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Year: 2011

(2011) 21 STR 603 (Tri.-Chennai) — Ramesh Enterprises v. CCE, Tirunelveli.

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Original authority has passed order-in-original without offering opportunity of personal hearing — CCE (Appeals) remanded for fresh adjudication to adjudicating authority.

Facts:
Original authority passed the order-in-original without offering personal hearing opportunity to the assessee. After observing the principle of natural justice, the Commissioner (Appeals) annulled the order and directed the lower authority to adjudicate afresh. The Department filed an appeal against the order of the Commissioner (Appeals) on the ground that the Commissioner (Appeals) had no power to remand.

Held:
Section 35A of the Central Excise Act, 1944 has not been made applicable to service tax matters u/s. 83 of the Finance Act, 1994. Section 85(4) does not preclude the Commissioner (Appeals) from passing a remand order if he thinks fit. Hence held that since the principle of natural justice was not followed and considering the amount of demand, the order of the Commissioner (Appeals) remanding the case was upheld and appeal of the Department was rejected.

Comment:
The above two judgments are contradictory.

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(2011) 21 STR 644 (Tri.-Mumbai) — Positive Packaging Industries Ltd. v. CCEx., Raigad.

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The assessee filed refund claim under Notification No. 41/2007-S.T. in relation to CHA service and commission agent service — Rejection of claim held as not correct in impugned order while holding claim to be sanctioned after verification — CCE (Appeals) not having power to remand — Impugned order not sustainable — Matter remanded to CCE (Appeals) for fresh decision.

Facts:
The original authority rejected the refund claim of the assessee in relation to CHA as well as commission agency. The Commissioner (Appeals) held that rejection of refund claim in relation to CHA and commission agent was not correct and the claim was required to be sanctioned after necessary verification and accordingly remanded the case back. The Revenue was in appeal against the order of the Commissioner (Appeals) on the ground that the Commissioner (Appeals) did not have power to remand.

Held:
It was observed that the law on the point of jurisdiction of the Commissioner (Appeals) on the subject of remand is well settled and it has been held that the Commissioner (Appeals) has no power to remand the matter and he has to decide the matter himself in case of any infirmity in the order passed by the adjudicating authority. It was held that the Commissioner (Appeals) having found that the findings on two issues by original authority were not sustainable, it was necessary for the Commissioner (Appeals) to analyse the materials on record and to arrive at appropriate finding on the claim of the assessee and not to leave the matter for verification by the adjudicating authority. Hence the order passed by the Commissioner (Appeals) was set aside and matter was remanded to the Commissioner (Appeals).

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(2011) 21 STR 663 (Tri.-Mumbai) — Rajdeep Buildcon Pvt. Ltd. v. CCEx., Aurangabad.

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The assessee paid excess service tax in October 2007 — Excess service tax was adjusted against service tax liability of January 2008 and February 2008 — Intimation about adjustment given after 15 days with jurisdictional Superintendent — There is no short payment.

Facts:
The assessee paid excess service tax in the month of October 2007 of Rs.1,00,924. Such excess was adjusted by the assessee against payables for the month of January 2008 and February 2008. Intimation for adjustment of excess payment was filed after 15 days. The Department issued show-cause notice to the assessee for payment of service tax of Rs.1,00,924 for the period January 2008 to February 2008, along with interest and penalty. Lower adjudicating authority confirmed the demand, however the Commissioner (Appeals) dropped the same.

Held:
The Tribunal observed that there was no dispute regarding excess payment of service tax by the assessee in October 2007 and eligibility of the assessee for refund of such excess payment. Also the assessee has intimated, to Range Superintendent, about the adjustment of excess payment but after 15 days and it was only a technical default and there is no short payment of service tax. Upholding the order, the appeal by the Revenue was rejected.

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(2011) 21 STR 668 (Tri.-Mumbai) — CBAY Systems (India) Pvt. Ltd. v. Commissioner of CCEx, Mumbai

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Appellants claimed refund of service tax on services used in export of goods under Notification No. 41/2007-S.T. — Exemption/refund denied on the ground that appellants not registered under Business Auxiliary service — Denial of refund not sustainable.

Facts:
The appellants utilised certain services for export of goods and claimed refund of the service tax on such services under Notification No. 41/2007 S.T. The refund claim was denied on the ground that the appellants were not registered under the category of ‘Business Auxiliary Service’.

Held:
CBEC has issued clarification, in the circular dated 12-3-2009, in regards to the above-mentioned issue stating that Notification No. 41/2007-S.T. provides exemption by way of refund for specified services used for export of goods. Granting refund to exporters, on taxable services that he receives and uses for export do not require verification of registration certificate of the supplier of service. Therefore, refund should be granted in such cases. The procedural violations by the service provider needs to be dealt separately. Accordingly, the denial of refund claim on the ground that the appellants were not registered under the ‘Business Auxiliary Service’ was not sustainable and the appeal was allowed.

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(2011) 21 STR 695 (Tri.-Mumbai) — Multi Organics Pvt. Ltd. v. Commissioner of Central Excise, Nagpur.

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Job worker paid service tax on the services rendered to the principal manufacturer — Processed goods used for manufacture of final product and duty paid on finished goods — CENVAT credit allowed by preferring later decision of the two contradictory decisions.

Facts:
The assessee appealed against the denial of CENVAT credit of the service tax paid by their job worker in the common order of the Commissioner (Appeals). However, the said order held the demand to be time-barred and also refrained from imposing penalty u/s. 11AC. This was challenged in the Revenue’s appeal.

Held:
The Tribunal observed that the Department relied on Bombay Dyeing & manufacturing Co. Ltd. v. Commissioner, [2001 (135) ELT 1392 (Tribunal)] which is contradictory to the decision relied on by the appellants in SPIC (HCD) Ltd. v. Commissioner of Central Excise, Chennai, [2006 (201) ELT 386 (Tri- Chennai)] for granting CENVAT credit for the service tax paid by the job worker. According to one of the well-established tenets of judicial discipline, where there are contradictory decisions of two Coordinate Benches, the later one would prevail. Therefore the view taken in the SPIC (HCD) Ltd. would be appropriate precedent. The assessee’s appeal for CENVAT credit of service tax paid by job worker to be allowed. Consequently, the Revenue’s appeal was dismissed.

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2011) 21 STR 589 (Tri.-Del.) — CCEx., Ludhiana v. Mayfair Resorts.

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Amount declared as income during the course of survey u/s. 133 of the Income-tax Act, 1961 not to be considered as revenue attributable to provision of service in absence of sufficient evidence.

Facts:
The Department was of the view that the amount declared during the course of survey u/s. 133 of Income-tax Act should be treated as receipt for rendition of service. The assessee produced a letter submitted to the income-tax authority which exhibited the date of findings. The letter nowhere stated that the amount was attributable to consideration from provision of service. The Department contended that the disclosure was subject matter of A.Y. 2005-2006 and the same should be considered as consideration for provision of service. The said amount was reflected in the balance sheet as well.

Held:
The matter was in respect of financial year 2004- 2005. The balance sheet did not disclose that the amount was attributable to provision of services. No evidence was produced by the Department. Therefore, the appeal was dismissed.

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Human Beings and Nature

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In the month of March 2011, a massive earthquake rocked Japan. This was followed by tsunami which left reactors in a nuclear power plant damaged. Thousands of people lost their life and the damage to property runs into billions of dollars.

Reports of radioactivity spreading into the environment are causing concern world over. Japan has asked importers not to impose any “unfair” import bans on its goods as a result of the nuclear accident that resulted from an earthquake and tsunami in the country on 11th March. Japan has tremendous capability of overcoming disasters. It is the only country in the world to have faced nuclear weapons attack.

The earthquake and the tsunami bring home one point very forcefully and that is the nature always has an upper hand. At times one feels that human beings consider themselves above the nature and overestimate their capabilities to impact the environment as compared to the nature and the process of evolution. I say this not only in connection with the capability of avoiding or overcoming the natural disasters but also in the context of the campaigns like ‘Save the Nature’ or `Save the Earth’.

Human beings are but only a small segment or part of the nature. We are not distinct or separate from the Nature. Can human beings really save the Nature, halt or even slow down the process of evolution. We talk about maintaining balance in ecosystem. But has there ever been balance in nature? Both in the Nature and market driven economy, there is never a state of equilibrium. It is only because there is imbalance that there is constant change.

The law of the Nature is `survival of the fittest’. Can we then really go against that law and stop the extinction of species that probably are destined to get extinct? When human population is rising is it not but natural that humans will look towards new places for settlement including the forests? At every stage of human development, humans had to ‘encroach’ on the territories of other species. This is also true with other living beings. Can we turn the clock back? Can we even think of farming without using chemical fertilisers? Today we can feed population of over 1 billion largely due to improved yield from the land achieved using fertilisers. Can the developed economies advice the developing economies to halt industrial progress, stop building cement plants because it causes climate change?

Possibly one way to look at the things is human beings are also part of the nature, what they do is due to their survival instinct that exists in all species. Yes, it may cause changes in the environment, climate; may have an impact on other species. But all that is part of the process of evolution. We have always heard the stories of there being deluge on the earth and that also is part of the process of evolution that earth goes through over a period of billions of years.

This thought may not gel with many. But it is a counterpoint that one needs to consider so we don’t go overboard with the campaigns of the environmentalist.

India is celebrating having won the semi-final of the World Cup against Pakistan. On the backdrop of the World Cup matches the Prime Ministers of Pakistan and India are meeting. Let us hope something positive comes out of the Indian initiative. It is in the mutual interest of Pakistan and India that both countries share good relations, there is peace between them, trade, cultural exchange flourishes between these two countries which not too long ago were one country.

Maybe one day in this part of the world also we will have a structure like European Union and it will be a force to reckon with in the global economy as well as on the political canvas of the world.

Sanjeev Pandit
Editor

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Appellate Tribunal: Powers of: Section 254 of Income-tax Act, 1961, read with Rule 29 of Income-tax (AT) Rules, 1963: A.Y. 2004- 05: U/r. 29, Tribunal has discretion to admit additional evidence in interest of justice once Tribunal affirms opinion that doing so would be necessary for proper adjudication of matter. This can be done even when application is filed by one of parties to appeal and it need not to be a suo motu action of Tribunal.

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[CIT v. Text Hundred India (P) Ltd., 197 Taxman 128 (Del.)]

In an appeal before the Tribunal filed by the assessee, the Tribunal admitted certain additional evidence filed by the assessee, allowing the application of the assessee u/r. 29 and remitted the case back to the Assessing Officer to decide the issue afresh after considering the said additional evidence.

The Revenue filed an appeal before the High Court contending that Rule 29 permits the Tribunal only to seek the production of any document or witness or affidavit, etc., to enable it to pass orders or for any other substantial cause; and that the assessee had no right to move any application for producing additional evidence.

The Delhi High Court held as under: “(i) As per the language of Rule 29, parties are not entitled to produce additional evidence. It is only when the Tribunal requires such an additional evidence in the form of any document or affidavit or examination of a witness or through a witness, it would call for the same or direct any affidavit to be filed, that too in the following circumstances:

(a) when the Tribunal feels that it is necessary to enable it to pass orders; or
(b) for any substantial cause; or
(c) where the Income Tax Authorities did not provide sufficient opportunity to the assessee to adduce evidence.

(ii) In the instant case, it was the assessee who had moved an application for production of additional evidence. It had the opportunity to file evidence before the Assessing Officer or even before the Commissioner (Appeals) but it chose not to file that evidence.

(iii) In view of several decisions, a discretion lies with the Tribunal to admit additional evidence in the interest of justice, once the Tribunal affirms opinion that doing so would be necessary for proper adjudication of the matter and this can be done even when application is filed by one of parties to appeal and it need not to be a suo motu action of the Tribunal.

(iv) The aforesaid rule is made for enabling the Tribunal to admit the additional evidence in its discretion, if the Tribunal holds the view that such an additional evidence would be necessary to do substantial justice in the matter. It is well settled that the procedure is handmade for justice and should not be allowed to be choked only because of some inadvertent error or omission on the part of one of the parties to lead evidence at the appropriate stage. Once it is found that the party intending to lead evidence before the Tribunal for the first time was prevented by sufficient cause to lead such an evidence and that said evidence would have material bearing on the issue which needed to be decided by the Tribunal and ends of justice demand admission of such an evidence, the Tribunal can pass an order to that effect.

(v) In the instant case, the Tribunal looked into the entire matter and arrived at a conclusion that the additional evidence was necessary for deciding the issue at hand. It was, thus, clear that the Tribunal found the requirement of the said evidence for proper adjudication of the matter and in the interest of substantial cause.

(vi) Rule 29 categorically permits the Tribunal to allow such documents to be produced for any substantial cause. Once the Tribunal had predicated its decision on that basis, there was no reason to interfere with the same.”

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(2011) TIOL 196 ITAT-Mum. Essem Capital Markets Ltd. v. ITO ITA No. 6814/Mum./2006 and 5349/Mum./2007 A.Ys.: 2003-2004 and 2004-2005 Dated: 25-2-2011

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Section 80IB(10) — Deduction u/s.80IB(10) cannot
be denied on the ground that the assessee is not the owner of the
property which he undertakes to develop, nor can it be denied on the
ground that the development agreement is not registered — Merely because
the commencement certificate was obtained prior to 1-10-1998, it does
not mean that the assessee has commenced the development and
construction of the project unless the assessee has taken some effective
steps on the site.

Facts:
The assessee entered
into a development agreement with M/s. Jay Jay Construction Co. on
12-10-1998. This development agreement, which was not registered, was in
respect of development right to construct a building ‘C’ on a plot of
land on which two buildings were already constructed (not by the
assessee). For the assessment years under consideration, the assessee
claimed deduction u/s.80IB(10) of the Act in respect of profits derived
from developing and building a housing project viz. ‘Building C’, which
claim was not accepted by the Assessing Officer (AO) on the ground that
the commencement certificate issued by the local authority was not in
the name of the assessee; development agreement was not registered;
commencement certificate was obtained prior to 1-10-1998 and building
‘C’ is not a separate project.

Aggrieved the assessee preferred
an appeal to the CIT(A) who confirmed the order of the AO and also had
an additional objection viz. that the condition regarding the area of
the plot is not fulfilled.

Aggrieved the assessee preferred an appeal to the Tribunal. 

Held:
The
Tribunal noted that subsequent to the two buildings being constructed
on the said plot, the plan of building ‘C,’ in respect of which the
assessee acquired the development right, was approved by the local
authority. The original plan was approved in 1995, but final approval
was given to the modified plan 10-9-1998 and permission for construction
of the building was finally given on 9-10-1998. The Tribunal also noted
that in the original approved plan/layout building ‘C’ was not shown.
Having observed that the commencement certificate (CC) was in the name
of the original owner since the title of the property was not in the
name of the assessee, the Tribunal held that:

(a) merely because
the commencement certificate is issued in the name of the original
landowner, the assessee cannot be deprived of deduction u/s.80IB(10) as
nowhere it is a mandate of the said provision that the assessee must be
the owner of the property which he undertakes to develop;

(b)
merely because the agreement is not registered, the assessee cannot be
deprived of the deduction u/s.80IB(10) as the assessee has developed
building ‘C’;

(c) merely because the CC was obtained prior to
1-10-1998, that does not mean that the assessee has commenced the
development and commencement of the building ‘C’;

(d) CC was
granted for the first time on 24-2-1995 and hence, building ‘C’ was not
part of the original project. It observed that on the said plot the
owner had constructed building ‘A’ consisting of 95 flats and tenements
and also building ‘B’. Just because the plot of land remained the same,
it cannot be construed that building ‘C’ is a part of the original
housing project;

As regards the objection of the CIT(A) on the
area of plot of land on which the project was constructed, the Tribunal
on facts found that there was no clearcut finding by the AO and CIT(A)
hence it restored the issue to the file of the AO to verify whether the
area of the plot on which the building ‘C’ is constructed is one acre or
not.

The appeal filed by the assessee was allowed.

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(2011) 21 STR 504 (Tri.-Del.) — Tangence Solutions (India) Pvt. Ltd. v. CCEx., Noida

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Rebate on export of services allowed for house-keeping services and denied for group insurance.

Facts:
The assessee was denied rebate claim on export of services on the ground that services of group insurance, health policy, medical policy and housekeeping services are not ‘input services’.

The assessee claimed that the term ‘input service’ is very wide and covers all services connected with the business activities. The appellants relied on the Madras Tribunal’s judgment in the case of Sundaram Fasteners Ltd. v. CCE, Chennai, (2010 TIOL 1342) and Tribunal’s decision in the case of CCE, Raipur v. Raipur Rotocast Ltd., (2010 (18) STR 466) for claiming CENVAT credit of service tax paid on group insurance. Moreover, they contended that in accordance with CAS-IV, expenses forming part of cost of providing services, should be considered as eligible ‘input service’.

The Department contended as under:

(i) Evidence was not shown to the effect that the house-keeping services were activities relating to business.

(ii) Group insurance, health policy, personal accident policy, etc. were not required to be provided mandatorily by the appellants and the same were provided as a welfare measure.

(iii) Drawing analogy from CAS-IV is not relevant as CAS-IV deals with valuation of captively consumed goods in manufacturing sector.

Held:
(i) CENVAT credit was allowed on procurement of house-keeping services as these were clearly necessary for rendition of service.

(ii) CENVAT credit on group insurance, health policy, etc. though forms part of cost of services rendered, the same could not be treated as ‘input service’ automatically. Moreover, since the group insurance was a welfare measure in the present case, the same could not be considered as integrally connected with the provision of service and therefore, was held to be ineligible.

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(2011) 21 STR 503 (Tri.-Chennai) — Nagappa Motors v. CCEx., Madurai.

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For the periods prior to 10th May, 2008, excess amount collected representing excise duty cannot be demanded from manufacturer u/s. 11D of the Central Excise Act.

Facts:
The assessee provided services under ‘authorised service station’ to various customers of Hero Honda Motors Ltd. The service tax was collected from Hero Honda Motors Ltd. and only 50% of the amount collected was deposited into the Government Treasury. Section 11D of the Central Excise Act was invoked for recovery of amount collected from the manufacturer along with interest and penalty.

Held:
During the period under consideration, section 11D was applicable when the amount was collected from buyers. Since Hero Honda Motors Ltd. was manufacturer and not the buyer of the goods, the appellants were not liable to pay such amount collected. Since amount need not be deposited, interest and penalty was also not leviable.

Comment:
Section 11D was amended through the Finance Act, 2008 and Ss. (1A) has been inserted for plugging such loop-hole in the Central Excise law and therefore, now excess amount received from any person as excise duty needs to be deposited into the Government Treasury.

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(2011) 21 STR 500 (Guj.) — CCEx. v. Steel Cast Ltd.

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Adjudication order not containing specific finding on suppression — Question of facts — Already answered by Tribunal — Question of law does not arise — Appeal dismissed.

Facts:
The assessee applied for registration under the category of ‘management consultancy services’. However, the adjudicating authority rejected the application and issued a show-cause notice invoking extended period of limitation. Adjudicating order did not record any specific finding as regards suppression of facts and value thereof. The respondents appealed before the Commissioner (Appeals) and contended that the revenue was reflected in the balance sheet and therefore, there was no suppression of facts. However, the Commissioner (Appeals) did not deal with the issue.

On appeal, the Tribunal held that though the services fall under ‘management consultancy services’, the extended period of limitation is not justified in view of bona fide interpretation of law, entertaining belief and due to confusion prevailing during the period under consideration.

Held:
The matter in relation to ‘suppression of facts with intent to evade tax’ was a question of facts which was already answered by the Tribunal in favour of the assessee. Moreover, the Revenue did not put any contrary arguments to findings of Tribunal. Therefore, the appeal was dismissed.

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(2011) 31 STT-51 (Delhi) — Pearey Lal Bhawan Association v. Satya Developers (P) Ltd.

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Service tax levy being an indirect tax on services, necessarily user of the service has to bear it by including the amount of tax in cost of service —Even if there is no explicit term in the contract — Sufficient internal indication in the Act present to indicate that the levy is indirect tax — Can be collected from the user — In this case lessee.

Facts:
The society, the owner of a building on leasehold land entered into lease deed with the lessee in October 2006 for the premises on the ground floor and also entered into agreement for the maintenance of common services and facilities of the said premises. Service tax was levied from 1-6-2007 on renting of immovable property for business purposes. The narrow issue in the dispute relates to whether service tax is to be borne by the lessee, the levy being an indirect tax which is required to be deposited after collecting from the user of the service. According to the plaintiff-society, by virtue of section 83 of the Finance Act, 1994 read with sections 12A and 12B of the Central Excise Act, the levy is to be borne by the user of the premises or services, whereas according to the lessee-defendant, the contract between the parties provided that the lessee would pay all taxes, charges, ground rent, house tax, easements and other outgoings imposed by the local authority, etc.

Held:
(i) The Court observed that the parties while entering into contract did not visualise that the tax would be levied on lease or rent of immovable property and there was no dispute that the tax was levied after the agreement was entered into. Referring to the Supreme Court in All India Federation of Tax Practitioners v. UOI, (2007) 10 STT 166 dealing with the nature of service tax liability the Court observed that the Apex Court had held that excise duty and customs are consumption-specific duties which do not constitute a charge on the business but on the client. Similarly, the Court also observed that in All India Tax Payers Welfare Association’s case (2008) 5 STT 136 (Mad.), it was observed that according to section 65 of the Finance Act, the provider of service only being an assessee is to collect service tax from the users of service as contemplated under the sections.

(ii) The Court further observed that sections 12A and 12B of the Central Excise Act were made applicable to service tax law vide section 83 of the Finance Act, 1994 to prescribe that the provider of service has the obligation to indicate the quantum of tax and that there is a presumption that incidence of duty is passed on to the buyer. Referring to section 64A of the Sale of Goods Act, 1930, the Court observed that the said section visualises and provides for situations where levies of tax are imposed after the contract is entered into.

(iii) In view of this, unless a different intention appears from the contract, in case of imposition or increase of tax subsequent to drawing a contract, the parties shall be entitled to be paid such tax or increase. In the instant case, even in the absence of explicit provision to enable lessor to receive the service tax component, there is sufficient internal indication in the Act through section 83 read with sections 12A and 12B of the Central Excise Act that the levy is an indirect tax cap-able of being collected from the user, the lessee in this case. Thus, the plaintiff was entitled to the amounts claimed from the lessee.

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Students’ Forum

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Dear friends, On Saturday, 11th June 2011 the forum has organised the Annual Day Programme to celebrate its 4th anniversary at Direct I-Plex, Andheri (w), starting from 3.30 p.m.

The Programme holds promise to achieve the following benefits:

Keynote address: At the Society it has always been our endeavour to harness talent and provide an environment not only conducive for pursuit of knowledge but also to provide a platform for future chartered accountants to achieve their potential.

Our learned speaker for the day Padma Shri (CA) T. N. Manoharan shall address the students throwing light on the various challenges that the path beholds and an alternative approach that one can follow to combat those challenges.

Awakening the writer within: Students pursuing the Chartered Accountancy Course are welcome to participate in the writing competition whereby they can write an essay on any topic of their liking and submit it to km@bcasonline.org and mark a copy to gm@ bcasonline.org. Only original ideas and viewpoints need to be expressed through the essays. Any essay found to be copied from the Internet or an existing write-up shall be disqualified.

Your write-ups should not exceed more than 1,000 words. The Editorial Committee of the BCAS will assess your contribution and if selected your essay will be published in BCAJ. The decision of the Editorial Committee is final and shall not be questioned under any circumstances whatsoever. Three selected best contributions will be awarded a prize. A certificate of participation will be issued to all the participants. Kindly note, your essays with your complete details and your registration number with ICAI should reach not later than May 23rd 2011.

Elocution Competition 2011 (for CA Students) Saturday, 11th June 2011:

“He came, He spoke, He won” — this is a story of a good communicator. The one who speaks convincingly and impressively wins half the battle. Now here is the opportunity of the year for CA students to present their communication skills. Be little humorous, let imagination run wild at the Elocution Competition organised by BCAS for CA students under the auspices of Smt. Chandanben Maganlal Bhatt Elocution Fund. The contestant will be given five minutes to express his/her views on any one of the undermentioned topics:

(a) Scams (Your Take on Combating It)
(b) Why I wished to be a C.A.?
(c) Coping with Stress (Your Mantra Decoded)
(d) An appointment with GOD (Your Agenda for the Meeting)
(e) Freedom of Expression (Used or Overused)

Those desirous of participating should enrol on or before May 23rd 2011. The best three speakers selected by a panel of judges will be awarded handsomely. An elimination round will take place on June 4th 2011, Saturday at the Society Office Churchgate starting from 2.30 p.m.

Strike fast: A quiz is organised at the Annual Day to enable you to test and gain more general knowledge, basic information on commerce, economics, health, sports and entertainment.

Articles of the same firm or self-formed groups can participate and compete as a group. Three prizes will be awarded to the winning team and a certificate for participation will be issued to each participant.

A rotating trophy is up for grabs to be awarded to the winning team’s CA firm.

Do not miss the opportunity to meet and enjoy with your student friends. Enrolment is limited for 200 students.

And above all, a sumptuous buffet to end a wonderful evening.

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Budget on the back burner — For UPA managers, meaningful discussion on Budget is far less important than the need for parliamentarians to campaign for Assembly polls.

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If the United Progressive Alliance (UPA) has its way, Parliament will approve the Union Budget for 2011-12 by 25th March, in less than a month of its presentation on 28th February. This will be both unusual and unprecedented. Worse, it will deal a blow to the time-honoured tradition of subjecting the government’s annual Budget to elaborate scrutiny and discussion by members of Parliament, before the final assent by the president.

The schedule, followed for several decades, is that the Budget receives Parliament’s nod of approval by the first week of May. A lot happens during the nine weeks between the presentation of the Budget on the last working day of February and its passage in the first week of May. Various parliamentary committees examine Budget provisions and present their findings to the Finance Minister. Also, members of the two Houses get an opportunity to discuss the various provisions in the Finance Bill and even make useful suggestions on the expenditure programmes of a few central ministries. There is, of course, a short recess in between. But that only allows the parliamentary committees to complete their scrutiny of the Budget and table their reports before the two Houses.

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CORRUPTION FUND OF INDIA

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Preamble:
Though a regular reader of the BCAJ, it is ironical that only last month that I had an opportunity to look into the “Cancerous Corruption” series when the Editor contacted me regarding publishing one of my articles on Corruption Audits in the Journal. That article has since been published, but it set me thinking on a concept which grew in my find but which requires a larger forum to brain-storm. I felt that the BCAJ is the ideal forum.

Consolidated Fund of India:
Readers may be aware of the Consolidated Fund of India. All revenues received by the Government by way of taxation like income tax, central excise, custom, land revenue (tax revenues) and other receipts flowing to the Government in connection with the conduct of Government business-like receipts from railways, posts, transport, etc. (non-tax revenues) are credited into the Consolidated Fund. Similarly, all loans raised by the Government by issue of public notifications, treasury bills (internal debt) and loans obtained from foreign governments and international monetary institutions (external debt) and all moneys received by the Government in repayment of loans and interest thereon are also credited into this Fund. All expenditure incurred by the Government for the conduct of its business including repayment of internal and external debt and release of loans to the States/Union Territory Governments for various purposes is debited against this Fund.

Corruption Fund of India (CFI):
Just like the Consolidated Fund of India, we should think of creating a Corruption Fund of India (CFI). Let’s assume the population of India to be 120 crore people and give a 50% allowance for children, elders and the poor who cannot be included in the list of contributors. That gives us 60 crore persons. Lets also assume that each person is asked to contribute Rs.100 annually to the CFI, we target an amount of Rs.6000 crores. Giving a further allowance of 50% for persons who are either unable or unwilling to pay, we end up with Rs.3000 crores. This target can be met with higher contributions from willing contributors and smaller ones from the hesitant. The Government should make a matching contribution from the Consolidated Fund of India giving us a kitty of Rs.6000 crores.

Utilisation of CFI amounts: CFI funds can be used in various ways:

1. It is often felt that negligible salaries and meagre allowances trigger corruption. Increasing the salaries and allowances of a certain sect of people who are habitually corrupt could be done from these funds. A ‘top-down’ approach — starting with the people who are suspected of corruption — should be adopted here with the goal that the salaries and allowances should be liberal enough to deter indulging in corruption.

2. The funds can also be used for setting up Special Corruption Courts. It is no secret that today’s judicial system can easily be overridden and trial of the guilty can take years. The Special Corruption Courts would take immediate action against the guilty.

3. The funds can also be used to disseminate information about corruption — the methods employed, action taken against the guilty and steps to minimise them.

4. Conducting special audits in corruption-prone areas such as government tenders, etc.

5. Pre-audits of events of special significance such as international gaming events, etc.

The above list is only representative. Other avenues to utilise the funds to spread awareness can be identified as we go along.

Why should the taxpayer contribute ? This is a question that has to be and would be asked. It is a fact that corruption has become so entrenched in the system that the Government alone may not be able to do much single-handedly since many of the constituents can be guilty themselves. A mass movement is required to create an impact. Taxpayers in the past have contributed to natural calamities and other disasters. Corruption is a national calamity of epic proportions. Contributions to the fund should qualify for a 100% deduction u/s.80G of the Income-tax Act.

Other details:
The CFI should be a body that is set up with reputed people with an impeccable public record. (thankfully, they still exist !) businessmen, judges, academicians can comprise the Board who should run CFI with no interference from the Government. The accounts and other activities would be made public irrespective of the status of the entity.

Brainstorming: The author understands that the above is overly ambitious (probably impractical too) and would meet huge obstacles. It would also have staunch opponents. However, one needs to make a beginning somewhere and this forum can be used to brainstorm on this issue. Even better, BCAJ can organise an open-house on this topic.

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READERS’ VIEWS

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Sir, With respect to the feature ‘Controversies — Restriction on Deduction due to section 80-IA(9)’ published in March issue of BCAJ at page no. 41, I would like to bring to the notice of the authors the provisions of section 80A(4) inserted w.e.f. 1-4- 2003. This section was inserted just to give legal sanctity to the Judgment of five member Bench in case of Hindustan ACIT v. Mint & Agro Products (P) Ltd., 123 TTJ 577 (Del.) (SB). However, neither the Delhi High Court nor the Bombay High court took note of the amended section. The reason possibly being it was not cited by anybody. So, for A.Y. 2003-04 and A.Y. 2004-05, I think the position is clear. The comments are solicited. –

– Pawan Singla

Errata In the March 2011 issue, in the `Readers’ Views’ the names of the letter writers were omitted. The letter commenting on `Closements’ was by Mr. G.Y. Limaye and the letter commenting on `is It fair’ was by Mr. B. D. Bhide. The error is regretted. – Editor 

(viii) Campus Placement for Articled Assistants: Board of Studies of ICAI has introduced campus placement scheme for selection of Articled Assistants by C.A. Firms. This is in addition to the Online Placement Service already available at http://bosapp. icai.org The campus placement will be held between 15th and 30th April, 2011 in cities viz. Ahmedabad, Mumbai, Nagpur, Pune, Bangalore, Chennai, Ernakulam, Hyderabad, Kolkata, Indore, Jaipur, Kanpur, Ghaziabad, Chandigarh and New Delhi.

(Refer C.A. Students Journal for March, 2011, Page 33)

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INCOME TAX DEPARTMENT GOVERNMENT OF INDIA

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INCOME TAX DEPARTMENT GOVERNMENT OF INDIA

Vision To partner in the nation building process through progressive tax policy, efficient and effective administration and improved voluntary compliance.

Mission

To formulate progressive tax policies
To make compliance easy
To enforce tax laws with fairness
To deliver quality services
To continuously upgrade skills and build a professional and motivated workforce

We Believe in
equity and transparency;
promoting taxpayer awareness towards voluntary compliance;
effective deterrence against tax evasion;
continuous research as the foundation of tax policy and administration; and
adopting technology as an enabler for im proved service deliver

This charter is issued on 24th of July 2010, revisiting the earlier charter issued in July 2007. In the preparation of this charter, consultations have been held with all stakeholders. This charter re ects the best endeavor of the Department. The Department intends to review the charter within a period of three years.

Expectations from Taxpayers

We expect our taxpayers:

• to be truthful and prompt in meeting all legal obligations;
• to pay taxes in time;
• to obtain PAN and quote it in all documents and correspondence;
• to obtain TAN for every unit and quote it in all documents and correspondence;
• to quote correct tax payment/deduction particulars in tax returns;
• to verify credits in tax credit statements;

Service Delivery Standards We aspire to provide the following key services within specied timelines:

Sl. No.

Key Services

Timelines

 

 

(From the end of the month in which return/

 

 

application
is received/cause of action arises)

 

 

 

1.

Issue of refund along with interest u/s
143(1) of the I.T. Act

 

 

(a) in case of electronically  led returns

6 months

 

(b) other returns

9
months

2.

Issue of refund
including interest from proceedings

 

 

other than section
143(1) of the I.T. Act

1
month

3.

Decision on
rectification application

2
months

4.

Giving effect to appellate/revision order

1 month

5.

Acknowledgement of
communication received through

 

 

electronic media or
by hand

Immediate

6.

Decision on
application seeking extension of time

 

 

for tax payment or for grant of installment

1 month

7.

Issue of Tax
Clearance Certi cate u/s 230

Within
3 working days from the

 

of the I.T. Act

date
of receipt of application

8.

Decision on
application for recognition/approval

 

 

to provident
fund/superannuation fund/gratuity fund

3
months

9.

Decision on
application for grant of exemption

12
months

 

or continuance
thereof to institutions

 

 

(University, School, Hospital etc.) under
section 10(23C)

 

 

of the I.T. Act

 

10.

Decision on
application for approval to a fund

 

 

under section 10(23AAA) of the I.T. Act

3 months

 

 

 

Sl. No.

Key Services

Timelines

 

 

 

 

 

(From the end of the month in which return/

 

 

 

 

 

application
is received/cause of action arises)

 

 

 

 

11.

 

Decision on application for registration of

 

 

 

charitable or religious trust or institution

4
months

12.

 

Decision on application for approval of

 

 

 

hospitals in respect of medical treatment of
prescribed diseases

3
months

13.

 

Decision on application for grant of
approval

 

 

 

to institution or fund under section
80G(5)(vi) of the I.T. Act

4
months

 

 

 

 

14.

 

Decision on application for no deduction

 

 

 

of tax or deduction of tax at lower rate

1
month

15.

 

Redressal of grievance

2
months

16.

 

Decision on application for transfer of case

 

 

 

from one charge to another

2
months

 

 

 

 

 

 

• to le complete & correct returns, within the due dates and in appropriate tax jurisdictions;
• to quote correctly Bank Account Number, MICR Code and
• other Bank details in the returns of income;
• to intimate change of address to the tax authorities concerned;
• to intimate any change in PAN particulars to designated agency; and
• to quote PAN of all deductees in the TDS Return We Endeavour
• to promote voluntary compliance;
• to educate tax payers and citizens about tax laws;
• to provide information, forms and other assistance
• at the facilitation counters and also on website www.incometaxindia.gov.in;
• to continuously improve service delivery;
• to induct state-of-the-art and green technology with a user friendly interface; and
• to inculcate a healthy tax culture where the taxpayers and
• the tax collectors discharge their obligations with a sense of responsibility towards nation building. Grievance Redressal
• All grievances received will be redressed within two months from the end of the month of their receipt.
• Petitions on un-redressed grievances led before next higher authority will be decided within 15 working days of receipt.
• The taxpayer can approach the Income Tax Ombudsman in case of un-redressed grievance. • The grievance redressal mechanism including contact details of Public Grievance O cers are available on the website www.incometaxindia. gov.in

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Periodicity for ‘I’ form under CST Act, 1956

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Under the CST Act there are various declaration forms. The forms are required to be furnished as per given periodicity. As per Rule 12(1) and Rule 12(9)(b) of the CST (Registration & Turnover) Rules, 1957, the C/E1/EII forms can be on quarterly basis. In other words, the forms can be for individual transaction or can be for all transactions in one quarter. As per Rule 12(5) of the CST (R & T) Rules, 1957, ‘F’ Forms can be on monthly basis. However, there is some ambiguity about periodicity of ‘I’ forms.

Few aspects of periodicity of ‘I’ forms are discussed below:

This form is issued by Special Economic Zone Unit to its supplier when the transaction is inter-State purchase from such supplier. The sales against ‘I’ forms are fully exempt from levy of CST in the hands of suppliers. ‘I’ form is issued as per section 8(8) of the CST Act, 1956. The said section reads as under:

“(8) The provisions of Ss. (6) and (7) shall not apply to any sale of goods made in the course of inter-State trade or commerce unless the dealer selling such goods furnishes to the authority referred to in Ss. (6), a declaration in the prescribed manner on the prescribed form obtained from the authority referred to in Ss. (5), duly filled in and signed by the registered dealer to whom such goods are sold.

Explanation — For the purpose of Ss. (6), the expression ‘special economic zone’ has the meaning assigned to it in clause (iii) to Explanation 2 to the proviso to section 3 of the Central Excise Act, 1944.”

In light of the above provision, the Central Government has prescribed Rule 12(11) in the CST (Registration & Turnover) Rules, 1957. The said Rule is reproduced below for ready reference:

“12(11)The dealer, selling goods in the course of inter-State trade or commerce to a registered dealer under sub-section (6) or under sub-section (8) of section 8 or under subsection (1) of section 5 of the Central Sales Tax Act, 1956 read with section 76A of the Customs Act, 1962 (52 of 1962), shall furnish a declaration for the purposes of Ss. (8) of the said section 8 in Form I duly countersigned and certified by the Authority specified by the Central Government authorising the establishment of the unit in the Special Economic Zone (notified u/s. 76A of the Customs Act, 1962 (52 of 1962) that the sale of goods is for the purpose of establishing a unit in such Zone.”

The relevant part of form ‘I’ is reproduced below for ready reference:

It can be seen that the ‘I’ form can be for sales made against one purchase order of the customer. There is no provision for clubbing more than one purchase order in one ‘I’ form. This position can be compared with Rule 12(1) about issue of ‘C’ forms. The said Rule is reproduced below for ready reference.

“12. (1) The declaration and the certificate referred to in Ss. (4) of section 8 shall be in Forms C and D, respectively; [Provided that Form C in force before the commencement of the Central Sales Tax Registration and Turnover (Amendment) Rules, 1974, or before the commencement of the Central Sales Tax Registration and Turnover (Amendment) Rules, 1976, may also be used up to the 31st December, 5 [1980], with suitable modifications:]

Provided further that a single declaration may cover all transactions of sale, which take place in a quarter of a financial year between the same two dealers.”

It can be seen that under this rule, the sale transactions effected in one quarter can be included in one ‘C’ form. This suggests that although the ‘C’ forms are supposed to be against each sale, however, by giving specific provision, it is provided that the sales transactions in a quarter can be included in one ‘C’ form.

In Rule 12(11) of CST (R & T) Rules, 1957, about ‘I’ form, there is no such provision allowing clubbing of transactions of one quarter in one ‘I’ form. In absence of the same, the natural outcome will be that against each sale, one ‘I’ form will be required. This position also gets confirmed by prescription in body of ‘I’ form. The form itself specifies that all the sale bills against one purchase order can be included in one ‘I’ form. It is a fact that one purchase order is one transaction. There can be more than one delivery in relation to such purchase order and accordingly more than one sale bill also may be prepared. However, it will be considered to be one transaction and therefore the form includes all the sale bills against one purchase order to be included in one ‘I’ form.

Howsoever, there is no facility to include more than one purchase order in one ‘I’ form, though they may be within one quarter. Therefore, the position is for one purchase order one ‘I’ form is required.

It is also a fact that if the declaration forms are not as per the provisions of the Rules, they are considered to be invalid. There are number of judgments wherein it is held that the procedure regarding issue of declaration forms should be strictly followed, lest the forms will be invalid and the claim may not be allowed. Reference can be made to judgment in case of India Agencies (Regd.) v. Additional Commissioner of Commercial Taxes, Bangalore, (139 STC 329) (SC). Supreme Court has observed as under:

“(1) The dealer has to strictly follow the procedure and produce the relevant materials required under that Rule. Without producing the specified documents as prescribed thereunder a dealer cannot claim the benefits provided u/s. 8 of the Central Sales Tax Act, 1956.

(2) Section 8(4)(a) of the Central Sales Tax Act, 1956, specifically provides that the provisions of Ss. (1) shall not apply to any sale in the course of inter-state trade or commerce unless the dealer selling the goods furnishes to the prescribed authority in the prescribed manner a declaration duly filled and signed by the registered dealer to whom the goods are sold containing the prescribed particulars in a prescribed form obtained from the prescribed authority.”

Therefore, the legal position appears to be clear that unless the form is as per relevant Rule it will not be valid and will not be allowable. Thus, in respect of ‘I’ forms special care is required to be taken that they are per transaction and not on quarterly basis.

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IS IT FAIR TO LEVY MAT

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The economics behind direct taxation is twofold:

i. Collection of revenue for the State in a manner to reduce the inequality in the distribution of wealth, and

ii. Using it as a fiscal tool for channelisation of the economy into desired sectors.

The first objective is achieved by enacting the Direct Taxes Laws and empowering the State to alter the tax rates annually while preparing the Budget for the ensuing financial year. The second objective is achieved by providing various tax incentives in the form of tax holiday (deduction or exemption), accelerated depreciation, etc. Needless to mention that various tax incentives provided by the Income-tax Act, 1961 (‘the Act’) have contributed to a large extent in the development of the Indian economy to bring it to its present state.

The above two objectives are conflicting with each other, in a way. Hence a proper balance has to be maintained between the two. But this is often lost sight of by the law-makers.

A typical example is levy of Minimum Alternate Tax (MAT) on book profits of companies. MAT was introduced for the first time in India u/s.115J by the Finance Act, 1987 and later removed, reintroduced and amended from time to time. This article is intended to raise a basic question whether levy of MAT is at all justified in the light of the second objective stated above.

The advocates of MAT basically give the argument that corporates should not be allowed to have two faces — one for the shareholders and the other for the State. In simple words, when they have huge profits in books of account but no or lesser ‘total income’ under ‘the Act’, they should pay MAT. But then, how did the corporates have no or lesser ‘total income’ under ‘the Act’? It was only because of tax incentives given by the State. For example, a company engaged in development of infrastructure facility is allowed a 100% deduction of profits derived from such business for a period of 10 consecutive years out of a total period of 20 years. Now assuming that it is the sole business of the company, its ‘total income’ under ‘the Act’ shall be nil (subject of course to the enormous litigation on the word ‘derived from’) but will have a positive book profits, on which it has to pay MAT @ 18%. It indirectly implies that deduction allowed u/s.80IA becomes only 40%. This result could have been achieved by simply amending section 80IA and restricting the deduction to 40% (Tax on 60% of the profits @ 30% is nothing but MAT of 18% on 100% profits). The same situation can be visualised in several other tax incentives like:

i. Deduction u/s.80IB to u/s.80IE
ii. Deduction u/s.10A, u/s.10B & u/s.10AA
iii. Additional depreciation @ 20% for new machineries (for manufacturers)
iv. Allowance of capital cost u/s.35AD for eligible business (obviously in books, these exp. will be capitalised giving rise to huge difference between book profits and total income)
v. Weighted deduction of 175% or 200% for R&D
vi. LTCG u/s.10(38) [when it is said that exemption u/s.10(38) is in lien of STT, where comes the need for MAT on such LTCG for corporates, as if they don’t pay STT?]
vii. Exemption u/s.54EC or u/s.54D or u/s.54G or u/s.54GA.
viii. Subsequent deduction u/s.40(a)(ia) or u/s.43B because of late compliance.

If the above situations are to be taxed anyway, then those sections themselves can be amended or deleted. No doubt, MAT credit is allowed to be carried forward u/s.115JAA; but its utilisation in future is subject to many contingencies and restrictions and we accountants are well aware of the time value of money.

We must debate on the question whether it is justified to levy MAT on book profits especially on tax incentives like 10AA or 80IA, etc.? I believe, it is a violation of the principle of ‘Promissory Estoppel’ ! ! !

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New Rules for the availability of names have been issued by the Central Government ‘Companies (Name Availability) Rules, 2011’.

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Please visit MCA website for complete text of the circular:

http://www.mca.gov.in/Ministry/pdf/Companies_ rules_15Mar2011.pdf

The following Notifications for affecting sections 5, 6, 20, 29, 30 & 31 of Competition Act have been issued vide Notification dated 4-3-2011.

1. In exercise of the powers conferred by clause (a) of section 54 of the Competition Act, 2002 (12 of 2003), the Central Government, in public interest, hereby exempts an enterprise, whose control, shares, voting rights or assets are being acquired has assets of the value of not more than Rs.250 crores or turnover of not more than RS.750 crores from the provisions of section 5 of the said Act for a period of five years.

2. In exercise of the powers conferred by clause (a) of section 54 of the Competition Act, 2002 (12 of 2003), the Central Government, in public interest, hereby exempts the ‘Group’ exercising less than 50% of voting rights in other enterprise from the provisions of section 5 of the said Act for a period of five years.

3. In exercise of the powers conferred by subsection (3) of section 1 of the Competition Act, 2002 (12 of 2003), the Central Government hereby appoints the 1st day of June, 2011 as the date on which sections 5, 6, 20, 29, 30 and section 31 of the said Act shall come into force.

4. In exercise of the powers conferred by subsection (3) of section 20, of the Competition Act, 2002 (12 of 2003), the Central Government, in consultation with the Competition Commission of India, hereby enhance, on the basis of the wholesale price index, the value of assets and the value of turnover, by 50% for the purposes of section 5 of the said Act.

Please visit MCA website for complete text of the notification:

http://www.mca.gov.in/Ministry/notification/pdf/ Notification_4mar2011(4).pdf

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Simplification of DIN Rules.

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In order to speed up and simplify the process to obtain a DIN, the below mentioned procedure has been recommended:

1. Application for DIN will be made on eForm. No physical submission of documents shall be accepted and for this purpose. Scanned documents along with verification by the applicant will be attached with the eForm. Only online fee payment will be allowed i.e., No challan payment.

2. The application can also be submitted online by the applicant himself using his DSC.

3. DIN 1 eForm can be digitally signed by the professional who shall also confirm that he has verified the particulars of the applicant given in the application.

4. Where the DIN 1 is verified by the professional, the DIN will be approved by the system immediately online.

5. In other cases the DIN cell will examine the application and the same shall be disposed of within one or two days.

6. Companies (Directors Identification Number) Rules, 2006 are being amended on the above lines.

7. Penal action against the applicant and professional certifying the DIN application in case of false information/certification as per provisions of section 628 of the Act will be taken in addition to action for professional misconduct and revocation of DIN, allotted on false information.

8. The above procedures is expected to enable allotment of DIN on the same day.

9. The above procedures applies to filing of DIN 4 intimating changes in particulars of Directors.

A Notification to notify the aforesaid procedure is being issued. After issue of necessary Notification, the applicant/professionals/DIN cell are advised to follow the notified procedures for allotment of DIN.

Please visit MCA website for complete text of the Circular: http://www.mca.gov.in/Ministry/pdf/ Circular_04Mar2011.pdf

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Process of incorporation of companies (Form-1) and establishment of principal place of business in India by foreign companies (Form-44) — Procedure simplified.

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General Circular No. 6/2011 — In order to speed up and simplify the process of incorporation of companies and establishment of principal place of business in India by foreign companies for reduction in time taken by Registrar of Companies, the belowmentioned procedure has been recommended:

1. Only Form 1 shall be approved by the ROC Office Form 18 and 32 shall be processed by the system online.

2. There shall be one more category, i.e., Incorporation Forms (Form 1A, Form 37, 39, 44 and 68) which will have the highest priority for approval.

3. Average time taken for incorporation of company should be reduced to one (1) day only.

A Notification to notify minor changes in e-forms 18 and 32 to enable them to be taken on record through STP mode for aforesaid procedure is being issued separately. Please visit MCA website for complete text of the circular: http://www.mca.gov.in/Ministry/pdf/ Circular_6-2011_8mar2011.pdf

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Payment of MCA fees — Only in electronic mode — Up to Rs.50000 w.e.f. 27-3-2011.

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In the interest of stakeholders, with a view to improving service delivery time, the Ministry has decided to accept payments of value up to Rs.50,000, for MCA 21 services, only in electronic mode w.e.f. 27th March, 2011.

For the payments of value above Rs.50,000, stakeholders would have the option to either make the payment in electronic mode, or paper challan. However such payments would also be made in electronic mode w.e.f. 1st October, 2011.

Please visit MCA website for complete text of the circular: http://www.mca.gov.in/Ministry/pdf/ Circular_9mar2011.pdf

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Exemption from taking Central Government for managerial remuneration.

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The MCA has granted a general relaxation to companies from the requirement for taking an approval of the Central Government for making payment of remuneration by way of commission to its non-whole-time director(s) in addition to the sitting fee, if the total commission to be paid to all those non-whole-time directors does not exceed:

1% of net profit of the company if it has one or more whole-time director

3% of the net profits of the company if it does not have a managing director or whole-time director(s). Please visit MCA website for complete text of the Circular: http://www.mca.gov.in/Ministry/pdf/ Circular_4-2011_4mar2011.pdf

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SIGNIFICANT AMENDMENTS IN CENVAT CREDIT

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1. Scope and background:

1.1 Scope of ‘Inputs’/Input Services — Subject of extensive litigations:

The scope of ‘inputs’ and ‘input services’ eligible to CENVAT credit under the CENVAT Credit Rules, 2004 (CCR) has been subject of extensive judicial controversy having significant implications.

The Supreme Court had interpreted the scope of ‘inputs’ narrowly in the case of Maruti Suzuki Ltd. v. CCE, (2009) 240 ELT 41 (SC).

In Chemplast Ltd. v. CCE, (2010) 17 STR 253, it was held that ‘input services’ definition including activities relating to business cannot be interpreted to include post-manufacturing activities. In Kbace Tech Pvt. Ltd. (2010) 18 STR 281, a narrow interpretation of ‘input service’ was made on the basis of Supreme Court ruling in Maruti Suzuki (supra).

In the mean time, the Bombay High Court in a landmark ruling in Coca Cola India Pvt. Ltd. v. CCE, (2009) 15 STR 657 (Bom.) held that scope of ‘input services’ is very wide to cover all business related services.

However, in CCE v. Manikgarh Cements Works, (2010) 18 STR 275 (Tri.-Mumbai), the Tribunal, held that the Bombay High Court ruling in Coca Cola case has been impliedly overruled by the Supreme Court ruling in Maruti Suzuki in regard to inputs, and a narrow interpretation was given to the scope of ‘input service’. This ruling was confirmed by the Bombay High Court in CCE v. Manikgarh Cement, (2010) 20 STR 456 (Bom.).

In a subsequent ruling by the Bombay High Court in CCE v. Ultratech Cement Ltd., (2010) 20 STR 577 (Bom.), after considering the Supreme Court ruling in Maruti Suzuki and the Bombay High Court ruling in Coca Cola, a wide interpretation has been given to the scope of ‘input services’ eligible to CENVAT credit.

Amidst all this, in a subsequent ruling, the Supreme Court in Ramala Sahkari Chini Mills Ltd. (2010) 260 ELT 321 (SC) doubted the Supreme Court ruling in Maruti Suzuki and has referred the matter to a larger Bench.

On this backdrop, significant and far-reaching changes have been made in CCR w.e.f. 1-4-2011, in particular relating to scope of ‘inputs’/ ‘input services’ eligible to credit rule providing for proportionate credit rules, point of credit availment, etc.

The more important amendments, essentially from a service provider’s perspective are discussed hereafter.

1.2 Government clarification:

Relevant extract from the Department clarification dated 28-2-2011 explaining the amendments is as under:

Para 1.1

The changes in the Cenvat Credit Rules are guided inter alia by the following considerations:

(a) Describe the scope of eligible inputs and input services more clearly so as to minimise disputes in their interpretation;

(b) Eliminate distortions and areas of tax avoidance arising from differential treatment of goods and services used for similar purposes;

(c) Provide a practical scheme for the segregation of Cenvat credits used in respect of final products and output services where they are partially exempted with condition that no such credits shall be taken;

(d) Liberalise the provisions in certain areas to meet the legitimate demands of business;

Overall comments:
An overall study of the amendments in CCR in totality clearly indicates that the CENVAT credit benefit of service tax paid on input services, would be substantially curtailed with effect from 1-4-2011.

The rate of service tax was increased from 5% to 10% during a short period of about 15 months. At that time, questions were posed before the Government, as to how would the business and end consumers absorb the 100% increase in a short time. At that time, Government had explained to the effect that impact of increase in the rate of service tax would be substantially neutralised by introduction of CENVAT credit mechanism across goods and services. The amendments are clearly against the stated position of the Government.

Further, it is the cardinal principle of VAT/GST tax system prevalent in over 100 countries that taxes paid on expenditure incurred for the purpose of business can be set off against VAT/GST payable at the output stage. Amendments in CENVAT credit denying credit of service tax paid on business expenses, is against the principles of VAT/ GST system prevalent world-wide.

Further, amendments do not appear to be trade/ taxpayer-friendly in the backdrop of imminent introduction of GST regime.

2. Exempted services:
Definition of ‘exempted services’ in Rule 2(e) of CCR has been amended to include taxable service, which is partially exempted, on the condition that no credit of inputs/input services used for taxable service shall be taken.

An Explanation has been added to clarify that ‘exempted services’ includes trading.

Comments:
(a) It is commonly found that a person is often engaged in trading activity (buying and selling of goods/services). The same could exist in one or more of the following combinations:

  • Only trading
  • Manufacturing and trading
  • Services and trading
  • Manufacturing, services and trading

As regards pure trading activity, it was very clear that benefit of CENVAT credit (viz. Service Tax paid on input services and excise duty paid on inputs/capital goods) would not be available to such dealer.

In Metro Shoes Pvt. Ltd. v. CCE, (2008) 10 STR 382 (Tri.-Mumbai) it was observed as under:

“. . . . . . Credit availed on the services which are directly/wholly attributable to the trading activity is ineligible to be availed as input service credit.”

In regard to persons engaged in trading activities along with manufacturing/services/or both, there was no clarity as regards availment of CENVAT credit on common input services.

In the case of Orion Appliances Ltd. v. CST, (2010) 19 STR 205 (Tri.-Ahd.) where the assessee, providing taxable services and engaged in trading activity, availed CENVAT credit on iput services used for taxable services as well as trading activity, the Tribunal held as under:

Trading activity is nothing but purchase and sales and cannot be called a service and therefore it cannot be considered as exempted service.

Rules 6(2) and 6(3) of CCR only deal with a situation where service provider is providing taxable and exempted services. Therefore, since trading activity is not an exempted service, Rule 6 cannot be applied to such a situation.

(b) On this backdrop, the burning issue of common input services in regard to trading activity is sought to be addressed by treating ‘trading’ as ‘exempted service’ through insertion of an Explanation in Rule 2(e) of CCR which defines ‘exempted services’.

This is a significant amendment, spelling out an important policy perspective, which is likely to result in curtailment on CENVAT credit available to service providers involved in trading business. It is felt that a clarification need to be issued to the effect that the amendment would be effective 1-4-201

Further, one can understand ‘trading activities’ being treated on similar lines as ‘exempted services’ for the limited purpose of determination of proportionate credit under Rule 6 of CCR. However, amendment made in section 2(e) of CCR, is likely to result in larger legal issues as to whether ‘trading activity’ can be regarded as ‘service’ at all so as to be regarded as ‘exempted services’.

(c) It seems that all services in respect of which, abatement is claimed (in terms of Notification No. 1/2006-ST) would now get treated as ‘exempted services’. Thus services like mandap keeper construction of complex commercial or industrial construction, catering, etc. where abatement is allowed subject to the condition that CENVAT credit is not availed, would all be now treated as ‘exempt servi

Indian Accounting Standards converged with IFRS — Notified.

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The MCA has notified thirty five Indian Accounting Standards (Ind-AS) converged with International Financial Reporting Standards and placed them on its website. The date of implementation of the Ind- AS will be notified by the MCA at a later date.

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Revised Schedule VI

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Revised Schedule VI which is available on the MCA website is applicable for Balance Sheet and Profit and Loss Account to be prepared for the financial year commencing on or after 1-4-2011 [Refer Notification No.50447CE dated 28th February as amended by notification dated 28th March 2011]. For details visit MCA website www.mca.giv.in

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General exemption under section 211 for companies

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The Central Government has issued a press release informing that a general exemption has been given to certain categories of companies from giving some specific disclosures required in part I of Schedule VI to the Companies Act.

Please visit the MCA website for the complete text of the press release:

http://www.mca.gov.in/Ministry/press/press/Press_ Note_No.2_08feb2011.pdf

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General exemption under Section 211 for public financial institutions (PFIs).

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The Central Government has issued a press release informing that a general exemption has been given to the PFIs from certain disclosures concerning investments, as required in part-I of the Schedule VI

However, this exemption is subject to fulfilment of certain conditions and PFIs will need to give disclosures required in the release. Please visit MCA website for complete text of the press release:

http://www.mca.gov.in/Ministry/press/press/Press_ Note_No.5_08feb2011.pdf

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A.P. (DIR Series) Circular No. 45, dated 15-3-2011 — Introduction of annual return on foreign liabilities and assets reporting by Indian companies and discontinuation of the Part B of Form FC-GPR.

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Presently, Part B of Form FC-GPR containing details of all investments made in the company during a financial year, is required to be submitted by 30th June directly by the company to the Director, Balance of Payment Statistics Division, Department of Statistics and Information Management, Reserve Bank of India, C-9, 8th floor, Bandra-Kurla Complex, Bandra (E), Mumbai-400051, by June 30th of every year.

 However, from this year onwards filing of Part B is being discontinued and in its place a separate ‘Annual Return on Foreign Liabilities and Assets’ is to be submitted by 15th July of every year to the Director, Balance of Payment Statistics Division, Department of Statistics and Information Management (DSIM), Reserve Bank of India, C-9, 8th floor, Bandra-Kurla Complex, Bandra (E), Mumbai-400051. This new return is to be submitted by all the Indian companies which have received FDI and/or made overseas investment (ODI) in the previous year(s) including the current year.

The new Form is given as Annex-I and the concepts and definitions is given as Annex-II to this Circular.

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A.P. (DIR Series) Circular No. 41, dated 11-2-2011 — Deferred Payment Protocols dated 30th April, 1981 and 23rd December, 1985 between Government of India and erstwhile USSR.

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With effect from January 31, 2011 the Rupee value of the special currency basket has been fixed at Rs.64.7004, as against the earlier value of Rs.62.788607.

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Point of Taxation (Amendment) Rules, 2011 and other amendments – Notification Nos. 22 / 2011 to 27/2011 – Service Tax all dated 31st March, 2011

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The Rules relating to Service Tax have been further amended with effect from 01st April 2011 through a series of notifications issued on 31st March 2011. Some of these amendments are in response to representations in respect of the relevant proposals in the Finance Bill, 2011. The salient features of these amendments are as follows;

• Amendments have been brought about in the manner of valuation and composition scheme for services in relation to sale of foreign currencies. These amendments are effective from 1st April 2011.

• Substantial changes were made in the CENVAT Credit Rules, 2004. Further amendments are proposed to permit the claim of credit on the basis of invoices rather than on the basis of payments. These amendments are effective from 1st April 2011.

• Substantial changes are made in the Point of Taxation Rules. 2011. While in general, the point of taxation has been shifted to the earliest of invoicing or receipt of advance, in the following cases, the receipt basis for payment of tax is being continued: a. Services rendered by specified professionals (CAs, CWAs, CSs, Interior Decorators, Advocates, Architects, Scientific Testing, etc.) b. Services subjected to reverse charge mechanism (subject to condition of receipt of payment within specified period) c. Export of Services (subject to condition of receipt of payment in specified period)

• It is further provided that the new rules will not apply in cases where the services are rendered prior to 31.03.2011. Further, an assessee can opt to defer the applicability of the new rules to 01.07.2011. An option is granted to discharge the service tax on receipt basis upto 30. 06. 2011.

• An adjustment is provided for deficiency of service but no adjustment is provided on account of bad debts.

• CENVAT Credit on input services can be availed on the basis of supplementary invoices. This amendment is effective from 01.04.2011. For details visit: http://www.servicetax.gov.in/stnotfns- home.htm

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Scrutiny norms for small taxpayers and senior citizens — Press Release dated 14-3-2011.

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In the aforementioned Press Note, during the financial year 2011-2012, the CBDT has decided not to subject to scrutiny small taxpayers being individuals and HUFs who have their annual taxable income less than 10 lakhs before availing deduction under Chapter VIA and senior citizens (age 60 and above), except when the tax officers have credible information.

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Changes in conditions to be fulfilled by a recognised Stock Exchange — Incometax (First Amendment) Rules, 2011 dated 4-3-2011.

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The CBDT has amended Rule 6DDA wherein the recognised Stock Exchange shall ensure that the transactions entered in respect of cash and derivative markets once registered cannot be erased. Further, in case there are genuine errors and such transactions are modified, a monthly report needs to be filed with the Tax Department within 15 days from the end of each month in prescribed Form 3BB.

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United Stock Exchange of India notified as a recognised stock exchange.

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United Stock Exchange of India notified as a recognised stock exchange for the purpose of definition of speculative transaction u/s.43(5) — Notification No. 12/2011, dated 25-2-2011.

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ITO v. Galaxy Saws P. Ltd. ITAT ‘G’ Bench, Mumbai Before Rajendra Singh (AM) and V. D. Rao (JM) ITA No. 3747/Mum./2009 A.Y.: 2005-06. Decided on: 11-3-2011 Counsel for revenue/assessee: Pawan Ved/ Jitendra Jain

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Section 115JB — Adjustment to book profit — Revaluation of assets sold — Whether the amount taken to balance sheet as revaluation reserve can be added to the book profit — Held, No.

Facts:
During the year the assessee sold its office premises for Rs.96 lakh. Its book value was Rs.3.29 lakh. However, the assessee revalued the said premises at Rs.97.44 lakh. The gain on revaluation of Rs.94.15 lakh was credited to revaluation reserve. Based on the revalued figure, the loss on sale of the premises was determined at Rs.1.44 lakh.

During the year the assessee had returned its income as per section 115JB. According to the AO, the revaluation of property made by the assessee was only a device to reduce the book profit. Further, he also relied on the decision of the Bombay High Court in the case of Veekaylal Investment Pvt. Ltd. (249 ITR 597). Therefore, the book profit as computed by the assessee was adjusted by him by adding the sum of Rs.92.71 lac to the book profit. On appeal, the CIT(A) following the Supreme Court decision in the case of Apollo Tyres Ltd. (255 ITR 273) allowed the appeal.

Before the Tribunal the Revenue relied on the decision of the Karnataka high Court in the case of CIT v. Brindavan Beverages Ltd., (321 ITR 197) in which case, according to the Revenue, the judgment in the case of Apollo Tyres Ltd. was considered. It also referred to the observation of the Supreme Court in the case of Motibhai Phulabhai Patel & Co. (AIR 1970 SC 829) that no rule of law should be interpreted so as to permit or encourage its circumvention. It pointed out that the assessee had not revalued all its assets and he had revalued only the immovable property, which makes it clear that the assessee had used it as a device to avoid tax.

Held:
Relying on the Supreme Court decision in the case of Apollo Tyres Ltd., the Tribunal noted that once the profit and loss accounts prepared as per Part II and Part III of the Schedule VI of the Companies Act and adopted at the Annual General Meeting of the company, the net profit disclosed in such accounts can only be adjusted for items specified in Explanation I to section 115JB(2).

In respect of the decision of the Karnataka High Court in the case of Brindavan Beverages Ltd. relied on by the Revenue, the Tribunal noted that in the said decision, the Court had only remanded the matter back to the AO and it was not held that the gain arising from the sale of the assets had to be added to the book profit.

As regards the contention of the Revenue that the assessee had adopted colourable device, hence, should be struck down applying the ratio of the Supreme Court decision in the case of McDowell & Co. (154 ITR 148), the Tribunal noted that the para 13 of the accounting standard on Fixed Assets (AS- 10) allows the assessee to revalue any property and para 13.7 of the Standard requires that increase in net book value on account of revaluation to be taken to the capital account as revaluation reserve and was not available for distribution. It also rejected the argument of the Revenue that the assessee had made selective revaluation to avoid payment of tax, since according to it, the Standard required that the whole class of assets should be revalued. And the assessee had only one immovable property which had been revalued and therefore, the entire class of immovable property got revalued in accordance with the Standard.

The Tribunal also noted that as per the provisions of Explanation 1 to section 115JB(2), the amount carried to any reserve had to be added to the net profit if the amount had been debited to the profit and loss account. In the case of the assessee, the amount had been directly taken to the balance sheet without debit to the profit and loss account. Further, the clause (iia) of Explanation 1 inserted w.e.f. 1-4- 2007 only provides for making adjustment qua the depreciation on account of revaluation of assets. It does not provide for addition of revaluation reserve to the net profit even if the same was not debited to the profit and loss account.

In view of the forgoing, the Tribunal upheld the order of the CIT(A) and dismissed the appeal filed by the Revenue.

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I-T to make staff’s work less taxing

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In a bid to reduce the burden on officials, the Income-tax Department is planning to outsource record management to private entities.

The number of income taxpayers in the country is about 35 million. It is expected to reach around 80 million by 2015. Considering that a substantial number of taxpayers file returns manually, managing records has become a major task for the Department.

The Department says it requires about 12,000 officials just for scrutiny cases. At present, around 4,000 officials are handling 7,00,000 scrutiny cases a year.

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Rajesh Keshav Pillai v. ITO ITAT ‘D’ Bench, Mumbai Before D. Manmohan (VP) and Rajendra Singh (AM) ITA No. 6661/M/2009 A.Y.: 2006-07. Decided on: 23-2-2011 Counsel for assessee/revenue: S. E. Dastur and H. S. Raheja/R. N. Jha

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Section 54 — Exemption u/s.54 is not restricted to capital gain arising on sale of one residential house. If more than one residential house is sold and more than one residential house is bought, a corresponding exemption is available in relation to each set of sale and corresponding investment in residential house. However, the exemption will have to be computed for each sale and the corresponding purchase adopting a combination beneficial to the assessee and not on an aggregate basis.

Facts:
The assessee earned long-term capital gain on sale of two residential houses. The assessee purchased two residential houses and claimed exemption u/s.54 of the Act on the ground that the aggregate investment in purchase of two residential houses was more than the aggregate long-term capital gain arising on sale of two residential houses. The Assessing Officer (AO), referring to the decision of the Special Bench of the Tribunal in the case of ITO v. Sushila M. Jhaveri, [292 ITR (AT) 1], held that the assessee is entitled to exemption u/s.54 in respect of long-term capital gain arising on sale of one residential house with the corresponding investment in one residential house. He, accordingly, charged to tax long-term capital gain arising on sale of other residential house.

Aggrieved, the assessee preferred an appeal to CIT(A) who upheld the view taken by the AO.

Aggrieved, by the order of the CIT(A), the assessee preferred an appeal to the Tribunal.

Held:
There is no restriction placed anywhere in section 54 that exemption is available only in relation to sale of one residential house. Therefore, in case the assessee has sold two residential houses, being long-term capital assets, the capital gain arising from the second residential house is also capital gain arising from transfer of a long-term capital asset being a residential house. The provisions of section therefore will also be applicable to the sale of second residential house and also to a third residential house and so on. Whenever exemption is restricted to one asset, a suitable provision is incorporated in the relevant section itself. Considering the language used in section 54(1), exemption will be available in respect of transfer of any number of long-term capital assets being residential houses if other conditions are satisfied.

The decision of the Special Bench of ITAT in the case of Sushila M. Jhaveri (supra) is distinguishable. There the issue was whether exemption was available in case the gain from sale of a house is invested in more than one residential houses and it was held that exemption will be available only for one house. But exemption will be available in respect of sale of any number of residential houses if there are corresponding investments in residential houses and all other conditions are fulfilled.

In case there is sale of more than one residential house, the exemption will be available in relation to each set of sale and corresponding investment in the residential house. In case there are sales of more than one residential houses, exemption has to be computed considering each set of sale of residential hose and the corresponding investment in one residential house and the combination which is beneficial to the assessee has to be allowed. The exemption cannot be calculated considering the aggregate of capital gain and aggregate of investment in the residential houses.

This appeal filed by the assessee was allowed.

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Curbing the lust for litigation

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The Supreme Court has abruptly replaced an internal mechanism to weed out wasteful government appeals with a think tank.

In more than one-third of the litigation in India’s Courts, the government is a party. In criminal cases, it cannot be avoided. According to one estimate, the government is involved in 10 million cases. No wonder, the Union Law Minister and Attorney General have described the government as a ‘compulsive’ litigant.

Some Supreme Court Judges also echoed this sentiment, in stronger terms. They criticised the government for resorting to prolonged litigation on ‘trivial’ issues, and pointed out that not only did this waste the judiciary’s time but also caused the public exchequer a ‘colossal’ loss.

While unveiling a tantalising vision statement last year, the Law Minister recognised the problem and promised to turn the government from a ‘compulsive to a responsible and reluctant litigant’. The government proposed to entrust the task of weeding out senseless litigation from the government’s docket to top law officers — the Attorney General and the Solicitor General. They now have a full-fledged office in central Delhi, assisted by 52 lawyers and 26 law researchers. Statistics on pending matters have been called from government departments including public sector undertakings.

Attorney General G. E. Vahanvati has also commented on the government’s unhealthy urge to litigate. “It cannot be denied that government has become a compulsive litigant. There are several reasons for this. The Law Commission identified various reasons why the government became an irresponsible litigant. It said that in most cases, government litigated because of the utter indifference on the part of civil servants,” he said at recent conference. “Sometimes, the government pursued litigation as a matter of prestige, with an attitude of vengeance. In several cases, the officials had an attitude of arrogance and a superiority complex in litigating. It is easy to file a case in Court and leave it to the Courts to decide. One obvious reason to do so is to avoid the necessity of taking decisions, some of which can be awkward.”

Meanwhile, a five-Judge Constitution Bench of the Supreme Court last week scrapped a scheme under which state-run enterprises had to resolve their disputes through an internal mechanism. In its judgment in the case, (‘ONGC cases’) in 1995, 2004 and 2007, the government set up a committee to settle the disputes so that they did not rush to the Court.

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Let’s fast-track the process of subsidy reform

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Society’s less well-off have long been treated as passive wards of the state. This has served as justification for a byzantine subsidy edifice which helps the poor less than it does politicians playing populist cards and babus entrenched as intermediaries in public services delivery. The govern-ment’s move to form a task force to facilitate direct cash transfers to beneficiaries of subsidies like kerosene, LPG, fertilisers, etc., signals fresh, reformist thinking. The panel being led by UIDAI chairman Nandan Nilekani, there’ll be technical expertise at the top for the job. As also a necessary synergy between the cash transfer and UID endeavours: both aim at better targeting and leak-proofing of redistributive mechanisms via proper identification of the end-users of subsidies.
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India works on EU for ayurveda lifeline

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India has asked the European Union to relax its May 1 ban on over-the-counter sale of ayurvedic and herbal drugs by another 10 years. A delegation of officials from the Department of Ayush and Commerce visited Brussels in January end.
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Speed up the judicial system

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The government faces flak for appointing P. J. Thomas as the Central Vigilance Commissioner. Thomas has a charge-sheet pending against him in Kerala, accusing him of being a party to a palm oil import controversy dating back to 1992. This brings up the desirability of having fast-track courts to try anyone in public life, politician or civil servant. Fast-track trials should be made mandatory for all lawsuits pending against public figures, including candidates for political office. This is necessary till India overhauls its creaking judicial machinery. The total number of judicial officials, including the 31 Judges of the Supreme Court, is a little more than 17,600, which means that India has less than 18 Judges per million people. This compares badly with 51 Judges per million Britons or Canada’s 75 Judges per million citizens. Unsurprisingly, all Courts have a long queue waiting for judgment: over 30 million cases await a verdict, with 52,000 lawsuits pending in the Supreme Court and over 4 million in the High Courts.

The condition of most Courts can reduce the hardiest undertrial to tears: the buildings are dilapidated and infrastructure hasn’t been upgraded for near to a century. This has to change. The government is flush with funds, and some of that has to be used to improve physical infrastructure in Courts. Over 3,000 judicial posts are vacant, mainly in the lower Courts, and these positions must be filled quickly. Today, the job of hiring judicial officers is with state and central governments. But their track record is abysmal and the goal of having 50 Judges per million Indians, stated nearly nine years ago, still looks distant. Governments are not doing a decent job of hiring judicial officers, particularly state governments. It is time to create an Indian judicial service, on the lines of the administrative and police services. That’s an idea that has been discussed in the past, but never implemented. There is little justification for delaying the proposal any further. Justice delayed is justice denied. In India, the denial of justice has become endemic, and that must stop. Delivering justice on time is a vital instrument of inclusive growth, with the potential to check the rampant misuse of social power that works against the poor, in the absence of legal restraint.

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PUNISHING INDEPENDENT DIRECTORS AND AUDIT COMMITTEE MEMBERS

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A recent SEBI Order debars certain Independent Directors of a listed company for two years from acting as independent directors or members of Audit Committee. This order of SEBI No. WTM/MSS/ ID2/92/2011, dated March 11, 2011 is available on SEBI’s website www.sebi.gov.in. While not the first of such orders, it ought to jolt independent directors out of complacency and impression that because their not being involved with day-to-day operations would help them avoid action in case of corporate frauds or violations. Apart from the debarment, certain fairly harsh words have been used as to their role in that case and there are findings of having committed fraudulent and manipulative acts. On the other hand, there are certain concerns about this order, particularly whether it is an ad hoc exercise of powers.

The requirements of corporate governance has resulted in tens of thousands of persons — most of them highly educated and experienced — being appointed as independent directors of listed companies. By definition, they are generally nonexecutive, since being a paid executive director would mean loss of independence. However, while such an army of independent directors has been created under this requirement, the law governing them remains age-old. Only the nomenclature of Independent Director is new. The role, powers and duties of independent directors are not provided for in the requirements relating to corporate governance framed by the SEBI and placed in the listing agreement as Clause 49. No extra powers or authority is given to the independent directors (though some functions and authority are given to the Audit Committee). Thus, for understanding the powers and duties of an individual independent directors, one has to look at the pre-existing law as contained in the Companies Act, 1956. While this law too does not lay down a specific and detailed framework for non-executive directors, the settled law is that individual non-executive directors are required to be diligent and exercise a level of care than a prudent person may ordinarily exhibit. Further, even these requirements relating to corporate governance have been, curiously, placed not in the SEBI Act or even in any notified regulations or rules, but in the listing agreement between the Company and the stock exchange. This gives these requirements, at best, a semi-statutory cognizance. The violation of these requirements generally results in action against the Company and not against the independent directors.

Expectedly, the other peculiar result is that there are no specific provisions providing for punitive or other adverse consequences for violating the requirements relating to corporate governance. As we will see later, this is perhaps the reason that the SEBI has used its omnibus powers to take action against the independent directors who were allegedly negligent and who even allegedly abetted the fraud.

The preceding paragraphs are not intended to provide for any excuse or leeway for the negligence of any independent directors, particularly a person who is a member of the Audit Committee. It is only to highlight the fairly inadequate manner in which the law has been framed. When a situation has arisen when such law was tested, the SEBI, instead of accepting this inadequate framework and taking corrective action in this regard, resorted to omnibus provisions to take punitive action which most Independent Directors could not even have visualised. Of course, it has to be noted that the facts of the case, if one goes by the SEBI Order, are fairly serious. Let us now consider the details of this case as provided in the SEBI Order.

It has been alleged by the SEBI that Pyramid, the listed company of which the specified persons were independent directors and members of its Audit Committee, overstated its revenues and thus its profits by manipulation of its accounts. The company which is engaged in the business of managing theatres and exhibition of films claimed to have entered into agreements with more than 800 theatres from which revenues flowed into the company. The SEBI recorded a finding that in reality barely about 250 such agreements could be proved and the rest of the agreements did not exist. Hence, it was alleged that the revenues based on such sham agreements were non-existent and through false book entries such revenues were recorded. The accounts based on such overstated revenues and profits were published for the benefit of the public.

SEBI made a finding that the accounts were thus misstated and the question then was, what role did the independent directors play and whether they did not perform their duties as expected of them. This was particularly so, since such Directors were also members of the Audit Committee.

It is worth noting the relevant extracts what SEBI says in its dealing with what it believes to be the role of the Board in general, of independent directors and of members of the Audit Committee :

“5. A company acts through its board of directors. It is the duty and responsibility of the directors to ensure that proper systems and controls are in place for financial reporting and to monitor the efficacy of such systems and controls. While the extent of responsibility of an independent director may differ from that of an executive director, an independent director has the duty of care. This duty calls for exercise of independent judgment with reasonable care, diligence and skill which should be reasonably exercised by a prudent person with the knowledge, skill and experience which may reasonably be expected of a director in his position and any additional knowledge, skill and experience which he has. The audit committee exercises oversight of the company’s financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible. It reviews the adequacy of internal control system and management discussion and analysis of financial condition and result of operations. The institutions of independent directors and audit committee have been established to promote corporate governance and enhance the protection of interests of investors. These have a critical role to play in the regulation and development of the securities markets and protection of interests of investors in securities.

6. I note that Mr. K. S. Kasiraman and Mr. K. Natarahjan were independent directors and members of the audit committee at the relevant time. It has been submitted that Mr. G. Ramakrishnan was not an independent director and a member of the audit committee for the entire period. I find that he was an independent director and also a member of the audit committee when quarterly reports of the last two quarters of the year were considered by the Board as well as the audit committee. Further, the quarterly reports of succeeding quarters, when he continued as an independent director and as a member of the audit committee, have indication about the unreliability of the financial statements of the previous quarters.

 7.   I find that the noticees overlooked numerous red flags in the trend in revenues, profits, receivables, advances, etc. which could not escape the attention of an independent director, who is also a member of the audit committee. For example, profits tripled in the quarter ending June 2007 over the preceding quarter. It doubled in the quarter ending December 2007 over the preceding quarter. The quarter ending March 2008 reported a loss of Rs.3.11 crore compared to a profit of Rs. 29.87 crore in the preceding quarter. Similarly, though the number of screens in theatres increased from 487 as on September 30, 2007 to 655 as on December 31, 2007, security deposits with theatres during the same period increased disproportionately from Rs.36.05 crore to Rs.170.38 crore. Such aberrations in financial figures would alert any person of ordinary prudence. The appropriate questions at the right time from the noticees would have unravelled the fraud being played by the company on the innocent investors. By failing to ask the right questions at the right point of time, I find that the noticees have failed in their duty of care as an independent director. They failed to review, as members of the audit committee, the internal control systems, which generated misleading financial statements. I find that the noticees were either too negligent to notice the aberrations in performance of the company and the fraud behind such aberrations or acted as shadow directors of the board/ members of the audit committee. In either case, they facilitated the company to make false and misleading disclosures and thereby created artificial prices and volumes in the securities of PSTL in the market, to the detriment of innocent investors. I, therefore, conclude that the charge of disclosure of false and misleading statements, as alleged in the SCN against the noticees, is established. Thus, the noticees are guilty of violating Section 12A of SEBI Act, 1992 and Regulation 3(b), 3(c), 3(d), 4(1), 4(2)(e), 4(2)(f), 4(2)(k), 4(2)(r) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.

  8.  Such conduct on the part of the noticees is disgrace to the institutions of independent directors and the audit committee of a listed company. This cannot be viewed lightly and warrants regulatory intervention. Therefore, in exercise of the powers conferred upon me u/s. 19 read with Sections 11, 11B and 11(4) of the Securities and Exchange Board of India Act, 1992 and Regulation 11 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003, I hereby restrain Mr. K. S. Kasiraman (Permanent Account Number: AFPPK3572B), Mr. K. Natarahjan (Permanent Account Number: ACJPN0418I), and Mr. G. Ramakrishnan (Permanent Account Number: AAEPR2014F) from being an independent director or a member of audit committee of any listed company for a period of two years from the date of this Order.”

This case is obviously an extreme one where, in a sense, like the Satyam case, serious allegations and findings of fraud were made and expectedly, the question would be how could such serious alleged frauds have escaped the attention of such directors. Or, worse, whether they actively abetted such frauds. This is more so, when they were also on the Audit Committee. However, such an extreme case cannot make and define the law for other cases particularly if there are lesser violations or for areas the facts are less clear.

It is also seen that the SEBI does not have any direct and specific powers to deal with non-performance of duties by the independent directors or for their being negligent. In fact, the SEBI has used its omnibus and comprehensive powers u/s. 11, 11B, etc. to take action against such Independent Directors. The issue is whether it is appropriate to use such powers in this manner creating an impression that the SEBI can act against anyone for anything that it perceives to be wrong or irregular without either defining what is right and wrong conduct and specifying clearly the consequences therefor.

Curiously, the SEBI has held that the Independent Directors are guilty of several provisions of the SEBI FUTP Regulations relating to fraud, price manipulation, etc. The Order, however, does not deal with each such clause separately and establish how it was violated. It is one thing to hold Independent Directors responsible for being negligent or passively not performing their duties and it is totally another thing that they were active participators or abettors of the fraud, etc.

It may be recollected that in an earlier case of an alleged massive fraud, the SEBI had made a similar order debarring the independent directors in that case. However, the Securities Appellate Tribunal (Appeal No. 347/2004, dated 8th December 2005) reduced the period of debarment and found that the SEBI had neither alleged nor established any aiding/abetting by the independent directors to the alleged fraud. It also noted that the independent directors were passive and had no active role in perpetrating the alleged fraud.

Of course, this is not to question the power of SEBI to take such action. As discussed in an earlier article in this column (December 2010 issue of BCAJ), the Bombay High Court in Price Waterhouse & Co. v. SEBI, [(2010) 103 SCL 96 (Bom.)] upheld the power of SEBI to take similar action against auditors and the ratio of that decision should apply directly in facts of the present case. Having said that, recently, questions have been raised (a subject that merits a separate discussion) whether the SEBI indeed has power to ‘punish’ persons under such general and omnibus powers.

To reiterate, a precedent against errant independent directors was needed and this Order does provide one. Having said so, one cannot help observing that the system is skewed against the independent directors. On one hand, by misplacing the requirements of corporate governance in the listing agreement and by not giving any specific right to individual independent director or even to them as a whole, the SEBI has not given them any teeth to really do their jobs well. On the other hand, their obligations, formal and otherwise, are significant. It could thus create difficulties for conscientious Independent Directors in their functions. And since independent directors are really the essential core of good corporate governance, the absence of a proper legal framework for their role, powers and duties is a serious vacuum that, if not filled, will make the requirements of corporate governance ineffective.

Sony India Pvt. Ltd. v. ACIT ITAT ‘G’ Bench, Delhi Before C. L. Sethi (JM) and K. G. Bansal (AM) ITA Nos. 4008/Del./2010 and 4994/Del./2010 A.Ys.: 2005-06 and 2006-07 Decided on: 8-4-2011 Counsel for assessee/revenue: N. Venkat Raman & Ors./Gajanand Meena & Ors.

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Sections 35DDA, 37, Rule 2BA — Deduction u/s.35DDA for expenditure on voluntary retirement cannot be denied on the ground that the scheme is not in accordance with the guidelines prescribed u/s.10(10C) read with Rule 2BA.

Facts:
The assessee was engaged in manufacturing and trading business. During the previous year relevant to A.Y. 2005-06 the assessee, as a part of restructuring of its business, closed down the manufacturing operations of its unit at Dharuhera. A voluntary retirement scheme known as ‘Employees Voluntary Retirement Scheme — 2004’ was framed which was applicable only to the employees of the closed unit. One-fifth of the expenditure incurred on voluntary retirement was claimed as a deduction u/s.35DDA.

The Assessing Officer (AO) disallowed the claim on the ground that since the scheme was not framed in accordance with Rule 2BA, the scheme is not VRS but a substitution of retrenchment compensation payable to the employees and hence the provisions of section 35DDA are not applicable. As regards the allowability of the expenditure u/s.37 he held that deduction can be allowed u/s.37(1) only in respect of those expenses which are incurred for the purposes of business. This, according to the AO, pre-supposes that the business continues to be carried on by the assessee. Since the expenditure under consideration was incurred in the closure of business or the transfer of business, the AO held that the same is not deductible u/s.37.

Aggrieved, the assessee preferred an appeal to the CIT(A) who held that the expenditure under consideration was incurred in terms of VRS and was not in the nature of retrenchment compensation. However, he held that the expenditure is not allowable u/s.35DDA since the VRS of the assessee did not comply with the conditions laid down by Rule 2BA.

Aggrieved, the assessee preferred an appeal to the Tribunal where it was contended that the Department has not challenged the finding of the CIT(A) that the expenditure is not in the nature of retrenchment compensation but is an expenditure on VRS and therefore such a finding has become final.

Held:
The Tribunal, for the following reasons, held the scheme of the assessee to be VRS, to which the provisions of section 35DDA are applicable:

(a) the deletion of conditionalities originally incorporated in the Bill shows that the legislative amendment was not to incorporate all the conditions of section 10(10C) in section 35DDA;

(b) the Legislature left the scheme of voluntary retirement open ended and did not place any restriction on the scheme. Thus, plain language of the provision supports the case of the assessee;

(c) it is not a case of taking guidance from a definition section;

(d) for sustaining the arguments of the learned DR, the provision contained in section 35DDA will have to be modified by incorporating a part of section 10(10C) in it. In our view, such an incorporation does not find support from any rule of construction stated before us.

The expenditure under consideration was held to be allowable u/s.35DDA.

As regards allowability u/s.37(1) of the Act, the Tribunal held that the assessee was required to prove that the closed unit was a part and parcel of the same business of the assessee. It stated that in order to give a finding, the assessee was required to prove that common control and management; interlinking of finances; common employees, no material effect of closure of the business on other businesses. Since the requisite material to give these findings was not on record the Tribunal did not give its finding on this aspect.

The appeal filed by the assessee on this ground was allowed.

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Nayan Builders & Developers Pvt. Ltd. v. ITO ITAT ‘B’ Bench, Mumbai Before R. S. Syal (AM) and Asha Vijayaraghavan (JM) ITA No. 2379/M/2009 A.Y.: 1997-98. Decided on: 18-3-2011 Counsel for assessee/revenue: Sanjiv M. Shah/Hari Govind Singh

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Section 271(1)(c) — Penalty u/s.271(1)(c) cannot be levied with respect to an addition which has been admitted by the High Court as a substantial question of law.

Facts:
The Assessing Officer (AO) levied penalty u/s.271(1) (c) in respect of additions to total income of the assessee of Rs.1,04,76,050 towards income from Spectrum Corporate Services Ltd., disallowance of brokerage of Rs.10,79,221 and disallowance of legal fees of Rs.2,00,000 which additions were upheld by the Tribunal.

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

Aggrieved by the order passed by the CIT(A) the assessee preferred an appeal to the Tribunal.

Held:
Having noted that the additions in respect of which the penalty was levied have been held by the jurisdictional High Court as involving a substantial question of law, the Tribunal held that when the High Court admits a substantial question of law on an addition, it becomes apparent that the addition is certainly debatable. In such circumstances, penalty u/s.271(1)(c) cannot be levied. The admission of substantial question of law by the High Court lends credence to the bona fides of the assessee in claiming the deduction. Once it turns out that the claim of the assessee could have been considered for deduction as per a person properly instructed in law and is not completely debarred, the mere fact of confirmation of disallowance would not per se lead to the imposition of penalty.

The Tribunal ordered deletion of the penalty. The Tribunal allowed the appeal filed by the assessee.

Cases referred to:
(i) Rupam Mercantile v. DCIT, (2004) 91 ITD 237 (Ahd.) (TM)

(ii) Smt. Ramila Ratilal Shah v. ACIT, (1998) 60 TTJ 171 (Ahd.)

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Synergy Entrepreneur Solutions Pvt. Ltd. v. DCIT ITAT ‘J’ Bench, Mumbai Before D. K. Agarwal (JM) and Pramod Kumar (AM) ITA No. 3076/M/2010 A.Y.: 2005-2006. Decided on: 31-3-2011

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Counsel for assessee/revenue: Arvind Dalal/ Sumeet Kumar

Section 263 — Revision order, if passed for a reason not mentioned in the show-cause notice, is invalid.

Facts:
The assessee was engaged in share trading activity. The assessee had claimed set-off of trading losses against trading profits which set-off was accepted by the Assessing Officer (AO) in an order passed u/s.143(3) of the Act. The CIT issued a show-cause notice u/s.263 in which he claimed that share trading losses were speculation losses u/s.73 and the same could not be set off against trading income. The assessee, in response to show cause, clarified that the trading losses were eligible for being set off against trading profits. The CIT, without rejecting the claim of the assessee, passed an order u/s.263 on the ground that the AO had not taken the details to verify whether the profits and loss from future trading amounts to speculation profit or loss. He directed the AO to obtain complete details and conduct necessary enquiries and examine the same for the assessment year under consideration. Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The Tribunal noted that the show-cause notice stated that the assessee was not eligible for set-off of losses on speculation transactions, whereas the revision has been on the ground that the AO did not make necessary verifications about the transactions. Relying on the ratio of the decision of the Tribunal in Maxpack Investments Ltd. v. ACIT, 13 SOT 67 (Del.) and the decision of the Punjab & Haryana High Court in the case of CIT v. Jagadhri Electric Supply and Industrial Co. Ltd., 140 ITR 490 (P & H), the Tribunal held that if a ground of revision is not mentioned in the show-cause notice issued u/s.263, that ground cannot be made the basis of the order passed under the section, for the simple reason that the assessee would have had no opportunity to meet the point. The Tribunal quashed the order passed u/s.263 of the Act.

On merits, the Tribunal found the issue to be covered in favour of the assessee by the decision of the jurisdictional High Court in the case of CIT v. Lokmat Newspapers Pvt. Ltd., (322 ITR 43) (Bom.) wherein it has been held that irrespective of whether or not the profits on sale of shares arose from deliverybased trading or non-delivery-based trading, as long as the assessee is hit by Explanation to section 73, the entire profits will be deemed to be speculation profits and, accordingly, losses from non-deliverybased activity will also be eligible for set-off against profits from delivery-based transactions as well.

The appeal filed by the assessee was allowed.

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Housing project: Deduction u/s.80IB(10) of Income-tax Act, 1961: A.Y. 2003-04: Deduction allowable on whole of the income of the project which is approved as a ‘housing project’ by the local authority: Clause (d) inserted to section 80IB(10) w.e.f. 1-4-2005 is prospective and not retrospective.

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[CIT v. M/s. Brahma Associates (Bom.), ITA No. 1194 of 2010 dated 22-2-2011]

In this case, the following questions of law were raised before the Bombay High Court:

“(i) Whether in the facts and in the circumstances of the case and in law, the ITAT was justified in holding that the deduction u/s. 80IB(10), as applicable prior to 1-4-2005 is admissible to a ‘Housing project’ comprising residential housing units and commercial establishments?

(ii) Whether on the facts and circumstances of the case and in law, the ITAT was justified in holding that a project having commercial area up to 10% of the project is eligible for deduction on the entire profits of the project u/s. 80IB(10) up to 1-4-2005?

(iii) Whether on the facts and circumstances of the case and in law, the ITAT was justified in holding that the projects wherein the commercial area is more than 10% of the project and the profits from the residential dwelling units in that project can be worked out separately, then subject to fulfilling other conditions, deduction on the profits relatable to the residential part of the project would be eligible for deduction u/s.80IB(10)?

(iv) Whether on the facts and circumstances of the case and in law, the ITAT was justified in holding that the limit on commercial use of built-up area as prescribed by clause (d) of section 80IB(10) has no retrospective application and it applies only w.e.f. the A.Y. 2005-06?”

The Bombay High Court answered the questions as under:

“(i) Up to 31-3-2005 (subject to fulfilling other conditions), deduction u/s.80IB(10) is allowable to housing projects approved by the local authority having residential units with commercial user to the extent permitted under the DC Rules/Regulations framed by the respective local authority.

(ii) In such a case, where the commercial user permitted by the local authority is within the limits prescribed under the DC Rules/ Regulations, the deduction u/s.80IB(10) up to 31-3-2005 would be allowable irrespective of the fact that the project is approved as ‘housing project’ or ‘residential plus commercial’.

(iii) In the absence of the provisions under the Income-tax Act, the Tribunal was not justified in holding that up to 31-3-2005 deduction u/s.80IB(10) would be allowable to the projects approved by the local authority having residential building with commercial user up to 10% of the total built-up area of the plot.

(iv) Since deductions u/s.80IB(10) is on the profits derived from the housing projects approved by the local authority as a whole, the Tribunal was not justified in restricting section 80IB(10) deduction only to a part of the project. However, in the present case, since the assessee has accepted the decision of the Tribunal in allowing section 80IB(10) deduction to a part of the project, we do not disturb the findings of the Tribunal in that behalf.

(e) Clause (d) inserted to section 80IB(10) w.e.f. 1-4-2005 is prospective and not retrospective and hence cannot be applied for the period prior to 1-4-2005.”

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The mechanism set up by Supreme Court requiring clearance of the Committee on Disputes in litigation between Ministry and Ministry of Government of India, Ministry and public sector undertakings of the Government of India and public sector undertakings between themselves and also in disputes involving the State Governments and their instrumentalities recalled.

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[Electronics Corporation of India Ltd. v. Union of India & Ors., Civil Appeal No. 1883 of 2011 (arising out of S.L.P. (C) No. 2538 of 2009) dated 17-2-2011]

By Order dated 11-9-1991, reported in 1992 Supp (2) SCC 432 (ONGC and Anr. v. CCE), the Supreme Court noted that “Public sector undertakings of Central Government and the Union of India should not fight their litigations in Court”. Consequently, the Cabinet Secretary, Government of India was “called upon to handle the matter personally”. This was followed by the order dated 11-10-1991 in 1995 Suppl. (4) SCC 541 (ONGC v. CCE) where the Supreme Court directed the Government of India “to set up a Committee consisting of representatives from the Ministry of Industry, Bureau of Public Enterprises and Ministry of Law, to monitor disputes between Ministry and Ministry of Government of India, Ministry and public sector undertakings of the Government of India and public sector undertakings between themselves, to ensure that no litigation came to a Court or to a Tribunal without the matter having been first examined by the Committee and its clearance for litigation”. Thereafter, in 2004 (6) SCC 437 (ONGC v. CCE) dated 7-1-1994, the Supreme Court directed that in the absence of clearance from the ‘Committee of Secretaries’ (CoS), any legal proceeding will not be proceeded with. This was subject to the rider that appeals and petitions filed without such clearance could be filed to save limitation. It was, however, directed that the needful should be done within one month from such filing, failing which the matter would not be proceeded with. By another order dated 20-7-2007, 2007 (7) SCC 39 (ONGC v. City & Industrial Development Corpn.) the Supreme Court extended the concept of Dispute Resolution by High-Powered Committee to amicably resolve the disputes involving the State Governments and their instrumentalities. The idea behind setting up of this Committee, initially, called a ‘High-Powered Committee’ (HPC), later on called as ‘Committee of Secretaries’ (CoS) and finally termed as ‘Committee on Disputes’ (CoD) was to ensure that resources of the State are not frittered away in inter se litigations between entities of the State, which could be best resolved by an empowered CoD. The machinery contemplated was only to ensure that no litigation came to Court without the parties having had an opportunity of conciliation before an in-house committee.

In CCE v. Bharat Petroleum Corporation, a two-Judge Bench of the Supreme Court held that the working of the COD had failed and that the time had come to revisit the law. The matter was referred to a Larger Bench for reconsideration.

The matter came up before a Constitution Bench of the Supreme Court consisting of five Judges, which noted that :

Electronics Corporation of India Ltd. (‘assessee’ for short), is a Central Government Public Sector Undertaking (‘PSU’) under the control of Department of Atomic Energy, Government of India. A dispute had been raised by the Central Government (Ministry of Finance) by issuing show-cause notices to the assessee alleging that the Corporation was not entitled to avail/utilise Modvat/Cenvat credit in respect of inputs whose values stood written off. Accordingly it was proposed in the show-cause notices that the credit taken on inputs was liable to be reversed. Thus, the short point which arose for determination was whether the Central Government was right in insisting on reversal of credit taken by the assessee on inputs whose values stood written off. The Adjudicating Authority held that there was no substance in the contention of the assessee that the writeoff was made in terms of AS-2. The case of the assessee before the Commissioner of Central Excise (Adjudicating Authority) was that it was a financial requirement as prescribed in AS-2; that an inventory more than three years old had to be written off/ derated in value; that such derating in value did not mean that the inputs were unfunctionable; that the inputs were still lying in the factory and they were useful for production and therefore they were entitled to Modvat/Cenvat credit. As stated above, this argument was rejected by the Adjudicating Authority and the demand against the assessee stood confirmed. Against the order of the Adjudicating Authority, the assessee decided to challenge the same by filing an appeal before the CESTAT. Accordingly, the assessee applied before the Committee on Disputes (CoD). However, the CoD vide its decision dated 2-11-2006 refused to grant clearance, though in an identical case the CoD granted clearance to Bharat Heavy Electricals Ltd. (‘BHEL’). Accordingly, the assessee filed a writ petition No. 26573 of 2008 in the Andhra Pradesh High Court. The writ petition filed by the assessee stood dismissed. Against the order of the Andhra Pradesh High Court the assessee moved the Supreme Court by way of a special leave petition.

In a conjunct matter, Bharat Petroleum Corporation Ltd. (‘assessee’ for short) cleared the goods for sale at the outlets owned and operated by themselves known as company-owned and company-operated outlets. The assessee cleared the goods for sale at such outlets by determining the value of the goods cleared during the period February, 2000 to November, 2001 on the basis of the price at which such goods were sold from their warehouses to independent dealers, instead of determining it on the basis of the normal price and normal transaction value as per section 4(4) (b)(iii) of the Central Excise Act, 1944 (‘1944 Act’ for short) read with Rule 7 of Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000. In short, the price adopted by the assessee which is a PSU in terms of Administered Pricing Mechanism (‘APM’) formulated by Government of India stood rejected. The Tribunal came to the conclusion that the APM adopted by the assessee was in terms of the price fixed by the Ministry of Petroleum and Natural Gas; that it was not possible for the assessee to adopt the price in terms of section 4(1)(a) of the 1944 Act; and that it was not possible to arrive at the transaction value in terms of the said section. Accordingly, the Tribunal allowed the appeal of the assessee. Aggrieved by the decision of the Tribunal, CCE went to the Supreme Court by way of Civil Appeal No. 1903 of 2008 in which the assessee preferred I.A. No. 4 of 2009 requesting the Court to dismiss the above Civil Appeal No. 1903 of 2008 filed by the Department on the ground that CoD had declined permission to the Department to pursue the said appeal.

The Supreme Court observed that the above two instances showed that the mechanism set up by the Supreme Court in its orders reported in (i) 1995 Suppl.(4) SCC 541 (ONGC v. CCE) dated 11-10- 1991; (ii) 2004 (6) SCC 437 (ONGC v. CCE) dated 7-1-1994; and (iii) 2007 (7) SCC 39 (ONGC v. City & Industrial Development Corpn.) dated 20-7-2007, needed reconsideration.

The Supreme Court held that whilst the principle and the object behind the aforestated orders was unexceptionable and laudatory, experience had shown that despite best efforts of the CoD, the mechanism has not achieved the results for which it was constituted and had in fact led to delays in litigation. The two examples given hereinabove indicated that on the same set of facts, clearance was given in one case and refused in the other. This has led a PSU to institute a SLP in the Supreme Court on the ground of discrimination. The mechanism had led to delay in filing of civil appeals causing loss of revenue. For example, in many cases of exemptions, the Industry Department gave exemption, while the same was denied by the Revenue Department. Similarly, with the enactment of regulatory laws in several cases there was overlapping of jurisdictions between authorities, such as SEBI and insurance regulator. Civil appeals lied to the Supreme Court. Stakes in such cases were huge. One could not possibly expect timely clearance by CoD. In such cases, grant of clearance to one and not to the other may result in generation of more and more litigation. The mechanism had outlived its utility. In the changed scenario indicated above, the Supreme Court was of the view that time had come under the above circumstances to recall the directions of this Court in its various Orders reported as (i) 1995 Supp (4) SCC 541, dated 11-10-1991, (ii) (2004) 6 SCC 437, dated 7-1-1994 and (iii) (2007) 7 SCC 39, dated 20-7-2007. In the circumstances, the said orders were recalled.

FINALITY OF PROCEEDINGS

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Issue for consideration: A lapse in a completed
assessment can be cured by the Assessing Officer by resorting to the
rectification or reassessment proceedings depending upon the nature of
the lapse. The remedy available to the Assessing Officer permits him to
proceed u/s.147 or u/s.154 for repairing the damage caused in assessing
the total income.

The existence of the information for the
belief that income chargeable to tax has escaped assessment is the sine
qua non for reopening the assessment u/s.147 and discovery of an error
apparent on the record is the sine qua non for rectification u/s.154 of
the Act. These provisions are to be invoked in different circumstances,
but there can be situations where they overlap, and the AO can have
recourse to one or the other.

It is common to come across cases
where an Assessing Officer, faced with the dilemma of choosing between
the two remedies, decides to prefer one over the other and later on
drops the first and proceeds under the second. For example, an Assessing
Officer, dropping the proceedings u/s.154 initiated for curing the
lapse, later on initiates fresh proceedings u/s.147 for curing the same
lapse.

The question that arises in such circumstances is about
the validity of the second proceedings, having once exercised the option
available under the law and thereafter choosing to proceed under the
second option.

The Madras High Court has held that an option
once exercised attains finality and the Assessing Officer is barred from
availing the second remedy. However, The Kerala High Court recently has
held that there is no prohibition on an Assessing Officer proceeding
under the second remedy after dropping the first.

E.I.D. Parry
Limited’s case: The issue arose before the Madras High Court in the case
of CIT v. E.I.D. Parry Ltd., 216 ITR 489. In that case, the assessee, a
company, submitted its income-tax returns for the years 1968-69 and
1969- 70, which were, after enquiry, accepted by the AO and it was
accordingly assessed and subjected to tax. The AO reopened the
proceedings u/s.147(b) of the IT Act by issuing a notice u/s.148 and
substantially changed the assessments, resulting in a demand for tax, on
the basis of the finding that substantial income had escaped
assessment. Pending the adjudication of the appeal by the assessee, the
AO, not satisfied with the reopening u/s.147 and notwithstanding the
pendency of the appeal, took recourse to proceedings for rectification
of mistake u/s.154 of the Act, allegedly for rectification of mistake
apparent from the record.

The High Court observed that the
provisions for rectification of an error apparent from the record and
that for bringing to tax an escaped income were common features in the
tax laws, and they were to be invoked in different circumstances; that
the AO could have recourse to one or the other, but he must have
recourse to the appropriate provision having regard to the facts and
circumstances of each case; that in cases where the two appear to
overlap, the AO must choose one in preference to the other and proceed;
that the AO should not take one as the appropriate proceeding and give
it up at a later stage to have recourse to the other, since such
proceedings were quasi judicial and were intended for the same purpose.

The
Court held that in a case of overlapping remedies, constructive res
judicata and not the statutory inhibition, should make the AO desist
from using one proceeding after the other, instead of using one of the
two with due care and caution. Accordingly, the proceedings for
rectification u/s.154, initiated subsequent to reassessment proceedings
u/s.147, were held to be invalid and not sustainable in law.

India
Sea Foods’ case: The issue again came up for consideration of the
Kerala High Court recently, in ITA No. 128 of 2010 in the case of the
CIT v. India Sea Foods and was adjudged by the High Court vide its order
dated 17th January, 2011. In that case, the question raised in the
appeal filed by the Revenue was whether the AO could give up
rectification proceedings initiated u/s.154 and then proceed u/s.147 of
the Income-tax Act for the same assessment year on the ground that
income had escaped assessment.

In that case the return filed by
the assessee was processed u/s.143(1) and the deduction claimed on
export profit u/s.80HHC was allowed in terms of the claim. The AO later
noticed that excessive relief was granted while computing deduction
u/s.80HHC and, to repair the damage, he initiated the rectification
proceedings u/s.154 for withdrawal of the excess relief by issue of a
notice to the assessee u/s.154(3) of the Act. The AO did not proceed
with the rectification proceedings on receipt of the objections from the
assessee challenging the maintainability of the proceedings u/s.154,
inter alia, on the ground that there was no mistake apparent from the
record. The AO however, later on issued a notice u/s.148 proposing to
bring to tax the escaped income on account of the excess relief granted
u/s.80HHC of the Act.

In the course of the reassessment
proceedings initiated u/s.147, the assessee raised various objections,
including about the maintainability of the reopening u/s.147, by relying
on the decision of the Madras High Court in CIT v. E.I.D. Parry Ltd.
(supra). The AO overruled the objections and withdrew the excess relief
in the order of reassessment, against which the assessee filed an
appeal. The CIT (Appeals) allowed the appeal against which Revenue filed
appeal before the Tribunal. The Tribunal dismissed the appeal, by
upholding the finding of CIT (Appeals) based on the decision of the
Madras High Court to the effect that, after initiation of rectification
proceedings u/s.154, the AO did not have the jurisdiction to proceed to
reassess the escaped income u/s.147 of the Act. The Revenue preferred an
appeal before the Kerala High Court against the order of the Tribunal.

The
Court noted that there was no dispute that the notice u/s.148 was
issued within time and the reassessment also was completed u/s.147
within the statutory period. The question to be considered was whether
the initiation of proceedings u/s.154 and the dropping of the same
affected the validity of re-assessment u/s.147.

The Kerala High
Court expressed its inability to uphold the principle of constructive
res judicata invoked by the Madras High Court in income tax proceedings
for invalidating the subsequent proceedings initiated by the AO
successively. The Court held that the fact that the AO initiated
rectification proceedings u/s.154 did not mean that he should stick to
the same only, and proceed to issue orders as proposed; that the very
purpose of issuing a notice to the assessee was to give him an
opportunity to raise objection against the proceeding which included the
assessee’s right to question the maintainability of the rectification
proceedings. If the assessee convinced the Officer that rectification
was not permissible, the AO was absolutely free to give up the same and
see whether there was any other recourse open to him to achieve the
purpose i.e., to bring to tax the escaped income.

The Kerala High Court was unable to uphold the findings of the first Appellate Authority or the order of the Tribunal on the issue before it, as, in its view, if an assessment happened to be an under-assessment or a mistaken order, the course open to the AO was either to rectify the assessment if it was a mistake falling u/s.154 or to resort to section 147 for bringing to tax an income that had escaped assessment. The Court held that both these provisions were self-contained provisions, wherein conditions for invoking the powers, the procedure to be followed and the time limit within which orders were to be passed, were specified.

The Court allowed the appeal of the Revenue by vacating the orders of the Tribunal and that of the first Appellate Authority and restoring the order of reassessment passed by the AO.

Observations:

The Income-tax Act contains many instances wherein an aggrieved party is provided with alternative remedies, not all of which are mutually exclusive, for redressing the grievance. Depending upon the circumstances, the party has to select the most appropriate remedy. Each of the remedies, by and large, is self-contained and provides for the circumstances and the mechanism for availing the recourse thereunder. Most of them do not contain any overriding provision or a non-obstante clause, eliminating the possibility of the alternative course of action. All of them, without exception, however contain the circumstances in which the recourse under the particular provision is made available, and a failure to satisfy the terms of the provision disentitles the person from availing the benefit of the said provision.

The existence of the information for the belief that income chargeable to tax has escaped assessment is the sine qua non for reopening an assessment u/s.147 and the discovery of a mistake apparent from the record is the sine qua non for a rectification u/s.154 of the Act. Usually, these provisions are to be invoked in different circumstances, but there can be situations where they overlap and the AO has the option to take recourse to one or the other. In choosing a particular remedy under the circumstances, the AO is expected to make an intelligent choice as an authority vested with the important power of assessing the total income of an assessee. The choice should be based on an application of mind and should be made after giving due weightage to the facts and circumstances of the case. The option should not be exercised in a routine manner.

In cases where recourse is open to the Assessing Officer to bring to tax escaped income, either by rectification or by way of reassessing the income that has escaped assessment, it is for the officer to choose between one of the two and proceed to pass one order. The AO cannot issue two proceedings, one u/s.154 and the other u/s.147.

The objective of the AO should be to avoid burdening an assessee with multiplicity of proceedings and to ensure that no undue harassment is caused to the assessee; first, on account of the failure to frame a proper order of assessment, followed by another failure to choose the right remedy under the law for repairing the damage caused by the first failure. It is this series of failures that has led the Courts to invoke the principle of constructive res judicata in favour of the assessee, to ensure a kind of disciplined approach, found routinely wanting, in the persons administering the provisions of the Income-tax Act.

There is a judicial acceptance of the principle that the proceedings for assessment of total income cannot be allowed to continue endlessly, and all litigation has to be brought to an end at the earliest possible time, and cannot be allowed to be pursued by resorting to the different provisions, otherwise made available, in succession of each other. Such a witch -hunt is found to be undesirable by the Courts. By resorting to the principle of constructive res judicata, the Courts have tried to bring some semblance of discipline in to the administration of the law.

Having said that, the principle of res judicata is not applicable to proceedings under the Income-tax Act. Therefore, warranting an application of constructive res judicata demands presence of such extraneous circumstances as leave the Court with no option but to invoke constructive res judicata to bring to an end the multiplicity of the proceedings caused by the non-application of mind.

Ind-AS impact on retail industry and summary of the carve-outs

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The final Indian Accounting Standards (Ind-ASs) have been notified by the Ministry of Corporate Affairs (MCA) vide its announcement dated 25th February 2011. With the announcement, the final position of Ind-ASs, including key carveouts, has become clear. However, the MCA announcement does not convey the effective dates for the application of the Ind-ASs, giving an impression to industry that the implementation of Ind-AS is deferred. However, such an interpretation may be made with caution, as the final notified date of transition may not be too far.

The adoption of Ind-AS will have an impact on financial reporting of many entities, some of which are sector-specific, while some may be entityspecific. This article attempts to analyse some of the key impact areas on transition to Ind-AS for the retail industry and summarises the carve-outs vis-à-vis the IFRS.

Revenue recognition:
Principal v. Agent: Many a time, the retailer permits another entity to operate from its retail outlet. Under such cases, the retailer should closely evaluate its risks emanating from the arrangement to determine whether the retailer is ultimately selling the goods to the customer in his own capacity or the retailer is only facilitating the sale of goods in his capacity as an agent.

Under the current practice, a retailer invariably recognises the gross value of sales proceeds as revenue in the absence of clear guidance in distinguishing a principal from an agent.

Ind-AS provides more elaborate guidance on classification between a principal and an agent. It clarifies that if the retailer carries significant risks (such as inventory risk and price risk) and determines the price of goods, it is considered a principal, or else an agent. If the retailer is acting as the agent, then only the commission earned should be booked as revenues.

Customer loyalty programmes: Most retailers use consumer promotional schemes to increase business opportunities. These promotions typically include offers such as award credits or points through a loyalty scheme or the provision of a future discount through vouchers or coupons. Award credits may be linked to individual purchases or group of purchases. The customer may redeem the award credits for free or discounted goods or services.

Under current practice, there is no specific guidance on accounting for customer loyalty programmes. Certain entities recognise the cost of discounted/ free goods along with cost of sales, while certain entities present such costs as sales promotion expense. Further certain entities recognise the cost upfront based on estimates, while certain entities recognise the cost on incurrence.

Under Ind-AS, the revenue transactions under customer loyalty programmes are considered to have multiple elements, where the revenue attributable to the sale of goods either free of cost or at discounted price in future is recognised separately from the current sale transaction. The principles of recognition of customer loyalty programmes are as under:

An entity recognises the award credits as a separately identifiable component of revenue and defers the recognition of revenue related to the award credits until its utilisation.

The revenue attributed to the award credits takes into account the expected level of redemption.

The consideration received or receivable from the customer is allocated between the current sales transaction and the award credits by reference to their fair values.

The fair value is determined based on relative fair value method (where the benefit under the award is charged proportionately to each component).

The above guidance shall lead to initial deferral of revenue attributable to the award credits.

Product warranties: In the retail industry, the retailers often provide warranty on sale of products of its own brand. Currently such warranty obligations are accounted for through full recognition of revenue and an accrual of estimated costs, irrespective of the duration of the warranty period. Under Ind-AS, where the normal warranty offered by entities is for a duration of more than a year, the warranty provision would be recognised at its discounted value. The provisions would accrete over the expected term of the provision leading to an interest expense.

Thus the warranty costs to the extent of time value of money would be recognised as interest cost.

Leases:
Often the lease arrangements involve an initial fit-out period before commencement of the retail store’s operation, during which the retailer may be offered a rent-free right to use the leased premise. The rent would commence on the commencement of the operations. In the absence of elaborate guidance on such arrangements, currently the lease rent is usually recognised based on the commencement of the lease payments.

The Ind-ASs provide specific guidance on treatment of such lease incentives as part of the net consideration agreed for the use of the leased asset, irrespective of the incentive’s nature or form or timing of payments. As such, the retailer (lessee) shall recognise the incentives as a reduction of rental expense over the lease term on a straightline basis, unless another systematic basis is representative of the time pattern of the lessee’s benefit from the use of the leased asset.

Thus, the lease rent shall be recognised even for the period when there were no lease rentals payable, leading to a higher lease rental during the initial rent-free period. However, the subsequent lease rental charge would decline on account of the lease incentives being recognised as a reduction of lease rent expense over the lease term.

Interest-free lease deposits: The retail outlets are invariably taken on a noncancellable operating lease with an interest-free lease deposit. Under the current practice, the interest-free deposits are recognised as such at their transaction values.

Under the Ind-ASs, such interest-free deposits are classified as financial assets, which are required to be recognised at its fair value on initial recognition and at its amortised cost subsequently. These interest-free deposits are recognised at their discounted values and the difference between the contractual amount and discounted values represent the prepaid lease rent. The lease deposits would accrete over the lease term to match the undiscounted amount, leading to interest income, while the prepaid lease rent would be amortised as lease rent over the lease term on a straight-line basis.

As such, the accounting treatment under Ind- AS would lead to grossing up of lease rent and interest income. However, as the lease rents would be charged on straight-line basis and the interest income on effective interest rate basis, the higher lease rents may not exactly offset the interest income for the intervening reporting periods, though they would exactly offset when the entire lease term is considered together.

Asset retirement obligations: The retailers that acquire their stores on lease invariably are obligated to return the leased premises to the lessor on completion of the lease term on an ‘as-is’ basis. The retailer is obligated to remove its fixed assets, especially the leasehold improvements, on completion of the lease term.

Ind-ASs, in line with the current practice, require the creation of a provision for asset retirement obligations when there is an obligation for outflow of economic resources that is probable and can is reliably measurable. However, it is not common to find entities, other than exploration companies, that recognise the asset retirement obligations under the current practice on account of lack of elaborate guidance under the current GAAP.

Ind-AS requires a provision (and a corresponding asset) to be created at the initial stage by discounting the eventual estimated liability to its present value. The discount is unwound by way of recognising an interest expense over the life of the asset. Further, the provision is required to be re-estimated every reporting date. Apart from re-estimating the amount and timing of the outflow of economic resources, even the discounting factor is also re-estimated at each reporting period and is accounted as a change of estimates.

Application of Ind-AS will lead to an increase in the depreciation charge related to the cost capitalised and higher finance costs on account of unwinding the discount over the life of the asset.

Key carve-outs:

The final Ind AS includes several ‘carve-outs’ (deviations) from IFRS as issued by the International Accounting Standards Board (IASB). The Indian standard-setters have examined individual IFRS and modified the requirements where deemed necessary to suit Indian conditions. ‘Carve-outs’ are generally perceived as non-desirable, since they would dilute the key purpose of converging with IFRS (i.e., to have a common set of accounting standards across countries; provide seamless access to international capital markets; provide comfort to investors).

An analysis of the Ind AS carve-outs reveal that while some of the carve-outs are mandatory and represent clear deviations from IFRS, several of the carve-outs represent removal of policy choices under IFRS in certain areas or conversely provide alternate policy choices under Ind AS for certain other areas.

Let us start with the first category of carve-outs (mandatory deviations). The significant mandatory deviations from IFRS that an Indian company cannot avoid are a handful. These include revenue recognition for real estate sales on the basis of percentage completion method (IFRS requires revenue recognition when the final possession is given to the customer) and accounting for the equity conversion option of a foreign currency convertible bond (FCCB) as an equity component (IFRS requires the equity conversion option to be periodically marked-to-market). Our experience indicates that these carve-outs are not expected to impact a wide cross-section of companies. There are some other, less substantive, mandatory deviations (for example, use of a government bond rate for discounting employee benefit obligations as opposed to corporate bond rates required by IFRS or excluding own credit risk in fair valuation of certain financial liabilities).

Let us now examine the second category of carve-outs (removal of policy choices). There are several areas where IFRS offers multiple policy choices, while Ind AS prescribes one of these policy choices. Such carve-outs include (1) Single statement presentation of the income statement (IFRS permits the statement of comprehensive income to be presented separately) (2) Classification of expenses in the profit and loss account by their nature (IFRS permits classification by function) (3) Classification of interest and dividend as financing/ investing cash flows (IFRS permits operating classification) (4) No choice to carry investment property at fair value (IFRS permits this) (5) Recognition of actuarial gains and losses directly in reserves (IFRS permits alternatives including recognition in the profit and loss account) and Recomputation of borrowing costs capitalisable (IFRS permits prospective application).

This category of carve -outs does not result in deviations from IFRS, as they represent permitted policy choices. These could pose a challenge for Indian companies, if global peers follow other alternative policies; if such companies are a part of a global group that follows other alternative policies; or if the Indian company has previously followed other alternative policies for IFRS reporting to overseas stakeholders.

The third category of carve-outs (additional policy choices) represent an area where a company can either elect to follow policies aligned to IFRS, or alternate policies that diverge from IFRS. Such carve-outs include (1) Choice to defer exchange differences on long-term foreign currency assets and liabilities, and recognise such differences over the period of the underlying asset/liability (IFRS requires all such differences to be immediately charged to the profit and loss account) (2) Choice to consider Indian GAAP carrying values as ‘deemed cost’ for fixed assets acquired prior to transition date (IFRS offers no such choice on transition — retrospective IFRS values or ‘fair values’ are the two choices on transition; Ind-AS offers a third choice). This category of carve-outs represents an area where each individual company needs to apply careful thought and consideration. While assessing these policy choices, companies need to evaluate not just their current environment, but future plans (for example, plans for a future overseas listing).

The notified converged standards have also deferred the applicability of guidance on accounting for embedded leases and service concession arrangements.

These carve-outs could have been avoided, but the Government has adopted a practical approach to implement a significant and complex change in the accounting framework. It is now up to each company to choose whether they want to fully converge with IFRS (subject to the mandatory deviations discussed above) or take a simpler way out to manage the transition.

Ind-AS financial statements for subsequent periods can be made compliant with IFRS if a company chooses optimal accounting policies and does not adopt the prescribed alternatives available under Ind AS (other than those impacted by mandatory deviations).

Tata Motors Ltd. (31-3-2010)

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From Accounting Policies: Product Warranty Expenses: The estimated liability for product warranties is recorded when products are sold. These estimates are established using historical information on the nature, frequency and average cost of warranty claims and management estimates regarding possible future incidence based on corrective actions on product failures. The timing of outflows will vary as and when warranty claim will arise —being typically up to three years.

From Notes to Accounts: Other provisions include [Schedule 12(e), page 72]:

Siemens Ltd. (30-9-2010)

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From Accounting Policies:

Provision: Provisions comprise liabilities of uncertain timing or amount. Provisions are recognised when the Company recognises it has a present obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

Provisions are not discounted to its present value and are determined based on best estimate required to settle the obligation at the balance sheet date. These are reviewed at each balance sheet date and adjusted to reflect current best estimates.

Disclosures for contingent liability are made when there is a possible or present obligation for which it is not probable that there will be an outflow of resources. When there is a possible obligation or a present obligation in respect of which the likelihood of outflow of resources is remote, no disclosure is made.

Loss contingencies arising from claims, litigation, assessment, fines, penalties, etc. are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated.

Contingent assets are neither recognised, nor disclosed in the financial statements.

From Notes to Accounts:

Disclosure relating to provisions:
Provision for warranty: Warranty costs are provided based on a technical estimate of the costs required to be incurred for repairs, replacement, material cost, servicing and past experience in respect of warranty costs. It is expected that this expenditure will be incurred over the contractual warranty period.

Provision for liquidated damages:
Liquidated damages are provided based on contractual terms when the delivery/commissioning dates of an individual project have exceeded or are likely to exceed the delivery/commissioning dates as per the respective contracts. This expenditure is expected to be incurred over the respective contractual terms up to closure of the contract (including warranty period).

Provision for loss orders:
A provision for expected loss on construction contracts is recognised when it is probable that the contract costs will exceed total contract revenue. For all other contracts loss order provisions are made when the unavoidable costs of meeting the obligation under the contract exceed the currently estimated economic benefits.

Contingencies:
The Company has made provisions for known contractual risks, litigation cases and pending assessments in respect of taxes, duties and other levies, the outflow of which would depend on the cessation of the respective events.

Jet Airways (India) Ltd. (31-3-2010)

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From Accounting Policies: Provisions, contingent liabilities and contingent assets:

Provisions involving a substantial degree of estimation in measurement are recognised when there is a present obligation as a result of past events and it is probable that there will be an outflow of resources. Contingent Liabilities are not recognised but are disclosed in the notes. Contingent Assets are neither recognised, nor disclosed in the financial statements.

From Notes to Accounts:

As per Accounting Standard-29, Provisions, Contingent Liabilities and Contingent Assets, given below are movements in provision for Frequent Flyer Programme, Redelivery of Aircraft, Aircraft Maintenance Costs and Engine Repairs Costs.

(a) Frequent Flyer Programme: The Company has a Frequent Flyer Programme named ‘Jet Privilege’, wherein the passengers who frequently use the services of the Airline become members of ‘Jet Privilege’ and accumulate miles to their credit. Subject to certain terms and conditions of ‘Jet Privilege’, the passenger is eligible to redeem such miles lying to their credit in the form of free tickets.

The cost of allowing free travel to members as contractually agreed under the Frequent Flyer Programme is accounted considering the members’ accumulated mileage on an incremental cost basis. The movement in the provision during the year is as under:

Particulars 2009-10 2008-09
Opening balance 3,344 2,949
Add :
Additional provisions during the year 1,346 1 ,446
Less :
Amounts used during the year (1,053) (1,0 51)
Less :
Unused amounts reversed
during the year (416) —
Closing balance 3,221 3,344

(b) Redelivery of aircraft:

The Company has in its fleet aircraft on operating lease. As contractually agreed under the lease agreements, the aircraft have to be redelivered to the lessors at the end of the lease term in the stipulated technical condition. Such redelivery conditions would entail costs for technical inspection, maintenance checks, repainting costs prior to its redelivery and cost of ferrying the aircraft to the location as stipulated under the lease agreement.

The Company therefore provides for such redelivery expenses, as contractually agreed, in proportion to the expired lease period.

Particulars Opening Balance 2009-10 3,031 2008-09 2,115
Add : Additional provisions during the year* 315 1,441
Less : Amounts used during the year 753 525
Less : Un-used amounts reversed during the year — —
Closing balance 2,593 3,031
The cash outflow out of the above provisions as per the current terms under the lease agreements are as under:

Year

 

 

2009-10

2008-09

 

 

 

 

 

 

 

 

 

Aircraft

 

Amount

Aircraft

Amount

 

 

 

 

(Rs. in lakhs)

 

(Rs.
in lakhs)

 

 

 

 

 

 

 

2010-11

 

3

 

256

4

394

 

 

 

 

 

 

 

2011-12

 

2

 

205

1

87

 

 

 

 

 

 

 

2012-13

 

18

 

1,493

17

1,286

 

 

 

 

 

 

 

2014-15

 

3

 

130

3

106

 

 

 

 

 

 

 

2015-16

 

13

 

425

13

269

 

 

 

 

 

 

 

2017-18

 

3

 

20

—

—

 

 

 

 

 

 

 

2018-19

 

3

 

50

3

12

 

 

 

 

 

 

 

2019-20

 

2

 

14

—

—

 

 

 

 

 

 

 

Total

 

 

 

2,593

 

2,154

 

 

 

 

 

 

 

    Aircraft maintenance costs:

Certain heavy maintenance checks including over-haul of auxiliary power units need to be performed at specified intervals as enforced by the Director General of Civil Aviation in accordance with the Maintenance Programme Document laid down by the manufacturers. The movements in the provisions for such costs are as under:

Particulars

2009-10

2008-09

 

 

 

Opening balance

3,433

2,115

 

 

 

Add/(Less)
:

 

 

Adjustments during the year*

(268)

1,441

 

 

 

Less
:

 

 

Amounts used during the year

(1,230)

525

 

 

 

Less
:

 

 

Unused amounts reversed

 

 

during the year

(166)

—

 

 

 

Closing balance

1,769

3,031

 

 

 

    Adjustments during the year represent exchange fluctuation impact consequent to restatement of liabilities denominated in foreign currency.

(d) Engine repairs cost:

The aircraft engines have to undergo shop visits for overhaul and maintenance at specified intervals as per the Maintenance Programme Document. The same was provided for on the basis of hours flown at a pre-determined rate.

 

Amount (Rs. in lakhs)

 

 

 

 

Particulars

2009-10

2008-09

 

 

 

 

 

 

 

Opening balance

333

 

 

657

 

 

 

 

 

 

 

Add/(Less)
:

 

 

 

 

 

Adjustments during the year*

(6)

 

 

164

 

 

 

 

 

 

 

Less
:

 

 

 

 

 

Amounts used during the year

327

 

 

372

 

 

 

 

 

 

 

Less
:

 

 

 

 

 

Unused amounts reversed

 

 

 

 

 

during the year

—

 

116

 

 

 

 

 

 

Closing balance

—

 

 

333

 

 

 

 

 

 

 

*Adjustments during the year represent exchange fluctuation impact consequent to restatement of liabilities denominated in foreign currency.

GAPs in GAAP — Presentation of Comparatives under Ind-AS

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The Institute of Chartered Accountants of India (ICAI) recently submitted a set of near-final Indian IFRS standards (known as ‘Ind-AS’) to the National Advisory Committee on Accounting Standards (NACAS). Subsequently, the Ministry of Corporate Affairs (MCA) notified the Ind-AS standards. These notified standards contain many changes from the IFRS as issued by the International Accounting Standard Board (IASB). Some of the changes are resulting in internal inconsistencies or may give rise to practical challenges (generally referred to as ‘GAP in GAAP’ by the author). This article highlights one such key issue. Whilst all the previous articles have focussed on Indian GAAP, henceforth this series will also additionally bring out the GAP in GAAP on the new Ind-AS’s.

IFRS 1 First-time adoption requires a company to transit from a previous GAAP (say, Indian GAAP) to IFRS at the beginning of the comparative period. Therefore an Indian company that has to prepare IFRS accounts for 2011-12 financial year, will transit to IFRS on 1st April 2010 (transition date or start date). This approach results in the company having both the current year (2011-12) and the comparable year (2010-11) prepared under IFRS with one transition date. By providing comparable numbers under the same IFRS framework, investors and analysts will have a better understanding of those financial statements.

A somewhat different approach is followed in Ind- AS 101 First-time Adoption of Ind-AS. Under this standard there is no mandatory requirement to prepare comparable numbers under the same Ind-AS framework. So typically an Indian company would have current year numbers under Ind-AS 101 prepared with the transition date of 1st April 2011 and comparable numbers as per Indian GAAP. Under this approach, the investors and analysts may face difficulties in understanding the financial statements that do not contain comparable numbers prepared under the same reporting framework.

There is another alternative approach that is allowed under Ind-AS 101, so that companies can provide comparative information under Ind-AS. Ind-AS 101 defines the ‘transition date’ as the beginning of the current period, i.e., 1st April 2011. Thus, a company cannot adopt Ind-AS from the beginning of the comparative period. If it desires to give comparative information as per Ind-AS in its first Ind-AS financial statements, it can do so on memorandum basis only. For the purposes of preparing comparative information on a memorandum basis, the company will have a deemed transition date, i.e., 1st April 2010. This gives rise to the following issue.

If a company decides to give Ind-AS comparatives in the first year of adoption, it will use two transition dates : actual transition date and memoranda/ deemed transition date. For example, if a company covered in phase 1 of the IFRS conversion roadmap and having 31st March year decides to give one year comparative, its actual transition date will be 1st April 2011. In addition, it will use 1st April 2010 as memoranda/deemed transition date to prepare memoranda comparatives. It may be noted that the memorandum balance sheet prepared at the end of 31st March 2011, will not be carried forward and a new balance sheet will be prepared at 1st April 2011, by applying Ind-AS 101 all over again. Though the intention is to provide comparability between two years under Ind-AS, the approach in Ind-AS 101 will end up doing exactly the opposite. Given below are few examples that explain the point.

(a) A company acquires a new business whose acquisition date falls within the memoranda comparable period (2010-11 in the above example). In preparing its memoranda information as at and for the year ended 31st March 2011, the company will apply acquisition accounting as per Ind-AS 103 Business Combinations. However, in preparing Ind-AS opening balance sheet at 1st April 2011, it can still use Ind-AS 101 exemption and continue with previous GAAP accounting under Indian GAAP, after making certain specific adjustments. The 2010-11 numbers will have the impact of acquisition accounting, but the 2011-12 numbers will be based on Indian GAAP accounting.

(b) A company decides to use fair value as deemed cost exemption for property, plant and equipment (PPE). For its memoranda transition, it will determine the fair value as at 1st April 2010. For actual transition, fair valuation as at 1st April 2011 will be needed. Other than having to do fair valuation for two transition dates, the value of the PPE and the resultant depreciation for the two years will not be comparable.

Paragraph 21(b)(ii) of Ind-AS 101 actually acknowledges this fact and states that “For example, the first-time adopter for whom the first reporting period is financial statements for the year ending 31st March, 2012 would apply the exceptions and exceptions as at 1st April, 2010 and 1st April, 2011; accordingly the balance sheet as at end of 31st March, 2011 may not be equivalent to the opening balance sheet as at 1st April, 2011.”

Requiring IFRS conversion on two transition dates (i.e., 1st April 2010 and 1st April 2011), so as to enable a company to prepare comparative numbers under Ind-AS seems rather unique, unnecessary cost and burden and self-defeating. The approach results in nonmatching of the balance sheets and in many cases may actually distort comparability. It is therefore likely that many companies may provide comparable numbers only under Indian GAAP rather than under Ind-AS.

For the standards-setters a better strategy would have been to accept IFRS 1, as it is. This standard would require transitioning to IFRS on 1st April 2010 as a starting point. Comparable and current year numbers would be prepared on that basis and the issue of noncomparability or non-matching balance sheets would not arise. Moreover investors would have found it easy to understand and useful for decision-making purposes. Global investors too would have preferred it, as being compliant with IASB IFRS.

It may be noted that this article assumes that the transition date is as suggested in the original roadmap issued by the MCA. However, MCA has clarified on the notified standards that the implementation date will be intimated later. Therefore it cannot be said with any certainty whether the dates mentioned in the roadmap will be met.

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TDS: Commission or brokerage: Section 194H of Income-tax Act, 1961: A.Ys. 2004-05 to 2007- 08: Agent of airline companies permitted to sell tickets at any rate between fixed minimum commercial price and published price: Difference between commercial price and published price not commission or brokerage: Not liable to TDS.

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[CIT v. Qatar Airways, 332 ITR 253 (Bom.)]

In an appeal preferred by the Revenue, the following question was raised:

“Whether on the facts and in the circumstances of the case and in law, the difference in amount between commercial price and published price is special commission in the nature of commission or brokerage within the meaning of Explanation (i) to section 194H of the Income-tax Act, 1961?”

The Bombay High Court held as under:

“(i) The agents of the assessee-airlines were granted permission to sell the tickets at any rate between the fixed minimum commercial price and the published price. The assessee would have no information about the exact rate at which the tickets were ultimately sold by its agents. It would be impracticable and unreasonable to expect the assessee to get a feedback from its numerous agents in respect of each ticket sold.
(ii) The permission granted to the agents to sell the tickets at a lower price could neither amount to commission, nor brokerage in the hands of the agents.
(iii) Thus the tax at source was not deductible on the difference between the commercial price and the published price.”

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Recovery of tax: Stay of recovery: S. 220(6) of Income-tax Act, 1961: Factors to be considered: Existence of prima facie case warrants stay.

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[KLM Royal Dutch Airlines v. DDIT, 332 ITR 224 (Del.):

In this case, the order rejecting the application of the assessee u/s.220(6) of the Income-tax Act, 1961 for stay of recovery was challenged by the assessee by filing a writ. It was pointed out that the factor that as regards the existence of the prima facie case was not considered while rejecting the application.

The Delhi High Court allowed the writ petition, set aside the order of rejection and directed to pass a fresh order specifically dealing with the existence of prima facie case.

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(2011) 21 STR 294 (Tri – Chennai) – Lakshmi Vilas Bank Ltd. vs. CCEx., Trichy

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Services of construction of staff quarters whether an input service for providing output service – Reference to division bench considered in view of two different views of co-ordinate benches.

Facts:
Revenue denied CENVAT credit on input services for construction of staff quarters. Appellant contended that if services are used in the ‘premises’ of service provider, CENVAT credit is allowed in view of the definition of “Input Services”. It is not relevant whether this is the ‘premises’ where service is actually provided or “office premises” or “residential premises”. Moreover, the matter is decided by the Tribunal in favour of appellant in appellant’s own case for prior periods.

The revenue contended that the word ‘premises’ should not be considered in isolation. It cannot include every ownership premises of service provider. It should have connection with the activities of providing output services as decided by the Tribunal in case of Manikgarh Cement Works (2010) (18 STR 275).

Held:
Ownership of the premises is not relevant for claim of CENVAT credit. Input services should be used in or in relation to provision of output service so as to be eligible for CENVAT Credit. However, the issue is decided by the Tribunal in appellant’s favour earlier. There being two different decisions of the co-ordinate benches, the matter is placed for considering reference to Division Bench.

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(2011) 21 STR 283 (Tri – Bang) – CCEx., Visakhapatnam vs. Dr. Reddy’s Laboratories Ltd.

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Definition of “input service” wide enough to cover business related activities like outdoor catering service, group medical insurance etc. If cost of service forms part of assessable value – Decision valid for period prior to 31/03/2011.

Facts:
Revenue denied CENVAT credit on the following input services:

a) Group medical insurance to employees and family members,

b) Insurance of directors and officers when they are on foreign tour,

c) Outdoor catering services i.e. canteen facility provided to employees within factory premises as required under Factories Act, 1948

Held:
The definition of input service is very wide as observed by the Mumbai High Court in case of Coca Cola India (P) Ltd. vs. Commissioner (2009) (242 ELT 168). The High Court in this case had provided a test for establishing whether the activity relates to business or not. If the cost of such services forms part of the assessable value on which excise duty is paid, CENVAT credit is allowed. Therefore, the matter was remanded back to the original authority with a comment to follow the above judgment. CENVAT credit on outdoor catering services stands allowed since the issue is decided earlier by the Tribunal for respondent itself.

Comment:
The definition of “input service” in the CENVAT Credit Rules, 2004 has been amended whereby its scope is restricted with effect from 01/04/2011. Therefore, the above interpretation will hold good only till 31/03/2011.

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(2011) 21 STR 421 (Tri – Chennai) – JMC educational Charitable Trust vs. CCEx., Trichy –

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Distant education programme by an institution analogical to a parallel college is not in the nature of commercial coaching or training service.

Facts:
The appellant was conducting classes under the distance education programmes. For these programmes, the students paid separately to university as well as the appellant. Diploma/degree from the university is obtained by the students. The appellant explained that their institution is like a parallel college and students facing troublesome situations can study through these courses. Therefore, the appellant pleaded for exemption as is granted to regular colleges and took support of the Kerala High Court’s verdict in Malappuram Distt. Parallel Colleges Association vs. Union of India (2006) (2 STR 321).

Held:
Since the Kerala High Court had held that provisions of service tax laws for levy of service tax on parallel colleges are ultra virus Article 14 of the Constitution of India, the appeal was allowed.

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(2011) 21 STR 303 (Tri – Bang) SAP India Pvt. Ltd. vs. CCEx., Bangalore III

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Services of upgradation of software post implementation of ERP not in the nature of maintenance or repair service. ‘Computers’ do not include software – service liable from 16/05/2008 as information technology software service.

Facts:
i. The Department contended that the services provided by the appellant for the period from July 2004 to January 2006 in relation to maintenance of software should be classified under “management, maintenance or repairs services”. However, the appellant claimed that the said services are classifiable as “information technology software services” which is introduced with effect from 16/05/2008.

ii. Appellant contended that repairs and maintenance of software services are specifically excluded from the definition of business auxiliary services and therefore, are not liable to service tax. They relied on a circular dated 17/12/2003 which clarified that maintenance of software was not chargeable to service tax. However, the Department claimed that circular dated 17/12/2003 was superseded by circular dated 07/10/2005 and therefore, the services of maintenance of software were chargeable to service tax.

iii. Department contended that software is considered as ‘goods’ by various courts and that though Notification No. 20/2003-ST dated 21/08/2003 had exempted maintenance or repairs of computers and its peripherals, Notification No. 7/2004-ST dated 09/07/2004 rescinded the said notification and therefore, such services are chargeable to service tax from 09/07/2004. The appellant argued that computers per se do not include software and therefore, the said notification did not apply to them. The appellant contended that service tax cannot be levied on activities which are specifically kept out of the purview of service tax and they explained that it provides computer software maintenance which can be categorised in following four streams as per the technical literature of special consultants and other sources: Corrective, adaptive, perfective and preventive.

These activities are in the nature of “ERP maintenance and upgradation activities”.

iv. The Department issued show cause notices for various periods including part of the period under dispute under “management consultant’s services”. The appellant challenged the notices on the ground of extended period of limitation as well as on the interpretation issue.

Held:
i. Variety of maintenance services were provided by the appellant post implementation of ERP. These services are mainly in relation to upgrading the software and enhancing ERP’s efficiency. “Maintenance” in relation to computer software is much wider than maintenance of any other goods or of a factual situation

ii. Though ‘software’ is considered as ‘goods’ by various courts, normally maintenance of goods would not result in upgradation of its value or functionality or efficiency to higher levels. Only “corrective maintenance” can be compared with maintenance of tangible goods.

iii. The case laws and circulars placed were in relation to computer software and the new levy with effect from 16/05/2008 is in relation to information technology software. Computer software and information technology software services are treated differently by the legislature which can be understood from section 65(64) of the Finance Act, 1994 which reads as under:

“management, maintenance or repair” means any service provided by —

(i) any person under a contract or an agreement or
(ii) a manufacturer or any person authorised by him, in relation to, —

(a) management of properties, whether immovable or not;
(b) maintenance or repair of properties, whether immovable or not; or
(c) maintenance or repair including reconditioning or restoration, or servicing of any goods, excluding a motor vehicle

Explanation — For the removal of doubts, it is hereby declared that for the purposes of this clause, —

(a) ‘goods’ includes computer software;
(b) ‘properties’ includes information technology software” Therefore, maintenance of computer software is covered by clause
(c) whereas maintenance of information technology software is covered by clause

(b) above.

(iv) The activities of the appellant being well within the scope of “information technology software services”, appellant was not liable for service for the period under dispute.

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(2011) 21 STR 398 (Tri – Mumbai) – Makjai Laboratories vs. CCEx., Kolhapur

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During the period prior to 01/09/2009, activity amounting to ‘manufacture’ not liable for service tax even if not liable under Central Excise Act but chargeable under Medicinal and Toilet Preparations Act or any other Act.

Facts:
The appellant was manufacturing medicines containing alcohol on job work basis. The said medicines were chargeable to duty under the Medicinal & Toilet Preparations (Excise Duty) Act, 1955. The Department claimed that the exemption from business auxiliary services to job worker is restricted only to excisable goods under section 2(f) of the Central Excise Act, 1944 and since the goods are not excisable under the said section, exemption cannot be granted to appellant.

Held:
The exclusion is applicable to activity of ‘manufacture’ under section 2(f) of the Central Excise Act, 1944 and not restricted to “excisable goods” under the said section. Considering this exemption is available to the activity which is regarded as manufacturing activity whether chargeable to Central Excise Act, 1944 or Medicinal & Toilet Preparations (Excise Duty) Act, 1955 or any other Act and the appeal was allowed.

Comment:
The definition of business auxiliary service has been amended with effect from 01/09/2009 whereby the term ‘manufacture’ relates only to excisable goods under the Central Excise Act. Therefore the above will not hold good for the period after 01/09/2009.

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(2011) 21 STR 241 (Tri – Ahmd.) – Globe Enviro Care Ltd. vs. CCEx., Surat

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Incineration of bio medical waste prima facie not in the nature of processing of goods – not a business auxiliary service – stay granted.

Facts:
Appellant was engaged in processing and treatment of liquid chemical effluents generated at various industries. It was held liable for service tax on the ground that such activities are processing of goods on behalf of client and therefore, the same are ancillary to business auxiliary services. Appellant referred to various judgments to argue that the same is not leviable to service tax at all.

Held:
The Tribunal observed that the lower authorities did not consider CBEC Circular issued in this behalf which clarified that incineration/shredding of biomedical waste cannot be considered as processing of goods. Granting unconditional stay, the matter was remanded to the adjudicating authority.

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(2011) 21 STR 224 (Kar) – CCEx., Mangalore vs. K. Vijaya C. Rai

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Non-payment of service tax for 3 years and payment only after receipt of show cause notice indicates malafide intention – penalty levied – cannot get away merely being a lady.

Facts:
The assessee, a lady, did not pay service tax for three years after becoming liable. On being surveyed, obtained the registration, but did not pay any service tax. Subsequent to issuance of show cause notice, paid service tax with interest. The Tribunal set aside the order levying penalty on her.

Held:
The Tribunal was carried away by the fact of assessee being lady and could not notice that people having malafide motives may use names of housewives. The High Court set aside the order of the Tribunal and upheld the penalty.

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(2011) 21 STR 210 (P & H) – CCEx. vs. Haryana Industrial Security Services

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Penalty u/s. 78 has to be equal to the amount of service tax demand and the law does not provide discretion to reduce.

Facts:
The assessee a security agency, paid service tax on the service charges received from the customers instead of gross amount charged for the period from 16/10/1998 to 30/09/1999. The assessee did not dispute the revenue’s contention that the minimum penalty prescribed under section 78 is equal to the amount of service tax. Based on other facts, the lower Appellate Authorities held that the assessee had suppressed facts and therefore, liable to penalty. However the Tribunal reduced the penalty amount to 1.5 lakh from 6.5 lakh.

Held:
The penalty equal to the amount of service tax was minimum and Tribunal’s order reducing penalty was set aside.

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DCIT v. Bharat Kunverji Kenia ITAT ‘B’ Bench, Mumbai Before D. Manmohan (VP) and Pramod Kumar (AM) ITA No. 929/Mum./2010 A.Y.: 2006-07. Decided on: 2-2-2011 Counsel for revenue/assessee: Hari Govind Singh/Pradip N. Kapasi

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Section 14 — Heads of income — Income from purchase and sale of shares — Whether taxable as capital gains or as business income — On the facts held as capital gains.

Facts:
During the year the assessee had shown short-term capital gain of Rs.40.31 lac from purchase and sale of shares. The AO noticed that the volume of purchase and sale was worth Rs.2.5 crore and the number of transactions aggregated to 276 in number. Based on the same he concluded that: the data indicated that the assessee intended to deal in shares as a trader and not as an investor. When the assessee contended that in the earlier years, under the similar circumstances, the income was taxed as capital gains and not as a business income, the AO observed that the doctrine of res judicata could be applicable to the decisions of Civil Courts and it cannot be invoked while deciding income-tax matter.

On appeal, the CIT(A) had the benefit of the order of the ITAT in the assessee’s own case for the A.Y. 2005-06 (ITA No. 6544/Mum./2008 dated 15-5-2009) wherein on identical facts, the Tribunal decided the issue in favour of the assessee. Applying the principle of consistency, the CIT(A) allowed the appeal of the assessee.

Before the Tribunal the Revenue relied on the order of the AO and further submitted that the volume, frequency and regularity of the transaction was one of the essential tests to consider the nature of transactions. Further, relying on the following two decisions, it was contended that where facts were distinguishable or fresh facts were brought on record, principles of res judicata did not come into play and the authority was free to take a different view on the matter. The decisions relied upon were as under:

  •  Sadhana Nabera v. ACIT, (ITA No. 2586/M/2009, dated 26-3-2010; and

  •  Rakesh J. Sanghvi v. DCIT, (ITA Nos. 4607/ M/2008 and 5710/M/2009, dated 31-8-2009).

Held:
According to the Tribunal, no single criteria laid down by the Courts or in the Board Circular (No. 4 of 2007, dated 15-6-2007) was decisive and they had to be considered cumulatively to bring out the real intention of the assessee before entering into such transactions. Referring to a chart prepared by the assessee, which was showing compliance with various conditions of the Board Circular, the Tribunal noted that he had complied with all the requirements mentioned in the Circular. In addition the Tribunal noted as under:

  •  The shares held were all along treated as an investment;

  •  The assessee had not borrowed funds for the purpose of making investments;

  •  Shares once sold were not purchased again;

  •  Average holding period of the shares sold by the assessee was of 181 days.

In view of the above and the Tribunal’s decision in the assessee’s own case for the earlier year, the Tribunal dismissed the appeal filed by the Revenue. According to the Tribunal, the case laws relied upon by the Revenue were distinguishable on the facts.

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51 DTR (Bang.) (Trib.) 173 Hewlett Packard India Sales (P) Ltd. v. CIT A.Y.: 2006-07. Dated: 16-8-2010

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Rent paid for parking slots cannot be treated as car running expenses for the purpose of levy of FBT.

Facts:
The assessee had paid Rs.1.25 crores as rent for parking slots. These slots were used for parking cars of employees of the assessee. The FBT assessment was completed without considering this rent as fringe benefit. The CIT u/s.263 set aside the assessment relying upon the CBDT Circular No. 8 of 2005, dated 29th August, 2005.

Held:
In the present case, even though the rent pertaining to the car parking slots was mentioned distinctly and separately in the lease deed, the assessee was paying the sum as part of the overall rent paid to the landlord. The essential facilities attached to a rented building have to be treated as part of the building itself and therefore the rent or licence fee paid for such facilities should be treated as forming part of rent.

Further, the head of expenditure relied on by the CIT to hold the assessee liable for FBT in respect of rent relating to car parking area is ‘running, maintenance and repair expenses of cars’. The running expenses of a motor car usually include fuel oil and other incidental expenses. It may include the driver’s wages as well. It may even include the taxes. But it is very difficult to argue that car parking expenses are in the nature of running expenses. It is not possible to treat parking slot expenses as analogous to repair and maintenance. Hence, they cannot be included within the fringe benefits.

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51 DTR (Mumbai) (Trib.) 283 DCIT v. Ushdev International Ltd. A.Y.: 2002-03. Dated: 9-10-2010

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Penalty u/s.271(1)(c) — If tax liability is determined u/s.115JB, penalty cannot be levied with reference to the additions made under normal provisions of the Act.

Facts:
The Assessing Officer had made two additions to the returned income under normal provisions of the Act which were upheld by the Tribunal. However the addition made to book profits on account of diminution in the value of investments for the purpose of computation u/s.115JB was deleted by the Tribunal. While passing the consequential order the tax payable was determined u/s.115JB since tax payable under normal provisions of the Act was nil.

The AO imposed penalty u/s.271(1)(c) in respect of disallowances made under normal provisions of the Act.

Held:
The additions which constitute the foundation for imposition of penalty u/s.271(1)(c), were made while computing income under the regular provisions of the Act. However, tax u/s.115JB was determined by making an addition on account of diminution in the value of investment, which finally stands deleted by the Tribunal. Thus the basis of assessment under the regular provisions of the Act is no more relevant because of the AO finally computed income u/s.115JB pursuant to the order passed by the Tribunal. Thus the additions which were made in the original assessment as per the regular provisions of the Act, have become academic inasmuch as they have not entered the final computation of total income made by the AO. Neither the total income has increased with such additions, nor has the loss scaled down.

The assessment under regular provisions of the Act, in which such additions were made, has been substituted with that u/s. 115JB, and in the latter case, such additions were either not made or finally deleted by the Tribunal. As such there cannot be any question of imposing or confirming the penalty u/s.271(1)(c) qua these additions.

The argument of the Revenue that penalty should be sustained since the assessee was granted credit in respect of tax paid on deemed income u/s.115JAA was not accepted as the tax credit was not available for tax paid u/s.115JB till A.Y. 2005-06.

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127 ITD 257 (Mum.) Torrential Investments (P.) Ltd. v. ITO, Ward-2(3)(3), Mumbai A.Y.: 1996-97. Dated: 11-8-2009

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Section 234C — Proviso to section 234C(1) as amended by Finance Act (No. 2), 1996 is retrospective in nature, since it was proposed to remove hardship faced by the assessee as the entire tax on capital gains had to be paid at short notice or even before the sale proceeds were received.

Facts:
The assessee had income from long-term capital gains of Rs.25,47,670 during the year which accrued to the assessee in the months of May, 1995 and July, 1995. The assessee paid advance tax instalments as per section 234C (as amended by Finance Act, 1996). However, the Assessing Officer charged interest u/s. 234C from the first instalment consequently holding that the amendment u/s. 234C is prospective.

Held:
(1) The amendment (by the Finance Act, 1996) was enacted to remove the hardship to the assessee as the entire tax had to be paid at short notice as per the original provision even before the sale proceeds were received.

(2) The amendment to proviso to section 234C is clarificatory in nature and has to be applied retrospectively.

(3) The assessee had paid taxes as a part of the instalments due after the date of sale of the asset and hence, was not in default as stipulated u/s. 234C. Thus, no interest was chargeable from it u/s. 234C.

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AGRICULTURAL LAND LAWS: MALCHA, 1961

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Introduction: In the previous four articles, we examined the Maharashtra Land Revenue Code, 1966 and the Bombay Tenancy and Agricultural Lands Act, 1948. We continue our study of laws pertaining to Agricultural Lands in the State of Maharashtra by examining a very important Act which imposes a ceiling on Agricultural Land — the Maharashtra Agricultural Lands (Ceiling on Holdings) Act, 1961 (‘MALCHA’).

This article gives a bird’s-eye view of the MALCHA (also ‘the Act’). This Act is relevant to companies since it lays down the ceiling/maximum limit on the holding of agricultural land in the State of Maharashtra. The Act also provides that the excess land can be acquired by the Government and distributed. The idea behind the Act is to ensure equality of agrarian land since agricultural is the main form of livelihood for the rural India. The Act is a part of the Government’s efforts to create social justice.

The Act applies to the whole of the State of Maharashtra.

Family Unit: U/s.4 of the Act the ceiling on the holding of agricultural lands is per ‘Family Unit’. This is a very unique and important concept introduced by the Act. It is very essential to have a clear picture as to who is and who is not included in one’s ceiling computation since that could make all the difference between holding and acquisition of the land. A family unit is defined to mean the following:

A person

His spouse or more than one spouse if that be the case — thus, if a person dies leaving two or more widows, then they would constitute one consolidated family unit for considering the ceiling — State of Maharashtra v. Smt. Banabai and Anr., (1986) 4 SCC 281.

His minor sons

His minor unmarried daughters

If his spouse is dead, then the minor sons and minor unmarried daughters from that spouse.

The definition of the term is exhaustive and hence, only the classes of relatives defined would be covered. Thus, the married daughter of a person, whether minor or major, would constitute a separate family unit and hence, any land held by such a daughter would not be included in computing the ceiling for a person. This is the reason why the simplest form of planning involves transferring land to one’s married daughter so as to exclude it from the ceiling limits. Since a daughter is a relative u/s.56(2)(vii) of the Income-tax Act, the transaction is out of the purview of that Section. Similarly, a daughter is a relative under the Bombay Stamp Act, 1958 and hence, a gift to one’s married daughter attracts a concessional stamp duty @ 2% instead of the standard rate of 5%. However, as in the case of any planning, commercial considerations must take precedence over tax concessions.

Further, it is important to note that a person’s parents are not included in his ceiling and hence, if either or both of one’s parents are alive and holding land, then the same would not be included in the person’s ceiling computation.

Similarly, land held by one’s major son and/or his wife is not included in a person’s ceiling computation.

Even in case of a joint family where a father and his sons and possibly are living and working together, the ceiling would be separate for each major male and his immediate family. For instance, in a joint family where there are two brothers and each of them has two major sons, there would be six separate ceilings and not one consolidated ceiling for the family even though they are joint in residence and business.

A very interesting scenario arises in the case of testate/intestate succession. For instance, there is a person who is holding land up to the maximum limit permissible. His major son is also independently holding another piece of land up to the maximum limit permissible. The father dies and his sole legal heir is his son. On his death, the land becomes that of the son. Can the son contend that since he has received the land by inheritance, the ceiling should not apply to the second land received by him? The Supreme Court had an occasion to consider this issue in the case of State of Maharashtra v. Annapurnabai and Others, AIR 1985 SC 1403. The facts were that the declarant died pending determination of excess ceiling area. A contention was raised that on his death the proceedings stand abated and that therefore, the authorities have no jurisdiction to proceed further with the determination of the excess land under the Act. The Supreme Court held that until the proceedings are completed, there is no abatement and the excess ceiling land has to be computed pursuant to the declaration under the provisions of the Land Ceiling Act and that therefore, the Government continues to have jurisdiction to determine the excess land. It held that the heirs and legal representatives of a deceased holder cannot be treated as independent tenure holders for fixing ceiling. Therefore, each heir would not be treated as independent tenure holders for fixing the ceiling.

Similarly, the Supreme Court in Bhikoba Shankar Dhumal v. Mohan Lal Punchand Tathed, 1982 SCR (3) 218 held that the persons on whom his ‘holding’ devolves on his death would be liable to surrender the surplus land as on the appointed day, because the liability attached to the holding of the deceased would not come to an end on his death. The heirs of the deceased cannot be permitted to contend to the contrary and allowed to get more land by way of inheritance than what they would have got if the death of the person had taken place after the publication of the Notification u/s. 21.

Where the family unit consists of more than five members, the unit would be entitled to hold land in excess of the ceiling area to the extent of 1/5th of the ceiling area for each member in excess of five members. However, the total holding of the family cannot exceed twice the ceiling area.

It may be noted that under the Bombay Tenancy and Agricultural Lands Act, 1948, land is said to be cultivated personally if a land is cultivated by the labour of one’s family members, i.e., spouse, children or siblings in case of a joint family. A joint family under that Act is defined to mean an HUF and in case of other communities, a group or unit the members of which are by custom joint in estate or residence. In one case, even a married sister living with her husband has been regarded as a part of the family — Case No. 8953 O/154 of 1954. Thus, the definition of family is different under different laws.

Ceiling area: No person or family unit can hold land in excess of ceiling area. Any excess is deemed to be surplus land. The Ceiling Area is fixed u/s.5 r.w. First Schedule to the Act. The ceiling varies depending upon the class of the land in question. The five classes of land and their respective ceilings are as given in Table-1:

Ceiling area:

No person or family unit can hold land in excess of ceiling area. Any excess is deemed to be sur-plus land. The Ceiling Area is fixed u/s.5 r.w. First Schedule to the Act. The ceiling varies depending upon the class of the land in question. The five classes of land and their respective ceilings are as given in Table-1:

No.

Class of land

Ceiling

(in acres)

 

 

 

 

 

1.

Land with assured water supply for

18

 

irrigation and capable of  yielding at

 

 

least 2 crops/year

 

 

 

 

2.

Land (other than land falling in class

27

 

3) with no assured water supply for

 

 

irrigation and capable of yielding only

 

 

1 crop/year

 

 

 

 

3.

Land irrigated seasonally by flow irriga-

36

 

tion from any source constructed or

 

 

maintained by the State Government

 

 

or Zilla Parishad or from any natural

 

 

source of water with unassured water

 

 

supply, i.e., where supply is given under

 

 

temporary water sanctions or those

 

 

which are dependent upon the avail-

 

 

ability of water in the storage

 

 

 

 

4.

Dry crop land (land other than the

36

 

above 3 classes of land) in Bombay,

 

 

Thana, Kolaba, Ratnagiri, etc., which is

 

 

under paddy cultivation for continuous

 

 

period of three years from 2nd Octo-

 

 

ber 1972, to 2nd October 1975

 

 

 

 

5.

Dry crop land other than the

54

 

above 4 classes of land

 

 

 

 


Various classes of land and respective ceilings

The above ceilings are mutually exclusive. Hence, a person can, at the same point of time, hold 54 acres of dry crop land as well as 18 acres of a land with an assured water supply.

The principle is better the irrigation and crop yielding capabilities of a land, the lower the ceiling and vice versa. Land which is totally unfit for cultivation is not to be included while computing the above ceilings. Thus, it becomes very important to ascer-tain the irrigation source of a particular land. For instance, in one case which I have come across the land holder was granted permission by a Collector to operate an electric water pump for irrigation at his own responsibility. The question arose that since the Collector’s permission was required for the pump, could it be said that the land was a Class 3 land and hence, the land was subject to a ceiling of 36 acres or was it a dry crop land and hence, subject to a ceiling of 54 acres. It is essential to note that it is not every case of a sanction which attracts a 36 acre ceiling. Only if the water sanctions are temporary or are linked to the quantity of water availability, the land becomes a Class 3 land. Hence, in this case, the ceiling was 54 acres and not 36 acres.

Restriction on transfer:

Any person holding surplus land cannot transfer the same. Transfer for this purpose means:

    Sale

    Gift

    Mortgage with possession

    Exchange

    Lease

    Assignment for maintenance

    Surrender of tenancy

Similarly, no person or family unit can acquire land by transfer in excess of the ceiling area. If any person transfers any surplus land, then in computing the ceiling limit of that person, the land transferred would also be considered and the excess would be deemed to be excess land even though he may be divested of its possession. This is true even if after the transfer the transferor’s land holding is lower than the permissible ceiling.

In Kewal Keshari Patil v. State of Mah., 1966 Mah LJ 94 it was held that a Will is not a transfer. When will was executed, it is not a transaction which is contravening the Act.

Surplus land:

If any person is in possession of surplus land in excess of the ceiling area, then he must, within a period of one month from the date of possessing the excess land, furnish a return to the Collector. The Collector would then determine the surplus land by such person or family unit. The Collector can do so even suo moto without a person filing a return. The Collector can acquire the surplus land by determining the compensation in the manner laid down in the Act. While determining the compensation, the Collector would give a notice to interested persons to submit their claims for compensation.

Significance of agricultural land laws:

Over the past few months, we have analysed three laws dealing with agricultural lands. Laws dealing with agricultural land are very important since they provide for acquisition of surplus land by the State Government in case of violation of the laws. Further, in case of acquisition of agricultural land, the buyer of the land should ensure that he is getting a valid title.

An auditor basically conducts audit under the provisions of a statute. His report is also according to the requirements of the relevant statute, e.g., report under Section 227 of the Companies Act, 1956. An auditor is not an investigator and hence, does not make roving enquiries. Hence, in case the auditor comes across documents dealing with agricultural land, he may consider whether or not the auditee should obtain an opinion on the legality of its title.

By broadening his peripheral knowledge, the auditor can make intelligent enquiries and thereby add value to his services. He can caution the auditee of likely unpleasant consequences which might arise. It needs to be repeated and noted that an audit is basically under the relevant law applicable to an entity and an auditor is not an expert on all laws relevant to business operations of an entity. All that is required of him is exercise of ‘due care’ and ‘diligence’.

(2010) 127 ITD 217 (Agra.) (SB) S. K. Jain v. CIT A.Y.: 2000-01. Dated: 13-4-2010

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Section 263 — Once a particular matter has been decided and considered in the appeal, and only because a particular issue or point relating to that matter has not been considered does not render the matter as unconsidered and hence does not give power to CIT to invoke section 263.

Facts:
The assessee had explained the source of investment made of Rs.4,50,000 as cash received from his mother under a will which was found to be genuine by the AO to the extent of Rs.4,00,000 and Rs.50,000 was added. However on appeal, the CIT(A) deleted the addition and the Revenue went for further appeal.

However during the pendency of the appeal, the CIT invoked the provisions of section 263 for revision of order stating the reasons that the AO had failed to examine whether the will had been probated or not, whether bequest of cash and jewellery was as per Hindu Succession Act.

The contention of the assessee was that since the matter has already been considered in the appeal, then the order of the AO got merged with the order of the CIT(A) and the CIT has no right to invoke the provisions of section 263 as per explanation (c) to section 263(1).

Held:
Once a particular matter of appeal has been considered and decided in the appeal, only because a particular point relating to the same remains unconsidered by the CIT(A), does not render the matter as unconsidered. Therefore the order of the AO merged with that of the CIT A and the CIT loses his right to invoke the provisions of section 263 as per the explanation (c) to section 263.

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Double Dip Recession

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Recession is a dreaded phenomenon in the world. It connotes economic misery for the people during its onset as well as its existence. It can be described as a period when economic activity in a country or a region, measured in terms of its Gross Domestic Product (GDP), declines and such a decline persists for at least two quarters. A recession is a business cycle contraction resulting in a general slowdown in the economic activity. It is understood as a period in which an economy achieves negative growth of its GDP.

Economic growth is primarily measured in the value of GDP achieved by the economy over a particular period as compared to the earlier period of similar duration. When the economic expansion is positive, as compared to the previous period, the period is considered as that of a positive growth. However, if growth falters and enters in the negative territory in a period as compared to the immediately preceding period, that period is called as a recessionary period. Most countries in the world, majority of the times, achieve positive growth of GDP, which is generally measured on month-on-month, quarter-on-quarter or year-onyear basis. The recessionary periods, wherein a country is not able to achieve GDP equal to or more than its last comparable period of measurement, generally indicates that there is something seriously wrong in the state of affairs of the economy, as the GDP is not able to grow, which is expected to be its natural movement in today’s world. In a period of recession, as the economy slows down, there is a slowdown of demand due to reduction in disposable income in the hands of the consumers in the economy. This reduction in demand has a negative effect on business activities in the economy. The decrease in the economic activities may lead to increase in unemployment and consequentially, may reduce liquidity and purchasing power in the hands of consumers, which is very essential for sustenance of demand in an economy. A recession can lead to a vicious circle of negative growth and may cause substantial economic misery, on the back of sustained high unemployment, unless intervened by the Government directly. Such intervention can be done by easing liquidity, by increasing money supply, by increasing public spending or by a combination of monetary measures to boost the economy. In the under-developed and even the developing countries, it can be achieved by liberalising trade and promoting foreign investment. Everybody dreads the recession because it brings in dissatisfaction and unhappiness amongst the people affected by it. It generally results in increase in unemployment, liquidity drying off, fall in per capita income, reduction of new investment and clouding of the investment climate in the economy. It may result in an increase in the stress levels in the minds of the people and can cause harm to the morale of the subjects of a country. A prolonged recession may even destabilise the political equation in a country. Therefore, recession is considered as socially and even politically a dangerous phenomenon by one and all across the globe.

A double dip recession is a rare phenomenon, wherein after continuing in recession for a short period, an economy bounces back and there is positive growth for a while. But the economy is not able to sustain the positive tempo of growth. It again buckles under recession and it registers negative GDP growth. Generally, a double dip recession denotes negative growth of an economy for a while, a turn around after the phase with a positive growth for a short while and thereafter another period with negative growth before the economy decisively comes out of recession with positive growth numbers. Typically, the second dip of the recession creeps in suddenly when the economic numbers are looking on an upswing. There occurs a sudden slippage and it is realised only after passage of some time. The second dip of the recession is not as severe as the first one, but the upward movement from the former happens more gradually as compared to the first dip. Further, during the period of the second dip, the sentiment in the economy is more deteriorated as compared to the period during the first dip.

In the case of a double dip recession, movement of the GDP numbers are somewhat like shown in the diagram on the next page. Movement of GDP numbers: The graphical representation of a double dip recession on a chart is like the alphabet ‘W’ with an uneven bottom level, but it can take various shapes depending upon whether the recovery out of the second dip is ‘V’ shaped, ‘U’ shaped, ’J’ shaped or ‘L’ shaped. In the ‘V’ shape, the recovery is swift. In ‘U’ shape, it is slower than that of the ‘V’ shape but which catches momentum after some time. In ‘J’ shape the initial recovery is slow, and the improvement is gradual. In ‘L’ shape, the recovery after the dip is slow and painful. The rate of recovery flattens out at the bottom of recession and the upward movement does not start quickly enough.

History of double dip recession: A double dip recession is rare. In the 150 years of economic history, it is said that double dip recession has happened three times. In the recent years since World War II, there was a double dip recession during the period 1980-1982 in the US. The economy was in recession in second and third quarter of 1980. It then recovered but fell back into recession in the fourth quarter of 1981 and remained in recession in the first quarter of 1982. Since then, there has not been any double dip recession in the developed world, but the fear of such a phenomenon lingers on even today.

Factors which contribute to a recession and a double dip recession:

1. Inflation: High inflation can erode the investors’ confidence in an economy, which may result in the exodus of funds from the economy, especially those of the foreign investors. It may make even the local investors lose their faith in the economy. Though they may not have many good options for investment of their funds and may be restricted from taking their investible funds out of the country, they would like to reduce their risk. In such a situation, they may prefer to invest more money in debt or fixed income earning instruments as compared to equity or new businesses, though the post of tax returns on investments may be lower than the rate of inflation. High inflation causes uncertainty for investors and increases their risk aversion. Reduction in the rate of fresh investments can slow down an economy. If the economy is already growing at a low rate, a marginal change in the investment sentiment may push it in recessionary conditions.

2. Unemployment: Unemployment can slow down consumption. High level of unemployment is not only politically troublesome, but it can even be economically disastrous. High unemployment reduces the earnings of the subjects of a state and also reduces the consumable money in the hands of the society. Availability of lesser money for consumption can reduce the demand for food and consumer goods. It can also reduce the demand for value added products and services. The reduction in demand may prove to be deterrent for the capital goods industry as well. Sustained high unemployment levels can reduce the consumption in an economy and cause a possibility of recession.

3.  Consumer confidence:
Consumer confidence is purely a psychological factor. An upbeat sentiment can influence an economy positively and a downbeat sentiment can have negative impact. A low consumer confidence can cause reduction of spending by the consumers as they would like to save their earnings or surplus for a future about which they are not certain. Level of the hold back of consumption is based on the perceived risk which is a matter of sentiment. The reduced level of consumption in an economy can cause economic slowdown due to inadequacy of demand and result in reduction of economic activities. Such a slowdown in an economy having already a low growth rate can push the economy into a recession.

  4.  Stock Market:


The stock market movements have a positive correlation with the consumption in an economy. A decline in stock markets can add fuel to the fire of slowing consumption. If the immediate future of the stock market is pointing towards a bear market, then it is likely that the consumers in the country may reduce their spending, not only of the essentials but on durables as well. Falling stock market may affect the sentiment in the housing sector as well, as buying of houses may get postponed. The reduction of spending can reduce the demand of capital goods which are used for capacity building to cater to expected consumption. Low demand means low turnover and low profits for the businesses, and even to the corporate sector in the economy. Lower corporate profits can further dampen the sentiments in the stock markets and further slowdown the economy. In fact, the stock market can be a lead indicator of a recessionary period as the professionals operating in the market are able to sense the economic future in a much better way than the common public and many a time even better than the Government and the policy-makers.

    5. Natural catastrophe:


If an economy gets subjected to a major national catastrophe, such a catastrophe can lead to a slow down and the economy may face a recession. This cause of a recession is generally out of the control of any individual or group of individuals or even the policy-makers. Not only major natural calamities such as flood, drought and tsunami can cause a recession; but even man-made cause such as a war can lead an economy to a recession. When an economy has just come out of a recession, a major natural calamity can push back its growth to a negative zone and the economy may face a double dip recession. In the early phase of recovery, an economy is fragile and does not have adequate strength to deal with adverse conditions. So the economy remains vulnerable to double dip.

   6. Misguided economic regulations:


Misguided economic regulations such as major embargoes on import-export, stringent exchange controls and curbs on foreign investment can cause economic pain and can lead the economy into a recession. Such regulations can hamper free trade in the country, deter the new domestic as well as foreign investments and spoil the sentiments. If damaging regulations are not reviewed and amended, they can cause serious detriment to the prospects of an economy over a short as well as long term. If the damaging regulations are introduced in the initial period of economic recovery, they may force the economy into a double dip recession.

    7. Failure of economic policies:

A country takes number of initiatives to improve its economy so that the best growth rate can be achieved. In recessionary days, policies are devised to curb the recession and to get out of it, as fast as possible. To stimulate growth in a sagging economy; rate of interest may be reduced, the rate of taxes may be pruned, the Government may increase spending, liquidity may be pumped into the economy or any other stimulant measures may be taken. These are described as the policy measures and they may be implemented and regulated by the Government directly or through designated authorities. These measures may have their negative side effects. As a direct result of these policy measures; the budgetary deficit in an economy can increase, there can be noticeable increase in inflation rate and the currency of the nation can be volatile or can weaken. To over-come the side effects of the policy measures, the Government may change the policies prematurely which can give a jerk to the slowly improving economy. Ill-conceived changes in policies can push the economy back in to recession. If these changes are made at an inappropriate time when the economy has just struggled out of recession, then it may even cause a double dip recession.

    8. Untimely withdrawal of stimulus or concessions:

Many weak economies and even some developing economies are habituated to various concessions given by their respective Governments and continued over a period. In today’s world, more and more countries are under pressure from the developed countries to create a fair play in their economies by reducing curbs and concessions so that the goods and services can flow easily across economies and give best deals to the consumers. Such changes, when initiated in an economy, can slow down the economy on a temporary basis and they can cause recessionary conditions. Similarly, when an economy which was in recession, is struggling to get out of the recession with the help of stimulus given by its Government, the untimely withdrawal of the stimulus due to inflationary pressure or any other political or socio-economic reasons may push the economy back into recession, thereby causing a double dip recession. When an economy is coming out of recession, the task of the policy-makers is extremely critical and any error of judgment in decision making may prove to be costly for the struggling economy.

The GDP numbers, which decide the growth rate, may fluctuate from period to period. An economy may post higher or lower GDP numbers from period on period as a normal phenomenon. The monthly or quarterly fluctuations are not given so much significance in ordinary situations. However, if the growth number goes into a negative territory or even goes to a low level and fails to bounce back, it is a serious matter of concern for the economy. A failure to hold on to the economic growth after a recession can lead to a double dip recession. A fluctuating chart pattern with double or triple dips much above the baseline of zero rate of growth does not cause any alarm bells in an economy, but its movement just below the par line is described as recession and becomes a major cause of concern. A double dip recession has always to be understood as unique phenomena and should not be confused with the fall in economic growth over a short to medium term.

Occurrence of double dip recessionary conditions in certain sectors of economy is not an uncommon phenomenon. While the economy may grow in totality, certain sectors of it may be in recessionary conditions at various times and for various reasons. Such conditions are usually not glaring as they are restricted to a limited segment of the overall economy and the country is not seriously affected by such situations as the negativity is more than balanced by the positive growth in other sectors. The factors causing such conditions and the remedies to the same are similar to those applicable to a double dip recession. Therefore understanding of the rare phenomenon of double dip recession is important for economists and the policy-makers of a country.

There was a great hue and cry about the impending double dip recession in various economies across the globe in the third quarter of 2010. After a painful recessionary period during 2008-2009, and a fragile recovery in early 2010 this was a dreaded phenomena. Fortunately, the current indicators are that the world has overcome the possibility and fear of a double dip recession for the time being and from here onwards most of the economies are likely to grow in positive territories for some years to come. Country-specific minor recessionary trends such as the one noticed in the UK in the last quarter of 2010, cannot be ruled out, but by and large it seems that the world will not face the phenomena of double dip in the near future. The concentrated efforts of the Governments of all the countries and their central banks have helped the world to surmount this major catastrophe and it is a great achievement.

SPREADING OUT: AIMING HIGHER OR . . . ?

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For the past several months, our financial press as
also other print media have been excitedly raving about our nationals
and corporations spreading their wings beyond India. They write about an
Indian company buying an oil refinery outside India; about our telecom
giant acquiring large non-Indian companies at a price that, till about a
decade ago, appeared unthinkable. They also write about Indian sugar
manufacturing companies trying to acquire agricultural lands in less
developed African/Latin American countries to support their existing
Indian business. There are also write-ups telling us that large Indian
companies engaged in steel/cement business are looking at acquiring
mining interests elsewhere in the world to meet their ever-growing
demand for inputs for their manufacturing business in India. There are
now definite reports about a successful Indian pharmaceutical company
acquiring, in the teeth of bitter litigation, a substantial non-Indian
company engaged in manufacturing and marketing generic drugs for global
sale.

All these indicate a sea change from our earlier record as
cost-effective manufacturers of basic inputs being exported to feed
large global entities in their manufacture of products that require
further value addition — in the manufacturing as well as marketing
field.

So, I started musing over these reports and asked myself
the question: Is this something that should gladden our hearts or, aside
from our usual national pride, it should provoke deeper thinking about
where are we heading?

I think about Indo-Aryans migrating 3,000
to 4,000 years ago in search of a more hospitable climate, bringing
along with them their advanced techniques and erudition. But my mind
also goes back to what happened to the people of Zoroastrian faith who
were persecuted by the fanatic spread of Islam in their home country —
Persia as it then was. My mind goes back to some newspaper reports that
the largest number of people who illegally sneak into North America from
Mexican borders are people of Indian origin.

Clearly, migration
signifies a kind of restlessness of mankind to be better tomorrow than
what they were yesterday. But the universally acclaimed success of our
software personnel does suggest that, apart from greater economic
success, they have enriched India and they have not been any less
attached to their motherland.

I have heard that one of our most
outstanding intellectuals — alas, no more — was asked by some
interviewers as to what part of his decisions concerning his personal
self and career he would have handled differently, if he was in a
position to do so. The answer was full of melancholic despair when he
said that his earlier steadfast decision to live and work in India could
have been otherwise.

I, therefore, realised that migration is
wholesome when dictated by a desire for enrichment — material and
otherwise — for self without losing faith in and love for one’s own
country. But when it is triggered by disappointment or fear, it is not
necessarily a happy phenomenon.

Take the case of Indian steel
companies seeking mining rights outside India. Perhaps they do so
because of unenlightened local governments whose desire to enrich their
power-brokers overrides that for economic development. And this is
compounded by mindless activism of people lacking knowledge about
economic home-truths, their ignorance being amply compensated by their
foolhardy bravado.

Again, take the case of Indian sugar
companies seeking farm lands elsewhere. Why have they been working in
that direction? I guess, it is because of antiquated agricultural
policies worsened by rampant political opportunism and bribery. The
great enthusiasm of our present Prime Minister about India opening a new
chapter in economic liberalisation through SEZs is all but dead. There
are credible stories about some authority in charge of granting approval
for an applicant for a unit in SEZ asking for bribes and sitting over
the application frustrating the honest efforts of the applicant to
participate in this economic reform.

So, my mind is more
burdened by the thought that this trend of ‘spreading out’ is no less
triggered by the foolish way in which we govern our polity, marked by
sloth, delays, counter-tenor of ‘activism’ and, worst of all,
engulfingly corrupt administration partnering some in the political wing
that are no less venal.

It is, of course, true that Indians by
their upbringing are more venturesome when it comes to spreading out.
Why, Mahatma Gandhi started his legal profession by seeking to work in
South Africa. Our native wit and the spirit of enterprise of our trading
community were responsible for the economic progress in some parts of
South Africa. All this appears to me as matters of pride.

But,
the recent trends do unmistakably point to the Zoroastrian syndrome:
persecution leading to migration. As Mr. Palkhivala used to eloquently
thunder, “In economics there are no miracles: only consequences”.

That is why I am raising the issue that is captured in the title of this article.

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136 TTJ 263 (Mumbai) (TM) ACIT v. Dharti Estate ITA Nos. 2808 (Mum.) of 2002 and 5056 (Mum.) of 2003. A.Ys.: 1998-99 and 1999-2000 Dated: 29-10-2010

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Section 145 of the Income-tax Act, 1961 — Assessee following percentage completion method consistently which was accepted in earlier and subsequent years — valuation of closing WIP at historical cost was correct particularly when the categorical findings of the CIT(A) highlighting that the assessee has not deviated from the guidelines issued by the ICAI under AS-7 was not challenged by the Revenue.

The assessee, a partnership firm, was engaged in the business of construction. For the relevant assessment years, the assessee valued its closing WIP at historical cost as per its past policy. Such historical cost was the average rate realised for all the years including current year. The Assessing Officer valued the WIP at the current year’s rate of realisation and made addition to the profit. The CIT(A) held that the Assessing Officer was not justified in making the additions.

Since there was a difference of opinion between the Members of the Tribunal the matter was referred to the Third Member u/s.255(4).

The Third Member, holding in favour of the assessee, noted as under:

(1) It is not in dispute that the assessee has followed percentage completion method consistently since inception and has been declaring income/loss from year to year and the same was accepted in earlier years.

(2) Despite the AO’s stand for the A.Ys. 1998-99 and 1999-2000, with regard to correctness of the method of accounting followed by the assessee, in the year 2000-01, when the assessee declared profit of more than Rs.5 crores on completion of the project, the AO appears to have accepted the same method to accept the income declared therein, which in itself is an indication that the method of accounting followed by the assessee is an approved method of accounting.

(3) Categorical finding of the learned CIT(A) to highlight that assessee has not deviated from guidelines issued by the ICAI (under AS-7), was not challenged before the Tribunal by learned Departmental Representative by producing any evidence thereof. The learned CIT(A) has discussed the issue elaborately and met each point of dispute raised by the Assessing Officer to highlight that there is no merit in the conclusion reached by the Assessing Officer.

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(2011) TIOL 209 ITAT-Mum. ACIT v. American School of Bombay Education Trust ITA No. 136 to 138/Mum./2010 A.Ys.: 2000-01 to 2002-03. Dated: 4-2-2011

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Sections 194C, 201(1), 201(1A), 271C — Penalty u/s.271C cannot be levied if the order u/s.201(1) is barred by limitation.

Facts:
The assessee was running a school popularly known as ‘American School of Bombay’. In the course of survey u/s.133A of the Act, conducted on 24-1-2006 it was found that the assessee had failed to deduct tax at source from the salaries paid to expatriate teachers by South Asia International Educations Services (SAIESF) outside India. The Assessing Officer, upon issuing show-cause notice and considering the explanations offered by the assessee, in an order passed an order u/s.201(1) and 201(1A) held the assessee to be in default for not deducting tax at source u/s.194C. He also levied interest u/s.201(1A) and initiated penalty proceedings, after obtaining approval from the Add. CIT(TDS), by issuing notice to the assessee. Not being satisfied with the explanation offered by the assessee, the AO levied penalty u/s.271C of the Act.

Aggrieved, the assessee preferred an appeal to CIT(A) who noted that the Tribunal has quashed the order passed by the DCIT(TDS) u/s.201(1) and 201(1A) on the ground that initiation of proceedings was beyond a period of six years and hence was barred by limitation. He deleted the penalty levied u/s.271C.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held:
The Tribunal noted that in the case of the assessee for the A.Y. 1997-98 to 1999-2000, the Tribunal has held that — a bare perusal of section 271C(1) indicates that penalty u/s.271C can be imposed only when there is a failure on the part of the assessee to deduct or pay the whole or any part of tax and, then, the quantum of penalty is equal to the amount of tax which such person failed to deduct or pay. From here, it emerges that there must be some sum which such person failed to deduct or pay. Such amount constitutes the basis for imposition of penalty u/s.271C. In other words, the liability of the assessee u/s.201(1) is a pre-condition for imposition of penalty u/s 271C. If the very order passed u/s.201(1) creating liability has been set aside on account of limitation and there is no possibility of any fresh order being likely to be passed u/s.201(1), there remains no question of the assessee being deemed to be an assessee in default in respect of such tax. The natural corollary which, therefore, follows is that if the order u/s.201(1) ceases to be operative, it will have the effect of the assessee not being in default. Once the assessee is not in default for failure to deduct or pay tax at source, naturally, there cannot be any question of imposing penalty u/s.271C for the reason that the very basis of such penalty is the amount of tax which such person failed to deduct or pay as per law and when there is no such amount in existence, the possibility of imposing penalty will automatically be ruled out.

The Tribunal noted that the effect of the Tribunal’s order quashing the order passed u/s.201(1) and 201(1A) on account of limitation is that the assessee is not deemed to be in default in respect of any failure to deduct or pay tax at source. It held that in such circumstances the question of penalty u/s.271C cannot arise.

The appeal filed by the Revenue was dismissed.

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Income from house property: Deemed owner: Section 27 of Income-tax Act, 1961: Assessee giving its building on sub-licence basis without charging any lease rent or licence fee but received interest free security deposits: Sub-licencees transferred their rights in favour of others and charged rent: Sub-licensees are deemed owners u/s.27(iii) and would be liable to be assessed u/s.22: AO directed not to charge annual letting value of said building under head ‘Income from house property’ in assesse<

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[CIT v. C. J. International Hotels Ltd., 197 Taxman 230 (Del.)]

The assessee-company was running a five-star hotel. The lawn on which the hotel was constructed belonged to NDMC which had executed a licence deed in favour of the assessee granting it licence for a period of 99 years for running of the aforesaid hotel. Adjacent to the hotel, there was another building constructed on that very lawn. Admittedly, that building was not used for hotel business of the assessee, but the apartments of that building were given on sub-licence basis to different parties for carrying on business as specified in the sub-licence agreements. The sub-licences were given for a period of 9 years and 11 months, which were renewable at the request of the sub-licensees. The assessee was not charging any lease rent or licence fee from those parties, instead it had received interest-free security deposits in the year of original sub-licence, which receipts were shown by it as unsecured loans in its balance sheet. The sub-licence deeds, which were executed by the assessee with the sublicensees, permitted the sub-licensees to transfer the same to any other person on payment of transfer charges to the assessee-company. Almost all the sub-licensees had transferred their sub-licences and, thus, various other persons were occupying those premises. The said persons were paying rents to the sub-licensees, which amount had been taxed in the hands of sub-licensees under the head ‘income from house property’. The Assessing Officer, calculated the annual letting value of the said property on the basis of rent/licence fee paid by the occupiers to the sub-licensees and added same to the assessee’s income under the head ‘Income from house property’. The Tribunal accepted the submissions of the assessee that in view of the provisions of section 27(iii) it was the sub-licensee who would be ‘deemed owner’ of those premises who would be assessable and not the assessee. The Tribunal set aside the addition.

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

“The approach of the Tribunal in deciding the aforesaid issue was perfectly justified. There was no reason to interfere with the same. The Tribunal was justified in directing the Assessing Officer not to charge the annual letting value of the said buildings under the head ‘Income from house property’.”

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(2011) TIOL 197 ITAT-Mum. Bharat Bijlee Ltd. v. Addl. CIT ITA No. 6410/Mum./2008 A.Y.: 2005-06. Dated: 11-3-2011

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Sections 2(42C), 45, 48 and 50B — As per section 2(42C) of the Act, only a transfer as a result of sale can be construed as a slump sale transfer of an undertaking by way of ‘exchange’ will not qualify as a slump sale — When an undertaking is transferred as a going concern it is not possible to conceptualise the cost of acquisition of such a going concern as well as date of acquisition thereof — If the cost of acquisition and/or date of acquisition of the asset cannot be determined, then it cannot be brought within the purview of section 45 for levy and computation of capital gains.

Facts:
During the previous year relevant to the assessment year under consideration, the assessee, pursuant to a Court-approved scheme of arrangement u/s.391 r.w.s 394 of the Companies Act, 1956, transferred its Lift Field Operations Undertaking (‘the undertaking’), as a going concern, to Tiger Elevators Pvt. Ltd. As consideration for transfer the assessee was entitled to receive preference shares and bonds. The price for transfer was a lump sum consideration without assigning any value to any of the individual items. In the return of income filed the assessee did not return any capital gains on the ground that since the cost of undertaking is not ascertainable the machinery for computing capital gains fails. It was also pointed out that the transfer was an exchange and not a sale and therefore did not fall within the purview of the definition of slump sale u/s.2(42C) of the Act.

The Assessing Officer (AO) held the transaction of transfer of the undertaking to be a transaction of slump sale, taxable as per provisions of section 50B of the Act.

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:
The Tribunal having considered the definition of ‘slump sale’ u/s.2(42C) of the Act, held that it is only a transfer as a result of sale that can be construed as a slump sale. Therefore, any transfer of an undertaking otherwise than as a result of sale will not qualify as a slump sale. On perusal of the clauses of the scheme the Tribunal noted that the scheme of arrangement did not mention monetary consideration for the transfer. The parties were ad idem that the scheme of arrangement was that the assessee was to transfer the undertaking and take bonds/preference shares as consideration. Thus, it was held to be a case of exchange and not sale and consequently the provisions of section 2(42C) were held to be not applicable. Therefore, the provisions of section 50B were also held to be not applicable to the facts and circumstances of the assessee’s case.

Since individual items of capital assets were not being transferred and aggregate of individual assets in the form of an undertaking was a capital asset which was transferred, the transfer being one of going concern, it was held that it is not possible to ascertain the profit or gain from transfer of undertaking, since cost of acquisition and the cost of improvement of the undertaking cannot be ascertained and consequently, computation provisions cannot be applied and the charge of capital gain fails.

This ground of appeal filed by the assessee was allowed.

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D B Zwirn Mauritius Trading No. 3 Ltd. AAR No. 878 of 2010 Article 13(4) of India-Mauritius DTAA; Section 195 of Income-tax Act Dated: 28-3-2011

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Capital gains arising from sale of shares of an Indian company by a Mauritius company are not chargeable to tax in India in terms of Article 13(4) of India-Mauritius DTAA.

Facts:
The appellant was a company incorporated in Mauritius (‘MCo’). Mauritius tax authority had issued Tax Residence Certificate (‘TRC’) to MCo. MCo held equity shares of an Indian company. MCo sold the shares to another Mauritius company resulting in capital gains.

MCo sought ruling of AAR on the following questions:

Whether MCo was liable to tax on capital gain under Income-tax Act and India-Mauritius DTAA?

Whether the sale of shares was subject to withholding tax u/s. 195 of Income-tax Act?

MCo contended that in terms of Article 13(4) of India-Mauritius DTAA, capital gain arising from sale of shares was not liable to tax in India and that TRC constituted valid and sufficient evidence of residential status under India-Mauritius DTAA. MCo also relied on Supreme Court’s decision in Union of India v. Azadi Bachao Andolan, (2003) 263 ITR 706 (SC) and Circular No. 789 of 2000 of CBDT.

Held:
In terms of Article 13(4) of India-Mauritius DTAA, power of taxation of gains is vested only in the state of residence (i.e., in this case, Mauritius). If the provision in DTAA is more beneficial, the taxpayer is entitled to seek benefit under DTAA. Hence, MCo was not liable to pay tax in India on capital gains.
Sale of share is not subject to withholding tax u/s. 195 of T I Act.

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Submission of balance sheet and profit & loss account by NBFCs — Notification No. DNBS.217/CGM (US)-2010, dated 1-12-2010.

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Changes relating to Company
Law for the period 15th Dcember, 2010 to 15th January, 2011.

63 Submission of balance
sheet and profit & loss account by NBFCs — Notification No. DNBS.217/CGM
(US)-2010, dated 1-12-2010.

The RBI has issued
Notification amending the non-banking financial (deposit Accepting) companies
Prudential Norms Direction, 2007 and non-banking financial (Non-Deposit
Accepting) companies Prudential Norms Direction, 2007 and providing that every
NBFC shall finalise its balance sheet and profit and loss account as on March 31
every year within a period of 3 months from the date to which it pertains. For
example, balance sheet as on March 31st of a year shall be finalised by June
30th of the year.

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Acceptance of third party address as correspondence address.

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Changes relating to Company
Law for the period 15th Dcember, 2010 to 15th January, 2011.

62 Acceptance of third party
address as correspondence address.

SEBI vide Circular No. CIR/MRD/DP/37/2010,
dated 14-12-2010 based on representations received from intermediaries seeking
guidance and clarifications whether to accept and capture the address of some
person (third party) other than the beneficial owner (BO) as a correspondence
address in the details of the demat account of the BO. SEBI has clarified that
it has no objection to a BO authorising the captureto : of an address of the
third party as a correspondence address, provided that the Depository
Participant (DP) ensures that all prescribed ‘Know Your Client’ norms are
fulfilled for the third party also. The DP shall obtain proof of identity and
proof of address for the third party. The DP shall also ensures that the
customer due diligence norms as specified in the Rule 9 of Prevention of Money
Laundering Rules, 2005 are complied with in respect of the third party. SEBI has
also stated that the depository participant should further ensure that the
statement of transaction and holding are sent to the BO’s permanent address at
least once in a year. It is clarified that the above provision shall not apply
in case of PMS (Portfolio Management Service) clients.

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SEBI Notification No. LAD-NRO/GN/2010-11/21/29390, dated 10-12-2010.

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Changes relating to Company
Law for the period 15th Dcember, 2010 to 15th January, 2011.

61 SEBI Notification No.
LAD-NRO/GN/2010-11/21/29390, dated 10-12-2010.

SEBI vide Notification No.
LAD-NRO/GN/2010-11/21/29390, dated 10-12-2010 has in terms of sub-regulation (1)
of Regulation 3 of the Securities and Exchange Board of India (Certification of
Associated Persons in the Securities Markets) Regulations, 2007 (the
Regulations) notified that the Board is empowered to require, by Notification,
any category of associated persons as defined in the Regulations to obtain
requisite certification(s).

2. Accordingly, it is
notified that with effect from the date of this Notification, the following
category of associated persons, i.e., persons associated with a registered
stock-broker/trading member/clearing member in recognised stock exchanges, who
are involved in, or deal with, any of the following, namely :

(a) assets or funds of
investors or clients,

(b) redressal of investor
grievances,

(c) internal control or
risk management, and

(d) activities having a
bearing on operational risk,

shall be required to have a
valid certification from the National Institute of Securities Markets (NISM) by
passing the NISM-Series-VII : Securities Operations and Risk Management
Certification Examination as mentioned in the NISM communiqué/Press Release NISM/Certification/Series-VII
: SORM/2010/01, dated November 11, 2010, read with Annexures-I and II thereto.

It is provided that the
stock-broker/trading member/clearing member shall ensure that all persons
associated with it and carrying on any activity specified in this paragraph as
on the date of this Notification obtain valid certification within two years
from the said date of Notification.

Provided further that a
stock-broker/trading member/clearing member who employs any associated persons
specified in this paragraph after the date of this Notification shall ensure
that the said associated persons obtain valid certification within one year from
the date of their employment.

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SEBI vide Notification No. LAD-NRO/GN/ 2010-11/22/30364, dated 21-12-2010, Foreign Venture Capital Investors (Amendment) Regulations, 2010 has further amended Foreign Venture Capital Investors, Regulations, 2000, to include after paragraph 9.

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Changes relating to Company
Law for the period 15th Dcember, 2010 to 15th January, 2011.

60 SEBI vide Notification
No. LAD-NRO/GN/ 2010-11/22/30364, dated 21-12-2010, Foreign Venture Capital
Investors (Amendment) Regulations, 2010 has further amended Foreign Venture
Capital Investors, Regulations, 2000, to include after paragraph 9.

SEBI vide Notification No.
LAD-NRO/GN/ 2010-11/22/30364, dated 21-12-2010, Foreign Venture Capital
Investors (Amendment) Regulations, 2010 has further amended Foreign Venture
Capital Investors, Regulations, 2000, to include after paragraph 9 :

10. To furnish firm
commitment letter(s) from investors for contribution of an amount aggregating
to at least US$ 1 million.

11. To furnish copies of
the companies’ financial statements as well as those of the investors’ who
have provided firm commitment letter(s), for the financial year preceding the
one during which the application is being made.

12. To furnish name,
address, contact number and the e-mail address of all the directors of the
company.

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Amendments to SEBI Equity Listing Agreement — Circular No. CIR/CFD/DIL/10/2010, dated 16-12-2010.

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Changes relating to Company
Law for the period 15th Dcember, 2010 to 15th January, 2011.

59 Amendments to SEBI Equity
Listing Agreement — Circular No. CIR/CFD/DIL/10/2010, dated 16-12-2010.

SEBI has issued a Circular
amending the Equity Listing Agreement with respect to various continuous
disclosures made by listed entities in relation to the following :

1. Amendments to Clause 35
— Disclosure relating to shareholding pattern

(a) Disclosure of
shareholding pattern prior to listing of securities

(b) Disclosure of
shareholding pattern of listed entities pursuant to material changes in the
capital structure

(c) Disclosure in respect
of depository receipts

2. Amendments to Clause
40A — Minimum public shareholding

3. Amendments to Clause 5A
— Uniform procedure for dealing with unclaimed shares

4. Amendment to Clause 20
& 22 — Corporate announcement

5. Amendment to Clause 21
— Notice period

6. Insertion of Clause 53
— Disclosures regarding agreements with the media companies

7. Insertion of Clause 54
— Maintenance of a website

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Comprehensive Guidelines on Over-the-Counter (OTC) Foreign Exchange Derivatives and Overseas Hedging of Commodity Price and Freight Risks

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New Page 1

Part C : RBI/FEMA


Given below are the
highlights of certain RBI Circulars.

58 A.P. (DIR Series)
Circular No. 32,

dated 28-12-2010

Comprehensive Guidelines on
Over-the-Counter (OTC) Foreign Exchange Derivatives and Overseas Hedging of
Commodity Price and Freight Risks

 

Annexed to this Circular are
Comprehensive Guidelines on Foreign Exchange Derivatives and Overseas Hedging of
Commodity Price and Freight Risks. These guidelines will come into effect from
February 01, 2011. In addition, the Comprehensive Guidelines on Derivatives
issued vide Circular DBOD.No.BP.BC. 86/21.04.157/2006-07, dated April 20, 2007
and subsequent amendments thereto would continue to apply to foreign exchange
derivatives.

The guidelines are divided
into the following seven sections :


I. Section A — Overview
of the guidelines

II. Section B —
Guidelines for per sons resident in India
(other than AD Category I banks)

III. Section C—
Guidelines for persons resi dent outside India

IV. Section D—
Guidelines for Authorised Dealers Category I

V. Section E— Guidelines
for Commodity Derivatives

VI. Section F—
Guidelines for Freight Derivatives

VII. Section G— Reports
to the Reserve Bank



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Asian Clearing Union (ACU) Mechanism — Indo-Iran Trade

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New Page 1

Part C : RBI/FEMA


Given below are the
highlights of certain RBI Circulars.

57 A.P. (DIR Series)
Circular No. 31,

dated 27-12-2010

Asian Clearing Union (ACU)
Mechanism — Indo-Iran Trade

 

This Circular provides that
all eligible current account transactions including trade transactions with Iran
should be settled in any permitted currency outside the ACU mechanism until
further notice. This has been done to mitigate the difficulties being
experienced by importers/exporters in payments to/receipts from Iran.

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Asian Clearing Union (ACU) Mechanism — Payments for import of oil or gas

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New Page 1

Part C : RBI/FEMA


Given below are the
highlights of certain RBI Circulars.

56 A.P. (DIR Series)
Circular No. 30,

dated 23-12-2010

Asian Clearing Union (ACU)
Mechanism — Payments for import of oil or gas

 

Presently, all eligible
current account transactions as defined by the Articles of Agreement of the
International Monetary Fund and the export/import transactions between the ACU
member countries on deferred payment terms, respectively, are to be routed
through the ACU mechanism.

This Circular provides that
henceforth payment for import of oil or gas must be settled in any permitted
currency outside the ACU mechanism.

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Use of International Debit Cards/Store Value Cards/Charge Cards/Smart Cards by resident Indians while on a visit outside India

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New Page 1

Part C : RBI/FEMA


Given below are the
highlights of certain RBI Circulars.

55 A.P. (DIR Series)
Circular No. 29,

dated 22-12-2010

Use of International Debit
Cards/Store Value Cards/Charge Cards/Smart Cards by resident Indians while on a
visit outside India

Presently, Banks are
required to submit a yearly statement on December 31 every year containing
details of International Debit Card holders who spend more than US $ 100,000 in
a calendar year.

This Circular informs RBI
decision to discontinue the submission of this Statement. Hence, Banks need not
submit the said Statement for the year ending December 31, 2010.

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Know Your Customer (KYC) norms/Anti-Money Laundering (AML) standards/Combating the Financing of Terrorism (CFT)/ Obligation of Authorised Persons under Prevention of Money Laundering Act, (PMLA), 2002, as amended by Prevention of Money Laundering (Amendme

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New Page 1

Part C : RBI/FEMA


Given below are the
highlights of certain RBI Circulars.

54 A.P. (DIR Series)
Circular No. 28,

dated 22-12-2010

A.P. (FL/RL Series) Circular
No. 9,

dated 22-12-2010

Know Your Customer (KYC)
norms/Anti-Money Laundering (AML) standards/Combating the Financing of Terrorism
(CFT)/ Obligation of Authorised Persons under Prevention of Money Laundering
Act, (PMLA), 2002, as amended by Prevention of Money Laundering (Amendment) Act,
2009 — Cross-Border Inward Remittance under Money Transfer Service Scheme

 

Attached to this Circular is
a Statement dated June 25, 2010 issued by the Financial Action Task Force (FATF)
which identifies certain jurisdictions which have strategic AML/CFT
deficiencies. The Statement calls upon the identified jurisdictions to complete
the implementation of their action plan within the time frame.

This Circular advices
Authorised Persons to consider the information contained the said Statement.

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Know Your Customer (KYC) norms/Anti-Money Laundering (AML) standards/Combating the Financing of Terrorism (CFT)/Obligation of Authorised Persons under Prevention of Money Laundering Act, (PMLA), 2002, as amended by Prevention of Money Laundering (Amendmen

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New Page 1

Part C : RBI/FEMA


Given below are the
highlights of certain RBI Circulars.

52 A.P. (DIR Series)
Circular No. 26,

dated 22-12-2010

A.P. (FL/RL Series) Circular
No. 7,

dated 22-12-2010

Know Your Customer (KYC)
norms/Anti-Money Laundering (AML) standards/Combating the Financing of Terrorism
(CFT)/Obligation of Authorised Persons under Prevention of Money Laundering Act,
(PMLA), 2002, as amended by Prevention of Money Laundering (Amendment) Act, 2009
— Cross-Border Inward Remittance under Money Transfer Service Scheme

Attached to this Circular is
a Statement dated June 25, 2010 issued by the Financial Action Task Force (FATF).
This Statement divides the strategic AML/CFT deficient jurisdictions into two
groups as under :

(a) Jurisdictions against
whom countermeasures are required to be applied to protect the international
financial system from the ongoing and substantial money laundering and
terrorist financing (ML/TF) risks — Iran.

(b) Jurisdictions with
strategic AML/CFT deficiencies that have not committed to an action plan
developed with the FATF to address key deficiencies as of June 2010 —
Democratic People’s Republic of Korea (DPRK), Sao Tome and Principe.

This Circular advices
Authorised Persons to take into account risks arising from the deficiencies in
AML/CFT regime of these countries, while entering into business relationships
and transactions with persons (including legal persons and other financial
institutions) from or in these countries/jurisdictions.

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Keyboard Short cuts for BlackBerry Devices

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TECH UPDATE

This article is about simple keyboard short cuts for
BlackBerry devices. Keyboard short cuts help in improving our typing speed and
in many cases, navigating between applications. The tips mentioned in this
write-up would apply for 8800 series and later devices; these may or may not
work on the older devices.

Everybody likes short cuts :

In general, we are all lazy in one way or another. If one
were to be told that he could do the same task with lesser effort (and without
compromising on the output), the first question he will ask is ‘How do I do
that’ and the answer would be ‘Use a short cut’. While keyboard short cuts like
CTLR+C and CTLR+X and others used extensively, this article is about short cuts
for your BlackBerry devices. Yes ! ! ! ! There are keyboard short cuts for
BlackBerry devices also (i.e., beyond the standard short cuts for copy,
paste and send). Here are some instances, which you may find useful :

Rapidly switch back and forth between BlackBerry applications :

The average desktop or for that matter a laptop contains a
smart chip. The chip is called smart because it contains ‘multiprocessors’. As
the name suggests, these are capable of performing several tasks and executing
processes simultaneously. Among other things, the multiprocessor allows a user
to switch from one task to another without compromising on the speed. The switch
is almost instantaneous when you use a desktop or a laptop. This agility,
however, is not available on your BlackBerry. The explanation is simple; the
BlackBerry device (like the other competing smart phones) uses a simple
processor.

So how does one get around this handicap ?

Simple . . . . . Use a short cut.

The most basic way to switch from one BlackBerry application
to another is to repeatedly hit the ‘ESCAPE’ key while inside a programme until
you get back to your icon screen. From there, you’d scroll your track ball or
wheel to find the next application you want and then click to launch it.

A quicker and more efficient way to go from an active program
to another program is to use a short cut. While inside an application, hold down
the ‘ALT’ key which is directly below the letter ‘A’ key and then click ‘ESCAPE’
the key with an arrow reversing directions and to the right of your trackball on
8000 series devices. While holding down ‘ALT’, you can scroll left or right
between apps, and you need only release the ‘ALT’ key to select a program. (For
this, you need to be using a program i.e., a program needs to have been opened
recently or still running). You can always access your Home Screen,
BlackBerry browser, Options, Call Log, Messages and a few other applications
depending on your device settings.

Using the event log :

Your BlackBerry’s Event Log displays your system’s recently
run events and processes. If you’re experiencing a problem with your BlackBerry
or having an issue with a specific application or service, information from the
Event Log can be helpful for troubleshooting. And it can be a good BlackBerry
hygiene to clear out the log, to keep your device running smoothly.

To access your Event Log, go to your Home Screen, hold down
the ALT key and then type ‘LGLG’. The Event Log will appear, and you can click a
specific event for more information or hit your BlackBerry MENU key more
options. (The MENU key has seven dots in the shape of the letter B, and it’s
found directly to the left of BlackBerry devices with a trackball). You can copy
event information using the MENU key and tailor your settings to log only the
specific types of events.

Freeing up some memory space :

You can also free up some valuable device memory to help your
device run faster by
clearing your Event Log. To delete your list of events, hit the BlackBerry MENU
key while any event is highlighted and then click ‘Clear Log’. A dialogue box
will pop up asking if you’re sure you want to delete the log. Once you confirm
the deletion, your log will be cleared. (Don’t worry, if your IT Department is
running device management software along with its BlackBerry Enterprise Server,
your company probably has its own record of this event log.)

Reboot your BlackBerry without removing the battery :

Any BlackBerry veteran knows that sometimes it is necessary
to reboot your device after installing a new application, to solve performance
problems, refresh your Smartphone’s memory or fix other minor issues. One way to
do so is to remove your battery door and pull the power pack. After the battery
is returned to the device, your BlackBerry reboots. This gets the job done, but
it’s time consuming to power down the device and then remove and replace the
battery and your battery door won’t fit as snugly if you’re constantly taking it
off.

The quickest and easiest way to reboot is via another
BlackBerry keyboard short cut. To reboot, simply hit ‘ALT’, ‘RIGHT SHIFT’ and
‘DELETE’. (The RIGHT SHIFT key is found on the bottom right corner of the
BlackBerry keyboard and DELETE key is also on the right hand side and has the
letters ‘DEL’ on its face) You might say this is the BlackBerry version of
CTRL+ALT+DEL. After pressing these three keys in tandem, your device powers
down, your LED indicator turns red for a few seconds and the reboot process
commences.

Change your signal strength display from bars to numeric :

Most modern cell phones offer up some form of ‘five-bars’ to
display user’s wireless signal strength, and the BlackBerry default mode is no
different. But if you want more precision than bars can offer, you can change to
the numeric signal strength display mode. The numeric mode shows wireless signal
strength in decibels per mill. watt (dBm), a ratio measured power in decibels
(dB), referenced to one mill. watt (mW).

To switch from bars to numbers, navigate to your BlackBerry
home screen, hold the ‘ALT’ key and enter in ‘NMLL’. The signal display will
then automatically display a dBm value. In general, a reading from -45 to -85 is
considered very strong. Any reading that’s lower than -85 — for instance, -100 —
is weaker. To switch back to bar mode from numeric, just hit ALT again and
retype ‘NMLL’.

The numeric display can be helpful to determine accurately on
how much a wireless signal degrades as you move from place to place. (It’s also
geek chic to read your cellular signal strength in dBm instead of boring old
bars.)

Bring up ‘Help Me’ screen for device, system data:

Your device’s ‘Help Me’ screen displays useful device and system information such as your vendors ID, the version of BlackBerry platform, OS version, your PIN, the International Mobile Equipment Identity (IMEI) number, etc. While most of this information is available at various locations throughout your BlackBerry Options, the Help Me offers a simple way to access all the data on a single screen.

To pull up the Help Me screen, navigate to your Home screen and then press ‘ALT’, either ‘SHIFT’ key and the letter ‘H’. To return to your Home screen, hit ESCAPE or open the MENU and select Close.

That’s all for this month. You can email your feedback to me on sam.client@gmail.com. Do look forward to my next write-up on the topic of cloud computing.

Prevention of Money-laundering (Maintenance of Records of the Nature and Value of Transactions, the Procedure and Manner of Maintaining and Time for Furnishing Information and Verification and Maintenance of Records of the Identity of the Clients of the B

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Part C : RBI/FEMA

Given below are the
highlights of certain RBI Circulars.

33. Prevention of
Money-laundering (Maintenance of Records of the Nature and Value of
Transactions, the Procedure and Manner of Maintaining and Time for Furnishing
Information and Verification and Maintenance of Records of the Identity of the
Clients of the Banking Companies, Financial Institutions and Intermediaries)
Second Amendment Rules, 2010 — Obligation of Authorised Persons.

The Government of India has
vide Notification No. 10/2010-E.S./F.No.6/8/2009-E.S., dated June 16, 2010,
amended the Prevention of Money-laundering (Maintenance of Records of the Nature
and Value of Transactions, the Procedure and Manner of Maintaining and Time for
Furnishing Information and Verification and Maintenance of Records of the
Identity of the Clients of the Banking Companies, Financial Institutions and
Intermediaries) Rules, 2005. A copy of the Notification is attached to this
Circular.

The highlights of the
amendments are :


(a) in Rule 2 in
sub-rule (1), after clause (g),
the following Explanation shall be inserted, namely :




Explanation :
Transaction involving financing of the activities relating to terrorism includes
transaction involving funds suspected to be linked or related to, or to be used
for terrorism, terrorist act or by a terrorist, terrorist organisation or those
who finance or are attempting to financing of terrorism.


(b) in Rule 9, for
sub-rule (1A), the following sub- rule shall be substituted, namely :


(1A) Every banking company,
financial institution and intermediary, as the case may be, shall determine
whether a client is acting on behalf of a beneficial owner, identify the
beneficial owner and take all reasonable steps to verify his identity.


(c) in Rule 9, for
sub-rule (1B), the following sub-rule shall be substituted, namely :


(1B) Every banking company,
financial institution and intermediary, as the case may be, shall exercise
ongoing due diligence with respect to the business relationship with every
client and closely examine the transactions in order to ensure that they are
consistent with their knowledge of the client, his business and risk profile and
where necessary, the source of funds.


(d) in Rule 9, for
sub-rule (1C), the following sub- rule shall be substituted, namely :


(1C) No banking company,
financial institution and intermediary, as the case may be, shall allow the
opening of or keep any anonymous account or account in fictitious names or
account on behalf of other persons whose identity has not been disclosed or
cannot be verified.


(e) in Rule 9, after
sub-rule (1C), the following sub- rule shall be inserted, namely :


(1D) When there is a
suspicion of money laundering or financing of activities relating to terrorism
or where there are doubts about the adequacy or vera-city of previously obtained
customer identification data, every banking company, financial institution and
intermediary shall review the due diligence measures including verifying again
the identity of the client and obtaining information on the purpose and intended
nature of the business relationship, as the case
may be.


(f) in Rule 10, after
sub-rule (3), the following Explanation shall be inserted, namely :


“Explanation : For the
purpose of this rule :


(i) the expression
‘records of the identity of clients’ shall include records of the
identification data, account files and business correspondence.

(ii) the expression
‘cessation of the transactions’ means termination of an account or business
relationship.



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Know Your Customer (KYC) Norms/Anti-Money Laundering (AML), Standards/Combating the Financing of Terrorism (CFT)/Obligation of Authorised Persons under Prevention of Money Laundering Act, (PMLA), 2002, as amended by Prevention of Money Laundering (Amendme

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New Page 2

Part C : RBI/FEMA

Given below are the
highlights of certain RBI Circulars.

32. Know Your Customer (KYC)
Norms/Anti-Money Laundering (AML), Standards/Combating the Financing of
Terrorism (CFT)/Obligation of Authorised Persons under Prevention of Money
Laundering Act, (PMLA), 2002, as amended by Prevention of Money Laundering
(Amendment) Act, 2009 — Cross-Border Inward Remittance under Money Transfer
Service Scheme.

This Circular advices
Authorised Persons (AP) and their sub-agents (for whom they are responsible
under MTSS) to not only take into account the risks arising from the
deficiencies in the AML/CFT regime of certain jurisdictions, as identified in
the Financial Action Task Force (FATF) Statement, issued from time to time,
while dealing with the individuals or businesses from these jurisdictions but in
addition also consider using publicly available information for identifying
countries, which do not or insufficiently apply the FATF Recommendations.

AP are further advised to
examine the background and purpose of transactions with persons (including legal
persons and other financial institutions) from jurisdictions included in FATF
Statements and countries that do not or insufficiently apply the FATF
Recommendations and where the transactions have no apparent economic or visible
lawful purpose, written findings together with all the documents should be
retained and made available to the Reserve Bank/other relevant authorities, on
request.

A.P. (DIR Series) Circular
No. 24,

dated 13-12-2010

A.P. (FL/RL Series) Circular
No. 5,

dated 13-12-2010

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Exemption to certain companies u/s.211(3) for Public Financial Institutions.

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Part D : company
law

 

80 Exemption to certain companies u/s.211(3) for
Public Financial Institutions.

MCA vide Notification No. S.O. 300(E), dated
8th February 2011 has u/s.211(3) exempted Public Financial Institutions as
specified u/s.4A of the Companies Act, 1956 from disclosing Investments as
required under paragraph (1) of Note (1) of Part-I of Schedule VI in their
balance sheet, subject to fulfilment of the following conditions, namely :

(i) the Public Financial Institutions shall make
the complete disclosures about investments in the balance sheet in respect of
the following, namely :

(a) immovable property;

(b) capital of Partnership firms;

(c) all unquoted investments, and;

(d) investments in subsidiary companies.

(ii) the Public Financial Institutions shall
disclose the total value of quoted investments in each of the following
respective categories, namely :

  •   Government and trusts
    securities;


  •   shares


  •   debentures;


  •   bonds; and


  •   other securities.

(iii) in each of the above categories referred to
in sub-paragraphs (i) and (ii), investments where value exceeds two percent of
total value in each category or one crore rupees, whichever is lower, shall be
disclosed fully, provided that where disclosures do not result in disclosure
of at least fifty percent of total value of investment in a particular
category, additional disclosure of investments in descending order of value
shall be made so that specific disclosures account for at least fifty percent
of the total value of investments in that category;

(iv) the Public Financial Institutions shall also
give an undertaking to the effect that as and when any of the shareholders ask
for specific particulars, the same shall be provided;

(v) all unquoted investments shall be separately
shown;

(vi) the company shall undertake to file with any
other authorities, whenever necessary, all the relevant particulars as may be
required by the Government or other regulatory bodies;

(vii) the investments in subsidiary companies or
in any company such that it becomes a subsidiary, shall be fully disclosed.


2. This Notification shall be applicable in respect
of balance sheet and profit and loss accounts prepared in respect of the
financial year ending on or after the 31st March, 2011.

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Exemption to certain Companies u/s.211(3).

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Part D : company
law

 

79  Exemption to certain Companies u/s.211(3).

MCA vide Notification No. S 301, dated 8th February
2011 has in public interest, exempted the following classes of companies from
disclosing in their profit and loss account the information mentioned under
column (3), against each class of companies mentioned under column (2) of the
table given below subject to fulfilment of the conditions stipulated in
paragraph 2 of this Notification, namely :

SI.
No.


Class of companies


Exemptions from paragraphs of Part-II of Schedule VI

1

Companies producing
defence equipments including space research;

paragraphs 3(i)(a),
3(ii)(a), 3(ii)(d), 4-C, 4-D(a) to (e) except (d).

2

Export-oriented
company (whose export is more than 20% of the turnover);

paragraphs 3(i)(a),
3(ii)(a), 3(ii)(b), 3(ii)(d).

3

Shipping companies
(Including airlines);

paragraphs 4-D(a) to
(e) except (d).

4

Hotel companies
(including restaurants);

paragraphs 3(i)(a)
and 3(ii)(d)

5

Manufacturing
companies/multi-product companies;

paragraphs 3(i)(a)
and 3(ii)(a)

6

Trading companies;

paragraphs 3(i)(a)
and 3(ii)(b).

Balance sheets of subsidiaries

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Part D : company
law

 

78 Balance sheets of subsidiaries.

1. MCA vide General Circular No.
2/2011No.:51/12/2007-CL-III issued on 8th February 2011, has given general
exemption u/s.212(8) of the Companies Act provided certain conditions as follows
are fulfilled.

The Central Government hereby directs that
provisions of section 212 shall not apply in relation to subsidiaries of those
companies which fulfil the following conditions :



(i) The Board of Directors of the company has by
resolution given consent for not attaching the balance sheet of the subsidiary
concerned;


(ii) The company shall present in the annual
report, the consolidated financial statements of holding company and all
subsidiaries duly audited by its statutory auditors;


(iii) The consolidated financial statement shall
be prepared in strict compliance with applicable Accounting Standards and,
where applicable, Listing Agreement as prescribed by the Security and Exchange
Board of India;


(iv) The company shall disclose in the
consolidated balance sheet the following information in aggregate for each
subsidiary including subsidiaries of subsidiaries : (a) capital (b) reserves
(c) total assets (d) total liabilities (e) details of investment (except in
case of investment in the subsidiaries) (f) turnover (g) profit before
taxation (h) provision for taxation (i) profit after taxation (j) proposed
dividend;


(v) The holding company shall undertake in its
annual report that annual accounts of the subsidiary companies and the related
detailed information shall be made available to shareholders of the holding
and subsidiary companies, seeking such information at any point of time. The
annual accounts of the subsidiary companies shall also be kept for inspection
by any shareholders in the head office of the holding company and of the
subsidiary companies concerned and a note to the above effect will be included
in the annual report of the holding company. The holding company shall furnish
a hard copy of details of accounts of subsidiaries to any shareholder on
demand;


(vi) The holding as well as subsidiary companies
in question shall regularly file such data to the various regulatory and
Government authorities as may be required by them;


(vii) The company shall give Indian rupee
equivalent of the figures given in foreign currency appearing in the accounts
of the subsidiary companies along with exchange rate as on the closing day of
the financial year;

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Amendments to Schedule XIII

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Part D : company
law

 

77 Amendments to Schedule XIII.

MCA vide Circular dated 8th February 2011, have
made the following amendments in Schedule XIII to Companies Act, 1956 :

In the Schedule XIII, in Part II, in S. II :

(i) in sub-para (C), in third proviso, after the
word, ‘scale’ occurring at the end, the following words shall be inserted,
namely :

“if the company is a listed company or a
subsidiary of a listed company”;

(ii) for Explanation IV, to the S. II, the
following Explanation shall be substituted, namely : For the purposes of this
Section, ‘Remuneration Committee’ means :

(i) ‘in respect of a listed company, a committee
which consists of at least three non-executive independent directors including
nominee director or nominee directors, if any; and

(ii) in respect of any other company, a
Remuneration Committee of Directors’;

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Easy Exit Scheme, 2011

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76 Easy Exit Scheme, 2011.

MCA vide General Circular No. 1/2011, F. No.
2/7/2010-CL V, dated the 3rd February 2011 in continuation to its Circular No.
6/2010, dated 3-12-2010 thereon decided to extend the Scheme for another three
months i.e., up to 30th April, 2011. Further all the terms of Circular
No. 6/2010, dated 3-12-2010 remain the same.

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Managerial remuneration in unlisted companies having no profits/inadequate profits

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75 Managerial remuneration in unlisted companies
having no profits/inadequate profits.

MCA vide Press Release No. 4/2011, dated 8-2-2011
has exempted public limited companies (listed and unlisted) with no
profits/inadequate profits, so long as the conditions specified in Schedule
XIII, including special resolution of shareholders and absence of default on
payment to creditors, from the requirement of approaching the Ministry for
approval in those cases where the remuneration of directors/equivalent
managerial personnel exceeds certain limits. The matter has been re-examined in
the light of the evolving economic and regulatory environment.

Accordingly, Schedule XIII of the Companies Act,
1956 is being amended to provide that unlisted companies (which are not
subsidiaries of listed companies) shall not require Government approval for
managerial remuneration in cases where they have no profits/inadequate profits,
provided they meet the other conditions stipulated in the Schedule.

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New versions of Form 21A, Form 23AC and Form 23ACA

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Part D : company law


Changes relating to Company Law for the period November 15,
2010 to December 15, 2010.

40. New versions of Form 21A, Form 23AC and Form 23ACA

New versions of Form 21A, Form 23AC and Form 23ACA are
available on the MCA portal, effective December 5, 2010 and the same are
required to be used for filing after December 5, 2010.

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Status of action initiated against vanishing companies and its promoters/directors.

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Part D : company law


Changes relating to Company Law for the period November 15,
2010 to December 15, 2010.

39. Status of action initiated against vanishing companies
and its promoters/directors.

Status of action initiated against vanishing companies and
its promoters/directors under the provisions of the Companies Act, 1956 and
under the Indian Penal Code can be viewed at
http://www.mca.gov.in/Ministry/vanishing.html

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