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The Ministry of Corporate Affairs has vide General Circular No 45/2011- dated 8th July 2011 issued the Name Availability Guidelines, and the applicants and the Registrar of Companies are advised to adhere to them while applying for or approving a name.
Facts
In the given case, an amalgamation involving IOCL (holding company) and IBP (subsidiary company) took place as per order of the Petroleum Ministry dated 30-4-2007 with retrospective effect from 1-4-2004. IOCL claimed refund of service tax which IBP had paid in respect of storage and warehouse charges rendered by IOCL during 1-4-2004 to 30-4- 2007 considering that during the said period services were rendered to oneself in terms of amalgamation with retrospective effect. The rejected claim was allowed by the Commissioner (Appeals).
Held
IBP ceased to exist as a separate legal entity w.e.f. 1-4-2004 even though the order was dated 30-4-2007. The transaction between IOCL and IBP could not be treated as one between a service provider and service recipient. IOCL was held entitled to refund of service tax paid by IBP.
Facts
The main questions to be considered by the Tribunal were:
Whether value of photography service was to include cost of goods, materials used/consumed?
Whether the exemption mentioned as per Notification No. 12/2003, dated 20-6-2003 was applicable in this case?
The appellant claimed that if the value of the goods used for providing photography service was ascertainable, the same should be excluded while determining service tax liability, since the Finance Act, 1994 taxes only taxable services. The Revenue claimed that the demand of service tax raised against the assessee was based on the amount as shown in the invoices. Unless there was documentary evidence in respect of goods sold while providing such service, the appellant cannot allege that tax is levied on such goods as well. Photography service being a pure service contract, there would be no contract for sale of goods unless an agreement brought such provisions to the notice of the Department about distinct sale, the consideration received in exchange for providing photo-graphy service would be the value chargeable to tax. The value of all goods and materials consumed for providing such service being inseparably and integrally connected to such service making the provision of such service possible, must form part of value of taxable service. The only deduction can be the value of unexposed film, if any, sold.
Held
Service tax being a destination-based tax, all elements of cost making the service consumable up to the destination contribute to the value of such tax. In case of photography service, it was held that the cost of materials and goods used are integral and indispensable to the provision of service and thus are to be included for the purpose of valuation of such service. Notification No. 12/2003 S.T. exempts goods which are separately sold by the service provider while providing such service and the same does not include deemed sale.
Facts Penalty u/s.76 was levied against the appellants in respect of the delay in payment of service tax on GTA services. The appellants claimed that the delay in payment of service tax was on account of financial problems. The respondents claimed that the penalty can be waived only if the delay is caused on account of the reasons mentioned u/s. 80 which are not present in the case.
Held
Except financial problems, no other reason was offered by the appellants. The reason of financial difficulty is not a valid reason for waiver of penalty u/s.80.
Facts
The appellant provided to the employees working in their factory canteen service (outdoor catering service), rent-a-cab service, group insurance health policy (insurance service) and claimed service tax paid thereon as CENVAT credit.
The Revenue disputed this claim and treated it as wrong utilisation of credit on the ground that the facilities provided were no way related to the manufacture of goods. According to the party, all the 3 services provided were within the definition of input services as per Rule 2(I) of CCR, 2004 and the services were used indirectly in relation to the manufacture of final products.
Held
Only by reason that the above-mentioned services are not contained in the definition of input service, the assessee could not be denied credit. Rent-a-cab service was used to bring the employees to the place of work to carry out manufacturing activities and thus could be treated as input service. Service tax was paid on canteen service irrespective of the fact that whether the food provided was subsidised or not. The cost of the food would thus form part of the cost of production and thus credit on such amount could be claimed. The group health insurance policy was taken to protect the interest of the employees either during the course of journey to the factory or while working in the factory. In such a case, the amount of premium was also to be considered by the manufacturer while fixing the price of the goods manufactured. The assessee was thus entitled to CENVAT credit.
Facts
The appellant claimed that the order was not served on them. The only proof of service available with the respondent was a noting made by an employee of the Department. The Commissioner (Appeals) as well as the Tribunal did not notice the discrepancy in the number of the order which had been served, nor did they provide any clarification regarding the same. The Department failed to prove that they had served the order as per the provisions of section 37C of the Central Excise Act, 1944.
Held
The respondent failed to serve the order as per the provisions of the law. As a result, the claim of the appellant was held valid and thus, the Commissioner (Appeals) was directed to hear the appeal on merits. When the matter arises as to the right of a party in the form of extinguishment of remedy of an appeal, then such provision has to be interpreted strictly even if the same is procedural.
“(2) If any dealer liable to get his accounts audited under subsection (1) fails to furnish a copy of such report within the time as aforesaid. The Commissioner may, after giving the dealer a reasonable opportunity of being heard, impose on him, in addition to any tax payable, a sum by way of penalty equal to one-tenth per cent, of the total sales.
Provided that, if the dealer fails to furnish a copy or such report within the period prescribed under sub-section (1), but files it within one month of the end of the said period, and the dealer proves to the satisfaction of the Commissioner that the delay was on account of factors beyond his control, then no penalty under this sub-section shall be imposed on him.”
Thus, the law provides for a steep penalty for delayed filing of VAT Audit Report. As per proviso delay up to one month, with reasonable cause, can be condoned.
Case of Nitco Paints Ltd. (42 VST 71) (Bom.)
The Sales Tax Department filed appeal before the Bombay High Court challenging the above order of the Tribunal on the ground that there is no authority with the Tribunal to reduce the amount. The argument of the Department was that there is discretion to levy or not to levy penalty depending upon the facts of the case, but if the authority decides to levy penalty, then there is no discretion about amount of the penalty. In other words, the argument was that once the authority decides to levy the penalty, then the amount is fixed, it should be calculated at 0.1% of the turnover of sales. The language used for determining the amount was relied upon along with judgment of the Supreme Court in case of Union of India v. Dharmendra Textile Processors, (18 VST 180) (SC).
Judgment of Bombay High Court in case of Ankit International (STA No. 9 of 2011, dated 15-9-2011)
“13. Having therefore, considered the submission which has been urged on behalf of the appellant, we are of the view that there is no reason to accept the contention that the discretion which is conferred by section 61(2) does not extend also to the quantum of the penalty. Under the substantive part of s.s (2) of section 61 the State Legislature has conferred discretion on the Commissioner before he imposes a penalty on the dealer for failing to furnish a copy of the audited report within the prescribed period. The proviso to s.s (2) states that if the dealer fails to furnish a copy of the said report within the prescribed period, but files it within one month of the end of the period, and the dealer proves to the satisfaction of the Commissioner that the delay was on account of factors beyond his control, then no penalty under this sub-section shall be imposed upon him. Hence, in the circumstances set out that the proviso to s.s (2), no penalty can be imposed at all if the conditions therein are fulfilled. The proviso operates when (i) the dealer fails to furnish a copy of the report within the prescribed period, but files it within one month of the end of the period; (ii) the dealer proves to the satisfaction of the Commissioner that the delay was for reasons beyond his control. Where the proviso applies, no penalty can be imposed on the dealer at all. The proviso is an exception and does not control the substantive part of section 61(2). The substantive part of s.s (2) of section 61 also confers discretion upon the Commissioner which is not diluted by the proviso to s.s (2).
14. In any event, we are of the view that if two views in regard to the interpretation of section 61(2) are possible, the Court would be justified in adopting that construction which favours the assessee. (See decisions of the Supreme Court in The Commissioner of Income Tax v. Vegetable Product Ltd. 10 and Mauri Yeast India Pvt. Ltd. v. State of U.P.)”
Accordingly the High Court confirmed order of the Tribunal reducing penalty and held that the authorities have discretion regarding the amount penalty as were.
Conclusion
While presenting the Union Budget for 2011-12, the Finance Minister proposed as under:
“Many experts have argued that it will be desirable to tax services based on a small negative list, so that many untapped sectors are brought into the tax net. Such an approach will be very conducive for a nationwide GST. I propose to initiate an informed public debate on the subject to help us finalise the approach to GST.”
Pursuant to the aforesaid announcement, a public debate on widening the tax base by introducing a negative list of services has been initiated by the Government, through the release of a draft concept paper inviting comments/suggestions from the affected parties.
Revenue implications
Relevant extracts from the draft concept paper are set out below for ready reference:
Para 9.1
Para 9.2
Para 9.3
Shortcomings in the present service tax law
Unlike Central Excise law which clearly defines the basic concept of ‘manufacture’, there is no definition of ‘service’ under the Finance Act, 1994 (‘Act’). Each of the 120 services which are liable to service tax are specified and defined u/s.65(105) of the Act. Taxable services are defined employing a very wide terminology. In the absence of a detailed Tariff (like Central Excise/ Customs) with Interpretative Notes, a large number of interpretation issues have arisen as to the coverage of services liable to service tax, resulting in extensive litigations.
The definitions in regard to each taxable service u/s.65(105) of the Act have been introduced at different points of time. Further, amendments have been made in the scope of definition within a service category from time to time. This has resulted in classification issues as regards date of applicability of levy and coverage under specific exemption Notifications;
A large number of exemption Notifications have been issued over the years, resulting in interpretation issues and disputes between the Department and the taxpayers; and
Issues of overlapping vis-à-vis other indirect taxes like State VAT, Central Excise, etc. resulting in double taxation and consequent increased burden to the end consumer.
The above shortcomings need to be satisfactorily addressed in the proposed service tax policy framework.
The draft concept paper in paras 2, 3 and 4 highlights in detail the issues surrounding the positive and negative lists. While it does accept that the currently existing positive list has certain advantages in terms of definitiveness, it seeks to justify the introduction of the negative list by citing certain limitations of the current mechanism of positive list. According to one school of thinking most of the said limitations can be either removed even in positive list approach or are so inherent that they would continue even in the negative list approach. The same is explained in Table 1
Para 2.6
“The limited experience gained in taxing the services on a selective basis has raised some important issues. The most important of them relates to the basic approach to taxing services. The selective approach to taxation, which has been followed till now, has given rise to many administrative problems arising from selectivity including inadequate coverage and increased litigation, Further, in accordance with the medium-term policy objective of the Government of evolving a manufacturing stage value added tax in respect of goods and services at central level, it is neces-sary to adopt a more general approach.”
Considering the serious shortcomings in the presently adopted selective approach (Positive List) to tax services and the prevailing international practices as regards taxation of services, according to a second school of thinking which is being supported by trade bodies/professional bodies across the country comprehensive approach (Negative List) to tax services may be desirable, more particularly in order to avoid breaking of chain and also to ensure wider coverage from the perspective of proposed GST regime.
However, a serious note of caution is advised while moving towards comprehensive approach (Negative List), keeping in mind that a substantial portion of our economy exists in the form of a large unorganised sector scattered in the different parts of the country and the possible adverse impact on the aam aadmi. Hence, it is essential that the likely con-sequences of adopting a comprehensive approach (Negative List) to tax services are appropriately dealt with.
Introduction of Comprehensive Approach (Negative List)
Introduction should be only with GST to avoid overlaps with State levies
Considering the substantive nature of the proposed legislative amendment which spells out a significant policy perspective of the Government and which is likely to have far-reaching implications, comprehensive approach (Negative List) to tax services should be introduced only as a part of GST Regime, which is being looked upon as the biggest indirect taxation reform in our country post independence.
While mutual overlaps between central levies have been resolved to a large extent, several overlaps remain due to the lack of coordination and uniformity in the approach to indirect taxation by the Centre and the States. GST, in creating a dual but uniform levy on goods and services simultaneously by the Centre and States is expected to resolve many of these issues. The definition of the term ‘service’ has been set out in such broad terms in the draft concept paper that the potential for overlap with the existing State levies (and certain central levies) is very high. Hence, until the State levies are synchronised with the Central levies (which will only happen upon the transition to GST) the introduction of a negative list may be a step in the wrong direction.
In case of introduction of Negative List prior to GST, public debate on amendments in affected legislations necessary Alternatively, if the comprehensive approach (Negative List) to tax service is to be put in place prior to the introduction of GST Regime, a Comprehensive Concept Paper along with drafts of amended legislations likely to be impacted should also be placed for public debate and response by the affected parties so as to fully understand the implications in totality.
An illustrative list of rules/regulations which could be impacted are as under:
Point of Taxation Rules, 2011
In relation to the aforesaid, it should be ensured that the existing substantive and established principles are continued upon in the negative list approach as well.
Time for preparation
Introduction of a comprehensive approach (Negative List) of taxing services with several consequential amendments in existing rules & regulations will undoubtedly require businesses to make innumerable changes in their current IT systems, processes, documentation, record management, etc. Therefore, businesses should be given a minimum of 6 months’ time after all the legislative amendments (including the Rules referred to above) are announced, but before they are made effective.
Important issues requiring consideration before adopting comprehensive approach (Negative List) to tax services
While moving towards comprehensive approach (Negative List) to tax services, the important and significant aspects which need to be considered are set out below.
Definition of ‘Service’
The term ‘service’ needs to be appropriately defined whereby the shortcomings of the present service tax law are taken care of and at the same time unintended transactions do not get taxed by ensuring the following, in particular:
l Exclude activities that are specifically notified from time to time for exemption/exclusion from the levy of service tax.
Threshold exemption
Under the comprehensive approach (Negative List) to tax services, a large section of the country’s unorganised economy is likely to get covered under the service tax, which could have adverse impact on the aam aadmi. In order to ensure that a large number of small taxpayers are kept out and administration efforts of the Government are focussed on large taxpayers the following is suggested:
Input services eligible for CENVAT credit
It is an established cardinal principle of any VAT/ GST system prevalent worldwide that taxes paid on all services availed for the purpose of business are eligible for input tax credit. If services are to be taxed comprehensively, there cannot be any justification for breaking the input tax credit chain. Hence, simultaneously with introduction of negative list of services, definition of ‘input service’ under the Cenvat Credit Rules, 2004 must be amended, whereby all services availed for the purpose of business qualify as input services eligible for CENVAT credit.
Negative List of services
Copy of the discussion paper is available for download on www.bcasonline.org
(a) Individual not being a citizen of India
(b) LLP registered outside India
(c) Company registered outside India
(d) Firm formed or registered outside India
(e) Association of persons (trust) formed outside India
(f) Association of persons (other than trust) or body of individuals or local authority or artificial juridical person formed or any other entity by whatever name called registered outside India.
The amended Rule also prescribes various documents that are to be furnished along with the form as proof of identity and address.
Facts:
The assessee, B. V. Kodre (HUF), entered into a development agreement on 26-6-2003 with M/s. Deepganga Associates, whereby the HUF gave rights of development of an agricultural land to M/s. Deepganga Associates. The development agreement was stamped under Article 5(ga) of Schedule I of the Bombay Stamp Act, 1958. Under the said article stamp duty was leviable @ 1%. The said article applied if possession of the property was not handed over. In cases where possession of property is handed over, the instrument would be covered by Article 25 and the stamp duty leviable would be 5%. Clause 10 of the agreement provided that possession would be given to the developer on receipt of full payment of consideration. Of the total consideration of Rs.60 lakhs the amount of Rs.38,48,150 was given by the developers to the assessee.
The assessee submitted that since it has not handed over possession of the property and also entire consideration has not been received, there was no transfer. Mere registration of development agreement does not give rise to a transfer. It was contended that since there was no transfer, capital gain is not chargeable to tax in the year under consideration. The AO did not agree with the contentions of the assessee. He noted that transfer u/s.2(47)(v) is wider than that as per the Transfer of Property Act, 1882. He noted that clause 5 of the development agreement allowed the developer to amalgamate, divide, plan and construct. According to him, this indicated that it was a transaction u/s.2(47)(v) of the Act. He charged capital gain to tax.
Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld the action of the AO.
Aggrieved, the assessee preferred an appeal to ITAT where it relied on the ratio of the following decisions:
(a) General Glass Company (P.) Ltd., 14 SOT 32 (Bom.)
(b) ITO v. Smt. Satyawati Devi Verma, (2010) 124 ITD 467 (Del.)
(c) Smt. Raja Rani Devi Ramna v. CIT, (1993) 201 ITR 1032 (Pat.) Held: The Tribunal noted that it has not been rebutted by the Revenue that the development agreement has been stamped under Article 5(ga) of Schedule I of the Bombay Stamp Act and not under Article 25. It also noted that clause 10 of the development agreement provides that property as stated in clause 1 of the agreement will be transferred and the purchase deed will be executed only after the receipt of the payment of entire consideration of Rs.60 lakhs and payment of stamp duty. The Tribunal held that registration is prima facie proof of an intention to transfer but it is no proof of an operative transfer, if there is a condition precedent as to payment of consideration. The transfer u/s.2(47) of the Act must mean any effective conveyance of capital asset to the transferee. Accordingly, where the parties had clearly intended that despite the execution and registration of the sale deed, transfer by way of sale would become effective only on payment of the entire sale consideration, it had to be held that there was no transfer made. Upon considering the ratio of the 3 decisions relied upon by the assessee, the Tribunal observed that the agreement in question does not establish that a transaction of sale of property was completed in terms of provisions of section 2(47)(v) of the Act r.w.s. 53A of the Transfer of Property Act, as neither the sale consideration was paid, nor the possession of the property was handed over to the vendor, and so, the capital gain worked out by the AO and added to the income of the assessee was not justified. The amount received out of the agreed consideration, during the year, at best can be treated as advance towards the agreed consideration of the transaction.
The Tribunal further held that it is an established proposition of the law that the AO is required to make just and proper assessment as per the law based on the merits of the facts of the case before it. Just assessment does not depend as to what is claimed by the assessee, but on proper computation of income deduced based upon the provisions of law. An AO cannot allow the claims of the assessee if the related facts and provisions of law do not approve it and similarly it is also the duty of the AO to allow even those benefits about which the assessee is ignorant but otherwise legally entitled to it.
The facts of the present case are distinguishable from the facts before the Apex Court in the case of Goetze (India) Ltd. v. CIT. In the case before the Apex Court the assessee subsequent to filing of return of income, claimed a deduction by filing a letter. The AO disallowed it on the ground that there was no provision in the Act to allow an amendment in the return without revising it. The action of the AO was upheld. In the present case the question is whether there was a transfer u/s.2(47) of the Act to make an assessee liable to pay capital gains tax. There is no estoppels against proper application of the law.
The Tribunal allowed the appeal filed by the assessee.
Facts:
The assessee had made an investment of Rs.24.84 crore in equity shares of a group company viz., TGL. Pursuant to a scheme of reduction u/s.100 of the Companies Act, the face value of the said company’s shares was first reduced to Rs.5 from Rs.10 and thereafter two equity shares of Rs.5 each were consolidated into one equity share of Rs.10. The assessee claimed its value of investment in TGL got reduced by half to Rs.12.42 crore and hence, after applying the indexation, a sum of Rs.22.22 crore was claimed as long-term capital loss. For the purpose it relied on the decision of the Supreme Court in the case of Kartikeya V. Sarabhai (228 ITR 163) wherein it was held that reduction in face value of shares would amount to transfer, hence, such loss was allowable. According to the AO, the said decision was distinguishable as in that case, the shares involved were non-cumulative preference shares and further in terms of section 87(2)(i) of the Companies Act, 1956, the voting rights of the preference shareholders were also reduced proportionately. He further observed that in the present case the assessee had not received any consideration for reduction in the value of shares, nor any part of the shares had been passed to anyone else. Thus, according to him, there was no change in the rights of the assessee vis-à-vis other shareholders and, therefore, no transfer had taken place and, thus, the assessee was not entitled to the claim of long-term capital loss. On appeal the CIT(A) upheld the action of the Assessing Officer on similar reasoning.
Before the Tribunal the assessee contended that the transaction did amount to a transfer and in support made the following submissions:
ISIN Number, a unique identification number allotted to each security, had changed, meaning thereby that the new shares were different from the old;
old shares had been replaced with the reduced number of new shares, hence, it should be treated as ‘exchange’ of shares which is covered by the definition of ‘transfer’;
as per the decision of the Supreme Court, in the case of Kartikeya V. Sarabhai (228 ITR 163) the definition of transfer given in section 2(47) is an inclusive definition and, inter alia, provides that relinquishment of an asset or extinguishment of any right therein would also amount to transfer of a capital asset;
the principle laid down in the case of CIT v. G. Narsimhan (Decd) and Others, (236 ITR 327) squarely applies since the issue therein was regarding reduction of equity share capital;
as per the Supreme Court in the case of CIT v. Grace Collis & Ors., (248 ITR 323), the expression ‘extinguishment of any right therein’ can be extended to mean extinguishment of right independent of or otherwise than on account of transfer. Thus, even extinguishment of right in a capital asset would amount to transfer and since the assessee’s right got extinguished proportionately, to the reduction of capital, it would amount to transfer.
As regards the absence of consideration, the other ground on which the claim for long-term capital loss was denied by the lower authorities, the assessee contended as under:
In the case of B. C. Srinivasa Setty (128 ITR 294) the proposition was not that if no consideration was received, then no gain can be computed but the proposition was that if any of the element in computation provision could not be ascertained, then computation provision would fail and such gain could not be assessed to capital gains tax. However, in the case of the assessee consideration was ascertainable, in the sense that same should be taken as zero. In this regard he relied on the decision of the Bombay High Court in the case of Cadell Wvg. Mill Pvt. Ltd. v. CIT, (249 ITR 265).
If the idea was not to subject zero consideration transaction to capital gain tax u/s.45, then there was no need for clause (iii) for gifts in section 47.
The assessee concluded by submitting that during the process of reduction of share capital, transfer had taken place and consideration received by the assessee should be considered as zero and, therefore, capital loss should be allowed.
Held:
According to the Tribunal, in the case of Cadell Wvg. Mill Pvt. Ltd. relied on by the assessee, the Bombay High Court specifically declined to entertain the argument that the cost of tenancy right should be taken at zero because according to it, that would amount to charging of capital value of the asset to tax and not capital gain.
In the case of reduction of capital, the Tribunal noted that nothing moves from the coffers of the company and, therefore, it was a simple case of no consideration which cannot be substituted to zero. It further noted that after the decision of the Supreme Court in the case of B. C. Srinivasa Setty, the Legislature had introduced specific provision wherein cost of acquisition of goodwill was to be taken at nil. Similar amendments were made to specify the cost with reference to trademark, cost of right to manufacture or produce or process any article or thing, etc. Therefore, wherever the Legislature intended to substitute the cost of acquisition at zero, specific amendment has been made. In the absence of such amendment it has to be inferred that in the case of reduction of shares, without any apparent consideration, that too in a situation where the reduction has no effect on the right of shareholder with reference to the intrinsic rights on the company, the cost of acquisition cannot be ascertained and, therefore, the provisions of section 45 would not be applicable. For the purpose it also relied on the decisions in the cases of Mohanbhai Pamabhai and also in the case of Sunil Siddharthbhai.
Further with the help of example, the Tribunal explained that even after reduction of capital, the net worth of the company remained the same and the share of every shareholder also remained the same. There was no change in the intrinsic value of the shares and even the shareholder’s rights vis-àvis other shareholders as well as vis-à-vis company remained the same. There was thus no loss that can be said to have actually accrued to the shareholder as a result of reduction in the share capital. The Tribunal further observed that there would also no change even in the cost of acquisition of shares which the shareholder would be entitled to claim as deduction in computing the gain or loss as and when the said shares are transferred or sold in future as per section 55(v).
Facts:
The assessee firm was engaged in the business of construction. In both assessment years, it derived profits from a housing project which was constructed on a land owned by Hotel Mullai (P) Ltd. (HMPL). The AO considered the agreement entered into between HMPL and the assessee. He observed that HMPL as the owner of the land decided to develop the project for which the assessee was nominated as its builder for construction. Further, the AO observed the fact that possession with the assessee of the land does not amount to possession as a part performance of the contract u/s.53A of the Transfer of Property Act. All permissions were obtained by HMPL, there was no outright purchase of land by the assessee and the assessee had sub-contracted the civil work to someone else. The AO was of the view that development includes many aspects and construction is only one of it. Based on the above facts, he concluded that the assessee is not eligible for deduction u/s.80-IB of the Act.
Besides the above, the AO noticed that certain other conditions were also violated like:
(a) The built-up area of certain flats exceeded the statutory limit of 1,500 sq.ft.
(b) In some cases, two flats were combined to make one unit which was exceeding 1,500 sq.ft.
(c) In one case, the purchaser had an exclusive right over the terrace and if built-up area of terrace included, then it would exceed 1,500 sq.ft.
(d) The project had to be completed on or before 31st March, 2008 and no completion certificate was on records.
The CIT(A) confirmed the order of the AO in toto in both the years.
Held:
1. The distinction between a ‘builder’, ‘developer’ and ‘contractor’ is quite blurred. As a matter of fact, different persons often use the expressions interchangeably and according to their own perceptions. The question is not who decided to develop the land, but the question is who actually developed the land. Obviously, since the land is owned by HMPL, permissions have to be in its name only. As per the agreement, the builder has the exclusive right to sell the flats to the persons of his choice. He has the exclusive right to determine the sale price of the flats. He has the exclusive right to collect the entire sales consideration of the flats. Out of the total sales consideration received by him, he has to make over only the cost of undivided share of land to the owner which is fixed at Rs.600 per sq.ft. of the super built-up area. Undoubtedly, HMPL as the owner of the land has ventured to realise the potentialities of the land. It has indeed realised the potentialities, not by developing the land, but by handing over the land for development to the builder. All these facts go to show that it is the builder who is responsible to develop the property, maintain it and satisfy the purchasers.
A distinction needs to be drawn between the expressions ‘developer and builder’ and ‘builder and contractor’. If a person is a contractor, then, his job would be merely to construct the building as per the designs provided by the owner and hand over the constructed building to the owner. Thus, the assessee is not a contractor simpliciter, he is not a builder simpliciter, he is not a developer simpliciter. He is all rolled into one i.e., he is a developer, a builder and also a contractor. Even though the assessee and HMPL are joint developers, the role of the assessee as a developer is greater than the role of HMPL as developer. In the final analysis, the assessee is a builder and a developer entitled to deduction u/s.80-IB(10) subject to fulfilment of other conditions mentioned in the section.
2. Once the flats are sold separately under two separate agreements, the builder has no control unless the joining of the flats entails structural changes. Therefore, it is quite clear that the two flat owners have themselves combined the flats whereby the area has exceeded 1,500 sq.ft. The project as a whole and the assessee cannot be faulted for the same. Moreover, clause (e) and (f) of section 80-IB(10) are effective from 1st April, 2010 and they are not retrospective in operation.
3. The assessee has placed on record the completion certificate issued by the Corporation of Chennai by way of additional evidence. The certificate clearly mentions that the building was inspected on 23rd November, 2007 and that it was found to have satisfied the building permit conditions. However, Chennai Metropolitan Development Authority (CMDA) issued completion certificate on 13th June, 2008 in response to an application by the assessee on 13th March, 2006. When sanction is given normally the sanction would contain a date. In the present case the certificate issued is a completion certificate that is a certificate accepting the claim of the assessee that the project has been completed, i.e., the certificate is issued on an application given by the assessee. The assessee can give an application for completion certificate only when the completion of the project is done. Thus the grant of a completion certificate after verification by the competent authority even on a subsequent date would relate back to the date on which the application is made.
4. The terrace talked about here is not the rooftop terrace. It is the terrace, the access to which is through the flat of the purchaser and which is at the floor level and is the terrace of the immediately lower flat. The regular terrace is considered as part of the common area. The terrace that is sold and that is attached to the flat and which is having exclusive access is separate from the regular terrace. Consequently private terrace is to be considered as part of the builtup area of the flat for computing the built-up area of 1,500 sq.ft.
5. The Accountant Member followed the decision of the judgment of the Calcutta High Court rendered in the case of CIT v. Bengal Ambuja Housing Dev. Ltd. in IT Appeal No. 458 of 2006, dated 5th January, 2007 which was a judgment directly on the issue upholding the view of the Calcutta ‘C’ Bench of the Tribunal that a pro-rata deduction is permissible u/s.80-IB(10) when some flats were having built-up area exceeding 1,500 sq.ft. It was held that proportionate deduction should be allowed u/s.80-IB(10) with a caveat that the built-up area of flats measuring more than 1,500 sq.ft. should not exceed 10% of the total built-up area. The Judicial Member disagreed with the above view and held that no such proportional deduction is allowable following the decision of the Co-ordinate Bench in the case of Viswas Promotors (P) Ltd. Upon difference of opinion among the members regarding the last issue the matter was referred to the Third Member.
The third member was of the view that the Madras High Court had not considered the decision in Viswas Promotors (P) Ltd on merits. The Madras High Court in its writ order has dealt with only the writ application filed by the assessee against the order of the Tribunal dismissing the miscellaneous petition filed by the assessee. The Court has specifically mentioned that the writ petition was misconceived and therefore liable to be dismissed. The Madras High Court has not considered anything concerning the merit of the issue. The judgment of CIT v. Bengal Ambuja Housing Dev. Ltd. was a judgment directly on the issue. As there is no direct decision of the jurisdictional High Court available on the subject, the judgment of the Calcutta High Court was to be followed. The assessee was entitled for deduction u/s.80-IB(10) in respect of flats having built-up area not exceeding 1,500 sq.ft. on proportionate basis.
Facts:
Each of the two assessees were 50% owners of a flat in a building known as Usha Kunj situated at Juhu, Mumbai which was stated to have been sold on 30-4-2004 for a total consideration of Rs.62,50,000 and share of each assessee was Rs.31,25,000. On this sale, capital gain of Rs.24,93,910 arose to each of the two assessees which capital gain was claimed to be exempt u/s.54 against the purchase of a new flat vide agreement dated 25-6-2003 which agreement was registered on 9-7-2003. The claim for exemption was made on the ground that the new flat was purchased within a period of one year before the date of transfer of the old flat which has been sold. In the course of assessment proceedings the assessee filed copy of agreement dated 23-4- 2004 which agreement was not registered. The AO made inquiry with the purchasers of this flat who filed agreement dated 26-8-2004 which agreement was registered on the same date. Upon inquiry with the society, it was found that the share certificate showed the date of transfer as 27-8-2004.
The assessee contended that simultaneous with the execution of the agreement dated 30-4-2004 the assessee received full consideration and handed over the possession of the flat to the purchasers along with all original documents including the share certificate and the application to the society for transfer of shares in favour of the transferee, application for transfer of electric meter to the name of the transferee and also NOC received from the society. The assessee submitted that there was delay on the part of the purchaser in getting the agreement stamped and subsequently when the agreement was presented for stamping the transferee was informed that some penalty was leviable for delay in presenting the same. The transferees, at this stage, requested the assessees to execute a fresh agreement and in these circumstances an agreement dated 26-8-2004 was executed which agreement was registered.
The AO denied exemption u/s.54 on the ground that after the amendment to section 53A of the Transfer of Property Act, the provisions of section 53A apply only to agreements which are registered. Since agreement dated 23-4-2004 was not registered, the date of transfer is not 23-4-2004 but 26-8-2004 and since the date of purchase of new flat is more than one year before 26-8-2004, the assessee was denied exemption u/s.54.
Aggrieved the assessee preferred an appeal to the CIT(A) who agreed with the AO and emphasised that since section 53A of the Transfer of Property Act has been amended, therefore, unless and until the agreement was registered, the same would not amount to transfer. He confirmed the action of the AO.
Aggrieved the assessee preferred an appeal to the Tribunal.
Held:
The Tribunal considered the amendment to section 53A of the Transfer of Property Act and held that even after the amendment, it has not been specifically provided that such instrument of transfer is necessarily to be registered. To ascertain the true meaning in the context of clause (v) of section 2(47) the Tribunal considered the Circular No. 495, dated 22-9-1987 explaining the purpose of introduction of clauses (v) and (vi) to section 2(47). Thereafter, it observed that clause (v) in section 2(47) does not lift the definition of part performance from section 53A of the Transfer of Property Act. Rather, it defines any transaction involving allowing of possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of TOPA. This means such transfer is not required to be exactly similar to the one defined u/s.53A of the TOPA, otherwise, the Legislature would have simply stated that transfer would include transactions defined in section 53A of TOPA. But the legislature in its wisdom has used the words ‘of a contract, of the nature referred to in section 53A’. Therefore, it is only the nature which has to be seen. The purpose of insertion of clause (v) was to tax those transactions where properties were being transferred by way of giving possession and receiving full consideration. Therefore, in a case where possession has been given and full consideration received, then such transaction needs to be construed as ‘transfer’. The amendment made in section 53A by which the requirement of registration has been indirectly brought on the statute will not alter the situation for holding the transaction to be a transfer u/s.2(47)(v) if all other ingredients have been satisfied.
Referring to the decisions of the Apex Court in the case of CIT v. Podar Cement P. Ltd., (226 ITR 625) (SC) and Mysore Minerals Ltd. v. CIT, (239 ITR 775) (SC) it held that for the purpose of the Act the ground reality has to be recognised and if all the ingredients of transfer have been completed, then such transfer has to be recognised. Merely because the particular instrument has not been registered will not alter the situation.
The Tribunal held that the transfer deed dated 30- 4-2004 transferred all the rights of the assessee to the transferees and, therefore, this deed should be considered as the deed of transfer. It held the date of transfer for old property has to be reckoned as 30-4-2004 which is well within one year from the date of acquisition of the new property on 25-6- 2003. It held that the assessees are entitled to claim exemption u/s.54 of the Act.
The Tribunal set aside the orders of the CIT(A) and directed the AO to allow exemption u/s.54. Appeals of both the assessees were allowed.
Facts:
The assessee, engaged in the business of prospecting, exploration and mining activities for diamonds and other minerals as also in the business of providing consultancy in the field of diamond prospecting and other related matters. The assessee filed a return of income declaring a loss of Rs.4,39,48,222. The AO noticed that the assessee has incurred expenditure of Rs.23,64,44,196 mainly on prospecting for minerals in India, commercial production of minerals has not commenced, the assessee has only capitalised Rs.17,04,80,638. He asked the assessee to show cause why the entire expenses should not be treated as capital expenses u/s.35E and be disallowed. The assessee submitted that apart from the expenses capitalised by the assessee, the assessee has suo moto disallowed Rs.1,20,06,438 and to this extent capitalisation of entire expenses will result in double disallowance. It was also submitted that expenses not capitalised are eligible for deduction u/s.37 and include expenses like property expenses, communication expenses, printing and stationery, travelling and conveyance, membership and subscriptions, etc., which expenses are not incurred wholly and exclusively for the purposes of prospecting. Further, the assessee has also carried consultancy business from which there were receipts of Rs.98,42,810 which receipts have been offered for taxation.
The AO was of the view that any expenditure incurred for the purpose of prospecting eligible minerals is to be capitalised u/s.35E and deduction is to be claimed only when commercial production starts. As regards earning of professional receipts he observed that “even applying the matching concept, it is not possible to accept that there can be expenditure of Rs.5,39,57,120 to earn consultancy income of Rs.98,42,810”. He allowed an ad hoc deduction of 30% for earning the income of Rs.98,42,810. The balance expenditure of Rs.5,10,04,277 was disallowed and treated as capital expenditure eligible for amortisation u/s.35E.
Aggrieved the assessee preferred an appeal to the CIT(A) who, on the basis of what he perceived as applicability of matching concept, restricted the deductibility of expenses and upheld the order passed by the AO.
Aggrieved, the assessee filed an appeal to the Tribunal.
Held:
The Tribunal upon going through the provisions of section 35E and also the CBDT Circular No. 56, dated 19th March, 1971 held that in order to be eligible for amortisation of expenses u/s.35E, the expenses must have been incurred wholly and exclusively for “exploring, locating or proving deposits of any minerals, and includes such operations which prove to be infructuous or abortive”. The Tribunal observed that the AO has proceeded on the basis that since the assessee is, inter alia, engaged in the business of prospecting minerals, all the expenses incurred by the assessee are to be treated as eligible for amortisation u/s.35E, unless he can demonstrate that the expenses are incurred for earning an income which is taxable in the hands of the assessee. The Tribunal held that this is an incorrect approach. The assessee even when he is engaged in the business of prospecting minerals is eligible for amortisation of such expenses as are eligible u/s.35E(2) r.w.s. 35E(5)(a). All other expenses are eligible for deduction as in the normal course of computation of business income.
As regards the restriction of allowability of expenses based on matching concept, the Tribunal held that the application of ‘matching principle’, based on the quantum of earnings, is wholly devoid of any merits. One cannot invoke the matching principle to restrict the deductibility of a part of expenses as a result of the expenses being too high in proportion to quantum of expenditure; it can at best be invoked to spread over the costs over the entire period in which revenues as a result of those costs are generated, such as in deferred revenue expenditure — but even in such cases the restriction on deductibility of expenses have not been upheld by the Co-ordinate Benches as indeed by the Courts. All that the matching principle states is that in measuring net income for an accounting period, the costs incurred in that period should be matched against the revenue generated in the same period, and that where costs result in a benefit over a period beyond one accounting period, the costs should be reasonably spread over the entire period over which the benefits accrue. As far as the position under the Income-tax Act is concerned, as long as expenses are incurred for the purposes of business, even if it turns out to be wholly unprofitable, the same is to be allowed as deduction in computation of business income. By no stretch of logic, matching principle can restrict the quantum of deduction of expenses by relating the same to the quantum of earnings as a result of incurring these expenses. Once the business has commenced, deduction of expenses in respect of that business cannot be declined on the ground that the earnings from consultancy income do not justify such high expenses. This kind of revenue mismatch, which cannot be a ground of disallowing the expenditure in anyway, is a normal commercial practice in the businesses which have long-term perspectives and larger business interests in their consideration.
The Tribunal held that the AO was in error in capitalising the expenses which were not directly attributable to the prospecting of diamonds, as also restricting the deductibility of expenses to 30% of consultancy revenues received by the assessee.
The appeal filed by the assessee was allowed.
Facts:
The assessee retired as a school teacher on 31- 7-1998. He received an amount of Rs.10,92,796 inclusive of interest of Rs.3,29,508. Interest was received by virtue of writ petition filed by the assessee. Since the amount received by the assessee included interest on which tax was deducted at source, the AO issued a notice u/s.148 of the Act upon noticing that income has escaped assessment (since assessee had not filed return of income). The assessee filed return of income returning income of Rs.6,19,392 and claimed relief u/s.89(1) of the Act. The AO restricted the relief u/s.89(1) to Rs.65,817 and assessed the total income at Rs.8,86,500.
The returned income as well as assessed income included interest received as per the order of the High Court. Upon completion of the assessment the assessee came to know that interest received pursuant to the order of the High Court, being non-statutory interest in the form of damages/ compensation, the same is not chargeable to tax. He filed an appeal to the CIT(A) and contended that interest wrongly returned by him be held to be not taxable in view of the decision of the Punjab & Haryana High Court in the case of CIT v. Charanjit Jawa, (142 Taxman 101). The CIT(A) rejected the same by stating that the assesse had offered the income in his return and the same cannot be reduced at the Appellate stage.
Aggrieved, the assessee preferred an appeal to the Tribunal.
Held:
The Tribunal noted that the moot question was whether the income determined by the AO on the basis of the return filed by the assessee can be a figure lower than the income returned by the assessee. It held that the principle for determining the taxable income of the assessee under the Act should be within the purview of the law in force. If the taxable income determined by the AO is not in accordance with such principle it is open to the assessee raise the contention to before the higher authorities for following the law to determine the actual taxable income of the assessee. The Tribunal held that the lower authorities cannot say that merely because the assessee has returned income which is higher than the income determined in accordance with the legal principles, such returned income can be lawfully assessed. An assessee is liable to pay tax only on his taxable income. The AO cannot assess an amount which is not taxable merely on the ground that the assessee has returned the same as its income. It is always open to the assessee to show before the higher authorities that income though returned as income is not taxable under law.
On merits, the Tribunal held that the case of CIT v. Charanjit Jawa, (supra) supports the view that interest received as a result of the order of the High Court was not a statutory interest and was in the form of damage/compensation and the same was not liable to tax. The Tribunal held that the interest of Rs.2,53,730 received by the assessee as per the order of the High Court was not taxable and the same is a capital receipt. The Tribunal also found support from the Circular issued by the CBDT being Circular No. 14 (XL-35) dated 11-4-1955 which has directed the officers not to take advantage of the ignorance of the assessees. The Tribunal directed the AO to treat the sum of Rs.2,53,730 as capital receipt.
The appeal filed by the assessee was allowed.
The appellant State Bank of India preferred application before the Debts Recovery Tribunal, Ahmedabad. Though a prayer was made to restrain the defendant borrowers from leaving India without prior permission of the DRT, originally no such order was passed.
The case was not decided for more than six years. After 6 years, the bank filed an interlocutory application for various interim reliefs including the direction to the Regional Passport Authorities to provide passport numbers and addresses of the defendant borrowers, for bringing them from the USA to India and for a direction to surrender the passports. Further prayer was made to direct the defendant Nos. 1, 2 and 3 not to leave India without prior permission of the DRT. The DRT, passed certain interim orders and also restrained defendant Nos. 1, 2 and 3 from leaving India without prior permission of the Tribunal. The borrowers preferred appeal to the Appellate Tribunal. The Appellate Tribunal in its order observed that the borrowers, had not approached the Tribunal for seeking permission to leave the country, and further observed that they could approach the DRT, justifying the travel abroad and seek permission accordingly. At this stage the borrowers filed a writ petition holding that — DRT had no power to control physical movements or to impound the passport. The bank filed appeal against this order.
The Court observed that Article 21 of the Constitution safeguards the right to go abroad against executive interference which is not supported by law; and law here means ‘enacted law’ or ‘State law’. Thus, no person can be deprived of his right to go abroad unless there is a law made by the state prescribing the procedure for so depriving him and the deprivation is effected strictly in accordance with such procedure.
Sub-sections (12), (13A), (17) and (18) of section 19 do not empower the Tribunal to issue any prohibitory order prohibiting the borrower from leaving the country without prior permission. Section 22 deals with the procedure and powers of the Tribunal and the Appellate Tribunal. It relates to summoning and enforcing the attendance, requiring the discovery and production of documents, receiving evidence on affidavits, issuing commissions for the examination of witnesses or documents, reviewing its decisions, dismissing an application for default or deciding it ex parte, setting aside any order of dismissal of any application for default or any order passed by it ex parte, or any other matter which may be prescribed, but no provision has been made therein or by a separate Notification issued by the Central Govt. empowering the Tribunal to deprive a person of his personal liberty to move abroad as guaranteed under Article 21 of the Constitution of India. In absence of any such ‘Enacted Law’ or ‘State Law’, it was held that the Tribunal had no jurisdiction to deprive the defendants, the respondents herein, of their right to go abroad.
For example, there is a term commonly used in securities laws — ‘person associated with securities markets’ — this term almost gives an omnibus power to cover any person directly or indirectly connected with securities markets. Investors, auditors and even independent directors have been held to be ‘persons associated with securities markets’ and thus action has been taken against them for alleged wrongs. It is important to highlight this since there are many persons such as insiders, acquirers which have been specifically defined in securities laws — who can be acted against only if it is first demonstrated that they do fall within the definition.
This impression is further supported by the areas in which SEBI can issue directions. These terms are also of wide import — for example:
Directions can be issued for purposes such as ‘in the interests of investors’ or ‘orderly development of securities markets’.
A clause in the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market), Regulations, 2003 reads that “no person shall directly or indirectly buy, sell or otherwise deal in securities in a fraudulent manner”.
‘Power to issue Directions’ — this term is capable of a fairly wide interpretation.
‘Power to punish’ may mean penalty, suspension or cancellation of registration, debarring a person from dealing in securities for a specified period.
Provision prohibiting indulging in ‘fraudulent or an unfair trade practice in securities’. There are numerous acts/omissions specifically listed which are deemed to be fraudulent or unfair trade practices. It is often found in actual cases that several of these provisions in the law are thrown at the alleged culprit and even the final order usually lists a long list of provisions that are said to have been violated by a single act/omission.
However, a well-settled principle of law is that the crime and punishment both have to be well defined and the person who is supposed to obey the law also has to be specified. This principle is obviously applicable even to securities laws and thus one occasionally sees decisions that strike down an order of SEBI on this ground. The recent decision of the Securities Appellate Tribunal (‘SAT’) in the case of G. M. Bosu & Co. Private Limited v. SEBI and others, (Appeal No. 183 of 2010, dated 15th February 2011) is worth reviewing in this context.
The facts of the case show a long series of steps a defrauded investor had to take to get back her money. Simplifying the facts a little, it appears that an investor was defrauded by a person who sold her shares in the open market by taking her signature on some forms. These signatures were taken on the pretext that they were required incidental to transfer of shares from her deceased husband’s name to her name. Such person, who was an ex-employee of a depository participant, then allegedly sold the shares in the market and thus defrauded the investor. On a police complaint being made, he confessed his guilt and agreed to compensate the investor. However, he died without compensating her. The investor then initiated a long legal battle in which the essential argument was that she should be compensated by the depository. The legal basis for this was a provision in Regulation 32 (though amended later on) of the Securities and Exchange Board of India (Depositories and Participants) Regulations, 1996 which requires that the depository should ensure that payment has been received by the investor before the shares are transferred to a third party.
It is worth mentioning here that the investor had to petition multiple authorities multiple times including finally facing, albeit indirectly, the SAT. Suffice it is to state that SEBI investigated the matter and held the depository participant concerned (DP) (which was the appellant here) responsible for the lapse in non-complying with the said Regulation 32. It ordered the DP to credit the account of the investor with the 100 shares with all benefits accrued on the shares (incidentally, the 100 shares had become 1500 shares by then). This direction was issued by SEBI exercising powers under sections 11 and 11B of the SEBI Act.
The DP went in appeal to the SAT pointing out that SEBI did not have any powers to direct the DP to give such compensation to the investor u/s. 11B of the Act. It pointed out that Regulation 64 of the SEBI Depositories Regulations clearly stated that in case if a depository participant who “contravenes any of the provisions of the Act, the Depositories Act, the bye-laws, agreements and these regulations . . . . shall be dealt with in the manner provided under Chapter V of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008”. In other words, it was argued that action could only be taken under the said SEBI (Intermediaries) Regulations, 2008 and resorting to section 11B and requiring payment of compensation by way of credit of the shares to the account of the investor was not in accordance with the law.
The SAT noted:
Firstly, the obligation of complying with Regulation 64 was on the depository and not on the depository participant.
Secondly, even assuming that there was a violation by the DP, the provisions of Regulation 64 and thereby the provisions of the SEBI (Intermediaries) Regulations should have been followed in taking action against the DP. This is what the SAT observed:
“Assuming (though not holding) that there was such a violation, Regulation 64 of the regulations requires that the depository or a participant who contravenes any provision of the regulations “shall be dealt with in the manner provided under Chapter V of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008.” The word ‘manner’ means that the procedure laid down in Chapter V of the intermediaries regulations shall have to be followed. Regulations 24 to 30 in that chapter provide the detailed manner/procedure according to which the delinquents are to be dealt with. These provisions envisage a two-stage inquiry before taking any action against the delinquent. A designated authority is required to be appointed which shall issue a show-cause notice to the delinquent and after holding an inquiry, a report shall be submitted. The report will then be considered by the designated member after issuing a notice to the delinquent who will also be furnished with a copy of the report. It is only then that the designated member can take any one or more of the actions referred to in Regulation 27 of the intermediaries regulations keeping in view the facts and circumstances of the case. Admittedly, this procedure has not been followed and neither the appellant nor the depository were dealt with in the manner prescribed in Chapter V of the intermediaries regulations. Instead, directions have been issued u/s. 11B of the Act to compensate respondent 3.”
Finally, the question was whether the powers u/s. 11B were wide enough to order such a compensation being made by the DP. The SAT observed as follows:
“It is true that the powers of the Board u/s. 11B are wide enough to issue directions to any intermediary or person associated with the securities market but such powers are to be exercised only to protect the interests of investors in securities or for orderly development of securities market and to preserve its integrity. These directions cannot be punitive in nature and cannot be issued to pun
The assessee had sold a flat forming part of block of assets for a consideration of Rs.9 lakh. The assessee deducted the said amount of Rs.9 lakh from the block of assets and computed the depreciation allowable on the balance amount. The Assessing Officer determined the fair market value of the flat at Rs.66,44,902 and reduced the said amount from the written down value of the block of assets while calculating the depreciation. The Tribunal accepted the assessee’s claim.
On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under :
“The Tribunal was right in holding that for the purpose of calculating depreciation allowable to a block of fixed assets, only the apparent consideration for which the flat was sold should be reduced from the block of the fixed assets being Rs.9 lakhs even though the fair market value of the flat was Rs.66,44,902 as determined by the Departmental Valuation Officer.”
The assessee-company was making export under the Advance Licence Scheme of the Government. In the accounts for the A.Y. 1997-98, the assessee passed a book entry debiting export benefit receivable account and crediting miscellaneous income by a sum of Rs.228.34 lakh. The said amount represented the customs duty benefit which would have accrued to the assessee on the import of raw materials in future. The assessee claimed that the sum of Rs.228.34 lakh credited to the profit and loss account was a notional figure not liable to income-tax and, accordingly, the said amount was claimed as a deduction from the profits as per profit and loss account. The Assessing Officer treated the sum of Rs.228.34 lakh as the assessee’s income on the ground that the assessee had itself shown the same as such in its books of account. On appeal, the Commissioner (Appeals) and the Tribunal upheld the order of the Assessing Officer.
On appeal filed by the assessee, the Calcutta High Court reversed the decision of the Tribunal and held as under :
“(i) If the language employed in clause (iiia) of section 28 is compared with the next two clauses, i.e., clauses (iiib) and (iiic), it will appear that while in case of clause (iiia), it is the profit on actual sale of licence that will be chargeable to tax, but in the cases covered by clause (iiib) or (iiic), cash assistance (by whatever name called) received or receivable by any person against exports or any duty of customs or excise repaid or repayable as drawback to any person against exports are chargeable to tax.
(ii) Thus, the Legislature was conscious that in cases covered under clause (iiia), only profit on sale of licence should be chargeable, but not the profit which may come in future on sale of the licence, because the benefit of making import without payment of customs duty accrues to an assessee only at the time of actual import and if the domestic price of the raw materials is lower than the landed cost of the imported materials, it would not be sensible to import the raw materials under the advance licence. Moreover, at times, the advance licences may not be utilised within the period of validity thereof and in such cases, no actual benefit is available to an assessee, whereas in the cases covered by clause (iiib) or (iiic), there is no scope of non-utilisation of the cash assistance or drawback mentioned therein and, as such, those are automatically chargeable to tax.
(iii) So long as the profit had not actually accrued to the assessee on sale of the licence, the notional figure indicated in the profit and loss accounts of the assessee could not be chargeable to tax.
(iv) It is now a settled law that if a particular income shown in the account of profit and loss is not taxable under the Act, it cannot be taxed on the basis of estoppel or any other equitable doctrine. Equity is outside the purview of tax laws; a particular income is either liable to tax under the taxing statute or it is not. If it is not, the ITO has no power to impose tax on the said income.
(v) Therefore, the Tribunal committed substantial error of law in treating the amount of Rs.228.34 lakhs as chargeable to incometax notwithstanding the fact that the same did not come within the purview of section 28(iiia) when the licence had not been sold and no profit had come in the hands of the assessee.”
In May 1986, the assessee-company had passed a resolution stating that for the business of the company, the managing director was required to go on tours to countries abroad, that if on such tours he were accompanied by his wife, it would go a long way to benefit the company since warm human relations and social mixing promoted better business understanding, that the wife of the managing director was also sometimes required to accompany him on tours abroad as a matter of reciprocity in international business and that the company has decided to bear the expenses of such travel. In the A.Y. 2000-01, the assessee had sent its managing director and the deputy managing director abroad along with their wives for the purpose of the assessee’s business and claimed deduction of the expenses. The Assessing Officer disallowed the expenses on the two wives. The Commissioner (Appeals) and the Tribunal confirmed the disallowance.
On appeal by the assessee, the Calcutta High Court held as under : “
(i) The Income-tax authorities have to decide whether the expenditure was incurred voluntarily and on the grounds of commercial expediency. In applying the test of expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of the business, the reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the Revenue.
(ii) When the board of directors of the assessee had thought it fit to spend on the foreign tour of the accompanying wife of the managing director for commercial expediency for reasons reflected in its resolution, it was not within the province of the Income-tax authority to disallow such expenditure.
(iii) However, there was no resolution authorising expenditure on the travel of the wife of the deputy managing director. The expenses on such travel were rightly disallowed.”
The assessee did not have any taxable income according to the normal computation provisions of the Income-tax Act, 1961 for the A.Y. 2001-02. It had also no liability u/s.115JB. Thus, the assessee had no liability to pay any advance tax u/s.208 for the A.Y. 2001-02.
By the Finance Act, 2002, section 115JB was amended with retrospective effect from 1-4-2001. In view of the aforesaid retrospective amendment, the assessee was not in a position to deduct the sum of Rs.26.51 crore withdrawn from the revaluation reserve. It recomputed the book profit u/s.115JB for the A.Y. 2001-02, worked out the amount of tax payable, paid the same on 31-8-2002 and it filed revised return on the basis of amended section. The Assessing Officer passed an order u/s.143(3)/115JB for the A.Y. 2001-02. The Assessing Officer computed the tax liability u/s.115JB at the same figure as shown in the assessee’s revised return. However, he charged interest u/s.234B and section 234C since the assessee did not pay any advance tax with reference to the liability for tax under the retrospective amended section 115JB.
The Commissioner (Appeals) allowed the assessee’s appeal holding that since the amended provision did not exist in the statute during the relevant previous year, the assessee’s contention that it had no liability u/s.208 to pay advance tax was well-founded. The Tribunal held that the assessee was liable to pay interest u/s.234B and u/s.234C.
On appeal by the assessee, the Calcutta High Court reversed the decision of the Tribunal and held as under:
“(i) A plain reading of sections 234B and 234C makes it abundantly clear that these provisions are mandatory in nature and there is no scope of waiving of the said provisions. However, in order to attract the provisions contained in sections 234B and 234C, it must be established that the assessee had the liability to pay advance tax as provided in sections 207 and 208 within the time prescribed u/s.211.
(ii) A mere reading of sections 207, 208 and 211 leaves no doubt that the advance tax is an amount payable in advance during any financial year in accordance with the provisions of the Act in respect of the total income of the assessee which would be chargeable to tax for the assessment year immediately following that financial year. Thus, in order to hold an assessee liable for payment of advance tax, the liability to pay such tax must exist on the last date of payment of advance tax as provided under the Act or at least on the last date of the financial year preceding the assessment year in question. If such liability arises subsequently when the last date of payment of advance tax or even the last date of the financial year preceding the assessment year is over, it is inappropriate to suggest that still the assessee had the liability to pay ‘advance tax’ within the meaning of the Act.
(iii) The amended provision of section 115JB having come into force with effect from 1-4-2001, the assessee could not be held defaulter of payment of advance tax. On the last date of the financial year preceding the relevant assessment year, as the book profit of the assessee in accordance with the then provision of law was nil, one could not conceive of any ‘advance tax’ which in essence was payable within the last day of the financial year preceding the relevant assessment year as provided in sections 207 and 208 or within the dates indicated in section 211, which inevitably fell within the last date of financial year preceding the relevant assessment year. Consequently, the assessee could not be branded as a defaulter in payment of advance tax as mentioned above and no interest could be imposed upon it u/s.234B and u/s.234C.”
For the A.Y. 2006-07, the assessee had claimed deduction of Rs.32.58 crore u/s.10A. In the draft assessment order passed u/s.144C of the Act, the Assessing Officer allowed deduction u/s.10A, but he reduced the quantum by Rs.44.49 lakh. The assessee filed an objection before the Dispute Resolution Penal (DRP). The DRP held that the assessee was not entitled to deduction u/s.10A of the Act as it was engaged in ‘research and development’. On the alternative plea of the assessee that the assessee was engaged in providing ‘engineering design services’ the DRP directed the Assessing Officer to examining the claim on merits.
The assessee filed a writ petition before the Karnataka High Court claiming that the direction given by the DRP withdrawing the deduction u/s.10A was beyond jurisdiction. The Single Judge dismissed the petition. On appeal by the assessee, the Division Bench held as under :
“As the Assessing Officer had accepted that the assessee was eligible for section 10A deduction and had only proposed a variation on the quantum, the DRP had no jurisdiction to hold that the assessee was not eligible for section 10A deduction.”
The petitioner, a company incorporated under the laws of the United States of America and thus a foreign company u/s. 2(23A) of the Act, had a branch office in India. It was a part of the International Coca Cola corporate group. The said group had other companies operating in India incorporated under the Companies Act, 1956. The petitioner obtained permission u/s. 29(1)(a) of the Foreign Exchange Regulation Act, 1973, (FERA) to operate a branch office in India to render a services to the Coca Cola group companies, as per conditions mentioned in the application for the said permission. There is a service agreement between the petitioner on the one hand and Britco Foods Company Private Limited (Britco) on the other.
As per the said agreement, the petitioner provides advisory services to Britco to advise, monitor and co-ordinate the activities of bottlers, in consideration of which the petitioner receives fee calculated on the basis of actual cost plus 5%. The petitioner was assessed under the Act for the A.Y. 1998-99 on 31st March, 2004. The Assessing Officer, however, formed an opinion that income of the petitioner, chargeable to tax for the said year, had escaped assessment within the meaning of section 147 of the Act. A notice dated 30th March, 2005, was issued u/s. 148 of the Act, requiring the petitioner to file a return and thereafter, some further information was sought from the petitioner for the purpose of assessment. The petitioner filed reply to the said notice, seeking reasons for the proposed reassessment.
The reasons indicated that the Assessing Officer referred to section 92 of the Act, which enables the Assessing Officer to determine profits which may reasonably deemed to have been derived, when less than ordinary profits are shown to have been derived by a resident. It was further stated in the said reasons that as per the order dated 7th February, 2005, u/s. 92CA(3) for the A.Y. 2002- 03, passed by the Transfer Pricing Officer-1, the profit declared by the petitioner was abnormally low, on account of which arm’s-length price had been fixed. On that account, the income of the assessee had escaped assessment. Similar notices were issued for the A.Ys. 1999-2000, 2000-01 and 2001-02. On 14th July, 2005, notice u/s. 92CA(3) of the Act was issued by the Additional Commissioner of Income-tax acting as Transfer Pricing Officer, on a reference made by the Assessing Officer u/s. 92CA(1) of the Act for the A.Y. 2003-04, to determine arm’s-length price. Identical notices were issued for the A.Ys. 2004-05, 2005-06 and 2006-07.
The Assesssing Officer made assessment in respect of income of the petitioner for the A.Y. 2002-03, vide order dated 24th March, 2005, after getting determined arm’s-length price of services rendered by the petitioner to its associated company, thereby enhancing the income of the assessee. Against the said order, the petitioner preferred an appeal which is pending before the appropriate authority. The petitioner filed a writ petition before the Punjab & Haryana High Court on 19th October, 2005. On 21st October, 2005, notice was issued to the respondents and, vide order dated 18th November, 2005, stay of passing of final order for the A.Ys. 2003-04, 2004-05, 1998-99 to 2001-02 was granted. Similarly, on 15th December, 2006, stay of passing final order for the A.Y. 2005-06 was granted and permission to amend the petition was also granted to challenge the notice in respect of the said year.
Similarly, on 26th May, 2008, stay of passing of final order for the A.Y. 2006-07 was granted. The petitioner further amended the petition to challenge the notice in respect of the A.Y. 2006-07, which amendment had been allowed by a separate order. The main contention raised in the writ petition was that the provisions of Chapter X, i.e., section 92 to 92F of the Act have been enacted with a view to prevent diversion of profits in intra-group transactions leading to erosion of tax revenue. The said provisions have been incorporated, vide Finance Act, 2001, and further amended, vide Finance Act, 2002. Having regard to the object for which the provisions have been enacted, applicability of the said provisions has to be limited to situations where there is diversion of profits out of India or where there may be erosion of tax revenue in intra-group transaction. In the present case, there was neither any material to show diversion of profits outside India, nor of erosion of tax revenue. If the price charged was less and profit of the petitioner was less, there was corresponding lesser claim for deduction by Britco.
Question of diversion of profits out of India would arise only if price charged is higher and that too if the higher profit was not subject to tax in India, which was not the situation in the present case. Further contention was that there was no occasion for determining arm’s-length price as the price determined by the petitioner itself was as per section 92(1) and (2) of the Act, i.e., cost plus 5%. In such a situation, there was no occasion to make reference to the Transfer Pricing Officer. Even if the reference was sought to be made, the petitioner was entitled to be heard before such a decision is taken, so that it could show that reference to the Transfer Pricing Officer was not called for. In objecting to the notices for reassessment, contention raised was that the provisions of Chapter X having been introduced only from 1st April, 2002, there could be no reassessment for the period from April 1, 1997, to 31st March, 2001. It was pointed out that prior to the amendment with effect from April 1, 2002, u/s. 92 of the Act, there was a provision for determination of reasonable profits deemed to have been derived by a resident and not a ‘non-resident’.
The amended provision could not be applied to the petitioner for the period prior to 31st March, 2001. In the reply filed on behalf of the respondents, the impugned notices and orders were defended. As regards the period prior to the A.Y. 2002-03, when the amended provisions of Chapter X were not operative, the stand of the respondents was that the petitioner suppressed its profit in its transactions with its associated companies, which was clear from the proportion of amount of working capital employed to the declared profit and this resulted in escapement of income within the meaning of section 147 of the Act. As regards the period for and after the A.Y. 2002- 03, it was submitted that the said Chapter was applicable to the petitioner as the petitioner had entered into ‘international transaction’ within the meaning of the said provisions with its ‘associated enterprises’. There was no condition that the said Chapter could apply only if the parties were not subject to the tax jurisdiction in India. The only requirement is that at least one of the parties should be non-resident, apart from other requirements in the said Chapter.
According to the High Court the following questions arose for its consideration: “
(i) Whether inapplicability of the unamended provisions of section 92 of the Act (as it stood prior to 1st April 1, 2002) to the petitioner created a bar to reassessment of escaped income of the petitioner?
(ii) Whether the order passed by the Transfer Pricing Officer under Chapter X after 1st April, 2002, could be one of the reasons for reassessment for period prior to introduction of the amended Chapter X in the Act?
(iii) Whether the provisions of Chapter X are attracted when both the parties to a transaction are subject to tax in India, in the absence of allegation of transfer of profits out of India or evasion of tax?
(iv) Whether opportunity of being heard is required before referring the matter of determination of arm’s-length price to the Transfer Pricing Officer?”
The above questions framed by the High Court were dealt by it as under:
Re: Question No. (i)
The High Court noted that the objection of the petitioner was twofold: (a) Reference to inapplicable provisions of section 92 of the Act, as it stood prior to the amended with effect from 1st April, 2002, and (b) irrelevance of the order of the Transfer Pricing Officer under Chapter X passed in respect of a subsequent assessment year.
The High Court held that section 147 of the Act requires formation of opinion that income has escaped assessment. The said provision is not in any manner controlled by section 92 of the Act, nor is there any limit to consideration of any material having nexus with the opinion on the issue of escapement of assessment of income. Interference with the notice for reassessment is called for only where extraneous or absurd reasons are made the basis for opinion proposing to reassess. Apart from the fact that the Assessing Officer had given other reasons, it cannot be held that the material relied upon by the Assessing Officer for proposing reassessment was irrelevant. Whether or not the said material should be finally taken into account for reassessment was a matter which had to be left open to be decided by the Assessing Officer after considering the explanation of the assessee. The High Court was of the view that having regard to the relationship of the petitioner to its associate company, it could not be claimed that the price mentioned by it must be accepted as final and may not be looked at by the Assessing Officer.
Reg: Question No. (ii)
As regards the question whether order of the Transfer Pricing Officer could be taken into account, the High Court was of the view that there could not be any objection to the same being done. Requirement of section 147 of the Act is fulfilled if the Assessing Officer can legitimately form an opinion that income chargeable to tax has escaped assessment. For forming such opinion, any relevant material can be considered. The order of Transfer Pricing Officer can certainly have nexus for reaching the conclusion that income has been incorrectly assessed or has escaped assessment. The High Court observed that in the present case, the said material came to the notice of the Assessing Officer subsequent to the assessment. There was no grievance that the provisions of section 148 to 153 of the Act had not been followed. In such a situation, it could not be held that the notice proposing reassessment was vitiated merely because one of the reasons referred to the order of the Transfer Pricing Officer.
Reg: Question No. (iii)
The High Court did not find any ambiguity or absurd consequence of application of Chapter X to persons who were subject to jurisdiction of taxing authorities in India, nor could find any statutory requirement of establishing that there was transfer of profits outside India or there was evasion of tax. The only condition precedent for invoking provisions of Chapter X was that there should be income arising from international transaction and such income had to be computed having regard to arm’s-length price. ‘International transaction’ as defined u/s. 92B of the Act, stood on different footing than any other transaction. Arm’s -length price was nothing but a fair price which would have been normal price. There was always a possibility of transaction between a non-resident and its associates being undervalued and having regard to such tendency, a provision that income arising out of the said transaction could be computed having regard to arm’s-length price, would not be open to question and was within the legislative competence to effectuate the charge of taxing real income in India.
The High Court did not find any merit whatsoever in the contention that provisions of Chapter X could not be made applicable to parties which were subject to jurisdiction of taxing authorities in India, without there being any material to show transfer of profits outside India or evasion of tax between the two parties. The contention that according to the permission granted by the Reserve Bank of India under the Foreign Exchange Regulation Act, the assessee could not charge more than particular price, could also not control the provisions of the Act, which provides for taxing the income as per the said provision or computation of income, having regard to arm’s-length price in any international transaction, as defined.
Reg: Question No. (iv)
The High Court held that when it is a matter of assessment by one or other officer and the assessee is to be provided opportunity, in the course of the assessment, there was no merit for inferring further opportunity at the stage of decision of the question, whether the Assessing Officer himself is to compute the arm’s-length price or to make a reference to the Transfer Pricing Officer for the said purpose.
On an appeal, the Supreme Court observed that the issue in the Special Leave Petition concerned the
application of the principle of transfer pricing. In this case a notice was issued u/s. 148 of the Act for some of the assessment years. On the question of jurisdiction, a writ petition was filed by the assessee, which was disposed of by the High Court in the writ jurisdiction. The Supreme Court, however, on going through the papers, found that foundational facts were required to be established, which could not have been done by way of writ petition. For the aforestated reasons, the Supreme Court was of the view that the assessee should be relegated to adopt proceedings, which were pending, as of date, before various authorities under the Act.
The Supreme Court accordingly, directed the authorities to expeditiously hear and dispose of pending proceedings as early as possible. If the petitioner- assessee was aggrieved by the orders passed by any of these authorities, it would have to exhaust the statutory remedy provided under the Act. It was made clear that each of the authorities would decide the matter uninfluenced by any of the observations made by the High Court.
The special leave petition was disposed of accordingly.
The petitioner before the Delhi High Court, formerly known as Maruti Udyog Limited (hereinafter referred to as ‘Maruti’), was engaged in the business of manufacture and sale of automobiles, besides trading in spares and components of automotive vehicles. The petitioner launched ‘Maruti 800’ car in the year 1983 and thereafter launched a number of other models, including Omni in the year 1984 and Esteem in the year 1994. The trade mark/logo ‘M’ was the registered trade mark of the petitioner-company.
Since Maturi wanted a licence from Suzuki for its SH model and Suzuki had granted licence to it, for the manufacture and sale of certain other models of Suzuki four-wheel motor vehicles, Maruti, on 4th December, 1992, entered into a licence agreement, with Suzuki Motor Corporation (thereinafter referred to as ‘Suzuki’) with the approval of the Government of India.
A reference u/s. 92CA(1) was made by the Assessing Officer of the petitioner, to the Transfer Pricing Officer (hereinafter referred to as ‘TPO’) for determination of the arm’s-length price for the international transactions undertaken by Maruti with Suzuki in the financial year 2004-05. A notice dated 27th August, 2008, was then issued by the TPO, to the petitioner with respect to replacement of the front logo ‘M’, by the logo ‘S’, in respect of three models, namely, ‘Maruti’ 800, Esteem and Omni in the year 2004-05, which, according to the TPO, symbolised that the brand logo of Maruti had changed to the brand logo of Suzuki. It was stated in the notice that Maruti having undertaken substantial work towards making the Indian public aware of the brand ‘Maruti’, that brand had become a premier car brand of the country. According to the TPO, the change of brand logo from ‘Maruti’ to ‘Suzuki’, during the year 2004-05, amounted to sale of the brand ‘Maruti’ to ‘Suzuki’. He noticed that Suzuki had taken a substantial amount of royalty from Maruti, without contributing anything towards brand development and penetration in Indian Market. It was further noted that Maruti had incurred expenditure amounting to Rs.4,092 crore on advertisement, marketing and distribution activity, which had helped in creation of ‘Maruti’ brand logo and due to which Maruti had become the number one car company in India. Computing the value of the brand at cost plus 8% method, he assessed the value of the brand at Rs.4,420 crore. Maruti was asked to show cause as to why the value of Maruti brand be not taken at Rs.4,420 crore and why the international transaction be not adjusted on the basis of its deemed sale to Suzuki.
Since the TPO passed a final order on 30th October, 2008, during the pendency of the writ petition and also forwarded it to the Assessing Officer of the petitioner, the writ petition was amended so as to challenge the final order passed by the TPO.
The TPO noted that Maruti had paid royalty of Rs.198.6 crore to Suzuki in the year 2004-05, whereas no compensation had been paid to it by Suzuki, on account of its trade mark having piggy-backed on the trade mark of Maruti. Since Maruti did not give any bifurcation of the royalty paid to Suzuki towards licence for manufacture and use of trade mark, the TPO apportioned 50% of the royalty paid in the year 2004-05, to the use of the trade mark, on the basis of findings of piggy-backing of ‘Maruti’ trade mark, use of ‘Maruti’ trade mark on co-branded trade mark ‘Maruti Suzuki’, impairment of ‘Maruti’ trade mark and reinforcement of ‘Suzuki’ trade mark, through co-branding process. The arm’s-length price of royalty paid by Maruti to Suzuki was held as nil, using the CUP method. He also held, on the basis of the terms and conditions of the agreement between Maruti and Suzuki, that Maruti had developed marketing intangibles for Suzuki in India, at its costs, and it had not been compensated for developing those marketing intangibles for Suzuki. He also concluded that non-routine advertisement expenditure, amounting to Rs.107.22 crore, was also to be adjusted. He, thus, made a total adjustment of Rs.2,06,52,26,920 and also directed that the Assessing Officer of Maruti shall enhance its total income by that amount, for the A.Y. 2005-06.
The High Court set aside the order dated 30th October, 2008 of TPO and the TPO was directed to determine the appropriate arm’s-length price in respect of the international transactions entered into by the petitioner Maruti Suzuki India Limited with Suzuki Motor Corporation, Japan, in terms of the provisions contained in section 92C of the Income-tax Act and in the light of the observations made in the judgment and the view taken by it therein. The TPO was to determine the arm’s-length price within three months of the passing of this order [(2010) 328 ITR 210 (Del.)].
On an appeal by Maruti Suzuki India Ltd., the Supreme Court noted that the High Court had remitted the matter to the TPO with liberty to issue fresh show-cause notice. The High Court had further directed the TPO to decide the matter in accordance with the law. The Supreme Court observed that the High Court had not merely set aside the original show-cause notice but it had made certain observations on the merits of the case and had given directions to the Transfer Pricing Officer, which virtually concluded the matter. In the circumstances, on that limited issue, the Supreme Court directed the TPO, who, in the meantime, had already issued a show-cause notice on 16th September, 2010, to proceed with the matter in accordance with law uninfluenced by the observations/directions given by the High Court in its judgment dated 1st July, 2010.
The Supreme Court further directed that the Transfer Pricing Officer would decide this matter on or before 31st December, 2010.
A benefit of exemption from tax on capital gains tax, is conferred on certain specified persons, subject to reinvestment of the capital gains or the net sales consideration, as the case may be, in specified assets, particularly vide sections 54, 54B, 54EC, 54ED and 54F of the Income-tax Act.
The reinvestment in the specified assets is required to be made within the time prescribed under the respective sections. The prescribed amount is required to be deposited in a designated bank account maintained under the Capital Gains Scheme. In a case where the reinvestment is not made by the due date of filing return of income for the year of capital gains, to be utilised for ultimate reinvestment in specified asset within the stipulated time.
It is common to come across cases, where an assessee has, for the purposes of reinvestment, utilised the funds other than the funds realised on sale of capital assets, borrowed or otherwise, leading to a question about his eligibility for exemption from tax for not having used the sale proceeds directly for reinvestment in specified asset. Conflicting decisions, delivered on the subject, require consideration by the taxpayers and their advisors to enable them avoid any unintended hardship in matters of daily recurrence.
2. V. R. Desai’s case
The issues recently came up for consideration before the Kerala High Court in the case of CIT v. V. R. Desai, 197 Taxman 52. An appeal in this case was filed by the Revenue u/s.260A of the Act for challenging the order of the Tribunal under which an exemption u/s.54F was granted from paying tax on long-term capital gains. In the peculiar and interesting facts of the case, the assessee was the managing partner of a firm, namely, M/s. Desai Nirman, which was engaged, among other things, in real estate business, including construction and sale of flats. During the previous year relevant to the A.Y. 1995-96, the assessee transferred 12.876 cents of land to the said partnership firm treating it as his contribution to the capital of the firm. The firm in turn credited the capital account of the assessee with an amount of Rs.38,62,800, being the full value of the land brought into the firm by him as his share of capital contribution. The assessee availed a loan from HDFC Bank for the construction of a house and within three years from the date of transfer of land to the firm, he got a new house constructed by another firm of M/s. Desai Home, in which also he was a partner.
There was no dispute that the transfer of the land by the assessee to the partnership firm towards his capital contribution to the firm was a transfer within the meaning of section 2(47) resulting into long-term capital gains as per section 45(3) of the Act. In the return filed for the A.Y. 1995-96, the assessee had in fact offered tax on capital gains on the very same transaction of contribution of the above land towards his capital contribution as managing partner, subject however, to his claim for exemption from capital gains tax u/s.54F of the Act, for investment made in the construction of the new building, out of the loan from HDFC Bank, within three years from the date of transfer of the land to the firm.
The AO noticed that the assessee had not invested the sale consideration in full or part in any of the designated bank accounts maintained under the Capital Gains Scheme prior to the date of filing return in terms of section 54F(4) of the Act. He therefore, completed the assessment and issued intimation u/s.143(1)(a) of the Act, holding that the assessee was not entitled to exemption u/s.54F of the Act. The intimation u/s.143(1)(a) was challenged by the assessee before the first Appellate Authority, who dismissed the appeal. In the second appeal filed by the assessee, the assessee took the contention that disallowance of exemption u/s.54F could not be made while issuing an intimation u/s.143(1)(a) of the Act. In the alternative, the assessee contended that the facts established the construction of a new house within three years from the date of sale of land, and so much so, the assessee was entitled to exemption in terms of section 54F of the Act. The Tribunal upheld the claims of the assessee on both the grounds raised.
The Revenue filed an appeal before the Kerala High Court, challenging the order of the Tribunal. The Revenue contended that in order to qualify for exemption u/s.54F, the assessee should have purchased a residential house within one year before or two years after the date of transfer or should have constructed a residential house within a period of three years from the date of transfer, in either case, by utilising the sale proceeds of land; that, for qualifying for exemption, the assessee should have, before the date of filing return, deposited the net sale consideration received in a nationalised bank in terms of section 54F(4) and the receipt should have been produced along with the return filed.
The assessee on the other hand, contended that in order to qualify for exemption, there was no need to directly utilise the sale consideration in constructing the house and it was enough if during the period of three years, an equivalent amount was invested in the construction of the house, from whatever sources; that the assessee admittedly had constructed a new house within three years from the date of transfer of the property and therefore was eligible for exemption.
The Court observed that the assessee allowed the firm to which the property was transferred to retain and use it as a business asset and towards consideration he got only credit of land value in his capital account and as a result the sale consideration was not received by the assessee in cash, nor could it be deposited in terms of clause 4 of section 54F with any nationalised bank or institution; that the assessee did not have the sale proceeds available for investment in the account under the scheme u/s.54F(3) of the Act. The Kerala High Court, on going through the provisions of section 54F, particularly sub-section (4), held that in order to qualify for exemption from tax on capital gains, the net sale consideration should have been deposited in any bank account specified by the Government for this purpose, before the last date for filing of the return and the assessee should have produced along with the return, a proof of deposit of the amount under the specified scheme, in a nationalised bank.
The Court further observed and held that in order to qualify for exemption u/s.54F(3), the assessee should have first deposited the sale proceeds of the property in any specified bank account, and the construction of the house, to qualify for exemption u/s.54F, should have been completed by utilising the sale proceeds that also were available with the assessee; that in the case before them, though the assessee constructed a new building within the period of three years from the date of sale, it was with the funds borrowed from HDFC. By allowing credit of value of transferred property in the capital account of the assessee in the firm, the assessee conceded that the sale proceeds was neither received, nor was going to be utilised for construction or purchase of a house.
The Court finally held that the assessee was not entitled to exemption u/s.54F, because the assessee neither deposited the sale proceeds for construction of the building in the bank in terms of s/s. (4) before the date of filing return, nor was the sale proceeds utilised for construction in terms of section 54F(3) of the Act and that the assessee was not entitled to claim exemption from tax on capital gains u/s.54F of the Act, which the AO had rightly declined.
3. P. S. Pasricha’s case
The Bombay High Court vide an order dated 7th October, 2009 passed in ITA 1825 of 2009 in the case of CIT v. Dr. P. S. Pasricha, dismissed the Revenue’s appeal against the order of the Tribunal reported in 20 SOT 468 (Mum.). The facts in the Revenue’s appeal before the Tribunal were that;
The Revenue, in the context of the discussion here, contended that the sale proceeds received on account of sale of flat in the building known as ‘Dilwara’ was utilised in purchase of commercial properties at Kolhapur; that the assessee had later on, purchased two residential flats in Lady Ratan Tower, Worli, Mumbai for a sum of Rs.1,04,78,750 out of the funds received from different sources; that to avail the benefit of section 54(1), the assessee was required to invest the sale proceeds received on transfer of long-term capital asset in purchase of another residential house, but, in the instant case, the said sale proceeds from earlier capital asset, were utilised to purchase the commercial property; that a residential house was purchased out of the funds obtained from different sources; that alternatively, the identity of the funds should not be changed and in the instant case, the identity was lost once the sale proceeds were exhausted in purchase of a commercial property; as such, the assessee was not entitled for deduction u/s.54(1) of the Act.
On behalf of the assessee, in the context, it was contended that no doubt the sale proceeds received on sale of residential flat in the building known as ‘Dilwara’ were utilised to purchase a commercial property at Kolhapur, but the assessee had purchased another residential house within the period specified u/s.54(2) of the Act; that the provisions of section 54 nowhere provided that the same sale proceeds, received on transfer of long-term capital asset, must be utilised for the purchase of another residential house; that the assessee was simply required to acquire the residential house within a period of one year before or two years after the date on which the transfer took place and in the instant case, the assessee had purchased the residential flat before the due date of filing of the return and as such, his claim was not hit by ss.(2) of section 54 of the Act and that the proposition propounded by the Revenue about the identity of the funds was without any basis as it could not be applied where the assessee acquired/purchased the residential house before the transfer took place.
The Tribunal observed that the Revenue’s main dispute was about the utilisation of the sale proceeds for purchase of a commercial property and the purchase of residential house out of the funds obtained from different sources, as such, losing the identity of funds. On an analysis of section 54, the Tribunal did not find much force in the Revenue’s contention as, in the opinion of the Tribunal, the requirement of section 54 was that the assessee should acquire a residential house within a period of one year before or two years after the date on which transfer took place and that nowhere, it had been mentioned that the same funds must be utilised for the purchase of another residential house, only that the assessee should purchase a residential house within the specified period, and source of funds was quite irrelevant. Since the assessee had purchased the residential house before the due date of filing of the return of income, his claim was found to be not hit by sub-section (2) of section 54 of the Act and the Tribunal therefore was of the view that assessee was entitled for deduction u/s.54(1) of the Act.
4. Observations
The wording of the section makes it clear that the law does not insist that the sale consideration obtained by the assessee itself should be utilised for the purchase of house property. The main part of section 54 provides that the assessee has to purchase a house property for the purpose of his own residence within a period of one year before or two years after the date on which the transfer of his property took place or he should have constructed a house property within a period of three years after the date of transfer. A reading of clauses (i) and (ii) of section 54 would also make it clear that no provision is made by the statute that the assessee should utilise the amount which he obtained by way of sale consideration for the purpose of meeting the cost of the new asset.
The assessee has to construct or purchase a house property for his own residence in order to get the benefit of section 54. The statutory provision is clear and does not call for a different interpretation.
There is no ambiguity in understanding the provisions of section 54 and section 54F. The purpose of these provisions is to confer exemption from tax on investment in residential premises. The Legislature itself has appreciated the fact that it would not always be possible to invest the sale proceeds immediately after the sale transaction and therefore, two years’ or three years’ time is given for reinvestment. Neither it is expected, nor is it prudent to keep the sale proceeds intact and keep the said proceeds unutilised till such time.
The fact that these provisions permit the invest-ment in residential premises even before the date of sale, within one year before the sale, and such an investment qualifies for exemption puts it beyond doubt that the Legislature does not intend to have any nexus between the sale proceeds and the investment that is made for exemption. For the purposes of section 54E, even the earnest money or advance is qualified for exemption as clarified by the CBDT’s Circular No. 359, dated 10th May, 1983.
The provisions of sub-sections (2) of section 54 and (4) of section 54F do not, anywhere mandate that there should be a direct nexus between the amount reinvested and the amount of sale consideration or a part thereof, in any manner. A bare reading of these provisions confirm that they use the same language as is used by the sub-section (1) and therefore to infer a different meaning form reading of these provisions, as is done by the Revenue, to obstruct the claim for exemption in cases where the reinvestment was made out of the borrowed funds or funds other than the sales proceeds, is unwarranted and not desirable.
The issue had first arisen before the very same Kerala High Court in the case of CIT v. K. C. Gopalan, 162 CTR 566 wherein, in the context of somewhat similar facts, the Court in principle held that in order to get benefit of section 54, there was no condition that the assessee should utilise the sale consideration itself for the purpose of acquisition of new property. The ratio of this decision was not brought to the attention of the Kerala High Court in V. R. Desai’s case, neither was this case cited. We are of the view that the decision of the Court would have been quite different had this decision and its ratio been brought to the attention of the Court.
In Prema P. Shah v. ITO, 100 ITD 60 (Mum.), the assessee’s claim for benefit of exemption u/s.54 was allowed by the Tribunal, following the said decision of the Kerala High Court in the case of K. C. Gopalan (supra) by rejecting the argument of the Revenue that the same amount should have been utilised for the acquisition of new asset and holding that, even if an assessee borrowed the required funds and satisfied the conditions relating to investment in specified assets, she was entitled to the exemption.
The decision in the case of K. C. Gopalan (supra), though cited, was erroneously distinguished and not followed by the Tribunal in the case of Milan Sharad Ruparel v. ACIT, 121 TTJ 770 (Mum.) wherein it was held that for exemption u/s.54F, utilisation of borrowed funds for purchase of house was detrimental and that the exemption u/s.54F was not available where the assessee purchased a residential house out of funds borrowed from bank. It was held that for the purposes of section 54F, residential property should either be acquired or constructed by the assessee out of his personal funds or the sale proceeds of the capital asset on which the benefit was claimed. Even here, the Tribunal has agreed that the assessee would be entitled to the exemption, which could not be denied to him on the ground of use of borrowed funds, if he is otherwise in possession of his own funds. Once this is conceded, the reference to sub-sections (3) and (4) and reliance thereon for denial of the exemption appears to be incongruous. Either they prohibit the use of other funds or they do not — there cannot be a third meaning assigned to the existence of these provisions.
Similarly, the claim for exemption was denied by the Tribunal in the case of Smt. Pramila A. Parikh in ITA No. 2755/Mum./1997, in which case the assessee had constructed a residential house out of the loans and thereafter the sale proceeds of shares of M/s. Hindustan Shipping & Weaving Mills were utilised for repayment of loans raised for the construction of a residential house. The assessee claimed exemption u/s.54F of the Act. The Tribunal had held that the assessee was not entitled to exemption u/s.54F as she had constructed the house by taking loans from other persons for the purpose of construction of the house and there-after sold the capital asset and repaid the loan out of the sale proceeds of the same.
The Ahmedabad Tribunal, when asked to exam-ine a similar issue in the context of section 54E, in the case of Jayantilal Chimanlal HUF, 32 TTJ 110, held that for claiming exemption u/s.54E, it was sufficient if sale proceeds were invested in Rural Bonds and that the source of funds was immaterial. Similar was the view in the case of Bombay Housing Corporation v. ACIT, 81 ITD 545, wherein it was held that the condition relating to investment in specified assets u/s.54E was satisfied even where the investment was made by the assessee by borrowing funds instead of a direct investment out of consideration received by it for transfer of capital asset. In that case, it was held that the exemption u/s.54E was available for investment in specified assets out of borrowed funds and that the requirement of section 54E was only that the assessee must invest an amount which was arithmetically equal to the net consideration in the specified assets and that no distinction could be made between an assessee who was forced to borrow for the purpose of making the investment and another assessee who effected the borrowing, not because of forced circumstances, but because he consciously or deliberately used the sale consideration for a different purpose. The fact that instead of making a direct investment in the bonds, the borrowed amount was invested in the bonds should not make any difference. These decisions are sought to be distinguished by the Revenue as was done by the Tribunal in the case of Milan Ruparel (supra) on the ground that the said section 54E did not contain a provision similar to section 54F(4) which required an assessee to deposit the sale proceeds in a designated bank account failing the reinvestment before the due date of return of income.
The provisions in any case are meant to be interpreted liberally in favour of the assessee, being incentive provisions, even where it is assumed that there is some doubt in their interpretation. The Courts have always adopted such liberal interpretation of sections 54 and 54F when there is substantial compliance with the provisions of the section.
Even if one looks at the object of sections 54 and 54F, the intention clearly is to encourage investment in residential housing. So long as that purpose is achieved, the benefit of the exemption should not be denied on technical grounds that the same funds should have been utilised.
As on today, the Registration under Voluntary Registration Scheme (VRS) is granted on the basis of advance payment of Rs.25,000. The said amount is adjustable against the liability which may be payable in the returns to be filed after registration.
However, now as per amendment in section 16(2) of the MVAT Act, 2002, the advance payment of Rs.25,000 will be treated as Security Deposit with the Government. It will not be allowed to be adjusted against liability. It will be refunded back after certain period, if there is no breach of any of the conditions which are laid down in this regard. As per newly inserted section 16(2A) of the MVAT Act, 2002, the Government can prescribe conditions for refund of deposit. The said conditions are prescribed by way of Rule 60A.
As per Rule 60A, it is the dealer who has to apply for refund of deposit. The application of refund can be made after 36 months from the end of month in which registration is granted but before 48 months from the said month. In case of cancellation of Registration Certificate (RC) before above period of 36 months, the application is to be made within six months from such date of cancellation. The application is to be made to registration authority and such authority should grant the refund within 90 days from receipt of application, subject to the dealer filing all returns as well as paying taxes as per the said returns.
2. Revised returns:
It is obligatory upon the dealers to file correct and complete returns by prescribed time. There are a number of events which may require correction in the original return or earlier revised returns. Therefore, the law permits dealers to file revised returns. This gives him opportunity of clearing himself of any charge of concealment or to prefer an additional claim, if any.
Up till now, there were no restrictions on the number of revised returns which can be filed by the dealers. In other words, a dealer could file more than one revised returns to correct the mistakes committed in the original returns or earlier revised returns.
However, now by the amendment a tab is put on the number of revised returns which can be filed by a dealer. As per section 20(4)(a), (b) and (c), there are three kinds of revised returns. A revised return can be filed suo motu or it can be to give the effect to VAT audit findings or it can be to give effect to findings of the business audit. The amendment seeks to allow only one revised return in each of the above categories. Though the amendment provides as above, a view can be taken that the dealer can file more than one revised returns to put up his position and in course of assessment such returns are also expected to be considered.
A dealer will now have to be very careful about filing revised return. He has to be certain that all the corrections are included in the particular one revised return. Allowing more than one revised return could not have caused any difficulty to the Department, but the curtailment will certainly cause great difficulty to the trading community.
It may be mentioned that in the category of suo motu revised return, the time limit was nine months from the end of concerned period/year. It is now enhanced to ten months.
This is an amendment about procedural law and the Department will take a view that the restriction operates from 1-5-2011. Therefore even for the returns for period prior to the above effective date, the restriction will be applied and accordingly after the above effective date the dealer may be permitted to file only one revised return relating to the said prior period.
3. No appeal against order levying interest:
The trend of amendments appears to be against the dealer community. The Government has debarred dealers from getting justice in case of levy of interest. The appeals against interest leviable u/s.30(2) and 30(4) are already prohibited by an amendment in 2010. However, appeals against interest u/s.30(1) (interest on URD) and 30(3) (differential dues) were allowed. Now section 26(5) is amended, whereby clause (c), which gave power to the Appellate Authority to deal with interest orders is deleted. Indirectly, the appeals will not be maintainable against the above interest u/s.30(1) and 30(3). Thus, one more beneficial provision is being done away with to the detriment of the dealer community. There will not be an opportunity to get justice in case of wrong levy.
It may be noted that appeals against orders levying interest u/s.30(1) and 30(3) themselves are not debarred. Therefore, it is possible to argue that the said appeals can be filed and the Appellate Authority can decide the matter under clause (d) of section 26(5) which covers appeal against any other order. Therefore, it appears that the dealers can still take an opportunity u/s.26(5)(d).
4. New taxation scheme for liquors:
Uptill now the liquors were taxed as per normal VAT chain. Every dealer was getting set-off and was liable to tax on sales.
Now from 1-5-2011 the system is changed. Wine is continued to be taxed as per the old system. Change is brought in taxation of IMFL, foreign liquors and country liquors by issue of Notification dated 30-4-2011 as per newly inserted section 41(5). The brief features of the new system can be noted as under:
(a) Manufacturer of liquors holding licence in PLL, BR-L and CL-I will be liable to tax @ 50% of sale price subject to limit of tax amount calculated as per Formula MRP x 25/125. They will be required to mention MRP on sale bills.
(b) Wholesalers holding licence in FL I, CL II will be exempt from tax if liquor is purchased from registered dealer in Maharashtra. No set-off is available to a wholesaler. If wholesaler has imported liquor from other State/country he will be required to discharge tax liability like a manufacture i.e., 50% of sale prices subject to limit of tax calculated as per formula MRP x 25/125.
(c) Retailer holding licence in FL IT, FL-BR-H, CL/ FL/TOD-III and CL-III will also be exempt from tax if liquor is purchased from registered dealers in Maharashtra. No set-off to them.
(d) Hotel, bars, restaurants and clubs (3-star and below):
Bars, restaurants and clubs holding licence in FL-III or FL-IV or E with grading of 3-star and below will be required to pay tax at 5% on the actual sale price of liquor which is purchased from registered dealers within the State and on which tax is paid or has become payable at earlier stage.
They can collect tax separately. No set-off is available on purchases.
(e) Hotels, bars, restaurants and clubs (4-star and above):
Hotels, bars and restaurants with grading of 4-star and above will be required to pay tax at 20% of their actual sale price, if the liquor is purchased from registered dealers within the State and on which tax is paid or has become payable at earlier stage.
If liquor is imported from other States or from outside the country, then in addition to 20% as above, they will be required to pay tax at Schedule rate subject to the limit of MRP x 25/125 of such liquor sold.
They can collect tax in the sale bills. No set-off is available on purchases of liquor.
(f) Taxation of stock as on 30-4-2011:
The tax on sale of liquors in stock as on 30-4-2011 will be as per the new system, discussed above i.e., at 50% of sale price limited to calculation made as per formula of MRP x 25/125. Hotels/ bars, in addition to the above, will be required to pay 5% or 20% as the case may be. In this case set-off will remain available on stock subject to submission of stock statement.
All the dealers, except manufacturers, shall furnish a statement of closing stock of goods mentioned in Entry 1, 2 and 3 of Schedule D to the MVAT Act, 2002 as on 30th April, 2011, in the Proforma appended to the Notification by 31st May, 2011.
5. Refunds — Unwarranted and unreasonable curtailment:
Section 51 of the MVAT Act deals with refunds as per returns. Few important changes can be noted as under:
(a) At present there is time limit on the Department to call for additional information. That could be called within one month of filing of the application.
However the time limit of one month is deleted by present amendment to section 51(2)(a). The result is that the Department will have open ground to call for additional information at any time.
(b) Refund to newly registered dealer:
Clause 51(2)(b) provides that the newly registered dealer can apply for refund after expiry of one year from the end of first year. This provision is sought to be deleted with the effect that they will be able to claim the refund on expiry of year, as any other normal dealer. This can be said to be beneficial to the newly registered dealers.
(c) Inter-state seller — Removal from preferred category:
With a view to give early refunds to the dealers involved in inter-state sales, they were put in preferred category by way of section 51(3)(a)(iv) . Therefore, these dealers could file refund applications as per return period and had not to wait till the end of full year. Now this category is removed with the result that such dealers will be required to claim refunds after the end of year. This will delay refund claims for them.
(d) Exporter — Defined:
Preferred category u/s.51(3)(a) includes exporter. They can file refund application as per the return period. However, the term ‘Exporter’ was not defined and hence a dealer having one export transaction could also file application as exporter. This liberal provision is now sought to be tight-ened. The term ‘Exporter’ is defined by inserting the following explanation.
“Explanation — For the purposes of sub-clause (i), the expression ‘Exporter’ shall mean a registered dealer whose turnover of exports during such period as may be prescribed, is not less than such percentage of the total turnover of his sales as may be prescribed in this behalf.”
The said percentage is prescribed by insertion of Rule 55A(3). According to the said Rule, if export turnover is not less then 50% in previous year or in concerned return period, then the dealer will be considered to be exporter.
(e) Bank guarantee:
Section 51(3)(b) provides for requirement of bank guarantee for granting refund. It also gave power to call for additional information. The clause for calling additional information is deleted and calling for bank guarantee is retained.
(f) Period for grant of refund — Extended:
Section 51(4) provides time limit for grant of refund. At present the limit is six months from the month of receipt of refund application. The said limit is extended to 18 months from the end of the month in which application is received. At present the dealer can get interest u/s.53(1) for delay in grant of refund after expiry of the above time limit of six months. Now this can take place after 18 months. Thus more time to retain the dealer’s money without interest.
The proviso to section 51(4) provides time limit for disposal of applications pending at present. It is sought to be provided that the applications filed up to 31-3-2011 for period up to 31-3-2010 will be disposed of by 30-9-2011. The applications filed up to 31-3 -2011 for period from 1-4-2010 to 31-3-2011 will be disposed of by 30-6-2012.
(g) Time limit for filing refund application — Section 53(7):
As per section 53(7) refund application can be filed within three years from the end of concerned year. Now the time limit is reduced to 18 months. Thus one more curtailment of the dealer’s right. Whereas time for grant of refunds by the Department is enhanced to 18 months from six months, the time limit for dealer is curtailed. This cannot be said to be a fair treatment. There will be many adverse effects on dealers.
The above provision will apply from 2009-10 and the refund applications for 2009-2010 will be required to be filed before 30-9-2011.
6. VAT Audit report — heavy ‘weight’ on dealers:
VAT Audit provision is becoming more and more stringent for dealers. Up till now there is penalty for late filing of report, to be calculated at 0.1% of turnover.
Now section 61(1) is amended to provide that the audit report should be ‘complete’ report.
By Explanation it is provided that the audit report will be deemed to be complete, if all items, certifications, tables, schedules and annexures are filed appropriately and are arithmetically self-consistent. If the report is found to be incomplete, then dealer will be subject to penalty at 0.1% of turnover, as per section 61(2A).
7. Prosecution for false tax invoice:
Sub-sections (1A)(i) and (ii) are inserted in section 74 to provide punishment by way of imprisonment for two years for issuing/producing false tax invoice to defraud revenue. The provision is extended to person who abates aforesaid offence.
In addition to above, there are changes in rate of taxes, few changes in composition schemes, etc. The same are not referred to here for sake of brevity.
Facts:
The appellant, manufacturer of computers, was assessed for the period from 1st May, 1986 to April 30, 1987 under the CST Act, 1956. The appellant filed appeal against the assessment order before the Deputy Commissioner of Sales Tax (Appeal) who allowed the appeal partly and imposed penalty u/s.9(2A) of the CST Act r.w.s. 36(2)(C), Explanation (2) of the BST Act, after giving opportunity of hearing to the appellant, for failure to file returns in time, by passing separate order. The appellant filed appeal before the Tribunal against such penalty order. The Tribunal confirmed the order of penalty passed by the DC (Appeal). The Tribunal, at the instance of the appellant and as per direction of the Court, referred substantial question of law before the Bombay High Court.
Held:
The High Court, considering provisions of section 36(2)(C) and section 55 of the Act, held that as per section 55(6)(a) and (b) of the Act, the Appellate Authority concerned did not have any power of imposing penalty for the first time and expression ‘confer or cancel such order or very it, so as to either enhance or to reduce the penalty’ employed in section 55(6)(b), neither covered the power to impose a fresh penalty for the first time nor did it confer any power upon the Appellate Authority to pass any order of penalty while deciding the appeal. Further it held that on the correct interpretation of section 36(2)(c) of the Act the Tribunal was not justified in holding that the DC (Appeal) in exercise of Appellate power had jurisdiction to initiate action for imposing penalty for the first time.
(ii) Income from discounting is business income and accrues in India and is taxable under Income-tax Act. However, in absence of PE, it would not be taxable in terms of DTAA.
(iii) Income accrues on discounting though the proceeds are realised later.
(iv) Since income is not liable to tax in India, transfer pricing documentation/report not required.
(v) As income is taxable under Income-tax Act, but extinguished under DTAA, return of income should be filed.
Facts:
The applicant was an American Company, which was tax resident of the USA. The applicant provided various financial services to its group companies as well as to other companies. As part of its business, it was drawing, making, accepting, endorsing, discount, executing and issuing Promissory Notes (PN), bills of exchange, etc.
ABC India Private Limited was a group company. The applicant proposed to purchase bills of exchange drawn by ABC India on its customers. It also proposed to purchase the PNs issued by the customers of ABC India from ABC India on ‘without recourse’ basis. The applicant has stated that it:
(a) may hold PNs till maturity, or
(b) sell them to another buyer, or
(c) may accept prepayment if the issuer is desirous of prepaying the amount.
The applicant raised the following issues before the AAR for its ruling:
(1) Whether the income earned from discounting bills of exchange or PNs pertaining to its Indian group entities was liable to tax in India under the Income-tax Act or under DTAA?
(2) If it was taxable, whether it would be taxable at the time of discounting, or on maturity, or on re-discounting?
(3) Whether the applicant would have PE in India? If yes, whether profits from discounting could be attributed to such PE?
(4) Whether income of the applicant would be subject to withholding tax u/s. 195 even if it was held not taxable in India?
(5) Whether transfer pricing documentation was required to be maintained and report was required to be filed, even if income was held not liable to tax in India?
(6) Whether the applicant was required to file a return of income even if it did not have any income chargeable to tax in India?
The applicant contended as follows:
The discount is the business income of the applicant. The applicant has no PE in India. Hence, the business income should be accessed outside India.
The discounted margin is not ‘interest’ u/s. 2(28A) of the Income-tax Act read with section 9(1)(v) of the Income-tax Act. Discounting is a mercantile practice and it does not create a loan or debt. The Revenue contended as follows:
The proposed transaction was a case of merchanting trade. The percentage of discount was really the interest on money advanced by the applicant to ABC India. It was a ruse to avoid taxation in India. Hence, such payment would be ‘interest’ u/s. 2(28A) of the Incometax Act.
Proceedings on similar questions were pending before the High Court and the Tax Authority in case of other group companies of applicant. Hence, advance ruling should not be given in this case.
Ruling:
The AAR ruled as follows:
(i) The bar of proviso (i) to section 245R(2) of the Income-tax Act is not attracted since the transaction in respect of which the ruling was sought was different from that in which other group entities were involved.
(ii) Discounting of bill is distinguishable from a pledge on deposit of security. If amounts to purchase of negotiable instrument and does not involve debtor-creditor relationship between endorser and endorsee, nor does it result in assignment of original debt. For ‘interest’ to arise, existence of a debt claim is necessary. Hence, ‘discount’ is not ‘interest’ under Article 11 of DTAA.
(iii) Applying the normal rule that ‘the debtor must seek the creditor’, the payment is to be made in India. Hence, the income accrues in India. Such income is business income taxable in accordance with provision of the Incometax Act, but subject to the rights conferred under DTAA. As applicant did not have PE in India, in terms of Article 7 of DTAA, it would not be taxable in India.
(iv) Income accrues on discounting even though the proceeds are realised later.
(v) The applicant would not be subject to withholding of tax u/s. 195.
(vi) Transfer pricing documentation were not required to be maintained and the report was not required to be filed since the income was not liable to tax in India.
(vii) As the income of applicant was liable to tax under the Income-tax Act and as such liability is extinguished only under DTAA, consistent with the ruling in VNU International BV (2011) 198 Taxman 454 (AAR), the applicant is liable to file a return of its income.
(ii) Under India-USA DTAA, ‘make available’ clause does not apply to non-technical services. Hence, payments for managerial services were FTS and chargeable to tax @20%.
(iii) Being managerial services, payments were FTS as defined in Explanation 2 to section 9(1)(vii) of Income-tax Act.
Facts:
The applicant is an Indian company, which is a whollyowned subsidiary of an American Co. The applicant is providing certain telecom and information technology-enabled services to USCo.
For improving efficiency and productivity, the parent American Company seconded certain employees of its affiliate, also an American Company (‘USCo’), to the applicant. USCo was also engaged in a business similar to that of the applicant.
The applicant entered into a secondment agreement with USCo. Pursuant to the secondment agreement, USCo deputed three persons. Each seconded employee was to function and act exclusively under the direction, control and supervision of the applicant and USCo was not responsible or liable as regards the work performed by the seconded employees. USCo was to pay to the employee the salary which the employee was entitled to receive and the applicant was to reimburse the same to USCo. Responsibility to withhold tax was of the applicant and the payment to USCo was to be on net of tax basis.
The applicant raised the following issues before the AAR for its ruling:
(1) Whether reimbursement by the applicant to USCo is income of USCo and liable to tax deduction u/s. 195?
(2) If answer to 1 is ‘yes’, whether it is taxable as FIS?
(3) Does USCo have a PE in India and, if yes, whether amount received by it from the applicant is ‘business profits’ attributable to the PE under the DTAA?
(4) If answer to 3 is yes, whether the taxable income would be nil because of cost-to-cost reimbursement?
(5) If reimbursement is income of USCo, what would be the rate of withholding tax?
The applicant contended as follows:
Since the applicant was the economic employer of these seconded employees, withholding tax obligation was of the applicant. The payments made to USCo were cost-to-cost reimbursements and no income arose to USCo. Since the applicant had withheld tax u/s. 192 (on salary), there should not be any further withholding u/s. 195.
USCo was not rendering any services to the applicant. The employees work under the control of the applicant, the reimbursement of salary to USCo was for administrative convenience and hence, it should not qualify as FIS under Article 12 of the DTAA as FIS would require that technical knowledge, skill, etc. is ‘made available’.
USCo had no fixed place from where it carried on business in India. Even if it was held that USCo had a fixed place of business in India, salary and expenses incurred on seconded employees would be deductible as expenditure and due to cost-to-cost reimbursement, net income would be nil. Hence, no tax deduction would be required.
The Revenue contended as follows:
Since, the applicant, the parent company and USCo were part of the same group, seconded employees represented the parent company and relying on DIT v. Morgan Stanley and Co. Inc, (2007) 292 ITR 416 (SC), they do not become employees of the applicant. Thus, the applicant would not be the economic employer.
Seconded employees claimed to be part of the parent company. Only USCo had the authority to terminate their services.
In A.T. & S. India P. Ltd., In re (2006) 287 ITR 421 (AAR), it was held that reimbursement of cost of seconded employees is in the nature of FTS and payment of taxes under the head ‘salaries’ is of no consequence. It is not correct to say that persons occupying managerial position cease to render technical service. The employees were seconded to render only technical advice/guidance. Hence, payments would be FIS even under DTAA.
Ruling:
The AAR ruled as follows:
(i) The three employees together constituted a team. While they were providing services to the applicant, they remained employees of USCo and their employment could be terminated only by USCo. This showed that it was USCo who rendered managerial services to the applicant.
(ii) As the seconded employees continued to remain the employees of USCo, it followed that the managerial services were performed by them as employees of USCo and not as those of the applicant.
(iii) The two receipts — one in the hands of USCo (for managerial services) and the other in the hands of employees (salary for employment) — spring from different sources, are of different character and represent different species of income. By correlating the two payments/ receipts, neither the nature nor substance of the transaction would change to give it the character of reimbursement. Amounts paid by the applicant to USCo represent income of USCo.
(iv) From reading of MOU to DTAA, it was clear that ‘make available’ clause does not apply to non-technical services. Since services provided by USCo were managerial services, the payments were FIS under Article 12(4) of DTAA. As regards the Income-tax Act, since the services were managerial in nature, the payments were FTS as defined in Explanation 2 to section 9(1)(vii).
(v) Since the reimbursed amounts were FIS, they would be chargeable to tax @20% under Article 12(4)(b) of DTAA. Also, as the payments are taxable as FIS answers to the other questions were academic.
Facts:
The applicant is an Indian company providing solutions in commercial and financial printing, print and mail management, product customisation, logistics, call centres, transactional online services, digital photography, colour services, etc.; high-end support services to the customers identified by its associated enterprises; online data-related services for different kinds of businesses.
RRDUK is a foreign company and is a tax resident of UK (‘UKCo’). UKCo was engaged in the business of communication management. For efficient discharge of service to its customers, the applicant had entered into data processing services agreement with UKCo. As per the agreement, the applicant was to pay fees to UKCo based on the invoice of UKCo.
The applicant raised the following issues before the AAR for its ruling:
(1) Whether amount receivable by UKCo is taxable as FTS under the Income-tax Act and DTAA?
(2) If the amount receivable by UKCo is not taxable in India, whether the applicant is required to withhold tax u/s. 195 of the Income-tax Act?
The applicant contended that the payment made to UKCo was not for technical services and hence, was not taxable in India. Further, in terms of Article 13 of DTAA unless the services are ‘made available’, they cannot be said to be technical services. The applicant also relied on rulings of the AAR in Invensys System Inc. (2009) 317 ITR 438 (AAR) and Intertek Testing Services India P. Ltd. (2008) 307 ITR 418 (AAR)1.
The Revenue contended that the personnel of UKCo periodically visiting India did not stay for more than 30 days and hence, no PE existed in India. However in view of explanation to section 9(2) of the Incometax Act (inserted with retrospective effect by the Finance Act, 2010), the applicant would be liable to withhold tax in India.
Ruling:
The AAR ruled as follows:
(i) The AAR observed that once the knowledge or technical know-how is transferred, no further assistance is required from the services provided. The services mentioned in the agreement are not managerial, technical or consultancy services and as stated by the ap-plicant, they do not involve usage of any sophisticated technology. Hence the fees for these services are not taxable.
(ii) As the fees are not taxable, question of withholding tax u/s. 195 does not arise.
(ii) Where consideration is for use of scientific work, etc. and no IPR in software is transferred, payment is royalties.
(iii) As DTAA does not have specific Article for taxation of FTS, it would be governed by other income Article.
Facts:
The applicant was a company incorporated in, and tax resident of, Sri Lanka. The applicant was engaged in providing technical feasibility studies, preparation of coastal zone management plan, port and other water-related engineering projects, etc. The applicant did not have any office or place of business in India.
Kolkata Port Trust had awarded a contract to a PSU. The PSU subcontracted the work to the applicant. Under the agreement with the PSU, the applicant was to provide services pertaining to software supplies, installations, modelling, field data collection, transfer of on-job training/technology, maintenance, monitoring, handover of software, designs and submissions of reports, etc. As per the applicant, on the basis of man-hours, substantial part of the services were rendered in Sri Lanka and only about 20% of the services were rendered in India. For rendering the services in India, the applicant deputed engineers to the project site at short intervals.
The applicant had outsourced part of the services to an Indian Company (‘IndiaCo’). Further, the applicant had also engaged a representative for assistance in connection with the contract.
The PSU treated the receipts of the applicant u/s. 9(1)(vii) of the Income-tax Act and deducted tax u/s. 195. The applicant had applied to the AO for nil withholding tax certificate u/s. 197, but subsequently withdrew its application and approached AAR raising the following questions:
(1) Whether on facts, the applicant had constituted PE in India in terms of Article 5 of DTAA read with the Protocol to, DTAA?
(2) Whether the consideration received by the applicant under the contract with the PSU was taxable in India under Article 7 of DTAA?
(3) If answer to the above question is no, whether the consideration received by the applicant under the contract with the PSU was taxable in India under any other article of DTAA?
The applicant contended as follows:
The contract is predominantly for services and supply of software is incidental to the contract. Thus, the payment is for obtaining limited rights for effective operation of the software and not for commercial exploitation of software. Hence, it cannot be considered royalty.
Consideration for provision of services is business receipts. The applicant did not have any fixed place of business, management or branch in India. Under Article 5(2)(i) of DTAA, a service PE is constituted if services are furnished for more than 183 days in any 12 months’ period. Due to MFN clause in DTAA, the period of 183 days is extended to 275 days as that is the period in Sri Lanka-Yugoslavia DTAA.
The Revenue contended as follows:
As DTAA did not have specific provision dealing with FTS, taxing under any other Article of DTAA would mean changing the character of the income. As such, FTS should be taxed u/s. 9(1)(vii) of the Income-tax Act.
As the software was not sold but licensed, the nature of consideration was royalty u/s. 9(1)(vi) of the Income-tax Act.
Presence in India of employees deputed by the applicant for less than 183 days was not ascertainable. Further, while subcontracting part of the work to IndiaCo and the representative, the applicant had given them instructions and thereby controlled them both. The applicant had also not substantiated that IndiaCo and the representative had not provided similar service to others. Hence, it cannot be concluded that they were not dependent agents. Therefore, the applicant has a PE in India.
Under contract between the PSU and the applicant, the applicant cannot outsource certain part of the work. Hence, u/s.s 190 to 194 of the Indian Contract Act, IndiaCo would constitute sub-agent. Therefore, the time spent by employees of IndiaCo should also be considered for determining service PE.
Ruling:
The AAR ruled as follows:
(i) IndiaCo is an independent service provider having expertise who has provided similar services to others. Indiaco has rendered services through its employees under its own control and supervision. Hence, employees of IndiaCo cannot be considered ‘other personnel’ under Article 5(2)(i) of DTAA. Therefore, duration of time spent by employees of IndiaCo is not to be considered for determining PE in India of the applicant.
(ii) The applicant did not sell any off-the-shelf product but provided scientific equipment for perpetual use. The tendered document envisages transfer of technology by means of field data collection and desk study of data to arrive at mathematical model by using software. Though the software is heart and soul of the transferred technology, no intellectual property rights in software are transferred. The consideration is for use of scientific work, model, plant, scientific equipment and scientific experience. Hence, it is royalties under Article 12 of DTAA.
(iii) As DTAA does not have specific Article for taxation of FTS, FTS would be governed by Article 22 (other income) and not as per Article 7.
The Tribunal, relying on the decision of the ITAT Pune in the case of Serum Institute of India Ltd. v. Dy. CIT, (2007) 12 TTJ (Pune) 174/111 ITD 259 (Pune), upheld the assessee’s claim.
The Tribunal noted as under:
(1) It is evident that the compensation was awarded to the assessee ‘against loss of reputation and goodwill’. It was not on account of the failure on the part of UBS to supply the quantity ordered or some loss caused to the assessee in a particular trading transaction.
(2) It was on account of injury caused to the reputation of the assessee, albeit such injury was caused due to some business transaction.
(3) Had the amount been awarded to make good the loss caused due to excess or short supply of the material or some other trading deficiency, it would certainly have been regarded as a revenue receipt.
(4) Since the nexus of the compensation is with reputation and goodwill and not with the trading operations, it cannot be held to be a revenue receipt.
(5) The main criterion to judge as to whether the compensation is capital or revenue is to ascertain the purpose for which such compensation is awarded. If the compensation is to recoup the loss suffered by the assessee in its business activity, then it will be a revenue receipt. If, however, the purpose is unrelated to the trading activity of the assessee, it will be in the nature of a capital receipt.
Facts:
The assessee was a super-specialty hospital dealing with cardiac and cardio vascular diseases. It had taken insurance policies on life of its key personnel — Chief Surgeon, Chairman and Managing Director, the premium on which was claimed as deduction.
The Assessing Officer disallowed the deduction on grounds that the benefit of policy was assigned to key personnel and therefore was not incurred wholly for business purpose.
On appeal, the learned CIT(A) held that since the surgeon had the requisite skill and knowledge of the field, therefore he was responsible for the turnover of the company and accordingly only the premium paid on his policy is deductible and that on the policy of the Chairman and the Managing Director is not.
Held:
(1) The assessee’s activity cannot be said to be solely depending on the surgeon. Though, he may be responsible for the turnover of the company, he may not be responsible for the profits of the company, due to lack of competence necessary for a businessman.
(2) Further, since the business is carried on with the ultimate motive of earning profits, it cannot be said that profits could not be taken as guiding factor to analyse the business.
(3) It was also not argued that the salaries paid to these persons were not allowable.
(4) Further, on their resignation in the subsequent year, the profits of the assessee reduced substantially.
(5) All the above factors led to the conclusion that the Chairman and the Managing Director were key personnel and accordingly the premium paid on their policy is allowed.
(1) threshing and drying of tobacco leaves and then after packing the same, and
(2) processing of raw cashew and recovering kernel as far as the activity is conducted by processing units for and on behalf of client as the activity doesn’t result in any change in their essential character at the output stage. In addition, this Circular also clarifies that service tax is not applicable on commission paid to agents stationed abroad who provide business auxiliary service to promote the export of rice.
These may seem to be harsh words but if we are honest to ourselves, we will be able to accept the truth. Preparation of financial statements is universally an object driven exercise, the reflection of the true state of affairs is rarely one of them. To most, it is ensuring the minimum tax burden, to some others it is keeping investors and lenders happy, and to the CEO it is the proof of his performance. It is left to the hapless auditor to examine whether the statements are true and fair.
It is in this context we must take a look at the audit reports that we issue. One often faces a question from young professionals as to whether it is “necessary” or “mandatory” to report a particular aspect. If we are to express an opinion on truth and fairness of the financial statement we need to disclose and report on every matter that has a material impact rather than making the letter of the statue a fortress to protect ourselves.
I do not believe that the blame lies only at our door, though we cannot escape our share of it. The tax audit report which is the bread and butter for many professionals in this country is an apt illustration. To the auditee the best report is one which causes it the least tax damage. He is not concerned with the content of the report. This is not only the attitude of small businessmen, but the largest of corporations including those in the public sector. The tax gatherer for whom these reports are issued pays scant attention to them. The authorities neither have the time nor the inclination to utilise these reports. Take the case of the report under the Companies Act. CARO 2003 has been with us for eight years now, but I wonder to what extent the regulators have used report under CARO. To both the entity and the regulator these reports appear to be a compliance formality.
The problem is compounded by the complexity of the accounting language. Accounting is supposed to be the language of business. However, the plethora of accounting and reporting standards and frequent changes in them has made this language incomprehensible. The AS, the Ind AS, IFRS can confuse the most competent professional and therefore one has sympathy for the plight of the entrepreneur. It is almost as if we had been asked to speak in Sanskrit, while the listener understands a Bambaiya Hindi. My suggestion to the authorities is to reserve Sanskrit for the gods of business and profession and permit commoners to converse in the language that they understand.
Auditing is the backbone of our profession and if it is to remain so something needs to be done quickly. One aspect is to simplify the accounting language which I have dealt with earlier. The second is to take a re-look at the form and content of the audit report and its universal application. I am sure that in the changing business environment many of the questions of CARO, 2003, are not relevant and even if they are, they should apply only to a selective class. Today, the criteria make their application virtually universal. It is also necessary for the attitude of the regulators to change. It is only if they start using the fruits of our toil better that we will regain the respect of our clients and the public at large. Finally, any effort has to be well rewarded. To the small businessman the cost of audit is a burden. This results in the quality being seriously compromised. The cost of audit increases because the auditor is required to ensure compliance with all the stringent accounting standards and his verification process is subject to comprehensive auditing standards. One possible solution is to revise the threshold limits after crossing which a tax audit is mandatory. The cost inflation index is a very apt indicator. If we rely on that to compute capital gains and pay tax, there is no reason why it should not be an acceptable benchmark for tax audit in its current form. Those below this revised threshold should be required to follow accounting norms which are easy to understand and the auditor should have a much simpler form of reporting. This will possibly meet the requirements of all stakeholders.
I believe that it is only a profession that is able to critically appraise itself survives, otherwise it is likely to be consigned to history. In my view the auditing profession is facing a crisis of credibility. The need of the hour is to take the challenge head on and neither turn a blind eye, nor brush it under the carpet.
Facts
The Sales Tax Officer, Haryana filed writ petition against the decision of the Haryana Sales Tax Tribunal, reversing order of the Commissioner of Sales Tax passed u/s.56(2) of the Act the Tribunal had held that sales of de-oiled cake of castor, neem and mahua is a fertilser and covered by Schedule Entry B-27 and hence as such tax-free.
Held
(1) Schedule Entry B-27 of the Act covers organic manure and chemical fertiliser, whereas Schedule Entry C-6 covers oil-cakes and de-oiled cakes including de-oiled rice bran. A de-oiled cake of castor, neem and mahua is organic manure as it is the offshoot of a living organism, namely, tree-born oil-seeds.
(2) The issue before the Court was whether an item apparently included in a specific wider entry can be held to fall in a more general entry on the ground of its use? Different commodities are classified on the basis of their use and denomination. Generally, a tariff entry is construed by applying common parlance test by considering what sense is to be attributed to an entry in the popular sense by people conversant with the subject-matter. This general principle can be departed from if the context so requires. User test though not determinative of nature of goods is not always ruled out particularly when commodity in question is capable of being put to only one use. Accordingly, the High Court approved the finding of tribunal that items in question will fall under Entry 27 of Schedule B and tax-free.
The High Court dismissed the writ petition filed by the Revenue and confirmed the order of the Tribunal.
Facts
The dealer engaged in business of sale of IT products effected inter-State sales to persons other than registered dealer and government and charged concessional rate of CST @ 2% as per Notification issued u/s.8(5) of the CST Act by State Government of Pondicherry. The dealer filed writ petition before the High Court against the passing of assessment order under the CST Act, for the years 2003-04, 2004-05 and 2005-06, wherein tax was levied on such inter-State sales of software and other IT products at 10% and at local rate of 12% on sales of air-conditioners. Section 8(5) of the CST Act was amended by the Finance Act, 2002, w.e.f. 11-5-2002 restricting power of the State Government to grant exemption or concession from payment of tax on inter-State sales made to registered dealer or government.
Held
(1) Section 8(5) of the CST Act empowers the State Government to grant exemption or concession from payment of CST on inter-State sales. Section 8(5)(b), contemplates two categories of dealers or persons — (i) registered dealers or government; (ii) any persons or such class of persons as may be specified in the Notification. Therefore the latter category of any persons or any class of person cannot be registered dealer or the government. Certainly they are different and distinct persons and we have to give different meaning to them.
(2) Further, after the amendment to said section 8(5) of the CST Act, similar Notifications are issued by other States, granting exemption or concession from payment of CST on inter-State sales to banks, educational and medical institutions, etc. In view of this, the State Government still has power to issue specified Notification.
The High Court accordingly allowed writ petition filed by the dealer and directed the assessing authorities to consider issues on their own merits without being influenced by observations made by it.
Facts
The appellants were provider of software development and support services taxable w.e.f. 16th May, 2008. They got registered from 24th July, 2008. The appellants made a claim for refund in respect of tax on input services paid by them. The claim was rejected on the ground that credit cannot be claimed in respect of input services received prior to registration.
Held
Since there was no provision in the rules which stated that credit shall not be allowed for the period prior to the registration, the appellant was entitled to refund on such amount paid.
Facts:
On 16-8-2004, the assessee was allotted leasehold rights in a plot of land for a period of 60 years under ‘12.50% Gaothan Expansion Scheme’. The allotment was in lieu of agricultural land owned by the assessee’s father which land was acquired by the Government of Maharashtra. The lease agreement, in favour of the assessee, was executed on 8-8-2005. On 25-8-2005, the assessee transferred its rights in the said plot for a consideration of Rs.2.50 crore. In the return of income, the assessee took the stand that since the plot which was transferred by the assessee was received in consideration for agricultural land which was not a capital asset, this plot is also not a capital asset and hence gain on its transfer is not chargeable u/s.45 of the Act. Alternatively, it was contended that the market value of the plot on the date of its allotment to the assessee be taken to be its cost of acquisition. The Assessing Officer (AO) held that though the original land was agricultural, the allotted land was not agricultural and therefore the land transferred was capital asset. He held that by virtue of section 49, the cost of acquisition of original land in the hands of the assessee’s father has to be regarded as the cost of acquisition of the land transferred by the assessee. Also, he invoked the provisions of section 50C and considered the market value of land as per stamp valuation authorities to be full value of consideration.
Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld the action of the AO.
Aggrieved, the assessee preferred an appeal to the Tribunal.
Held:
(1) There were two distinct transactions — the first was the acquisition by the Government of land belonging to the assessee’s father, against which the assessee, as legal heir, was given lease of plot on 16-8-2004. This transaction got completed when the assessee got the leasehold rights viz. on 16-8-2004. The second transaction was transferring, on 25-8-2005, leasehold rights in the plot for a consideration of Rs.2.50 crores. The second asset i.e., leasehold rights in the plot cannot be categorised as agricultural land within the meaning of section 2(14)(iii) of the Act.
(2) The sole criteria for considering whether the asset transferred is capital asset u/s.2(14) or not is to consider the nature of asset so transferred in the previous year and not the origin or the source from which such asset came to be acquired. The second asset i.e., the leasehold rights in the plot cannot be categorised as agricultural land within the meaning of section 2(14)(iii) of the Act. Hence, gains arising on transfer of leasehold rights were chargeable to tax u/s.45 of the Act.
(3) Section 49(1) provides that where a capital asset becomes the property of the assessee by any of the modes specified in clauses (i) to (iv), such as gift or will, succession, inheritance or devolution, etc., the cost of acquisition of such capital asset in the hands of the assessee receiving such capital asset shall be deemed to be the cost for which it was acquired by the person transferring such capital asset in the prescribed modes. In order to apply the mandate of section 49(1), it is a sine qua non that the capital asset acquired by the assessee in any of the modes prescribed in clauses (i) to (iv) should become the subject matter of transfer and only in such a situation where such capital asset is subsequently transferred, the cost to the previous owner is deemed as the cost of acquisition of the asset. Once such capital asset is transferred and another capital asset is acquired, there is no applicability of section 49(1) to such converted asset. The lower authorities erred in applying the provisions of section 49(1) to transfer of leasehold rights.
(4) Since the market value of the leasehold rights, on the date of allotment, constituted full value of consideration for transfer of lands belonging to the assessee’s father, the cost of acquisition of leasehold rights will be its market value on the date of allotment. Once a particular amount is considered as full value of consideration at the time of its purchase, the same shall automatically become the cost of acquisition at the time when such capital asset is subsequently transferred.
(5) Section 50C is a deeming provision which extends only to land or building or both. Deeming provision can be applied only in respect of the situation specifically given and hence cannot go beyond the explicit mandate of the section. The distinction between a capital asset being ‘land or building or both’ and any right in land or building or both is well recognised under the Income-tax Act. The deeming fiction in section 50C applies only to a capital asset being land or building or both, it cannot be made applicable to lease rights in land. As the assessee had transferred lease rights for sixty years in the plot and not land itself, the provisions of section 50C cannot be invoked.
The appeal filed by the assessee was allowed.
Facts:
The assessee had made investment in shares through the Portfolio Management Scheme. She had disclosed a short-term capital gain of Rs.11.61 lakh and short-term capital loss of Rs.0.5 lakh in respect of purchase and sales of shares of various companies. According to the AO based on CBDT Circular No. 4 of 2007, dated 15-6-2007, the case of the assessee falls in the case of trading in shares. A reference was also made to the Supreme Court decision in the case of G. Venkataswami Naidu & Co v. CIT, (35 ITR 594), wherein the had laid down a principle that where purchases had been made solely and exclusively with intention to resell at a profit and the purchaser had no intention of holding property for himself or otherwise enjoying or using it, presence of such an intention was a relevant factor and unless it was offset by presence of other factors, it would raise a strong presumption that the transaction was in the nature of trade. He also noted that dividend earned during the year amounted to Rs.0.94 lakh, which according to him indicated that the intention of the assessee was to hold shares only for such period as may enable her encashing the appreciation in its value. On appeal by the assessee, the CIT(A) held in favour of the assessee. Being aggrieved, the Revenue appealed before the Tribunal and relied on the order of the AO.
Held:
The Tribunal noted that the assessee was doing investment activities through the Portfolio Manager. Such activities were for maximisation of wealth rather than encashment of profits on appreciation in value of shares. It further noted that the very nature of the Portfolio Management Scheme was such that the investments made by the assessee were protected and enhanced. Therefore, according to it, in such a circumstance, it cannot be said that Portfolio Management was a scheme of trading in shares and stock. Accordingly, it upheld the order of the CIT(A).
Facts:
The assessee derives income from sale of motor parts, tractor parts, tyres, etc. The assessee had shown GP at 10.84% which was less than previous year GP of 14.17%. To support the reduction in GP, the assessee submitted regular books of accounts which were audited. As no quantitative details of purchases, sales, closing stock, etc. were maintained, the book results were rejected by the AO applying provisions of section 145. The AO thereafter added an estimated amount of Rs.50,000 to total income.
Held:
The assessee had maintained inventory of opening and closing stock and vouchers for purchases and sales which were also audited. Mere non-maintenance of stock register cannot mean that the books of accounts maintained are false. Also, low GP may justify an enquiry but cannot justify an addition to the profit shown. In the present case, the AO had not shown any mistake in books of accounts. Furthermore, rate of GP in a particular year depends on many factors and the same need not be constant from year to year. Therefore addition to income is not justified.
Facts:
The assessee received gift from two parties vide cheques. To prove the gifts are genuine, the assessee submitted affidavits of donors. However, the assessee’s claim was rejected as the AO was also not satisfied with the relationship between donor and donee. Further the AO observed that the assessee did not produce donors for verification and also did not prove financial capacity. The CIT(A), however, upheld the contention of the assessee.
On Revenue’s appeal, there was a difference of opinion between the members, and the matter was referred to the Third Member.
Held II:
The gifts received by the assessee were to be considered genuine as the gift was made through cheque and also disclosed in the books of accounts of the donees. Also the donees have admitted the gift given in their respective affidavits and hence there was no reason in disbelieving the genuineness of the gift.
Facts:
The assessee, a partnership firm, engaged in business of running a marine training institute, filed its return of income declaring the total income of Rs.1,86,466. During the previous year relevant to the assessment year under consideration the assessee sold a building, on which depreciation was claimed in earlier years, for a consideration of Rs.49,43,525. Since the amount of consideration was the same as its WDV, the assessee did not offer short-term capital gains on sale of the building. The value of this building as per stamp valuation authorities was Rs.76,49,000. The Assessing Officer (AO) was of the view that one of the office building i.e., office No. 101 having a WDV of Rs.13,14,425 was not sold by the assessee during the year under consideration. The Assessing Officer (AO) held that in view of the provisions of section 50 r.w.s 50C, the value of the building adopted by the stamp valuation authorities needs to be taken as full value of consideration. He, accordingly, made an addition of Rs.20,44,900, being the difference between value of the office sold (excluding office No. 101) as per stamp valuation authorities (Rs.56,74,000) and the WDV of the said office (Rs.36,29,100), to the total income of the assessee.
Aggrieved the assessee preferred an appeal to the CIT(A), where it contended that the provisions of section 50C cannot be invoked in the case of an assessee wherein section 50 is applicable. It contended that it is not permissible to impose a supposition on a supposition of law. The CIT(A) held that the deeming provisions of section 50C could not apply to depreciable assets. He also held that the block of assets had ceased to exist. He deleted the addition made by the AO.
Aggrieved the Revenue preferred an appeal to the Tribunal.
The President, ITAT constituted a Special Bench to consider the following question:
“On a proper interpretation of sections 48, 50 and 50C of the Income-tax Act, 1961, was the Assessing Officer right in law in applying section 50C to capital assets covered by section 50 (depreciable assets) and in computing the capital gains on the sale of depreciable assets by adopting the stamp duty valuation?”
Held:
(1) There are two deeming fictions created in section 50 and section 50C. The first deeming fiction modifies the term ‘cost of acquisition’ used in section 48 for the purpose of computing the capital gains arising from transfer of depreciable assets, whereas the deeming fiction created in section 50C modifies the term ‘full value of the consideration received or accruing as a result of transfer of the capital asset’ used in section 48 for the purpose of computing the capital gains arising from the transfer of capital asset being land or building or both.
(2) The deeming fiction created in section 50C operates in a specific field which is different from the field in which section 50 is applicable. It is not a case where a supposition has been sought to be imposed on other supposition of law. Going by the legislative intentions to create the said fictions, the same operate in different fields.
(3) The harmonious interpretation of the relevant provisions makes it clear that there is no exclusion of applicability of one fiction in a case where other fiction is applicable.
(4) The assessee’s alternate argument that as the AO had held that the block of asset had not ceased to exist in the year and was in existence, section 50C could not apply as held in Roger Pereira Communications 34 SOT 64 was not acceptable, since the assessee itself had considered the entire block of buildings as having been sold/transferred during the year and the same was upheld by the CIT(A). The assessee is not entitled to take a stand with regard to facts, inconsistent with the stand that he had taken before the Revenue Authorities to obtain a decision in his favour. He cannot be heard to say that the stand on facts so taken by him is not correct just to raise a new legal plea.
The question referred to the Special Bench was answered in the affirmative i.e., in favour of the Revenue and against the assessee. The appeal filed by the Revenue was allowed.
Facts:
One Mrs. Mani Cawas Bamji (the deceased) was a childless widow who died in Mumbai on 6-1-2001. She possessed considerable movable properties in the form of shares, debentures and fixed deposits and immovable property known as Avasia House in her sole name at Nepean Sea Road, Mumbai. During her lifetime, she had allegedly executed a will dated 2-5- 1997. The only legal heirs entitled to her property in the event of her intestacy were the assessee, being the son of a pre-deceased sister of the deceased, and Mr. Dinshaw Jamshedji Mistry, being brother of the deceased. Under her will dated 2-5-1997, the deceased had bequeathed all her properties to her brother Mr. Dinshaw Jamshedji Mistry (DJM), who was also appointed as one of the executors in the will. There were three executors to the will but the other two (other than Mr. Dinshaw Mistry) renounced their executorship. DJM filed a petition before the Bombay High Court for grant of probate of the last will of the deceased. The assessee, as a legal heir of the deceased, received a citation from the Bombay High Court in the petition for grant of probate in respect of the last will of the deceased. The assessee filed a caveat against the grant of probate in respect of the last will of the deceased. In the affidavit filed in support of the caveat the assessee set out reasons as to why the alleged will was not valid. On such objection, the petition for grant of probate was converted into a testamentary suit. The Bombay High Court restrained DJM from dealing with the properties of the deceased. On 28-9-2002, DJM died leaving behind his will dated 29-10-2001 appointing Mr. Rajesh K. Bhavsar (RKB) as the sole executor and legatee. RKB got himself impeded as plaintiff in place of DJM in the testamentary suit for grant of probate of the last will of the deceased.
RKB and the assessee entered into a compromise agreement dated 22-11-2002, whereby the assessee agreed to receive a sum of Rs.5,08,80,000 in consideration for agreeing to the Court granting probate in respect of the last will of the deceased. This sum of Rs.5,08,80,000 was later reduced by Rs.30,00,000 and the sum of Rs.4,78,80,000 was received by the assessee in the following manner:
F.Y. 2003-04 : Rs.1,04,77,032 by various cheques
F.Y. 2005-06 : Rs.3,73,95,335 by various cheques
F.Y. 2006-07 : Rs.7,633 by cash
RKB and the assessee had on 12-12-2002 signed consent terms which consent terms were identical to the agreement dated 22-11-2002. The Court recorded the consent terms and modified the earlier order restraining DJM from alienating any part of the estate of deceased and permitted RKB to alienate some of the properties to enable him to raise funds to discharge the obligation to pay the assessee. The assessee on receipt of the agreed sum was to withdraw his caveat to enable issue of letters of administration with the Will annexed in respect of the estate of the deceased.
The assessee did not offer these amounts for taxation in the A.Y. 2006-07. The AO taxed on substantive basis the sum of Rs.3,73,95,335 (in the year of receipt) and the sum of Rs.1,04,77,032 (received in previous year relevant to A.Y. 2004-05 on a protective basis).
Aggrieved the assessee preferred an appeal to the CIT(A) who confirmed the order of the AO.
Aggrieved the assessee preferred an appeal to the Tribunal.
Held:
The Tribunal noted section 56(2)(v) has been introduced w.e.f. 1-9-2004. Thus, prior to 1-9-2004, receipts of any sum of money would not be income u/s.56(2)(v). A sum of Rs.1,04,77,032 was received between 3-4-2003 to 14-10-2003. Therefore, these receipts could not be taxed as income u/s.56(2)(v). As regards the sum of Rs.3,73,95,334, the Tribunal held that the sum in question was received by the assessee in consideration of giving up his rights to contest the will of late Mrs. Mani Cawas Bamji. The consideration referred to in the provisions of section 56(2)(v) of the Act have to be understood as per the definition of consideration as given in the Indian Contract Act, 1872 in section 2(d). The assessee has abstained from contesting the will and this constitutes the consideration for payment by RKB to the assessee. Thus, the amount received by the assessee is not without any consideration. Therefore the provisions of section 56(2)(v) were not applicable. The additions made by the AO were directed to be deleted.
The appeal filed by the assessee was allowed.
Facts:
The
assessee company, engaged in the business of providing IT-enabled
services and BPO services, e-filed its return of income declaring total
income of Rs.98,90,146 and claiming therein a refund of Rs.22,76,152.
The Assessing Officer in an order passed u/s.143(3) assessed the total
income to be Rs.98,90,146. While calculating the amount of tax payable
by the assessee/refund due to it, the AO in form ITNS 150A granted
credit for TDS and advance tax as claimed by the assessee, but did not
grant credit of Rs.8,38,764 claimed by the assessee u/s.90 and u/s.91 of
the Act.
Aggrieved, the assessee preferred an appeal to the
CIT(A) who held that the appeal was not maintainable since he was of the
view that section 246A did not permit such issues within its ambit.
Referring to the provisions of section 246A(1) (a), he held that the
reference to ‘tax’ is only for calculation of tax on total income and
not beyond that. He also made a reference to the definition of ‘tax’
u/s.2(43) and held that since the assessee was not challenging the
calculation of tax on total income, the grounds raised were several
steps beyond this calculation. He held that the issue of granting of
credit for advance tax or TDS could not be agitated in an appeal.
Aggrieved, the assessee preferred an appeal to the Tribunal.
Held:
The
Tribunal noted that the AO had in form ITNS 150A not granted credit of
withholding tax of Rs.8,38,764 u/s.90/91 and also that he had left the
column 18 of ITNS-150A, which specifically provides for DIT relief
u/s.90/91, blank. Upon going through the provisions of section
246A(1)(a) of the Act, the Tribunal observed that the assessee’s case
can be considered only under the second part of section 246A(1)(a) viz.
‘to the amount of tax determined’ and not under the remaining parts as
non-granting of benefit in respect of withholding tax u/s.90 /91 can
neither be considered as ‘the income assessed’, nor ‘the loss computed’,
nor ‘the status under which he is assessed’. Having so observed the
Tribunal proceeded to examine whether non-granting of refund in respect
of withholding tax u/s.90/91 can be considered under the expression
‘amount of tax determined’ and held:
(1) From the ratio
decidendi of the decisions of SC, in the case of Auto and Metal
Engineers and Others v. Union of India and Others, 229 ITR 399 (SC) and
Kalyankumar Ray v. CIT, 191 ITR 634 (SC), it is discernible that the
‘determination of tax’ refers to finding out the amount finally payable
by the assessee for which notice of demand is issued.
(2) The
expression ‘amount of tax determined’ in section 246A(1)(a) also refers
to the determination fo the sum finally payable by the assessee. Not
only the calculation of tax on the total income but also the adjustment
of taxes paid by or on behalf of the assessee is also covered within the
determination of sum payable by the assessee u/s.156 of the Act.
(3)
The expression ‘amount of tax determined’ as employed in section
246A(1)(a) encompasses not only the determination of the amount of tax
on the total income but also any other thing which has the effect of
reducing or enhancing the total amount payable by the assessee. As the
question of not allowing relief in respect of withholding tax u/s.90/91,
has the direct effect of reducing the refund or enhancing the amount of
tax payable, such an issue is squarely covered within the ambit of
section 246A(1)(a).
(4) Accepting the view-point of the CIT(A)
that the appeal is not maintainable in respect of non-allowing of relief
for tax withheld u/s.90/ 91 would amount to violating the language of
section 246A, which has otherwise given the right to the assessee to
appeal broadly against on any aspect of the ‘amount of tax determined’.
(5)
The CIT(A) was not justified in dismissing the appeal of the assessee
as not maintainable on the aspect of not allowing of credit by the AO of
tax withheld on behalf of the assessee u/s.90 and 91. The AO was
directed to modify ITNS 150A and grant the consequential refund due,
which has not been allowed.
The appeal filed by the assessee was allowed.
The Tribunal also held in favour of the assessee. The Tribunal noted as under:
(1) The assessee is a broker as well as an investor. It has maintained the investment portfolio separately, income from which was liable to be taxed as capital gains, since the intention in respect of this was to hold the investment as investment only and was shown as such in the books of account and income therefrom was shown and treated as capital gains in the successive assessments.
(2) The schedule of investments was duly appended in the balance sheet.
(3) The assessee has also maintained separate D-mat accounts for investment and for trading. Therefore, the assessee has distinctly maintained investment account and trading account.
(4) The assessee was holding certain stock for the purpose of doing business of buying and selling and at the same time it was holding other shares as its capital for the purpose of dividend income.
Therefore, the CIT(A) has rightly held that the income is to be treated as capital gains and not as business income.
For the relevant assessment year, certain additions were made by the Assessing Officer against which the assessee filed an appeal. The CIT(A) considered the issue in great detail and passed an elaborate order in favour of the assessee. Aggrieved by this, the Department preferred an appeal before the Tribunal. The Tribunal passed a short order since it was in agreement with the CIT(A)’s order.
The Department filed a miscellaneous application on the ground that the Tribunal was not justified in passing a short order without elaborating on the issues and, thus, it gives rise to a ‘mistake apparent from record’ since it has to be presumed that the Tribunal has not applied its mind on the contentions and issues raised by the Department. In this regard, the applicant has taken a support from para 11 of the guidelines issued by the then President of the Tribunal.
Rejecting the miscellaneous application, the Tribunal observed as under:
(1) Internal guidelines issued by the then President were only to prod the Members to give detailed reasons, as far as practicable, implying thereby that whenever an order of the lower forum is based on two reasons out of which an Appellate Authority agrees only with one reason which would ultimately have an effect of upholding the order of the lower authority, it is the duty of the Tribunal to give detailed reasons to satisfy as to the basis for coming to such conclusion. In a given case, where the appellant raises some additional issues and relies upon some additional case laws which were not considered by the lower authority, even though they are not applicable to the facts of the instant case, the Tribunal may have to give its reasons rejecting such arguments while upholding the order of the CIT (A).
(2) However, when the facts and circumstances are not disputed before the Tribunal and no additional arguments were advanced by the learned Departmental Representative and, in addition to that, when the Tribunal is fully agreeing with the reasons given by the learned CIT(A), as rightly observed by the Apex Court in the case of K. Y. Pilliah & Sons (1967) 63 ITR 411 (SC), it may not be necessary to repeat the reasons given by the first Appellate Authority and an order passed by the Tribunal under such circumstances cannot be said to be illegal.
(3) In para 3 of the order of the Tribunal this Bench has specifically observed that it was in agreement with the reasons given by the CIT (A). Thus, mere non-production of the reasons and the conclusions of the CIT(A) in the body of the order of the Tribunal do not give rise either to a mistake of law or fact, nor can it be considered as an irregular order.
Last year, around 10,600 tax-filers reported annual incomes over Rs.1 crore. The number dropped to 1,257 for those with an yearly income of over Rs.5 crore. Hardly surprising, given that less than 3% of people file tax returns in India. The base of income tax should be widened to raise the level of tax collection to GDP. The best way to do that is to expand the coverage of AIR. Also, moderate income tax rates, simple and transparent tax laws will improve compliance and stop generation of black money.
Scrutiny of cases where misuse of tax exemption has been noticed and modifications in reporting procedures to capture their activities, funding patterns and income are among measures taken for streamlining procedures. The Directorate of Exemption has already identified a substantial number of cases, which are being selected for scrutiny. These cases pertain to the new proviso added to section 2(15) of the Income-tax Act, applicable from 2009-10.
The new norm disentitles tax exemption to any trust or society, engaged in the advancement of any object of general public utility, if it collects fees or other charges for services rendered in the nature of business, commerce or trade.
The Directorate has suggested a criteria for selection of cases during the current year. It includes quantum of refund claim, quantum of investment, gross receipts and income from business and profession.
Modifications in Form No. 10-B associated with the auditors’ report for charitable institutions has also been planned to get full details of activities of these entities. The proposed modified features include disclosure of nature of charitable activities and places of primary business.
Further, complete information with regard to donation by both internal and external donors with details of Foreign Contribution Regulation Act (FCRA) approvals would also be required in this format.
Details of exemption claims made simultaneously under different provisions, yearwise break-up of accumulation and utilisation of funds, information in respect of cash transactions, Tax Deducted at Source (TDS) compliance and other business transactions would have to be furnished once the Central Board of Direct Taxes (CBDT) approves this new form.
A new income tax return form for public charitable trusts is also being prepared by the Directorate to facilitate comprehensive reporting of their income and expenditure. It would facilitate e-filing and help in selecting cases for investigation and would also provide details of foreign, anonymous and corpus donations, donation in kind and FCRA approvals.
If the country needed a wake-up call, it has got it in the run-up to choosing a new managing director of the International Monetary Fund. First, there was the small matter that its favoured candidate for the post was over-aged — a fact ignored for several days amidst expectant speculation. It now turns out that China, while seeming to go along with the BRICS position that the choice should not automatically go to a European, has done a deal while quietly offering support to the French candidate. There is a precedent worth recalling: the election of the United Nations Secretary-General. The Government backed Shashi Tharoor’s candidature when he had little hope of winning because the US preferred a candidate from another ‘risen’ country with whom it has a military alliance, South Korea. India, in comparison (and rightly so), seeks strategic autonomy in international relations.
Such tactical mistakes are not without cost. If it turns out that China has in fact done a deal, securing the No. 2 position at International Monetary Fund (IMF) for its national as quid pro quo for supporting Christine Lagarde, then India has scored an own goal. From the perspective in New Delhi, a European or American would have been preferred in that position, rather than a Chinese. Indeed, the Prime Minister is known to have argued in the past that having a European at the head of the IMF has served India well. What might happen in the IMF could be a precursor of other things to come. Pushing for re-ordering the global order, and a declining role for the West, means that the default country that gets to fill the power vacuum will be China — which after all has an economy thrice as big as India’s, a much greater role in world trade, a pivotal place in the currency market, and much else.
BRICS solidarity is also a double-edged sword. In the Doha Round of trade talks, the rich countries have been able to drive a wedge between ‘emerging markets’ like India and the more numerous poor economies, by pointing out that the two groups’ interests are not synonymous. In a recent meeting of the World Trade Organisation, some of the fiercest criticism of BRICS positions came from poor countries in Africa. In short, India should be careful about what it wishes to achieve in international affairs and how it leverages group dynamics; it might well get what it asks for — only to discover that the earlier arrangement was more to its advantage.
The only thing that has saved the Union Government’s fiscal strategy so far, especially in the face of sluggish revenue receipts, is the less-than-budgeted defence expenditure. It was widely expected that immediately after the state Assembly elections were wrapped up the Government would attend to the extant fiscal challenge. Apart from the heroic increase in petrol prices, no other action has been taken. On the other hand, it appears that the Finance Ministry may not be able to meet the disinvestment target it had set. While no one expects last year’s bonanza to be repeated this year, even budgeted amounts may not be forthcoming if the overall approach to macroeconomic management remains lack lustre.
The delay in tax reform — with the introduction of a Goods and Services Tax still on hold and the apparent inability of major political parties to focus attention on issues pertaining to revenue mobilisation and revival of growth — is raising fresh concerns about the sustainability of even 8.0% economic growth. With the international economic environment remaining precarious and far from stable and with regional security re-emerging as a major policy concern, the gathering clouds do not bode well for growth, revenue generation and fiscal correction. It is not our intention to sound needlessly alarmist, but the time has come to ring a warning bell. India’s macroeconomic authorities must focus on fiscal stabilisation and Mr. Mukherjee has to provide the leadership as Finance Minister.
This, however, is not yet an outright downgrade of US sovereign debt and it is unlikely that the US government will default on its credit obligations in the near future. However, if concerns about fiscal health intensify (US treasury credit default swap spreads have been rising steadily), the status of US treasury bonds as the ‘default’ safe haven (and by extension the US dollar) in times of rising risk aversion will come into question. Europe’s travails rule out any European alternative. The only viable safe haven appears to be gold and German bonds, since Germany’s robust growth (and, consequently, its fiscal health) seems to be miles ahead of its moribund neighbours. One could argue that emerging markets like India and China, despite their immediate inflation problem, should get the safe haven status. Their underlying growth momentum (cyclical corrections notwithstanding) remains strong and their fiscal health, at least in comparison with the Western world, certainly looks to be in the pink. On the other hand, emerging markets could face other problems. Where US treasury yields to rise on the back of fiscal anxieties, it could turn off the spigot of cheap dollars that have been flooding these markets. Asset prices in these markets could see a sharp correction. Commodity prices that have ridden the wave of easy liquidity could also be hit. The worst-case scenario would be one in which rising interest rates and a heavy fiscal burden could drive the US economy down and that, in turn, would pull the global economy back into the throes of a recession. Though this seems a tad unlikely at this stage, one cannot simply wish the likelihood away. The world expects better leadership from US politicians, but S&P is clearly doubtful if this would be forthcoming.
Facts:
The assessee, a private limited company, deducted tax at source from payments made to labour contractors from many unorganised sectors. The amount of tax deducted at source was paid, but the TDS returns for the four quarters of financial year 2005-06 were delayed by a period ranging from 733 days to 1031 days. The Assessing Officer (AO) rejected the explanation furnished by the assessee and levied a penalty of Rs.2,14,550 for failure to comply with section 206/206C of the Act.
Aggrieved the assessee preferred an appeal to the CIT(A) who recorded the following findings and cancelled the penalty levied:
(a) The applicable provision is section 200(3) which provision has been inserted w.e.f. 1-4-2005 and this was the first year after the introduction of the provision;
(b) Under Rule 31A of the Income-tax Rules, the assessee has to obtain PAN from deductees. Since the deductees were small-time labourers, there was difficulty in collecting those details from them;
(c) The nature of contract was such that the assessee had to employ labour contractors from many unorganised sectors, which made it more difficult to collect the PAN;
(d) The Chief Accountant of the assessee company who was working with it for past ten years and was looking after TDS and IT-related compliances resigned. He was replaced by another accountant who also resigned and had to be replaced;
(e) Every corporate assessee has faced similar difficulties in preparing the statements or in filing them in electronic form;
(f) Despite all the difficulties, the quarterly TDS returns were ultimately filed voluntarily without being prompted by any notice from the Department;
(g) There is no revenue loss since the tax deducted has been paid to the Government. Only paperwork was delayed, which is only a technical breach.
Aggrieved, the Revenue filed an appeal to the Tribunal.
Held:
The Tribunal noted that though the penalty order refers to section 206/206C, the default, as found by the CIT(A) and as explained to the Bench, is u/s.200(3). It also noted that the penalty order was in a cyclostyled form without referring even to the appropriate section. This may show non-application of mind. The only question which arose was whether the delay on the part of the assessee was due to a reasonable cause within the meaning of S. 273B. The Tribunal held that the findings of the CIT(A), which were not disputed by the Revenue, constituted a reasonable cause for delay in filing the TDS returns. The Tribunal upheld the order passed by the CIT(A).
The appeal filed by the Revenue was dismissed.
http://www.mca.gov.in/Ministry/notification/pdf/ Revised_Report_Rules_03jun11.pdf
Assessee had paid an amount of Rs.7,61,600 up to the last day of the previous year and further a sum of Rs.25,00,000 after the end of the previous year but before the due date of filing of return and Rs.4,38,592 after the due date of filing of return but before filing return.
However, for the purpose of calculation of interest u/s.234A, the Assessing Officer had treated an amount of Rs.7,61,600 only, that was paid up to 15-3-1994, as advance tax. He ignored the payment of Rs.25,00,000 though the same was paid before the due date of filing of return.
On appeal the Commissioner (Appeals) upheld that taxes paid after the financial year could not be treated as advance tax and therefore cannot be reduced from assessed tax for purpose of calculating interest u/s.234A.
Aggrieved by the decision of the CIT(A), the assessee preferred an appeal before the Appellate Tribunal.
Held:
Interest u/s.234A is compensatory in nature and not penal. It aims to compensate the Government for not getting its dues within the time limit provided u/s.139(1).
Therefore, if entire tax amount is paid before the due date of filing of return, though the assessee has delayed in filing the return, no interest is leviable u/s.234A.
The same view was also held by the Apex Court in the case of CIT v. Pranoy Roy & Anr., (309 ITR 231).
12 Taxman.com 476 (Cal.) The institute (ICAI) received a complaint against the respondent, a chartered accountant that the respondent, while holding position of auditor of a company, agreed to act as an arbitrator/mediator in transaction of shares of the said company which constituted professional misconduct and further, he did not even perform duties imposed upon him under the agreement. The council held the respondent guilty of professional misconduct falling within the meaning of clause 7 of part 1 of the Second Schedule to the Act and recommended to the Court that the name of the respondent should be removed from the register of members for a period of three months.
The Calcutta High Court held as under:
“(i) A plain reading of the provisions contained in sections 21 and 22 and the Schedules annexed thereto indicates that for the purpose of the Act, the expression ‘professional misconduct’ includes an act or omission specified in the Schedules. In the instant case, the council had found the respondent guilty under clause 7 of part 1 of the Second Schedule, i.e., grossly negligent in the conduct of his professional duties.
(ii) In order to hold the respondent guilty under the aforesaid charge, it must be established that the alleged act or omission on the part of the respondent related to his professional duty as a chartered accountant. In the instant case, he was made an arbitrator or mediator by the parties and the duty cast upon him as such arbitrator could be done by any person and it is not necessary that only a chartered accountant can do such duties.
(iii) It was true that the respondent was an auditor of the company with which the parties were connected and for acting as such auditor, the parties had confidence in him and that was probably the reason for making him the arbitrator. In such circumstances, even if the contention of the council was accepted that he did not act fairly as such arbitrator, such betrayal of confidence reposed in him did not come within the purview of professional misconduct. The duties conferred upon the respondent, by virtue of the agreement between the parties, were not the duties of a chartered accountant and, thus, by no stretch of imagination, the alleged act or omission could be brought within the purview of the clause 7 of part 1 of the Second Schedule.
(iv) In order to attract the aforesaid clause, the act or omission must be in connection with the duties cast upon a chartered accountant in such capacity which no person other than a chartered accountant can perform.
(v) Thus, the respondent was not at all guilty of any professional misconduct as charged under clause 7 of part 1 of the Second Schedule and, consequently, no action was called for against the respondent.”
‘Gathering information about the Pawars was a difficult task. However, we used the RTI Act to search the data of air-travel of Mr. Pawar and his family members on Balwa’s air craft’ from the Pune air traffic control. Through RTI application it was gathered that Balwa’s plane was used by Pawar on several occasions and on one trip, besides BCC president Shashank Manohar and his wife, the Balwas accompanied Pawar and his family to Dubai. Khadse has also reportedly dug up facts to prove that Supriya, along with her husband Sadanand and DB Realty, was the promoter of a technology park near Pune set up on an illegally procured land.
Disclosure of personal properties by CIC:
In a major step to introduce greater transparency and accountability, the six Central Information Commissioners now have declared details of their properties on the Commission’s Website.
The Commissioners draw a salary of Rs. 90,000 p.m. Following are the brief summary of declarations made:
S. Mishra : Land, property worth Rs. 1.5cr.
D. Sandhu : Agriculture land worth Rs. 81,000,
2 houses worth Rs. 5.5cr.
S. Singh : house, flat worth Rs. 66.5 lakh.
S. Gandhi : Flat worth Rs. 80,000 (cost at
time of purchase), plus shares,
mutual funds and bank deposits.
A. Dixit : Flat, cottage worth Rs. 51 lakh.
M. L. Sharma : Property worth Rs. 4.50 lakh.
Selection procedure of for appointment of Chief of Trai:.
The selection procedure of the chairman of telecom regulator Trai, including all the details of the selection committee meeting, should be made public, the Central Information Commission (CIC) has held. The panel rejected the plea of the cabinet secretariat that the information was personal in nature and cannot be given u/s. 8(1)(j) of the Right to Information Act, which prohibits disclosure of such details.
“We fail to understand how the desired information could be classified as personal information at all … The information sought in these cases is far from personal. Selection and appointment to certain posts in the government are part of the administrative decision-making process and must be placed in the public domain as soon as possible in order to ensure transparency,” Chief Information Commissioner Satyananda Mishra said. He directed the secretariat to allow the RTI applicant the inspection of the entire file related to the selection of the Trai chairman.
BMC’s functioning :
We all know that it takes months, sometimes years to get projects and files cleared from Brihanmumbai Municipal Corporation (BMC) babus. However, if you have the right connections, then your work could be done in a single day. In 2008 the BMC displayed exemplary promptness and granted permissions in a single day for construction of 13 additional floors on a building in Dadar. Interestingly, all clearances were granted to the builder and the area of a reserved public playground was reduced to make way for the building.
The issue came to light when residents procured documents under the Right to Information (RTI) Act. They learnt how BMC’s Building Proposal Department allowed developers, Finetone Realtors Pvt. Ltd. to construct 13 additional floors on the plush 20-storey Garden Court building in Dadar. Arun Sapkal, a Dadar resident and RTI activist said, “It’s shocking how the BMC first granted permission and later issued stop notice to the builder after the construction was over?” However, developers Ramakant Jadhav of Finetone Realtors Pvt. Ltd. said, “ we have all the necessary permissions in place as per the DCR rules for construction of the building and the playground. We have kept the reservations as allowed by the BMC.”
Information on ITR thru RTI:
Manoj Kumar Saini made an RTI application to get information on income tax-return (ITR) of his father-in-law Mr Munna Lal Saini, CIC Deepak Sandhu ruled:
The I-T returns of individuals do not enjoy ‘absolute ban’ from disclosure CIC has held, while directing the I-T department to provide details of the total income of a person to his son-in-law who is facing a dowry case. We direct the CPIO to provide information pertaining to the taxable income of Munna Lal Saini, father-in-law of the appellant,” Information Commissioner Deepak Sandhu said. The case relates to RTI application filed by Manoj Kumar Saini, who sought to know income of his father-in-law Munna Lal Saini from the I-T as he needed it to buttress his arguments in a dowry case filed against him.
Maharashtra State Information Commission’s Annual Report for the year 2010 is out, just now only in Marathi. Some brief statistics:
RTI applications filed : 5.49 lakh
Appeals received : 19,483
Appeals disposed : 17,266
Complaint received : 4,592
Complaint disposed : 3,911
Public Information Officers penalised : 523
Total penalties : Rs 34.38 lakh
Department action against PIOs : 602
PENDENCY
Taking note of the increasing pendency of appeals/ complaints in the Commission over the last few years and realising the need for their expeditious disposal, the Commission hereby resolves that each single bench of the Commission shall take urgent steps to maximise its disposal without comprising the quality thereof, as a general rule, each single bench will endeavour to finally decide about 3200 appeals/complaints per year.
Application of the provisions of the RTI-Act to the entities under the Public Private Partnership (PPP Arrangement)
Chief CIC has exchanged letters with the Deputy Chairman, Planning Commission, India on the subject of PPP Arrangement. Extracts from the same:
Satyananda Mishra, CIC on 04.01.2011 writes:
A PPP entity should be deemed to be a public authority u/s. 2(h) for the purpose of the RTI Act.
All Projects which are handed over to a PPP entity for building, operating or maintaining the land, even if not any other resources, given by the Government, forms a vital component of the project and, to that extent, can be deemed to substantial financing.
However, due to a lack of clarity on this at various levels and, especially since the RTI Act does not expressly refer to such bodies while defining the public authorities, a lot of confusion persists and such entities have, by and large, remained outside the purview of the RTI Act.
This Commission is of the view that time has come to clarify the role and responsibility of the PPP entity for implementing the RTI Act in order to bring in greater transparency in implementation of such projects.
Letter then suggest how the coverage is to be implemented and once carried out, a lot of confusion in this regard will go and the citizens will have access to vital information regarding the projects which affect their lives. Needless to say, this will also greatly improve the accountability of such entities to both the Government and the public at large.
In reply, Montek Singh Ahluwalia vide letter dated 14.03.2011 states:
In the Press Note issued, we recognise that the powers of the Information Commission are laid down in the RTI Act. It is for the Commission to exercise these powers in their best judgment. It may not be appropriate to expand or reduce the jurisdiction of the Information Commissions through a contractual arrangement in the concession agreements. However, we have referred the matter to the Department of Legal Affairs for advice and I will revert to you on receiving their advice.
The Commission discussed above referred letter at its meeting of 22-03-2011 and recorded as under:
The Commission discussed the letter of the Deputy Chairman, Planning Commission on application of RTI Act to the entities under the PPP. The CIC decided to wait for two months for the Planning Commission to send a copy of response of Department of Legal Affairs on this issue as referred to in the letter of the Deputy Chairman dated 14-03-2011.
It is now reported in ET of 26 April that MoF objects to plan Panel’s role in social PPPs and says that they fall in its domain. Matter has been referred to the cabinet secretariat seeking its intervention on the matter.
I hope that PPP arrangements come in the domain of RTI whoever may be in charge of the same at Government level.
The Charity Commissioner has powers of supervision,
regulation and control of public trusts. All public trusts must register
under the Act with the Charity Commissioner. It should be remembered
that all public trusts are trusts, but all trusts need not be public
trusts. The Act does not apply to section 25 companies which are created
under the Companies Act, 1956. The Bombay Chartered Accountants’
Society is an instance of a public trust registered under this Act.
Definitions:
A
public trust is defined to mean an express or constructive trust for
either public or charitable purpose or both and includes a temple, a
math, a wakf, church, synagogue, agiary or any other religious or
charitable endowment and a society formed either for religious or
charitable purposes or both and registered under the Societies
Registration Act, 1860.
The word ‘trust’ is not defined under
the Act and hence, one needs to refer to the definition under the Indian
Trusts Act, 1882. Section 3 of the said Act defines a ‘trust’ as an
obligation annexed to the ownership of property and arising out of a
confidence reposed in and accepted by the owner or declared and accepted
by him for the benefit of another or of another and the owner. A public
trust must be for the public at large or some significant portion of
the public. However, the number of beneficiaries must be a fluctuating
body. It is the extensiveness of object which affords some indication of
the public nature of the trust — Prakash Chandra v. Subodh Chandra, AIR
1937 Cal. 67. A trust cannot be held to be for charitable purpose if it
is not for public benefit. Thus, private charitable trusts are not
governed by this Act. The term public purpose is not capable of any
strict definition and depends upon the facts and circumstances of each
case. No rigid rules can be applied to define the same — State of Bombay
v. S. R. Nanji, AIR 1956 SC 294.
The Supreme Court in
Radhakanta Deb v. Commissioner of Hindu Religious Endowments, Orissa,
AIR 1981 SC 798, the Court held that “the cardinal point to be decided
is whether it was the intention of the founder that specified
individuals are to have the right of worship at the shrine, or the
general public or any specified portion thereof.” Thereafter, the Court
observed that the mere fact that members of the public are allowed to
worship by itself would not make an endowment a public, unless it is
proved that the members of the public had a right to worship in the
temple.
The Supreme Court formulated four tests as providing
sufficient guidelines to determine on the facts of each case whether an
endowment is of a private or of a public nature. The four tests are as
follows:
(a) Whether the use of the temple by members of the public is of right;
(b)
Whether the control and management vests either in a large body of
persons or within the members of the public and the founder does not
retain any control over the management;
(c) Whether the dedication
of the properties is made by the founder who retain the control and
management and whether control and management of the temple is also
retained by him; and
(d) Where the evidence shows that the founder
of the endowment did not make any stipulation for offerings or
contributions to be made by the members of the public to the temple,
this would be an important intrinsic circumstance to indicate the
private nature of the endowment.
Charitable purpose is defined u/s. 9 of the Act to include:
(a) relief of poverty or distress
(b) education
(c) medical relief
(d)
provision for facilities for recreation or other leisure-time
occupation (including assistance for such provision), if the facilities
are provided in the interest of social welfare and public benefit, and
(e)
the advancement of any other object of general public utility, but does
not include a purpose which relates exclusively to religious teaching
or worship.
Hence, a trust for both religious and charitable
purposes is feasible under the Bombay Public Trust Act, although the
same is not recognised u/s. 11 of the Income-tax Act (if created after
1-4-1961).
The term ‘public’ does not mean the humanity as a
whole, but some indefinite class of persons, a crosssection of the
community — CIT v. Radhaswami Satsang Sabha, 25 ITR 472 (All). Charity
need not benefit the entire mankind but should at least benefit an
ascertainable section of the community — Hazarat Pirmahomed Sahah Sahib
Roza Committee, 63 ITR 490 (SC). The trustees can decide on such
charitable purpose as they deem fit — Smith v. Massey, (1960) ILR 30
Bom. 500. A trust does not become invalid if the discretion of selecting
the charitable purpose is left to the trustees and they are free to
apply the fund in such manner and at such time and to such charities as
they deem fit — Sardar Bahadur Indra Singh Trust, AIR 1956 Cal. 164.
Registration:
Section 18 of the Act and the Bombay Public Trust Rules lay down the procedure for registration of a trust as follows:
(a) Apply to the Deputy Charity Commissioner of the region in Schedule II within three months of creation of the trust.
(b)
The application must contain the names and details of the trustees, the
trust, list of movable and immovable properties along with their
approximate market values, etc. A copy of the trust deed should also be
annexed. A memorandum must also be sent, which must contain the
prescribed particulars relating to the immovable property of the trust.
Schedule IIA to the Rules contains the format for the same. Section 22C
of the Act also provides for particulars of the memorandum.
On
receipt of the application, the Deputy Commissioner would make an
inquiry u/s.19 for ascertaining whether there exists a public trust and
whether the trust falls within its jurisdiction. The principles of
natural justice must be followed in this inquiry process. On completion
of the inquiry, the Deputy Commissioner shall record his findings with
reasons as to the matters inquired by him and may make an order for the
payment of the registration fee. The Charity Commissioner shall maintain
a Register containing all details of the trust.
Investment of trust money:
The
funds of the trust which cannot be deployed for the purposes of the
trust shall be deposited either with a bank or invested in designated
public securities. Public securities means those issued by the
Central/State Government/Railways/Local Authorities, etc.
The
money may also be invested in the first mortgage of immovable property
if the property is not leasehold for a term of years, i.e., the lease
must be indefinite, and secondly, the value of the property must exceed
the mortgage money by one-half times. Thus, if the value of the property
is Rs.1.50 crores, the investment permissible in the first mortgage is
Rs.1 crore.
Purchase of an immovable property as an investment
of trust funds would also require the permission of the Charity
Commissioner. If the property is purchased without its permission, then
the trustees would become liable for penalty for contravention of the
Act. However, the transaction is not void ab initio. This is contrary to
the provisions for sale of an immovable property. Any sale transaction
without the Commissioner’s permission is void ab initio.
Trustees
cannot borrow money for the purpose of or on behalf of
Background:
Cloud computing, as explained in the previous issue, is a model for enabling convenient, ondemand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications, and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction. By providing on demand access to a shared pool of computing resources in a selfservice, dynamically scaled and metered manner, cloud computing offers compelling advantages in speed, agility and efficiency.
Moving on, one needs to appreciate that, currently, cloud computing is at an early stage of its life-cycle, and cloud computing as we know it, is the evolution and convergence of several trends. In order to benefit from the fast evolving model, one needs to understand certain important aspects and key terminology being used in the context of cloud computing.
Commonly used models of cloud computing:
The first in the order of things is for the readers to understand the different (common) cloud computing models available in the market. The models currently in vogue are:
Private clouds:
These refer to clouds for exclusive use by a single organisation. Such clouds are typically controlled, managed and hosted in private data centers. However, this not a hard and fast rule, there are exceptions wherein the private cloud is for the exclusive use by one organisation, but the hosting and operation of the private clouds is outsourced to a third party service provider.
Public clouds:
These refer to clouds which are leased out for use by multiple organisations (tenants) on a shared basis. These clouds are hosted and managed by a third party service provider. These are fairly common and serve small and medium enterprises. Examples would be Microsoft 365, Google docs.
Community clouds:
These refer to clouds for use by a group of related organisations who wish to make use of a common cloud computing environment. For example, a community might consist of the different branches of the military, all the universities in a given region, or all the suppliers to a large manufacturer. To cite an example: Large Hadron Collider1. (Look this up on the Internet, you may find the facts and dynamics hard to believe.)
Hybrid clouds:
These refer to situations when a single organisation adopts both private and public clouds for a single application, in order to take advantage of the benefits of both. For example, in a ‘cloudbursting’ scenario, an organisation might run the steady-state workload of an application on a private cloud, but when a spike in workload occurs, such as at the end of the financial quarter or during the holiday season, they can burst out to use computing capacity from a public cloud, then return those resources to the public pool when they are no longer needed. (Somebody please wake up the Tax Department, please use this on due dates.)
Of the above, private clouds and public clouds are the most commonly seen and implemented.
Advantages:
While the advantages such as efficiency, availability, scalability and fast deployment are common to both public as well as private clouds, there are certain advantages which would be unique either to public clouds or to private clouds. Some of these are: Some benefits are unique to public cloud computing:
Some benefits are unique to private cloud computing:
Summarising:
To recap, cloud computing is characterised by real, new capabilities such as self-service, auto-scaling and chargeback, but is also based on many established technologies such as grid computing, virtualisation, SOA shared services and large-scale, systems management automation. The top two benefits of cloud computing are speed and cost. Through self-service access to an available pool of computing resources, users can be up and running in minutes instead of weeks or months. Making adjustments to computing capacity is also fast, thanks to elastically scalable grid architecture. And because cloud computing is pay-per-use, operates at high scale and is highly automated, the cost and efficiency of cloud computing is very compelling as well.
In the next write-up:
While cloud computing offers compelling benefits in terms of speed and cost, clouds also present serious concerns around security, compliance, quality of service and fit. There are a number of issues and concerns that are holding some organisations back from rushing to the cloud. The top concern far and away is security. While one can debate the relative security of public clouds versus in-house data centers, the bottom-line is that many organisations are not comfortable entrusting certain sensitive data to public clouds where they do not have full visibility and full control. So some particularly sensitive applications will remain in-house while others may take advantage of public clouds. Another concern is quality of service, since clouds may not be able to fully guarantee service level agreement in terms of performance and availability. A third area of concern is fit, the ability to integrate with in-house systems and adapt SaaS applications to the organisation’s business processes. Organisations are likely adopt a mix of public and private clouds. Some applications will be appropriate for public clouds, while others will say in private clouds, and some will not use either.
Until the next write-up . . . . Cheers!!!!!!
The final standards notified by the MCA are substantially similar to the current IFRS standards. However, there are certain changes made to the Ind-AS standards as part of the convergence (rather than adoption) process to suit more appropriately to the Indian environment. These changes can be classified into the following categories:
This article attempts to explain the first category of carve-outs i.e., mandatory differences with IFRS and their impact on the financial statements. We will cover the other categories of carve-outs in our subsequent articles.
Foreign currency convertible bonds (FCCB):
Position under IFRS:
FCCB involve an exchange of a fixed number of shares for a fixed consideration that is denominated in foreign currency. Since the cash flows of the issuer entity in its own functional currency (i.e., in rupees) is variable due to changes in exchange rates, FCCB do not meet the definition of an equity instrument under IFRS. Thus, under IFRS, FCCB are classified as hybrid instruments and are initially split between the conversion option (embedded derivative) and the loan liability.
Conversion option: The conversion option is treated like a derivative and is initially recorded at its fair value. Like all derivatives, the conversion option is subsequently marked-to-market (MTM) at every reporting date and the impact is recognised in the income statement.
Loan liability: The loan liability is initially recorded as the difference between the proceeds and the amount allocated to the conversion option. Interest is thereafter recorded based on imputed interest rates. Further, the loan is adjusted for exchange rate movements that are recognised in the income statement.
Position under Ind-AS:
The Ind-AS has modified the definition of financial liabilities under Ind-AS 32 (vis-à-vis IAS 32) to exclude from its definition, the option to convert the foreign currency denominated borrowings into a fixed number of shares at a fixed exercise price (in any currency). Thus, these instruments will be split initially into the loan liability and the conversion option (as discussed above), but the conversion option will be recognised as equity (as against a derivative under IFRS) and therefore will not remeasured subsequently i.e., no subsequent MTM.
Key implications of the carve-out:
The key implication of this is that the conversion option is not subsequently MTM under Ind-AS, while such MTM is required under IFRS.
Under IFRS, the changes in the fair value of the conversion option may have a significant impact and result in volatility in profits. Further, the impact on the profits for the year is inversely related to the movement in the underlying share price; i.e., if the fair value of the underlying shares rises, MTM of the conversion option would lead to losses to be recognised in the income statement and vice-versa.
Under Ind-AS, since the conversion option is recognised as equity and is not remeasured subsequently, the carve-out eliminates the volatility in profits on account of the changes in the underlying share prices of the company.
Let us understand the impact of the carve-out with the help of an example:
On 1st April 2012, Company A (INR functional currency) issued 10,000 convertible bonds of USD 100 each with a coupon rate of 4% p.a. (interest payable annually in arrears). The total proceeds collected aggregated to USD 1 million. Each USD 100 bond is convertible, at the holder’s discretion, at any time prior to maturity on 31st March 2017, into 1,000 ordinary shares of Rs.10 each. For simplicity, transaction costs and deferred taxes are ignored. The following information on the exchange rate (spot) and fair value of conversion option (option) may be relevant:
Under IFRS, proceeds collected would be required to be split into loan liability and the conversion option. The total proceeds from the issue of USD 1 million aggregates to Rs.45 million based on a conversion rate of USD 1 = Rs.45. On initial recognition, the conversion option would be recognised at its fair value (i.e., Rs.4.5 million or 0.1 million USD) and the remaining proceeds (i.e., Rs.40.5 million or 0.9 million USD) would be recognised as loan liability.
The Company shall compute an effective interest rate based on the loan principal received (i.e., 0.9 million USD), loan principal on maturity (USD 1 million) and payments to be made for interest costs @ 4% p.a. on the loan principal of USD 1 million. The effective interest rate in this case works out to 6.4% p.a. The interest cost p.a. shall be computed based on outstanding loan principal (in foreign currency) and the effective interest rate of 6.4% p.a. converted at average exchange rates during the year. Further, the loan liability shall be translated at exchange rate as at the reporting date, with the exchange differences recognised in the income statement.
The conversion option on initial recognition aggregated to Rs.4.5 million, while the fair value of the conversion option as at the end of the year aggregates to Rs.9.2 million i.e., an increase by Rs.4.7 million. IFRS requires such a change in the fair value of conversion option to be recognised in the income statement.
Let us consider the movements in the carrying values of the conversion option and the loan liability:
Under IFRS
There are three costs recognised in the income statement i.e., interest cost on the loan, the exchange differences on the loan and the MTM gains/losses on the conversion option.
Under Ind-AS, the accounting for the loan liability is same as under IFRS. However, the conversion option is to be recognised as equity. As stated above, for simplicity we have ignored the transaction costs and deferred taxes. On initial recognition, the fair value of the conversion option (i.e., Rs.4.5 million) shall be recognised as equity. As at the end of the first year i.e., 31st March 2013, there is no further adjustment required on account of the fair value movements of the conversion option.
The costs to the company on account of FCCB under Ind-AS will be the interest cost and exchange gains/losses on the loan components of the instrument, with the conversion option not being remeasured for changes in its fair value.
Under Ind-AS
Agreements for sale of real estate (IFRIC 15):
Position under IFRS:
IFRIC 15 focusses on the accounting for revenue recognition by entities that undertake the construction of real estate. IFRIC 15 provides guidance on determining whether revenue from the construction of real estate should be accounted for in accordance with IAS 11 (Construction contract) or IAS 18 (Sale of goods), and the timing of revenue recognition.
IFRIC 15 clarifies that IAS 11 is applied to agreements for the construction of real estate that meet the definitio
20. Exceptional items:
(a) Exceptional item of current year includes Rs.5.77 crores being the write-back of provision for diminution in the value of investments in the Company’s wholly-owned subsidiary Asian Paints (International) Limited, Mauritius in consequent to the buyback of 41,00,000 shares at US$ 1 per share by Asian Paints (International) Limited.
(b) Exceptional item of current year includes Rs.19.69 crores being the reversal of provision made towards diminution in the value of investments in the Company’s wholly-owned subsidiary Asian Paints (International) Limited. Mauritius, based on management’s assessment of the fair value of its investments.
(c) Exceptional item of previous year consists of provision of Rs.5.90 crores towards diminution in the value of the Company’s long-term investment in its subsidiary Asian Paints (Bangladesh) Ltd. made through its whollyowned subsidiary Asian Paints (International) Ltd. based on the management’s assessment of the fair value of its investment. Deferred tax asset on the above provision was not recognised.
4. In terms of the agreements entered into between Tata Teleservices Ltd. (‘TTSL’), Tata Sons Ltd. (‘TSL’) and NTT DoCoMo, Inc. of Japan (Strategic Partners-SP), TSL gave an option to the Company to sell 36,542,378 equity shares in TTSL to the SP, as part of a secondary sale of 253,163,941 equity shares effected along with a primary issue of 843,879,801 shares by TTSL to the SP. Accordingly, the Company realised Rs.424.22 crores on sale of these shares resulting in a profit of Rs.346.65 crores which has been reflected as an exceptional item in the profit and loss account for the current year.
11. On 27th August, 2008, the Arbitration Tribunal (the ‘Tribunal’) of the International Chamber of Commerce, Hague handed down a final award in the arbitration proceedings brought by Reliance Globalcom Limited (‘Reliance’), formerly known as ‘FLAG Telecom’, against the Company relating to the Flag Europe Asia Cable System. The Tribunal directed the Company to pay Rs.95.60 crores (US$ 21.45 million) (2008: Rs. NIL) as final settlement against US$ 385 million claimed by Reliance. The amount of Rs.95.60 cores has been charged to profit and loss account and has been disclosed as an exception item.
From Notes to Accounts:
Consequent to the decision to exit Plastic Storage Tanks business, the difference between estimated resale value of assets of this division an value reflected in the books has been accounted towards impairment loss in terms of AS-28.
(13) (a) The exceptional items stated in the Profit and Loss account are as under:
(b) During the year, upon completion of necessary compliances under FEMA regulations, the Company divested its stake in Sundari LLC (Sundari) on 8th June, 2009. Sundari ceased to be subsidiary of the Company from the said date. Accordingly, the financial statements of Sundari have been consolidated with that of Marico Limited for the period from 1st April, 2009 to 8th June, 2009. The net effect of the divestment of Rs.4.05 crores is charged to the Profit and Loss account and reflected as ‘Exceptional item’ (detailed hereunder):
(c) Kaya Ltd., a wholly-owned subsidiary of the Company, had launched the Kaya Life prototype to offer customers holistic weight management solutions and had opened five ‘Kaya Life’ centres in Mumbai and Kaya Middle East FZE, a step-down subsidiary of the Company had also opened one centre in the Middle East during the past three years. While clients had been experiencing effective results on both weight loss and inch loss, the prototype had less than expected progress in building a sustainable business model. Hence, the Management took a strategic decision of closing down the centres in March, 2010. Consequently, the Group has made an aggregate provision of Rs.5.74 crore towards impairment of assets of Rs.2.91 crore and other related estimated liabilities of Rs.2.83 crore towards employees’ termination, lease termination costs, customer refunds and stock written down relating to these centres for the year ended 31st March, 2010. (Refer note 23 below)
During the current year, the Company has estimated provision for slow and non-moving spares based on age of the inventory. Accordingly, the Company has recognised a provision of Rs.61.03 crores as at 31st December, 2010. The provision based on such parameters applied to spares inventory at the beginning of the year amounting to Rs.46.10 crores has been disclosed as an exceptional item in the profit and loss account.
The petitioner-plaintiff was not allowed to exhibit two documents in a suit, namely, family settlement and a map annexed thereto on the ground that the same were not registered and duly stamped. The petitioner contented that it was not required for a settlement to be registered with the Office of the Registrar as these documents were simply a recitation of past events.
The Court relying on the decision of Roshan Singh v. Zile Singh, AIR 1988 SC 881, held that while an instrument of partition which operates or is intended to operate as a declared volition constituting or severing ownership and causes a change of legal relation to the property divided amongst the parties to it, requires registration u/s. 17(1)(b) of the Act, a writing which merely recites that there has in time past been a partition, is not a declaration of will, but a mere statement of fact, and it does not require registration. The essence of the matter is whether the deed is a part of the partition transaction or contains merely in incidental recital of a previously completed transaction. The use of the past tense does not necessarily indicate that it is merely a recital of a past transaction. It is equally well settled that a mere list of properties allotted at a partition is not an instrument of partition and does not require registration. Section 17(1)(b) lays down that a document for which registration is compulsory should by its own force, operate or purport to operate to create or declare some right in immovable property. Therefore, a mere recital of what has already taken place cannot be held to declare any right and there would be no necessity of registering such a document.
Two propositions therefore flow : Firstly, a partition may be effected orally; but if it is subsequently reduced into a form of a document and that document purports by itself to effect a division and embodies all the terms of bargain, it will be necessary to register it. If it be not registered, section 49 of the Act will prevent its being admitted in evidence. Secondly, evidence of the factum of partition will not be admissible by reason of section 91 of the Evidence Act, 1872. Partition lists which are mere records of a previously completed partition between the parties, will be admitted in evidence even though they are unregistered to prove the fact of partition.
In view of the aforesaid, the Court allowed the writ petition.
The appellant and respondents (1-6) are brothers and sisters and are governed by Hanife School of Muslim Law. The other respondents are sons and daughters of second wife and other relatives. The suit was filed by one of the sisters against the brother and other sisters to get partition with respect to certain properties.
The properties in dispute were recorded in the name of mother Bibi Jainab (first wife). The father of the appellants and defendants had executed one of the properties to his wife in lieu of dawar debt. The Trial Court held that the plaintiff was entitled to get partition. The appeal was filed contending that the Trial Court has wrongly decided the issue considering the principles of Hindu law, where a property is not the absolute property of a female, if the source, from which the property has been purchased, is proved to be of the joint family or by the husband, then it will not be considered to the property of the female. But in the Muslim law, all the properties in the name of muslim lady belong to her, irrespective of source of money, from which it was purchased. The plaintiff is the full-blood sister of the defendants, thus, the plaintiff and the defendants are the legal heirs and successors of their deceased father, Md. Yakub and deceased mother, Jainab Khatoon. The partition suit was filed for preparing of separate ‘takhta’ for the plaintiff after granting a decree of 1/12th share in the properties of her father, Md. Yakub and her mother, Jainab.
The defendant alleged that no property is joint as claimed by the plaintiff. They also claimed that after the death of their parents, the parties have amicably settled their properties and the defendant and the plaintiff was allotted specific share.
The Court referred to certain salient features of Muslim law of succession which distinguish it from modern Hindu law of inheritance, the Muslim law of succession is basically different from the parallel indigenous systems of India. The doctrine of janmswatvavada (right by birth), which constitutes the foundation of the Mitakshara law of succession, is wholly unknown to Muslim law. The law of inheritance in Islam is relatively close to the classical Dayabhaga law, though it differs also from that on several fundamental points. The modern Hindu law of succession as laid down in the Hindu Succession Act, 1956 is, however, much different from both the aforesaid classical systems; it has a remarkable proximity, in certain respects, to the Muslim law of inheritance.
Whatever property one inherits (whether from his ancestors or from others) is, at Muslim law, one’s absolute property — whether that person is a man or a woman. In Muslim law, so long as a person is alive, he or she is the absolute owner of his or her property; nobody else (including a son) has any right, whatsoever, in it. It is only when the owner dies and never before that the legal rights of the heirs accrue. There is, therefore, no question of a would-be heir dealing in any way with his future right to inherit.
The Indian legal concepts of ‘joint’ or ‘undivided’ family, ‘coparcenary’, karta, ‘survivorship’, and ‘partition’, etc., have no place in the law of Islam. A father and his son living together do not constitute a ‘joint family’; the father is the master of his property. The same is the position of brothers or others living together.
Unlike the classical Indian law, female sex is no bar to inherit property. No woman is excluded from inheritance only on the basis of sex. Women have, like men, right to inherit property independently, not merely to receive maintenance or hold property ‘in lieu of maintenance’. Moreover, every woman who inherits some property is, like a man, its absolute owner; there is no concept of either streedhan or a woman’s ‘limited estate’ reverting to others upon her death. The same scheme of succession applies whether the deceased was male or a female.
Since all properties in the name of a female belongs to her exclusively and there is no concept of jointness of nucleus or any concept that the property is purchased from joint nucleus of the head of the joint family, hence, all the properties which are exclusively purchased by sale deed by Bibi Jainab in her name can be divided only between her children. Thus, the plaintiff would be granted 1/10th share in the property belonging to Bibi Jainab. A property which was belonging to the father will be divided amongst all the 17 parties in the ratio of 1/17th each and a separate takhta would be carved out.
(i) The words should be interpreted to mean that ‘the benefit of the service should accrue outside India’;
(ii) The words ‘accrual of benefit’ is not restricted to mere impact on the bottomline of the person who pays for the services;
(iii) The above interpretations should not apply to services which are merely performed from India and where the accrual of benefit and their use outside India are not in conflict with each other. The relation between the parties may also be relevant in certain circumstances.
Though contractual work under work order has been carried out in territorial jurisdiction of India the parties had agreed to refer their dispute to arbitration in Singapore in accordance with Singapore International Arbitration Center (SAIC) Rules. According to the said Rule during subsisting of arbitration proceedings under such rules, law of arbitration shall be governed by the International Arbitration Act. Any of party aggrieved by any interim ruling or order of arbitrator, may resort remedy for under Rule 32 of SIAC Rules of the International Arbitration Act. International Arbitration Act (2002 Ed. Statutes of the Republic of Singapore), Chap. 143A, Rule 32 deals with Jurisdiction of the Court. Where parties agreed to refer dispute to arbitration in Singapore in accordance with SIAC rules, whereby during subsisting arbitration proceedings, jurisdiction of the Indian Court was expressly or impliedly ousted. Arbitration being carried out by arbitrator according with SIAC rules. Indian courts has no jurisdiction to entertain any appeal against award of arbitrator. After referring dispute to the arbitrator, parties could not be permitted to approach Court in India, specially when the parties are bound by SIAC Rules. The same cannot be challenged under the Arbitration and Conciliation Act 1996 or any other enactment except the International Arbitration Act. No appeal would lie u/s.37(2)(b) of the Act of 1996.
The second candidate for government largesse is the International Cricket Council (ICC), presided over by Sharad Pawar. The government has just given the ICC’s World Cup tax-free status. The reports say this means a tax saving for ICC of Rs.45 crore, though the figures of revenue (Rs.1,476 crore) and expenditure (Rs.571 crore) suggest a much larger giveaway. It is easy to see why the government has played ball; Mr. Pawar is the leader of a coalition partner, and agriculture minister. Oddly, the sports minister argued against the freebie. So did a note put up by the finance ministry, though the finance minister seems to have batted for the ICC. As happens all too often, the Prime Minister has chosen the path of least resistance.
Now the history of the ICC is that, once cricket became a big-money game some years ago, this London- based body decided that it needed tax shelters. It created a subsidiary for its business operations and housed it in Monaco. But running between London and Monaco was inconvenient, so the ICC told the British treasury that it would re-locate entirely to London if the government offered tax-free status. When the response was a polite ‘No’, the ICC moved to Dubai. Penny-pinching London could learn a thing or two from the generosity that New Delhi shows to the really deserving.
But the most deserving of all is Vijay Mallya, owner of yachts, private jets, vintage cars, a cricket team, an island in the Mediterranean, and homes on every continent, and also two-thirds owner of Kingfisher Airlines. Kingfisher has been so run that it has been losing money, and borrowing up to its gills. The lenders (13 banks led by the government-owned State Bank of India) have now agreed to convert some of the loans into equity — at a share price of Rs.64.48, when the going market rate was Rs.40. That means a loss straightaway of nearly 40% of the loan value — and there are further loans outstanding. Could the lenders have flexed their muscles, since the airline is in no shape to repay loans? Yes. Could they have threatened to buy out the promoters’ 66% shareholding at the going value of Rs.740 crore, and put in new management? Almost certainly, yes. So if Mr. Mallya still has majority control of the airline, it tells you the scale of the government banks’ largesse.
The properties in question were the ancestral properties of one the late Manmohan Swain. One Smt. Sanjukata Swain purchased a TATA truck by availing a loan from Orissa State Financial Corporation (‘OSFC’). Accordingly, an agreement was entered into between the parties. In the said loan, the late Manmohan Swain, and other two persons, namely, Ganeswar Swain and Ghanashyam Swain stood as guarantors and created equitable mortgage in respect of the properties in question in favour of OSFC. Since the loan amount was not paid, the OSFC published a notice for sale of the mortgaged properties in the newspaper. The said properties were put to auction and the sale was finalised in favour of Shri Subhransu Sekhar Padhi for a total consideration of Rs.10,09,000. Pursuant to such sale, sale deed was executed between OSFC and Shri Subhansu. Thereafter, OSFC sent a notice by Registered Post to the petitioner Prafulla Chandra Swain, the son of the late Manmohan Swain to take refund of Rs.2,85,486. Being dissatisfied with such action of OSFC, the petitioners filed the writ petition.
The High Court observed that section 29 speaks about the right of financial corporation in case of default in repayment of loan. The default contemplated thereby is of the industrial concern. When an industrial concern makes any default in repayment of any loan or advance or any instalment thereof under the agreement or in meeting its obligation in relation to any guarantee given by the corporation, the financial corporation has the right to take over the management or possession or both of the industrial concern. It further gives right to the corporation to transfer by way of lease or sale and realise the property pledged, mortgaged, hypothecated as assigned to the financial corporation by the industrial concern. The right of financial corporation in terms of section 29 must be exercised only on a defaulting party. Section 29 does not empower the corporation to proceed against the surety even if some properties are mortgaged or hypothecated to it. The said view is further strengthened by the provisions of sub-section (4) of section 29 which lays down appropriation of sale proceeds with reference to only industrial concern and not surety or guarantor. In view of the above, the Court held that the OSFC in exercise of power vested u/s. 29 of the SFC Act cannot sell out the properties mortgaged to it by the guarantors. The Court further observed that section 31 of the SFC Act provides for a special provision for enforcement of claims by the financial corporation against a surety or guarantor. The financial corporation can proceed against a surety or mortgagor invoking the provision u/s. 31 for the default committed by the industrial concern, and also where the financial corporation requires the industrial concern to make immediate repayment of loan or advance in terms of section 30 and the industrial concern fails to make such repayment. To exercise power u/s. 31, the OSFC is required to apply to the District Judge having appropriate jurisdiction. Thus, section 29 is concerned with the property of industrial concern, while section 31 takes within its sweep both the property of industrial concern and that of the surety. The statute provides an additional remedy for recovery of the amount in favour of the OSFC by proceeding against the surety in terms of section 31 of the OSFC Act. Such a power is not vested with the corporation u/s. 29.
Needless to say that public money has to be recovered from the defaulters, who do not repay the loan amount to the financial institutions. This does not mean that financial institutions are at liberty to dispose of the secured asset of the defaulters in unreasonable or arbitrary manner in flagrant violation of the statutory provisions and principles of natural justice.
Opening up the aviation sector made air travel an affordable reality for the Indian middle class. However, oversight of this sector is poor. Each day the safety of thousands of passengers hangs in the balance. If sons and daughters of DGCA officials are able to obtain licences despite dubious flying records, it opens the door to large-scale fraud. Apart from an internal purge of the DGCA itself, it is imperative to undertake a thorough audit of the 40 flying schools in the country. A public DGCA database for result cards of candidates is a good idea. That corruption hasn’t even spared a sensitive industry like aviation, jeopardising the lives of thousands, is a grave concern. Now that the rot lies exposed, civil aviation minister Vayalar Ravi must undertake thorough and rapid action to cleanse the system and bring back credibility to civil aviation.
A Supreme Court order had asked colleges to have full-time approved principals and teachers in place or face punitive action like a ban on admissions to first year of courses in the 2011- 12 session. Seventy-seven of the 125 colleges have secured court relief against possible action. The university will stop admissions in the 48 other colleges.
At the meeting, senate members raised questions on how exams for students from these colleges were conducted, who assessed their papers and what action the varsity was taking to ban first-year admissions in the 48 colleges.
They also demanded a panel to probe how the local inquiry committees recommended continuation of affiliation for the 125 colleges. Director of UoP’s board of college and university development W. N. Gade and controller of exams S. M. Ahire could not placate the senate, which wanted to know if answer papers were assessed at the colleges lacking approved staff.
Ironically, the university was recently accorded the highest ‘A’ grade by the National Assessment and Accreditation Council. The university’s approval of teaching staff makes students of affiliated colleges eligible for exams. Without approved teachers/principals, a college cannot be an exam centre. Students then take their exams in the nearest college with approved staff. If the college is unable to accommodate more students, it assigns two approved teachers to the college to be ‘custodians’ of the varsity’s exam material, including answer papers.
The norms are ambiguous on who should assess answer papers of colleges lacking approved teachers.
In a suit when the counter-claim was pending for cross-examination of the witnesses of the opposite party, Shri P. Deshmukhya, counsel for the plaintiff-petitioners, filed an application, stating to the effect, inter alia, that the plaintiff-petitioners had taken away all their papers, documents/files from him as they had decided to engage another lawyer and that he (P. Deshmukhya) and Shri B. K. Acharyya, another counsel, had accordingly withdrawn from the suit. On considering the application, so filed, the learned Munsiff passed an order dispensing with the cross-examination of the defendant, namely, Swapon Saha, (i.e., opposite party No. 1) and fixed the counter-claim, on next date, for cross-examination of further witness of the counter-claimant.
On the date so fixed, while the defendant’s counsel was present, none appeared on behalf of the plaintiffs. The learned Trial Court, then, passed an order dispensing with the cross-examination of the defendant’s witness, closed the evidence of the defendant’s side and fixed the counter-claim, for argument. Before the date, so fixed, the plaintiffpetitioner, namely, Anamika Gupta filed a petition, with the prayer to adjourn the argument and give another opportunity to the plaintiff-petitioners to cross-examine the defendant and his witness. The plaintiff-petitioners stated that Shri Acharyya, advocate, had expressed his inability to conduct the suit and advised the plaintiff-petitioners to engage another lawyer; the plaintiff-petitioners came to know that their engaged counsel had already withdrawn from their case, but the relevant papers/files remained with the said counsel and all the efforts made by the plaintiff-petitioners to obtain the papers/files from the said counsel did not yield any result; thereafter, the plaintiffpetitioner No. 1 applied for certified copies of the plaint, written statement, counter-claim, evidence, orders, etc., which were received in May 2010, and it was after receipt of the said certified copies that they were able to engage, in June 2010, Shri P. Deb, advocate, as their counsel. The Trial Court rejected the application.
Aggrieved by order rejecting the application, the same was challenged before the High Court. The Court observed that while considering the provisions, embodied in Rules 1, 2 and 4 of Order III of CPC, it may be noted that in a civil suit, it is not necessary for a party to remain present, in person, on every date of hearing unless there is a specific order passed, in this regard, by the Court. It is for this reason, therefore, that order III Rule 1 provides that appearance, on behalf of the parties, may be made by recognised agents. A party or his recognised agent may also appoint a pleader and every such appointment shall be filed in the Court. Once duly appointed, the engagement of the pleader subsists until engagement is determined with the leave of the Court. It logically follows that withdrawal of engagement cannot be an arbitrary act and the permission of the Court is necessary to terminate engagement of a counsel.
It is also worth noticing that the appointment of a pleader, filed in the Court, shall be deemed to have remained in force until determined ‘with the leave of the Court’ by (i) a writing, signed by the client or the pleader, as the case may be, and filed in the Court, or (ii) until the client or the pleader dies, or (iii) until all proceedings, in the suit, have ended so far as regards the client. This clearly shows that until the client or the pleader dies or until all proceedings, in the suit, end as far as the client is concerned or until the leave of the Court is obtained determining the relationship of pleader and client, the appointment, once made and filed in a suit, shall continue to remain in force.
In the present case too, when no leave had been granted by the learned Trial Court, mere filing of the petition by the plaintiffs’ pleader intimating the Court that the plaintiffs had taken away all the papers or documents from their counsel had not determined the relationship of client and pleader, which had existed between the plaintiffs’ pleader and the plaintiffs. In such circumstances, the order, dispensing with the cross-examination of the defendant, could not have been made.
The construction industry is said to be the second largest one after agriculture. It is labour-intensive, employing 20 million and it is estimated that every Rs.1 crore invested on construction project generates employment of 22,000 unskilled man-days and 23,000 skilled or semi-skilled man-days. Recognising its importance, Parliament passed the Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1996 and the Building and Other Construction Workers’ Welfare Cess Act, 1996.
The government stated in the preamble that construction works are characterised by their inherent risk to the life and limb of workers. The work is also characterised by its casual nature, temporary relationship between employer and employee, uncertain working hours, lack of basic amenities and inadequacy of welfare facilities. Although the provisions of various labour laws like the Minimum Wages Act, Contract Labour (Regulation & Abolition) Act and Inter-State Migrant Workmen (Regulation of Employment & Conditions of Services) Act are applicable to building workers, there was no comprehensive central legislation for this category of workers. The two enactments were aimed to improve matters.
After nearly 15 years, the central and state governments have done little to implement these laws. Ten years after the laws came into force, a public interest petition was moved in the Supreme Court pointing out the non-implementation of the provisions of the Acts (National Campaign for Central Legislation on Construction Labour v. Union of India). The Court passed several orders over the years asking state governments to implement the main provisions of the law. There was little response. Last week, the Court took a tough stand and summoned five top labour officers in the country to be present in the Chief Justice’s Court and explain the lapse.
The dubious honour goes to the Union Labour Secretary, the Director General of Inspection, Government of India, and Labour Secretaries of Nagaland, Meghalaya and Lakshdweep.
The Court stated that many among the 36 states and Union territories have not taken even the initial steps. They have not appointed ‘Registration Officers’ before whom the employers of workers have to register their establishments. They have also ignored their obligation to constitute state welfare boards.
While the movement’s leader, Anna Hazare, is a Gandhian, adopting the Mahatma’s method of fasting, many joining him are not satyagrahis shaped by austerity. Several are middle-class Indians, moulded by professionalism, progress and consumption. Many are youth in university or jobs, shaken by what they see, stirred into joining an elderly leader who refers to another leader’s practices, which for many have passed into the realm of cliche. The agitation is strong enough, however, to override these divisions. Corruption, exemplified by a terrible year of scams, is the oil fuelling such coalescing.
However, there’s more. The Indian middle class is not only demanding accountability but dignity in citizenship. This notion has been catalysed by recent cases like Rizwanur Rehman’s and Ruchika Girhotra’s, where regular middle-class lives were crushed by a brutal nexus of political and financial clout. The booing away from Jantar Mantar of Om Prakash Chautala, one of the political shields around Ruchika’s tormentor, police officer S. P. S. Rathore, reflected public anger with precisely this sort of nexus. This reflects growth in ideas about citizenship. Previously, notions of citizenship were limited to a small, well-educated elite. Today, this circle has perforce widened. Media and travel have changed the way people think. Indians are increasingly aware of countries where bribery isn’t normal, where murders get punished even when committed by the powerful. It’s become apparent that globalisation is not just about mobile phones and malls, but lawful, equal societies, an ideal many are now demanding.
The media is their ally. Starting with the Jessica Lal case in 1999, the media began acting as mirror and motor to civil society agitation, transmitting information about unpunished crimes, locations to gather at and modes of protest, like candlelight vigils, email and text campaigns. The Internet also sees massive following for Hazare’s movement. All this gives lie to the notion of middle-class Indians being ‘apathetic’ to politics. Where once frustration existed without cohesiveness, today there are effective means to channel feelings, forums to gather at, ways to debate and discuss. Several ‘ideas of India’ are emerging. Many Indians feel a deeper connection to their country. In that sense, Anna has won the war even as the battle persists.
Users need to visit www.google.com/transit and key in the start and endpoints of their proposed journey. Google then uses algorithms to churn out the best possible routes. The application, which is available in desktop and mobile versions, utilises a database of BEST bus routes as well as the railway routes and schedules on the Western, Central and Harbour lines.
However, this is not the first application that encourages people to use public transport. The BEST runs its own application on www.bestundertaking.com.
1. The Lokpal will have jurisdiction only over the Prime Minister, ministers and MPs
2. The Lokpal will not have suo motu power to initiate inquiry or even receive complaints of corruption directly from the public. The complaints will be forwarded to it by the presiding officer of either House of Parliament
3. It is purely an advisory body and can therefore only give recommendations of the Prime Minister on complaints against ministers and to the presiding officer of either House on complaints against the Prime Minister and MPs
4. Since it has no police powers, the Lokpal cannot register an FIR on any complaint. It can only conduct a preliminary enquiry
5. Anybody found to have lodged a false complaint will be punished summarily by the Lokpal with imprisonment ranging from one year to three years
6. The Lokpal will consist of three members, all of them will be retired judges
7. The committee to select Lokpal members will consist entirely of political dignitaries and its composition is loaded in favour of the ruling party
8. If a complaint against the Prime Minister relates to subjects like security, defence and foreign affairs, the Lokpal is barred from probing those allegations
9. Though a time limit of six months to one year has been prescribed for the Lokpal to conduct its probe, there is no limit for completion of trial, if any
10. Nothing has been provided in law to recover ill-gotten wealth. After serving his sentence, a corrupt person can come out of jail and use that money.
Jan Lokpal Bill (Civil society version):
1. The Lokpal will have jurisdiction over politicians, bureaucrats and judges. The CVC and the entire vigilance machinery of the Centre will be merged into the Lokpal
2. The Lokpal cannot only initiate action on its own, but it can also entertain complaints directly from the public. It will not need reference or permission from any authority
3. After completing its investigation against public servants, the Lokpal can initiate prosecution, order disciplinary proceedings or both
4. With the corruption branch of the CBI merged into it, the Lokpal will be able to register FIRs, conduct investigations under the Criminal Procedure Code and launch prosecution
5. The Lokayukta can only impose financial penalties for complaints found to be false
6. The Lokpal will consist of 10 members and one chairperson, out of which only four are required to have legal background without necessarily having any judicial experience
7. The selection committee will be broad-based as it includes members from judicial background, Chief Election Commissioner, Comptroller and Auditor General, retired Army Generals and outgoing members of the Lokpal
8. There is no such bar on the Lokpal’s powers
9. The Lokpal will have to complete its investigation within one year and the subsequent trail will have to over in another year
10. Loss caused to government due to corruption will be recovered from all those proved guilty. (Source: The Times of India, dated 8-4-2011)
The players, their coaches and selectors have all been adequately rewarded not just in kind, but also in cash. In any case, India’s cricket players are the richest among the country’s sportspersons, given the money in the sport, the sponsorships and the advertisement budgets. The glistening diamonds worn by the wives of Indian cricketers, and their fancy cars, tell a tale of adequate recompense. So why did the taxpayer have to shell out more cash, in the form of cash awards from state governments and a tax break from the central government? There are games sportspersons play to win and there are games they play to make money. The Indian Premier League is a money-making enterprise. But a World Cup match is about winning for the country. It is the kind of achievement that finds recompense in the form of a Padma Shri or a Padma Bhushan award.
But tax breaks and cash awards from the government are an unnecessary indulgence. Gujarat’s Chief Minister Narendra Modi has resisted the cash award idea; instead, he has so far restricted himself to giving the Eklavya award. Some of India’s world-class sportspersons deserve financial support given the lack of adequate investment and the absence of a mass market in their respective sports. Cricket is certainly not one of them. The market is doing a good job, and the government, too, has done a good, indeed an excellent, job in ensuring security and safety of the players and the huge audience. Having done the job it must, and that too well, the government need not have tried to ingratiate itself with the players with more cash!
Seema Bai (since deceased), was dashed by the driver of Marshal Jeep by driving the said vehicle rashly and negligently, due to which she succumbed to the injuries sustained in the said accident.
The Tribunal on a close scrutiny of the evidence led, material placed and submissions made, held that deceased Seema Bai was not legally wedded wife of the appellant; the appellant not being legal representative of the deceased; nor was the appellant dependent upon her, is not entitled to file claim petition u/s. 166 of the Motor Vehicles Act, and dismissed the claim petition. The appeal was filed by the appellant claiming compensation for the death of deceased Seema Bai.
The Court observed that the fact that deceased Seema Bai was not legally married wife of the appellant is not in dispute. Admittedly, one Kaushalya Bai is the legally wedded wife residing with the appellant. It was also not in dispute that the appellant was not dependant upon the deceased.
As per section 5(i) of Hindu Marriage Act, 1955, a marriage may be solemnised between any two Hindus if neither party has a spouse living at the time of marriage.
U/s. 166 of the MV Act, an application for compensation arising out of an accident of the nature specified in Ss.(i) of section 165 may be made where death has resulted from the accident, by all or any of the legal representative of the deceased.
According to section 2(11) of the Code of Civil Procedure, ‘legal representative’ means a person who in law represents the estate of a deceased person, and includes any person who intermeddles with the estate of the deceased and where a party sues or is sued in a representative character the person on whom the estate devolves on the death of the party so suing or sued. Almost in similar terms is the definition of legal representative under the Arbitration and Conciliation Act, 1996, i.e., u/s. 2(1)(g). The term legal representative has not been defined in the Motor Vehicles Act.
The word ‘legal representative’ occurring in section 166 of the MV Act, has the same meaning as defined u/s. 2(11) of the Code of Civil Procedure. Now if the same definition of legal representative is applied to the facts and circumstances of the present case, it was crystal clear that the appellant, admittedly was not dependent upon the deceased, is neither a person who in law represents the estate of deceased Seema Bai, nor is a successor in interest of the deceased. Therefore, if the definition of legal representative as provided u/s. 2(11) of the Code of Civil Procedure is taken in its widest amplitude even then the appellant cannot be termed as a legal representative of the deceased entitled to file claim petition before the Tribunal under the MV Act and thus, the order of the Tribunal was upheld.
Parties are wife and husband. The petition for divorce between the parties and other ancillary reliefs was pending trial. The wife, who is the petitioner, is under cross-examination. The husband relies upon certain handwritten diaries of the wife as well as a compact disk (CD) on which conversation between the wife and the husband has been recorded by the husband on certain dates. The husband has produced the transcript of the said conversation. The wife admits the handwriting in her diaries. The parties are at dispute with regard to the taped conversation on the CD. It is contended on behalf of the wife that the taped conversation cannot be relied upon as a document. It is also contended by the wife that the affidavit of documents was not filed and the instrument on which the initial conversation was recorded is not produced. The wife has neither admitted nor denied the conversation. The husband seeks to use it in her cross-examination.
The Court referred to the elementary principle of recording evidence which must be first considered. Evidence consists of examination-in-chief and cross-examination. A party is required to offer for inspection and produce the documents relied upon by him in support of his case. This is required in his examination-in-chief. This contains the oral and documentary evidence.
The Court further observed that the accuracy of the tape-recorded conversation is of utmost importance since the document, which is a CD having tape-recorded conversation, is liable to erasure or mutilation. Thus it would be for the defendant to show that it was the original recording. This could be done by producing the initial record or the original electronic record. This original electronic record, which is primary evidence, is the instrument on which the original conversation is recorded. The defendant has not produced that evidence. The defendant has not shown the mechanical/ electronic process by which the CD was obtained. The defendant has relied upon the CD per se. That, being a copy, is secondary evidence. At the stage at which the CD is sought to be produced (that is in the cross-examination of the plaintiff), the defendant is permitted not to produce the original electronic record. The copy of such record, being the CD, can itself be used for confrontation in the cross-examination. Much will depend upon the answers in the cross-examination by the plaintiff. If however, the defendant desires to set up a specific case, for which the evidence is contained in the CD, he would be required to satisfy the test of accuracy by producing the original electronic record.
It must be mentioned that evidence is to be considered from three aspects; admissibility of evidence, recording of evidence and appreciation of evidence. It is settled law that tape-recorded conversation is admissible in evidence. What must be of importance is how the tape-recorded conversation is to be recorded as evidence and appreciated thereafter. Recording can be in the cross-examination of the other side and/or in the evidence of the recorder himself. The appreciation of evidence would require consideration of the aforesaid three requirements; identification, relevancy and accuracy. It is left to the defendant to pass those tests. If the tests are not passed, the tape-recorded conversation would be of no use in effect ultimately.
The requirement of sealing the recorded conversation would not be applicable in this case. That requirement is of essence in a criminal case where during investigation the conversation of a party is recorded by the investigating officer. He would certainly be required to seal the tape-recorded conversation and keep it in a safe custody so as to play before the Court at the time of the trial. It has nevertheless to be shown to be accurate and untampered with.
It was the case of the plaintiffs that plaintiff No. 2 who was the daughter of late Arumugha Mudaliar and plaintiff No. 1 was the son of plaintiff No. 2, i.e., grandson of late Arumugha Mudaliar. Arumugha Mudaliar had three children, namely, Mangalam, Saraswathi and Jayasubramanian. Jayasubramanian, the only son had expired in 1982. As the son of late Arumugha Mudaliar had expired, he had adopted Santhilkumar, his grand-son, the son of his daughter Saraswathi and plaintiff No. 1, by executing an adoption deed after doing necessary rituals required to be performed under Hindu Law. Late Arumugha Mudaliar had thereafter executed a registered Will whereby the properties referred along with other properties had been bequeathed and properties referred to in the schedule attached to the plaint had been disposed of in favour of his daughter Saraswathi and his grandson Santhilkumar, i.e., the plaintiffs.
As the defendants i.e., the present appellant and respondent Nos. 3 and 4 were interfering with or were likely to interfere with the possession of the properties referred to, a suit was filed by Saraswathi and her son Santhilkumar who was minor at the relevant time. The said suit was dismissed for the reason that the Trial Court did not believe that Santhilkumar was properly adopted by late Arumugha Mudaliar and the properties which had been bequeathed in the will were ancestral properties and, therefore, late Arumugha Mudaliar did not have absolute right to dispose of the same.
On appeal the Court observed that so far as the adoption of Santhilkumar was concerned, the said adoption had been duly established before the Trial Court. Late Arumugha Mudaliar had followed the rituals required as per the provision of Hindu Law while adopting Santhilkumar as his son. There was sufficient evidence before the Trial Court to establish that Santhilkumar had been validly adopted by late Arumugha Mudaliar. Shri Kandasamy , a witness, had been examined in detail, who had placed on record photographs taken at the time of the ceremony. The said witness had given details about the rituals performed and the persons who were present at the time of the adoption ceremony and the deed of adoption had also been registered. The aforestated facts leave no doubt in mind that the adoption was valid. Even the photographs and negatives of the photographs which had been taken at the time of adoption are forming part of the record. In such a set of circumstances, there was no reason to disbelieve the adoption. Therefore, it was held that Santhilkumar was the legally adopted son of late Arumugha Mudaliar.
So far as execution of the Will was concerned, the said Will had been duly registered. For the purpose of proving the Will, one of the attesting witnesses of the Will, namely, Umar Datta had been examined. In his deposition, he had stated that he was present when the said Will was being written by Kalyanasundaram. The scribe of the Will had also been examined. Thus the Will was proved. The decree of the Trial Court was set aside.
(b) amortisation of discounts or premiums relating to borrowings;
(c) amortisation of ancillary costs incurred in connection with the arrangement of borrowings;
(d) finance charges in respect of assets acquired under finance leases or under other similar arrangements; and because the definition of borrowing costs is an inclusive one, numerous interpretative issues arise. For example, would borrowing costs include hedging costs ? Let me explain my point with the help of a simple example using a commonly encountered floating to fixed interest rate swap (IRS).
Example:
Floating to fixed IRS
Company X is constructing a factory and expects it to take 18 months to complete. To finance the construction, on 1st January 2011 the entity takes an eighteen-month, Rs.10,000,000 variable-rated term loan due on 30th June 2012. Interest payment dates and interest rate reset dates occur on 1st January and 1st July until maturity. The principal is due at maturity. Also on 1st January 2011, the entity enters into an eighteen-month IRS with a notional amount of Rs.10,000,000 from which it will receive periodic payments at the floating rate and make periodic payments at a fixed rate of 10% per annum, with settlement and rate reset dates every 30th June and 31st December. The fair value of the swap is zero at inception. During the eighteen-month period, floating interest rates are as follows: 
Under the IRS, Company X receives interest at the market floating rate as above and pays at 10% on the nominal amount of Rs.10,000,000 throughout the period.
At 31st December 2011 the swap has a fair value of Rs.40,000, reflecting the fact that it is now in the money as Company X is expected to receive a net cash inflow of this amount in the period until the instrument is terminated. There are no further changes in interest rates prior to the maturity of the swap. The fair value of the swap declines to zero at 30th June 2012. In this example for sake of simplicity we assume hedge is 100% effective, issue costs are nil and exclude the effect of discounting.
The cash flows incurred by the entity on its borrowing and IRS are as follows:
There are a number of different ways in which Company X could theoretically calculate the borrowing costs eligible for capitalisation, including the following:
(i) The IRS meets the conditions for, and Company X applies, hedge accounting. The finance costs eligible for capitalisation as borrowing costs will be Rs.1,000,000 in the year to 31st December 2011 and Rs.500,000 in the period ended 30th June 2012.
(ii) Company X applies hedge accounting, but chooses to ignore it for the purposes of treating them as borrowing costs. Thus it capitalises Rs.925,000 in the year to 31st December 2011 and Rs.540,000 in the period ended 30th June 2012.
(iii) Company X does not apply hedge accounting. Therefore, it will reflect the fair value of the swap in income in the year ended 31st December 2011, reducing the net finance costs by Rs.40,000 to Rs.960,000 and increasing the finance costs by an equivalent amount in 2012 to Rs.540,000.
(iv) Company X does not apply hedge accounting. However, it considers that it is inappropriate to reflect the fair value of the swap in borrowing costs eligible for capitalisation, so it capitalises costs based on the net cash cost on an accruals accounting basis. In this case this will give the same result as in (i) above.
(v) Company X does not apply hedge accounting and considers only the costs incurred on the borrowing, not the IRS, as eligible for capitalisation. The borrowing costs eligible for capitalisation would be Rs.925,000 in 2011 and Rs.540,000 in 2012.
All the above views have their own arguments for and against, although the preparer will need to consider what method is more appropriate in the circumstances. For example, the following points may be considered by the preparer:
1. The decision to hedge interest cost results in the fixation of interest cost at a fixed level and are directly attributable to the construction of the factory. Therefore, method (ii) may not carry much support.
2. To use method (iv) it is necessary to demonstrate that the derivative financial instrument is directly attributable to the construction of a qualifying asset. In making this assessment it is clearly necessary to consider the term of the derivative and this method may not be practicable if the derivative has a different term to the underlying directly attributable borrowing.
3. In this example, method (v) appears to be inconsistent with the underlying principles of AS-16 — which is that the costs eligible for capitalisation are those costs that could have been avoided if the expenditure on the qualifying asset had not been made — and is not therefore appropriate. However, it may not be possible to demonstrate that specific derivative financial instruments are directly attributable to particular qualifying assets, rather than being used by the entity to manage its interest rate exposure on a more general basis. In such a case, method (v) may be an acceptable treatment. Method (iii) may not be appropriate in any case. Whatever policy is chosen by the entity, it needs to be consistently applied in similar situations.
The bigger issue is: in the era of accounting standards — is this diversity warranted and/or desirable?
Facts:
The assessee was an Indian company (‘IndCo’) engaged in the business of marine dredging and port construction. IndCo was awarded contract for dredging of Inner Harbour Channel. For executing the contract, IndCo hired a dipper dredger from a Netherlands company (‘DutchCo’). As per the agreement between IndCo and DutchCo, the dipper dredger was provided to IndCo with two charter coordinators and two operators. During the course of survey by Tax Authority it was found that IndCo had made certain payments to DutchCo for usage of dredger. It had not deducted tax from these payments. Hence, the AO held that the dredger constituted PE and permanent base of business of DutchCo in India. Therefore, the AO passed order u/s. 201 of Income-tax Act levying tax and interest.
Before the Tribunal, IndCo contended that:
The Tax Authority contended that:
hence, DutchCo had a permanent place of business in India and the dredger should be considered as PE of DutchCo.
Held:
As regards PE under Article 5(1):
As regards Article 5(3):
Installation of structure used for more than 183 days would constitute PE if the foreign company was carrying out the contract in India. Since IndCo was carrying out the contract and dredger was used by IndCo and not DutchCo, DutchCo cannot be said to have installed equipment or structure for exploration in India.
Facts:
The assessee was a company based in the USA (‘USCo’). USCo was engaged in the business of sale of diamonds and diamond jewellery. After obtaining approval of RBI, USCo established a Liaison Office (‘LO’) in India for purchase of diamonds for exports to its Head Office (‘HO’). During the course of survey by the tax authority, the following was noted as business model of USCo and its LO in India:
It was also noted that USCo had 76% shareholding in another Indian company and that company purchased rough diamonds, got them processed from others and sold the finished diamonds in open market. About 25% of the total purchases of LO were from this company.
Based on the above activity conducted by LO, the tax authority held that LO constituted PE in India of USCo and computed its income @5% of the value of diamonds imported through LO.
USCo contended that as per clause (b) of Explanation 1 to section 9(1)(i), no income could be deemed to accrue or arise in India through or from operations which were confined to the purchase of goods in India for purposes of export. Reliance, in this regard was placed on Circular Nos. 23, dated 23-7-1969 and 163, dated 29-5-1975.
In appeal, CIT held that LO was not involved in manufacture or production and was not selling diamonds. Also, under India-USA DTAA, LO, which was engaged in the purchasing of goods or merchandise, or for collecting information for the HO, could not be considered as PE in India.
Held:
Facts:
The applicant was a company incorporated in, and a tax resident of Netherlands (‘DutchCo’). DutchCo was subsidiary of another Netherlands company. DutchCo held entire capital of an Indian company (‘IndCo1’). IndCo1 entered into a scheme of arrangement with another Indian company (‘IndCo2’) for demerger of one of the divisions of IndCo1 into IndCo2. Subsequently, DutchCo transferred 50% of the shares in IndCo2 to a Switzerland company resulting in substantial capital gains for DutchCo.
DutchCo sought ruling of AAR on the following questions:
Held:
Apart, it is necessary to have all the facts connected with the question on which the ruling is sought or is proposed to be sought in a wide amplitude by way of a return of income than alone by way of an application seeking advance ruling in Form 34C under IT Rules. Instead of causing inconvenience to the applicant, the process of filing of return would facilitate the applicant in all future interactions with the Income-tax Department.
He was unwittingly speaking the truth. The Lokpal Bill introduced in the Parliament is just not up to the expectations and aspirations of the people. It does not represent the people’s will. The government tried to shield itself behind procedures and by raising the issue of supremacy of the Parliament. The government, while refusing to consider any draft other than the one presented by it, overlooked the fact that National Advisory Council, chaired by the President of the Indian National Congress, Sonia Gandhi, as part of its mission gives policy and legislative inputs to the government.
It also failed to realise that when the elected representatives do not understand, appreciate and articulate views of the population that they represent, a movement like the one started by Anna Hazare takes birth. The spokesmen of the ruling party made things worse by making wild allegations and unreasonable arguments. Eminent lawyer politicians of the ruling party were incapable of convincing the people and finally, due to Anna’s resilience and overwhelming support of the people to him, had to eat a humble pie. The opposition parties also failed the people of the country by avoiding to express their position. The lame excuse was they will do so when the bill is discussed in the Parliament. It was only when the situation reached where it did that the political parties were forced to take a view. Both, the government and the opposition need to work harder to regain the confidence of the citizens of this country. While we blame the politicians, one must not hesitate to complement them where they deserve. Some of the speeches in the Parliament in the recent debate on the Lokpal issue were brilliant and appeared to be coming from heart. Some of the parliamentarians are extraordinary thinkers and if they rise above party lines and have the interests of the country upper most on their agenda, they can be instrumental in the progress of this country. In a democracy each one has a right to protest, lobby and articulate his views.
The pluralistic nature of our society makes it even more necessary that we have an open mind towards views of others. It was disheartening to see Nikhil Dey a social activist in his own right and a close associate of Aruna Roy being branded as a traitor because he expressed a different view. It would be dangerous if a group insisted that only its views are acceptable, however well-intentioned that group may be. People supported the anti-corruption movement rather than the Jan Lokpal Bill per se. Nobody doubts the good intentions of the Civil Society but the proposition that only the Bill drafted by them is acceptable and should be passed by the Parliament does not appeal. We hope that Team Anna realises this. Now that the government has agreed to consider various drafts of the Lokpal Bill, it is essential that various groups consider all the drafts, engage in a healthy debate and convey the views to the select committee which will be considering the Lokpal Bill. Aruna Roy and National Campaign for People’s Right to Information (NCPRI) have made very good suggestions for fighting corruption.
It includes set of set of measures (including having a Lokpal) to be collectively and simultaneously adopted. These appears more practical and realistic. Let us hope that the country will have an effective institution of Lokpal soon. It is also true that merely having the institution of Lokpal will not eradicate corruption. One must look at the causes of corruption. There are many. Greed, shortages of resources, lack of transparency in decision-making, discretionary powers, lack of accountability and acceptance by the people that corruption is the way of life have all contributed to corruption spreading everywhere, not only in the government but also in corporate world. We also require a change in our attitude. We need to resist corruption in all situations.
Let us hope and strive to make India lose the distinction of being one of the most corrupt countries.
Sanjeev Pandit
Editor
Facts:
The appellants had filed rebate claims under the Export of Service Rules, claiming rebate of Service tax paid on input service used for export of GTA service. The claims were rejected since the rebate was claimed on GTA service which was an input service and there was no export of any service. The appellants contended that they had inadvertently filed rebate claim instead of refund claim for Service tax paid on input services used in relation to export of goods. The appellants agreed that the refund claim was filed in wrong form.
Held:
During the period when the rebate claim was filed by the appellants there was no form prescribed for filing the refund claim. Therefore, filing of a letter with relevant details would have been sufficient. Thus, the appellants have made a clerical error which is a rectifiable error. Therefore, appeal was allowed.
Facts:
The appellants were entitled for refund of predeposit amount of Rs.50,000 in view of favourable order of the Commissioner(A). The refund accrued in the year 2001 but the appellants filed a refund claim in the year 2007. Hence, by applying the law of limitation, the refund claim was rejected.
The appellants relied on Board’s Circular dated 2-1-2002, wherein it was clarified that claim for refund of pre-deposit is not required to be filed by appellants and a mere letter would be sufficient. Apart from this, time limit u/s. 11B of Central Excise Act for claiming refund was held inapplicable to refund of pre-deposit implying that the Revenue ought to have suo motu refunded the same.
Held:
Refund claim of pre-deposited amount cannot be rejected by applying the General Limitation Act. The pre-deposit amount should be refunded by the Department suo motu without much delay.
Facts:
The appellants had deposited an amount of Rs.40,000 in terms of stay order passed by the Tribunal. At a later stage, the same was refundable to them as the order was passed in favour of the appellants. Consequently, the appellants took the credit suo motu by intimating the Revenue.
However, proceedings were initiated against the appellants on the argument that they should have applied for refund instead of taking credit suo moto. As a result, penalty of Rs.5,000 in addition to the amount mentioned supra was confirmed against the appellants.
Held:
Refund of pre-deposit accrued to the appellants immediately on passing of the Tribunal’s order allowing the appeal. It was held that Revenue cannot raise any objection for granting of Cenvat credit since the same was intimated to the Revenue and provisions of unjust enrichment do not apply to such refund of pre-deposit. Hence, appeal was allowed in favour of the appellants.
Demand and penalty — Time-barred for part period — As bona fide intention proved — Matter remanded for quantification.
Facts:
The appellants had entered into a ‘Marketing agreement’ with its joint venture to sell, distribute, market, advertise and promote the products of joint venture. The appellants had a belief that the services rendered by them during the period 1-7-2003 to 8-7-2004 were of a commission agent and were fully exempt under Notification No. 13/2003-S.T., dated 20-6-2003. Therefore, they did not pay any Service tax on the services rendered by them. However, the said Notification was withdrawn w.e.f. 9-7-2004 and as a consequence of which the appellants got themselves registered with the Service Tax Department in August 2004.
The Revenue contended that the services provided by the appellants were taxable under business auxiliary service and benefit of exemption Notification cannot be availed as the appellants were not the commission agents. Commission agent meant a person who causes sale or purchase of goods on behalf of another person for a consideration. The commission agents usually charge a fixed percentage of sale price, but the appellants were not charging a fixed percentage. Additionally, the scope of activities undertaken by the appellants is far beyond the activities of commission agent and fall within the purview of definition of business auxiliary service.
The extended period of limitation was invoked. However, the appellants contended that the limitation of five years cannot be invoked as the intention of the appellants was bona fide since they had immediately registered themselves when the relevant exemption Notification was withdrawn.
Held:
The services were to be taxable under business auxiliary service. However, due to reasonable cause for failure to pay Service tax, the penalties levied on the appellants were set aside. Further, the matter was remanded for quantification of demand within the period of limitation.
Facts:
The respondents were in the business of selling sim cards, recharge coupons, mobile phones, etc. On 17-10-2003, they declared unaccounted income, to the Income-tax Officers on survey, of Rs.4,00,000. Since the respondents were engaged in providing business auxiliary services, the unaccounted income was treated to be income from business auxiliary services.
The respondents contended that the entire income of Rs.4,00,000 cannot be attributed to business auxiliary service since the service had become taxable from 1-7-2003, whereas the visit of survey team was on 17-10-2003. Moreover, for generating income of Rs.4,00,000 during the period of three months, a turnover of Rs.2,50,00,000 would be required, which is practically not possible for a small business man. Apart from this, no inquiry was made with the respondent for ascertaining the source of unaccounted income. In absence of any evidence, the income cannot be attributed to taxable services provided by them.
Held:
Since no inquiry was undertaken by the Department as to whether the respondent’s turnover during the period of three months was to the tune of Rs.2,50,00,000 plus the evidence gathered by the Department was insufficient to establish even the prevalence of probability, the Revenue’s appeal was dismissed.
Facts:
The respondents had availed credit of Service tax paid on rent-a-cab service which was used by officials of the company for timely completion of their jobs, telephone service as landline phones were installed at residences of officials and bills were paid by the respondents, and professional service of Chartered Accountant which was directly related to the business of the respondents.
The Revenue was in appeal against allowance of credit on above-mentioned service as it contended that conveyance offered to officials was for their personal comfort and welfare purpose which was in no way connected to the respondent’s business activity.
Held:
By relying on various judgments, issue regarding eligibility of Cenvat credit on rent-a-cab service, telephone service and professional service of Chartered Accountant was settled in favour of the respondents as the services were connected with their business activity and accordingly the Revenue’s appeal was rejected.
Comment:
With the recent changes in the CENVAT Credit Rules, taking credit on such items could be a challenge.
