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Year: 2012

2011-TIOL-748-ITAT-Mum. ITO v. Taj Services Pvt. Ltd. A.Y.: 2003-04. Dated: 16-9-2011

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Section 48(i) — Compensation paid by the assessee to lessee to terminate the leasehold rights and surrender possession of the aircraft to the purchaser of the aircraft from the assessee is eligible for deduction while computing capital gain.

Facts:
The assessee-company, engaged in the business of travel-related services, gave an offer to Mafatlal Finance Co. Ltd. (MFL) for purchase from MFL an aircraft which MFL owned and was leased by MFL to Megapode Airlines Ltd. (MAL), for a period of 7 years commencing on 30-12-1994 and ending on 29-12-2001, under a lease agreement dated 30-12-1994, with an option to renew the lease for an indefinite period of time. The terms of sale of air-craft by MFL to the assessee were that the assessee would pay MFL a consideration of Rs.43,75,000 and sale would be subject to the rights of the lessee (MAL) under the lease agreement dated 30-12-1994 and in particular the right of MAL to extension of the tenure of the lease. In addition to the consideration, the assessee was also to pay to MAL a sum of Rs.3.18 crores spent by MAL to refurbish the aircraft to make it air-worthy. On 15-1-2002, MFL raised an invoice on the assessee for sale of aircraft. On 1-3-2002, the Directorate General of Civil Aviation issued a certificate of registration, registering the assessee as the owner of the aircraft. This certificate also recognised MAL as the operator of the aircraft. According to the assessee, it acquired the aircraft on 28-12-2001.

The assessee informed MAL that since it proposed to sell the aircraft without any encumbrances, the assessee proposed to foreclose the lease and requested MAL to handover the aircraft. The assessee gave 3 months’ notice of termination and informed MAL that the termination would be effective 6-5-2002.

Consequent to various negotiations which took place between the assessee and MAL, it was agreed by the assessee with MAL that the assessee would give Rs.4.70 crore to MAL as compensation for premature closure of the lease agreement and MAL agreed to deliver the aircraft in good working condition on or before 6-5-2002. Also, by lease agreement dated 25-2-2002 between the assessee as owner and lessor of the aircraft and MAL as the lessee, the lease period of the aircraft to MAL was extended by 5 years effective from 30-12-2011.

The assessee sold the aircraft without any encumbrances for a consideration of Rs.8,92,87,147. While computing short-term capital gains arising on transfer of aircraft, the assessee inter alia claimed a deduction of Rs.4,70,00,000, being amount of compensation paid for premature termination of the lease agreement, u/s.48(i) of the Act, as being expenditure incurred wholly and exclusively in connection with transfer of capital asset.

The AO while assessing the total income of the assessee did not allow this amount as a deduction on the ground that also that MFL having earned Rs.17.51 crore as lease rentals from MAL till date of sale could have sold the aircraft to MFL or MAL for a consideration of Rs.43.75 lakh and the amount which would have been taxable in that case would have been greater; the assessee and MAL were part of the same group and that MAL was suffering losses and therefore payment for foreclosure of lease agreement was to avoid tax liability. Also, the transaction was not a genuine transaction since the termination of lease by the assessee was on 6-2-2002, whereas the renewal agreement with MAL was entered only on 25-2-2002 and even this lease agreement did not contain clauses for termination of the lease and the monetary compensation quantified and agreed between the parties.

Aggrieved, the assessee preferred an appeal to the CIT(A) who distinguished the decisions relied upon by the AO and allowed the appeal filed by the assessee on the ground that once it is established that the assessee was under a contractual obligation to provide the aircraft free of any encumbrances for which it had paid compensation to MAL, such compensation is inextricably incidental to transfer and, hence, allowable as deduction u/s.48(i) of the Act.

Aggrieved the Revenue preferred an appeal to the Tribunal.

Held:
The Tribunal held that the compensation paid to MAL for surrendering its pre-existing rights as the lessee is inextricably connected to the transfer of the aircraft as one of the condition for sale of the aircraft by the assessee was surrender of possession to the purchaser free from all encumbrances. It noted that the renewal agreement had to be signed between the assessee and MAL on 25-2-2002 so that possession of the aircraft by MAL till delivery to the purchaser is made remains lawful. It also held that there can be no complaint regarding compensation paid to MAL being excessive. It is for the parties to the agreement to decide on the rightful compensation. There is no material available on record to show that there was any ulterior motive in paying the sum of Rs.4.70 crore as compensation by the assessee to MAL for surrendering leasehold rights and delivering possession of the aircraft. It also observed that the alternative computation filed by the assessee clearly demolishes the case of the AO that there was any motive to avoid tax.

This ground of appeal filed by the Revenue was dismissed.

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2011-TIOL-735-ITAT-PUNE Glaxosmithkline Pharmaceuticals Ltd. v. ITO (TDS) A.Ys.: 2006-07 to 2008-09. Dated: 7-10-2011

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Sections 9(1), 194C, 194J — Security services are not technical or professional services. Hence, payment made in lieu of such services is not covered u/s.194J but u/s.194C.

Facts:
The assessee, engaged in manufacturing of medicines was subjected to survey action u/s.1333A of the Act on 21-11-2007 by the ITO (TDS) (AO). The AO noticed that in respect of payments made by the assessee towards security charges, the assessee was deducting tax at source @ 2.26% u/s.194C. The AO was of the view that the payments for security charges are covered u/s.194J. He passed an order u/s.201 and 201(1A) r.w.s. 194J and demanded payment of TDS and interest on TDS for the 4 assessment years 2005-06 to 2008-09.

Aggrieved the assessee preferred an appeal to the CIT(A) who held that security personnel were rendering skilled services to the assessee and can be categorised as professional or technical services as per the Explanation to section 194J of the Act. He upheld the order passed by the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The Tribunal having considered the answer of the CBDT to Q No. 28 of Circular No. 715, dated 8-8-1995 held that an electrician is also a skilled person and if the services of an electrician provided by a contractor are treated by the CBDT under the provisions of section 194C vis-àvis section 194J, then it gives strength to the argument that security services provided by a contractor will also come under the provisions of section 194C, because the security guards are also skilled persons as an electrician. The services provided by security personnel under a contract with the agency cannot be categorised as technical service unless the provisions of clause (vi) to Explanation 2 to section 9(1) are fulfilled. In order to rope in any service provider within the net of section 194J, it is of paramount importance to check the true nature of service provided on the touchstone of the mandate of this provision alone. Clause (vii) to Explanation 2 to section 9(1) defines fees for technical services, as consideration for rendering of any ‘managerial, technical or consultancy services’, the word ‘technical’ is preceded by the word ‘managerial’ and is succeeded by the word ‘consultancy’. Following the view of the decision of the Mumbai Bench in the case of ACIT v. Merchant Shipping Service (P) Ltd. and Others, (135 TTJ 589) (Mum.) it held that as both managerial and consultancy services are possible with human endeavour, the word ‘technical’ should also be seen in the same light. To be more precise, any payment for technical services in order to be covered u/s.194J, should be a consideration for acquiring or using technical know-how simplicitor provided or made available by human element. There should be direct and live link between payment and receipt/use of technical services/information. If the conditions of section 194J r.w.s. 9(1), Explanation 2 clause (vii) are not fulfilled, the liability under this section is ruled out. The payments made by the assessee for security services are covered u/s.194C.

The Tribunal allowed the appeal filed by the assessee.
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(2011) 131 ITD 84 (Hyd.) Sri Venkateswara Bhakti Channel v. ACIT, Circle-1(1) Dated: 26-11-2010

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Section 12A — Can a section 25 company be registered u/s.12A of Income-tax Act — Held, Yes.

Facts:

The assessee-company was registered u/s.25 of the Companies Act, 1956 and was engaged in producing religious feature films, serials for a temple. It applied for registration u/s.12A with the Commissioner. The application was rejected on the grounds that the assessee was a private limited company.

Held:
The provisions of section 11 deal with the exemption of the total income of a ‘person’ who derives income from property held under trust for charitable or religious purposes. The plain reading of the definition of person also includes a company. The word institution is also not defined anywhere in section 12AA, but the meaning as given in Oxford Dictionary nowhere suggests that company is not an institution. The company being a person in accordance with the scheme of the Act is entitled to benefit of section 12A.

Thus the test whether an assessee could be registered u/s.12A is not the status of the ‘person’, but on the basis that whether the person (assessee) was established for charitable or religious purpose.

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(2011) 131 ITD 1 (Ahd.) ITO Ward-2(4), Ahmedabad v. Chandrakant R. Patel A.Y.: 2006-07. Dated: 8-4-2011

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Section 55A r.w.s. 48 — Reference to DVO can be made under specific circumstances prescribed u/s.50C and fair market value determined by DVO cannot be replaced for full value of consideration.

Facts:

The assessee had shown long-term capital gain on sale of land. There was a common sale deed executed along with co-owners in respect of two plots. The assessee had showed sale consideration of Rs.41,860 per sq.mt. The ‘Jantri’ rate as per ‘Stamp Duty Authority’ was Rs.4500 and Rs.7000 per sq.mt. respectively, for the plots. The AO considering the area of the property referred valuation of the same to the DVO. The valuation report of the DVO valued the same at Rs.45,000 per sq.mt. The AO on the basis of report of DVO made the addition.

On appeal the assessee contended that reference made u/s.50C was illegal. The CIT(A) opined that reference to the DVO can be made u/s.142A, or u/s.55A, or u/s.50C. The CIT(A) was of opinion that section 142A has a limited scope for reference to Valuation cell i.e., for estimating an investment as prescribed u/s.69 and u/s.69B for certain assets (bullion, jewellery, valuable articles). Section 55A is in respect of ascertaining the fair market value for purpose of determining the cost of acquisition u/s.55(2)(b). As per section 50C reference is possible only if sale consideration is less than the stamp duty value fixed by stamp valuation authority. Thus, the CIT(A) held that addition made by the AO was not lawfully sustainable.

Aggrieved the Revenue appealed before the ITAT.

Held:
(1) The language in section 55A does not refer ‘value of consideration’ but only uses the term ‘Fair market value’. So, the scope of the section gets confined to determine the fair market value of a capital asset only. Thus, considering the language of section 48 the value so determined cannot be substituted for ‘Full value of consideration’.

(2) Section 50C states that the AO can refer to the DVO u/s.55A only if the assessee claims that the value adopted by the stamp valuation authority exceeds their fair market value or the value so adopted by stamp valuation authority has not been disputed by any authority, Court or High Court.

(3) Thus, the valuation made by the DVO and the consequential addition as made by the AO was reversed and the view taken by the CIT(A) was upheld.

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(2011) 129 ITD 200 (Delhi) Honda Siel Cars India Ltd. v. ACIT A.Y.: 2003-04. Dated: 16-5-2008

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Section 37(1) — Nature of payment made for acquiring technical know-how is capital or revenue expenditure depends upon whether payment is made to acquire any proprietary rights in technical know-how or right to use same for the business for limited period of time.

Section 92 — Transfer Pricing Officer (TPO) is not concerned, nor is he competent to decide as to whether payment for technical rights is capital or revenue — Tribunal decision regarding nature of payment for technical rights by assessee could not be deferred at the request of Department till TPO determines arm’s-length price. Such course was not contemplated by law.

Section 37(1) — Expenditure incurred on advertisement is undisputedly business expenditure —Assurance given by assessee to give away car at its own cost to winner of advertisement scheme launched by paint company might be beneficial to the assessee in the long run and allowable as business expenditure.

Facts: I

The assessee paid Rs.29.40 crore being lump-sum fee for technical know-how and Rs.18.55 crore being royalty to Honda Motor Company Ltd. (HMCL) under technical collaboration agreement. Under the said agreement the assessee acquired right to use technical information provided by HMCL and ownership rights continued to remain with HMCL. As the assessee got only limited right to use and exploit know-how and did not acquire any intellectual property, he claimed the expenditure as revenue. However AO did not accept the assessee’s contention to treat the expenditure as revenue. He disallowed the same and treated the same as capital expenditure on the ground that know-how was crucial for setting up of the assessee’s business and not towards running an existing business.

Facts: II


Reference was made by the Revenue to TPO, to determine arm’s-length price of the amount paid for technical know-how and royalty. The Revenue requested ITAT that it should not give any finding on nature of the above payment till TPO determines its arm’s-length price.
Facts: III

Nerolac Paint launched a sales promotion scheme where the winner would get Honda City car. The assessee-company agreed to bear the cost of the car.

The Revenue disallowed the above advertisement expenditure in the books of the assessee as they were of the opinion that Nerolac Paint stood to benefit from the campaign and not the assessee.

Held: I


In order to ascertain whether payment made for acquiring technical know-how is capital or revenue expenditure, test that is to be applied in such case is whether the assessee got any proprietary/ownership rights or he merely got right to use the same for his business, irrespective of whether expenditure was incurred at the time of initiation of business or at any point of time subsequent thereto.

After noticing all the terms of technical know-how agreement, the ITAT held that on payment for technical know-how the assessee did not become owner of the same. HMCL continued to retain ownership rights in the technical know-how. HMCL merely granted licence to the assessee for manufacture of cars. The manufacture of the cars was the business for which the company was established. Payment made to HMCL was not in connection with setting up of plant but to enable the assessee to manufacture Honda cars in India which formed part of its stock in trade.

Therefore the payment of lump-sum fees for technical know-how and the royalty were treated as part of revenue expenditure.

Held: II

The function of TPO under the provisions of section 92 to 92C is to determine arm’s-length price and he is not concerned with deciding whether it is capital or revenue, nor is he competent in law to decide such question.

The ITAT held that it is first necessary to determine nature of payment and if it is held to be capital then it is not allowable as deduction and determination of arm’s-length price by TPO may not be necessary. However if it held to be revenue, then while giving effect to the order, the AO may, if so advised, refer the question of determination of arm’s-length price to TPO. But decision of tribunal regarding nature of payment cannot be deferred till determination of arm’s-length price by TPO. Such path was not contemplated by law.

Therefore, the request made by the Revenue was rejected.

Held: III


Any expenditure which is not capital or personal nature is allowable as deduction provided it is incurred wholly and exclusively for the purpose of the business according to section 37(1). Expenditure incurred wholly and exclusively for the purpose of the business does not cease to be so merely because it also benefits some other person.

As long as the expenditure benefits the assessee it should be allowed as deduction. Assurance of giving away Honda car at its own cost to the winner of Nerolac Paint promotion scheme may be beneficial to the assessee’s business in long run and is business expenditure. Hence, the expenditure incurred on advertisement should be allowed.

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(2011) 62 DTR (Mum.) (Trib.) 349 Free India Assurance Services Ltd. v. DCIT A.Ys.: 2001-02 to 2004-05. Dated: 30-3-2011

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Bogus purchases — Assessee made payments by cheques to two parties, received cash against the cheque payments and utilised such cash to purchase cloth from the grey market and the same has been recorded in the closing stock — Such purchases are allowed as deduction and cannot be treated as bogus.

Facts:

At the time of search and seizure, it was found that the assessee had made purchases amounting to Rs.30,80,730 for which the assessee had issued cheque and in lieu thereof he received cash. The assessee admitted the fact that such cash received was actually used to purchase fabric from the grey market. Thus the purchase bills were taken from parties to cover up the purchase actually made in the grey market. The fabric was purchased in the previous year and was lying in stock as on the last day of the previous year. The AO treated the same as bogus purchases and disallowed the same. The CIT(A) stated that as long as the stock is reflected in the books of account to that extent the credit for fabrics purchased ought to be given. But the CIT(A) disallowed 20% of total purchase u/s.40A(3) on the ground that the assessee had admitted that the purchases were from grey market.

Held:
In the absence of any material to show that no such cheque payments were made by the assessee or cash amount received by the assessee against the cheque payments was utilised by the assessee other than the purchases or the entry recorded in the closing stock is found to be fictitious or false, the assessee has made cash purchases of Rs.30,80,730 and the same needs to be allowed since they were undisputedly found recorded in the inventory of the assessee.

Regarding the application of provisions of section 40A(3), no such material was found to show that the assessee had made cash payments in the violation of section 40A(3). Disallowance cannot be merely based on a presumption basis.

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Revision: Power of Commissioner: section 264: A.Y. 1996-97: Exempt income offered for taxation by mistake: Commissioner not justified in rejecting application for revision.

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For the A.Y. 1996-97, in the return of income the assessee had offered an amount of Rs.7,18,050 being interest on FCNR deposits as taxable income. In appeal, the Commissioner (Appeals) had remanded the matter to the Assessing Officer. In the course of fresh assessment proceedings, the assessee realised that the interest of FCNR deposits was exempt u/s.10(15) (iv)(fa) of the Income-tax Act, 1961. Therefore, by a letter dated 5-1-2000, the assessee requested the Assessing Officer to exclude the amount from the taxable income. The Assessing Officer did not consider the request. The assessee, preferred a revision application u/s.264 to the Commissioner requesting for the relief. The Commissioner rejected the revision application.

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

“(i) The income-tax authorities under the Incometax Act, 1961, are under an obligation to act in accordance with law. Tax can be collected only as provided under the Act. If an assessee, under a mistake, misconception or on not being properly instructed, is overasses-sed, the authorities under the Act are required to assist him and ensure that only legitimate taxes due are collected.

(ii) Once the assessee had approached the Commissioner u/s.264, the Commissioner was required to apply his mind to whether the assessee was entitled to the relief prayed for. He was not justified in dismissing the application merely on the ground that it was the assessee who had shown the interest as his income for the year under consideration.

(iii) The Commissioner (Appeals) upon appreciation of the evidence on record had, as a matter of fact, found that the assessee was not ordinarily resident during the relevant periods. The present year fell between the said assessment years. Hence, it was apparent that the assessee was ‘not ordinarily resident’ for the year under consideration. The Commissioner was, therefore, not justified in rejecting the application u/s.264.”

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Export profit: Deduction u/s.80HHC: A.Y. 1998- 99: Supply of food and beverages to foreign airlines leaving India: Amount received deemed to be convertible foreign exchange: Assessee entitled to deduction u/s.80HHC.

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The assessee engaged in the business of hotelier supplied food and beverages in sealed containers to international flights leaving India. Such foods and beverages were cleared for transmission to the aircrafts and were also escorted by the Customs authorities at international airports. The Assessing Officer disallowed the claim for deduction u/s.80HHC of the Income-tax Act, 1961. The disallowance was upheld by the Tribunal.

On appeal by the assessee, it was contended by the Revenue that the assessee had charged sales tax on those items of food and beverages from the airline authority and such conduct itself indicates that the transactions were sales of items within the country. The Calcutta High Court reversed the decision of the Tribunal and held as under:

“(i) Though the word ‘export’ has not been defined in the Act, the word is to be interpreted in the light of the language of section 80HHC including the Explanation added thereto and if the formalities required in section 80HHC are fully complied with, it is not necessary that all the other formalities prescribed under the Customs Act, 1962, for export of the articles also required to be fully complied with by an assessee in addition to those prescribed u/s.80HHC.

(ii) There is no estoppel for the mistake of an assessee in treating the actual nature of transaction and the taxing authority cannot refuse to give appropriate benefit of deduction of tax merely for the mistake of an assessee if the mistake is lawfully rectified. If the assessee had wrongly realised sales tax on the item of export by treating the sale as within the State, the law would take its own course for such wrong action of the assessee, but such fact could not be a ground for refusing a just benefit available under the Act.

(iii) The certificate issued by the Commissioner of Customs indicated that the assessee in the process of selling the food and beverages in the airport had complied with the conditions mentioned in Explanation (aa) of section 80HHC. The Foreign Exchange Department, RBI certified that the provisions regarding treatment of the amounts received in rupees by a hotel company out of repatriable funds would also apply under the Foreign Exchange Management Regulations. In the absence of any evidence disputing the assertion of the officer concerned, the assessee had also complied with in condition mentioned in Explanation (a) and (aa) of section 80HHC of the Act.

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Export: Exemption u/s.10B: A.Y. 2003-04: Assessee an approved EOU and manufacturing articles for export: Some work done on job basis by sister concern: Not relevant: Assessee entitled to exemption u/s.10B.

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The assessee was an approved export-oriented unit and was manufacturing articles for export and was eligible for exemption u/s.10B of the Income-tax Act, 1961. For the A.Y. 2003-04, the Assessing Officer disallowed the exemption u/s.10B on the ground that the assessee had done some work on job basis from its sister concern. The Tribunal allowed the assessee’s claim.

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

“(i) There was no dispute that the assessee was an approved export-oriented unit and making exports. The authorities below recorded a finding that the assessee was involved in manufacture of an article or thing and the mere fact that it was getting some works done on job basis from its sister concern would not deprive the assessee of its claim to be an export-oriented manufacturing unit.

(ii) The Assessing Officer himself had recorded in respect of the assessee’s own case for the A.Y. 2004-05 that its unit fulfilled the conditions u/s.10B and allowed deduction. Even for the A.Y. 2005-06, the appeal filed by the assessee had already been allowed by the Commissioner (Appeals) holding the assessee to be entitled to claim deduction u/s.10B.

(iii) The assessee was entitled to exemption u/s.10B for the A.Y. 2003-04.”

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Depreciation: Intangible assets: section 32(1) (ii): A.Y. 2004-05: Depreciation is allowable on abkari licence u/s.32(1)(ii).

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The assessee was owning a bar attached hotel. For the A.Y. 2004-05, the assessee claimed depreciation on the value of the abkari licence u/s.32(1)(ii) of the Income-tax Act, 1961 as an intangible asset. The Assessing Officer disallowed the claim. The Tribunal observed that purchase of licence is a capital asset, but held that the assessee is not entitled to depreciation as the abkari licence does not depreciate.

On appeal by the assessee, the Kerala High Court reversed the decision of the Tribunal and held as under:

“Abkari licence is a business right given to the party to carry on liquor trade. The abkari licence squarely falls u/s.32(1)(ii) on which the assessee is entitled to depreciation at 25% of the written down value.”

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Scope of Revision of orders by the Commissioner u/s.263

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Issue for consideration

Section 263 of the Income-tax Act, 1961 (‘the Act’) corresponding to section 33B of the Income-tax Act, 1922 (‘the 1922 Act’) was inserted in the statute with the main objective of arming the Commissioner of Income-tax (‘CIT’) with the powers of revising any order of the Assessing Officer (‘AO’), where the order is erroneous and resulted in prejudice to the interest of the Revenue. Prior to the introduction of section 33B in the 1922 Act, the Department had no right of appeal against any order passed by the AO and therefore, it was necessary to provide the CIT with the powers of revision.

While the power is not meant to be a substitute for the power of the AO to make assessment, the same can certainly be exercised when the order of the AO is erroneous and prejudicial to the interest of the Revenue. Whether or not the order is erroneous and prejudicial to the interest of the Revenue has to be decided from case to case.

The relevant provisions of section 263 reads as under:

“263(1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous insofar as it is prejudicial to the interests of the Revenue, he may, after giving the assessee an opportunity of being heard and making or causing to made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment . . . . .”

The controversy discussed here revolves around the scope of revisional power of the CIT — whether it extends to issues examined by the AO but not discussed in the assessment order.

The Karnataka High Court recently had an occasion to deal with this issue, wherein the Court held that an assessment order is erroneous and prejudicial to the interest of the Revenue, if the AO has not given any conclusion and finding on the ground of revision in the assessment order, thereby, justifying the exercise of powers of revision u/s.263. In deciding the issue, the Karnataka High Court dissented with the earlier findings of the Bombay and Delhi High Courts on the subject.

Gabriel India’s case

The issue under consideration first came up before the Bombay High Court in the case of CIT v. Gabriel India Ltd., (203 ITR 108). In that case, Gabriel had claimed deduction of a sum of Rs.99,326 as ‘Plant relayout expenses’ as being revenue in nature, being business expenditure on account of exercise of merging the two plants which necessarily called for relocation of the facilities as well as adapting the existing structure and other services necessary for the plant as a whole. The AO had accepted the explanation of Gabriel and allowed the deduction as claimed by it.

Upon completion of assessment, the CIT issued notice u/s.263 on the ground that there was an error in the order of the AO in allowing the deduction of the amount, as it was capital in nature. The CIT did not accept the contention of Gabriel that there was proper application of mind by the AO, before allowing the claim of expenditure as revenue in nature.

On appeal by Gabriel to the Tribunal, the Tribunal concluded that the action of the CIT was not in accordance with the provisions of section 263.

Being aggrieved by the order of the Tribunal, the Revenue appealed to the High Court. The High Court, after the considering the facts of the case and perusing the orders of lower authorities, opined that the power of suo moto revision u/s.263(1) was in the nature of supervisory jurisdiction and could be exercised only if the circumstances specified therein existed.

Two circumstances must exist to enable the CIT to exercise power of revision u/s.263:
— The order of AO must be erroneous; and
— By virtue of the order being erroneous, prejudice is caused to the interest of the Revenue.

The High Court held that if the AO acting in accordance with law makes certain assessment, it cannot be termed as erroneous by the CIT simply because according to him the order should have been written more elaborately. The section does not visualise a case of substitution of judgment of the CIT for that of the AO, who has passed the order, unless the decision is held to be erroneous.

The High Court further observed that the AO had exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion. Such a conclusion could not be termed as erroneous simply because the CIT did not feel satisfied with the conclusion. In such a case, in the opinion of the CIT, the order may be prejudicial to the interest of the Revenue, but it cannot be held to be erroneous for the exercise of revisional jurisdiction u/s.263. According to the Court, for an order to be erroneous, it must be an order which is not in accordance with the law or which has been passed by the AO without making any inquiry in undue haste. The Court noted that though the words ‘prejudicial to the interest of the Revenue’ have not been defined, but it must mean that the orders of assessment challenged are such as are not in accordance with law, in consequence whereof the lawful revenue due to the State has not been realised or cannot be realised. [Following Dawjee Dadabhoy & Co. v. S. P. Jain & Anr., (31 ITR 872) (Cal.) and Addl. CIT v. Mukur Corporation, (111 ITR 312) (Guj.)]

The High Court also observed that for re-examination and reconsideration of an order of assessment, which had already been concluded and controversy about which had been set at rest, to be set again in motion, must be subject to some record available with the CIT and should not be based on the whims and caprice of the revising authority. The High Court made the following specific observations as regards the issue under consideration to uphold the contention of the Tribunal, which is as under: “The ITO in this case had made enquiries in regard to the nature of expenditure incurred by the assessee. The assessee had given detailed explanation in that regard by a letter in writing . . . . . Such a decision of the ITO cannot be held to be ‘erroneous’ simply because in his order he did not make elaborate discussions in that regard . . . . . Moreover, in the instant case, the CIT himself, even after initiating proceedings for revision and hearing the assessee, could not say that the allowance of the claim of the assessee was erroneous . . . . . He simply asked the AO to re-examine the matter. That in our opinion is not permissible.”

Ashish Rajpal case

The issue under consideration had also come up before the Delhi High Court in the case of CIT v. Ashish Rajpal, (320 ITR 674). In that case, in the course of scrutiny, several communications were addressed by the assessee to the AO, whereby the information, details and documents sought for, were adverted to and filed, which were subject to grounds of revision u/s.263. On challenge before the Tribunal by the assessee of the powers of revision of the CIT, the Tribunal held that the assessee had filed all the relevant details and there was due application of mind by the AO on the grounds of revision. Therefore, merely because the assessment order did not refer to the queries raised during the course of the scrutiny and the response of the assessee thereto, it could not be said that there was no enquiry and that the assessment was therefore erroneous and prejudicial to the interest of the Revenue.

On appeal by the Revenue before the High Court, similar conclusions were arrived at and the exercise of the revisional power of the CIT, on the ground that there was lack of proper verification by the AO, was found to be unsustainable. Further, the High Court, after considering the decisions on the subject, explained the meaning of the expression ‘erroneous’ and ‘prejudicial to the interest of the Revenue’ as under:

“…..(iii) An order is erroneous when it is contrary to law or proceeds on an incorrect assumption of facts or is in breach of principles of natural justice or is passed without application of mind, that is, is stereotyped, inasmuch as, the AO, accepts what is stated in the return of the assessee without making any enquiry called for in the circumstances of the case, that is, proceeds with ‘undue haste’. [See Gee Vee Enterprises v. ACIT, (99 ITR 375) (Del.)]

(iv)    The expression ‘prejudicial to the interest of the Revenue’, while not to be confused with the loss of tax, will certainly include an erroneous order which results in a person not paying tax which is lawfully payable to the Revenue. [See Malabar Industrial Co. Ltd. (243 ITR 83)]”

Infosys Technologies’ case

The issue under consideration came up recently before the Karnataka High Court in the case of CIT v. Infosys Technologies Ltd., (341 ITR 293).

Infosys had claimed certain deductions for A.Y. 1995-96 and A.Y. 1996-97 towards its tax liability on account of tax deducted at source (‘TDS’) from payments received in respect of its business activities in Canada and Thailand. The aggregate tax relief as claimed as per Double Taxation Avoidance Agreement (‘DTAA’) under India-Canada tax treaty and India-Thailand tax treaty for A.Ys. 1995-96 and 1996-97 were Rs.18,12,897 and Rs.48,59,285, respectively. The AO, during the course of original assessment proceedings, after considering the submissions and records of Infosys duly allowed the tax relief as claimed by it under the respective treaties.

However, the CIT, on a consideration of non-speaking order of the AO on the aforesaid tax relief so allowed and in light of Article 23(2) of the India-Canada DTAA and Article 23(3) of the India-Thailand DTAA, was of the view that the order was erroneous and prejudicial to the interest of the Revenue. The CIT exercised his powers u/s.263 of the Act and remanded the matter to the file of the AO to ascertain the exact tax relief to which Infosys was entitled under respective tax treaties.

On appeal by Infosys before the Tribunal, the revisional orders of the CIT u/s.263 were set aside by the Tribunal vide a common order, on the ground that the orders passed by the AO were not shown as erroneous and prejudicial to the interest of the Revenue by the CIT.

The Revenue, aggrieved by the order of the Tribunal, appealed to the Karnataka High Court. After considering the arguments of the respective sides and perusing the orders of the lower authorities, the High Court accepted the fact that the CIT in his order does not anywhere explicitly show as to how the order of the AO is erroneous and prejudicial to the interest of the Revenue. The High Court held that the object of section 263 is to raise revenue for the state. The said provision is intended to plug leakage of revenue by erroneous orders passed by the lower authorities, whether by mistake or in ignorance or even by design.

Reference was made by the Karnataka High Court to the observations of the Supreme Court in the cases of Electro House (82 ITR 824) and Malabar Industrial Co. Ltd. v. CIT, (supra) to hold that since the AO had not disclosed the basis on which the tax reliefs were arrived at in the assessment order, which being important for determination of tax liability, there was definitely a possibility of the order being both erroneous and prejudicial. The ratios of the decisions of the Bombay High Court in the case of Gabriel India (supra) and the Delhi High Court in the case of Ashish Rajpal (supra) were referred to but were considered as not applicable to the facts and circumstances of the present case. The High Court held that the argument that the materials had been placed before the AO and therefore, the AO had applied his mind to the same could not be accepted to restrict the power of the CIT to revise the orders u/s.263.

Further, the following specific findings were made by the High Court as regards the issue under consideration to uphold the exercise of revisional power of the CIT u/s.263:

“We are of the clear opinion that there cannot be any dichotomy of this nature as every conclusion and finding by the assessing authority should be supported by reasons, however brief it may be, and in a situation where it is only a question of computation in accordance with the relevant articles of a DTAA and that should be clearly indicated in the order of the assessing authority, whether or not the assessee had given particulars or details of it. It is the duty of the assessing authority to do that and if the assessing authority has failed in that, more so in extending a tax relief to the assessee, the order definitely constitutes an order not merely erroneous but also prejudicial to the interest of the Revenue…….”

Further the AO, pursuant to the directions of the CIT u/s.263, had re-examined the tax reliefs, resulting in some reduction of tax relief to Infosys. On appeal by the assessee before the CIT(A) and further before the Tribunal, the Tribunal had set aside the fresh assessment on the ground that the revisional jurisdiction of the CIT u/s.263 had been set aside at that point in time and the appeal against such fresh assessment by Infosys was accordingly allowed with necessary tax reliefs. Aggrieved by this Tribunal order, the Revenue had appealed against this order to the High Court, which appeal was clubbed with the appeals against the orders u/s.263. The High Court, on taking cogni-zance of these facts, set aside the matters to the file of the Tribunal, for deciding the issue on merits and in accordance with law.

Observations

Recently, the Full Bench of the Gauhati High Court in the case of CIT v. Jawahar Bhattacharjee, (67 DTR 217), after extensively considering the legal decisions and precedents on the subject, explained the expression ‘erroneous’ assessment in context of section 263 is an ‘assessment made on wrong assumption of facts or on incorrect application of law or without due application of mind or without following the principles of natural justice.’ Though the decisions of the Bombay High Court in the case of Gabriel India Ltd. (supra) and the Delhi High Court in the case of Ashish Rajpal (supra) were not specifically referred to in the aforesaid decision, the ratio of these judgments were accepted by the Full Bench in the decision.

The Karnataka High Court in the case of Infosys Technologies Ltd. (supra) has held that the AO should record reasons for his conclusions and findings in the assessment order, irrespective of whether the issue has been accepted or not by the AO. In case the assessment order does not contain the reasons for his findings and conclusions, then it may be construed as an order which is erroneous and prejudicial to the interest of the Revenue, whereby the action of revision by the CIT shall be justified u/s.263.

This interpretation would subject the concluded assessments of the assessees to revision by the CIT for want of duty not performed by the AO in recording reasons for his findings and conclusions in his orders. In other words, the assessees may be penalised for want of non-performance of the duty by the AO. If one were to construe the provisions of section 263 in such a manner, then all settled issues which are concluded at the assessment stage after due application of mind by the AO, may also be subject to revision by the CIT. Such a construction of the expression ‘erroneous order and prejudicial to the interest of the Revenue’ by the Karnataka High Court is clearly in contradiction to the Full Bench of the Gauhati High Court and other High Courts as referred to above.

In addition to the above, the following decisions have also held that merely because the AO should have gone deeper into the matter or should have made more elaborate discussion could not be a ground for exercising power u/s.263:

  •    CIT v. Development Credit Bank Ltd., (323 ITR 206) (Bom.);

  •     CIT v. Hindustan Marketing and Advertising Co. Ltd., (341 ITR 180) (Del.);

  •     CIT v. Ganpati Ram Bishnoi, (296 ITR 292) (Raj.);

  •     CIT v. Unique Autofelts (P) Ltd., (30 DTR 231) (P&H);

  •     Hari Iron Trading Co. v. CIT, (263 ITR 437) (P&H); and

  •     CIT v. Goyal Private Family Specific Trust, (171 ITR 698) (All.).

Further, from the limited facts as understood from the order, the Karnataka High Court also failed to appreciate that the material as filed by Infosys during the course of assessment before the AO for the claim of tax relief was also available for consideration before the CIT. However, the CIT, instead of considering the materials on record and then reaching the necessary conclusions, chose to remand the matter to the file of the AO for re-examination without giving any reasons and findings for satisfaction as to how the tax relief so claimed by the assessee was erroneous and prejudicial to the interest of the Revenue. The CIT, in that case, seems to have relied on the text of the impugned Articles of the DTAAs to remand the matter to the file of the AO for re-examination, without taking cognizance of the material filed by the assessee before the AO for claim of tax reliefs or pointing out any specific defects in the application of the impugned articles. The CIT has also in his order seems to have neither opined, nor demonstrated how the conditions provided under the respective tax treaties were not fulfilled by the assessee or satisfied only for a particular amount out of the total tax relief claimed. Under similar circumstances on different issues, the Bombay High Court in the case of Gabriel India Ltd. (supra), after elaborate discussions as reproduced above, had set aside the revisional order of the CIT.

Though it may sound paradoxical, the Karnataka High Court while expecting the AO, being a quasi-judicial authority, to record the reasons and conclusions for the findings in the assessment order, it allowed the CIT, also a quasi-judicial authority, to exercise the revisional power, though the satisfaction and reasons were not recorded for holding the order of the AO as erroneous and prejudicial to the interest of the Revenue. The powers of revision had been exercised by the CIT merely on the ground of a doubt that the AO had not properly applied his mind in carrying out the procedural aspect of allowing the tax relief as per the impugned Articles under consideration and because the assessment order did not discuss the issue.

While one appreciates that the CIT u/s.263 is never required to come to a firm conclusion before exercising his powers of revision, it is equally true that the CIT being a quasi-judicial authority, is also required to satisfy himself and give reasons before invoking the powers of revision. This legal proposition is also approved in the following decisions rendered in the context of section 263:

  •     CIT v. T. Narayana Pai, (98 ITR 422) (Kar.);
  •     CIT v. Associated Food Products, (280 ITR 377) (MP);
  •     CIT v. Jai Mewar Wine Contractors, (251 ITR 785) (Raj.);
  •     CIT v. Duncan Brothers, (209 ITR 44) (Cal.) — an order of the CIT not bringing any cogent materials on record and based only on certain hypothesis is unsustainable;
  •     CIT v. Kanda Rice Mills, (178 ITR 446) (P&H);
  •     CIT v. Trustees, Anupam Charitable Trust, (167 ITR 129) (Raj.) — the error envisaged in this section is not one which depends on possibility or guesswork, it should be actually an error either of fact or of law; and
  •     CIT v. R. K. Metal Works, (112 ITR 445) (P&H);

Without prejudice to the aforesaid discussions, it would be relevant to mention that in the case of Infosys Technologies (supra), the reference to the observations of the decisions of the Supreme Court in the case of Electro House (supra) and Malabar Industrial Co. Ltd. (supra) may not help the case for justification of exercise of revisional power by the CIT u/s.263. While the decision of the Apex Court in the case of Electro House (supra) dealt with the question of whether it is necessary to issue notice to the assessee before assuming jurisdiction u/s.33B of the 1922 Act (corresponding to section 263) vis-à-vis requirements of issue of notice u/s.34 of the 1922 Act (corresponding to section 148, section 149 and section 150), the decision of the Apex Court in the case of Malabar Industrial Co. Ltd. (supra) had a specific finding of fact that the AO had undertaken assessment in absence of any supporting material and without making any inquiry, which does not seem to be the case in Infosys Technologies matter (supra).

In light of the above, the findings of the Karnataka High Court in the case of Infosys Technologies Ltd. (supra) may require reconsideration. Otherwise, practically, considering the manner in which orders are passed by the AOs, wherein the reasons for the conclusions and findings are only spelt out with regard to the issues where the claims of the assessees are not accepted, such a view may give a free hand to the CIT to exercise powers of revision u/s.263 in almost all cases and revise all such settled assessments, which is unwarranted.

Further, judicial propriety and judicial discipline required that the case of Infosys Technologies Ltd. (supra) should have been referred to a Larger Bench of the Karnataka High Court, particularly considering that the same High Court in the case of T. Narayana Pai (supra) had decided otherwise regarding want of satisfaction and recording of a finding by the CIT in the context of section 263.

The view taken by the Bombay and Delhi High Courts, that revision cannot be resorted to in cases where the relevant information has been examined by the Assessing Officer, though not recorded in the assessment order, therefore seems to be the better view.

GAAR — are safeguards adequate?

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It was not surprising that the Government did not wait for introducing the General Anti Avoidance Rules (GAAR) as a part of the Direct Taxes Code (DTC). Its introduction in the Finance Bill, 2012 was natural corollary to the Supreme Court decision in the Vodafone’s case. The Government has now deferred the implementation of GAAR for a year and has introduced few more safeguards after negative reaction of the stock market and industry in general to GAAR.

Now, the discussion on the issue as to whether or not India should have GAAR has become irrelevant after its introduction in the Finance Bill. At this moment arguably, pertinent discussion could be about whether or not GAAR has enough safeguards that address the concerns of the taxpayers. Common concerns of the most taxpayers are that GAAR gives too much power to the tax authorities; it will also hit genuine tax planning schemes and it creates uncertainty as it cannot be predicted as to which arrangements will be hit by GAAR.

Many countries such as Australia, Canada, China, New Zealand, South Africa, and Spain among others have safeguards in varying degrees in their GAAR responding to the similar concerns expressed in their jurisdictions. This article discusses the safeguards in the Indian provisions and particularly, the safeguard provided by Australia, Canada, and UK on Panel akin to the Approving Panel in Indian GAAR.

  • Safeguards in the Indian GAAR GAAR has now the following safeguards after the amendments to the Finance Bill, 2012:  The burden of application of GAAR rests with the tax authority.
  • Assessing Officer (AO) can invoke GAAR only after obtaining the approval of the Approving Panel.
  • The Approving Panel will have an ‘Independent Member’.
  • AO can pass Order only after the approval of the Commissioner.
  • Taxpayer can avail the facility of the Advance Ruling on GAAR.

The Government has also formed a committee for drafting and recommending the Rules and the Guidelines for the implementation of GAAR. The Guidelines are almost certain to specify a monetary threshold for invoking GAAR and may incorporate the Parliamentary Committee’s recommendation that the AO should record the reasons before applying GAAR.

Burden of proof is on the Department

The earlier version of GAAR had one of the most criticised provision under which the taxpayer was responsible for proving that the GAAR is not applicable to it. In the amended Bill, this particular provision is deleted to bring it in line with other tax charging provisions. Now, the burden of proving the applicability of the GAAR in a particular case rests with the tax authority.

Approving Panel

GAAR has provided one more safeguard in the form of the Approving Panel. The provision on the Approving Panel in the clause 144BA of the Finance Bill is as under:

  • The AO has to make a reference to the Commissioner for invoking GAAR.
  • The Commissioner shall provide an opportunity of being heard to the taxpayer on receipt of the reference. He shall refer the matter to the Approving Panel if he is not satisfied by the reply of the taxpayer and is of the opinion that GAAR provisions are required to be invoked. The Commissioner shall also decide as to whether the arrangement is an impermissible avoidance arrangement or not when the taxpayer does not object or reply.
  • The Approving Panel after providing an opportunity to be heard to the taxpayer has to dispose of the reference within six months after examining material and if necessary, after getting further inquiry conducted. The disposal could be either by declaring an arrangement to be impermissible or by declaring it to be not impermissible.

The AO will determine the consequences of such declaration of an arrangement as ‘impermissible avoidance arrangement’.

  • Every direction of the Approving Panel shall be binding on the AO and the AO shall complete the proceedings in accordance with the directions only after the approval of the Commissioner.
  • The period taken by the proceedings before the Commissioner and the Approving Panel shall be excluded from the time limitation for the completion of assessment. l The Approving Panel shall comprise of minimum three members. Out of which, two members would be of the Income-tax Department of the rank of Commissioner or above and third ‘independent’ member would be from the Indian Legal Service not below the rank of Joint Secretary.
  • The Board may make rules for the procedure, for efficient working of the Panel and for expeditious disposal of references.

This proposed Section is largely based on the provision under UK’s draft law on GAAR2. For appreciating the issues involved in Approving Panel, it might be worthwhile to peruse the information on similar panels formed by Australia and Canada as well as proposed Panel of UK for the application of GAAR.

Role of the Approving Panel

Australia3 (GAAR Panel) and Canada4 (GAAR Committee) have non-statutory, advisory or consultative body to assist tax officers in administration of GAAR and to ensure consistency in approach in application of GAAR. In both the countries, although the Tax Officer finally decides as to whether or not to apply GAAR, he considers the advice given by the Panel before taking the decision. Similarly, UK’s proposed statutory Advisory Panel also shall give only its opinion as to whether there is reasonable ground for the application of GAAR5. The Indian Approving Panel neither is an advisory in nature, nor is mandated to assist the AO on the application of GAAR. Neither the clause 144BA elaborate, nor the ‘explanatory notes to the Finance Bill’ explain the role of the Approving Panel. This ambiguity can create different expectations among taxpayers as it has happened in the case of the ‘Dispute Resolution Panel’ (DRP).

Many taxpayers see the DRP as an adjudicating body on a dispute between the taxpayer and the Department. This expectation is because of the words ‘dispute resolution’ used for the Panel along with the lack of clarity on its role. On the other hand, many Departmental officers perceive DRP as an administrative safety mechanism to prevent inappropriate application of law against a taxpayer. Their justification is based on the argument that, the Law does not intend to have an appellate level between the AO and the Tribunal even before the order is passed. Moreover, DRP cannot be an adjudicating body, as it does not have necessary powers to function as an Appellate Court.

The role of the Approving Panel appears to be of an administrative in nature for ‘approving’ or ‘disapproving’ applicability of GAAR, a function similar to that of the Range head (Additional Commissioner) who approves some of the AO’s orders6. However, in absence of clarity, officers on the Panel may consider that it is their job to ensure successful invoking of GAAR in deserving cases. Therefore, they also may give directions to strengthen the case of the Department. On the other hand, the taxpayer would like to have a neutral body in which the panel should decide against the Department in weak cases rather than the Panel issuing directions to strengthen the Department’s case. Therefore, elaboration of the Panel’s role will help all in its functioning.

Aspect of consistency in the Panel’s approach is also of worth consideration. Australia and Canada ensure consistency in the Panel’s decisions by having a system under which reference is made only from a single point (head office) and by having centralised Panel in the country. In India also, initially only one Panel may be constituted to ensure consistency. Number of Panels can be gradually added with the increase in work. The need for consistency also requires that the Panel members should be appointed for a longer duration and should not be frequently changed. It might be a good idea to have the members dedicated only for the work of the Approving Panel or the DRP for ensuring consistency in its approach.

Composition of the Panel
The Parliamentary Standing Committee has recommended that the Departmental body should not review application of GAAR but an independent body should review it. The Committee has suggested that the Chief Commissioner should head the reviewing body and it should have two independent technical members. However, the Government has decided to form a Panel consisting of the senior Tax Officers and an Officer of Indian Legal Service as against the arguments for having non-Governmental independent members. Now the composition of the Panel appears to be more balanced than what was previously proposed, although taxpayers would have preferred to have non-Governmental independent member on the Approving Panel.

The Australian GAAR Panel consists of senior tax officers, businessmen and professional experts. The Panel is headed by a senior Tax Officer7. UK’s Advisory Panel is proposed to be to be chaired by an independent person and will have a tax officer and an independent member having experience in area relevant to the activity involved in the arrangement8. Whereas, the Canadian GAAR Committee consists of the representatives from the different departments of the Government such as Department of Legislative Policy, Tax Avoidance and Income-tax Rulings. The Committee also has lawyers and representatives from the Department of Finance of the Government.9

Presence of the non-governmental independent members on the Approving Panel gives more confidence to taxpayers in its decisions. Tax-payers perceive such a panel to be fair and unbiased. It also results in external review of the Departments’ work on GAAR and makes the Department some-what accountable to external systems.

However, having independent non-governmental member in the Committee raises different issues, such as such member’s eligibility criteria, transparency in selection process, tenure, etc. Having non-Governmental independent members on the Panel also raises the issue of protection of taxpayers’ confidentiality. Not many taxpayers would prefer their affairs becoming known to other professionals or businesspersons. Again, non-Governmental independent members have conflict of perception and occasionally may have conflict interest. Unlike in many developed taxation systems, it is doubtful as to how many independent members in India would take an adverse view of the arrangement devised by a fellow professional or a businessperson. Further, a non-Governmental independent member on a Panel also may lead to the issue of his accountability, especially when the Panel’s decision is not advisory but is binding on the tax authority under the present law. Moreover, eminent independent persons may not be easily available for the Approving Panel work due to pressure on their time. Constituting a Panel with eminent independent persons is easier said than done and therefore, a Panel consisting of independent members also may not solve the problem.

Powers and procedure of the Panel

Both, the Australian GAAR Panel and the Canadian GAAR Committee do not investigate or find facts or arbitrate disputed contentions. They advise on the basis of the facts referred by the tax officer and by the taxpayer. The Panel may suggest tax officer to make additional enquiries if the facts are disputed. As against this, Indian Panel is armed with more powers and it can direct the Commissioner to get necessary enquiries conducted as the Panel’s role is not advisory in its nature.

The Australian GAAR Panel may extend invitation to the taxpayer to make oral as well as concise written submission before it. The Canadian GAAR Committee does not afford taxpayer right to represent before it, but they may file written submissions before it. The taxpayers are not entitled to have copies of the reports and other submissions made by the authorities or experts in their case before the Committee. However, they will receive the copy of the Committee’s decision along with the reasons of the decision. The Australian Tax office releases the decision of the Panel in the form of either taxation ruling or in the form of the summarised decision on issue to be followed by the tax officers as the official tax office position on that issue.

Working of the Panel

The statistics of Australia and Canada show that these bodies have recommended application of GAAR in majority of the cases referred to it. In a period from 1st July 2007 to 30th June 2011, the Australian Panel advised application of GAAR in 64% of cases, called for further information in 17% of cases, whereas it decided not to apply GAAR only in 19% of the cases referred to it10. Whereas, as on 31st March 2011, the Canadian Committee approved application of GAAR in 73% cases referred from the date since GAAR was first introduced in Canada in 198811. Based on this statistics, one can expect similar trend in India on approval of GAAR references.

The statistics of the decisions of these Panels are available in public domain in Australia and in Canada. Australia also releases the decisions of the Panel in form of taxation rulings or in form of decisions to be followed as a precedent. UK’s draft law also proposes publication of a synopsis of each opinion (without revealing the identity of
taxpayer to protect confidentiality) and publication of regular digests of such opinions.12 It might be good to release statistics of the decisions of the Approving Panel for transparency.13

Purposive interpretation of GAAR

One relevant issue, which is not a safeguard but requires consideration for ensuring effectiveness of GAAR is of having a legal provision on interpretation of GAAR.

The Indian Courts have largely applied the rule of literal construction to the interpretation of taxing statutes. This approach is based on the following two principles:

  •     Legislation should be strictly interpreted on the basis of the words used and legislative purpose should not be presumed and

  •     If the words of a provision are found to be ambiguous, the ambiguity should be resolved in favour of the taxpayer.

This approach creates problem when taxpayer pay lesser taxes by using a legal construction or transaction based on a gap or a loophole in law which will place him outside reach of the law.14 Therefore, the Courts of Australia, UK and Canada more often use purposive interpretation on provisions of tax avoidance as narrow interpretation of the legal provisions could result in injustice. Purposive interpretation of taxing statute seeks to interpret the provision according to the object, spirit, and purpose of the tax provision. This approach is sum marised in the case of the Pepper v. Hart, (1993) 1 All ER 42, HL(E) as under:

“The object of the Court in interpreting legislation is to give effect so far as the language permits to the intention of the Legislature….. Courts now adopt a purposive approach which seeks to give effect to the true purpose of legislation and are prepared to look at much extraneous material that bears upon the background against which the legislation was enacted.”

Purposive interpretation is also justified on the ground of fundamental principle of taxation statute, which seeks to treat similarly placed taxpayers similarly. In absence of purposive interpretation, arrangement of one taxpayer may be treated as tax avoidance, but similar arrangement of other taxpayer may not be treated as tax avoidance due to some minor insignificant difference. Therefore, Australia15 and New Zealand16 have enacted a specific legal provision to ensure that the provision is interpreted according to purpose and object of the statute. Other provision permits them to use extrinsic aids to overcome the problem of gathering the purpose and object of the law17.

Tax laws deal with the transactions taking place in changing economic circumstances. Tax avoidance schemes are carefully devised so that legal provision may not catch them. Purposive interpretation could be helpful on such occasions. Therefore, clarification in the proposed Guidelines may help in ensuring uniformity in the judicial approach on interpretation of the GAAR.

Conclusion

The Indian Approving Panel is statutory and non-advisory body and its directions are binding on the AO. It is sufficiently empowered to carry out its function effectively by getting further enquires conducted. The Indian Panel is the most powerful when compared to similar Panels in other jurisdictions. Therefore, legally, the Indian GAAR has the strongest safeguard on this ground among all.

However, industry’s apprehensions on GAAR may be arising out on implementation of such tax laws in India. It is a fact that many of these concerns are because of the huge trust deficit between the Department and taxpayers. Improving their relationships is an uphill task in a country which has massive tax evasion leading to various estimates of the size of parallel economy. For the Government, raising more revenue by plugging revenue loss taking place due to tax evasion schemes is a matter of high priority when less than 3% of its population bears the burden of paying taxes. Therefore, there is no going back from GAAR. Now, one can only hope that, GAAR and its procedure will gradually evolve for better with the feedback of the stakeholders.

1    The author is Commissioner of Income-tax. Views expressed in the article are entirely personal.

2    Section 14, ‘Illustrative draft GAAR’, ‘GAAR Study’, Report by Graham Aaronson, QC, at p-52

3    PS LA 2005/24, 13th December 2005, Australian Taxation Office.

4    William Innes, Patrick Boyle and Joel Nitikman, ‘The essential GAAR manual: Policies, principles and procedures’, CCH Canadian Ltd. (Toronto: 2006) pp- 1-296, at p-90.

5    Para 61, See note-2, at p-72

6    Search Assessment Orders, some of the penalty orders under Chapter-XXI.

7    Para 23, see note-3.

8    Para 66, see note-2, at p 73

9    See note-4, at p 90

10    Out of total 55 cases, GAAR application was advised in 35, declined in 10 and decision deferred for various reasons in 9. Source- GAAR Panel Report, NTLG Minutes, March 2008, September 2008, September 2009, March 2010, October 2010, March 2011 and September 2011, Australian Taxation Office, Australia website.

11    Lynch Paul, ‘GAAR Committee Update-March 31 2011’ Canadian Tax Adviser, May 24,2011, http://www.kpmg. com/Ca/en/IssuesAndInsights/ArticlesPublications/ CanadianTaxAdviser/CTA_Uploads/

12    Para 5.25, see note 2, at p 34.

13    “We are working on an easy and transparent mechanism to implement GAAR, but more specifics will be notified once the Finance Bill is passed,” Shri R. Gopalan, Secretary, Economic Affairs, 16th April 2010, moneycontrol.com

14    Vanistendael Frans, ‘Legal framework for taxation’, Tax Law Design and Drafting, Vol-1, (ed, Victor Thuronyi), International Monetary Fund (1996), Washington DC, at p 45.

15    Acts Interpretation Act, 1901, Australia. section 15AA — Regard to be had to purpose or object of the Act.
“(1) In the interpretation of a provision of an Act, a construction that would promote the purpose or object underlying the Act (whether that purpose or object is expressly stated in the Act or not) shall be preferred to a construction that would not promote that purpose or object.”

16    Interpretation Act, 1999, Section 5(1) “The meaning of an enactment must be ascertained from its text and in the light of its purpose.”

17    Australia section 15AB of Acts Interpretation Act, 1991 and New Zealand section 5(1) and 5(2) of the Interpretation Act, 1999.

Colour of Money

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At the time that he presented the budget, the
Finance Minister had promised a white paper on black money. He presented
the paper in the recently concluded budget session, one of the few
promises he has managed to keep. The paper was welcomed or criticised by
members of parliament depending upon which side of the political divide
they belonged to. I was amused by the title of the paper. As one
matures one realises that there is nothing spotlessly white or totally
black in life and there are only shades of grey. There was a great
temptation to comment on or analyse the white paper, but then I realised
that such an analysis, in the limited length of an editorial could have
been described by the same dress that the former finance minister used
to describe the white paper. I therefore decided to restrict myself to a
few observations and share my thoughts on a related topic.

The
paper describes money as white or black. Whatever the colour most of us
strive to possess it. Whether one likes it or not it is the driving
force, for individuals, families, and yes, nations as well. Recently I
read a book titled the “Ascent of money” by Niall Ferguson, British
historian. The book traces the financial history of the world. Money in
the form of currency as we know today is a creation not more than few
centuries old, but since its discovery it has pervaded human life. The
standard definition of money is that it is a medium of exchange. To
function optimally it has to be durable, fungible, portable and
reliable. Modern day money whether it is paper, plastic or electronic
has all these attributes except the last one; reliability. The book
quotes with approval Jacob Bronowoski who said that the ascent of money
has been essential to the ascent of man. Many would dispute the
correctness of that statement.

The singularly distinctive
quality of modern day money is its ability to be stored for any length
of time for future use and consumption. This may be the cause or at
least the catalyst for some of the problems that the world faces today.
To illustrate, in 2007, the year in which one of the worst financial
crisis that continues to plague the world commenced, the CEO of Goldman
Sachs received$ 73.7 million as remuneration. In the same year George
Soros, the veteran speculator made $ 2.9 billion. All this at a time
when more than 1 billion people around the world earned less than $ 1 a
day. In this scenario, is the development of money synonymous with the
development of the human race? It is a question that is difficult to
answer since financial scams and scandals occur frequently enough to
make money appear to be a cause of poverty rather than prosperity.

We
strive to give our next generation good health, the best education and
enhanced security. None of this can be bought with money. We teach our
children, ethics, morality and the innumerable sterling qualities that a
human being must possess but when the child steps out into the world
the singularly significant assessment parameter is the money he makes,
the money he would leave for his future generations. We make a
distinction between what we practice and what we preach and seek to
justify the same. We as professionals tell our students that there is a
great difference between theory and practice. There certainly is but
should that difference be as wide as white and black? While accepting
the exalted status that money has we must be conscious and make our
future generations aware of its most serious limitation that it is only a
medium. When society evaluates the financial health of a person, the
questions to be asked are “how” he earned money and thereafter “how
much”? The order should not be reversed.

Before readers mistake
this editorial for a philosophical discourse, let me make a few
observations on the white paper. The paper states that black money is
the result of two categories of activities. The first category is that
of crime, drug trade, terrorism and corruption. In the second category
which according to the paper is the more likely reason of generation of
black money is the intent to defraud the public exchequer. It is
difficult to agree to this categorisation. Undoubtedly hard core crime,
drug money and terrorism are social and political problems which give
rise to unaccounted money; they can be controlled or contained by an
intolerant attitude of the state and participation of all its
enforcement agencies. Corruption must fall into a different category.

The
real problem is the second category. We must decide whether we want to
equate avoidance with evasion. Those who avoid taxes remaining within
the corners of law cannot be treated as generators of black money. In a
majority of the cases it is post compliance harassment that forces
people to side step regulation. Archaic, multiple laws and regulation,
coupled with uncontrolled discretion and lack of accountability on the
part of the bureaucrats and politicians leads to corruption. There is
thus a vicious circle of evasion of statutory obligations, and enjoyment
of the largesses under the benevolent eye of the corrupt authorities.
In the first category, the “black” money generated by crime is
distributed, however inequitable the distribution. In the second the
proceeds of evasion of statutory dues and particularly corruption are
siphoned off. Often they are then laundered with the blessings of the
corrupt authorities.

In the first category the money generated,
will give rise to violence and will maim citizens and the country but
the second is like a deadly cancer that will cause total decay of the
moral fabric.

The white paper discusses various methods by which
to curb the menace of unaccounted money. In this regard the government
must consider three requirements essential to ensure success in its
endeavour. Firstly there must be total transparency in regard to
thinking of the government. If the authorities consider certain action
of business or industry as contrary to legislative intent it must make
this fact known expeditiously. Secondly it needs to integrate inter
agency and intra agency databases, before increasing reporting
requirements an aspect that the white paper recognises, but one hopes
there will be follow up action. Thirdly before introducing a measure
like NOC for real estate transactions which the white paper
contemplates, past experience must be analysed otherwise the measure
will have limited effect.

We need fair, simple laws fairly and
humanly administered. What worries the nation is not the fiscal deficit,
because that will hopefully be corrected, but the trust deficit. When a
representative of the government stands on the floor of the house and
makes a statement it should be treated with the sanctity that it
deserves. We all know that today “black” money dominates our economy.
The endeavour must be to see that the generation of black money reduces.
Along with deterrent punishment for violators there should be an
incentive for compliance. In any economy compartmentalisation of “black”
and “white” money is virtually impossible. It is also irrational to
believe that black money will disappear from the landscape. The attempt
must be to gradually change the proportion. The proportion is such that
today the economy is a chequered one. The proportion of black should
reduce so much that it becomes an adorable beauty spot on flawless
beauty!

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GIVING — LESSONS FROM LIFE

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“Give now, that the seasons of giving may be yours and not your inheritors” — Kahlil Gibran

(1) His name is Dhairya, age about 7 months. I have not even seen him. But he is in my list of Gurus! His mother is a C.A. One morning she called me, and conveyed that they are opening a bank account for Dhairya; and that the first cheque to be issued from his account will be for charity! Dhairya has taught me that one is never too young to start giving! I learnt that one can start giving at any age. The mother also taught me how children should be given sansakaras.

(2) Her name is Naseema Hurzuk. They fondly call her Naseemadidi. She became a paraplegic when she was barely 17. She must be 61 years old now. In spite of the terrible tragedy, she courageously built up her own strength and decided to help other handicapped persons. Her organisation is called ‘Helpers of the Handicapped’. She has by now helped over 8000 persons. Her autobiography ‘NASEEMA — THE INCREDIBLE STORY’ brings tears in one’s eyes. What touched me most is that even when she was in that dire state, she started donating blood! I learnt from Naseemadidi, that one’s handicap is no handicap in helping others. One only needs courage and, of course, the grace of God.

(3) His name was Behramjibhai Irani. He died several years ago. A middle-aged Irani musician, who played mandolin in film orchestras. I walked into his house on 2nd floor in an old building at Grant Road uninvited. I wanted to learn to play mandolin from him. He was making his living by playing in film orchestras, and earning only 30/40 rupees per day as and when he was called to play. I went to him for a few years, but anytime I asked him for his fees, the answer was “Go out of the house and down the stairs! I am not teaching people for making money.” What was extraordinary about Behramjibhai was — he was totally blind. Here was a blind musician, making a living by playing in orchestras, but teaching me a young man from well-to-do family and several other students free of charge and refusing any fees.

I learnt from Behramjibhai that even a blind person can make you ‘see’ and give you a vision of life.

(4) His name is Pandubhai Maganbhai Mahala. He is an adivasi. He lives in a small village located far away in Dharampur, a backward area on Gujarat-Maharashtra border — on the bank of a river. A few persons from Sarvoday Parivar Mandal were dreaming of putting up a school there. The question was of getting resources for buying land. Pandubhai — a poor adivasi very graciously gave away his land! Despite being poor, giving came effortlessly to him! I learnt from Pandubhai that one need not have lot of money in order to give. One only needs richness of the heart.

I cannot help recalling an article called ‘Madhuri and Pushpa’ about two girls seven years of age. It is my favourite one, because it is written by Mahatma Gandhi, ‘The Collected Works of Mahatma Gandhi’ (Vol. 23 : 6 April 1921-July, 1921 pp.330-333) and also because Madhuri in this episode is my mother. It is a great example of how during our freedom struggle even children contributed wholeheartedly. This is also a reminder to the present generation as to how millions of selfless sacrifices of young and old, rich and poor, were given in the fight for our independence. Readers can view the article on:

http://www.gandhiserve.org/cwmg/VOL023. PDF > Article no. 152, pg. no. 330.
This article time and again reminds me that what my mother could do when she was only seven, I am unable to do at 77. At seven she virtually gave away all her wealth. I am reminded that giving has no limits.
“. . . . And there are those who give and know not pain in giving, nor do they seek joy, nor give with mindfulness of virtue;

They give as in yonder valley the myrtle breathes its fragrance into space.

Through the hands of such as these God speaks, and from behind their eyes He smiles upon the earth . . . .”

— Kahlil Gibran
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Policy paralysis causing long-term damage to PSUs

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Imagine a train without an engine. That’s the state of some of the key state-run financial institutions, viz., LIC of India, UTI, SAT, GIC, IRDA, New India Assurance, etc. that are without full-time chief executives, including two where millions of Indians invest their hard-earned money. The state of the government, blamed for policy paralysis, is affecting these vital institutions built over decades, which serve public interest.

Institutions such as Life Insurance Corporation and UTI are trusted household names, and dithering over key appointments in such organisations could send wrong signals apart from affecting their operations. Appointments in the government are an elaborate process, but it is supposed to start on time and ensure that decision-making does not suffer. The absence of chief executives, in some cases fulltime ones, is hurting. This, at a time when the economy is becoming strained, forcing companies to come up with their own solutions. Most of the institutions are stable at this point of time. But leaving these institutions headless may result in certain important decisions getting postponed, which can cause damage in the long term. Indecision can lead to these companies ceding ground to nimble private sector rivals, who are out to capitalise on such opportunities. These are not institutions where investors are looking for quarterly earnings that could keep the management on its toes, but closed ones whose financials are not even known or scrutinised. The absence of key personnel at the regulator may not look as problematic as it is with corporations, but they are vital for markets just as much.

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Health chief warns: Age of safe medicine is ending, says WHO chief

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The world is entering an era where injuries as common as a child’s scratched knee could kill, where patients entering hospital gamble with their lives and where routine operations such as a hip replacement become too dangerous to carry out, the head of the World Health Organisation (WHO) has warned.

There is a global crisis in antibiotics caused by rapidly evolving resistance among microbes responsible for common infections that threaten to turn them into untreatable diseases, said Margaret Chan, director general of WHO.

She said: “Antimicrobial resistance is on the rise in Europe and elsewhere in the world.

We are losing our first-line antimicrobials. “Replacement treatments are more costly, more toxic, need much longer durations of treatment, and may require treatment in intensive care units.

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Mild exercise can cut heart attack risk

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The interheart study shows the link between a sedentary lifestyle and heart problems.

The interheart study in fact focusses a lot on physical activity at leisure that can help control heart problems. “The study shows that people doing any activity can reduce their heart attack risk (compared to those who don’t do any activity at all) by almost 50%,’’ said Dr. Aashish Contractor, who is attached to the Asian Heart Institute in BKC.

“The study says that people who do 30 minutes of activity per week in their leisure time could reduce their heart attack risk by 21%. Those who do 210 minutes of activity per week can reduce the risk by over 44%,’’ he said. Those who pursued activity for 60-180 minutes per week could reduce their risk by 40%. “The Interheart study shows that one need not do fabulously hard work to stay fit. Even small steps — just 30 minutes per week — will help keep your heart healthy.’’ (Source: The Times of India, dated 12-1-2012)

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35% MLAs ‘criminals’, 66% crorepatis — Criminalisation of politics

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More than one third of the politicians elected in the just-concluded assembly polls have criminal cases against them, with Uttar Pradesh MLAs topping the list.

About 35% or 252 of the 690 MLAs elected to the assemblies in UP, Punjab, Uttarakhand, Manipur and Goa have a criminal background, while 66% or 457 of the MLAs are ‘crorepatis’.

The analysis by Association for Democratic Reforms and National Election Watch, based on the affidavits submitted to the Election Commission, also shows that compared to the 2007 assembly polls, there is an over-32% increase in the number of crorepati MLAs and about 8% rise in the number of legislators with a criminal past.

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Risk of ‘cultural revolution’ if no reforms: Wen

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Chinese premier Wen Jiabao warned his Communist colleagues recently that the dark days of the Cultural Revolution (1966-76) would return if political restructuring wasn’t carried out in real earnest.

Wen said much of the economic advancement achieved by China would come undone if political restructuring did not take place. His warning is bound to cause a stir in the Chinese industry, because the Cultural Revolution had tried to purge the country of all capitalist elements.

It was apparent that Wen was using his last press conference before completing the 10-year term till early 2013 to convey some important message to hardcore sections within the party opposed to political reforms.

 “As the economy continues to develop, new problems like income disparities, lack of credibility and corruption have occurred. We must press ahead with economic and political structural reforms, particularly reform in the leadership system of our party and country,” he said. These won’t succeed without the ‘consciousness, support, enthusiasm and creativity’ of the Chinese people, Wen said. (Source: The Times of India, dated 15-3-2012)

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Fast foods — A dangerous addiction

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The Sunita Narain-headed Centre for Science and Environment (CSE), a non-profit organisation, has analysed fast food, checking for fats, carbs, salt and trans-fat. The results are as follows:

Fried potato chips

It has around 33% fats. A standard-sized packet of chips (65-75gm) meets half of your daily fats quota. Unlike in a balanced diet, where 30% calories should come from fats, 50-60% of calories come from fats in chips.

Indian snacks

If you are fond of bhujia with tea, you get high doses of salt and trans-fats, along with a high amount of calories.

Instant noodles

This tasty meal comes with high salt, empty calories. A packet of noodles has around 3 gm of salt; recommended intake is 6 gm per day.

French fries

Fries are laden with fats: 20% of its weight is fats, 1.6% of its weight is trans-fats. By eating a large serving (220 gm), one exceeds the safe limit for trans-fats. Burgers 35% of calories in a veg burger come from fats. In non-veg burgers, 47% calories are from fats.

Carbonated drinks

The 300 ml serving that one drinks with fast food has enough sugar (over 40 gm) to exceed one’s daily sugar quota of 20 gm. After this, forget the cup of tea, one should not even eat fruits.

Fried chicken

A two-piece fried chicken has nearly 60 gm of fats, which is recommended for the whole day. Pizza By far, basic pizzas were found to be healthy compared to other fast foods. They have low levels of salt and fats; levels of trans-fats were also low.

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Fortune names N. R. Narayana Murthy among greatest entrepreneurs

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Infosys co-founder N. R. Narayana Murthy is among the 12 greatest entrepreneurs today, according to a Fortune magazine list. Apple’s late chief Steve Jobs leads the bunch. The list includes Microsoft founder Bill Gates and Facebook chief executive officer Mark Zuckerberg for turning ‘concepts into companies’ and changing the ‘face of business’.

The US publication said as the visionary founder of Infosys, Murthy has built one of the largest companies in India, helping to transform the economy and put it on the world stage. Murthy, 65, proved “India could compete with the world by taking on the software development work that had long been the province of the West; Murthy helped spark the outsourcing revolution that has brought billions of dollars in wealth into the Indian economy and transformed his country into the world’s back-office,” the magazine said.

Fortune cited his lesson that an organisation starting from scratch must coalesce into a team of people with an enduring value system. “It is all about sacrifice today, fulfilment tomorrow,” it quotes Murthy, who is ranked 10th, as saying. “It is all about hard work, lots of frustration, being away from your family, in the hope that some day you will get adequate returns from it.”

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Encyclopaedia Britannica goes out of print, enters digital world

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The oldest English-language encyclopaedia in print is moving solely into the digital age.

The Encyclopaedia Britannica, which has been in continuous print since it was first published in Edinburgh, Scotland in 1768, said on Tuesday it will end publication of its printed editions and continue with digital versions available online. The flagship, 32-volume printed edition, available every two years, was sold for INR85,947. An online subscription costs around INR4,297 per year and the company recently launched a set of apps ranging between INR122 and INR306 per month. The company said it will keep selling print editions until the current stock of around 4,000 sets ran out. It first flirted with digital publishing in the 1970s, published a version for computers in 1981 for LexisNexis subscribers and first posted to the Internet in 1994.

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‘Thank You’ to Income-Tax Department for ruining Indian Economy

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Jaithirth Rao, renowned entrepreneur, expresses deep anguish at the arbitrary manner in which the Income-tax Department is harassing Global BPO companies and raising bogus tax demands, forcing them to relocate their operations to foreign countries like the Philippines and China. This shortsighted approach of the Income-tax Department will ruin the Indian economy, he warns.

Jaithirth Rao, entrepreneurial whiz-kid, has launched a blazing attack on the Income-tax Department for its arbitrary policies which is forcing large bluechip MNCs to shift their BPOs from India to more reasonable countries.

In a thought-provoking article in the Indian Express, Jaithirth Rao spoofs a letter from the Finance Minister of Philippines to the Finance Minister of India ‘thanking’ the latter for the ‘vicious harassment’ that the Income-tax Department has heaped on the Indian IT and BPO industries which has caused a shift of BPO businesses from India to the Philippines.

The Income-tax Department is raising tax demands on captive units of global companies using their global profits as the basis and points out that this one decision alone would cause several of these companies not only to stop growing their Indian subsidiaries, but actually start winding them down.

Jaithirth Rao points out that the Income-tax Department has launched a ‘concerted strategy‘ over the past several years by making frequent and arbitrary changes in rules and says that this has resulted in ‘vicious harassment’ of Indian IT and BPO industries. In sarcastic & death-gallows humour, Jaithirth Rao says that Philippines counts the Indian income-tax authorities amongst its ‘best friends’ and requests that the names of the ‘worthy individuals’ who are behind this ‘wonderful strategy of weakening this labour-intensive Indian industry’ be given so that they can be awarded special ‘Magsaysay Awards’ and be honoured as ‘Friends of the Philippines’.

On a serious note, Jaithirth Rao points out that the Indian income-tax authorities are particularly targeting captive BPO companies, which were till recently being regarded as the ‘poster-boys of Indian I. T. Industry’, by asking them to re-compute their taxable profits based on arbitrary and changing transfer pricing guidelines without adequate safe harbour provisions, which are commonplace in most countries.

While in forums like the WTO, India has been vehemently arguing in favour of free movement of labour and opposing the stand of US political groups that it is not ‘body-shopping’, the Incometax Department has taken the reverse position that revenues from such activities do not constitute ‘service exports’ and that it really is ‘bodyshopping’.

He says that this ‘capricious behaviour’ has resulted in many captive units stopping the growth of their Indian BPO outfits and accelerating the growth of their units in foreign countries.

 He also laments that the Income-tax Department is raising tax demands on captive units of global companies using their global profits as the basis and points out that this one decision alone would cause several of these companies not only to stop growing their Indian subsidiaries, but actually start winding them down.

Jaithirth Rao says these ‘business-unfriendly’ ideas of the Income-tax Department will shrink the Indian BPO industry and while these ‘rapacious tax demands’ will in due course be struck down by the courts, in the meantime, the companies will have to pay up, be out of cash and will be spending their time and money on expensive tax lawyers instead of focussing on their operating businesses. In this unfortunate state of affairs, all BPOs close shop in India and move to the Philippines and China, he says. The Income-tax Department is “determined to wreck one of the few industries where India has achieved world class and where Indian companies are considered formidable operators” and their action of reopening past assessments and raising huge untenable demands by terming ‘service export revenues’ as ‘body shopping revenues’ (despite earlier explicit and emphatic assurances that on-site project implementation revenues would be treated as export income) is forcing large and successful world-class companies to flee India. He says that this flight of capital is making China and Philippines ‘salivate’ at the prospect of global corporations setting up operations in those countries in preference to India.

As opposed to the unreasonable stand adopted by the Income-tax Department, the Revenue in Philippines and China have decided to do exactly the opposite and are reasonable in their tax demands, simple and transparent in their transfer pricing rules and generous in their tax holidays, he says.

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HC notice to CBDT for linking promotions with tax collection

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The Gujarat High Court has issued notices to the chairman of the Central Board of Direct Taxes (CBDT) and Chief Commissioner of Income-tax Department in the state on a petition challenging CBDT’s decision to link promotions and postings of officers with tax collection made by them.

The notices were issued by a division bench of acting Chief Justice Bhaskar Bhattacharya and Justice J. B. Pardiwala while hearing a public interest litigation filed by Prakash Kapadia, chairman of an NGO, Jagega Gujarat Sangharsh Samiti.

The Court has sought an explanation about the circular that stated that promotions of the Incometax officers would depend on achievement of targets (of tax collection).

According to the petitioner, the practice of the Income-tax Department to set annual targets for tax collections and to give incentives to its staff for meeting those targets was hurting the taxpayers. The petitioner has challenged the instruction issued by CBDT chairman on February 7 to all chief commissioners and directors general of I-T to generate more collections.

 The petitioner’s counsel, Rashmin Jani, cited three cases of assessees who have suffered at the hands of tax officers due to this policy. He argued that after issuance of such instructions, the officials have started sending demand notices and passed mala fide orders in order to achieve targets.

The petitioner has also contended that the promise of promotion and posting in plum positions may result in serious prejudice to assessees. He also cited an order by the Bombay High Court quashing similar instructions issued by the CBDT chairman earlier.

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EAC Opinion – Accounting for payments made in respect of land pending execution of conveyance deeds and borrowing costs incurred in respect thereof

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Facts

The Government of India directed a State Port Trust (SPT) to construct a new Port. Accordingly SPT acted as the executing agency and completed a Port. For this, the Government of India provided a sum of Rs.426.11 crore to SPT towards implementation of the Port. The Government of India vide their letter dated 14-2-2002 directed SPT to handover the completed Port to ABC Limited, (‘the company’) which is owned by the Government of India and was incorporated with the specific purpose of corporatising the Port.

The company has stated that the Port has been developed and constructed on land acquired from Government agencies. The total consideration paid for acquisition of land was Rs.24.89 crore. Of which, Rs.14.89 crore was paid by SPT and balance Rs.10 crore was paid by the company. In the financial year 2007-08, the Government of India decided that land be owned by the company and therefore directed the company to pay to SPT the amount of Rs.14.89 crore together with interest of Rs.16.51 crore i.e., totaling Rs.31.40 crore. The company had shown the entire amount of Rs.24.89 crore in its books as ‘Advance for Land’ under the head ‘Loans & Advances’, as nature of title that will accrue to the company was not known at the time of making these payments.

Based on the subsequent development in this regard between the company, the Government and Government agencies involved in this issue, the company expects to get ‘Orders of Alienation of Title’ for the land from the respective vendors of the land in due course of time. The company has informed that the formal transfer of title of the land would be through issuance of ‘Orders of Alienation of Title’ by the transferor Government.

Query

On these facts the company has sought the opinion of EAC that (i) whether the company can capitalise the value of land at Rs.24.89 crore in the financial year 2010-11 with a suitable disclosure in the Notes to Accounts as ‘Pending receipt of formal Orders of Alienation of Title’, and (ii) whether the company can charge the interest of Rs.16.51 crore paid to SPT to its profit and loss account for the financial year 2010-11, as separate line item being extraordinary and non-recurring?

Opinion

After considering paragraphs 17 & 35 of Accounting Standard (AS) 1 ‘Disclosure of Accounting Policies’ and paragraphs 35, 49, 58 & 88 of ‘Framework for the Preparation and Presentation of Financial Statements’ the Committee is of the view that the company should capitalise the total amount of Rs.41.40 crore paid by both the company and SPT as ‘Land’ and not as ‘Advance for Land’ from the date when the company possess the beneficial interest in the land and not in the financial year 2010-11. However, the company should give suitable disclosures to convey to the users of financial statements that the execution of conveyance deeds in favour of the company is in progress. Further, the Government has made reference to a rate of interest as a means to compute final sale consideration of the land. Therefore, the amount so determined is in substance not ‘interest’. So the question of treating interest as revenue expenditure and disclosure of interest paid as an extraordinary item does not arise.

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Disciplinary case

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In the case of ICAI v. CA Ajay Kumar Gupta, the CIT Delhi filed a complaint before ICAI that the member had issued an audit report in Form No. 10CCAC certifying that the assessee had made exports and that it was eligible for deduction u/s.80HHC of Rs.18.32 lac. During the assessment proceedings, the claim for deduction u/s.80HHC was found to be false and the assessee admitted this fact. The assessee’s accounts showed that the sale proceeds for exports were not received during the year within the prescribed period.

 ICAI conducted the enquiry and found the member guilty of professional misconduct under clause (7) of Part I of Second Schedule of the C.A. Act. It recommended to the Delhi High Court that the name of the member be removed from the Register of Members for a period of 3 years.

The defence of the member before the High Court was that he was in practice for 21 years without a single incident of professional misconduct or negligence. He also argued that he could not put up his defence before ICAI properly because he had suffered paralytic attack and the assessee had taken away the file. He submitted that a lenient view may be taken in his case.

The High Court has held as under:

(i) The accountants’ profession occupies a place of pride amongst various professions of the world and makes observance of professional duties and propriety more imperative. When conduct of a member of the profession is contrary to honesty, or opposed to good morals, or is unethical, it is misconduct-warranting consequences indicated in the Statute. A breach of confidence is a stigma not only on the individual concerned, but is also likely to have effect on credibility of the profession as a whole.

(ii) The CA’s explanation that the assessee had taken away the file and that he suffered a paralytic stroke does not inspire any confidence because the relevant documents and information were supplied to him. The assessee accepted the fact that section 80HHC claim was not maintainable during the assessment proceedings. Once it is established that no payment was received against the export, the certificate issued by the CA was false. It is a bogey raised by the CA that he has verified all the documents and only then issued the certificate. On the quantum of punishment, on the one hand, the CA pleads his sickness, has an otherwise unblemished practice of 21 years and incident is old. On the other hand, the misconduct is of serious nature because submitting a false/ bogus certificate to the client to enable him to make false claim of deduction under the Incometax Act, is of serious offence. That the CA made an attempt to dupe the tax authorities and help the assessee to avoid the tax to that extent such a conduct has to be taken seriously.

He accordingly cannot be let off merely by giving him reprimand. Some penalty needs to be imposed so that it acts as deterrent and such professional misconduct is not committed. Weighing the circumstances, the ends of justice would be subserved by removing his name from the Register of Members for a period of six months. (itatonline — 9-3-2012).

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Service of notice u/S.143(2)

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Issue for consideration

Section 143
of the Income-tax Act, 1961 (‘the Act’) provides for assessment by an
Assessing Officer (‘AO’) of the tax payable by an assessee for a
particular assessment year. Section 143 is a purely procedural or
machinery section laying down the procedures for making assessment in
various contingencies. Broadly, section 143 prescribes two types of
assessment — ‘summary assessment’ u/s.143(1) and ‘scrutiny assessment’
u/s.143(2).

As the name suggests, under ‘summary assessment’,
the AO makes regular assessment without inquiry and makes adjustments,
if any, to the income, limited to any arithmetical error in the return
or an incorrect claim which is apparent from any information in the
return. Section 143(2) on the other hand provides for regular assessment
after detailed inquiry. Section 143(2)(ii) enables the AO to make a
regular assessment after detailed inquiry.

The proviso to
section 143(2)(ii) of the Act prescribes the service of notice on the
assessee within a particular period as a pre-requisite to enable the AO
to complete an assessment other than summary assessment. The notice
should specify a date and should call upon the assessee either to attend
before the officer on that date or produce or cause to be produced
before the officer, on that date, any evidence which the assessee may
rely upon in support of his return and it is then up to the assessee to
satisfy the officer by producing necessary material that the return is
correct and complete. At present, the proviso to section 143(2)(ii)
specifies six months from the end of the financial year in which the
return is furnished, as the time-limit within which notice needs to be
served on the assessee for valid assessment of his return of income.

Section
143(2)(ii) and the proviso thereto, read as under: “Section 143(2)
Where a return has been furnished u/s.139, or in response to a notice
u/ss.(1) of section 142, the Assessing Officer shall, —
(i) ……..

(ii)
notwithstanding anything contained in clause (i), if he considers it
necessary or expedient to ensure that the assessee has not understated
the income or has not computed excessive loss or has not underpaid the
tax in any manner, serve on the assessee a notice requiring him, on date
to be specified therein, either to attend his office or to produce, or
cause to be produced, any evidence on which the assessee may rely in
support of the return; Provided that no notice under clause (ii) shall
be served on the assessee after the expiry of six months from the end of
the financial year in which the return is furnished.”

The controversy
sought to be discussed here, revolves around the issue as to whether the
expression ‘served’ used in the proviso to section 143(2) (ii) of the
Act needs to be given a literal meaning of ‘actual physical receipt of
notice by the assessee’ or otherwise needs to be construed as giving a
meaning of ‘issue’ of notice by the AO.

The Punjab and Haryana High
Court had an occasion to deal with this issue, holding that the date of
receipt of notice by the assessee was not relevant to determine whether
the notice had been served within the prescribed time, and that the
expression ‘serve’ meant the date of ‘issue of notice’. In deciding the
issue, the Punjab and Haryana High Court specifically dissented with the
findings of other earlier judgments of the Punjab and Haryana High
Court on the subject.

V.R.A. Cotton Mills’ case

The issue came up
recently before the Punjab and Haryana High Court in the case of V.R.A.
Cotton Mills (P) Ltd. v. Union of India and Others, (CWP No. 18193 of
2011) dated 27 September 2011 (reported in www.itatonline.org). V.R.A.
Cotton Mills filed a writ petition challenging the notice dated 30
September 2010 issued by the AO u/s.143(2) for A.Y. 2009-10, on the
ground that the notice was not served within the prescribed time limit
and accordingly, claimed that the initiation of assessment proceedings
by the AO was bad in law. The Court opined that the expressions ‘serve’
and ‘issue’ were interchangeable, relying on the following legal
precedents to construe the expression ‘serve’ as the date of issue of
notice:

  •  Banarsi Debi and Anr. v. ITO, (53 ITR 100);
  • Collector of
    Central Excise v. M/s. M. M. Rubber & Co., (1991 AIR 2141 SC);
  • Bhagwandas Goverdhandas Kedia v. Girdharilal Parshottamdas & Co.,
    (AIR 1966 SC 543); and
  • State of Punjab v. Khemi Ram, (AIR 1970 SC
    214). 

The High Court dissented from its own earlier judgment in the case
of CIT v. AVI-OIL India (P.) Ltd., (323 ITR 242), on the ground that
the legal precedents referred to above were not placed before the Court
in the case of AVI-OIL India (supra) and therefore, the Court, in
ignorance of law, had given literal meaning to the word ‘served’ in that
case. Treating the decision of AVI-OIL India (supra) as per incuriam,
the Court in V.R.A. Cotton Mills case (supra) held that the purpose of
the statute would be better served, only if the expression ‘served’ was
considered as being issue of notice. The Court, in light of the
aforesaid findings, dismissed the writ petition of the assessee and
construed the expression ‘served’ as meaning ‘issue’ of notice.

AVI-OIL
India’s case

This issue had come up earlier before the Punjab and
Haryana High Court in the case of CIT v. AVI-OIL India (P.) Ltd.
(supra).

In that case, the assessee filed its return of income on 29
October 2001 for A.Y. 2001-02 and notice u/s.143(2) was issued on 29
October 2002. The notice server visited the factory premises of the
assesseecompany on 31 October 2002 and as per the report of the notice
server, the office was found closed. The AO then directed the notice
server to serve the notice by affixture. This mode of service of notice
by affixture was challenged in appeal and the Court upheld the decision
of the Tribunal that such service of notice was not in accordance with
section 282 of the Act and Rules as prescribed under the Code of Civil
Procedure, 1908.

In addition, another notice dated 30 October 2002, was
also issued by the AO and sent by Registered post on 30 October 2002.
This notice was served upon the assessee on 1 November 2002. Relying on
the proviso to section 143(2)(ii) of the Act, the assessee-company
submitted that the second notice was non est in law considering that it
was served on the assessee beyond the then prescribed time limit of 12
months from the end of the month in which the return was furnished.

On
perusal of section 143(2) of the Act, the Court held that a notice under
that section is not only to be issued but also has to be served upon
the assessee within the time-limit as provided under the proviso to
section 143(2)(ii) for a valid assessment. The Court further held that
belated service of notice cannot be considered as curable u/s.292B of
the Act, as this section deals with issue of notice and not service of
notice.

In light of these facts, the Court upheld the decision of the
Tribunal of service of notice on the assessee not being a valid service
of notice u/s.143(2).

Observations

Section 143 of the Act corresponds in material particulars to section 23(1) to section 23(3) of the Income-tax Act, 1922 (‘the 1922 Act’). Section 143 has received major overhauls due to changes in the assessment procedures vide Taxation Laws (Amendment) Act, 1970 and Direct Tax Laws (Amendment) Act, 1987. Over the years, amendments have been carried out in the provisions of section 143, to reach its present form. The condition of service of notice on the assessee and the time-limit thereof was introduced in section 143 by the Direct Tax Laws (Amendment) Act, 1987. Circular No. 549, dated 31 October 1989 issued by the Central Board of Direct Taxes (CBDT), 182 ITR 19 (St.), explains the scope of the amendment in the proviso to section 143(2) of the Act, as under:

“5.10 Commencement of proceedings for scrutiny and completion of scrutiny proceedings [s.s (2) and (3) of section 143] —………….

5.12 Since, under the provisions of s.s (1) of new section 143, an assessment is not to be made now, the provisions of s.s (2) and (3) have also been recast and is entirely different from the old provisions…….

5.13 A proviso to s.s (2) provides that a notice under the sub-section can be served on the assessee only during the financial year in which the return in furnished or within six months from the end of the month in which the return in furnished, whichever is later. This means that the Department must serve the said notice on the assessee within this period, if a case is picked up for scrutiny. It follows that if an assessee, after furnishing the return of income does not receive a notice u/s.143(2) from the Department within the aforesaid period, he can take it that the return filed by him has become final and no scrutiny proceedings are to be started in respect of that return.”

The Legislature, by inserting proviso to section 143(2) has intended that if no notice is received by the assessee within the prescribed time-limit, then the assessee can consider that the return filed by him has become final and that no scrutiny proceedings have been started. The notice can only be received on actual service, and therefore the intention seems to have been to place a time-limit for actual service, and not merely for issue, of the notice.

This position is further supported by Circular No. 621, dated 19 December 1991, 195 ITR 154 (St.), which clarifies as under:

“Extending the period of limitation for the service of notice u/ss.(2) of section 143 of the Income-tax Act — 49. Under the existing provisions of section 143 of the Income-tax Act relating to the assessment procedure, no notice u/ss.(2) thereof can be served on the assessee after the expiry of the financial year in which the return is furnished or the expiry of six months form the end of the month in which the return is furnished, whichever is later.

49.1 The aforesaid period of limitation for the service of notice u/ss.(2) of section 143 does not allow sufficient time to the Assessing Officers to select the returns for scrutiny before assessment. Therefore, s.s (2) has been amended to provide that the notice thereunder can be served on the assessee within twelve months from the end of the month in which the return in furnished.”

This interpretation of the proviso to section 143(2)(ii) of the Act is also supported by the enactment of sections 282 and 292BB. Section 282 prescribes the procedure and manner in which service of notice needs to be generally effected under the provisions of the Act and further, section 292BB of the Act vide a legal fiction holds certain notices as valid service of notice under the Act, based on satisfaction of certain conditions.

Further, section 34 of the 1922 Act corresponds to section 148, section 149 and section 150 of the Act (collectively referred to as ‘reassessment provisions’) which deals with procedure and conditions for reassessment of income of the assessee for a particular assessment year. On comparison of the language of section 143(2) of the Act with the reassessment provisions, one finds that the reassessment provisions have used both the expressions ‘issue of notice’ and ‘service of notice’, as against the provisions of section 143(2), which have consistently used only the expression ‘service of notice’.

The decision of the Supreme Court in the case of Banarsi Debi and Anr. v. ITO (supra) relied upon by the High Court in the V.R.A. Cotton Mills’ case (supra) was delivered in the context of section 34 of the 1922 Act. The Apex Court was considering an amendment in section 34 of the 1922 Act vide section 4 of the Amending Act of 1959, which sought to save the validity of notices issued beyond the prescribed period. Since section 34 used the term ‘served’ and not the term ‘issued’ while the amendment sought to cover notices ‘issued’ beyond the prescribed time, the Supreme Court, in that case, held as under:

(1)    The clear intention of the Legislature was to save the validity of notice as well as the assessment from an attack on the ground that the notice was served beyond the prescribed period;

(2)    That intention could be effectuated if a wider meaning was given to the expression ‘issued’, whose dictionary meaning took into account the entire process of sending the notice as well as the service thereof;

(3)    The word ‘issued’ in section 4 of the Amending Act had to be construed as interchangeable with the word ‘served’ or otherwise the amendment would become unworkable.

On perusal of these findings, one notices that the Apex Court confirmed that the expression ‘issue of notice’ had two meanings. The word ‘issue of notice’ was equated to as being ‘service of notice’ in a wider sense and of ‘notice sent’ in a narrower sense. In order to make the section workable and to further the intention of the Legislature of enacting section 4 of the Amending Act, 1959, the Court had to interpret the word ‘issue of notice’ as ‘service of notice’ in a contextual sense.

When the applicability of these findings were sought to be applied to corresponding reassessment provisions of the 1961 Act, the Supreme Court in the case of R. K. Upadhyaya v. Shanabhai P. Patel, (166 ITR 163), distinguished the decision of Banarsi Debi and Anr. v. ITO, (supra) holding that the scheme of the 1961 Act so far as notice for reassessment was concerned was quite different; and that a clear distinction had been made out between the ‘issue of notice’ and ‘service of notice’ under the 1961 Act.

The decision of Banarsi Debi and Anr. v. ITO (supra) was also distinguished by the High Courts in the following decisions on similar lines:

  •     Jai Hanuman Trading Co. Ltd. v. ITO, (110 ITR 36) (P&H) (FB);

  •     CIT v. Sheo Kumari Devi, (157 ITR 13) (Pat) (FB); and

  •     New India Bank Ltd. v. ITO, (136 ITR 679) (Del.)

Further, the following extracts of observations in the context of ‘issue of notice’ and ‘service of notice’ of the Full Bench of the Patna High Court in the case of Sheo Kumar Devi (supra), need to be noted:

“Once the maze of precedents is out of the way, one might as well examine the issue refreshingly on principle. To my mind, the fallacy that seems to have crept in this context is to suggest that (barring some very peculiar or compulsive textual compulsion) in plain ordinary English, the word ‘issue’ and the word ‘serve’ are synonyms or identical in terms. With great respect, it is not so. Their plain dictionary meaning runs directly contrary to any such assumption. No dictionary says that the issuance of an order is necessarily the service of order on a person as well, or in reverse, that the service of an order on a person is the mathematical equivalent to its issuance. In Chamber’s Twentieth Century Dictionary, the relevant meanings given to the word ‘issue’ are act of sending out, to put forth, to put into circulation, to publish, to give out for use. On the other hand, the word ‘serve’ in the same dictionary has been given the meaning, as a term of law, to deliver or present formally, or give effect to. Similarly in the New Illustrated Dictionary, the relevant meaning attributed to the word ‘issue’ is come out, be published, send forth, publish, put into circulation whilst the relevant meanings attributed to the word ‘serve’ are to supply a person with, make legal delivery of (writ, etc.), deliver writ, etc., to a person. Thus it would appear that the words ‘issue’ and ‘serve’ are distinct and separate and the indeed the gap between the two may be wide, both in point of time and place. An order or notice may be issued today, but may be served two years later. An order or notice may be issued at one place and may be served at a point 1,000 or more miles away. An order issued may not require any service at all……. shape of notification…….. Merely because a statute may provide that an order issued should also be properly served subsequently on the person directly affected would not, in my view, in any way render the words ‘issue’ and ‘serve’ as either synonymous or identical. A very peculiar situation in a statute and the compulsion of sound cannon of construc-tion may sometimes require the enlargement or extension of a word to save the legislation from being rendered nugatory. That, indeed, was the situation in Banarsi Debi case (supra).”

On similar lines, the other decisions as relied on by the Court in the case of V.R.A. Cotton Mills (supra) are not relevant in the context of the issue under consideration, since none of these decisions dealt with the expression ‘issue; or ‘service’ of notice.

On the contrary, the following decisions of the High Courts, delivered in the context of section 143(2), upholding the interpretation of service of notice not being synonymous with issue of notice, were not considered by the High Court in the case of V.R.A. Cotton Mills (supra):

  •     CIT v. Shanker Lal Ved Prakash, (300 ITR 243) (Del.) — in this case, the High Court even issued directions to AOs to dispatch notices at least a fortnight before the expiry of the date of limitation;

  •     CIT v. Yamu Industries Ltd., (306 ITR 309) (Del.) — the principles of section 282 were also applied in this case in interpreting the expression ‘service’ of notice;

  •     CIT v. Cebon India Ltd., (34 DTR 119) (P&H);

  •     CIT v. Pawan Gupta and Others, (318 ITR 322) (Del.) and Rajat Gupta v. CIT, (41 DTR 265) (Del.) — In context of block assessment;

  •     CIT v. Bhan Textiles (P) Ltd., (287 ITR 370) (Del.);

  •     CIT v. Vardhman Estate (P) Ltd., (287 ITR 368) (Del.); and

  •     CIT v. Dewan Kraft Systems (P) Ltd., (165 Taxman 139)(Del.).

One also needs to keep in mind that the requirement of service of notice within the specified period, and not issue of notice within that time, has been provided for to ensure that AOs do not show a notice as having been issued at an earlier date, though issued and dispatched much later, as that could have resulted in possible harassment of assessees.

In the light of the above, the better view is that the expression ‘served’ as referred to in section 143(2)(ii) of the Act and its proviso thereof, has to be given literal meaning of ‘actual receipt of notice by the assessee’ as against the meaning of issue of notice. The decision of the Punjab and Haryana High Court in the case of V.R.A. Cotton Mills case (supra), with due respect, therefore requires reconsideration.

Further, the principle of judicial propriety and judicial discipline demanded that the matter in the case of V.R.A. Cotton Mills Ltd. (supra) should have been referred to a Larger Bench of the Punjab and Haryana High Court, more particularly after the fact that the same High Court in the cases of Cebon India (supra) and AVI-OIL India Ltd. (supra) had decided otherwise in the context of section 143(2).

OffShore Transaction of Transfer of Share between Two NRs Resulting in Change in Control & Management of Indian Company —Withholding Tax Obligation and Other Implications

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Part-III
(Continued from last month)
VIH’s obligation to withhold tax — Section 195

3.14 As stated in Part II of this write-up, the Apex Court held that the capital gain in question is not chargeable to tax u/s.9(1)(i) of the Act and as such, question of deduction of TAS does not arise.

3.15 While deciding the issue relating to withholding tax obligation of VIH, the Court analysed the provisions of section 195 and the implications thereof and made certain observations such as: if, in law, the responsibility for payment is on a Non-Resident (NR), the fact that the payment was made under the instructions of NR to its agent/ nominee in India or its PE/Branch Office, will not absolve the Payer of his liability to deduct Tax At Source (TAS) u/s.195; the liability to deduct TAS is different from the assessment under the Act, etc. The Court then took a view that in the present case the transaction is of ‘outright sale’ between two NRs of a capital asset (share) situated outside India and the transaction was entered into on a principal-to-principal basis. Therefore, no liability to deduct TAS arose.

3.15.1 On the issue of withholding tax obligation of VIH, the Court effectively held that since the capital gain arising on transfer of share of CGP is not chargeable to tax in India, question of deduction of TAS u/s.195 does not arise. The Court also further stated that Tax Presence has to be viewed in the context of the transaction that is subjected to tax and not with reference to an entirely unrelated matter. The Tax Presence must be construed in the context, and in a manner that brings the NR assessee under the jurisdiction of the Indian Tax Authorities. The investment made by VG Companies in Bharati did not make all the entities of that group subject to the Indian Income Tax Act and the jurisdiction of the tax authority. The Court also noted that in the present case, the Revenue has failed to establish any connection with section 9(1)(i). Under these circumstances, the Court concluded that section 195 is not applicable.

3.15.2 Even the concurring judgment concludes that there was no obligation on the part of VIH to withhold tax. However, this judgment has gone a step further and considered the issue of applicability of section 195 extra-territorially. After considering the hosts of statutory compliance requirements for a tax deductor, apart from deducting tax and paying to the Government, other provisions relating deduction of TAS, such as 194A, 194C, 194J, etc. and the normal presumption of applicability of the provisions of Indian law to its own territory, this judgment took the view that section 195 is intended to cover only Resident Payers who have presence in India. The tax presence has to be considered in the context of the transaction that is subject to tax and not with reference to entirely unrelated matter. Finally, this judgment interpreted the expression ‘any person responsible for paying’ to mean only person resident in India and accordingly, took a view that section 195 “would apply only if payments made from a resident to another non-resident and not between two non-residents situated outside India”.

Applicability of section 163

3.16 In view of the fact that the transaction relates to transfer of capital asset situated outside India between two NR’s, both the judgments took a view that the VIH cannot be considered as representative assessee for HTIL u/s.163.

Mauritius Tax Treaty

3.17 Since the issue before the Court did not invoke the application of treaty, the majority judgment has not specifically dealt with the impact of Mauritius Tax Treaty in the case under consideration. However, the concurring judgment specifically dealt with the Mauritius Tax Treaty and in that judgment certain observations have also been made in that context after referring to the judgments of the Apex Court in the case of Azadi Bachao Andolan (supra).

 3.17.1 In this judgment, principles laid down in the case of Azadi Bachao Andolan (supra) governing the application of Mauritius Tax Treaty have been reiterated. Accordingly, it is held that in the absence of Limitation of Benefit (LOB) Clause and in the presence of the Circular No. 789, dated 13-4-2000 and the TRC, the Tax Department cannot deny the benefit of Mauritius Tax Treaty to Mauritius companies, on the ground that: principal company (foreign parent) is resident of a third country; or all the funds were received by the Mauritius company from a foreign parent; or the Mauritius subsidiary is controlled/managed by the principle company; or the Mauritius company had no assets or business other than holding the investments/shares in Indian company; or the foreign principal of the Mauritius company had played a dominant role in deciding the time and price of the disinvestment/sale/transfer; or the receipt of sale proceeds by the Mauritius company was ultimately remitted to the foreign principal, etc. Setting-up of a WOS in Mauritius for substantially long-term FDI in India through Mauritius, pursuant to Mauritius Tax Treaty, can never be considered to be set up for tax evasion.

3.17.2 According to this judgment, the LOB and look through provisions cannot be read into Mauritius Tax Treaty. However, the question may arise as to whether the TRC is so conclusive that the Tax Department cannot pierce the veil and look at the substance of the transaction. In this context, the judgment further observed as under (page 102):

 “. . . . . DTAA and Circular No. 789, dated 13-4-2000, in our view, would not preclude the Income-tax Department from denying the tax treaty benefits, if it is established, on facts, that the Mauritius company has been interposed as the owner of the shares in India, at the time of disposal of the shares to a third party, solely with a view to avoid tax without any commercial substance. Tax Department, in such a situation, notwithstanding the fact that the Mauritian company is required to be treated as the beneficial owner of the shares under Circular No. 789 and the Treaty is entitled to look at the entire transaction of sale as a whole and if it is established that the Mauritian company has been interposed as a device, it is open to the Tax Department to discard the device and take into consideration the real transaction between the parties, and the transaction may be subjected to tax. In other words, TRC does not prevent enquiry into a tax fraud, for example, where an OCB is used by an Indian resident for round-tripping or any other illegal activities, nothing prevents the Revenue from looking into special agreements, contracts or arrangements made or effected by Indian resident or the role of the OCB in the entire transaction.”

3.17.3 Referring to the issue of round tripping, based on the reports which are afloat that millions of rupees go out of the country only to be returned as FDI or FII, it is stated that round tripping can take many formats like under-invoicing and over-invoicing of exports and imports. It also involves getting the money out of India, say, Mauritius, and then bring back to India by way of FDI or FII in Indian company. With the idea of tax evasion, one can also incorporate a company off-shore, say, in a Tax Haven, and then create WOS in Mauritius and after obtaining a TRC may invest in India. Large amounts, therefore, can be routed back to India using TRC as a defence. If it is established that such an investment is black money or capital that is hidden, it is nothing but circular movement of capital known as round tripping; then TRC can be ignored, since the transaction is fraudulent and against the national interest.

3.17.4 Accordingly, in view of the above, the concurring judgment takes further view that though the TRC can be accepted as a conclusive evidence for accepting status of residence as well as beneficial ownership for applying the Mauritius Tax Treaty, it can be ignored if the treaty is abused for the fraudulent purpose of evasion of tax.

Conclusion

In view of the above judgment of the Apex Court the following principles governing tax implications of an offshore transaction of transfer of share between two NRs may emerge or get re-iterated:

4.    Section 9(1)(i) of the Act is not a ‘look through’ provision to include the transfer of shares of a foreign company holding shares in an Indian company by treating such transfer as equivalent to transfer of shares of an Indian company on the premise that section 9(1)(i) covers direct and indirect transfer of capital asset. Accordingly, section 9(1)(i) does not cover indirect transfer of capital asset situated in India.

4.1 Section 195(1) is attracted only if the sum in question is chargeable to tax. According to the concurring judgment, in case of a NR Payer, the obligation of withholding tax u/s.195(1) does not arise if NR Payer does not have any tax presence whatsoever in India. For this, support can also be drawn from the observations made in the majority judgment. However, there is no clarity as to the meaning of tax presence in India. It seems that if the entity has tax presence in India that should suffice. If the entity has permanent establishment or branch office, etc. in India, it is desirable to treat the entity as having tax presence in India.

4.1.1 In the concurring judgment, a view is taken that section 195(1) applies only in cases where Resident makes a payment to NR and the same is not applicable to payments between two NRs outside India. This view may have a great persuasive value for the lower authorities/courts. However, it seems advisable not to take recourse to this view to avoid deduction of TAS. This could, of course, be a good defence in case of a default.

4.2 In view of the fact that the transfer in question in the above case was of a capital asset situated outside India, the NR Payer (VIH) was also not to be treated as representative assessee u/s. 163 of the Act.

4.3 There is no conflict between the judgments of the Apex Court in the case of McDowell & Company Ltd. (supra) and the judgment in the case of Azadi Bachao Andolan (supra). In this context, the Court has further held that to decide the issue relating to allegation of tax avoidance/evasion, it is the task of the Court to ascertain the legal nature of the transaction and while doing so, it has to look at the entire transaction as a whole and not to adopt dissecting approach.

4.3.1 In the above context, referring to the majority judgment in the McDowell’s case, the Court reiterated the principle that tax planning may be legitimate provided it is within the frame work of law and it should not be a colourable device.

4.4 Carrying on business by a large business group through subsidiaries under the control of a Holding Company (HC) is a normal method of carrying on business. Setting up of such subsidiaries, even in low-tax jurisdiction, by itself should not be regarded as a device.

4.4.1 Such holding structures give rise to tax issues such as double taxation, tax deferrals, tax avoidance, implication of GAAR, etc. In the absence of an appropriate provision in the statute/treaty regarding the circumstances in which judicial GAAR would apply, when it comes to taxation of a holding structure, at the threshold, the burden is on the Revenue to establish the abuse, in the sense of tax avoidance in the creation and/or use of such structure. For this, the Revenue must apply look at test and the Revenue cannot start with the question as to whether the impugned transaction is a tax deferment/ savings device but it should apply the look at test to ascertain its legal nature.

4.4.2 Holding company, as a shareholder, will have influence on its subsidiaries and in that sense, will be in a persuasive position. However, that cannot reduce the subsidiary or its directors’ puppets. The power of persuasion cannot be construed as a right in legal sense. The decisive criteria is whether the parent company’s management has such steering interference with the subsidiaries core activities that subsidiary can no longer be regarded to perform its activities on the authority of its own directors. The concept of ‘de facto’ control, in genuine cases, conveys a state of being in control without any legal right to such a state.

4.4.3 A case of FDI should be seen in a holistic manner and while doing so, various factors enumerated by the Court should be taken into account. Cases of participative investment should not be construed as tax avoidant/device.

4.5 In transactions of divestment of investment of this type, it becomes necessary for the parties to enter into SPA for various commercial reasons and for recording various terms and to give smooth effect to the transaction.

4.6 When the structure is held to be a device/ tax avoidant on the basis of various tests referred to in para 3.5 of Part II of this write-up, the Revenue would be entitled to ignore this structure and tax the actual entity and to re-characterise the transaction appropriately for that purpose.

4.7 For the purpose of entering into any such transaction efficiently, if more than one routes are available, then it is open to the parties to opt for any one of those routes available to them.

4.8 Under such arrangement, call options to acquire shares of a company cannot be equated with interest in share capital of that company. The legal understanding as to acquisition of shares in Indian company for the purpose of compliance with FDI norms and the commercial understanding of the parties in that respect with regard to the transactions could be different.

4.9 In case of transactions involving the transfer of shares lock, stock and barrel for a lump-sum consideration, the same cannot be broken up into separate individual components or rights, such as right to vote, management rights, controlling rights, etc.

The above principles are, now, subject to the follow-ing proposals contained in the Finance Bill, 2012 and accordingly, the same will have to be read with the final amendments which are expected to be carried out by the Finance Act, 2012.

5.    In the Finance Bill, 2012, stated clarificatory amendments are proposed in various sections such as: Section 2(14) (to clarify that property includes any rights in or in relation to Indian company, including rights of management, control, etc.), section 2(47) (extending the scope of the definition of the term ‘transfer’ to include disposing of or parting with an asset or any interest therein, or creating an interest in any asset in any manner whatsoever, directly or indirectly, etc. even if, transfer of such rights has been characterised as being effected or dependent upon or flowing from transfer of shares of a foreign company) and section 9(1) to effectively provide that the section is a ‘look through’ provision and also to provide that an asset or capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be situated in India if it derives, directly or indirectly, its value substantially from the assets located in India. These amendments are proposed with retrospective effect from 1st April, 1962. These amendments are intended to effectively nullify all the major effects (favourable to the taxpayers) of the judgment of the Apex Court in the above case. Some of these proposals, if enacted in the present form, will also have far-reaching other implications and the same will not necessarily confine to only offshore transactions.

Considering the nature of above proposed amendments and their far-reaching unreasonable consequences and effects, it is difficult to digest that these amendments are clarificatory in nature as claimed by the Government. If the amendments are carried out in the present form, it is likely that the validity of the retrospective effect thereof may come up for questioning. In the past, the Parliament’s power to make retrospective law has been upheld. However, the manner in which these amendments are proposed is matter of serious concern and will have a far-reaching long-term implications in Indian tax jurisprudence. Therefore, we will have to wait and watch as to how this complex constitutional issue gets further developed. But one thing is certain that such an approach of the Government is highly unfair and also raises a question about the respect for rule of law in the tax matters.

5.1 Similarly retrospective amendment is also proposed in section 195 to effectively provide that all persons, including all NRs, will be under an obligation to comply with the requirements of section 195(1). For this purpose, whether the NR has a residence or place of business or business connection in India or any other presence in any manner whatsoever in India or not will not be relevant. Even this amendment, is proposed with retrospective effect from 1st April 1962. One may wonder whether any retrospective amendment of this kind can be made in the provisions dealing with TDS creating an obligation on the ‘person’ to deduct TAS with retrospective effect. The validity of the retrospective provision of this kind could be open to question. Even the validity of prospective operation of the applicability of this provision to NR having no presence whatsoever in India may come up for questioning and will have to be tested on the basis of the principles laid down by the Constitution Bench of the Apex Court in the case of GVK Ind. Ltd. (332 ITR 130). This judgment was analysed by us in this column in the June and July, 2011 issues of this Journal.

5.2 The Finance Bill, 2012 also proposes to introduce set of provisions dealing with the General Anti- Avoidance Rules (GAAR) w.e.f. 1-4-2013. These provisions, inter alia, specifically provide that the period for which the arrangement exists, the fact of payment of taxes, directly or indirectly, under the arrangement in question and the fact that exit route is provided by the arrangement shall not be taken into account for determining whether an arrangement lacks commercial substance or not. It may be noted that this provision was not made in the GAAR proposed in the Direct Tax Code Bill, 2010 (DTC).

The above-referred tests are part of the tests (referred to in para 3.5 of Part II of this write-up) considered by the Apex Court for determining the genuineness of the arrangement of the Hutchison Group in Vodafone’s case to conclude that the arrangement was having commercial substance.

5.3 The introduction of the GAAR provisions will also have a practical impact on the effect and implications of Mauritius Tax Treaty (and, of course, also other such Tax Treaties) and therefore, many of the observations made in the concurring judgment in the above case in that respect will have to be read with the GAAR provisions. It may also be noted that the applicability of the proposed GAAR provisions is not restricted only to offshore transactions, but the same will also apply to all other transactions including domestic transactions. Considering the wide discretionary powers sought to be granted to the assessing authorities, these provisions may also create enormous amount of unintended hardships at the implementation level.

The unrestricted and highly discretionary unguided powers sought to be given to the Government under the provisions relating to GAAR has raised quite a few genuine issues of far-reaching implications and such excess delegation of effectively unguided powers may come up for judicial scrutiny if, such provisions are enacted in the present form.

Vodafone – Part III

5.4 In the context of the manner in which retrospective amendments are proposed in the Finance Bill, 2012 the following observations of the learned authors of the book ‘Nani Palkhivala, The Courtroom Genius’ are worth mentioning:

“……….There is complete absence of any fair-play in the administration of tax laws. If a decision of the court or the tribunal is in favour of the assessee, the relevant statutory provision is promptly amended retrospectively with very little regard for the enormous hardship that it causes to the assessee. One can only conclude with the last passage of the last preface written by Palkhivala:

‘Every Government has a right to levy taxes. But no Government has the right, in the process of extracting tax, to cause misery and harassment to the taxpayer and the gnawing feeling that he is made the victim of the palpable injustice’.”

(Concluded)

Is it fair to make amendments that may cause unintended hardship (Sub-clauses (e) and (f) of Section 80IB vis-à-vis sub-clause (c)

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Introduction:

Section 80IB(10) provides for 100% deduction of profits and gains from housing projects for certain period if it satisfies various conditions prescribed in the section. Section 80IB(10)(c) prescribes the condition restricting the size of residential unit to maximum built-up area of one thousand sq.ft if the residential unit is situated within the cities of Delhi or Mumbai and one thousand five hundred sq.ft at any other place.

In case of housing project having houses beyond this size, the developers used to circumvent the provisions by showing one house as two adjacent houses on paper, sell these premises to one person or persons belonging to one family and then combine it.

To avoid any such misuse, sub-clauses (e) and (f) were inserted by Finance Act, 2009 w.e.f. 1-4-2010. According to sub-clause (e), deduction shall be denied to the undertaking if more than one residential unit in the housing project is allotted to an individual.

Further, as per sub-clause (f), such deduction shall be denied to the undertaking, if one residential unit is allotted to an individual and at the same time the other unit is allotted to

(i) him or the spouse or his/her minor child, or

(ii) HUF of which he is a karta. Thus insertion of clause (e) and (f) definitely provided a check in the case of undertakings where the size of units was more than 1000 or 1500 sq.ft as the case may be. However, it created a hurdle even where the combined size of units was less than the prescribed area. In other words, if two units of 500 sq.ft each are allotted to husband and wife, respectively, then in that case the undertaking may lose the deduction even though the cumulative area does not exceed the prescribed area. This was certainly not the intention of the Legislature.

The unfairness:
How far is it logical to deny the deduction to an undertaking just because the condition in sub-clause (e) or (f) is not satisfied even though the prescribed condition of total built-up area to a family of an individual is satisfied, or not violated.

In fairness sub-clause (e) or (f) should have been drafted in such a way that the area allotted to a family of an individual collectively shall not exceed the prescribed area. In fact, that was the intention of the Legislature in inserting clauses (e) and (f).

In the situation where the question of denial of deduction arises where the areas of some of flats are exceeding the prescribed area or the flats are allotted as stated above, the solace is available to an undertaking in view of the decisions given below in which it was held that in such a situation, deduction may be denied only in respect of those units where the area exceeds the prescribed limit or the condition as above is not satisfied.

The said decisions are as follows:

(1) Sanghavi & Doshi Enterprise v. ITO, (Third member ITAT Chennai) (2011) 131 ITD 151/12 Taxmann. com 240

(2) CIT v. Bengal Ambuja Housing Development Ltd., (ITA 458 of 2006 dated 5-1-2007)

Conclusion:
In short, the purpose of introducing sub-clauses (e) and (f) was to curb the practice of claiming tax benefits by circumventing the limits of area. However, in the process, there has been an overdoing of the remedy, due to which even the genuine cases involving the total area within prescribed limits are also adversely affected. It is desirable that a suitable proviso be inserted or a clarification issued to the effect that the deduction or the tax benefits would not be denied so long as the total area is within the limits. In fact section 80-IB was introduced to encourage housing projects and in view of this, one may even feel that clauses (e) and (f) may prove to be harsh on the assessees.

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Censorship by Didi

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The Trinamool Congress (TMC) ended the 34-year-old rule of the Left Parties in West Bengal and came to power with a thumping majority. Chairperson of the ruling party Ms. Mamata Banerjee – Didi – is known for her simplicity and integrity. She is a poet and painter, and holds Rabindranath Tagore in great esteem. Her views on economic policies are controversial. One may argue and oppose the same, but she’s entitled to her beliefs in a democratic setup that India follows. As Voltaire said, “I may not agree with what you say, but I will defend to the death your right to say it.”

Bengal is considered to be the State of intellectuals. Kolkata has a rich tradition of culture, literature and art. Literature and art thrive when there is freedom – freedom to think and freedom to express. But, under the rule of the present government, it is this freedom that is under attack. It is against the spirit of democracy and the Constitution of India.

Recently, the West Bengal Government headed by Mamata Banerjee issued an order to various government and government-aided libraries, instructing them about the newspapers that could be subscribed to by the libraries. The order banned these libraries from subscribing to all newspapers, except a few which are reportedly controlled by supporters of the ruling party.

The role of media, including newspapers, in dissemination of information is vital. The press plays an important role in the formation of opinions. It is considered the fourth pillar of democracy. Ideally, newspapers should not have any bias. But one cannot ban newspapers having leanings towards certain political parties. It is only when various views, opinions and perspectives are freely expressed that the public can form its own opinion. Every individual has the right to express himself as well as to decide what he wants to read. The ruling government cannot decide what the people should read or think. But whenever there is concentration of power in any government or authority or individual, there is always a danger of attempt being made to curb the freedom of expression.

In 1986, the Queen’s Bench Division (R. vs. Ealing Borough Council, ex. p. Times Newspapers Ltd. (1987) 85 L.G.R. 316) quashed decisions by certain UK councils banning publications of Times Newspapers and News Group Newspapers from public libraries. The court held that the order banning the newspapers was abuse of power under the Public Libraries and Museums Act, 1964 of the UK. The principle applies equally in India. Any edict or order of the government, which curbs this freedom, needs to be opposed and struck down. It is patently against the right to information and freedom of expression.

A few days ago, a professor was arrested for circulating on the Internet a cartoon on TMC supremo Mamata Banerjee. The arrest was defended and justified by the authorities. Political opponents and media were blamed, alleging attempts to malign Mamata Banerjee. There were protests in various quarters opposing the arrest. The professor himself was physically attacked by supporters of TMC. The incident showed how the government is intolerant towards any expression or views, which are not in sync with the government of the day.

Partho Sarothi Ray, an eminent scientist, was arrested recently for allegedly participating in a rally, though he was not present at the venue. His offence – supporting the demand for compensation for the people evicted from slums on the eastern fringes of Kolkata. He had to languish in jail for 10 days before he was freed on bail. Both arrests created a huge public outcry amongst academicians and social activists. Partho Ray stated that his arrest was a clear infringement of the fundamental rights of freedom of expression and freedom to assemble peacefully.

TMC leaders have urged their party workers not to socialise with their political opponents, not even to share a cup of tea, visit their homes or marry a family member of their political opponents. In short, the cadre is directed to boycott political opponents socially.

This trend in West Bengal is bizarre and surely worrying. The state is trying to control what a person should read, what one should think, what one should do in his or her social life. Anybody with a different view and thought is considered an enemy. TMC in its manifesto has stated that its mission is to reconstruct Bengal with a positive attitude, creativity, empathy and always with a human face. The manifesto promised to end Cadre Raj and the party-centric model of governance.

But what we see today is a completely different approach. The attack on freedom of expression is possibly the result of arrogance that comes with power combined with a sense of insecurity.

All over the world, in democratic states, freedom of thought, freedom of expression and right to information are considered sacrosanct. In a civilised democratic society, it is important that people have freedom to think and express without fear. One may or may not accept the other’s point of view, but for a healthy democracy, it is necessary that each one is entitled to his point of view. The West Bengal government, under the leadership of Mamata Banerjee, is attacking just that. This attack, this censorship should end.

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USA — Disciplinary proceedings against Auditors to be made public.

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A bipartisan pair of influential senators introduced legislation that would make disciplinary hearings against auditing firms public.

The bill would change a provision of the Sarbanes- Oxley Act that requires the Public Company Accounting Oversight Board to keep disciplinary proceedings against auditing firms confidential. The proposed legislation, sponsored by Senators Jack Reed and Chuck Grassley is called the PCAOB Enforcement Transparency Act of 2011.

The current chairman of the PCAOB, also has called for making the disciplinary proceedings public, arguing that “secrecy has a variety of unfortunate consequences” and this “state of affairs is not good for investors, for the auditing profession, or for the public at large.”

The PCAOB is responsible for ensuring that auditors of public companies meet the highest standards of quality, independence, and ethics,” Reed said in a statement. “Reliable financial reporting is vital to the health of our economy and we must take the legislative steps necessary to enhance transparency in the PCAOB’s enforcement process. Currently, Congress, investors, and others are being denied critical information about an auditor’s disciplinary process. Investors and companies alike should be aware when the auditors and accountants they rely on have been charged or sanctioned for violating professional auditing standards.”

Lack of transparency surrounding disciplinary proceedings under current law can provide unscrupulous firms with an incentive to litigate cases in order to continue to shield conduct from the public.

One accounting firm that was the subject of a disciplinary proceeding issued no fewer than 29 additional audit reports on public companies during the course of the proceedings, they noted. Because of the confidential nature of the proceedings, those public companies and their investors were completely unaware there was a potential auditing problem with this accounting firm. Before the firm was expelled from public company auditing, it issued those audit reports, knowing all the while that it was subject to disciplinary proceedings, but investors were denied this information.

“Sunshine is the best disinfectant,” Grassley said. “This legislation levels the playing field between auditors reviewed by the SEC and auditors reviewed by the PCAOB. Currently, PCAOB proceedings are secret while SEC proceedings are not. The secrecy provides incentives to bad actors to extend the proceedings as long as possible, so they can continue to do business without notice to businesses about potential problems with a particular auditor. This bill ends the secrecy and brings the kind of transparency that adds accountability to agency proceedings.”

They argued that the PCAOB’s closed proceedings run counter to the public enforcement proceedings of other regulators. Not only the SEC, but also the Labour Department, the Federal Deposit Insurance Corporation, the U.S. Commodity Futures Trading Commission, and other government agencies use public proceedings, as does the self-regulating Financial Industry Regulatory Authority. Nearly all administrative proceedings brought by the SEC against public companies, brokers, dealers, investment advisers and others are open, public proceedings.

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Supreme Court : Lending firms must follow norms before ‘re-possession’.

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The Supreme Court last week cautioned hire purchase firms not to take goods forcibly but follow the norms set by the Reserve Bank of India. In the judgment, Citicorp Maruti Finance Ltd. v. S. Vijayalaxmi, it emphasised that “in case of mortgaged goods subject to hire purchase agreements, the recovery process has to be in accordance with law.” The Court noted that the recovery process referred to in the agreements also contemplated such recovery to be effected in due process of law and not by use of force. “Till such time as the ownership is not transferred to the purchaser, the hirer normally continues to be the owner of the goods, but that does not entitle him on the strength of the agreement to take back possession of the vehicle by use of force. The guidelines which had been laid down by the Reserve Bank of India support and make a virtue of such conduct. If any action is taken for recovery in violation of such guidelines or the principles as laid down by this Court, such an action cannot but be struck down.”
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It’s disruption, not dissent: Deepak Parekh

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HDFC chairman Deepak Parekh and MP Ashok Ganguly issued a statement urging corporate India to throw its weight behind the government on the retail FDI issue. “We felt very strongly about this because we had raised the issue of policy inaction and now that they are trying to do something, there is so much opposition. What is happening today is disruption, not dissent,” said Parekh. He added that industry was unanimously in support of FDI in retail and so were Indian farmers.

“Nowhere in the world is there a four-times difference between what the farmer gets and what the retailer pays,” he said. According to the two leaders, opposition to FDI is coming from vested interests to the detriment of the majority. It points out that indigenous retail outlets — the kirana stores — suffer more because of political bandhs than because of competition. “FDI in retail has not been a sudden decision taken by the government. On the contrary, the idea has been toyed with for over 14 years. Detailed discussions with various stakeholders have been held, experts consulted and studies commissioned based on international experiences of organised retailing.”

“What is intriguing and bewildering is that the false alarm of FDI is continuing to be used after so many years, as a bogey in modern times against foreigners and foreign investment,” it said. The statement comes at a time when filibustering over the bill to allow FDI in retail has derailed the Parliament functioning. “There are 32 bills in this winter session of the Parliament for consideration and passing, many of which are of far greater consequence and importance for the country than FDI in retail. The protests on FDI in retail are misconceived and unfortunate, but hope to salvage this situation should not be lost,” the statement said.

The authors have pointed out that earlier this year many concerned with the country’s economic prospects had asked the government to stem the slowdown, increase investments and bring in new reforms. “No one objected till then. But when the government began to act, what have we, but chaos and adjournments over a decision to allow foreign direct investment in retail,” the statement said.

The group of 14 which had come together on issues relating to the economy included Wipro’s Azim Premji, ICICI’s N. Vaghul, industrialists Keshub Mahindra, Jamshyd Godrej and Anu Aga, former RBI governors M. Narasimham and Bimal Jalan (now a Rajya Sabha member), Justices B. N. Srikrishna and Sam Variava, architect of key Sebi and RBI regulations Yezdi Malegam, member of the PM’s Economic Advisory Council A. Vaidyanathan, and banker-turned-social worker Nachiket Mor.

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Reebok working on $ 1 shoe

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After low-cost airlines and vehicles, it’s now time for low-cost footwear. Sportswear maker Reebok is working on a project that could lead to the introduction of a shoe that is priced at $1, or around Rs.50. Reebok International, which is in the process of rolling out the project, said it will soon test the technical feasibility of ‘producing a durable, functional and affordable shoe’ before launching it in India.

In 2008, Herbert Hainer, CEO Adidas Group, which consists of the brand Reebok, had begun discussions with Grameen Bank founder Muhammad Yunus. This was followed by the development, marketing and distribution of low-cost footwear in Bangladesh in the form of a social business, which the Adidas Group expressed interest in.

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8 Indians in world’s top thinkers list

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India’s intellectual potential just got a branding shot in the arm when eight Indians made it to Thinkers 50 — a bi-annual global ranking of 50 most influential thinkers.

At number three is Vijay Govindarajan, professor of international business at Tuck School of Business at Dartmouth College in New Hampshire in the US, while Nitin Nohria, dean of Harvard Business School came in at number 13 on the list, compiled by consultancy Crainer Dearlove promoted by Stuart Crainer and Des Dearlove.

Govindarajan, author of The Other Side of Innovation that focusses on how to turn an innovative idea into a successful commercial business, moved up from 24th position in the 2009 list and 23rd position in the 2007 list.

In 2008, on a sabbatical from his university, he joined General Electric (GE) for 24 months as its first Professor in Residence and Chief Innovation Consultant. Govindarajan also created ripples in the world of innovation when he posed a global challenge of how to build a $300 house.

“The Thinkers 50 ranking has kept pace with ideas that are shaping the daily agenda of global businesses and managers, and the ranking is a guide to which thinkers are in, and who have been consigned to business history,” According to the Thinkers 50 website, to arrive at the list of the final 50, panelists rely on criteria such as “originality of ideas, practicality of ideas, presentation style, written communication, loyalty of followers, business sense, international outlook, rigour of research, impact of ideas and the elusive guru factor.”

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New Quit India Movement? — India’s billionaires talk of getting out.

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The government may have saved its political skin by putting FDI in retail on hold, but it has added to the sense of gloom that’s engulfing India Inc. For the past several weeks, there’s been a depressing drumbeat of stories of Indian businessmen choosing the relatively low growth, high-stability option of investing abroad over the uncertainty of launching new ventures at home.

Says the India-head of a fabled global investment bank, “For me, there’s no slowdown. My plate’s full with mandates from Indian companies looking at acquisitions abroad”.

But it’s not just about the flight of investments anymore. Several Indian billionaires say they are frustrated enough to want to shift base overseas and run their increasingly transnational business empires from cities like London and Singapore. “I’m sick and tired of what’s happening here. I don’t want to live in this country anymore,” said one of India’s biggest barons.

The reasons are mainly twofold: the policy paralysis brought on by a politically weak and scam-struck government, compounded by obstructionist competitive politics; and the climate of fear that has spread because of the raids on and arrests of businessmen. They have a third, more specific grouse (not that it’s new): the time and hassle it takes to get environmental clearance and acquire land.

Bulge-bracket businessmen — from industries as diverse as telecom and textiles, aviation and steel, real estate and minerals — are talking ‘Quit India’, but obviously not in public. They may be exaggerating their angst, but for the first time since the dawn of liberalisation 20 years ago, the India story seems to be dimming compared to the welcoming lights of foreign shores. As RPG Enterprises chairman Harsh Goenka quips, “We are looking for the red carpet, not for red tape.”

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Seva: Humanitarian service is central theme of sikh philosophy

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“The best way to find yourself is to lose yourself in service of others.” — Mahatma Gandhi
The concept of community service or Seva is central to the spirit of the Sikh faith. God is all pervasive, and what better way to realise Him than through service? He is no separate from His creation; so serving Him by serving what He has created is the ultimate duty of every Sikh. The Sikh often prays as did Guru Arjun Dev: ‘As Your servant, I beg for Seva of your people, which is available through good fortune alone.’

Seva or service occupies the central place in Sikhism where no worship is conceivable without Seva. The spirit of service not only creates in one’s heart, love and affection for others, but also helps the person overcome his ego, the main obstacle in the path of spiritual realisation. Service is suggested as a practical way of life for a Sikh, and he is expected, among other things, to meditate on the Name of God and perform service for the welfare of humanity.

Service could be any kind — serving the poor and needy; giving charity, providing food or shelter, helping a person in distress, saving someone in danger or reading the scriptures for his solace or providing services for the common good. These acts are considered far superior to countless sacrificial fires and performance of ceremonies or mere meditation and worldly knowledge, says Bhai Gurudas.

Seva can be rendered in any form through labour, feelings or material means. The first is considered the highest of all and is prescribed for every Sikh.

Dignity of labour is realised the foremost in Guru Ka Langar, the community kitchen, and in serving the Sangat, the holy assembly. Langar is the unique way of combining worship with Seva. One can contribute in cutting of vegetables, cooking of food, distribution of water in

Langar, washing of utensils, cleaning of the premises, taking care of footwear as well as in collection of rations. Langar, therefore, becomes a place of training in voluntary service and helps develop the notion of equality, hospitality and love for human beings. It makes you humble by helping curb your ego. Humility is a special virtue recommended to the Sikhs. It can be acquired through Seva. The Sikh prayer, Ardas, ends with a supplication for the welfare of all, ‘Sarbat da Bhala’. The attitude of compassion should be combined with a practical way of serving God through His creation.

Seva through material means should be a silent and non-personal contribution. It is meant for the welfare of the community and the whole humanity, and should be done in a way as to help dissolve one’s ego. Even in serving others, one serves not the person concerned, but God Himself through him. Even as one feeds the hungry, it has been the customary Sikh practice to pray: “The grain, O God, is your own gift. Only the Seva is mine, which please be gracious enough to accept.”

Service should be rendered without any expectation of reward. Desire for any reward in return turns it into a bargain, and it ceases to be a service. ‘He who serves without reward, he alone attains God’. True Seva, as pro-claimed by the Gurus, must be performed in humility, with purity of intention and without any desire for reward. Service is its own reward that leads to liberation. ‘We get eternal bliss through service of God and merge in the peace of poise,’ says the Guru Granth Sahib.

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A.P. (DIR Series) Circular No. 58, dated 15-12-2011 — Risk management and interbank dealings.

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This Circular has, with immediate effect, made the following changes:

(1) Under contracted exposures — Forward contracts booked by residents irrespective of the type and tenor of the underlying exposure, once cancelled, cannot be rebooked.

(2) Under probable exposure based performance:

(a) For importers availing of the above past performance facility, the facility stands reduced to 25% of the limit as computed above, i.e., 25% of the average of the previous three financial years’ (April to March) actual import/ export turnover or the previous year’s actual import/export turnover, whichever is higher. In case of importers who have already utilised in excess of the revised/reduced limit, no further bookings may be allowed under this facility.

(b) All forward contracts booked under this facility by both exporters and importers hence forth will be on fully deliverable basis. In case of cancellations, exchange gain, if any, must not be passed on to the customer.

(3) All cash/tom/spot transactions can be undertaken for actual remittances/delivery only and cannot be cancelled/cash-settled.

(4) Hedging by FII — Forward contracts booked by the FII, once cancelled, cannot be rebooked. The forward contracts may, however, be rolled over on or before maturity.

(5) Treasury functions of authorised dealers

(a) Net Overnight Open Position Limit (NOOPL) to be reduced across the board.

(b) Intra-day open position/daylight limit must not exceed the existing NOOPL approved by RBI.

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A.P. (DIR Series) Circular No. 57, dated 13-12-2011 — Foreign Exchange Management Act, 1999 (FEMA) — Foreign Exchange (Compounding Proceedings) Rules, 2000 (the Rules) — Compounding of Contraventions under FEMA, 1999.

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Presently, all applications for compounding are received and processed by the Compounding Authority at RBI Central Office at Mumbai.

This Circular has decentralised compounding contraventions in respect of the following at its Regional Office:

(i) Delay in reporting of inward remittance,

(ii) Delay in filing of form FC-GPR after allotment of shares, and

(iii) Delay in issue of shares beyond 180 days.

All applications must be made to the Regional Offices at:

(i) Bhopal, Bhubaneshwar, Chandigarh, Guwahati, Jaipur, Jammu, Kanpur, Kochi, Patna and Panaji for amount of contravention below Rupees one crore (Rs.10,000,000).

(ii) Ahmedabad, Bangalore, Chennai, Hyderabad, Kolkata, Mumbai and New Delhi for amount of contravention without any limit.

All applications other than those dealt with by the Regional Offices will continue to be dealt with by the Compounding Authority at RBI Central Office at Mumbai.

Also, annexed to this Circular are formats required to be submitted along with the compounding application in respect of the following contraventions :

(1) Details to be furnished along with application for compounding of contravention relating to Foreign Direct Investment in India.

(2) Details to be furnished along with application for compounding of contravention relating to External Commercial Borrowing.

(3) Details to be furnished along with application for compounding of contravention relating to overseas investment.

(4) Details to be furnished along with application for compounding of contravention relating to branch/liaison office in India.

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A.P. (DIR Series) Circular No. 56, dated 9-12-2011 — Foreign investment in pharmaceuticals sector — Amendment to the Foreign Direct Investment Scheme.

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This Circular, based on Press Note 3 (2011 Series), dated November 8, 2011, has amended FDI policy for pharmaceuticals sector as under:

(i) FDI, up to 100%, under the Automatic Route, would continue to be permitted for greenfield investments in the pharmaceuticals sector.

(ii) FDI, up to 100%, would be permitted for brownfield investment (i.e., investments in existing companies), in the pharmaceutical sector, under the Approval Route.

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A.P. (DIR Series) Circular No. 55, dated 9-12-2011 — Foreign Direct Investment (FDI) in India — Issue of equity shares under the FDI scheme allowed under the Government route.

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Presently, companies are permitted to issue equity shares/preference shares under the Approval Route by conversion of import of capital goods/ machineries/ equipment (including second-hand machineries) and pre-operative/pre-incorporation expenses (including payments of rent, etc.), subject to terms and conditions.

This Circular has modified two of the conditions as follows:

 

 

 

A.P.
(DIR Series)

Earlier
condition

Revised
condition

Circular
No. 74,

 

 

 

 

 

dated
30-6-2011

 

 

 

 

 

 

 

 

Para 3(I)(d)

All
such conversions of import payables for

Applications
complete in all respects, for

 

capital
goods into FDI should be completed

conversion
of import payables for capital

 

within
180 days from the date of shipment of

goods
into FDI being made within 180 days

 

goods.

from
the date of shipment of goods.

 

 

 

Para 3(II)(d)

The
capitalisation should be completed within

The
applications complete in all respects,

 

the
stipulated period of 180 days permitted for

for
capitalisation being made within the

 

retention
of advance against equity under the

period
of 180 days from the date of in-

 

extant
FDI policy.

corporation
of the company.

 

 

 

 

 

 

CAS-14 — Cost Accounting Standard on pollution control cost.

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The Institute of Cost Accountants of India has issued the Cost Accounting Standard CAS 14 on ‘Pollution Control Cost’ and it deals with principles and methods of determining the pollution control costs. This standard deals with the principles and methods of classification, measurement and assignment of pollution control costs, for determination of cost of product or service, and the presentation and disclosure in cost statements. It is issued with the objective of bringing uniformity and consistency in the principles and methods of determining the pollution control costs with reasonable accuracy. It is to be applied to cost statements which require classification, measurement, assignment, presentation and disclosure of pollution control costs including those requiring attestation.

Full version of the same can be accessed at
http://casbicwai.org/CASB/docs/CASB/CAS_14_Pollution_ Control_Final.pdf

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Alteration to Schedule XIV of Companies Act — Inclusion of intangible assets created under certain circumstances.

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The Ministry of Corporate Affairs has issued a notification dated 17th April 2012 to make alterations in Schedule XIV of the Companies Act pertaining to the rates of depreciation, to insert the category of intangible assets created under Build, Operate and Transfer, Build, Own, Operate and Transfer or any other form of Public-Private Partnership Route. Full version of the Circular can be accessed at

http://www.mca.gov.in/Ministry/notification/pdf/ GSR_(E)_17apr2012.pdf

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Timeline for submission of annual audited financial results for financial year 2011-12.

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SEBI vide its Circular No. CFD/LA/SK/AT/8278/2012, dated 11th April 2012 has given an option to listed entities for submission of financial results for quarter ended F.Y. 2011-12 and in respect of annual audited results for F.Y. 2011-12, to either:

  • Submit limited reviewed Q4 results within 45 days from end of the quarter and thereafter submit annual audited results as soon as they are approved by the Board. (or)
  •  Submit annual audited results within 60 days from the end of the fourth quarter along with Q4 results.

This one-time measure has been taken in view of the difficulty faced in submission of annual financial results along with Q4 results owing to the first-time adoption of the revised Schedule VI.

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Amendments to the Equity Listing Agreement — Change in format for interim disclosure of results.

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The Ministry of Corporate Affairs has vide Circular No. CFD/DIL/4/2012, dated 16-4-2012, revised the format of Balance Sheet under Schedule VI of the Companies Act as was notified in Notification dated 28-2-2011. Pursuant to the same, it has been decided to carry out consequential amendments to listing Agreement regarding interim disclosure of financial results by listed entities to the stock exchange. Full version of the Circular is available on SEBI website at www.sebi.gov.in under the categories ‘Legal Frame and Listing.’

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A.P. (DIR Series) Circular No. 104, dated 4-4- 2012 — Authorised Dealer Category-II — Permission for additional activity and opening of Nostro account.

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1. Issue of foreign exchange pre-paid cards

Presently,
only Authorised Dealers Category-I banks are permitted to issue foreign
exchange pre-paid cards to residents travelling on private/business
visit abroad.

This Circular now permits Authorised Dealers
Category-II also to issue foreign exchange pre-paid cards to residents
travelling on private/business visits abroad, provided:

 (1) AD Category-II adheres to KYC/AML/CFT requirements.

(2) Settlement in respect of foreign exchange prepaid cards is effected through AD Category-I banks.

2. Opening of Nostro Accounts

This Circular permits AD Category-II to open Nostro accounts subject to the following terms and conditions:

(i) Only one Nostro account for each currency must be opened.

(ii)
Balances in the account must be utilised only for the settlement of
remittances sent for permissible purposes and not for the settlement in
respect of foreign exchange prepaid cards.

(iii) Idle balance cannot be maintained in the said account.

(iv) Reporting requirements as prescribed are complied with.

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A.P. (DIR Series) Circular No. 101, dated 2-4-2012 — Overseas Direct Investments — Liberalisation/Rationalisation.

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Presently, an Indian Party requires prior permission of RBI to open, hold and maintain Foreign Currency Account in a foreign country for the purpose of overseas direct investments in that country. This Circular permits an Indian Party to open, hold and maintain Foreign Currency Account (FCA) abroad for the purpose of overseas direct investments without obtaining prior permission from RBI, provided:

(1) The Indian Party is eligible to undertake overseas direct investments.

(2) The host country Regulations require that investments into the country are to be routed through a designated account in that country.

(3) FCA is opened, held and maintained as per the regulations of the host country.

 (4) Remittances sent to the FCA by the Indian party are utilised only for making overseas direct investment into the overseas JV/WOS.

(5) Any amount received in the account by way of dividend and/or other entitlements from the overseas JV/WOS are repatriated to India within 30 days from the date of credit.

 (6) The Indian Party submits details of debits and credits in the FCA on yearly basis to the designated bank along with a certificate from the Statutory Auditors of the Indian party certifying that the FCA was maintained as per the host country laws and applicable FEMA regulations/provisions.

(7) FCA so opened must be closed immediately or within 30 days from the date of disinvestment from overseas JV/WOS or cessation thereof.

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A.P. (DIR Series) Circular No. 100, dated 30-3-2012 — Trade credits for imports into India — Review of all-in-cost ceiling.

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This Circular states that the present all-in-cost ceiling or Trade Credits, as mentioned below, will continue up to September 30, 2012:

Sr.

No.

Average maturity period

All-in-cost over 6 month LIBOR for the respective
currency of borrowing or applicable benchmark

1

Up to one year

350 bps

2

More than 1 year and up to 3 years

350 bps

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

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A.P. (DIR Series) Circular No. 99, dated 30-3-2012 — External Commercial Borrowings (ECB) Policy — Review of all-in-cost ceiling.

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This Circular states that the present all-in-cost ceiling for ECB, as mentioned below, will continue up to September 30, 2012:

Sr.

Average maturity period

All-in-cost over 6 month No. LIBOR for the respective currency of borrowing or applicable benchmark

1

Three years and
up to five years

350 bps

2

More than five years

550 bps

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A.P. (DIR Series) Circular No. 98, dated 30-3- 2012 — Discontinuation of supplying printed GR forms by Reserve Bank.

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This Circular states that with effect from July 1, 2012, GR forms will only be available online from RBI website www.rbi.org.in at the following link:

“Notification -> FEMA -> Forms -> For Printing of GR Form”.

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Notification No. 15/2012 [F.No. 149/21/2010- S.O. (TPL)]/S.O. 694 (E), dated March 30, 2012 — Income-tax (fourth amendment) Rules, 2012 — Amendment in the New Appendix I.

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Depreciation on windmills installed after March 31, 2012 shall be restricted to 15%.

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Exports — Taxability of profits u/s.28 — Deduction under Chapter VIA — DEPB is ‘cash assistance’ receivable by a person against exports and fall under clause (iiib) of section 28 and is chargeable to tax even before it is transferred by the assessee (in the year of entitlement) and profit on transfer of DEPB fall under clause (iiid) of section 28 and were chargeable to tax in the year of transfer — If the assessee having export turnover of more than Rs.10 crore does not satisfy the two conditio<

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[Topman Exports v. CIT, (2012) 342 ITR 49 (SC)]

During the previous year relevant to the A.Y. 2002- 03, the assessee, a manufacturer and exporter of fabrics and garments, sold the DEPB and DFRC (Duty Free Replenishment Certificate) which had accrued to it on export of its productions. The assessee filed a return for the A.Y. 2002-03 claiming a deduction of Rs.83,69,303 u/s.80HHC of the Act. The Assessing Officer held that if the profit on transfer of the export incentive was deducted from the profits of the assessee, the figure would be a loss and there will be no positive income of the assessee from its export business and the assessee will not be entitled to any deduction u/s.80HHC of the Act as has been held by this Court in IPCA Laboratory Ltd. v. Deputy CIT, (2004) 266 ITR 521 (SC). Aggrieved, the assessee filed an appeal before the Commissioner of Income-tax (Appeals) and contended that the profits on the transfer of DEPB and DFRC were not the sale Kishor Karia Chartered Accountant Atul Jasani Advocate Glimpses of supreme court rulings proceeds of the DEPB and the DFRC amounting to Rs.2,06,84,841 and Rs.1,65,616, respectively, but the difference between the sale value and face value of the DEPB and the DFRC amounting to Rs.14,35,097 and Rs.19,902, respectively, and if these figures of profits on transfer of the DEPB and the DFRC are taken, the income of the assessee would be positive and the assessee would be entitled to the deduction u/s.80HHC of the Act. The Commissioner of Income-tax (Appeals) rejected this contention of the assessee and held that the assessee had received an amount of Rs.2,06,84,841 on sale of the DEPB and an amount of Rs.1,65,612 on sale of the DFRC and the costs of acquisition of the DEPB and the DFRC are to be taken as nil and hence the entire sale proceeds of the DEPB and the DFRC realised by the assessee are to be treated as profits on transfer of the DEPB and the DFRC for working out the deduction u/s.80HHC of the Act and directed the Assessing Officer to work out of the deduction u/s.80HHC of the Act accordingly.

Aggrieved, the assessee filed an appeal before the Income-tax Appellate Tribunal (for short ‘the Tribunal’). A Special Bench of the Tribunal heard the appeal and held that there was a direct relation between the entitlement under the DEPB Scheme and the customs duty component in the cost of imports used in the manufacture of the export products. The Tribunal further held that the DEPB accrues to the exporter soon after export is made and application is filed for the DEPB and the DEPB is a ‘cash assistance’ receivable by the assessee and is covered under clause (iiib) of section 28 of the Act, whereas profit on the transfer of the DEPB takes place on a subsequent date when the DEPB is sold by the assessee and is covered under clause (iiid) of section 28 of the Act. The Tribunal compared the language of section 28(iiib) of the Act in which the expression ‘cash assistance’ is used, with the language of section 28(iiia), (iiid) and (iiie) of the Act in which the expression ‘profit’ is used and held that the words ‘profit on transfer’ in section 28(iiid) and (iiie) of the Act would not represent the entire sale value of the DEPB but the sale value of the DEPB less the face value of the DEPB. With these reasons, the Tribunal set aside the orders of the Assessing Officer and the Commissioner of Incometax (Appeals) and directed the Assessing Officer to compute the deduction u/s.80HHC of the Act accordingly.

Against the judgment and order of the Tribunal, the Commissioner of Income-tax, Mumbai, filed appeal u/s.260A of he Act before the High Court and by the impugned order the High Court disposed of the appeal in terms of the judgment delivered in CIT v. Kalpataru Colours and Chemicals, [ITA(L) 2887 of 2009] (328 ITR 451). In Commissioner of Income-tax v. Kalpataru Colours and Chemicals (supra), the High Court formulated the following two substantial questions of law (page 454 of 328 ITR):

“(a) Whether the Tribunal is justified in holding that the entire amount received on the sale of the Duty Entitlement Pass Book does not represents profits chargeable u/s.28(iiid) of the Income-tax Act, 1961, and that the face value of the Duty Entitlement Pass Book shall be deducted from the sale proceeds?

(b) Whether the Tribunal is justified in holding that the face value of the Duty Entitlement Pass Book is chargeable to tax u/s.28(iiib) at the time of accrual of income, i.e., when the application for Duty Entitlement Pass Book is filed with the competent authority pursuant to the exports made and that the profits on the sale of the Duty Entitlement Pass Book representing the excess of the sale proceeds over the face value is liable to be considered u/s.28(iiid) at the time of sale?”

In its judgment, on the first question of law formulated under (a), the High Court held that the Tribunal was not justified in holding that the entire amount received on the sale of the DEPB does not represent profits chargeable u/s.28(iiid) of the Act and in holding that the face value of the DEPB shall be deducted from the sale proceeds of the DEPB. On the second question of law formulated under (b), the High Court in its judgment did not agree with the Tribunal that the face value of the DEPB is chargeable to tax as income of the assessee u/s.28(iiib) of the Act and instead held that the entirety of sale consideration for transfer of the DEPB would fall within the purview of section 28(iiid) of the Act.

Against the judgment and order of the High Court the assessee appealed before the Supreme Court under Article 136 of the Constitution. The Supreme Court on a reading of the Hand Book on the DEPB and the Export and Import Policy of the Government of India, 1997-2002, observed that it was clear that the objective of the DEPB Scheme was to neutralise the incidence of customs duty on the import content of the export productions. Hence, it had direct nexus with the cost of the imports made by an exporter for manufacturing the export products. The neutralisation of the cost of customs duty under the DEPB Scheme, however, was by granting a duty credit against the export product and this credit could be utilised for paying customs duty on any item which is freely importable. DEPB was issued against the exports to the exporter and was transferable by the exporter.

It was clear from reading of the provisions of section 28 that under clause (iiib) cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India is by itself income chargeable to income-tax under the head ‘Profits and gains of business or profession’. DEPB was a kind of assistance given by the Government of India to an exporter to pay customs duty on its imports and it was receivable once exports were made and an application was made by the exporter for the DEPB. The Supreme Court therefore, held that the DEPB was ‘cash assistance’ receivable by a person against exports under the scheme of the Government of India and fell under clause (iiib) of section 28 and was chargeable to Income-tax under the head ‘Profits and gains of business or profession’ even before it was transferred by the assessee.

Under clause (iiid) of section 28, any profit on transfer of the DEPB is chargeable to Income-tax under the head ‘Profits and gains of business or profession’ as an item separate from cash assistance under clause (iiib). The Supreme Court held that the word ‘profit’ meant the gross proceeds of a business transaction less the costs of the transaction.

It was further held that ‘Profits’ therefore, imply a comparison of the value of an asset when the asset is acquired with the value of the asset when the asset is transferred and the difference between the two values is the amount of profit or gain made by a person. As DEPB had a direct nexus with the cost of imports for manufacturing an export product, any amount realised by the assessees over and above the DEPB on transfer of the DEPB would represent profit on the transfer of the DEPB.

The Supreme Court therefore held that while the face value of the DEPB would fall under clause (iiib) of section 28 of the Act, the difference between the sale value and the face value of the DEPB would fall under clause (iiid) of section 28 of the Act and the High Court was not right in taking the view in the impugned judgment that the entire sale proceeds of the DEPB realised on transfer of the DEPB and not just the difference between the sale value and the face value of the DEPB represent profit on transfer of the DEPB.

(i)    The Supreme Court further held that: (i) cost of acquiring the DEPB was not nil, because the person acquired it by paying customs duty on the import content of the export product and the DEPB which accrues to a person against exports had a cost element in it. Accordingly, when the DEPB is sold by a person, his profit on transfer of the DEPB would be the sale value of the DEPB less the face value of DEPB which represents the cost of the DEPB.

(ii)    The DEPB represents part of the cost incurred by a person for manufacture of the export product and hence even where the DEPB is not utilised by the exporter but is transferred to another person, the DEPB continues to remain as a cost to the exporter. When, therefore, the DEPB is transferred by a person, the entire sum received by him on such transfer does not become his profits. It is only the amount that he receives in excess of the DEPB which represents his profits on transfer of the DEPB.

(iii)    If in the same previous year the DEPB accrues to a person and he also earns profit on transfer of the DEPB, the DEPB will be business profits under clause (iiib) and the difference between the sale value and the DEPB (face value) would be the profits on the transfer of the DEPB under clause (iiid) for the same assessment year. Where, however, the DEPB accrues to a person in one previous year and the transfer of the DEPB takes place in a subsequent previous year, then the DEPB will be chargeable as income of the person for the first assessment year chargeable under clause (iiib) of section 28 and the difference between the DEPB credit and the sale value of the DEPB credit would be income in his hands for the subsequent assessment year chargeable under clause (iiid) of section 28.

The Supreme Court then held that s.s (1) of section 80HHC, makes it clear that an assessee engaged in the business of export out of India of any goods or merchandise to which this section applies shall be allowed, in computing his total income, a deduction to the extent of profits referred to in s.s (IB), derived by him from the export of such goods or merchandise. S.s (IB) of section 80HHC gives the percentages of deduction of the profits allowable for the different assessment years from the A.Ys. 2001-02 to 2004-05. S.s (3)(a) of section 80HHC provides that where the exports out of India is of goods or merchandise manufactured or processed by the assessee, the profits derived from such exports shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee.

Explanation (baa) u/s.80HHC states that ‘profits of the business’ in the aforesaid formula means the profits of the business as computed under the head ‘Profits and gains of business or profession’ as reduced by (1) ninety per cent of any sum referred to in clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of similar nature including any such receipts and (2) the profits of any branch office, warehouse or any other establishment of the assessee situated outside India. Thus, ninety per cent, of the DEPB which is ‘cash assistance’ against exports and is covered under clause (iiib) of section 28 will get excluded from the ‘profits of the business’ of the assessee if such DEPB has accrued to the assessee during the previous year. Similarly, if during the same previous year, the assessee has transferred the DEPB and the sale value of such DEPB is more than the face value of the DEPB, the difference between the sale value of the DEPB and the face value of the DEPB will represent the profit on transfer of DEPB covered under clause (iiid) of section 28 and ninety per cent of such profit on transfer of DEPB certificate will get excluded from ‘profits of the business’. But, where the DEPB accrues to the assessee in the first previous year and the assessee transfers the DEPB certificate in the second previous year, only ninety per cent of the profits on transfer of DEPB covered under clause (iiid) and not ninety per cent of the entire sale value including the face value of the DEPB will get excluded from the ‘profits of the business’.

To the figure of profits derived from exports worked out as per the aforesaid formula u/ss. (3) (a) of section 80HHC, the additions as mentioned in first, second, third and fourth proviso u/s.(3) are made to profits derived from exports. Under the first proviso, ninety per cent of the sum referred to in clauses (iiia), (iiib) and (iiic) of section 28 are added in the same proportion as export turnover bears to the total turnover the business carried on by the assessee. In this first proviso, there is no addition of any sum referred to in clause (iiid) or clause (iiie). Hence, profit on transfer of the DEPB or the DFRC are not be added under the first proviso.

The second proviso to s.s (3) of section 80HHC states that in case of an assessee having export turnover not exceeding Rs.10 crore during the previous year, after giving effect to the first proviso, the export profits are to be increased further by the amount which bears to ninety per cent of any sum referred to in clauses (iiid) and (iiie) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assesses. The third proviso to s.s (3) states that in case of an assessee having export turnover exceeding Rs.10 crore, similar addition of ninety per cent of the sums referred to in clause (iiid) of section 28 only if the asses-see has the necessary and sufficient evidence to prove that (a) he had an option to choose either the duty drawback or the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme; and (b) the rate of drawback credit attributable to the customs duty was higher than the rate or credit allowable under the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme. Therefore, if the assessee having export turnover of more than Rs.10 crore does not satisfy these two conditions, he will not be entitled to the addition of profit on transfer of DEPB under the third proviso to s.s (3) of the section 80HHC.

A.P. (DIR Series) Circular No. 52, dated 23-11-2011 — External Commercial Borrowings (ECB) Policy — Parking of ECB proceeds.

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Presently, borrowers are permitted to either keep ECB proceeds abroad or remit these funds to India, pending utilisation for permissible end-uses.

This Circular states that henceforth all proceeds of ECB raised abroad and meant for Rupee expenditure in India should be brought back immediately by the borrowers for credit to their Rupee accounts with banks in India. These Rupee funds cannot be used for investment in capital markets, real estate or for inter-corporate lending. Only ECB proceeds meant for foreign currency expenditure can be retained abroad pending utilisation.

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Withdrawal of draft Dematerialisation of Certificate Rules.

The Ministry of Corporate Affairs has in consultation with the Law Ministry withdrawn the draft of Dematerialisation of Certificates Rules, 2011 as per the Notification issued on 28-10-2011.

Cost Accounting Records Rules prescribed for various products in supersession of the earlier Rules.

The Ministry of Corporate Affairs has issued the Cost Accounting Records Rules applicable to various products in supersession of the Rules issued thereof earlier. Full Notifications can be accessed on:

    1. Telecommunications http://www.mca.gov.in/ Ministry/notification/pdf/TELECOM_CARR_869E. pdf

    2. Sugar Industry http://www.mca.gov.in/ Ministry/notification/pdf/SUGAR_CARR_872E. pdf

    3. Pharmaceutical Industry http://www.mca.gov.in/Ministry/notification/pdf/ PHARMA_CARR_874E.pdf

    4. Petroleum Industry http://www.mca.gov.in/Ministry/notification/pdf/PETROLEUM_CARR_870E. pdf

    5. Fertiliser Industry http://www.mca.gov.in/Ministry/notification/pdf/Fertilizer_CARR_873E.pdf

    6. Electricity Industry http://www.mca.gov.in/Ministry/notification/pdf/ELECTRICITY_CARR_871E.pdf

Companies Bill.

The Companies Bill, 2011 as presented in the Parliament on 14th December 2011 can be accessed on http://www.mca.gov.in/Ministry/pdf/The_Companies_Bill_2011.pdf.

The Bill, proposes significant changes to the existing corporate law provisions. The Bill has 470 clauses as against 658 sections in the existing Companies Act, 1956.

Unlisted Public Companies (Preferential Allotment) Amendment Rules, 2011.

The MCA vide Notification dated 14th December 2011, has issued the Unlisted Public Companies (Preferential Allotment) Amendment Rules, 2011 wherein it has mentioned that Preferential allotment means allotment of share or any other instrument convertible to shares including hybrid instruments issued under the provisions of section 81(1A) i.e., further issue of shares to existing shareholders and the allotment has to be made within 60 days of receipt of application money, else it is to be repaid in 15 days, failing which it is to be repaid with 12% p.a. interest.

The Rules shall come into force on the date of their publication in the Official Gazette.

Company Law Settlement Scheme (CLSS 2011) extended to 15th January 2012.

The MCA vide Circular No. 71/2011, dated 15th December 2011 has extended the last date for availing benefit under Company Law Settlement Scheme (CLSS), 2011 to 15th January, 2012 and has stressed that the Scheme will not be extended beyond 15th January, 2012. The statutory documents like Balance Sheets, Annual Returns not filed with the ROC can be filed under this scheme by paying additional 25% fee and immunity from prosecution is granted by the ROC.

Allocations of regions under the Regional Director.

The MCA has notified vide its Notification dated 16th December 2011 the respective regions under the 6 regional Directors and their headquarters.

Extension of date for submission of PAN details In DIN-4.

The MCA vide Circular No. 70/2011, dated 15th December 2011 has extended the last date for filing form DIN-4 by DIN holders for furnishing their Income-tax PAN and to update Income-tax PAN details to 29th February, 2012. These details are required to be given in case of mismatch of details between the DIN and the PAN, for which the ROC has issued letters to DIN holders requesting that the same be updated.

Further, to ascertain whether a DIN holder needs to submit such details, the same can be done through the Quick Link on the MCA 21 homepage by entering the DIN no. and his PAN card.

Cost Accounting Records and Cost Audit Record Rules — Clarifications regarding applicability and compliance requirements.

The Ministry has issued clarifications vide Circular No. 68/2011, dated 30-11-2011 regarding cost accounting records and cost audit wherein it is clarified that:
    1) Companies covered under Companies Cost Accounting Records Rules, 2011 are only required to file a compliance report in Form B notified in the Circular and not details of cost records.

    2) Companies falling under the said Rules 2011 for the first time shall keep cost records and cost details, statements, schedules, etc. in good order for the next eight financial years beginning with first year of application of the said Rules.

    3) To maintain the appointment of Cost Auditor under the rules as independent and at arm’s length, it is clarified that cost auditor(s) appointed u/s.233B(2) of the Companies Act, 1956 (whether for one or all of the company’s products covered under cost audit), shall not provide any other services to the company relating to

i) design and implementation of cost accounting system; or

ii) the maintenance of cost accounting records, or

iii) act as internal auditor, whether acting individually, or through the same firm or through other group firms where he or any partner has any common interest.

However it is clarified that cost auditors are allowed to certify the compliance report or provide any other services as may be assigned by the company, but which shall not include any of the services mentioned above.

Cost Accounting Records and Cost Audit Record Rules — Clarifications about coverage of certain sectors thereunder.

The MCA has vide Circular No. 67/2011, dated 30th November, 2011 has issued clarifications regarding coverage of certain sectors in the Cost Audit Record Rules. It has mentioned that the rules are not applicable to wholesale and retail activities, those engaged in job work, export-oriented units having 100% captive consumption, etc.

Service tax refund to exporters through the Indian Central EDI System (ICES) — Circular No. 149/18/2011-ST, dated 16-12-2011.

Vide this Circular, the Government has proposed to introduce a simplified scheme for electronic re-fund of service tax (STR) to exporter of goods on the line of duty drawback. According to this new scheme, exporters have two options i.e., (i) either they can opt for electronic refund through ICES (Indian Custom EDI System) system, which is based on the ‘schedule of rates’ (to be notified shortly) or (ii) they can opt for refund on the basis of docu-ments, by approaching the Central Excise/Service Tax formations. To obtain benefit under the new electronic STR scheme, an exporter should have a bank account and also a Central Excise registration or service tax code number and the same should be registered with Customs ICES using specified ‘Annexure-A’ Form and an exporter should declare his option to avail STR on the electronic shipping bill while presenting the same to the proper officer of the Customs.

A.P. (DIR Series) Circular No. 68, dated 17-1-2012 —Risk Management and Inter-Bank Dealings — Commodity hedging.

This Circular permits all AD Category-I banks:

1.    To grant permission to listed companies to hedge the price risk in respect of any commodity (except gold, silver, platinum) in the international commodity exchanges/markets as specified under the delegated route.

2.    To grant permission to unlisted companies to hedge price risk on import/export in respect of any commodity (except gold, silver, platinum) in the international commodity exchanges/markets subject to guidelines Annexed to this Circular.

GAPs in GAAP — Revenue — Gross vs. Net of Taxes

The gross v. net presentation of taxes is very important for many companies as revenue is a key performance indicator. Further some companies have to pay licence fees or have a revenue sharing arrangement and hence the amount disclosed as revenue becomes critical. There is substantial accounting literature in Indian GAAP that deals with these issues, albeit in various context.

In the ‘Guidance Note on Terms used in Financial Statements’ of ICAI, the expression ‘sales turnover’ has been defined as: “The aggregate amount for which sales are effected or services rendered by an enterprise.” The term ‘gross turnover’ and ‘net turnover’ (or ‘gross sale’ and ‘net sales’) are sometimes used to distinguish the sale aggregate before and after deduction of returns and trade discounts”

The Guide to Company Audit issued by the Institute while discussing ‘sales’, states as follows:

“Total turnover, that is, the aggregate amount for which sales

are effected by the Company, giving the amount of sales in respect of each class of goods dealt with by the company and indicating the quantities of such sale for each class separately.

The term ‘turnover’ would mean the total sales after deducting therefrom goods returned, price adjustments, trade discount and cancellation of bills for the period of audit, if any. Adjustments which do not relate to turnover should not be made e.g., writing off bad debts, royalty, etc. Where excise duty is included in turnover, the corresponding amount should be distinctly shown as a debit item in the profit and loss account.”

The ‘Statement on the Amendments to Schedule VI to the Companies Act, 1956’ issued by the ICAI while discussing the disclosure requirement relating to ‘turnover’ states as follows:

“As regards the value of turnover, a question which may arise is with reference to various extra and ancillary charges. The invoices may involve various extra and ancillary charges such as those relating to packing, freight, forwarding, interest, commission, etc. It is suggested that ordinarily the value of turnover should be disclosed exclusive of such ancillary and extra charges, except in those cases where because of the accounting system followed by the company, separate demarcation of such charges is not possible from the accounts or where the company’s billing procedure involves a composite charge inclusive of various services rather than a separate charge for each service.

In the case of invoices containing composite charges, it would not ordinarily be proper to attempt a demarcation of ancillary charges on a proportionate or estimated basis. For example, if a company makes a composite charge to its customer, inclusive of freight and despatch, the charge so made should accordingly be treated as part of the turnover for purpose of this section. It would not be proper to reduce the value of the turnover with reference to the approximate value of the service relating to freight and despatch. On the other hand if the company makes a separate charge for freight and despatch and for other similar services, it would be quite proper to ignore such charges when computing the value of the turnover to be disclosed in the Profit and Loss Account. In other words, the disclosure may well be determined by reference to the company’s invoicing and accounting policy and may thereby vary from company to company. For reasons of consistency as far as possible, a company should adhere to the same basic policy from year to year and if there is any change in the policy the effect of that change may need to be disclosed if it is material, so that a comparison of the turnover figures from year to year does not become misleading.”

The Statement on the Companies (Auditors’ Report) Order 2003 issued by the Institute in April 2004, while discussing the term ‘turnover’ states as follows: The term ‘turnover’ has not been defined by the order. Part II of Schedule VI to the Act, however, defines the term ‘turnover’ as the aggregate amount for which sales are effected by the company. It may be noted that the ‘sales effected’ would include sale of goods as well as services rendered by the company. In an agency relationship, turnover is the amount of commission earned by the agent and not the aggregate amount for which sales are effected or services are rendered. The term ‘turnover’ is a commercial term and it should be construed in accordance with the method of accounting regularly employed by the company.

As per the ‘Guidance Note on Tax Audit’ — “The term turnover for the purposes of this clause may be interpreted to mean the aggregate amount for which sales are effected or services rendered by an enterprise. If sales tax and excise duty are included in the sale price, no adjustment in respect thereof should be made for considering the quantum of turnover. Trade discounts can be deducted from sales, but not the commission allowed to third parties. If, however the excise duty and/ or sales tax recovered are credited separately to excise duty or sales tax account (being separate accounts) and payments to the authority are debited in the same account, they would not be included in the turnover. However, sales of scrap shown separately under the heading ‘miscellaneous income’ will have to be included in turnover.”

As per explanation to paragraph 10 of AS-9 Revenue Recognition, “The amount of revenue from sales transactions (turnover) should be disclosed in the following manner on the face of the statement of profit and loss:

Turnover (Gross)    XX
Less: Excise Duty    XX
Turnover (Net)    XX

The amount of excise duty to be deducted from the turnover should be the total excise duty for the year except the excise duty related to the difference between the closing stock and opening stock. The excise duty related to the difference between the closing stock and opening stock should be recognized separately in the statement of profit and loss, with an explanatory note in the notes to accounts to explain the nature of the two amounts of excise duty.” AS-9 clearly sets out the requirement with respect to presentation of revenue and excise duty.

With respect to VAT the Guidance Note on Value Added Tax issued by ICAI states that “VAT is collected from the customers on behalf of the VAT authorities and, therefore, its collection from the customers is not an economic benefit for the enterprise and it does not result in any increase in the equity of the enterprise”. Accordingly, VAT should not be recorded as revenue of the enterprise. Correspondingly, the payment of VAT is also not treated as an expense. The Guidance Note on VAT further states, “Where the enterprise has not charged VAT separately but has made a composite charge, it should segregate the portion of sales which is attributable to tax and should credit the same to ‘VAT Payable Account’ at periodic intervals”. Currently most companies follow this guidance, though some entities have presented revenue gross of VAT and correspondingly treated VAT as an expense.

With respect to sales tax and service tax, the Guidance Note on revised Schedule VI states that such taxes are generally collected from the customer on behalf of the Government in majority of the cases. However, it adds that this may not hold true in all cases and it is possible that a company may be acting as principal rather than as an agent in collecting these taxes. Whether revenue should be presented gross or net of taxes should depend on whether the company is acting as a principal and hence responsible for paying tax on its own account or, whether it is acting as an agent i.e., simply collecting and paying tax on behalf of Government authorities. In the former case, revenue should also be grossed up for the tax billed to the customer and the tax payable should be shown as an expense. However, in cases, where a company collects tax only as an intermediary, revenue should be presented net of taxes. Strangely under the Guidance Note on revised Schedule VI, this concept of principal and agent is to be applied only with respect to sales tax and service tax, but not on excise duty which is covered under AS-9 and VAT which is covered by the GN on VAT.

Author’s view

Sellers of goods and services may enter into different arrangements with respect to indirect taxes. Some contracts clearly require the customer to pay the seller whatever tax is finally paid to the Government; in other words the seller acts as an agent between the Government and the customer. In other cases, the seller charges one all inclusive lump-sum amount for the entire sale contract including taxes.

The seller then pays to the Government whatever taxes are due, shouldering the risks of changes in tax rate or tax legislations. The tax burden on the seller would be the amount paid to the Government less any amount of input credit that is available to him. The tax burden could vary significantly under different scenarios, and this would determine the ultimate profit the seller makes on the lump- sum contract. In such cases, it could be said that the seller acts as a principal with respect to these taxes and hence should present revenue on a gross basis and the indirect tax as an expenditure. This example highlights a quagmire that companies have to face due to conflicting literature. On the one hand the guidance note on VAT requires a net presentation; whereas the guidance note on revised Schedule VI with respect to sales tax and service tax requires an assessment of principal and agent relationship which in this example would translate into a gross presentation.

The end result is that “what is good for the goose is not good for the gander” and absent a uniform principle for presentation of revenue and indirect taxes significant disparity in the disclosures would continue to arise in the future.

In the author’s view, the ICAI should commission a project to deal comprehensively with the presentation of various indirect taxes paid in India. Whether these taxes are presented gross or net, would depend on the nature of the indirect tax and the contractual arrangements between the seller and the buyer. It may be noted that under International Financial Reporting Standards, the evaluation of gross v. net presentation is done on the basis of principal agent relationship.

Establishing Taxable Event — Burden on Whom?

Introduction:

Under fiscal laws, and more particularly under Sales Tax Laws, many a time an issue arises as to whether any taxable transaction has taken place or not? The tax under Sales Tax Laws can be levied only if there is a transaction of sale or purchase, as the case may be. It is possible that on the facts of the case the dealer may be contending that his transaction is not sale/purchase transaction and hence no tax should be levied on the same. Under the above circumstances, dispute arises as to on whom the burden lies to prove the taxable event. There are a number of judgments throwing light on the said issue. Reference can be made to the following important judgments.

Judgments:

(a)    Haleema Zubair Tropical Traders v. State of Kerala, (19 VST 142) (SC)

The gist of the judgment is as under:

The assessee was the proprietor of two concerns: Tropical Traders and Poseidon Food Co. Tropical Traders was a dealer in tiles, and, the business of Poseidon Food Co. was to render services to various exporters in respect of inspection and certification of quality of the items sought to be exported.

The assessee declared taxable turnover of Rs.28,20,474, being sale of goods, for the purpose of sales tax under the Kerala General Sales Tax Act, 1963. However, receipt shown as commission amounting to Rs.45,80,168 from the business of Poseidon Food Co. was also sought to be assessed by the Department on the ground that it was not supported and proved by any documentary evidence. Before the Appellate Authority the assessee produced the income-tax returns and the assessment orders as well as copy of orders placed by exporters and the certificate granted by the Marine Products Export Development Authority. The first Appellate Authority held that the profes-sional services rendered by the assessee to the exporters involving skill and knowledge did not constitute any transfer of property and that the levy of sales tax on the sum of Rs.45,80,168 was not in order. The Sales Tax Appellate Tribunal, however, reversed the decision of the first Appellate Authority on the ground that the onus was on the assessee to prove that the receipts were not the result of sale. The High Court dismissed the revision petition of the assessee as well as a review application.

On appeal, the Supreme Court, setting aside the decision of the High Court and remitting the matter to the Assessing Authority, held that the Assessing Authority ought to consider the matter afresh on the basis of the materials placed by the assessee, viz., income-tax returns, assessment orders, certificate issued by the MPDEA, etc.

This shows that the authorities are under obligation to consider the material placed before it and prove the taxable event. They cannot put such burden upon an assessee.

(b)    Girdharilal Nannelal (39 STC 30) (SC)

The facts of the case can be noted as under:

The Sales Tax Assessing Authority treated a cash-credit entry of Rs.10,000 (which was declared as undisclosed income for income-tax purpose) in the account books of the appellant-firm in the name of the wife of one of its partners as income of the appellant out of concealed sales and added Rs.1,00,000 to the turnover of the appellant on the basis that the sum of Rs.10,000 represented 10% of the profit. The explanation offered by the appellant that the sum of Rs.10,000 was given by the partner of the firm to his wife to obtain her consent for his second marriage and that the amount was lying with her and had been deposited by her with the appellant was not accepted by the sales tax authorities. The High Court also was not satisfied with the explanation and inferred that the amount reflected profits of the appellant’s business and those profits arose out of sales not shown in the account books.

On further appeal, the Supreme Court held that in order to impose liability upon the appellant for payment of sales tax by treating the amount of Rs.10,000 as profits arising out of undisclosed sales of the appellant, two things had to be established: (i) The amount was the income of the appellant and not of the partner or his wife. (ii) The amount represented profits from income realised as a result of transactions liable to sales tax and not from other sources. The onus to prove the above two ingredients was upon the Department. The fact that the appellant or its partner and his wife failed to adduce satisfactory or reasonable explanation with regard to the source of that amount would not in the absence of some further material had the effect of discharging that onus and proving both the ingredients. In such a case no presumption arose that the amount represented the income of the appellant and not of the partner or his wife. It was necessary to produce more material in order to connect that amount with the income of the appellant as a result of sales. In the absence of such material, mere absence of explanation regarding the source of the amount would not justify the conclusion that the amount represented profits of the appellant derived from undisclosed sales.

The above judgment also further reiterates the principle that the burden lies on the Sales Tax Department, if it wants to levy sales tax.

(c)    Mittal & Co. (69 STC 42) (All.) The gist of the judgment is as under:

The assessee did not maintain manufacturing account and contended that no sale was effected inside the State during the assessment year and the Assessing Officer estimated the sale on the ground that the assessee, in past, had effected sale inside the State. In revision the Allahabad High Court held that though the initial onus to establish that no sale was made by the assessee is on the assessee, no evidence could be adduced for establishing a negative fact. When the assessee denies the factum of sale, the onus shifts to the

Revenue to disprove the contention of the assessee.

This judgment also clearly lays down that negative burden cannot be cast on the assessee. It is the Department who has to bring evidence for justifying levy of tax.

(d) M. Appukutty v. STO, (17 STC 380) (Ker.)

The Kerala High Court observed that principles of natural justice demand that there should be a fair determination of a question by quasi -judicial authorities. Arbitrariness will certainly not ensure fairness. If giving a mere opportunity to show cause, and to explain, would satisfy the principles of natural justice, the notice to show cause be-comes an empty formality signifying nothing, for, after issuing the notice to show cause, the authority can decide according to his whim and fancy. The judicial process does not end by making known to a person the proposal against him and giving him a chance to explain. It extends further to a judicial consideration of his representations and the materials and a fair determination of the question involved.

If the quasi-judicial authority dis-regards the materials available or if it refuses to apply its mind to the question and if it reaches a conclusion which bears no relation to the facts before it, to allow those decisions to stand would be violative of the principles of natural justice. Arbitrary decisions can also, therefore, result in violation of the principles of natural justice which is a fundamental concept of Indian jurisprudence. If a decision is allowed to be made as it likes, it may amount to even a mala fide decision.

In particular the High Court observed as under:

“The rejection of the account books does not give the Taxing Authority a right to make any assessment in any way it likes without any reference to the materials before him. The process of best judgment assessment, whether it be one relating to income-tax, agricultural income-tax or sales tax, is a quasi-judicial process, an honest and bona fide attempt in a judicial manner to determine the tax liability of a person. And such determination must be related to the materials before the authority.”

Therefore, even in the best judgment assessment, the authorities are under obligation to refer to the material on record and to arrive at just and proper conclusion. In one way this judgment also casts burden on the authorities to establish taxable event before levy of tax.

Conclusion:

From the above precedents, it can very well be said that for levying tax, it is the duty of the taxing authority to prove the taxable event. Even in cases where dealer fails to prove his case, it will not automatically entitle the authorities to levy tax. In such cases also they will be required to bring sufficient supporting evidence about taxable event before levy of tax.

Establishment of Offices of the Registrar of Companies-cum-Official Liquidator.

Vide Notification date 13th November 2011, the Central Government has established the following Offices of the Registrar of Companies-cum-Official Liquidator at the places having territorial jurisdictions as stated below for discharging the functions of the Registrar of Companies as well as Official Liquidator under the various provisions of the said Act:
Pursuant to the above, the existing Office of the Official Liquidator at Ranchi shall stand upgraded as the Office of the Registrar of Companies-cum-Official Liquidator and the separate Offices of Registrar of Companies and Official Liquidator at Cuttack, Patna and Jaipur shall stand merged as the Office of the Registrar of Companies–cum-Official Liquidator.