity:
There are several questions that need clearer answers and some of these are as follows:
1. What is the status of a holding investment company that does not have the minimum assets, calculated in the prescribed manner, of Rs.100 crores??
Whether such company, if not yet registered, is not required to be registered?
The Reserve Bank of India has issued simultaneous notifications giving certain exemptions, but a more express and clear exemption would clarify such issues with greater finality.
2. What would be the implications if a CIC is not in complying with the various requirements such as minimum capital adequacy, debt-equity ratio, etc. of these newly notified Directions?? By what time will it be required to be in compliance with such conditions?
3. A question related to the earlier one is whether the requirements relating to, say, having minimum 90% investments in group companies mandatory for registration or mandatory conditions after registration. The intention appears to be that if a CIC is required to be registered, then they should ensure that their asset profile consists investments in group companies only as per the specified formula. One will have to see in practiced, how the Reserve Bank of India deals with such matter.
4. It is seen that many of the related directions, circulars, etc., are presently prescribed, keeping in mind the regular categories of NBFCs such as loan, investment, etc. The CIC-ND-SI is clearly a separate category of NBFCs and hence these other directions would have to be amended to ensure coverage of such CICs as well, of course with suitable modifications where required. For example, the Directions to Auditors of 2008 would need appropriate amendments to cover such CICs.
5. Can existing registered holding companies shift to this new category? As discussed earlier, many existing holding investment companies may be finding it difficult to maintain capital adequacy and other ratios. However, they may be already registered as investment companies, but surely they would like to obtain the benefit of the diluted requirements if they otherwise qualify for being registered as CICs. The Directions do not provide for shifting of registration from being an ordinary registered investment company to a CIC. It is hoped that in keeping with the spirit of these Directions, the Reserve Bank of India allows shifting of such registration.
Conclusion:
These new Directions will require several promoter groups, particularly of listed companies, to check whether their holding companies need compliance of these Directions in the form for registration. Further, they will need to make a plan of restructuring the capital and finances of such companies to ensure that they fall within the framework of the new Directions.
“There’s no reason to be the richest man in the cemetery. You
can’t do any business from there.”
— Colonel Sanders
In the highly readable book ‘Tuesdays with Morrie’, a true
story by Mitch Albom, ailing Morrie in his final days of life says, “Everyone
knows they are going to die but nobody believes it. If we did, we would do
things differently. To know you are going to die, and to be prepared for it at
any time, that’s better. That way you can actually be more involved in your life
while you are living.”
What has life and death to do with CAs ? We are a party to
the creation, preservation and liquidation of companies. We are very much
present in all the cycles a company passes through. When it comes to our own
life, where do we stand ? Targets, goals, due dates and deadlines till one is
dead.
Take a typical day of a CFO of a company. The day begins in
the car replying to emails and reading business dailies. More emails and,
therefore, more replies after one reaches the office. Review of the work with
the colleagues in the department, attending interdepartmental meetings,
strategy/budget/budget review sessions. Unexpected work comes regularly — Income
Tax assessment order where the assessing officer shows his immense knowledge of
the Income-tax Act, legal issues arising out of termination of an employee and
so on. Added to this is the need to comply with the requirements of SEBI, stock
exchanges and the board of directors. The day is not over yet. On his way back
home he has to catch up on the latest judgment on transfer pricing, IFRS and
that highly recommended article that appeared in the latest Harvard Business
Review.
Being from the industry, I have narrated a typical day of the
CA in the industry. It is no different for the practising CA who has to endure
more at home too — phone calls from clients, chairman of the co-operative
society about the problems they are facing, et cetera.
Where is the time to do what one wanted to do when one was
young ? Where is the time to pursue one’s passion ? Where is the time for near
and dear ones ? My mother’s recent passing away triggered these thoughts. I
could not help the feeling that I had taken for granted the constant help
received from my parents. Did I express gratitude ? Would have, but not as
profusely as one would do with one’s bankers or customers. After all, we are
looking for repeat orders from the customers. Memories started flowing of the
many times my mother would wake me up in the night druing preparation for my CA
exams, or check to see whether I was sleeping and, if so, prepare a cup of tea,
kept everything ready as one came back from exams.
Numerous promises one made, some fulfilled and some just
remained as promises. Three of them still remain in my mind and guilt is
unlikely to go away during my lifetime. The promises to take her to the temple
of our family deity in the southern part of Tamil Nadu, darshan of
Shankaracharya of Sringeri Mutt, visit to Varanasi and dip in the Ganga. The
time required for all these trips would not have been more than a week. But one
kept postponing. Parents do not demand, nor do they remind you of the promises
made. I had the excuse of paucity of time. One does not postpone visit to a
multiplex or a restaurant or a sports stadium.
We are not saints to ignore worldly duties. We cannot be
selfless to nip our self interest. We are paid to do our work. We have to take
care of our clients. The professional firms and organisations we run have to go
on. It is not just our livelihood but the livelihood of many who depend on our
organisations. At the same time can’t we look at life not as a sprint but as a
marathon, as Prof. Raghunathan wrote in his book, “Don’t sprint the marathon”.
The belated lesson I learnt and which I wish to share with
the fellow members of our profession is not to postpone what one wanted to do in
one’s personal life. As Morrie said, “We are too involved in materialistic
things and they do not satisfy us. The loving relationships we have, the
universe around us, we take these things for granted”.
When Clayton Christensen (Innovation guru and author of
management bestsellers like “The Innovator’s Dilemma” and “The Innovator’s
Solution”) was asked last year to address the students of MBA in Harvard, he
ended his speech with the following :
“This past year I was diagnosed with cancer and faced the
possibility that my life would end sooner than I had planned. Thankfully, it
now looks as if I will be spared. But the experience has given me important
insight into my life. I have a pretty clear idea of how my ideas have
generated enormous revenue for the companies that have used my research; I
know I have had a substantial impact. But as I have confronted this disease,
it has been interesting to see how unimportant that impact is to me now. I
have concluded that the metric by which God will assess my life, isn’t dollars
but the individual people whose lives I have touched”.
Wise words indeed.
