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Year: 2013

TDS: F. Y. 2012-13: Certificate u/s. 197: Cannot be denied on the ground that the assessee had violated the provisions of TDS and proceedings u/ss. 276B and 271C were pending:

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[Serco BPO (P) Ltd. Vs. ACIT ; 253CTR 410 (P&H):]

On 03/04/2012, the assessee filed an application u/s. 197 of the Income-tax Act, 1961 for issuance of a Nil tax deduction certificate for the F.Y. 2012-13. The application was rejected on the ground that proceedings u/ss. 276B and 271C of the Act were pending.

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

“i) Issue of certificate u/s. 197(1) of the Act is mandatory on fulfillment of conditions enumerated under the rules.

ii) Rejection of application of assessee on the ground that the assessee had violated the provisions of TDS and proceedings u/ss. 276B and 271C were pending was not sustainable. None of these grounds validly form part of reasons for rejecting an application filed by an assessee u/s. 197(1) r/w. r. 28AA.

iii) The Assessing Officer is directed to redecide the application within a period of two weeks.”

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2013-TIOL-1550-CESTAT-MUM Varun Shipping Co. Ltd. vs. Commissioner of Service Tax, Mumbai

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Payment of tax before receipt of consideration is an advance and not an excess payment and thus can rightly be adjusted suo motu against the actual liability.

Facts:
The appellant paid service tax in December 2008 and reflected the same as advance payment of tax in the return for the period October 2008 to March 2009 without intimating the range superintendent. On receiving the consideration in April 2009, appellant adjusted the said advance and reflected the same in the return for the period April- September 2009. The department contended that the said payment was not an advance payment but excess payment and thus the appellant could not adjust it suo motu in terms of Rule 6(4B) of Service Tax Rules, 1994 and demanded the tax thereon with interest and penalty.

Held:
Observing that the appellant had reflected the payment of advance payment of tax particulars in both the returns, it was evident that what the appellant made was advance payment of tax and not excess payment of tax. Since the liability to pay tax arose only in April 2009, the Hon. Tribunal held that the payment made prior to such date can be contemplated only as an advance and thus no service tax was liable to be paid.

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2013 (32) STR 179 (Tri.-Delhi) Delhi Public School Society vs. Commissioner of Service Tax.

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Whether agreement to provide expertise, guidance etc. for setting up an enterprise for running an educational institution along with provision of brand name without sharing any profit or loss arising from said enterprises amounts to Joint Venture Agreement and not subjected to service tax?

Facts:
The appellant having a brand image and reputation for establishing and managing schools entered into an agreement termed as “Education Joint Venture Agreement” with other parties for setting up schools for the use of their brand name and to continue to provide managerial and operational techniques and standards of imparting education against receipt of annual fees. The appellant neither had any obligation for sharing any losses arising out of this activity nor enjoyed the benefits arising out of successful running of the other party’s institutions.

The Respondent issued various show cause notices for demanding service tax on the fees received in pursuance of the said Joint Venture Agreement under the category of “Franchise Fees” and confirmed the demand along with penalties.

Held:
It was held that the financial burden of establishing and maintaining the school was solely on the other party which signalled the absence of any partnership or joint venture and that the appellant was neither supposed to contribute towards capital nor liable for any loss or profit,
the appellant provided service not to itself but to other parties to the agreement. The Hon. Tribunal held that the scope of the Appellant clearly got covered within the category of ‘Franchise’ service as the ingredients of ‘franchise’ being satisfied, however quashed the show cause notices which were beyond the normal period of limitation, as there was no case of suppression.

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2013-TIOL-1518-CESTAT-MUM TCS e-serve Ltd. vs. Commissioner of Service Tax, Mumbai-II

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Data processing services provided to banks cannot be treated as “business auxiliary service” as it is not customer care, it is excluded from its scope.

Facts:
The appellant provided collection and sales service, call centre services and computerised data processing services and discharged service tax liability on the same with effect from 01-07-2003, 01-05-2006 and 01-05-2010 respectively under the categories of business auxiliary service and business support service.

On the activity of data processing, service tax was demanded with effect from 01-07-2003 under “Business Auxiliary Services” alleging that the customers of the bank submitted physical documents at the bank’s branches and the appellant performed computerised processes on the input submitted to the bank using the bank’s systems and saved the output on the bank’s system, which amounted to services incidental or auxiliary to the customer care services rendered by the bank. However, the reasoning recorded in the impugned order was that the appellant collected data from the clients’ customers, and the banks during the course of providing banking services also provided customer care services, and the services rendered by the appellant to the bank were incidental or auxiliary to the customer care services provided by the bank. It was also contended that the services provided by the appellant were not customer care services but banking and financial services as provided by the bank to its customers. The services of computerised data processing as specifically excluded under business auxiliary service cannot be taxed under the said category. Moreover the majority of the clients were located outside India and since the consideration was received in foreign  exchange, the services were to be treatedas exports and thus there would be no liability of service tax.

Held:
Observing that the order-in-original deviated from the charges made in the show cause notice, the Hon. Tribunal held that since there was a complete variation between the grounds alleged in the show cause notice and the grounds on which the demands were confirmed, the impugned order was liable to be set aside on that ground alone. The Hon. Tribunal also considered the other submissions of the appellant and held that no service tax was liable to be paid under business auxiliary service.

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2013-TIOL-1568-CESTAT-MUM Kpit Cummins Infosystems Ltd. vs. Commissioner of Central Excise, Pune-I

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Service tax being destination based consumption tax, services received outside India by branches of an Indian company outside India not liable for service tax u/s. 66A of the Finance Act, 1994.

Facts:
The overseas branches of the appellant provided services abroad and remitted the consideration for the bills raised by them to its Indian head office after deducting the expenditure incurred. Further, the appellant also had permanent establishments abroad by way of personnel located in the offices of their various clients and so remitted certain amount for the expenditure incurred by them for providing various services. The department contended to levy tax on the above said activities of the appellant. The appellant contended that the branches and the Indian head office were not independent entities and so there cannot be selfservice and assuming that they were independent entities, since the services were rendered abroad and consideration received in foreign exchange, it amounted to export of service. The case was of providing services abroad by the branches and not receiving of services from abroad by the Indian company to attract provisions of section 66A of the Act. Further, for the services provided by permanent establishments abroad, it was already subjected to the local tax laws and hence there was no jurisdiction with the Indian authorities to levy tax on the same.

Held:
Referring to the provisions of section 66A and affirming to the contentions of the  appellant, the Hon. Tribunal remanded the appeal with regards to the only question whether the adjudicating authority had any jurisdiction for the services completely rendered outside India and on which tax liability was already discharged under the local laws where the activity took place.

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2013 (30) STR 96 (Tri- Del.) Commissioner of Central Excise, Ludhiana vs. Singh Travels .

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Whether providing vehicle on call basis amounts to renting of cab service?

Facts:
Revenue’s contention was that vehicle let out by Respondent to National Fertilizer Limited (NFL) during the period from October, 2001 to March, 2006 resulted in providing of rent-a-cab service. The fact that the vehicle was given to NFL, does not diminish the liability. According to the assessee, the vehicles were not altogether given on rental basis by the respondent to NFL but the service was of hiring of taxi as per Clause (3) of the contract with NFL which also reflected that service of taxi was provided under a scheduled rate contract without the taxi being in exclusive control of NFL.

Held:
The Tribunal observed that there was no condition of providing of vehicles on a term basis, but was on call basis i.e. one hour from booking time in regard to local travel and with suitable notice time for outside journey. Thus, it was evident that there was an arrangement of providing transport service without renting the vehicles. NFL paid the consideration as per the agreed rate schedule on transportation services provided. In the case of no call or no demand or no transportation provided to NFL, no consideration was demanded. Thus, it cannot be held that the respondent rented any cab to NFL and therefore, did not invite any service tax liability.
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Writ – Non-entertainment of petitions under writ jurisdiction by the High Court when an efficacious alternative remedy is available is a rule of self-imposed limitation. It is essentially a rule of policy, convenience and discretion rather than a rule of law.

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The assessee, a Sikkim based non-Sikkimese filed his first return of income for the assessment year 1997-98. Upon assessment, it was discovered that the he had a net profit of Rs. 5,73,832/- during the assessment year 1996-97 relevant to the previous year 1995-96. Since no return was filed for the assessment year 1996-97 despite capitalising the aforesaid profit, proceedings u/s. 147 of the Act were initiated against him for the said assessment year. Accordingly, on 26th May, 1998, the notice was issued u/s. 148 of the Act. Further, the Revenue found out that as on 31st March, 1996, the assessee had brought forward closing capital of Rs. 1,73,90,397/- including that aforesaid net profit during the assessment year 1996-97. The same remained unexplained as the return of income for the assessment year 1995-96 was also not furnished by the assessee. Hence, another notice u/s. 148 was issued to the assessee for the assessment for the assessment year 1995-96, dated 30th March, 2000. The assessee did not comply with the aforesaid notices u/s. 148 of the Act and thus, a letter dated 19th January, 2001, came to be issued to the assessee as a reminder to file his returns to income for the assessment years clearly mentioning that failure to do so would lead to an ex parte assessment u/s. 144 of the Act. Thereafter, upon filing of written submissions by the assessee, notice u/s. 142(1) of the Act dated 25th June, 2001, was issued for the assessment year 1995-96 along with final show cause fixing compliance for hearing dated 9th July, 2001. The assessee sought an adjournment which was not granted and the assessments were completed ex parte u/s. 144 of the Act raising a tax demand of Rs. 2,45,87,625/- and Rs. 6,32,972/- for the assessment year 1995-96 and 1996-97, respectively by order dated 9th July, 2001 and 28th March, 2001, respectively. Further, penalty proceedings u/s. 271(1)(c) of the Act were also initiated for both assessment years.

The assessee approached the writ court challenging the aforesaid notices issued u/s. 148, dated 26th May, 1998 and 30th March, 2000 and the subsequent assessment orders dated 9th July, 2001 and 28th March, 2001. The issue raised before the writ court was whether the income of the non-Sikkimese residing in Sikkim was taxable u/s. of the Act. The said question was referred to a Committee for its consideration and the writ petition was disposed of as withdrawn with the direction to maintain status quo in the matter till the declaration of final decision by the Committee, by order dated July 21, 2005. In the meanwhile, section 10(26AAA) of the Act was inserted by section 4 of the Finance Act, 2008, whereby certain income accruing or arising to a Sikkimese individual was exempted from tax. Thereafter the Central Board of Direct Taxes (for short “the Board”) issued Instruction No.8, dated 26th July, 2008 in respect of tax liability of the income accruing or arising to a non- Sikkimese individual residing in Sikkim. In the light of the aforesaid amendment and instruction, the writ court by order dated 15th July, 2009, reiterated.

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Section 17 incentive bonus received by LIC Development Officer to be treated as salary and no expenses deductible.

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The appellant, T.K. Ginarajan, Development Officer in the LIC, claimed deduction of 40 % of the incentive bonus paid to him in the return of income-tax for the various years prior to 1st April, 1989, on the ground that he had incurred expenditure to the extent of 40 % of the incentive bonus for canvassing business.

The claim for exclusion of 40 % of the incentive bonus towards the expenditure was declined by the Income-tax Officer. The Commissioner of Income-tax (Appeals) dismissed the appeal. However, the Incometax Appellate Tribunal held in favour of the assessee. But the High Court was in favour of the Revenue.

The Supreme Court noted that LIC of India had requested the Central Board of Direct Taxes (hereinafter referred to as “the CBDT”) for a clarification on deduction explaining that the Development Officer had actually incurred some expenditure in the performance of their duty, to the tune of at least 40 % of the incentive bonus paid to them. However, the CBDT affirmed that the incentive bonus paid by the LIC to the Development Officers formed part of their income towards salary. To quote :
“ Such portion of the incentive bonus which is actually spent by the Development Officer for duties of office can still be exempted from tax if the LIC makes the payment against the expenses incurred by the Development Officer by way of reimbursement of expenses. In that case, such reimbursement will not form a part of the salary of the Development Officer and only the incentive bonus will appear in their salary certificate. LIC has not certified that a part of the incentive bonus is against the expenses incurred by the Development Officers by way of reimbursement of expenses. If such a part is certified and that part of the salary and that part of the incentive bonus which is not certified will appear in the salary certificate. Hence, no deduction is contemplated from the incentive bonus, which finds a place in the salary certificates…”

The Supreme Court further noted that, however, with effect from 1st April, 1989, the LIC itself issued a clarification to the effect that the Development Officers would be entitled to claim reimbursement to the extent of 30 % of the incentive bonus granted to them.

The Supreme Court observed that thus, the dispute was confined only to the period prior to 1st April, 1989, and, thereafter, the Development Officers were entitled to the reimbursement of actual expenses incurred by them, to the extent of 30 %. In other words, after 1st April, 1989, only that part of the incentive bonus after reimbursing the expenses to the extent of 30 % would appear in the salary certificate. What is the fate of the incentive bonus to the Development Officers in LIC prior to 1st April, 1989, for the purpose of income tax was therefore the question to be considered in this case.

The Supreme Court held that compartmentalisation of income under various heads and computation of the taxable portion strictly in accordance with the formula of deductions, rebates and allowances are to be done only as per the scheme provided under the Act. The appellant being a salaried person, the incentive bonus received by him prior to 1st April, 1989, had to be treated as salary and he was entitled only for the permissible deductions u/s. 16 of the Act. The expenses incurred in the performance of duty as Development Officer for generating the business so as to make him eligible for the incentive bonus was not a permissible deduction and, hence, the same was eligible to tax. According to the Supreme Court, there was no merit in the appeal of the Appellant. The appeal was accordingly dismissed.

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Acquisition of New Asset by Assessee for Capital Gains Exemption

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Issue for Consideration

Sections 54, 54B,54EC, 54F, 54GA and 54GB of the Income Tax Act, 1961 provide for exemption of capital gains on an acquisition by an assessee, of a specified asset (purchase, construction, etc.) within the specified time period, subject to fulfilment of various other conditions. Section 54 exempts along term capital gains arising on transfer of a residential house and section 54F grants exemption to long term capital gains arising on transfer of any other capital asset. Section 54B provides for exemption for long term capital gains on transfer of a land used by for agricultural purposes. Similar provisions are contained in other sections for grant of exemption for capital gains on reinvestment by the assessee within the specified period, in specified assets.

All these sections require acquisition by the assessee. Section 54 reads – “the assessee has within a period of ………………purchased, or has ………..constructed a residential house”. The other sections use similar language. In view of the stipulation in the above mentioned provisions, that require the acquisition by an assessee, aquestion has arisen before the courts as to whether the acquisition (purchase, construction, etc.) by the assessee necessarily means that the new asset must be acquired in the name of the assesseeor that it would be sufficient where the funds belonging to the assessee are used for acquiring the specified asset to enable an assessee to claim the exemption from tax.

The courts do not find any difficulty in upholding the claim of the assessee for exemption in cases where the acquisition of the new asset is in the joint names of the assessee and another person, as in the courts opinion such acquisition in joint names would not hamper the claim for exemption, so long as the funds for acquisition of the new house have come from the assessee. The conflict of the judicial view however, has been in respect of acquisition of a new asset in the name of a family member, without the name of the assessee being included, though with the funds from the assessee. While the Madras, Andhra Pradesh and Delhi High Courts have taken the view that even in such a case, the assessee is entitled to the benefit of the exemption, the Punjab & Haryana, Bombay and Delhi High Courts have taken a contrary view.

Prakash’s case
The issue came up before the Nagpur bench of the Bombay High Court in the case of Prakash vs. ITO 312 ITR 40 in the context of section 54F. In that case,the assessee, an elderly person, sold certain plots of land, and acquired a plot of land in the name of his adopted son and constructed a residential building thereon by submitting plans for construction in the name of his son. He did not file his return of income voluntarily, but did so after receipt of a notice u/s. 139(2) from the Assessing Officer. The assessee besides claiming that the plots sold were agricultural land, which was not a capital asset, and that there was therefore no capital gains, also claimed an exemption u/s. 54F in respect of the purchase of a plot of land and the construction of the residential building thereon. It was claimed that the investment in the new asset was made in the son’s name, in view of the advanced age of the assessee.

The Assessing Officer rejected both the contentions of the assessee and subjected the capital gains to tax. He denied the claim for exemption on the ground that the reinvestment was in the son’s name. The Commissioner (Appeals) held that the transfer was of the agricultural land which was not a capital asset, and accordingly no taxable capital gains arose. The Tribunal held that the asset transferred was a capital asset and subject to eligibility of the assessee for an exemption u/s. 54F, a taxable capital gains arose. It however, remanded the matter back to the Commissioner (Appeals) to examine the assessee’s claim for exemption u/s. 54F.

On remand, the Commissioner (Appeals) held that section 54F contemplates only investment in a residentialproperty by the assessee; it was enough if the sale proceeds were invested in the construction of aresidential house. It was further held by the Commissioner (Appeals) that it was not necessary that the newly constructed house should be in the name of the assessee, and that an adopted son had the samerights as a natural son. The Commissioner (Appeals) allowed the appeal of the assessee granting relief u/s. 54F. The Tribunal quashed the order of the Commissioner (Appeals), denting the benefit of the exemption.

On appeal by the assessee, the Bombay High Court examined the provisions of section 54F and the definition of the term “assessee” contained in section 2(7). It noted that as per the scheme of section 54F, the assessee, who is the owner of the original asset, needs to, purchase or construct a residential house within the specified period. It noted that the concepts of “assessee”, “own”, “owner”, “ownership”, “co-owner”, “owner of house property”, and “ownership of property” contained in various sections were very much interlinked and connected for granting the benefits under the Income Tax Act. Referring to the Supreme Court decisions in the cases of Podar Cement (P) Ltd. 226 ITR 625 and Mysore Minerals Ltd 239 ITR 775, it expressed the view that an assessee must have valid title legally conveyed to him after complying with the requirements of law or should at least be entitled to receive income from the property in his own right and have control and domain over the property for legal purposes, while basically excluding a third person of any right over the said property. It was of the view that the object being to give a benefit to the assessee, it meant that the assessee must comply with the conditions strictly in all respects.

The Bombay High Court expressed the view that right from the sale of the original asset till the purchase and/ or construction of the new asset, the ownership and domain over the new asset was a must. According to the High Court, the new property must be owned by the assessee, or he should have legal title over the same. Though others might use and occupy the property along with the assessee, the ownership of the residential house should be of the assessee.

The Bombay High Court noted that by constructing the house in the name of his son, the assessee effectively transferred the new property to his son, who became the owner thereof, in spite of the prohibition on transfer of the new house for a period of 3 years from the date of transfer of the original asset. The High Court noted that the assessee had no domain and/or right on the property, which disentitled him to the claim for exemption, since there was non-compliance of the conditions as per the scheme of section 54F.

The Bombay High Court noted the decision of the Andhra Pradesh High Court cited before it in the case of Late Mir Gulam Ali Khan 228 ITR 165, where the court had taken the view that the term “assessee” must be given a wide and liberal interpretation, and that where the legal heirs had completed the purchase of the new house after the death of the assessee, the assessee was entitled to the benefit of the exemption. The Bombay High Court however expressed its disinclination to accept the liberal view given to the word “assessee” in Late Mir Gulam Ali Khan’s case, stating that the facts before it were different, since in the case before them, it was the son (who was not the assessee) who had purchased and constructed the new property. It also noted that the assessee had admitted that the son was the beneficial owner of the property.

The Bombay High Court therefore held that the as-sessee was not entitled to the benefit of exemption u/s. 54F.

A similar view has been taken in the context of sec-tion 54B by the Punjab & Haryana High Court in the case of Jai Narayan vs. ITO 306 ITR 335 , where the new land was purchased in the names of the son and the grandson of the assessee, by the Rajasthan High Court in the case of Kalya v CIT 251 CTR 174, where the new land was purchased in the names of the son and the daughter-in-law, and in the context of section 54F, by the Delhi High Court, in the case of Vipin Malik (HUF) vs. CIT 330 ITR 309, where the new house was purchased in the names of the karta and his mother.

Kamal Wahal’s case

The issue came up recently before the Delhi High Court in the case of CIT vs. Kamal Wahal 351 ITR 4.

In this case, the assessee, a retired employee, sold his share in an inherited property, and invested a part of the sale proceeds in purchase of a residential house in the name of his wife. He claimed exemption u/s. 54F for the investment in the residential house.

The assessing officer denied the benefit of the exemption, on the ground that the investment should have been made in the assessee’s name, and not in the name of his wife. The Commissioner(Appeals) allowed the assessee’s appeal, following the decisions of the Madras High Court in the case of CIT vs. V Natarajan 287 ITR 271 and of the Andhra Pradesh High Court in the case of Mir Gulam Ali Khan vs. CIT 165 ITR 228.The tribunal dismissed the appeal of the revenue, following the judgments of the Madras and Andhra Pradesh High Courts, and also of the Karnataka High Court in the case of DIT vs. Jennifer Bhide 349 ITR 80, where the property was purchased in the joint names of the assessee and her spouse. While noting the decision of the Bombay High Court in the case of Prakash(supra), the tribunal took the view that where a statutory provision was capable of more than one view, the view favouring the taxpayer should be preferred.

The Delhi High Court approved the decision of the tribunal, noting that besides the decisions referred to by the tribunal, the Delhi High Court itself in the case of CIT vs. Ravinder Kumar Arora 342 ITR 38 had also taken a similar view in the context of section 54F involving purchase of a new property in the joint names of the assessee and his spouse. The Delhi High Court also noted the decision of the Punjab and Haryana High Court in the case of CIT vs. Gurnam Singh 327 ITR 278, where a similar view had been taken in the context of section 54B involving purchase of the new land in the joint names of the assessee and his bachelor son.

According to the Delhi High Court, the predominant judicial view was that, for the purposes of section 54F, the new residential house need not be purchased by the assessee in his own name nor was it necessary that it should be purchased exclusively in his name. It noted that in the case before it, the property was not purchased in the name of a stranger, somebody unconnected with the assessee, but in the name of his wife, and that there was no dispute that the entire investment had come out of sale proceeds and that there was no contribution from the assessee’s wife.

Having regard to the rule of purposive construction and the object of section 54F, the Delhi High Court held that the assessee was entitled to the benefit of exemption u/s. 54F.

Observations

The Andhra Pradesh High Court, in Mir Gulam Ali’s case reiterated the acknowledged position in law, while deciding in favour of the assessee’s claim for exemption, that the exemption provisions should be liberally construed. None of the sections, under scanner, expressly require purchase or construction in the name of the assessee himself and a concerted effort is requfcired by the courts to read that requirement in the law so as to deny the benefit of exemption to the assessee. It is this highly debatable position, perhaps,that has led the courts to favour the assesses including the courts, which originally had taken a stand against the claim for exemption, but had later on, in other cases favoured the claim for exemption from tax. Further, the intention behind sections 54 and 54F and other provisions similarly placed is to encourage reinvestment in residential houses, which purpose is achieved by permitting reinvestment in the name of a close relative.

It is quite common to purchase properties in joint names of husband and wife, or jointly with close relatives and importantly there is no prohibition in law against it. In such an event, if the funds flow from the assessee, it is clear that the assessee cannot be denied the benefit of the exemption. Given this, should it make a difference if the assessee does not include his own name because of the circumstances of his old age or for convenience of simpler succession?

It may be noted that almost all the decisions favouring the assessee have been cases where the property has been purchased in the name of the spouse of the as-sessee and where funds have flown from the assessee. In all such cases, in any case, clubbing provisions would operate and the property would be regarded for both income tax and wealth tax purposes as the property of the assessee. The natural corollary is that the benefit of the exemption should also be given in such cases.

On the other hand, the decisions which have gone against the assessee have been cases where the prop-erty was purchased in the name of a son, daughter-in-law or grandson. In the case of a major son or grandson, clubbing provisions do not apply, and hence perhaps the adverse view was taken by the courts, though not highlighted in so many words .

The decisions involving section 54B which have gone against the assesseehave also been partly decided on account of the fact that section 54B requires use of the new land for agricultural purposes by the assessee unlike section 54F that merely requires acquisition of a residential house, and does not require the assessee to reside therein.

Mir Gulam Ali Khan’s case again was a case where the assessee initiated the process of purchase of the property, but passed away before he could complete the purchase, and the purchase was then completed by his legal heirs. Therefore, the subsequent purchase by the legal heirs was part of the same chain of events of sale of the old property and purchase of the new property initiated by the assessee himself.

Of course, one would need to take into account the provisions of the Benami Transactions (Prohibition) Act, 1988 in such a case. That Act excludes transac-tions entered into in the name of a wife or unmarried daughter. The Benami Transactions (Prohibition) Bill, 2011, seeks to exclude transactions in the name of spouse, brother or sister or any lineal ascendant or descendant. The law, therefore, seems to recognise that properties of a person can be purchased in the names of certain close relatives. Given this legal background, can the intention be to deny the benefit of an exemption, the conditions of which are otherwise fulfilled, on the mere ground that the property is pur-chased in the name of one such close relative?

In view of the fact that the issue involves interpretation of tax exemption provisions and that the said provisions do not in any case require that the investment has necessarily to be made in the name of the assessee, leading to a possibility of a debate, the better view seems to be that purchase of a property in the name of a spouse or close relative should qualify for the benefit of the exemption u/s. 54, 54B or 54F, as long as the funds belonging to the assessee are used and the assessee retains domain over the property. However, given the fact that while planning one’s affairs one should not plan in a manner so as to attract unnecessary litigation, it is advisable to purchase the property in the joint names of the assessee and such close relative, rather than in the name of the close relative alone.

Speculative business: Section 43(5) proviso (d): A. Y. 2006-07: Proviso (d) to section 43(5) inserted w.e.f. 01-04-2006: Transactions in derivatives on recognised stock exchange not deemed speculative: Rule prescribing conditions for notification framed on 01-07-2005: Notification in January 2006: Notification has retrospective effect: Loss in derivative transactions during July 2005 and September 2005 is not deemed speculative:

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CIT vs. NASA Finelease P. Ltd.; 358 ITR 305:

The assessee was engaged in the business of dealing in securities and investments. The assessee had claimed a loss of Rs. 1,90,29,988 in derivative transactions during the period July, 2005 and September, 2005 and claimed that it is not deemed speculative in view of exclusion in proviso to clause (d) to section 43(5) of the Income-tax Act, 1961 and Notification dated 25th January, 2006 notifying the National Stock Exchange and Bombay Stock Exchange for that purpose. The Assessing Officer held that the loss was speculative loss u/s. 73, and since the derivative transactions were during the period July, 2005 to September, 2005, they were violative of proviso (d) to section 43(5) and the benefit of Notification dated 25th January, 2006 is not applicable for those transactions. The Tribunal allowed the assessee’s appeal and held that the assessee was entitled to the benefit u/s. 43(5) proviso (d) read with the said Notification dated 25th January, 2006.

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

“i) Notification No. 2 of 2006, dated 25-01-2006, issued by CBDT does not specify any particular date and simply notifies the National Stock Exchange and Bombay Stock Exchange under proviso (d) to section 43(5) of the Act. Issue of notification obviously had to take some time as it involved processing and examination of applications etc. This was a matter relating to procedure and the delay in issue of notification or even framing of the Rules was due to administrative constraints.

ii) The delay occasioned, as procedure and formalities have to be complied with, should not disentitle or deprive an assessee, specially, when the transactions were carried through a notified stock exchange. The notification was procedural and necessary adjunct to the section enforced w.e.f. 01-04-2006.

iii) The rule and notification issued in the present case effectuate the statutory and the legislative mandate. There was no reason to interfere with the findings of the Tribunal.”

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Penalty: Concealment: Section 271(1)(c): A. Y. 2002-03: Assessee, a limited company, made a claim for deduction of loss in the course of assessment proceedings: AO rejected the claim and imposed penalty u/s. 271(1)(c): Penalty not justified: Liberal view is required to be taken as necessarily the claim is bound to be scrutinised both on facts and law:

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CIT vs. DCM Ltd.; 262 CTR 295 (Del):

For the A. Y. 2002-03, in the course of the assessment proceedings u/s. 143(3), the assessee company made a claim that the loss of Rs. 95.55 lakh on account of loan granted to its subsidiary DCM International Ltd., which was written off, was deductible as business expenditure or in alternative as capital loss. The Assessing Officer disallowed the claim and also imposed penalty u/s. 271(1)(c) for concealment of income. The Tribunal deleted the penalty.

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

“i) It is not disputed or denied that the loan in fact was granted and has been also written off. There was no concealment or furnishing of inaccurate facts. Case is completely covered by Explanation 1 to section 271(1)(c). It is not disputed that full factual matrix or the facts were before the Assessing Officer at the time of assessment when this claim was made. The fact that scrutiny assessment was pending is a relevant and important circumstance to show the bona fides of the assessee as he was aware that the claim would be examined and would not go unnoticed.

ii) Secondly, the claim was rejected in view of the legal position, which was against the assessee and not because of statement of incorrect or wrong facts. Law does not bar or prohibit an assessee for making a claim, which he believes may be accepted or is plausible. When such a claim is made during the course of regular or scrutiny assessment, liberal view is required to be taken as necessarily the claim is bound to be carefully scrutinised both on facts and in law. Full probe is natural and normal.

iii) Threat of penalty cannot become a gag and/ or haunt on assessee for making a claim which may be erroneous or wrong, when it is made during the course of the assessment proceedings. Normally penalty proceedings in such cases should not be initiated unless there are valid or good grounds to show that factual concealment has been made or inaccurate particulars on facts were provided in the computation.

iv) There is no merit in the present appeal and the same has to be dismissed.”

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Industrial undertaking: Deduction u/s. 80-I: A. Ys. 1993-94 and 1994-95: Profit must be derived from industrial undertaking: Ownership of industrial undertaking is not a condition precedent:

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Krishak Bharti Co-operative Ltd. vs. Dy. CIT: 358 ITR 168 (Del):

The assessee had an ammonia/urea plant at H. Just next to it and within its premises, the Hazira ammonia extension plant, which manufactured heavy water, had been set up and established by the Heavy Water Board, which was part of the Department of Atomic Energy, Government of India. There was an agreement between the assessee and the Government of India whereby the assessee operated and maintained the heavy water plant. The heavy water plant belonging to the Heavy Water Board and the ammonia/urea plant of the assessee were both integrated with each other. The process of manufacture of the heavy water plant was dependent on the supply of synthesis gas enriched with deuterium which was a by-product of the assessee’s ammonia/ urea plant. The assessee received service charges from the Heavy Water Board and claimed deduction u/s. 80-I in respect of it. The claim was rejected by the Assessing Officer. The Tribunal upheld the order of the Assessing Officer on the ground that the industrial undertaking manufacturing heavy water was not a part of the ammonia/urea plant of the assessee. It held that the service charges received by the assessee from the Heavy Water Board could not be treated as having been derived from an industrial undertaking of the assessee.

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

“i) A provision in a taxing statute granting incentives for promoting growth and development should be construed liberally.

ii) A plain reading of section 80-I(1) and (2) of the Income-tax Act, 1961, would indicate that the ownership by the assessee of an industrial undertaking from which assessee derives profits and gains is not a stipulated condition. The only thing that has to be seen is whether the source of the profit or gains is an industrial undertaking.

iii) The service charges received by the assessee were profits and gains derived from an industrial undertaking and were eligible for a deduction u/s. 80-I.”

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Business expenditure: TDS: Works contract: Disallowance u/s. 40(a)(ia) r/w. section 194C: Assessee running coaching classes for competitive exams: Agreement with franchisees: Not a works contract: Tax not deductible at source on payment to franchisees: Amount paid to franchisees not disallowable u/s. 40(a)(ia):

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CIT vs. Career Launcher India Ltd.; 358 ITR 179(Del):

The assessee was a company engaged in providing education and training for various preparatory examinations like IIM, IIT, designing, etc. These services were provided across the country through education centres run by the assessee itself or by its franchisees. For the A.Ys. 2005-06 and 2006-07, the Assessing Officer disallowed the amounts paid to the franchisees relying on section 40(a)(ia) on the ground that the assessee had not deducted tax at source which it was obliged to do u/s. 194C of the Act. The Tribunal deleted the disallowance and held that the agreement was not for making any payment to licensee for any work done for the assessee and that it was a case of sharing of fees for carrying out respective obligations under a contract. It held that neither section 194C nor section 40(a) (ia) was applicable.

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

“i) The agreements with franchisees were not the simple cases of the assessee engaging certain other persons to conduct the learning centres for which they were to be paid. The agreements were much more complex and reflected a business arrangement, as opposed to a contract for carrying out a work. Both the parties, the assessee and the licensee had entered into this agreement only in their mutual interest and for mutual gains. It was a simple case of permitting the use of its trade name or reputation by the licensees for a consideration.

ii) The provisions of section 194C and section 40(a)(ia) were not applicable to the facts of the case.”

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Business expenditure: TDS: Disallowance u/s. 40(a)(ia) r/w. s/s. 9(1)(vii) and 195: A. Y. 2007- 08: Circular in force during relevant year not obliging to deduct tax at source: Disallowance u/s. 40(a)(ia) not proper: Subsequent withdrawal of Circular not relevant:

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CIT vs. Model Exims; 358 ITR 72(All):

In the A. Y. 2007-08, the Assessing Officer disallowed an amount of Rs. 57,49,489 paid to overseas entities as commission relying on section 40(a)(ia) on the ground that tax is not deducted at source u/s. 195 of the Act. The Assessing Officer rejected the contention of the assessee that the assessee was not obliged to deduct tax at source on the said payments in view of the Circular Nos. 23 of 1969, 163 of 1975 and 786 of 2000 and accordingly the said payments were not taxable in the hands of the recipients. The CIT(A) deleted the disallowance and held that the Circular No. 7 of 2009 withdrawing the above said circulars was operative only from 22nd October, 2009, and not prior to that date and had no bearing in the instant assessment year. The Tribunal confirmed the order of the CIT(A) and dismissed the appeal filed by the Revenue. On appeal by the Revenue, the Allahabad High Court upheld the decision of the Tribunal and held as under:

“i) The Circulars did not oblige the assessee to deduct tax at source. The assessment in question for the A. Y. 2007-08 would be governed by the Circular, which was operative at the relevant time. The assessee was not entitled to deduct tax at source.

ii) Circular No. 7 of 2009, dated 22-10-2009, withdrawing the earlier Circulars became operative only from that date. The Circulars in the relevant year were binding on the Department and the Assessing Officer did not have any right to ignore the Circulars and to disallow u/s. 40(a) (ia) of the Act, for non-deduction of tax at source u/s. 195.”

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Sections 194H read with section 40(a)(ia) of the Income Tax Act, 1961 – Mere distribution of the collected amount of commission does not require tax deduction if it is not shown as an expense.

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5. (2013) 55 SOT 356 (Delhi)
ITO vs. Interserve Travels (P.) Ltd.
ITA No.3526 (Delhi) of 2010
A.Y.2006-07. Dated 18-05-2012
 
Sections 194H read with section 40(a)(ia) of the Income Tax Act, 1961 – Mere distribution of the collected amount of commission does not require tax deduction if it is not shown as an expense.

Facts

The assessee was engaged in business of travel agents. It had entered into a consortium agreement with 12 other members who were travel agents for booking air tickets through platform provided by `A’. The consortium members agreed that assessee would act as a lead member and authorised it to enter into contracts with `A’ to make collections and distribute monies to each of the consortium travel agents in proportion to segment bookings effected by each travel agent. The assessee collected commission for services rendered by other members and distributed said commission amongst members on priority basis. Though the TDS certificate issued by `A’ reflected commission of Rs. 65.72 lakh, the assessee distributed an amount of Rs. 52.22 lakh amongst members for services rendered by them in booking tickets, etc. Since assessee did not deduct tax at source while making payment of commission to travel agents, the Assessing Officer disallowed the amount of Rs. 52.22 lakh u/s. 40(a)(ia).

The CIT(A) held that since the amount of Rs. 52.22 lakh was not received for any services rendered by the assessee to `A’, the amount could not be treated as income of the assessee. Further, since the assessee did not claim the said amount as expenditure in its accounts, no tax was deducted at source by the assessee. Therefore, no disallowance could be made in terms of provisions of section 40(a)(ia).

Held
On further appeal by the Revenue, the Tribunal upheld the CIT(A)’s order. The Tribunal noted as under :

1. As is evident from the terms and conditions of the consortium agreement, the payment by the assessee to other consortium members is not voluntary. The assessee is under a legal obligation in terms of the agreement to pay the amount to other consortium members in accordance with settled terms.
2. There is nothing to suggest that the assessee rendered any service to `A’. It is the settled legal position that income accrues when an enforceable debt is created in favour of an assessee. In other words, income accrues when the assessee acquires the right to receive the same. The terms of the consortium agreement do not reveal any such right in favour of assessee. Income of Rs. 52.22 lakh rightfully belonged to the other consortium members to whom the amount was distributed by the assessee.
3. Since the assessee only distributed the income in terms of the agreement and this did not amount to incurring of an expenditure nor did the assessee claim any expenditure, there was no infirmity in the findings of the CIT(A) in deleting the disallowance u/s. 40(a)(ia).

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TDS: Section 194C: A. Y. 2005-06: Contract for purchase of natural gas: Transportation charges paid to seller: Transportation part of sale transaction: No works contract or contract for carriage of goods: Section 194C not attracted:

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[CIT Vs. Krishak Bharati Co-operative Ltd.; 349 ITR 68 (Guj): 253 CTR 402 (Guj):]

Assessee was engaged in the manufacture of fertilisers. It consumed natural gas which was supplied by different agencies through pipelines. The Department took the view that the agreement involved works contract for transport of the gas and the assessee was required to deduct tax at source at the appropriate rate u/s. 194C on the transportation charges. The Tribunal held that the assessee did not hire any service of carriage of goods and that, therefore, the case would not fall in clause (c) of Explanation III to section 194C of the Act.

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

“i) The contract of sale of gas itself envisaged that gas would be supplied by the seller to the assessee at the receiving point of the assessee’s factory. For such purpose, the seller would be laying down its pipelines and other equipment and would maintain such paraphernalia. The seller would also have the right to use such pipelines and equipment for the purpose of distributing gas to other gas consumers. The ownership of the gas was passed on from the seller to the assessee only at the point of delivery and not before.

ii) The agreement essentially was for purchase and sale of gas. Transportation of gas was only a part of the entire sale transaction. The clear understanding of the parties that the ownership of gas would pass on to the buyer at the delivery point, showed that the transport of gas by the seller was a step towards execution of contract for sale of gas and there was no contract for carriage of goods.

iii) Thus the case was not covered u/s. 194C. The transportation charges did not depend on the consumption of quantity of gas but were a fixed monthly charges to be borne by the assessee as part of the agreement between the parties. Therefore, the application of section 194C did not arise.”

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Sections 2(24) read with sections 4 and 28(i) of the Income Tax Act, 1961 – Amount realised on sale of carbon credits is a Capital Receipt and it cannot be taxed as a Revenue Receipt.

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2. (2013) 151 TTJ 616 (Hyd.)
My Home Power Ltd. vs. Dy.CIT
ITA No.1114 (Hyd.) of 2009
A.Y.:2007-08. Dated: 02.11.2012

Sections 2(24) read with sections 4 and 28(i) of the Income Tax Act, 1961 – Amount realised on sale of carbon credits is a Capital Receipt and it cannot be taxed as a Revenue Receipt.

For the relevant assessment year, the amount realised by the assessee from sale of carbon credits was treated by the Assessing Officer and the CIT(A) as a revenue receipt and not a capital receipt.

The Tribunal, relying on the decision of the Supreme Court in the case of CIT vs. Maheshwari Devi Jute Mills Ltd. (1965) 57 ITR 36 (SC), held that sale of carbon credits is to be considered as a capital receipt.

The Tribunal held as under :

Carbon credit is in the nature of “an entitlement” received to improve world atmosphere and environment by reducing carbon, heat and gas emissions. It is not generated or created due to carrying on business but it is accrued due to “world concern”. It has been made available assuming character of transferable right or entitlement only due to world concern.

Further, carbon credits cannot be considered as a by-product. It is a credit given to the assessee under the Kyoto Protocol and because of international understanding. The persons having carbon credits get benefit by selling the same to a person who needs carbon credits to overcome one’s negative point carbon credit. Carbon credit is entitlement or accretion of capital and, hence, income earned on sale of these credits is capital receipt.

Thus, the amount received for carbon credits has no element of profit or gain and it cannot be subjected to tax in any manner under any head on income. It is not liable for tax for the assessment year under consideration in terms of sections 2(24), 28, 45 and 56.

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Bombay Chartered Accountant’s Society

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13th February, 2013
The Chief Commissioner of Income-Tax,
Aayakar Bhavan,
Maharshi Karve Road,
Mumbai – 400 020

Dear Sir,

We refer to your above letter and thank you for providing us with an opportunity to give our suggestions on various issues relating to Foreign Tax Credits. Annexed to this letter are the issues commonly faced while trying to obtain credit for taxes paid/ deducted abroad along with suggestions for mitigating the hardships that taxpayers may face while claiming credit for the same. We hope you will find the suggestions useful. If you need any further information/clarification in respect of the above we shall be glad to provide the same.

Yours truly,
For Bombay Chartered Accountants’ Society

Deepak R.Shah                           Kishor B.   Karia                          Rajesh S. Kothari
President                                    Chairman                                       Co-Chairman

International Taxation Committee

Bombay Chartered Accountant’s Society

Representation on “Foreign Tax Credit Rules”

1. Proof of Payment

Many times it is noticed that difficulties arise as to the acceptability of proof of payment of taxes in the source country due to various reasons.

Suggestion

FTC Rules can provide various documents that can be accepted as proof for granting credits for taxes paid / deducted overseas. Some such proofs may be: –

(i) Confirmation from the Revenue Authorities;

(ii) Certificate from the Employer in case of TDS on salaries;

(iii) Acknowledgement of Payment in case of online payment or payment across the Bank counter; and

(iv) Where appropriate proof is not available based on the domestic law of the source country than the Officer processing the return must be empowered to grant credit on being satisfied that the taxes are paid / deducted in the source country.

2. Timing Difference

More often than not the tax assessment year in India is different than it is in the foreign tax jurisdiction. For example: An assessee in India has to follow tax year from April-March whereas in US it is based on the calendar year which results in timing difference and overlapping period.

Suggestion

The FTC Rules should provide for granting proportionate tax credit based on the quantum of income falling within the previous year in line with section 199 i.e. credit for foreign taxes must be granted in the assessment year in which the income is taxed in India.

3. Unilateral Credits even where DTAA exists if payment is as per domestic tax law of the Source Country

Section 90(2) grants an option to a non-resident earning income from sources in India to either opt to be governed by the provisions of the DTAA (in case there is a DTAA between India and the country of residence of the non-resident) or opt to be governed by the provisions of the Domestic Tax Law of India, whichever is more beneficial. However, a similar choice is not available to a resident who receives income from sources outside India. He has to be governed by the provisions of the DTAA (in case there is a DTAA between India and the country from which income is sourced) and where there is no DTAA to be governed by the provisions of section 91 relating to unilateral tax credit. Many times a situation may arise when a person would not like to opt for DTAA provisions (inspite of there being a DTAA) and chooses to be governed by the provisions of domestic tax laws of the source country if they are more beneficial to him.

Suggestion

FTC Rules may provide an option to claim credit based on the rate at which taxes have been actually withheld / paid in the source country i.e. either as per DTAA or Domestic Tax Code of the source country.

4. Exchange Rate for conversion of Foreign Taxes

Since Foreign Taxes are paid in the local currency of the concerned State, an issue arises as to which of the following rate to be applied for conversion to arrive at their rupee equivalent.

 (i) Exchange rate on the date on which the taxes are paid / deducted;

(ii) Exchange rate on the date on which the income is recognised in the Indian books;

(iii) Exchange rate on the date on which income accrues in India;

(iv) Exchange rate on the date of remittance of income to India;

Suggestion

Where income is recognized by the recipient in India on accrual basis on a particular date, FTC Rules should provide that the RBI Reference Rate as prevalent on that date should be considered as the rate of exchange. When income is booked on receipt basis at the time of its remittance to India during the previous year the actual rate of exchange should be taken as the rate of conversion for FTC.

5. Corresponding Adjustments on completion of Assessment

Taxes paid in foreign jurisdiction may be increased or reduced depending upon the tax liability after regular tax assessment. An issue may arise whether India should consider such changes in tax demand or refund while giving tax credit?

Suggestion

It would be fair to provide a mechanism for Corresponding Adjustments on increase or decrease of tax liability upon completion of assessment in the source country.

6. Underlying Tax Credit (UTC)

 Taxation of dividends invariably results in economic double taxation. In order to encourage declaration of dividends by foreign subsidiaries of Indian companies, Section 115BBD provides for concessional rate of tax. This is indeed a welcome step. However, underlying tax credit is the only solution to mitigate economic double taxation. Unfortunately very few Indian Treaties provide for UTC.

Suggestion

FTC Rules should provide for unilateral UTC. This will further encourage Indian MNCs to bring back precious foreign exchange to the country by declaring dividends. UTC will be imperative if the Govt. is thinking of introducing Controlled Foreign Companies Regulations (CFC). However, as a safeguard against possible misuse a minimum direct shareholding % may be prescribed for availing UTC.

 7. FTC in case of a Tax Sparing situation

Many Indian Tax Treaties provide for tax sparing clauses where by India will give deemed credit for taxes on exempt income in the source country. Issue may arise as to determination of the credit amount in absence of proof of payment.

Suggestion

FTC Rules may provide for acceptance of certificate issued by the Auditor’s or tax authorities to determine the tax relief for giving FTC in cases of tax sparing.

8. FTC in case India becomes country of residence under a tie-breaking test

Worldwide major issue of debate or challenge is determination of the place of “Source” of income and place of residence of a tax payer. In a Jurisdictional tax system, taxes are levied on “Residence” link as well as on a “Source” link. Under this system the tax payer is taxed on his worldwide income in the State of residence and the credit is given for the taxes paid / deducted in the source State.

A problem arises when a tax payer is held to be resident of two contracting states based on different criteria / due to timing difference. (For example a US Citizen present in India for more than 182 days would be regarded as resident of both States). Although DTAA provide for series of tie-breaking tests to determine the State of residence and State of source difficulties will arise in claiming FTC.

Suggestion

FTC Rules must provide clear guidance for claiming tax credit in cases of dual residency of individuals.

Moneys of client to be kept in a separate bank account (Clause 10 of Part I of Second Schedule)

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Shrikrishna (S) – Hello, Arjun, you are looking in a good mood today, Any major fees received?

Arjun (A) – No. I am not that lucky. My last September’s bill will be received next September.

S – Then what is the secret of your smiling face today?

A – I just booked a foreign tour for my family in the coming vacation.

S – Great! But you go on vacation every year. What is special this year?

A – My son Abhimanyu is in the 10th SSC. Due to his classes and studies, we did not go anywhere for the last three years.

S – Where are you going?

A – Europe tour. But don’t tell Draupadi and Subhadra. I want to keep it as a secret.

S – But you said your clients don’t pay in time. You always crib about money, especially in March.

A – True. Fortunately, one of my clients went abroad for six months and he has kept a sizeable amount with me for his tax pay ments – Advance tax and self assessment.

S – Oh!

A – Another client has also given some amount to be invested in PPF next month. He is also touring for a long time.

S – Then what do you do with that money?

A – It came in handy to me for paying for the foreign trip. Sometimes, I also use it for my investments or share dealings.

S – Don’t you keep it separate?

A – Why? I will pay the tax or put in PPF at the appropriate time. I do it quite often.

S – But it is client’s money!

A – So what? He has entrusted it to me.

 S – But there are restrictions. It is not permissible.

A – Why should there be any bar? If the client has no objection, where is the problem?

S – Dear Partha, please read clause 10 – Second Schedule – in Part I.

A – Whatever I do, you always find some fault with it. My friends are also doing the same thing as I do and they deal with huge sums.

S – See, dear. So long as it is going smoothly, there will not be any problem. But basically, it is not ethical. You are using client’s money for your personal things.

A – But what is the logic?

S – There were instances where the CAs never paid the taxes of the clients. They also did not make investments as directed by the clients.

A – Many times, clients pay us for making Government payments. Stamp duty, registration fees and so on. Can we not deposit that amount in our accounts?

S – See, if it is to be expended in a short time, you may keep it. But if it is a long time, then you need to open a separate bank account for clients’ money.

A – This is strange!

S – Yes. It has also happened that CAs were tempted to play with others’ money. Some times, they lost it in the share market or entered into wrong deals.

A – This is alarming. I know one such instance. Fortunately, he could recover with the help of his friends. Otherwise, he had a tough time.

S – That is the wisdom to be learnt. Your Council does not want it to happen to other members.

A – You mean to say, I should not deposit the clients’ money in my account at all? There are no exceptions?

S – Not necessarily. The Council has already thought of practical situations. For exam ple, if an advance fee is received, it need not be deposited in a separate account. It is your money.

A – Good! Sounds sensible.

S – If some payments are to be made on behalf of clients in a short time, then it can be routed through your normal account.

A – Can I put it in short term deposits?

S – Ideally speaking, No. You are not supposed to use that money for personal benefit. You cannot earn out of it.

A – What do you mean by short time?

S – Council has used the expression ‘reasonably short time’. That depends on facts and circumstances of each case.

A – I have heard that lawyers are also required to keep separate account for clients’ money. They receive huge amounts – for court fees, stamp duty and even as stake-holders – as escrow money.

S – Yes. Same principle applies here. Another thing, whatever you receive in your capacity as a trustee, executor or liquidator, you must put it in a separate account.

A – Oh! I need to be cautious now.

S – What is really objectionable is using it for personal benefit. CAs have gone to the extent of even depositing client’s income tax refund order in their account.

A – That is criminal. It is a fraud.

S – But apart from the fraud, he was held guilty under this clause only.

A – You have opened my eyes. I feel like can celling the tour tickets.

S – You need not go that far. But make sure that whatever obligation of your client you have undertaken, fulfill those, please don’t let him down. Faith and credibility are your greatest assets and you can’t afford to lose those. After all, you are a trustee.

A – I agree. Om Shanti! The above dialogue is with reference to Clause 10 of Part I of the Second Schedule which reads as under:

Clause 10: fails to keep moneys of his client other than fees or remuneration or money meant to be expended in a separate banking account or to use such moneys for purposes for which they are intended within a reasonable time. Further, readers may also refer pages 286 – 289 of ICAI’s publication on Code of Ethics, January 2009 edition (reprinted in May 2009).

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Extension of Time Limit for Filing Cost Audit Reports and Compliance Reports for the year 2011-12

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The Cost Audit Branch of Ministry of Corporate Affairs Vide Circular No. 2/2013 has decided that all cost auditors and the companies concerned are allowed to file their Cost Audit Reports and Compliance Reports for the year 2011-12 [including the overdue reports relating to any previous year(s)] with the Central Government in the XBRL mode, without any penalty, within 180 days from the close of the company’s financial year to which the report relates or by 28th February, 2013, whichever is later.

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Extension of Time Limit for Filing Form 23AC/ACA XBRL

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The Ministry of Corporate Affairs Vide Circular No 05/2013 dated 12th February 2013 has extended the time limit for filing of Form 23 AC – ACA XBRL to 28th February 2013 or within 30 days from the due date of AGM of the Company, whichever is later for the financial year commencing on or after 1-4-2011.

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Relaxation of Additional Fees and Extension of the last date of filing various forms with the Registrar of Companies.

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The Ministry of Corporate Affairs has vide Circular No 03/2013 dated 8th February, 2013 relaxed the Additional Fees and extended the last date of filing various forms with the Registrar of Companies.

 • The payment of Additional fees has been relaxed on Forms which ought to have been filed post the transition of MCA 21 from TCS to Infosys, but could not be filed due to technical issues in the system.

• Documents which have expired on or after 17th January 2013 due to non submission/resubmission PUCL may be restored.

• All the cases related to filing of court orders/ competent authority where the due date/date of filing was falling on or after 17th January is extended without payment of additional fees

 • Name availability which expired due to nonsubmission of incorporation documents will be made available for filing of the same.

• For documents regarding registration of charges, the due date is to be extended by the Regional Director on case to case basis for due dates on or after 17-1-2013. Due dates in these cases is extended till 28-2-2013 based on request received by the RD/ROC and examined on case to case basis without levying of additional fee – the request should be made by the Company/Professional by e-mail/post along with the supporting documents. A ticket will be raised on examining the application and on being resolved, the user will be accordingly informed for filing within the time given in the e-mail. However, stakeholders who are able to file the documents by date of this circular are not eligible for fees relaxation or extension nor refund.

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Foreign Exchange Management Act, 1999 – Import of precious and semi precious stones – Clarification

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This circular clarifies that, with immediate effect, Suppliers’ and Buyers’ Credit (trade credit) including the usance period of Letters of Credit opened for import of precious stones and semi-precious stones should not exceed 90 days from the date of shipment.

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Opening of NRO accounts by individuals of Bangladesh Nationality.

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Presently, Nationals of Bangladesh are permitted to open Non-Resident Ordinary (NRO) accounts in India only after obtaining RBI approval.

This circular permits Nationals of Bangladesh who hold a valid visa and a valid residential permit issued by Foreigner Registration Office (FRO) / Foreigner Regional Registration Office (FRRO) concerned to open a NRO account without obtaining RBI permission. However, entities of Bangladeshi ownership will continue to require RBI permission for opening Bank accounts in India.

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Foreign investment in India by SEBI registered FIIs in Government securities and corporate debt

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SEBI has revised the guidelines relating to investment in Government Securities & Corporate Debts by FII, Sovereign Wealth Funds (SWF), Multilateral Agencies, Endowment Funds, Insurance Funds, Pension Funds and Foreign Central Banks as under:

Exchange Earner’s Foreign Currency (EEFC) Account, Diamond Dollar Account (DDA) & Resident Foreign Currency (RFC) Domestic Account

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Presently, EEFC, RFC (Domestic) and Diamond Dollar account holders can access the foreign exchange market for purchasing foreign exchange only after utilizing fully the available balances in their foreign currency account. This circular has removed the said restriction. Hence, EEFC, RFC (Domestic) and Diamond Dollar account holders can now access the foreign exchange market for purchasing foreign exchange without fully utilizing the available balances in their foreign currency account.

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SEBI Investment Advisers Regulations — Formal Birth of a New Profession

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SEBI has notified the Investment Advisers Regulations, 2013 on 21st January 2013. The objective is to require persons engaged in the business of advising on investments to get registered with SEBI and be subject to fairly elaborate regulations. The intention seems to create/recognise a separate category of advisers rendering investment advice and who are not affected by biases of distributors. Such Advisers would thus ideally advise clients on which investment mix is best suited to the clients’ needs and risks and get paid by the client for such advice.

Presently, there are certain concerns in respect of persons providing services in investments. Often, they are not paid by the clients to whom they render services, but are paid by the entities whose products they deal in. Even if they are paid by clients, they may get commissions and other amounts from entities whose products they recommend or distribute. Thus, there is an inherent conflict of interest. Further, even otherwise, if an adviser is paid in other manner such as the quantity of stock in which the client has traded or similar criteria, he faces other types of conflict of interest such as making the client trade more, etc. By such conflicts which over a period the client also understands and realises, the concept and field of investment advice itself is brought to disrepute. Some of those engaged in investment advice have been known not to follow a wholly ethical and professional practice. The advice may be without doing due diligence of the client of his risks and objectives. The advice may even be malafide in the sense that the adviser may himself trade in the opposite direction, while advising the client to take a particular direction.

Thus, there was a need for creating such a separate category of advisers who are engaged almost exclusively in rendering such advice, who take fees from the clients and who make due disclosures about the fees he receives and the trades he himself carries out and so on. It appears that the intention was also to either prohibit the adviser from distributing products himself or making due disclosures of that, particularly of the fact of the consideration he receives if the client buys products that he advises. These Regulations are intended to carry out such objectives. However, the intention also seems to exclude several categories of persons who are otherwise regulated by other regulators such as IRDA, by other professional organisations or even by SEBI itself. Important features of these Regulations are explained as follows.

All Investment Advisers will be required to register with SEBI as a pre-condition to carry on the business of rendering investment advice. The term “investment advice” is broadly framed and includes advice on dealing in investment related products. The Investment Advisers will need to have certain basic relevant qualification and also obtain specialised training/certification. The process of registration is elaborate. They are subject to a detailed code of conduct. The requirements of documentation for clients and in particular the advice given are quite detailed. However, these requirements are perhaps impractical or infeasible particularly for small advisers, though they do set a high benchmark of standards of ethics and good business practices.

The Regulations are dated 21st January 2013 and will come into effect from the ninetieth day of their notification. An existing Investment Advisers is required to apply for registration within six months of their coming into effect and if he has done so may to carry on the activity continue till disposal of his application. New Investment Advisers will have to first apply and obtain registration before commencing such activity.

Investment Adviser is a person who is engaged in the business of rendering investment advice to clients or other persons for a consideration. Thus, persons giving free advice/tips are not covered. Having said that, the business need not be the main business (though see later exemptions for certain categories). Investment advice is broadly defined. It essentially means, advice relating to dealing in securities or investment products. It is not clear whether this would exclude products like gold, real estate, etc. since these are investment products too, though the scheme of the Regulations seem to indicate that they may not be intended to be covered. Even otherwise, it is arguable whether SEBI has jurisdiction over investments in gold, real estate, etc. But even then, a large variety of products would be covered, such as shares, derivatives, mutual fund and other units, shares of unlisted companies, company deposits (even bank deposits), insurance policies/products, small savings like national savings certificates, public provident fund, etc. Viewed even in this way, the impression would be that it would cover almost every agent/ broker dealing in financial products. However, since the requirement is that the Investment Adviser should be rendering advise for consideration, and if one takes a view that the consideration should flow from the clients, then many distributors who earn purely through commissions and the like may not get covered.

There are certain specific exclusions and thus the Regulations will not apply to such excluded persons. Insurance agents/brokers registered with IRDA, who offer investment advice solely in insurance products are excluded. So are pension advisers registered with PFRDA advising solely in pension products. Question is whether advisers who advise on multitude of products (subject, of course, to restrictions by the Regulator) would also need registration.

Distributors of mutual funds registered with specified bodies and registered stock-brokers/sub-brokers who render investment advice to their clients incidental to their primary activity are also excluded.

Professionals like Chartered Accountants, Company Secretaries, lawyers, etc. find a special mention. They too are excluded if they provide advice incidental to their professional service/legal practice. However, the wording is ambiguous. For example, Chartered Accountants are excluded if they provide “investment advice to their clients, incidental to his professional service”. There are Chartered Accountants who, for example, as part of their tax advice, also advice on investments. However, there are Chartered Accountants for whom rendering of financial advice is the main and not incidental professional service they render. It is not clear whether the intention is to exclude all practicing professionals or only those whose principle professional service is other than investment advice.

Thus, if giving such advice is not merely incidental to their professional activity, they too may require registration, irrespective of the fact that they may be regulated by their parent body. It is possible that some of such professionals may thus be covered. Entities such as individuals, firms, corporates, etc. are all covered. The Investment Adviser needs to have formal qualification. The recognised qualifications include professional qualification/post-graduate degree/diploma in finance, accountancy, etc. from recognised institutions, etc. Alternatively, the person may be a graduate in any discipline with at least five years’ experience in areas such as advice in financial products, securities, etc. Individuals and representatives of Investment Advisers need to have – in addition to such qualification it appears – a certification in financial planning from recognised institutions.

Corporate Investment Advisers need to have a minimum net worth of at least Rs. 25 lakh. Individuals and firms need to have net tangible assets of at least Rs. 1 lakh. Elaborate responsibilities and code of conduct have been provided. In particular, stress is given on not placing oneself in conflict of interest.

More important to highlight are the elaborate documentation requirements expected of Investment Advisers. Extensive disclosures relating to the Investment Advisers to the clients need to be made. Significant information has also to be collected of the client. A formal process has to be laid down to assess and analyse the client data from various perspectives including risk profiling. There has to be a documented process for selecting investments based on the client’s investment objectives and financial situation. Know Your Client records of the client’s need to be maintained by the Investment Advisers.

Curiously, the investment advice provided, written or oral, and even its rationale, has to be recorded. This innocuous and even well intended requirement can have serious practical and legal consequences. It is interesting that professionals like CAs, lawyers, etc. need not record or render every professional advice they offer in writing, but Investment Advisers are being required to so record. This may be impractical and cumbersome where clients are numerous and amounts of investments involved small, as they often are. Of course, in case of advising high net worth clients and the like, recording such advice makes sense. No specific requirement is made to take acknowledgement of the client of having received such advice and in such a case, the one-sided recording does not make sense.

The Investment Advisers are required to carry out a yearly audit of compliance of the Regulations by a Chartered Accountant or Company Secretary. Moreover, an Investment Adviser, other than an individual, is required to appoint a Compliance Officer for monitoring the compliance of the Act, Regulations, etc.

The scheme of the Regulations has a few puzzling as-pects. Whom do the Regulations really intend to cover and what types of activities? Is the intention to cover only those Investment Advisers who are not otherwise regulated by SEBI or other bodies? Is the intention not to cover mere distribution of investment products? Or is the intention to cover only those people who carry out investment advice business as their primary activity? The Regulations are not wholly clear and it is just possible that any person who carries out, wholly or partly, the business of giving investment advice would be covered. Thus, there will be multiple and even overlapping regulation.

However, in the other extreme, if the intention is to totally exclude persons already regulated by other bodies or totally exclude distributors of investment products, then the scope of the Regulations may be too narrow and the ills sought to be cured by Regulations will remain only partially touched.

There is yet another confusing area. Is the intention to cover only those Investment Advisers who are compensated by the clients and not by the issuer of the products? The Regulations seem to suggest that the Investment Advisers may receive consideration for advice from any source and not merely the client. In such a case too, intentionally or otherwise, the scope of the Regulations is broadened.

In any case, there are many types of investment products where there are thousands of small investment advisers/agents. These include, for example, agents of public provident funds, small savings, etc. It is arguable that though these too render “investment advice”, SEBI may not have jurisdiction over such products/advice. It will also be cumbersome and expensive for such agents to register themselves and difficult for them to maintain the type of records expected of them, apart from other compliances. SEBI could specifically clarify – since this seems to be the intention also – that unless they receive consideration directly from the client, the Regulations should not apply.

Another concern is of multi -service financial companies. It appears that the intention is to create chinese walls between product distribution department and investment advice department and only the latter would come under the purview of these Regulations. However, in practice, these chinese walls can be expected to be porous and this will thus make a mockery of the Regulations.

SEBI needs to relook at the Regulations to consider the difficulties highlighted above and have a dialogue with the industry and its participants, before bringing the Regulations into effect.

A. P. (DIR Series) Circular No. 25 dated 14th August, 2013

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All Scheduled Commercial Banks which are Authorised Dealers (ADs) in Foreign Exchange/All Agencies nominated for import of gold

This circular states that it supersedes all earlier instructions is respect of import of gold by Authorised Dealers in Foreign Exchange/Nominated Agencies. The circular provides that: –

a) Import of gold in the form of coins and medallions is now prohibited.

b) All nominated banks/nominated agencies and other entities must ensure that at least 20% of every lot of gold imported into the country is exclusively made available for the purpose of exports and the balance for domestic use. A working example of the operations of the 20/80 scheme is annexed to this circular. The scheme shall be monitored by customs authorities, and will be implemented port-wise only.

c) Nominated banks/nominated agencies and other entities can make available gold for domestic use only to the entities engaged in jewellery business/ bullion dealers and to banks authorised to administer the Gold Deposit Scheme against full upfront payment only.

d) Nominated banks/agencies/refineries and other entities must ensure that there is no front loading of imports, particularly in the first and second lots of imports. Such imports have to be linked to normal quantities of gold supplied to the exporters by the nominated banks/agencies and must not exceed the highest quantity supplied during any one year out of last three years. The quantity thus arrived at, however, will not be imported in one or two lots only. As a thumb rule, imports of more than maximum of two months of requirements of the exporters in a lot would be considered unusual. In case there is no previous record of having supplied gold to the exporters then nominated banks/agencies must seek prior approval of the RBI before placing orders for import of gold for the first lot under the 20/80 scheme.

e) The 20/80 principle would also apply for the henceforth import of gold in any form/purity including gold dore, whereby 20 % of the gold imported will be provided to the exporters. This will be administered and monitored at the refinery level for each consignment at the time of such imports as well as by the customs authorities. The refinery can make available gold for domestic use only to the entities engaged in jewellery business/bullion dealers and to the banks authorised to administer the Gold Deposit Scheme against full upfront payment and sale of gold against any other form of payment shall not be permitted. Import of gold dore can be permitted only against a license issued by the DGFT.

f) Any authorisation such as Advance Authorisation/ Duty Free Import Authorisation (DFIA) can be utilised for import of gold meant for export purposes only and no diversion for domestic use is permitted.

However, entities/units in the SEZs and EOUs, Premier and Star Trading Houses are permitted to import gold exclusively for the purpose of exports only.

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A. P. (DIR Series) Circular No. 24 dated 14th August, 2013

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NOTIFICATION [NO.FEMA 263/RB-2013]/GSR 529(E), DATED 05–03-2013

Liberalised Remittance Scheme for Resident Individuals- Reduction of limit from $200,000 to $75,000

This circular has made changes as under to the Liberalised Remittance Scheme (LRS):

1. The existing limit of $200,000 per financial year has been reduced to $75,000 per financial year (April-March).

2. Remittance can be made for any permitted current or capital account transaction or a combination of both. However, no remittance under LRS can be made for acquisition of immovable property, directly or indirectly, outside India.

3. With effect from 5th August, 2013 resident individuals (single or in association with another resident individual or with an ‘Indian Party’ as defined in this Notification) satisfying the criteria as per Schedule V of Notification No. 263/RB-2013 dated 5th March 2013, may make overseas direct investment in the equity shares and compulsorily convertible preference shares in any Joint Ventures (JV)/ Wholly Owned Subsidiaries (WOS) outside India for bona fide business activities outside India within the limit of $75,000.

4. The existing limit for gift in rupees by Resident Individuals to NRI close relatives and loans in rupees by resident individuals to NRI close relatives has been reduced to $75,000 per financial year.

Schedule V [See Regulation 20A]

A. Overseas Direct Investments by Resident Individuals

1. Resident individual is prohibited from making direct investment in a JV or WOS abroad which is engaged in the real estate business or banking business or in the business of financial services activity.

2. The JV or WOS abroad shall be engaged in bona fide business activity.

3. Resident individual is prohibited from making direct investment in a JV/WOS [set up or acquired abroad individually or in association with other resident individual and/or with an Indian party] located in the countries identified by the Financial Action Task Force (FATF) as “non-co-operative countries and territories” as available on FATF website www.fatf-qafi.org or as notified by the Reserve Bank.

4. The resident individual shall not be on the Reserve Bank’s Exporters Caution List or List of defaulters to the banking system or under investigation by any investigation/enforcement agency or regulatory body.

5. At the time of investments, the permissible ceiling shall be within the overall ceiling prescribed for the resident individual under Liberalised Remittance Scheme as prescribed by the Reserve Bank from time to time. [Explanation: The investment made out of the balances held in EEFC/RFC account shall also be restricted to the limit prescribed under LRS.]

6. The JV or WOS, to be acquired/set up by a resident individual under this Schedule, shall be an operating entity only and no step-down subsidiary is allowed to be acquired or set up by the JV or WOS.

7. For the purpose of making investment under this Schedule, the valuation shall be as per Regulation 6(6)(a) of this Notification.

8. The financial commitment by a resident individual to/on behalf of the JV or WOS, other than the overseas direct investments as defined under Regulation 2(e) read with Regulation 20Aof this Notification, is prohibited.

B. Post Investment Changes

Any alteration in shareholding pattern of the JV or WOS may be reported to the designated AD within 30 days including reporting in the Annual Performance Report as required to be submitted in terms of Regulation 15 of this Notification.

C. Disinvestment by Resident Individuals

1. A resident individual, who has acquired/set up a JV or WOS under the provisions of this Schedule, may disinvest (partially or fully) by way of transfer/sale or by way of liquidation/ merger of the JV or WOS.

2. Disinvestment by a resident individual shall be allowed after one year from the date of making first remittance for setting up or acquiring the JV or WOS abroad.

3. The disinvestment proceeds shall be repatriated to India immediately and in any case not later than 60 days from the date of disinvestment and the same may be reported to the designated AD.

4. No write-off shall be allowed in case of disinvestments by the resident individuals.

D. Reporting Requirements

1. The resident individual, making overseas direct investments under the provisions of this Schedule, shall submit Part I of the Form ODI, duly completed, to the designated authorised dealer, within 30 days of making the remittance.

2. The investment, as made by a resident individual, shall be reported by the designated authorised dealer to the Reserve Bank in Form ODI Parts I and II within 30 days of making the remittance.

3. The obligations as required in terms of Regulation 15 of this Notification shall also apply to the resident individuals who have set up or acquired a JV or WOS under the provisions of this Schedule.

4. The disinvestment by the resident individual may be reported by the designated AD to the Reserve Bank in Form ODI Part IV within 30 days of receipt of disinvestment proceeds.

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A. P. (DIR Series) Circular No. 23 dated 14th August, 2013

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Overseas Direct Investments

Presently, an Indian Party can invest under the Automatic Route up to 400% of its net worth as on the date of the last audited balance sheet in all its overseas Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS) engaged in any bona fide business activity.

This circular has reduced the above limit of 400% of net worth to 100% of net worth in case of all fresh Overseas Direct Investment proposals under the Automatic Route. Also, in case of fresh investment in overseas unincorporated entities in the energy and natural resources sectors, the above limit of 400% of net worth has been reduced to 100% of net worth in case of all fresh Overseas Direct Investment proposals under the Automatic Route. ODI in excess of 100% of the net worth will be considered by RBI under the Approval Route. Existing JV/WOS set up under earlier regulations will continue to be governed by the same.

However, there is no change as regards investment overseas under the Automatic Route by Navratna Public Sector Undertakings (PSUs), ONGC Videsh Limited (OVL) and Oil India Ltd (OIL), in overseas unincorporated entities and the overseas incorporated entities in the oil sector (i.e., for exploration and drilling for oil and natural gas, etc.), which are duly approved by the Government of India. They can invest without any limit.

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A. P. (DIR Series) Circular No. 20 dated 12th August, 2013

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Foreign Exchange Management Act, 1999 (FEMA) Foreign Exchange (Compounding Proceedings) Rules, 2000 (the Rules) – Compounding of Contraventions under FEMA, 1999.

This circular states that applications for compounding must contain details of the bank account of the applicant in the format annexed to this circular to facilitate refund of compounding fees in case the application has to be returned because of nonobtaining of proper approvals or permission from the concerned authorities or for any other reason(s).

Also, annexed to this circular are the revised annexures for submission of information with regards to violation in respect of Foreign Direct Investment, External Commercial Borrowings, Overseas Direct Investment and Branch Office/Liaison Office. In the revised annexures details of PAN and the activity as per NIC codes-1987 have to be given. If the said information is not given, the application will be treated as incomplete. Also, information regarding change in the address/contact detail of the applicant has to be submitted to the Compounding Authority.

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A. P. (DIR Series) Circular No. 19 dated 7th August, 2013

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Non-Resident Deposits–Comprehensive Single Return (NRD-CSR): Submission under XBRL

This circular states that RBI is shifting, from 1st October, 2013, the NRD-CSR reporting to eXtensible Business Reporting Language (XBRL) platform to provide validations for processing requirement in respect of existing NRD schemes, improve data quality, enhance the security-level in data submission, and enable banks to use various features of XBRL-based data submission, and tracking. The procedure and new formats are given in/annexed to this circular.

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A. P. (DIR Series) Circular No. 18 dated 1st August, 2013

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Risk Management and Inter-Bank Dealings

This circular clarifies that an FII can enter into a hedge contract for the exposure relating to that part of the securities held by it against which it has issued any PN/ODI only if it has a mandate from the PN/ODI holder for the purpose.

Banks are expected to verify such mandates. However, in cases where this is difficult they must obtain a declaration from the FII:

a. Regarding the nature/structure of the PN/ODI establishing the need for a hedge operation; and

b. Such operations are being undertaken against specific mandates obtained from their clients.

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A. P. (DIR Series) Circular No. 17 dated 23rd July, 2013

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Risk Management and Inter-Bank Dealings – Reporting of Unhedged Foreign Currency Exposures of Corporates

Presently, banks are required to submit a quarterly statement on foreign currency exposures and hedges undertaken by corporates based on bank’s books.

This circular states that banks should now submit the said quarterly report as per the revised format online only from quarter ended September 2013 through the Extensible Business Reporting Language (XBRL) system which may be accessed at https://secweb.rbi.org.in/orfsxbrl.

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Income: Interest: Accrual: A. Y. 1992-93: Assessee-company promoted by State Government: Amount received from Government towards share capital: Interest earned on short term deposits: Agreement that interest would belong to Government: Interest not assessable in hands of assessee:

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Gujarat Power Corporation Ltd. vs. ITO; 354 ITR 201 (Guj):

The assessee was promoted by the Government of Gujarat and the Gujarat Electricity Board to augment power generating capacity in the State of Gujarat. The Gujarat Government sanctioned a sum of Rs. 5 crore towards equity share capital. It was agreed that, pending the allotment of shares whatever income was earned by way of interest by the assessee would belong to the Government of Gujarat. In the accounting year relevant to the A. Y. 1992-93, the assessee earned interest of Rs. 53.92 lakh from such short-term deposits. The assessee claimed that the interest amount belonged to the State Government and accordingly was not assessable in its hands. The Assessing Officer did not accept the contention and assessed the interest in the hands of the assessee. The Tribunal confirmed the addition.

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

“i) Merely because the initial agreement between the parties did not make any provision with respect to the treatment of such interest, that would not be sufficient to change the nature and basic character of such income. In the absence of specific stipulation to the contrary, such interest must be treated to be held by the assessee in trust for the Government.

ii) Further, on 17th September, 1992, the Government of Gujarat and the assessee after due deliberation, agreed that the best solution would be to transfer such income to the Government. The amounts were not assessable in the hands of the assessee.”

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Tenancy – Determination of Annual ratable – Property exempt from Rent Control Legislation – Value – Mumbai Municipal Corporation Act, 1888, section 154(1) and Maharashtra Rent Control Act, 1999 section 3.

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Municipal Corporation of Greater Mumbai & Ors. vs. Dalamal Tower Premises Co-operative Soc. Ltd & Anr. 2012 Vol. 114(5) Bom. L.R. 3159

On a difference of opinion in a Division Bench, in an appeal arising out of the decision of a Single Judge, the following question of law was sent for reference to a third judge:

In view of the repeal of the Bombay Rent Act and enactment of the Maharashtra Rent Control Act, is the Bombay Municipal Corporation justified in taking into consideration the actual amount of rent received or receivable by the landlord in relation to the units which are let out, but where the lease is exempted from the provisions of the Rent Act for determination of annual letting value with effect from 1st April 2000?

The issue which falls for determination relates to the consequences, if any, that would ensue in computing the ratable value of land or building where the premises in a building are exempt from the provisions of the Rent Control legislation. According to the Municipal Corporation, when the premises are exempt from the operation of the Rent Control legislation, the contractual bargain between a landlord and a tenant is not circumscribed by the provision for the fixation of standard rent in the Rent Act. Moreover, once the premises are exempt from the Rent Act, it is not unlawful for a landlord to receive rent in excess of the standard rent. On the other hand, according to the property owners, the true test to be applied is whether the Rent Control legislation is in operation in the area in which the premises are situated and if it is, it would make no difference that the premises are exempt from the operation of the Rent Control legislation. Hence, according to the property owners, even if the premises are exempt from the Rent Act, the annual value for the purposes of municipal legislation cannot exceed the standard rent under the Rent Control legislation.

The Hon’ble Court observed that where the premises are exempt from the operation of the Maharashtra Rent Control Act, 1999, by the provisions of section 3, the Assessing Authority in determining the annual rent at which the premises might reasonably be expected to let from year to year u/s. 154(1) is not constrained by the outer limit of the standard rent determinable with reference to the provisions of the Rent Act and secondly, where the premises are exempt from the provisions of the Maharashtra Rent Control Act, 1999, it is not unlawful for the landlord to claim or receive an amount in excess of the standard rent, since the provisions of section 10 would not be attracted. In such a case, the actual rent received by the landlord is in the absence of special circumstances a relevant consideration which may be borne in mind by the Assessing Authority while determining the rateable value for the purposes of municipal taxation u/s. 154(1) of the MMC Act, 1888. The Assessing Authority must have regard to all relevant facts and circumstances while applying the standard of reasonableness u/s. 154(1), including the prevalent rate of rents of lands and buildings in the vicinity of the property being assessed, the advantages and disadvantages relating to the premises, such as, the situation, the nature of the property, the obligations and liabilities attached thereto and other features, if any, which enhance or decrease their value.

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Income: Accrual: S/s. 5 and 145: A. Y. 1989-90 and 1990-91: Assessee selling lottery tickets to stockists subject to return of unsold tickets before one day of draw: Income on sale of tickets accrues on the date of draw:

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CIT vs. K. & Co.: 259 CTR 398 (Del):

The assessee was engaged in the business of printing of lottery tickets and organising lotteries on behalf of, inter alia, the Government of Sikkim. The following question of law was raised by the Revenue in appeal before the Delhi High Court:

“Whether, on the facts and the circumstances of the case, the Tribunal was right in law in holding that the tickets sent to the stockists do not become a sale on their dispatch but assumes the character of a sale on the happening of various events including the draw taking place?”

According to the Revenue, the moment the assessee dispatches the tickets to its stockists, a sale takes place. Therefore, the fact that the tickets were sent to the stockists within the accounting year would mean that the sales had been finalised during that year. It is also the contention of the revenue that it is irrelevant as to when the draw actually takes place.

The High Court upheld the decision of the Tribunal and held as under:

“i) After going through the agreement, the Tribunal had observed that the arrangement by which the assessee sent tickets to the stockists who in turn sold the same to their agents did not indicate that the sale took place at the point of dispatch of tickets to the stockists. We also notice that the unsold tickets are to be returned to the organising agent of the assessee at least one day before the actual date of the draw and any tickets received thereafter would not be accepted and treated as sold by the stockists.

ii) This makes it clear that those tickets which are returned by the stockists cannot be treated as having been sold. The corollary to this is that mere dispatch of tickets to the stockists would not entail a sale. It is only those dispatches of tickets which are not returnable in the manner indicated as above which would be recorded as sales.

iii) Thus, till the date of the draw or just prior to the date of the draw it cannot be ascertained as to whether the dispatched tickets were actually sold or not.

iv) We, therefore, agree with the view taken by Tribunal and, consequently, decide this question in favour of the assessee and against the Revenue.”

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Registration – Property – Refusal to Register document – None can transfer a better title than what he has – Indian Registration Act:

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Chairman/Secretary, Deep Apartment CHS Ltd vs. The State Maharashtra & Ors. 2012 Vol. 114 (6) Bom. L.R. 3728

Writ petition was filed challenging the orders of the Registering Authority and the Appellate Authority refusing to register a conveyance executed by and between a private limited company which was the builder of the building and the co-operative housing society of flat purchasers which had been registered under the Maharashtra Co-operative Societies Act. The order of refusal set out various provisions of various legislations which are claimed not to have been complied. The order further referred to section 72(3) of the Maharashtra Registration Manual, Part II which requires compliance with sections 19 to 26 and 33 to 35(b) of the Indian Registration Act. Under the impugned orders the Registering Authorities had consistently maintained that the vendor mentioned in the conveyance deed had no title.

The Registering Authority is required to register a document executed by the parties who present themselves before the Registering Authority and admit execution thereof.

Hence, it is seen that the document would have to be presented before the Registration office by the executors or their representatives. Once that is done, the Registering Authority would see that the executors are personally present before him or their representative is present before him. The Registering Authority will also ask whether they admit the execution. The Registering Authority will satisfy himself that the persons before him are the persons they claim to be. If that is done, the Registering Authority must register the document.

It may be mentioned that the registration of a document shows nothing other than the fact that the document which is executed is admitted to have been executed or is executed before the Registering Authority. It does not prove the contents of the document. It is settled law that even certified copies issued by the Registering Authority do not prove the truth of the contents of the documents. They only prove the fact that the document was indeed registered as per procedure. [See Omprakash Berlia vs. UTI, AIR 1983, Bom 1].

The Court observed that the Registering Authority persisted in refusing to register the document on the ground that the title of the vendor had not been shown. It is only the Civil Court which would consider the title. There is nothing in the Registration Act or the Registration Manual, to empower the Registrar to see or satisfy himself about the title of the vendor. Hence, registration entails nothing more than the factum that the executants or their agents attended before the Registrar and admitted the execution of the document.

It is contended on behalf of the respondents that there are many instances where the parties without any title seek to transfer such purported title which they do not have and legitimise the illegal act by the process of registration. That may be the ground reality. The Registering Authority, being conscious of such a fact, may consider himself obliged to prevent transfers by such illegal acts. However, the jurisprudential rule that none can transfer a better title than what he has, is indeed as elementary as it is basic. The Registering Authority, therefore, need not be take upon itself the duty of a Civil Court which alone would go into question of title upon it being challenged. The Registry Authority was directed to register the document within 4 months from the date of order.

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Charitable purpose: Educational institution: Exemption u/s. 11 r.w.s. 13: A. Ys. 1998-99 to 2002-03: CBSE denied recognition to SSSPL being a corporate entity and insisted for a society structure: Assessee society formed by SSSPL was granted recognition by CBSE: Assessee running educational institution in the set up of SSSPL: Paid rent and royalty to SSSPL: No violation of section 13: Assessee entitled to exemption u/s. 11:

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Chirec Education Society vs. Asst. DIT; 354 ITR 605 (AP):

CBSE denied recognition to SSSPL, which established a corporate run school, on the ground that the school was run by a private limited company and insisted that a properly registered society of non-proprietary character was required to be constituted. Thereafter, SSSPL formed the assessee society. It took on lease, premises belonging to SSSPL. It was granted affiliation by the CBSE. It paid rent for the building and playground that belonged to SSSPL and royalty for using its name. The Assessing Officer denied exemption u/s. 11, on the ground that SSSPL was taking out huge receipts of the assessee in the shape of rent and royalty which has the effect of violating section 13(1)(c). The Tribunal upheld the disallowance of the claim for exemption.

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

“i) If the assessee had taken the infrastructure and the trade name of somebody, other than SSSPL, it could not be disputed that the assessee would incur similar expenditure like the one being paid to SSSPL towards royalty as no reasonable man would transfer user rights of name and other benefits without charging adequate consideration. Merely because such facility was provided by SSSPL and royalty was being paid to it by the assessee in that behalf, the Revenue could not contend that it was impermissible.

ii) Therefore, the Revenue’s contention that this amounted to diversion of funds by the assessee to SSSPL and clause (g) of s/s. (2) of section 13 was attracted was misconceived since the payment of royalty was necessary to secure the use of trade name and infrastructure of SSSPL.

iii) Merely because the assessee was registered by SSSPL to run the school after SSSPL’s application for approval was rejected by the CBSE, it could not be said that the assessee’s payment by way of royalty to SSSPL was prohibited and consequently the assessee shall be deprived of exemption u/s. 11. The assessee was entitled to the benefit of section 11.”

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Contract – Repayment of time barred debt – Enforceability of debtor liability Contract Act, 1872.

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Dinesh B. Chokshi vs. Rahul Vasudeo Bhatt and the State of Maharashtra, 2012 Vol. 114(6) Bom. L.R. 3766

The reference to Division Bench was for deciding the two questions which were:-

(i) Does the issuance of a cheque in repayment of a time barred debt amount to a written promise to pay the said debt within the meaning of section 25(3) of the Indian Contract Act, 1872?

(ii) If it amounts to such a promise, does such a promise, by itself, create any legally enforceable debt or other liability as contemplated by section 138 of the Negotiable Instruments Act, 1881?

If there is a promise to pay an amount and if a breach thereof is committed, a suit for recovery is required to be filed within the stipulated period of limitation provided under the law of Limitation. After the time provided for filing a suit for recovery expires, the promise ceases to be enforceable. Section 10 of the Contract Act provides that all agreements are contracts, if they are made by free consent of the parties competent to contract for a lawful consideration and with a lawful object and which are not expressly declared to be void under the Contract Act. Section 20 of the Contract Act incorporates a category of void agreements. Sections 19 and 19A provide for categories of agreements which are voidable. Section 23 provides that if the consideration or the object of an agreement is forbidden by law or is immoral or is opposed to public policy, the consideration or object of the agreement is unlawful and the agreement is void. Sections 26 to 30 of the Contract Act also provide for different categories of agreements which are void. Therefore, apart from the agreements which cease to be enforceable by reason of bar of limitation, there are other categories of agreements which are void and, therefore, obviously not enforceable by law.

On a plain reading of section 13 of the Negotiable Instruments Act, 1881, a negotiable instrument does contain a promise to pay the amount mentioned therein. The promise is given by the drawer. U/s. 6 of the said Act of 1881, a cheque is a bill of exchange drawn on a specified banker. The drawer of a cheque promises to the person in whose name the cheque is drawn or to whom the cheque is endorsed, that the cheque on its presentation, would yield the amount specified therein. Hence, it will have to be held that a cheque is a promise within the meaning of s/s. (3) of section 25 of the Contract Act. What follows is that when a cheque is drawn to pay wholly or in part, a debt which is not enforceable only by reason of bar of limitation, the cheque amounts to a promise governed by the s/s. (3) of section 25 of the Contract Act. Such promise which is an agreement becomes exception to the general rule that an agreement without consideration is void. Though on the date of making such promise by issuing a cheque, the debt which is promised to be paid may be already time barred, in view of s/s. (3) of section 25 of the Contract Act, the promise/agreement is valid and, therefore, the same is enforceable. The promise to pay a time barred debt becomes a valid contract. Therefore, the first question was answered in the affirmative.

The Court further observed that u/s. 118 of the said Act of 1881, there is a rebuttable presumption that every negotiable instrument was made or drawn for consideration. Section 139 creates a rebuttable presumption in favour of a holder of a cheque. The presumption is that the holder of a cheque received the cheque of the nature referred to in section 138 for discharge, in whole or in part of any debt or liability. Thus, under the aforesaid two sections, there are rebuttable presumptions which extend to the existence of consideration and to the fact that the cheque was for the discharge of debt or liability.

Under the Explanation to section 138, the debt or other liability referred to in the main section has to be a legally enforceable debt or liability. Merely because a cheque is drawn for discharge, in whole or in part of the debt or other liability, section 138 of the said Act of 1881 will not be attracted. The provision will apply provided the debt or other liability is legally enforceable. Thus, section 138 will not apply to a cheque drawn in discharge of a debt or liability which is not legally enforceable. There may be several categories of debts or other liabilities which are not legally enforceable. A debt or liability is legally enforceable if the same can be lawfully recovered by adopting due process of law. A debt or liability ceases to be legally enforceable after expiry of the period of limitation provided in the law of Limitation for filing a suit for recovery of the amount. Thus, a time barred debt by no stretch of imagination can be said to be a legally enforceable debt within the meaning of the Explanation to section 138.

While considering the second question, the court specifically dealt with a case of promise created by a cheque issued for discharge of a time barred debt or liability. Once it is held that a cheque drawn for discharge of a time barred debt creates a promise which becomes an enforceable contract, it cannot be said that the cheque was drawn in discharge of debt or liability which was not legally enforceable. The promise in the form of a cheque drawn in discharge of a time barred debt or liability becomes enforceable by virtue of s/s. (3) of section 25 of the Contract Act. Thus, such a cheque becomes a cheque drawn in discharge of a legally enforceable debt as contemplated by the Explanation to section 138 of the said Act of 1881. Therefore, the second question was also answered in the affirmative.

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Capital gain: Exemption u/s. 54F: A. Y. 2007- 08: Sale of agricultural land and residential house on 20-06-2006: No deposit in capital gains account: Paid substantial amount and took possession of residential house on 30- 03-2008: Paid balance amount of Rs. 24 lakh on 23-04-2008: Assessee entitled to exemption u/s. 54F:

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CIT vs. Jagtar Singh Chawla: 259 CTR 388 (P&H):

On 20-06-2006, the assessee sold an agricultural land and a residential house for Rs. 2,16,00,000/- and Rs. 8,25,000/- respectively. In the A. Y. 2007- 08, the Assessing Officer disallowed the assessee’s claim for exemption of long-term capital gain of Rs. 76,85,829/- on the ground that the sale proceeds were not deposited in the specified capital gains account before the due date for filing the return u/s. 139(1) of the Income-tax Act, 1961. The assessee claimed that on 20-06-2006 itself the assessee had written a letter to the bank to deposit the said amount in the capital gains account, but the said amount was deposited in a “flexi general account”, which is a saving as well as fixed deposit account. Assessee purchased a residential house from the sale proceeds and took possession on 30-03-008. A substantial amount was paid before 31-03-2008 and the balance amount of Rs. 24 lakh was paid on 23- 04-2008. The Tribunal allowed the assessee’s claim on the ground that the assessee has purchased the residential house within the period prescribed for filing return of income u/s. 139 of the Act.

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

“i) In the present case, the assesee has proved the payment of substantial amount of sale consideration for purchase of a residential property on or before 31-03-2008, i.e. within the extended period of limitation of filing of return. Only a sum of Rs. 24 lakh was paid out of total sale consideration of Rs. 2 crore on 23-04-2008, though possession was delivered to the assessee on execution of the power of attorney on 30-03- 2008.

ii) Since the assessee has acquired a residential house before the end of the next financial year in which sale has taken place, therefore, the assessee is not liable to pay any capital gains tax. Such is the view taken by the Tribunal.

iii) In view of the above, we do not find any merit in the present appeal. Hence, the same is dismissed.”

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Consumer complaint – Builder – Flat sold to other person – Builder to return the amount with interest @ 15% and pay cost: Consumer Protection Act.

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Consumer Welfare Association vs. Trimurti Developers & Builders Complaint Case No. CC/12/89, dated 12-12-2012 (Maharashtra) (State Consumer Disputes Redressal Commission.)

Complainant was a flat purchaser and the complainant had booked a flat with the Opponent by agreement dated 20-4-2005. As per the said agreement, flat no.B-203 admeasuring 1100 sq.ft. super built up area on the second floor of the building Palm Towers Co-op. Hsg. Society was agreed to be sold to the Complainant. However, the said flat was sold by the Opponent after construction and possession of the said flat was not given. In respect of the said flat, the complainant had paid an amount of Rs. 19,80,000/-. However, since the flat was not delivered, there was subsequent MOU between the parties dated 5-9-2011. By the said MOU, earlier agreement was cancelled by the Opponent and the Opponent agreed to pay an amount of Rs. 30 lakh to the Complainant. The said amount was to be paid by three installments to be paid on 5-9-2011, 15-10-2011 and 25-12-2011. Out of this Rs. 30 lakh, an amount of Rs. 10 lakh was paid on 5-9-2011 and since the remaining amount had not been paid, the complaint was filed.

It was held that in view of the MOU executed between the parties, the Opponents was under obligation to return the amount as agreed. Since the amount had not been returned, the Opponents were also liable to pay interest on the said amount. Not only that, but since the flat had been sold to another person, naturally, he must have obtained price higher than the price which was agreed between the Complainant and the Opponent. The prayer in respect of allotment of the flat was not allowed in view of the fact that the Complainant had not pressed for the said prayer.

The complaint was allowed and the Opponent was directed to pay the balance amount of Rs.20 lakh with interest @ 15% p.a. from 25-12-2011 onwards till the actual realisation of the amount. By way of costs of the complaint, the Opponent was directed to pay Rs. 25,000/- to the Complainant.

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Arbitration – Impleadments of party to arbitration proceeding in absence of arbitration agreement

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JSW Ispat Steel Ltd vs. Jeumont Electric and Anr. 2012 Vol. 114(5) Bom. L.R. 3320

The Plaintiff had filed the suit for a declaration that there is no arbitration agreement between the Plaintiff and Defendant No. 1

The Plaintiff had also taken out a notice of motion, praying for an order of restraint restraining Defendant No. 1 from proceeding with or prosecuting the arbitration proceeding initiated by it before the International Chamber of Commerce. Defendant No. 2 is a subsidiary of the plaintiff, had an independent existence and, as such, independent contracting capacity.

The Court observed that the present case was squarely covered by the law laid down by the Apex Court in the case of Indowind Energy Ltd. vs. Wescare (I) Ltd. AIR 2010 SC 1793 wherein the Apex Court in clear terms had held that to constitute an arbitration agreement, it is necessary that it should be between the parties to the dispute and should relate to or be applicable to the dispute. The Apex Court in unequivocal terms observed that, unless the party who is sought to be implicated in the arbitration proceeding is signatory to the agreement, it cannot be roped in the arbitration proceedings. In the present case, it could clearly be seen from the contract as well as the correspondence between the Defendant No.1 and the Defendant No.2, that the Plaintiff was not a contracting party or even a consenting party to the contract between the Defendant No.1 and the Defendant No.2. Not only that, but the entire correspondence with regard to the claim of the Defendant No.1 was only between the Defendant No.1 and the Defendant No.2. It was only for the first time that in the arbitration proceedings the Plaintiff had been implicated and as the words used by the Defendant No.1 itself in the claim “to drag in this arbitration”. Thus, there was no agreement at all between the Plaintiff and the Dr. K. Shivaram Ajay R. Singh Advocates Allied laws Defendant No.1 and therefore, the Plaintiff could not be roped in the arbitration proceedings.

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Appeal before Tribunal: Agricultural land: Capital asset: S/s.2(14) and 253: A. Ys. 2008- 09 and 2009-10: AO did not doubt the land being used for agriculture: Tribunal did not consider the ground taken by the Revenue that the land is not agricultural land: Tribunal was right in doing so:

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CIT vs. Nirmal Bansal; 215 Taxman 693 (Del): 33 taxman. com 511 (Del):

The assessee sold different plots of land, which were claimed to be agricultural land, situated at distance of more than 8 kms. from municipal limits. In support of his contention, the assessee furnished certificate of Tehsildar and letter of District Town Planner stating that the land was situated beyond 8 kms from Municipal Committee. However, the Assessing Officer did not accept the contention of the assessee that it was not a capital asset u/s. 2(14) (iii) of the Income-tax Act, 1961, taking a view that there was possibility of some other shorter distance between the plots of land and the municipal limits, being less than 8 kms. The Commissioner (Appeals) allowed assessee’s claim. The Tribunal upheld the order of Commissioner (Appeals).

In appeal by the Revenue, it contended by the Revenue that the Tribunal did not consider the question raised by the revenue that the lands in question were not agricultural lands at all. The Delhi High Court dismissed the appeal and held as under:

“i) The Tribunal noted that the Assessing Officer had made the disallowance merely on the ground that there was the possibility of a shorter distance, which would be less than 8 kms from the outer limits of the municipal corporation. The Tribunal noted that the Assessing Officer had not doubted the nature of the land being for agriculture. It was in these circumstances that the Tribunal rejected the plea of the revenue that the matter be restored to the file of the Commissioner (Appeals) for verification of the fact as to whether the lands were agricultural in nature or not.

ii) The decision in National Thermal Power Co. Ltd. vs. CIT [1998] 229 ITR 383 (SC) would be of no assistance to the revenue. In the said decision it has been clearly noted that the Tribunal had jurisdiction to examine a question of law which arose from the facts as found by the Income-tax authorities and which had a bearing on the tax liability of the assessee. The point to be noted is that the question of law which could be raised before the Tribunal would have to arise from the facts as found by the Income-tax authorities.

iii) In the present case, the Assessing Officer had not doubted the fact that the lands in question were agricultural in nature. There was no foundational fact that the lands were not agricultural in nature. As such the plea raised by the revenue before the Tribunal could not be gone into by the Tribunal as there was no foundational basis for the same. Clearly, the decision in National Thermal Power Co. Ltd. (supra) would be of no avail to the revenue in the facts of the present case.

iv) In view of the foregoing, no interference is called for with the impugned order of the Tribunal. The appeals are dismissed.”

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Ind AS 105 – Non-current assets held for sale and Discontinued Operations

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Background

Current Indian GAAP does not prescribe comprehensive guidance on Non-current assets held for sale and discontinued operations. Under Indian Accounting Standards (Ind AS) that are converged to International Financial Reporting Standards (IFRS), Ind AS 105 has been aligned with IFRS 5 and there are no major differences between Ind AS and IFRS. Ind AS 105 also covers in an appendix the requirements specified in IFRIC 17 – Distribution of non-current assets to owners.

Scope and Definitions

Ind AS 105 provides guidance with respect to classification, measurement and presentation of all noncurrent assets/disposal groups held for sale and assets classified as held for distribution. The standard also covers classification and presentation requirements of Discontinued Operations.

Definitions

Non-current assets are assets which do not meet the definition of current assets as defined in Ind AS 1. In practical terms, non-current assets are assets which are not expected to be realised within a period of twelve months from the reporting period.

Disposal Group is a group of assets to be disposed of, by sale or otherwise, together as a group in a single transaction, and liabilities directly associated with those assets that will be transferred in the transaction. Thus, disposal group may contain assets or liabilities which are current in nature or assets which do not fall within the purview of this standard. Here, when an entity applies the measurement requirements of this standard it has to consider the Disposal group as a whole.

Discontinued Operation is a component of an entity that either has been disposed of or is classified as held for sale and:
• represents a separate major line of business or geographical area of operations;
• is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations; or
• is a subsidiary acquired exclusively with a view to resale.

Criteria for Classification as “Held for sale”

Under Ind AS 105, an entity shall classify a non-current asset (or disposal group) as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use.

There are mainly two conditions which must be satisfied for an asset (or disposal group) to be classified as “Held for sale”.

1) An Asset must be Available for Immediate Sale in the Present Condition Subject to Terms that are Usual and Customary i.e. Common Practices which Exist for Sales of such Assets (or disposal groups) For example, an entity intends to sell second hand machinery and there is demand for second hand machinery in the market, however there are very few users of this particular machinery and usually it takes three to six months of time to close the sale transaction. In this case, the asset can be said to be available for immediate sale and can be considered as “held for sale” if other criteria is met.

2) Sale must be Highly Probable:

The Standard provides detailed guidance on this second condition about when can sale be said to be highly probable. The standard specified that for the sale to be highly probable:

• Appropriate level of management must be committed to a plan to sell the asset (or disposal group) and active programme to locate a buyer and complete the plan has been initiated.

 • Assets (or disposal group) under consideration must be marketed at a price that is reasonable to its current fair value.

• The sale should be expected to qualify for recognition as a completed sale within one year from the date of such classification i.e. an entity expects to complete the sale transaction within one year from the date on which theses assets are classified as held for sale.

Measurement Principles

There are mainly three stages of measurement of assets (or disposal group) held for sale:

• Before initial classification as held for sale – Assets (or disposal group) held for sale before such classification are measured according to applicable Indian accounting standard e.g. Plant and machinery as per Ind AS 16.

• At the time of initial classification – Non-current asset (or disposal group) classified as held for sale is measured at the lower of its carrying amount and fair value less costs to sell.

• Subsequent measurement – After the classification of assets (or disposal group) as held for sale during subsequent reporting period, these assets (or disposal group) as a whole is measured at the lower of carrying amount and fair value less costs to sell.

Ind AS 105 also provides guidance on impairment testing of assets (or disposal group) classified as held for sale. Impairment testing is carried out on initial classification as well as during the subsequent measurement period. Write down of assets to fair value less cost to sell that has not been recognised as per the above mentioned criteria is recognised as impairment loss. For example, if carrying amount of non-current asset held for sale is 1,000 and fair value less cost to sell is 900, 100 will be included in profit and loss account as impairment loss.

Also, at the time of subsequent measurement, if there is any gain due to increase in fair value less cost to sell of an asset the same should be recognised to the extent of cumulative impairment loss recognised previously. For example, continuing above if there is gain of 120 based on re-measurement of non-current asset, gain to the extent of only 100 i.e. to the extent of impairment loss recognised earlier will recognised as gain in profit and loss.

Disposal group may contain assets or liabilities that are not non-current in nature or not within the scope of Ind AS 105. At the time of initial classification or during subsequent measurement, these assets or liabilities are measured or remeasured as per the standard applicable to such assets or liabilities. The measurement criteria i.e. amount lower of carrying amount and fair value less costs to sell is applied to disposal group as a whole i.e. for the disposal group itself.

For example, Disposal group contains PP&E (non-current asset) and also has inventories (current asset – not covered under Ind AS 105). Based on the individual assessment of assets applying relevant accounting standard value of disposal group let’s say is 20,000. If after applying the measurement criteria of Ind AS 105 to this disposal group as a whole value comes to 18,000 then 2,000 will be recognised as impairment loss. However, as per the standard this loss of 2,000 will be proportionately allocated only to non-current assets within the disposal group. Another important aspect that merits consideration is that the non-current assets held for sale shall not be depreciated (or amortised) individually or as a part of disposal group.

Changes to a Plan of Sale

If non-current asset (or disposal group) classified as held for sale, no longer meet the criteria specified, then such assets cease to be classified as held for sale.

In such a case, non-current asset (or disposal group) is measured at lower of:

• its carrying amount before the asset (or disposal group) was classified as held for sale, adjusted for any depreciation, amortisation or revaluations that would have been recognised had the asset (or disposal group) not been classified as held for sale, and

• its recoverable amount at the date of the subsequent decision not to sell.

The impact of the above change is recognised in profit and loss account.

There can be a case where some of the non-current assets of disposal group still meet the criteria of held for sale’ whereas disposal group as a whole does not meet the requirement. In such cases, these non-current assets shall be measured as per the measurement criteria of this standard in their individual capacity.

Disclosure in Financial Statements

There are mainly two disclosure requirements as per Ind AS 105 viz. disclosure requirements for:

•    Non-current assets (or disposal group)
These are presented separately from other assets and liabilities (which are part of disposal group).

Also, an entity should not offset such assets and liabilities.
•    Discontinued operations
There are mainly two disclosure required with respect to discontinued operations. These include (a) post-tax profit or loss and post-tax gain or loss recognised on the measurement to fair value less costs to sell or disposal group constituting discontinued operations. Both these can be presented as a single amount in the statement of profit or loss. (b) related income tax expenses as per Ind AS 12 on above.
Similarly, cash flows from discontinued operations will also form part of disclosure in cash flow statement. An entity has a choice of presenting above either in statement of profit or loss/cash flow or in notes to accounts.

Apart from above there are certain additional disclosures required by Ind AS 105 which mainly includes description of non-current assets (or disposal group), facts and circumstances leading to sale or disposal etc.

Distribution of Non-current Assets to Owners

The essence of the above guidance is that distribution of non-current assets to owners is akin to dividend distribution and hence should be accounted as such.

Appendix C of Ind AS 105 and Appendix A of Ind AS 10 contain this guidance.

This part of the standard mainly covers two types of transactions:

•    Distribution of non-cash assets; and
•    Distribution that give owners a choice of receiving either non-cash assets or a cash alternative.

The standard does not cover transactions where non-cash assets distributed are controlled by the same party or parties who controlled such assets before distribution or transactions where entity distributes ownership in a subsidiary but retains control.

Measurement and Presentation Requirements

As per the standard, when a company declares to distribute assets to its owners, the company should recognise liability for dividend payable when dividend is appropriately authorised and is not at the discretion of the entity.

Dividend payable liability will be measured by an entity at the fair value of the assets to be distributed where non-cash assets are distributed as dividend. Further, the standard specifies that when an entity settles the dividend payable, it shall recognise the difference, if any, between the carrying amounts of the assets distributed and the carrying amount of the dividend payable in profit or loss. The same is disclosed as a separate line item in profit or loss account.

An entity shall disclose carrying amount of the dividend payable at the beginning and end of the period and any changes in carrying amount of such liability due to changes in fair value which is reviewed at the end of each reporting period and necessary adjustments are made.

Conclusion

This accounting standard provides specific guidance on measurement and classification of Non-current assets held for sale, which does not exist under current Indian GAAP. The guidance requires measurement of such assets at lower of carrying amount and fair value less costs to sell.

Further, the standard also lays down criteria to be met for an operation to be classified as discontinuing operation.

The guidance on distribution of non-cash assets to owners requires accounting for such transactions as dividend.

The above guidance would change the accounting and disclosure requirements for the above transactions/events as compared to existing Indian GAAP.

Section A: Revision of Financial Statements since 31st March 2009 pursuant to approval obtained from the Ministry of Corporate Affairs (MCA)

Essar Oil Limited (31-3-2012)

From Directors’ Report Re-opening of books of accounts for financial years 2008-09, 2009-10 and 2010-11

As a consequence of the above-referred Supreme Court order, to reflect a true and fair view in the books of account for the three financial years ended on 31st March, 2009, 31st March, 2010 and 31st March, 2011 based on the permission received from the Ministry of Corporate Affairs, the Company proposes to re-open the books of accounts and financial statements for the said three financial years. Necessary resolution seeking approval of shareholders for re-opening of the said financial statements has been incorporated in the Notice convening the ensuing Annual General Meeting. Except for reflecting true and fair view of the sales tax incentives/liabilities etc. concerning the Government of Gujarat, there is no material change in the reopened and revised accounts of the Company.

Consequent to reopening of the books of account for the above three financial years, the financial statements for these years have been revised. The statement containing the salient features of the reopened and revised audited Balance Sheets, Statements of Profit and Loss, Cash Flow statements and auditors, reports on the abridged revised financial statements for the financial years 2008-09 to 2010-11 along with Auditors’ report on full revised financial statements and amendments to Directors’ Reports for respective financial years form part of the Annual Report. With amendment in the aforementioned financial statements, there are corresponding changes in the consolidated financial statements of the Company and its subsidiaries prepared in accordance with Accounting Standard AS 21 for the financial years ended on 31st March, 2009 and 31st March, 2010. Accordingly, statements containing the salient features of the reopened and revised audited Consolidated Balance Sheets, Statements of Profit and Loss, Cash flow statements and auditors’ reports on the abridged revised consolidated financial statements for the financial years 2008-09 and 2009-10 form part of the Annual Report.

From Auditors’ Report

2. We had previously audited the Balance Sheet of the Company as at 31st March, 2012, the Statement of Profit and Loss and the Cash Flow Statement for the year ended on that date, both annexed thereto (“the original financial statements”) which were approved by the Board of Directors of the Company in its meeting held on 12th May, 2012. Our report dated 12th May, 2012 on the original financial statements, expressed a modified opinion with respect to the matter described in paragraph 3(a)(ii) of the said report.

As explained in Note 38 to the attached revised financial statements, the original financial statements have been revised pursuant to revision of the financial statements for the years ended 31st March, 2009, 31st March, 2010 and 31st March, 2011 (“the prior years”) in accordance with the approval of the Ministry of Corporate Affairs (“the MCA”) obtained during the financial year 2012-13, subsequent to the approval of the original financial statements by the Board of Directors of the Company. The said note explains the effect of the revision of the financial year 2011-12. As explained in the Note, the effect of the revision of the financial statements of the prior years on the opening balances include decrease of opening balance of Reserves and Surplus as at 1st April, 2011 by Rs. 3,006.17 crore. In view of the above, our report dated 12th May, 2012 on the original financial statements stands replaced by this report. 4.

Attention is invited to:

(a) Note 38 of the revised financial statements wherein it is stated that, the Honorable Supreme Court of India has vide its order dated 17th January, 2012, set aside the order of the Honourable High Court of Gujarat dated 22nd April, 2008 which had earlier confirmed the Company’s eligibility to the ‘Capital Investment Incentive Premier/Prestigious Units Scheme 1995 – 2000’ of the State of Gujarat (“the Scheme”), making the Company liable to immediately pay Rs. 6,168.97 crore being the sales tax collected under the Scheme (“the sales tax dues”). The Company has deposited Rs. 1, 000 crore on account of the sales tax as per the directive of the Honourable Supreme Court on 26th July, 2012. In response to a Special Leave Petition filed by the Company with the Honourable Supreme Court seeking payment of the sales tax dues in installments and without interest, the Honorable Supreme Court has, on 13th September, 2012, passed an order allowing the payment of the balance sales tax dues in eight equal quarterly installments beginning 2nd January, 2013 with interest of 10% p.a. with effect from 17th January, 2012.

Consequent to the above and having regard to the revision of the financial statements for the prior years referred in paragraph 2 above, the Company has reversed income of Rs. 978.59 crore recognised during 1st April 1, 2011 to 31st December, 2011 by defeasance of the deferred sales tax liability under the Scheme, reversed liability of Rs. 45.21 crore recognised during the said period towards contribution to a Government Welfare Scheme for being eligible under the Scheme, recognised interest income of Rs. 155.13 crore (net of break up charges of Rs. 10.57 crore) on account of interest receivable from the assignee of the defeased sales tax liability and recognised interest of Rs. 83.39 crore (net of Rs. 43.33 crore capitalised as cost of qualifying fixed assets) on sales tax dues; and presented the same under ‘Exceptional Items’ in the Revised Statement of Profit and Loss.

(b) Note 7(ii)(c) of the revised financial statements detailing the recognition and measurement of the borrowings covered by the Corporate Debt Restructuring Scheme (“the CDR”) as per the accounting policy consistently followed by the Company in the absence of specific guidance available under the Accounting Standards referred to in s/s. (3C) of section 211 of the Companies Act, 1956 and consideration of the CDR exit proposal submitted by the Company which has been recommended for approval to the CDR Core Group by the CDR Empowered Group. (c) Note 7(ii)(a) of the revised financial statements describing the fact about accounting of interest on certain categories of debentures on a cash basis as per the Court order.

37. Exceptional items

38.    Sales tax

The Company was granted a provisional registration for its Refinery at Vidinar, Gujarat under the Capital Investment Incentive to Premier/Prestigious Unit Scheme 1995-2000 of Gujarat State (“the Scheme”). As the commercial operations of the Refinery could not be commenced before the timeline under the Scheme due to reasons beyond the control of the Company viz, a severe cyclone which hit the Refinery Project site in June 1998 and a stay imposed by the Honourable Gujarat High Court on 20th August, 1999 based on a Public Interest Litigation which was lifted in January 2004 when the Honourable Supreme Court of India gave a ruling in favour of the Company, representations were made by the Company to the State Government for extension of the period beyond 15th August 15, 2003 for commencement of commercial operations of the Refinery to be eligible under the Scheme. As the State Government did not grant extension of the period as requested, the Company filed a writ petition in Honourable Gujarat High Court which vide its order dated 22nd April, 2008, directed the State Government to consider the Company’s application for granting benefits under the Scheme by excluding the period from 13th July, 2000 to 27th February, 2004 for determining the timeline of commencement of commercial production. Based on the order of the Honourable High Court, the Company started availing the benefits under the deferral option in the Scheme from May 2008 onwards and simulta-neously defeased the sales tax liability covered by the Scheme to a related party. An amount of Rs. 6,308.94 crore was collected on account of sales tax covered by the Scheme and defeased at an agreed present value of Rs. 1,892.82 crore resulting in a net defeasement income of Rs. 4,416.12 crore which was recognised during the period 1st May, 2008 to 31st December, 2011. The Company also recognised a cumulative liability of Rs. 189.27 crore towards contribution to a Government Wel-fare Scheme which was payable, being one of the conditions to be eligible under the Scheme.

The State Government had filed a petition on 14th July, 2008 in the Honourable Supreme Court of India against the order dated 22nd April, 2008 of the Honourable Gujarat High Court. The Honourable Supreme Court of India has vide its order dated 17th January, 2012, set aside the order of the Honourable High Court of Gujarat dated 22nd April, 2008 which had earlier confirmed the Company’s eligibility to the Scheme, making the Company liable to pay Rs. 6, 168.97 crore (net of payment of Rs. 236.82 crore) being the sales tax collected till 16th January, 2012 under the Scheme (“the sales tax dues”). Consequently, the Company had reversed the income of Rs. 4,416.12 crore recognised during 1st May, 2008 to 31st December, 2011, reversed the cumulative liability of Rs. 189.27 crore towards contribution to a Government Welfare Scheme and recognised income of Rs. 264.57 crore (net of breakup charges of Rs. 32.09 crore) on account of interest receivable from the assignee of the defeased sales tax liability, and had presented the same under ‘Exceptional Items’ in the Statement of Profit and Loss forming part of the financial statements for the year ended 31st March, 2012 which were approved by the Board of Directors in its meeting held on 12th May, 2012. These financial statements are hereinafter referred to as ‘the original financial statements’.

The Company has deposited Rs. 1,000 crore on account of the sales tax as per the directive of the Honourable Supreme Court of India on 26th July, 2012. In response to a Special Leave Petition filed by the Company with the Honourable Supreme Court of India seeking payment of the sales tax dues in installments and without interest, the Honorable Supreme Court has, on 13th September, 2012, passed an order allowing the payment of the balance sales tax dues in eight equal quarterly installments beginning 2nd Janu-ary, 2013 with interest of 10% p.a. with effect from 17th January, 2012.

The Company has since reopened its books of account for the financial years 2008-09 to 2010-11 (“the prior years”) in accordance with approval of the Ministry of Corporate Affairs (“the MCA”) obtained during the financial year 2012-13 subsequent to the approval of the original financial statement by the Board of Directors of the Company, for the limited purpose of reflecting true and fair view of the sales tax incentives/liabilities, etc. consequent to the order dated 17th January, 2012 of the Honourable Supreme Court of India. Accordingly, the income aggregating to Rs. 3,437.53 crore recognised during 1st May, 2008 to 31st March, 2011 by defeasance of the sales tax liability and the cumulative liability of Rs. 144.06 crore pertaining to the prior years towards contribution to a Government Welfare Scheme were reversed, and interest of Rs. 109.44 crore (net of breakup charges of Rs. 21.52 crore) recoverable from the assignee of the defeased sales tax liability was recognised and the net effect was presented as ‘Exceptional Items’ in the Revised Statement of Profit and Loss for the respective prior years.

The effects of the revisions have been explained in detail in the revised financial statements for the prior years.

In view of the above, the original financial statements for the year ended 31st March, 2012 have now been revised. Consequent to the said revision and having regard to the revision of the financial statements for the prior years described above, the Company has reversed income of Rs. 978.59 crore recognised during 1st April, 2011 to 31st December, 2011 by defeasance of the deferred sales tax liability under the Scheme, reversed liability of Rs. 45.21 crore recognised during the said period towards contribution to a Government Welfare Scheme for being eligible under the Scheme, recognised interest income of Rs. 155.13 crore (net of break-up charges of Rs. 10.57 crore) receivable from the assignee of the sales tax liability and recognised interest of Rs. 83.39 crore (net of Rs. 43.33 crore capitalised as cost of qualifying fixed assets) on the sales tax dues; and presented the same under ‘Exceptional Items’ in the Revised Statement of Profit and Loss.

The revised financial statements also consider the effect of subsequent events after the approval of the original financial statements in accordance with Accounting Standard 4, (AS 4), ‘Contingencies and Events Occurring after the Balance Sheet Date’.

The effects of the revisions of the financial statements for the prior years on the opening balances for 2011-12 have been summarised below:

The summary of changes in the original financial statements has been given below:


a)    Statement of Profit and Loss:


GAP in GAAP? Virtual Certainty vs. Convincing Evidence

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The principles of virtual certainty continue to remain challenging for many Indian enterprises. Paragraph 17 of AS-22 Accounting for Taxes on Income states as follows: “Where an enterprise has unabsorbed depreciation or carry forward of losses under tax laws, deferred tax assets should be recognised only to the extent that there is virtual certainty supported by convincing evidence that sufficient future taxable income will be available against which such deferred tax assets can be realised.”

Explanation to paragraph 17 states as follows: Determination of virtual certainty that sufficient future taxable income will be available is a matter of judgment based on convincing evidence and will have to be evaluated on a case to case basis. Virtual certainty refers to the extent of certainty, which, for all practical purposes, can be considered certain. Virtual certainty cannot be based merely on forecasts of performance such as business plans. Virtual certainty is not a matter of perception and is to be supported by convincing evidence. Evidence is a matter of fact. To be convincing, the evidence should be available at the reporting date in a concrete form, for example, a profitable binding export order, cancellation of which will result in payment of heavy damages by the defaulting party. On the other hand, a projection of the future profits made by an enterprise based on the future capital expenditures or future restructuring etc., submitted even to an outside agency, e.g., to a credit agency for obtaining loans and accepted by that agency cannot, in isolation, be considered as convincing evidence.

Author’s analysis of virtual certainty

Let us analyse the above requirements of virtual certainty.

1. Virtual certainty has to be supported by convincing evidence of future taxable income. The evidence has to be very strong, such as a non cancellable order, the cancellation of which will result in heavy penalty. The explanation provides non cancellable order as an example. There could be many other examples, which do not entail a non cancellable order, but nonetheless provide virtual certainty. For example, an oil well with proven oil reserves, or FDA approval of a blockbuster drug or a toll road between two very busy cities, for which there is no alternate commute (monopoly situation).

2. Virtual certainty is not a matter of perception, but judgment needs to be exercised. Judgment is based on detailed analysis of facts and circumstances; whereas perception is not based on a detailed analysis or evidence.

3. Mere projections will not suffice. There has to be virtual certainty of future taxable income. Projections would certainly be required to determine future taxable income. However, those projections would have to be supported by virtual certainty of future profits. The virtual certainty could come from non cancellable confirmed orders or other factors.

The Expert Advisory Committee (EAC) has also opined on several occasions on the concept of virtual certainty. Some of the key views of the EAC in addition to those already described above are set out below.

1. An unlimited period of carry forward in respect of unabsorbed depreciation is not a basis for recognising DTA and on its own does not demonstrate virtual certainty.

2. The fact that the company has made book profits (DTA is with respect to tax losses) does not on its own demonstrate virtual certainty.

3. Orders secured by the company, may be considered while creating deferred tax asset, provided these are binding on the other party and it can be demonstrated that they will result in future taxable income. However, mere projections made by the company indicating the earning of profits from future orders, or financial restructuring proposal under consideration or the fact that the books of account of the company are prepared on going concern, or the upward trend in the business or economy, may not be considered as convincing evidence of virtual certainty.

Apparently, the “virtual certainty” criteria laid down in AS 22 for the recognition of DTA is difficult to implement. Given below are the author’s perspectives on some of the key challenges:

(i) The explanation to paragraph 17 gives an example of a profitable binding order for the recognition of DTA and disallows recognition of DTA on the basis of mere projections of future profits based on capital expenditure/restructuring plans.

In practice, there will be many situations that fall between the two scenarios. Let us consider the following scenarios:

(a) A newly set-up entity (New Co) incurred significant losses in the first three years of operations due to reasons such as advertising and initial set-up related costs, significant borrowing costs and lower level of activity in the first two years of operations. Over the years, there has been a significant increase in the operations of New Co and its advertisement cost has stabilized to a normal level. Further, it has raised new capital during the year and repaid its major borrowing. The cumulative effect of all the events is that the New Co has started earning profits from the fourth year. It is expected to make substantial profits in the next three years that will absorb the entire accumulated tax loss of the entity.

(b) A battery manufacturer (Battery Co), which had incurred tax losses in the past, enters into an exclusive sales agreement with a car manufacturer (Car Co). According to the agreement, all the cars manufactured by Car Co will only use batteries manufactured by Battery Co. Though Car Co has not guaranteed any minimum off-take, there is significant demand for its cars in the market.

A perusal of both the aforementioned scenarios indicates that entities have significant additional evidence than mere projections of future profitability to support the recognition of DTA. However, since they do not have any binding orders in hand, or other concrete evidence, it may lead to the conclusion that the virtual certainty criterion laid down in AS 22 for recognition of DTA is not met.

(ii) There are certain sectors such as retail or building material, which generally do not have any binding sale orders. This indicates that these sectors, unless they are monopolies, cannot recognise DTA if they have unabsorbed depreciation and/or carry forward of tax losses. This may not be fair, as the principle of virtual certainty is tilted in favour of entities that work on binding orders such as construction, IT or engineering companies.

(iii) If the intention is that profits are to be virtually certain for the recognition of DTA in case of carry forward losses/unabsorbed depreciation, then it is not clear why the virtual certainty principles are applied only for revenue and not for input costs or availability of inputs.

The virtual certainty principle has a fatal flaw; nothing in this world is virtually certain. Even profitable binding orders could be cancelled without receiving any penalty as the buyer/seller could end up getting bankrupt. Interestingly, both Ind-AS 12 (Ind-AS are notified in the Companies Act, but are not yet applicable) and IAS 12 on Income Taxes lay down the criteria of “probability” to recognise DTA, including on unabsorbed depreciation and/or carry forward of tax losses. However, when an entity has a history of recent losses, it should recognise DTA only to the extent it has convincing evidence that sufficient taxable profit will be available. The principle of convincing evidence under Ind-AS and IAS is not only fair, but is also practical to apply, compared to the “virtual certainty” principle under AS 22. In the two examples referred to in this article, the principles of convincing evidence (under Ind-AS and IFRS) would probably result in recognition of DTA, but under Indian GAAP principles of virtual certainty, no DTA can be recognised.

The ICAI should look into the matter and align the requirement of Indian GAAP with Ind-AS.

S/s. 92A, 92B – ‘Deemed international transaction’ fiction is not applicable to transactions between Indian entities. Indian JV’s transaction with ‘Indian JV partner’ is not hit by transfer pricing provisions.

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Facts:

S Pvt Ltd (taxpayer) is a joint venture company (JV Co), with Andhra Pradesh Housing Board (APHB) and an Indian company (ICo) as JV partners. ICo is a subsidiary of a foreign group (FCo Group). APHB and ICo are the shareholders of the taxpayer in the ratio of 49:51. The taxpayer JV Co was responsible for the construction and implementation of the housing projects as contemplated by APHB and was bound by the policy framework of the Government of Andhra Pradesh (GAP).

During the year, the JV Co entered into transactions with ICo. The Transfer Pricing Officer (TPO) treated these transactions as ‘deemed international transactions’ u/s. 92B(2) and held that though the transactions were entered into by the taxpayer with IJMII, the terms of such transactions were determined in substance between the taxpayer and FCo Group (Associated Enterprise). On appeal, Dispute Resolution Panel (DRP) upheld TPO’s view. Aggrieved, the taxpayer appealed before the Tribunal.

Held:

In order to determine deemed associated enterprise relationship u/s. 92B(2), the international transaction should be between enterprises wherein at least one of enterprise is a non-resident. In the facts of the case, both the parties are residents and hence the same should not constitute international transaction.

Further on scope of s/s. 92A and 92B(2) the tribunal held as below:

One of the essential limbs/constituents of an international transaction is “associated enterprise”. Section 92B(2) outlines the circumstances under which a transaction between two persons would be deemed to be between associated enterprises. Such deeming fiction is in addition to the one created u/s. 92A(2) i.e., parameters of management, control or capital. Section 92B(2) should be read as an extension of definition of AE u/s. 92A.

U/s. 92A two or more enterprises once determined to be AEs remain so for the entire financial year. However, the fiction embodied in section 92B(2) is transaction specific and does not apply to all transactions between the enterprise.

The legal fiction created u/s. 92B(2) in respect of the specified transaction can be used only for the purpose of examining whether such transaction constitutes an ‘international transaction’ u/s. 92B(1). In case section 92B(1) is not attracted, the fiction u/s. 92B(2) ceases to operate.

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S/s. 195A and 206AA – The grossing up of the payment in case of net of tax contracts is to be made at “rates in force” and should not be made at the higher rate of 20% specified u/s. 206AA.

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Facts:

Taxpayer, an Indian company, entered into repairs contracts with its foreign supplier, a resident in Germany. Further, as per the contracts, taxpayer was required to pay on net-of-tax-basis. The Tax Authority contended that
(a) the payments were in the nature of technical services and constituted FTS, both under the Act and the India-Germany DTAA.
 (b) Also, section 206AA overrides all other provisions of the IT Act and, hence, nonresidents are also required to furnish their PAN to the payer of income
 (c). Accordingly, in the absence of PAN, higher rate of 20% should be applied and consider net of tax payments grossing up also should be done at 20%. CIT(A) upheld tax authority’s observations. Aggrieved, the taxpayer filed an appeal before the Tribunal.

Held:

Section 206AA overrides all the other provisions of the ITL and applies to all recipients of income, irrespective of the recipients’ residential status. Therefore, a nonresident whose income is chargeable to tax in India has to obtain a PAN and provide the same to the payer of income/taxpayer. In the absence of PAN, section 206AA is applicable and tax is required to be withheld at 20%.

A literal reading of the grossing up provisions u/s. 195A implies that the income should be increased by the “rates in force” for the relevant tax year and not the rate at which the “tax is to be withheld” by the taxpayer. Meaning and effect has to be given to the expression used in a section, as held by the SC in the case of GE India Technology [(2010) 327 ITR 456 (SC)]. Thus, the grossing up of the amount is to be done at the “rates in force” and not at the rate of 20% specified u/s. 206AA.

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Pilot Construction Pvt. Ltd. v. ITO ITAT Mumbai `C’ Bench Before Rajendra Singh (AM) and Vivek Varma (JM) ITA No. 5307/Mum/2011 A.Y.: 2007-08. Dated: 21-11-2012. Counsel for assessee/revenue: Uttamchand Bothra / Vijay Kumar Jaiswal

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6. Pilot Construction Pvt. Ltd. v. ITO
ITAT  Mumbai `C’ Bench
Before Rajendra Singh (AM) and Vivek Varma (JM)
ITA No. 5307/Mum/2011
A.Y.: 2007-08.  Dated: 21-11-2012.
Counsel for assessee/revenue: Uttamchand Bothra / Vijay Kumar Jaiswal

S/s 44AB, 271B – In case of an assessee following project completion method, advance received which is required to be adjusted against future income cannot be considered as gross receipt of business or turnover. Bonafide belief constitutes reasonable cause for non levy of penalty.

Facts:

The assessee company was engaged in business of construction. It was following project completion method of accounting. In respect of a SRA project taken up by the assessee, it had received a booking advance of Rs. 11.25 crore from M/s Welspun Gujarat Stahi Robern Ltd. The advance was subsequently returned in 2010 since the property had several encroachments.

The assessee did not get its accounts audited as required u/s. 44AB of the Act since it was of the view that the provisions of section 44AB would apply only when sales, turnover or gross receipts exceed Rs 40 lakh. Since the assessee had only received an advance which was later refunded and the assessee was following project completion method and the sales would be accounted in the year of completion of the project.

The Assessing Officer (AO) relying on the decision of Lucknow Bench of ITAT in the case of Gopal Krishan Builders (91 ITD 124) levied penalty u/s. 271B of the Act. Aggrieved the assessee preferred an appeal to CIT(A) who confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:

The Tribunal noted that the assessee was following project completion method, the advance received has been subsequently returned, the project in respect of which advance was received had not commenced even when the matter was being heard by the Tribunal. It also noted that section 44AB applies only when sales, turnover or gross receipts of business exceed Rs. 40 lakh. The amount of advance received was only from one party and also this advance was subsequently returned.

The Tribunal relying on the decision of the Delhi High Court in the case of Dinesh Kumar Goel (239 ITR 46) held that the advance received which is required to be adjusted against future income cannot be considered as gross receipt of business or turnover. The decision of the Lucknow Bench of Tribunal in the case of Gopal Krishan (supra) cannot be followed in view of the decision of the Delhi High Court in Dinesh Kumar Goel. Moreover, the issue being debatable, the plea of the assessee that it was of the view that books were not required to be audited u/s 44AB has to be considered as bonafide. Bonafide belief constitutes a reasonable cause.

The Tribunal set aside the order of CIT(A) and deleted the penalty levied.

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ITO vs. Bajaj Bhavan Owners Premises C.S.L. ITAT Mumbai `B’ Bench Before B. R. Mittal (JM) and Rajendra (AM) ITA Nos. 8067/M/2011 A.Y.: 2007-08. Decided on: 18th April, 2013. Counsel for revenue/assessee: Manjunath Karkihalli/M. A. Gohel

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Section 22 – Rental receipts for letting out of
terrace for erecting of antenna are chargeable to tax under the head
`Income from House Property’ subject to deductions u/s 24.

Facts:
The
assessee had received Rs. 16,39,284 as rent for letting out terrace of
the building to six parties including Bharati Airtel, Hathway, etc. The
amount of rent was claimed to be chargeable to tax under the head
`Income from House Property’ subject to deduction u/s. 24(a). The
Assessing Officer (AO) relying on the decision of the Calcutta High
Court in the case of Model Manufacturing Co. Pvt. Ltd. (175 ITR 374)
held that the amounts received by the assessee from six parties was
chargeable under the head `Income from Other Sources’ and not `Income
from House Property’ as returned. He did not allow any deduction u/s. 57
of the Act.

Aggrieved, the assessee preferred an appeal to
CIT(A) who following the order of ITAT for earlier years for the same
issue in assessee’s own case held that rental of terrace has to be
assessed under the head `Income from House Property’ subject to
deduction u/s. 24.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:
The Tribunal noted the following observations made by the `B’ Bench of
the Tribunal while deciding the appeals for the AY 2001-02, 2002-03 and
2003- 04 (ITA/5048/Mum/2004, 1433/Mum/2007 and 1434/ Mum/2007) in
assessee ‘s own case –

“35. Ground No. 5, 6,7 and 8 are against the sustenance of addition of rental income Rs. 5,93,700 as income from other sources.

36.
The brief facts of the above issue are that it was found by the
Assessing Officer that the assessee has allowed M/s. Hutchison Max
Telecom Ltd. to erect the tower on their terrace in consideration of an
amount of Rs. 5,93,700 and claimed as income from house property subject
to deduction u/s. 24 of the Act. However, the Assessing Officer while
observing that the assessee’s society has not provided any house
property to the company and it is only the open terrace which has been
let out, treated the same as assessable under the head income from other
sources without allowing any expenditure in this regard. On appeal the
ld. CIT(A) while confirming the Assessing Officer’s action treating the
income from other sources directed the Assessing Officer to allow 20% of
the gross receipts as expenses to earn such income.

39. After
carefully hearing the submissions of the rival parties and perusing the
material available on record we find that the facts are not in dispute.
We further find that in the case of Sharda Chamber Premises vs. ITO in
ITA No. 1234/M/08 dated 01-09-2009 for Assessment Year 2003-04 in which
JM was one of the party, on the similar facts, the Tribunal after
considering the decision in ITO vs. Cuffe Parade Sainara Premises
Co-operative Society Ltd. 7225/Mum/05 dated 28th April, 2008 for
Assessment Year 2002-03 and also the decision in the case of Sohan vs.
ITO (1986) 16 ITD 272 supra has held vide para 6 and 7 of its order
dated 01-09-2009 as under:

“6. We have carefully considered the
submissions of the rival parties and perused the material available on
record. We find merit in the plea of the ld. Counsel fo the assessee
that in the case of M/s. Dalamal House Commercial Complex Premises
Co-operative Society Ltd., the Tribunal while admitting the additional
ground being a legal issue has also held that the letting out of the
terrace, erection of antenna and income derived from letting out has to
be taxed as `income from house property’ and not as `income from other
sources’. The Tribunal while deciding the issue has followed the order
of the Tribunal in the case of M/s. Cuffe Parade Sainara Premises Co-op.
Society Ltd. (supra).

7. In the absence of any distinguishing
feature brought on record by the revenue we, respectfully following the
order of the Tribunal (supra) and keeping in view the consistency while
admitting the additional ground taken by the assessee hold that the
letting out of terrace has to be assessed under the head `income from
house property’ as against `income from other sources’ assessed by the
Assessing Officer and also allow deduction provided u/s. 24 of the Act
and accordingly the additional ground taken by the assessee is allowed.”

Respectfully following the order of the Tribunal supra, we are
of the view that the letting out of terrace has to be assessed under the
head income from house property subject to deduction u/s. 24 of the Act
as against income from other sources assessed by the Assessing Officer.
We hold and order accordingly. The grounds taken by the assessee are
therefore allowed.”

Following the above mentioned observations, the Tribunal decided the issue in favor of the assessee.

The appeal filed by the Revenue was dismissed.

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Bhawanji Kunverji Haria vs. ACIT ITAT Mumbai `B’ Bench Before B. R. Mittal (JM) and N. K. Billaiya (AM) ITA No. 5642/Mum/2011 A.Y.: 2008-09. Decided on: 23rd April, 2013. Counsel for assessee/revenue: G. C. Lalka/ Roopak Kumar

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Section 22 – Notional income in respect of property belonging to the assessee, but used by the firm in which the assessee is a partner, is not chargeable to tax under the head `Income from House Property’.

Facts:
The property of the assessee, located at Mahavir Market, Navi Mumbai, was utilised by the firm M/s Lakhmichand Cooverji & Co., in which assessee was a partner. The Assessing Officer (AO) charged to tax notional income in respect of this property. Accordingly, a sum of Rs. 1,68,000 was added to total income of the assessee.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The Tribunal noted that the issue was covered in favour of the assessee by the order of the Tribunal in the assessee’s own case for AY 2006-07 vide ITA No. 4032/Mum/2009. It noted the following observations in the said order –

“On the second issue of notional income in respect of property located at Mahalaxmi Market, Navi Mumbai. The Learned Counsel relied upon the decision of the CIT vs. Rabindranath Bhol (Ori) (1995) 211 ITR 299, in which on identical facts, the Hon’ble High Court of Orissa has held that the income from the house property owned by the assessee’s partner and used in the business carried out in the partnership firm in which the assessee is a partner would qualify for exemption u/s 22(2) (sic 22). We find that the facts of the present appeal are identical with the facts in as much as in the present appeal also the property of the assessee is being used by the firm in which the assessee is also a partner. Respectfully following the decision of the Hon’ble High Court, the addition of Rs.1,68,000 is deleted.”

Since the facts were identical the Tribunal deleted the addition made by the AO.

The appeal filed by the assessee was allowed.

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(2013) 84 DTR 383 (Pune) Ramsukh Properties vs. DCIT A.Y.: 2007-08 Dated: 25.7.2012

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Section 80-IB(10) – Assessee is entitled to deduction in respect of completed flats if the entire project could not be completed due to reasons beyond his control

Facts:
The assessee claimed a deduction u/s. 80-IB(10) in respect of a project consisting of six buildings and 205 flats although the completion certificate was obtained only for 173 flats within the statutory time period. The assessee contended that 85% of the project was completed within statutory time period and revenue was fully booked in accordance with the project completion method of accounting. The latecompletion was due to the fact that the assessee submitted certain modifications/rectifications for the top floors of the buildings. The said revision could not be completed as the Pune Municipal Corporation could not approve the modification as their files had been taken over by the CID for investigation under ULC Act by the Government of Maharashtra. The Assessing Officer rejected the claim of deduction on account of violation of basic condition of completing the construction within the given time period and even an alternative plea of the assessee to allow the proportionate deduction.

Held:
In case such a contingency emerges which makes the compliance with provision impossible, then the benefit bestowed on an assessee cannot be completely denied. Such liberal interpretation should be used in favour of assessee when he is incapacitated in completing project in time for the reasons beyond his control. The assessee was prevented by sufficient reasonable cause which compelled the impossibility on part of the assessee to have completion certificate in time. It is settled legal position that the law always give remedy and the law does wrong to no one. Plain reading of section 80-IB(10) suggests about only completion of construction and no adjective should be used along with the word ‘completion’. This strict interpretation should be given in normal circumstances. However, in this case, assessee was prevented by reasonable cause to complete construction in time due to intervention of CID action on account of violation of provisions of Urban Land Ceiling Act applicable to land in question. Assessee should not suffer for same. The revision of plan is vested right of assessee which cannot be taken away by strict provisions of statute. The taxing statute granting incentives for promotion of growth and development should be construed liberally and that provision for promoting economic growth has to be interpreted liberally. At the same time, restriction thereon too has to be construed strictly so as to advance the object of provision and not to frustrate the same. The provisions of taxing statute should be construed harmoniously with the object of statue to effectuate the legislative intention. In view of above facts and circumstances, it was held that assessee is entitled for benefit u/s. 80-IB(10) in respect of 173 flats completed before prescribed limit.
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(2013) 84 DTR 271 (Mum) SKOL Breweries Ltd vs. ACIT A.Y.: 2007-08 Dated: 18.1.2013

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Section 40(a)(i) – Provisions of section 40(a)(i) are not attracted to the claim of depreciation and licence fee for using computer software which falls under Explanation 4 to section 9(1)(vi)

Facts:
During the relevant assessment year, the assessee made payments to a foreign company for acquiring its trade name. The amount so paid was capitalised and depreciation was claimed in respect of it. The Assessing Officer held that the payment made by the assessee for acquisition of trademarks though capitalised by the assessee company in the books of account, the said payment attracted provisions of section 195. Since, assessee failed to deduct tax at source while making said payment, it was disallowed u/s. 40(a)(i).

Held:
There is a difference between the expenditure and other kind of deduction. The other kind of deduction which includes any loss incidental to carrying on the business, bad debts etc., which are deductible items itself not because an expenditure was laid out and consequentially any sum has gone out; on the contrary the expenditure results a certain sums payable and goes out of the business of the assessee. The sum, as contemplated u/s. 40(a)(i) is the outgoing amount and therefore, necessarily refers to the outgoing expenditure. Depreciation is a statutory deduction and after the insertion of Explanation 5 to section 32, it is obligatory on the part of the Assessing Officer to allow the deduction of depreciation on the eligible asset irrespective of any claim made by the assessee. Therefore, depreciation is a mandatory deduction on the asset which is wholly or partly owned by the assessee and used for the purpose of business or profession which means the depreciation is a deduction for an asset owned by the assessee and used for the purpose of business and not for incurring of any expenditure. The deduction u/s. 32 is not in respect of the amount paid or payable which is subjected to TDS; and therefore, the provisions of section 40(a)(i) are not attracted on such deduction.

Facts:
The assessee made payment to a group company towards software license fees. The Assessing Officer opined that the payment made by the assessee to the group company was royalty and thereby attracting the provisions of section 195 failure of which attracted the provisions of section 40(a)(i). Accordingly, the Assessing Officer disallowed the said amount.

Held:
It is clear from the Clause A of Explanation to section 40(a)(i), the meaning of the royalty for the purpose of section 40 has to be taken as given in the Explanation 2 to section 9(1)(vi). It is also clear from the Explanation 2 to section 9(1)(vi) that the payment for transfer of any right to use computer software does not fall within the meaning of royalty. Rather, the payment for transfer of right for use or right to use of computer software has been defined as royalty under Explanation 4. When the royalty for transfer of right to use of computer software does not fall under Explanation 2 to section 9(1)(vi); but the same falls under Explanation 4 to section 9(1) (vi), then in view of the Explanation to section 40(a) (i), the said amount cannot be disallowed under the provisions of section 40(a)(i).

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(133 ITD 363)(Mum.) Vidyavihar Containers Ltd. vs. Deputy Commissioner of Income Tax AYs. : 2002-03 & 2006-07 Date of Order: 21st October 2011

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Section 45(2) – Conversion of Capital Asset (Land) into Stock in Trade – conduct of the assessee showed that land was converted to stock in trade for the purpose of conducting business – hence the assessee should be rightly entitled to the benefits of section 45(2).

Section 48 – fee paid for change in the user name from industrial to commercial would constitute the cost of improvement of the asset.

Notional income – assessee cannot be charged to taxed on notional income.

Facts:
The assessee was earlier engaged in manufacturing activity. It discontinued the business and passed a special resolution at the extra ordinary general meeting of shareholders held on 12th September, 1994 authorising commencement of business of real estate and converting its land into stock in trade. It further took steps to make the property fit for development and contracted with a third party for further development in consideration of allotment of constructed area. The assessee also applied for change in the user of land from industrial to commercial user and permission for the same was granted on 4th March, 1997. The AO held that the factory land could not have been converted into stock in trade prior to the permission of the government in respect of change of user of the said land. He further held that the land thus remained to be a capital asset irrespective of the fact that special resolution was passed. Hence the assessee was denied the benefits of section 45(2) and was charged to tax u/s. 45(1).

Held:
The intention of the assessee to pass a special resolution in the meeting of shareholders to authorise the commencement of business of real estate, convert the land into stock in trade, and the further steps taken to make the property fit for further development in consideration of allotment of constructed area makes it clear that the assesseecarried on the business of real estate development. Further, the provisions of section 45(2) only pertain to computation of capital gains and business income arising on sale of asset which is converted into stock in trade prior to sale. It does not prescribe any conditions to be fulfilled. Hence, the question for permission to be sought from government for change in user of land prior to conversion does not arise. Thus the assessee was liable to be charged in terms of section 45 (2) and not section 45(1).

Facts:
The assessee has paid fees amounting to Rs. 23 crore to the collector for change of user of land from industrial to commercial. The assessee claimed the same as business expense. Alternatively, the assessee submitted that the same be treated as cost of improvement while computing capital gains u/s 45(2). The AO however held that there was no real estate development business carried on and thus declined to allow the claim of the assessee. He also disallowed the alternative claim of the assessee for deduction of the said amount in computation of capital gains u/s 48 holding that the said amount was not in the nature of cost of improvement.

Held:
The assessee had paid to the collector the amount for change in user of land before conversion of land into stock in trade. This amount paid was vital in determining fair market value of the asset. If the said amount was paid prior to conversion, the same would constitute cost of improvement. And if the said amount is paid after conversion, the same would constitute business expense. The matter was remanded back to the AO with the direction to consider and allow the claim of the assessee depending upon the fair market value of the property as on the date of conversion.

Facts:
The property of the assessee was offered as collateral security for the bank guarantee limits availed by its holding company in the AY 2002-03. Assessee did not receive any commission for the same. However, the AO noted that the assessee company had foregone commission of 2 percent for offering its property as collateral security and made addition of such notional income.

Held:
There was nothing bought on record to show that any such commission was agreed to be paid to the assessee by its holding company. Thus the addition made by the AO in the form of notional income which had never actually accrued or arisen to the assessee was not sustainable.

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(2011) 133 ITD 306 (Mum.) NRB Bearings vs. DCIT A.Y.: 2005-06. Dated : 20th September, 2011

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Section 32(1)(iia) – Allowability of Additional Depreciation Claim – enhanced capacity has to be considered unit wise and not in relation to entire business

Facts:
The assessee acquired plant & machinery in a manufacturing unit at Waluj, Ahmedabad on which additional depreciation was claimed. The claim mentioned was rejected by the AO on grounds that the enhanced capacity can only be considered with reference to the overall capacity of the company and not a single unit.

Held:
The increase in capacity is to be compared with reference to the concerned undertaking where the machinery was installed and not the whole business. This was because the additional depreciation was claimed on only one unit where the machinery was installed. This made the manufacturing unit a separate industrial undertaking for the purpose of allowability of depreciation. Also the allowability of additional depreciation nowhere requires that the capacity increase is to be compared with reference to the operational activities of all the units which have already been set up earlier by the assessee. The intention of the legislature is only to examine the increase in capacity of the undertaking where the machinery was installed and not of the entire business. The claim of the assessee was thus justified.
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I High Court – 2013 (31) STR 515 (Mad) Chitra Builders P. Ltd. vs. Addl. Commr. Of C., C. E. & S. T., Coimbatore

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Recovery during search cannot be held valid in absence of a proper assessment order and due procedures established under service tax laws.

Facts:

The Revenue conducted search and collected a sum of Rs. 2 Crore from the petitioner. The petitioner contested that since they were not registered with the department and were not carrying out any activities within their jurisdiction, the search and collection of Rs. 2 Crore was arbitrary and illegal and thus they were entitled for the refund of amount paid.

The respondents argued that the petitioners collected Rs. 17 Crore which was further claimed as CENVAT by the service recipients and that the amount so paid voluntarily should not be returned and should be adjusted against service tax liability to mitigate the offence committed u/s. 73(3) of the Finance Act, 1994.

Held:

Directing the respondents to return the amount paid, the Hon. High Court held that the collection of Rs. 2 crore during the search was not valid in the eyes of law. Although the collection was voluntary, the respondents did not prove that the petitioners were liable to pay service tax and that the tax cannot be collected without appropriate assessment order and without following the procedures established by the Law.

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Appeal to High Court: Section 260Aa: Territorial jurisdiction: Order of Tribunal passed within the jurisdiction: Appeal lies to that High Court:

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CIT vs. Shree Ganapathi Rolling Mills P. Ltd.; 356 ITR 586 (Gauhati):

Revenue preferred appeals against the orders of the Gauhati Bench of the Tribunal before the Gauhati High Court. The issue in those cases was covered in favour of the assessee by the judgment of the Gauhati High Court in CIT vs. Meghalaya Steels Ltd.; (2013) 356 ITR 235 (Gauhati). The learned Solicitor General appearing on behalf of the Revenue contended that the orders, which were impugned before the learned Tribunal, were orders passed by the Assessing Officer in the State of Meghalaya and, hence, this court does not have the territorial jurisdiction to decide the appeals.

The Gauhati High Court dismissed the appeals filed by the Revenue following its decision in the case of Meghalaya Steel Ltd. and held as under:“

i) U/s. 20 of the Code of Civil Procedure, 1908, suits are to be instituted, where the defendents reside or where a cause of action, wholly or in part, arises. An appeal is nothing but an extension of a suit. Hence, a place where the cause of action, wholly or in part arises, is the legal venue for institution of an appeal under the Income-tax Act, 1961.

ii) The orders challenged in this set of appeals had been passed within the local limits of the territorial jurisdiction of the court and, hence, the court had the jurisdiction to try the appeals.”

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L o n d o n S t a r D i a m o n d C o m p a n y ( I ) P . L t d . vs. D C I T In the Income Tax Appellate Tribunal “D” Bench, Mumbai Before Vijay Pal Rao, (J. M.) and D. Karunakara Rao, (A. M.) I.T.A. No.6169/M/2012 Assessment Year: 2009-2010. Date of Order: 11.10.2013 Counsel for Assessee/Revenue: Soli Dastur and Nikhil Ranjan/Dipak Ripote

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Section 43(5) – Loss on forward exchange contracts held as incidental to export activity hence allowed as business loss.

Facts:
The assessee is engaged in the business of trading and manufacturing of rough and polished diamonds. It had entered into forward contracts with the banker to safeguard against the exchange fluctuations of export considerations/sale profits as per RBI guidelines. Total of forward contracts entered into during the was Rs. 135.99 crore and the cancellation thereof aggregated to Rs. 126.3 crore. The total exports during the year was Rs. 107.57 crore. Total outstanding receivable in foreign exchange was much higher than any of these figures. It filed its return of income declaring the total income of Rs. 35.29 lakh. The AO examined the applicability of the provisions of section 43(5) of the Act in general and clause (c) of the proviso to section 43(5) in particular and held that the foreign exchange contracts constituted speculative transactions under the said provisions and treated the loss on cancellation thereof of Rs. 4.69 crore as the speculation loss and assessed the income of the assessee at Rs. 5.04 crore. On appeal, the CIT(A) upheld the order of the AO.

Before the tribunal, the revenue relied on the orders of the AO and the CIT(A) and contended that the certain data showed that the total of Forward exchange Contracts on certain dates were more than the exports receivable and also questioned the asssessee‘s failure to demonstrate the paisa to paisa and date-wise correlation between the Forward Contracts and the Export Invoices.

Held:
The tribunal laid down the following principles:

• Considering the judgment of the Calcutta High court in the case of CIT vs. Sooraj Muill Magarmull (129 ITR 169) which was followed by the Bombay High Court in the case of CIT vs. Badridas Gauridu Pvt. Ltd. (261  ITR 256), it held that the Forward Contracts are commodities falling in the definition of speculative transactions governed u/s. 43(5);

• Forward exchange contracts when entered into with the banks for hedging the losses due to foreign exchange fluctuations on the export proceeds, are to be considered integral or incidental to the export activity of the assessee and therefore, the losses or gains constituted the business loss or gains and not the speculation activities. For the purpose it relied on the decisions of the Mumbai tribunal in the case of D. Kishorekumar and Co. (2 SOT 769), the Bombay High Court in the case of CIT vs. Badridas Gauridu (P) Ltd. (supra) and the Calcutta High Court in the case of CIT vs. Sooraj Muill Magarmull (supra).

The tribunal then noted that the loss suffered by the assessee on account of the cancellation of forward exchange contract was broadly of two types viz., loss suffered on cancellation of matured contracts (Rs. 4.15 crore) and loss suffered on cancellation of pre-matured contracts (Rs. 64 lakh). According to the tribunal, the former being related to the Forward exchange contracts which are integral or incidental to the exports of the diamonds, should be allowed as business loss in view of the binding High Court or Tribunal decisions/ judgments in the case of D. Kishore kumar and Co (supra), Badridas Gauridu Pvt. Ltd. (supra), Sooraj Muill Magarmull, (supra). In the case of loss suffered on cancellation of pre-matured contracts, the tribunal observed that the onus is on the assessee to explain satisfactorily why the assessee resorted to premature cancellation of some FCs. Further, it observed that it is not required that there must be 1:1 precise correlation between Forward exchange Contacts and the corresponding export invoice. So long as the total Contracts does not exceed the exports of the year plus outstanding export receivable, the Forward exchange Contracts can constitute hedging transaction‘. In the case of loss suffered on cancellation of pre-matured contracts, the tribunal allowed the loss of Rs. 42 lakh accepting the explanation of the assessee that the maturity date of those contracts fell during the weekend days and therefore, the assessee cancelled the contracts three days prior to the due date. As regards the other contracts cancelled prior to longer than three days it held that losses therefrom should also be allowed as business loss so long as the same are integral part of the exports. However, according to it, the assessee needs to answer as to why it went for premature termination and the onus was on the assessee as per the ratio of the Apex Court in the case of CIT vs. Josef John (67 ITR 74). Accordingly, to examine this part of the loss, the matter was remanded to the AO.

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Green Infra Ltd. vs. ITO ITAT Mumbai `G’ Bench Before D. Manmohan (VP) and N. K. Billaiya (AM) ITA No. 7762/Mum/2012 A.Y.: 2009-10. Decided on: 23rd August, 2013. Counsel for assessee/revenue: Porus Kaka/ Abha Kala Chanda.

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S/s. 56, 68. Share premium being a capital receipt cannot be charged to tax as income.

Facts:
In the course of assessment proceedings the Assessing Officer (AO) observed that an amount of Rs. 47,97,10,000 was credited under Share Premium. He observed that the assessee company was incorporated on 03-04-2008 and had collected share premium of Rs. 47,97,10,000 on allotment of shares of face value of Rs. 10 each at a premium of Rs. 490 per share. He asked the assessee interalia to justify the premium charged with specific reference to basis of valuation, furnish note on factors considered for allotting shares at a premium.

The assessee filed a detailed reply explaining that the subscribers to the Memorandum of Association have subscribed to 50,000 equity shares of Rs. 10 each amounting to Rs. 5,00,000. These shares were allotted at par and all remaining shares were allotted at a premium. The Companies Act, 1956 does not specify the price at which shares are to be issued. Also, it does not limit the premium at which shares are to be issued. Share premium is a capital receipt and has to be dealt with in accordance with section 78 of the Companies Act, 1956. The assessee also filed internal valuation report which was obtained prior to issuance of equity shares at a premium. It was also contended that the assessee company is not required to prove the genuineness, purpose or justification for charging premium on shares. As regards chargeability of share premium u/s. 56(1), it was submitted that the share premium being a capital receipt is not income in its ordinary sense.

The AO was of the belief that premium charged on allotment is not justified. He was of the opinion that these funds were introduced by the assessee through the shareholders in the guise of share premium. He held that there is no basis for the estimates made in the valuations and that the values adopted are nowhere near to the actual and achievements. He also observed that the assessee did not have any hidden assets in the form of patents, copy rights, intellectual property rights or even investments, etc belonging to the company based on which the assessee would be likely to substantially enhance its profits. He also observed that of the total receipts of Rs. 47,97,10,000 an amount of Rs. 45,36,95,212 was invested in units of IDFC Mutual Fund and balance amounts were utilised for investments in shares of subsidiary companies, bank FDRs, advances to subsidiaries, etc. He held that the assessee has entered into a sham transaction. Accordingly, he invoked the provisions of section 56(1) of the Act and taxed the share premium under the head `Income from Other Sources’.

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

Aggrieved the assessee preferred an appeal to the Tribunal where the capital structure of the assessee company was explained. It was explained that IDFC Private Equity Fund-II is holding 98% shares in the assessee company and almost all the Directors of the assessee company are related with IDFC group.

Held: The Tribunal noted that the transaction of issue of shares at such a premium by a zero balance sheet company could raise eye brows but considering the subscribers to the assessee company, the test for the genuineness of the transaction goes into oblivion. It observed that 10,19,000 equity shares were subscribed and allotted to IDFC PE Fund II which company is a Front Manager of IDFC Ltd., in which company Government of India is holding 18% of shares. The contributors to IDFC PE Fund-II who is subscriber to the assessee’s share capital, are LIC, Union of India, Oriental Bank of Commerce, Indian Overseas Bank and Canara Bank all of which are public sector undertakings. Therefore, to raise eye brows to a transaction where there is so much involvement of the Government directly or indirectly does not make any sense.

No doubt a non-est company or a zero balance company asking for a share premium of Rs. 490 per share defies all commercial prudence but at the same time we cannot ignore the fact that it is a prerogative of the Board of Directors of a company to decide the premium amount and it is the wisdom of the shareholders whether they want to subscribe to such a heavy premium. The Revenue authorities cannot question the charging of such huge premium without any bar from any legislated law of the land. Details of subscribers were before the Revenue authorities. The AO has also confirmed the transaction from the subscribers by issuing notice u/s 133(6) of the Act. The Board of Directors contains persons who are associated with IDFC group of companies, therefore their integrity and credibility cannot be doubted. The entire grievance of the Revenue revolves around the charging of such huge premium so much so that the revenue authorities did not even blink their eyes in invoking provisions of section 56(1) of the Act.

Having gone through the provisions of section 56(1), the Tribunal held that the emphasis in section 56(1) is on `income of every kind’, therefore, to tax any amount under this section, it must have some character of “income”. It is settled proposition of law that capital receipts, unless specifically taxed under any provisions of the Act, are excluded from income. The Supreme Court has laid down the ratio that share premium realised from the issue of shares is of capital nature and forms part of share capital of the company and therefore cannot be taxed as revenue receipt. It is also a settled proposition of law that any expenditure incurred for the expansion of capital base of a company is to be treated as a capital expenditure as has been held by the SC in the case of Punjab State Industrial Corporation vs. CIT 225 ITR 792 and in the case of Brooke Bond India Ltd. vs. CIT. Thus the expenditure and receipts directly relating to the share capital of a company are capital in nature and therefore cannot be taxed u/s. 56(1) of the Act.

In the course of hearing, the DR raised the plea that the nature of transaction should be judged from the parameters of section 68 as well. Though, the counsel of the assessee raised a strong objection to such a plea, the Tribunal in the interest of justice and fair play, drawing support from the decision of SC in Kapurchand Shrimal vs. CIT (131 ITR 451) allowed the DR to raise this issue.

Considering the arguments of the DR, the Tribunal held that the identity of the subscribers has been established beyond all reasonable doubts nor have the revenue authorities questioned the identity of the shareholders. On facts, it held that the capacity of the shareholders cannot be doubted. To counter the argument of the Revenue that charging of premium of Rs. 490 per share is beyond any logical sense and that the transaction is a sham transaction, the Tribunal looked at the application of the funds so raised. It held that the ultimate beneficiaries of the share premium may clear the clouds over the transaction being alleged to be a sham.

The Tribunal fund that the assessee company invested funds in its three subsidiary companies wherein the assessee is holding 99.88% of share capital which meant that the funds were not diverted to an outsider. This, according to the Tribunal, cleared the doubt about the application of funds and the credibility of the company in whom the funds were invested.

The Tribunal held that it could not find a single evidence which could lead to the entire transaction to be a sham. It held that the revenue authorities erred in treating the share premium as income of the assessee u/s. 56(1) of the Act. The Tribunal directed the AO to delete the addition of Rs. 47,91,00,000.

This ground of appeal filed by the assessee was allowed.

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Umaben Shaileshbhai Sheth vs. DCWT ITAT Ahmedabad `D’ Bench Before A. Mohan Alankamony (AM) and Kul Bharat (JM) ITA No. 44 to 49/Ahd/2010 A.Y.: 2000-01 to 2005-06. Decided on: 4th October, 2013. Counsel for assessee/revenue: Vijay Ranjan/K. C. Mathews.

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Proviso to section 5(1)(vi) of the Wealth-tax Act, 1957. If the assessee’s share in the plot of land is less than 500 sq. mts., the benefit of the proviso cannot be denied to the assessee on the ground that the area of the entire plot is more than 500 sq. mts.

Facts: The assessee had joint share in a plot of land, admeasuring 567 sq. mts., allotted by Urmi Society, along with her husband. She was a joint shareholder as well. The Assessing Officer (AO) accepted that the assessee is the owner of half portion of the land but he denied the benefit of exemption to section 5(1)(vi) in an order passed u/s 24 r.w.s. 17 r.w.s. 16(3) of the Wealth-tax Act, 1957 (WT Act).

Aggrieved, the assessee preferred an appeal to the CWT(A) who dismissed the appeal filed by the assessee on the ground that the assessee and her husband had disclosed the value of the plot of land in their taxable wealth while filing returns of net wealth for AYs 2006- 07 and 2007-08 and therefore, how can the value of the said plot be exempt in earlier years. He held that the market value of the plot of land allotted by Urmi Society is includible in taxable wealth.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held: The Tribunal noted that the CWT(A) had not given any basis as to how the proviso to section 5(1)(vi) is not applicable when there is a finding of fact by the AO that the assessee is treated owner of land less than 500 sq. mts. The only basis of denial of exemption by the CWT(A) was that the assessee had not filed the wealth-tax return for the earlier period. The Revenue had not placed reliance on any judicial pronouncement or on any provision of law to deny exemption. It further noted that as per proviso to section 5(1)(vi) of the WT Act, if plot of land is comprising an area of 500 sq. mts or less then no wealth-tax shall be payable by an assessee.

The Tribunal held that admittedly, the assessee has been treated as owner of one-half share in a plot of land admeasuring 567 sq. mts, therefore the right of the assessee is lesser than 500 sq. mts. The assessee cannot be fastened with a liability of tax which otherwise cannot be fastened under the WT Act. It held that on this piece of land, no wealth-tax is payable by the assessee in terms of proviso to section 5(1)(vi). It held that the CWT(A) erred in not granting exemption under proviso to section 5(1)(vi) of the WT Act. It directed the AO to allow exemption.

The appeal filed by the assessee was allowed.

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Time for a system overhaul?

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“Americans are fed up of Washington”says President Obama, a sentiment strikingly similar that of the Indian people in regard to New Delhi. In two of the world’s largest democracies citizens are distraught, with the way their countries are being run.

More than 6 decades ago we began our tryst with destiny. Our rulers left us the legacy of the four pillars on which our democracy was to be built, the legislature, the executive, the judiciary and the media. In 66 years, a number of ills, corruption being the most significant one, have led to a virtually complete decay of these four pillars.

The leaders that we elected were expected to govern the country with the aid of tried and tested institutions like the CBI and the CAG with the CVC ensuring that the functioning of the government was above board. These institutions have been misused and maligned. The perception is that the premier investigating agency functions as an arm of the government, ministers discredit and question the CAG and the appointment of the CVC is under a cloud.

People look at the judiciary as their saviour. I do not believe that courts can substitute either the elected legislature or the bureaucracy. To illustrate, in a recent phenomenon in a public interest litigation filed for the non-grant of tax deducted at source to tax payers the Delhi High Court gave directions and the CBDT issued circulars. Despite this, has the situation on the ground materially changed? The answer is an emphatic no.

What then is the problem, people who man the system or the system itself? I think it is both. On account of the fact that those at the helm of affairs suffer from a lack of vision, they tend to gloss over the root of the problem and take short term measures. For those few who have the foresight and do take decisions in the long-term interest of the people, the bureaucracy mired in red tape does not let them function.

Our country is facing problems of great proportions. There cannot be any immediate solutions. What is required is a surgery, however painful it may be. Let us take the problem of affordable housing in the city of Mumbai and consequential proliferation of slums. Merely shifting cut-off dates for free housing for slum dwellers from 1995 to 2000 or the next date is a cruel joke both on slum dwellers and tax payers.. One needs to have three pronged strategy with a long-term perspective to tackle this problem. Firstly, MHADA, the authority that is vested with the responsibility to construct affordable houses needs to construct quality homes with the needs of those for whom they are meant in mind. Secondly, tenancy laws need to be restructured and administered in a manner so that dilapidated structures get rebuilt and finally, one needs to ensure that the fruits of development are equitably distributed all over the country so that forced migration gradually reduces and ultimately stops. The need is to address the cause and not the effect.

To conclude, it is necessary that the systems that have failed us need to change. Electoral reform is probably the right point to begin. The process will be long drawn and may cause substantial turbulence. The youth of our country dream of India as a land of opportunity. I see hope in the youth of this country. They are desperate for a change and they have the energy to carry out movements which will be a catalyst for change. Those who are the leaders of these movements need to focus on certain priorities, rather than spread themselves thin. In the hands of these young people lies the future of incredible India!

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ITO vs. Pritesh D. Shah (HUF) ITAT Ahmedabad `B’ Bench Before G. C. Gupta (VP) and T. R. Meena (AM) ITA No. 175/Ahd/2013

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S/s. 40(a)(ia), 194C, 194IA – Provisions of S/s. 194C, 194IA are not applicable to amounts paid by Clearing & Forwarding Agent, on behalf of his client, receipts whereof are issued in the name of the client.

Facts:
The assessee, a clearing & forwarding agent, had charged service charges known as agency charges from its clients whose goods were exported through various ports mainly in Gujarat & Maharashtra. In respect of the amounts paid by the assessee on behalf of its clients, receipts whereof were issued by the recipients in the name of the clients, the assessee did not deduct tax at source. The assessee contended that it was merely a facilitator in the export business of its clients. The assessee received from its clients reimbursement of amounts paid on their behalf and also service charges/agency charges. It was only the agency charges which were credited as income to P&L account of the assessee.

The Assessing Officer (AO) made an addition of Rs. 1,69,11,269; Rs. 23,01,424 and Rs. 26,76,785 u/s. 40(a) (ia) r.w.s. 194C & 194I of the Act on the ground that the assessee had failed to deduct tax at source on payments made by it on behalf of its clients.

Aggrieved the assessee preferred an appeal to CIT(A) who allowed the appeal.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:
The Tribunal noted that the assessee received railway freight, shipping freight, ICD charges, etc from its clients by way of reimbursement of expenses. It held that the assessee is merely a facilitator in the export business of its clients and facilitates to and fro movement of client’s goods both in land and overseas using road, rail, air and sea routes including temporary storage of the goods in custom bonded warehbouse for legal and procedural purposes, etc. The assessee received reimbursement of expenses incurred and also service charges. The Tribunal noted that the receipts were issued by various parties in the name of clients of the assessee and not in the name of the assessee and that it is only the agency charges which are credited to the P & L account of the assessee.

The Tribunal held that for applicability of provisions of section 194C and section 194I, the relationship of contractor and payee pursuant to contract between the parties is essential. In the facts of the assessee’s case, the Tribunal held that such a relationship is missing.

The Tribunal noted the finding given by CIT(A) that the clients of the assessee are reimbursing monies paid by the assessee to such agencies along with the assessee’s commission or handling charges and also that the CIT(A) has referred to number of decisions where the Hon’ble Courts have held that TDS provisions are not attracted in cases involving reimbursement of expenses held that addition on account of payments made to various parties on behalf of its clients by the assessee could not be sustained and deserves to be deleted. The Tribunal confirmed the order passed by CIT(A).

The appeal filed by the revenue was dismissed.

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A. P. (DIR Series) Circular No. 15 dated 22nd July, 2013

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Import of Gold by Nominated Banks/Agencies

This circular has modified the policy for import of gold by nominated banks/agencies as under:

A. Nominated Banks/Agencies

1.
They have to ensure that at least 20% of every lot of import of gold
(in any form/purity including import of gold coins/dore) is exclusively
made available for the purpose of export. Such imports have to be linked
to the financing of exporters by the nominated agencies (i.e. average
of last three years or any one year whichever is higher). Further,

2.
They can make available gold in any form for domestic use only to
entities engaged in jewellery business/bullion dealers supplying gold to
jewellers.

3. They will be required to retain 20% of the imported quantity in the customs bonded warehouses.

4.
They are permitted to undertake fresh imports of gold only after the
exports have taken place to the extent of at least 75% of gold remaining
in the customs bonded warehouse.

5. Any import of gold under any type of scheme, shall follow the 20/80 principle set out at (1) and (3) above.

6. Any other instructions, as regards import of gold on consignment basis, LC restrictions etc. stand withdrawn.

Entities/units
in the SEZ and EOU, Premier and Star trading houses are permitted to
import gold exclusively for the purpose of exports only.

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ICAI and Its Member

1.    Code of Ethics

The Ethical Standards Board of ICAI has considered some issues relating to Code of Ethics. These issues are published on pages 1518-1520 of April, 2013, CA Journal. Some of these issues are as under.

(i) Issue No. 1
Can the name of a proprietary firm of a Chartered Accountant, after his death, be used by the C.A. who purchases the goodwill of the firm?

Response

The Council has taken the view that the goodwill of a proprietary firm of Chartered Accountant can be sold/transferred to another eligible member of the Institute, after the death of the proprietor concerned and the name of the firm can be used by the purchaser subject to following conditions:

(a)    in respect of cases where the death of the proprietor concerned occurred on or after 30-8-1998, if the sale is completed/effected in all respects and the Institute’s permission to practice in deceased’s proprietary firm name is sought within a year of the death of such proprietor concerned. In respect of these cases, the name of the proprietary firm concerned would be kept in abeyance (i.e. not removed on receipt of information about the death of the proprietor as is being done at present) only up to a period of one year from the death of proprietor concerned as aforesaid.

(b)    in respect of cases where the death of the proprietor concerned occurred on or after 30-8-1998 and there existed a dispute between the legal heirs of the deceased proprietor, the position is as under.

The information as to the existence of the dispute should be received by the Institute within a year of the death of the proprietor concerned. In respect of these cases, the name of the proprietary firm concerned shall be kept in abeyance till one year from the date of settlement of dispute.

ii) Issue No. 2
What is the meantime of communicating with the retiring auditor?

Response

Where a new auditor is appointed, the incoming auditor has an obligation to communicate the fact of his appointment to the retiring auditor and make enquiry as to whether there are any professional or other reasons why he should not accept the appointment.

This is intended not only as a mark of professional courtesy but also to know the reasons for the change in order to be able to safeguard member’s own interest, the legitimate interest of the public and the independence of the existing accountant. The provision is not intended, in any way, to prevent or obstruct the change.

The incoming auditor may not accept the audit in the following cases :-

(i)    Non-compliance of the provisions of Sections 224 and 225 of the Companies Act.

(ii)    Non-payment of undisputed audit fees by auditee’s other than in case of sick units for carrying out the statutory audit under the Companies Act, 1956 or various other statutes; and

(iii)    Issuance of a qualified report.

(iii) Issue No. 3
Can a member act as a Tax Auditor and Internal Auditor of an entity?

Response

The Council has decided that Tax Auditor cannot act as an Internal Auditor or vice-versa for the same financial year.

(iv) Issue No. 4
Can a Concurrent Auditor of a Bank also undertake the assignment of quarterly review of the same bank?

Response

The Concurrent audit and the Assignment of quarterly review of the same entity cannot be taken simultaneously as the concurrent audit is a kind of internal audit and the quarterly review is a kind of statutory audit. It is prohibited in terms of the ‘Guidance Note on Independence of Auditors’.

2.    EAC Opinion

Treatment of Expenditure on Stabilisation of Expanded Plant Declared Commercial.

Facts:


(i)    A company (company) engaged in petrochemicals business decided for an expansion project to enhance the production capacity of its mother plant by about 30%. The expansion project was of a complex nature requiring integration of its mother plant with various downstream plants. The execution of the project started in the year 2006.

(ii)    The company stated that after completion of the major activities of the said project, the existing plant was shut down from October, 2009 to February, 2010 for completing the installation, integration and commissioning of the project / plant. Although the existing plant which was shut down during this installation period came into operation from February, 2010, the Parallel Chilling Train and the Extended Binary Refrigeration (EBR) Compressor had not been successfully integrated. As a result, the capacity of the mother plant had not been ramped up and the increased feed from mother plant to auxiliary and other downstream plants had not been achieved. In view of this, the expansion project was not declared commissioned in February, 2010. The plant started operation at nearly 95% of the enhanced capacity (without one heater which was damaged in fire in July, 2009 and was under reconstruction) for about a month following the integration and commissioning of the EBR and the New Chilling Train (NCT) in May, 2010 and based on an internal certification, the management decided to go ahead with the capitalisation of the project in the books of account in June, 2010.

(iii)    In view of the frequent problems faced by the company post commissioning of the project, non-achievement of the expanded capacity of the plant and also considering the opinion given by the licensor, the management of the company has prospectively realised that the expansion project which was commissioned and capitalised in June, 2010 has not yet fully stabilised to operate at the enhanced capacity on a consistent basis.

(iv)    Therefore, the management of the company is of the opinion that (i) Till stabilisation and successful commissioning of the plant in compliance of the criteria and parameters recommended by the licensor, the company should consider costs relating to the expansion project so capitalised earlier as capital work in progress. (ii) All subsequent expenditure for rectification of the defects, shut down cost, revenues, gain and loss, etc., incurred during the commissioning and stabilisation period of this expansion project should form part of the project cost (iii) Capitalisation of all such costs as mentioned in point (i) and (ii) above in the books in the year of such successful commissioning.

Query:

(v)    On the basis of the above, the company has sought the opinion of the EAC on the aforesaid accounting treatment and whether the same is in conformity with the applicable accounting principles and Accounting Standards.

EAC Opinion

(vi)    The Committee notes that the basic issue raised in the query relate to accounting for expenditure on rectification of defects, shut down costs, revenues, gains and losses, etc., incurred during the stabilisation period of the expansion project after declaration of its commissioning and fitness for commercial production in June, 2010 and determination of the point of time when costs relating to expansion project should be capitalised along with the plant.

(vii)After considering the facts stated in (i) above and Paragraphs 9.4 and 9.4 of AS 10 – “Accounting for Fixed Assets” the Committee is of the view that the activities undertaken for stabilisation of plant cannot be treated as the test run as prescribed in the Standard. The purpose of test run, in the view of the Committee, is to ascertain whether the plant and machinery and other relevant facilities, as installed, give the commercially feasible output in terms of quality and quantity. If during the test run, the production standards are not met, normally, the production is stopped and necessary alterations/modifications are made in the plant and machinery. It may be necessary to carry out test runs(s) further until the output of commercially feasible quality and quantity is obtained. The Committee notes that in the company’s case, the plant after expansion was operational at 95% of the enhanced capacity and was able to produce the commercially feasible goods, and, therefore, was ready for commercial production in June, 2010. Accordingly, in the company’s case, capitalisation of expenditure on rectification of defects, shut down costs, revenues, gains and loss, etc. incurred after declaration of commissioning of the expansion project in June, 210 is not appropriate. Therefore, the question of writing back the costs related to the expansion project, capitalised earlier, in June 2010 to ‘capital work in progress’, as stated by the company does not arise.

[Pl. Refer Page nos. 1558 to 1561 of C. A. Journal – April , 2013]

3. ICAI News

(Note :    The page nos given below are from CA Journal of April, 2013)

(i)  ICAI Towers, BKC, Mumbai

ICAI Towers at BKC, Mumbai, was dedicated to ICAI members and students on 15-3-2013 by the Union Corporate Affairs Minister, Shri Sachin Pilot. The Towers has ground + 8 floors which will house the WIRC office as well as ICAI Decentralised office. This building is spread over 32090 sq. ft. (Page 1506)

(ii) Industrial Training for Articled Assistants

CA Regulations, 1988 provide scope for Industrial Training facilitating articled assistants real life exposure in office workings at industry and service organisations in order to develop their professional acumen. Industrial Training is highly benefiting to articled assistants in terms of practical knowledge & learning. The period of Industrial Training may range between nine months to twelve months during last year of the prescribed period of Practical Training under CA Course.

An articled assistant who has passed Intermediate (Integrated Professional Competence) Examination/

Intermediate (Professional Competence) Examination Professional Education (Examination-II)/Intermediate Examination may serve as an Industrial Trainee in any of the financial, commercial, industrial undertakings under an eligible member of the Institute working with such organisation. A list of registered organisations permitted to impart Industrial Training is available at the ICAI website.

Members are requested to inform and encourage their articled assistants to pursue industrial training by fulfilling the above eligibility. Detailed information and prescribed application forms are available on ICAI website www.icai.org as well from concerned regional offices of ICAI.

Members serving in such organisations/industries are also requested to apply separately in the prescribed form for empanelment of their organisation with the Institute for imparting Industrial Training (Page 1646).

(iii) Secondment of Articled Assistants

CA Regulations, 1988 provide scope for Secondment of articled assistant facilitating an opportunity for gaining practical experience in multi-disciplinary work and variety of business situations. A principal may second an articled assistant to other member/s with a view to provide him/her training in the areas where the principal/articled assistant may require. Secondment can also be availed during Industrial Training.

Such Secondment can be done under an eligible member whether in practice or in employment. A member can provide secondment upto maximum two articled assistants at a time. The minimum period of secondment shall be four months and the maximum period shall be one year which may be served with more than one member. During the period of secondment, the member with whom the articled assistant is seconded shall pay stipend at the rates prescribed under CA Regulations. A record of training imparted during secondment will be properly maintained.

For Secondment, a statement in the form containing particulars of training needs to be filed with the Institute within 30 days from the date of commencement of training on secondment.

Members may inform their articled assistants regarding secondment and encourage them to undergo secondment with an eligible member for training in the desired field. Detailed information and prescribed application form of secondment is available on ICAI website www.icai.org as well as with the concerned regional offices of ICAI. (Page 1646)

(iv) Quality Review Board

The Government of India has constituted Quality Review Board (QRB) u/s. 28A of CA Act. Details about its constitution and functions are published on page 1648 of CA Journal for April, 2013. Our members interested in working as “Technical Reviewers” for QRB can empanel their names with QRB as stated in ICAI Note at page 1648.

(v)    Notification about consequences of breach of C.A. Regulation 65

The Executive Committee of ICAI has noticed that some Articled Assistants are pursuing more than one study courses, besides C.A. Course, during their training period. This amounts to breach of CA Regulation 65. Council is taking a serious view about this non-compliance of CA Regulations. The Notification states that in the cases of Articled Trainees, who have not complied with this Regulation, ICAI will not grant Membership after they qualify for the period during which there was non-compliance. It is also clarified that appropriate action will be taken against the members who have trained such Articled Trainees (Page 1517).

Sections 45(4) read with section 2(47) of the Income Tax Act, 1961 – Capital gain tax cannot be levied on firm on mere admission of partner if there was no distribution of any capital asset.

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4. (2013) 55 SOT 122 (Mumbai)
ITO vs. Fine Developers
ITA No.4630 (Mum.) of 2011
A.Y.2008-09. Dated 12-10-2012

Sections 45(4) read with section 2(47) of the Income Tax Act, 1961 – Capital gain tax cannot be levied on firm on mere admission of partner if there was no distribution of any capital asset.


Facts

During the relevant assessment year, the assesseefirm of builders and developers admitted HDIL as a new partner with 50% share. The Assessing Officer held that on the date of admission, there was a plot of land costing Rs. 28 crore held by the firm and 50% of such amount was transferred in favour of the new partner HDIL on its admission in the firm. Accordingly to the Assessing Officer the assesseefirm was, therefore, liable to capital gain tax u/s. 45(4).

The CIT(A) held that :
a. During the relevant assessment year there was only admission of HDIL as new partner in the firm.
b. There was neither retirement nor distribution of assets nor revaluation of plot of land during the assessment year under consideration.
c. Mere admission of partners did not attract provisions of section 45(4).
d. During the continuance of the partnership-firm, rights of the partners were confined to obtaining the share of the profit and no partner could have exclusive claim to any assets.

Accordingly, the addition made by the Assessing Officer was set aside.

Held
On appeal by the Revenue, the Tribunal dismissed the appeal. The Tribunal noted as under :

1. It is not a case where firm was taken over by the new partner so that provisions of section 45(4) can be invoked. As per the settled principles of law of partnership, during the continuation of the partnership, partners do not have separate right over the assets of the firm in addition to interest in share of profits. The basis of the said proposition is that value of the interest of each partner with reference to the assets of the firm cannot be isolated and carved out from the value of the partners’ interest in the totality of the partnership assets.

2. In the case under consideration, asset of the firm, i.e., plot of land, was never transferred to anybody – it always remained with the assesseefirm only. From the date of purchase of the plot till 27-05-2008, when three partners retired, it was the asset of the firm and there was no change in the ownership of the said plot. Thus, there was no extinguishment of rights, as envisaged by section 2(47), in the case of assessee-firm.

3. From the very beginning of the partnership, the plot of land in question was treated as stockin- trade by the assessee-firm. Even on 31-03- 2008 it was shown as current asset (i.e. W-I-P) in the balance sheet. The Assessing Officer has nowhere rebutted/doubted this factual position.

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Consolidated Financial Statements vs. Companies Bill

Currently, listing agreement mandates listed companies to prepare Consolidated Financial Statements (CFS). Neither the existing Companies Act nor AS 21 requires companies to prepare CFS. Under the Companies Bill, 2012 (Bill) all companies, including unlisted companies and private companies that have a subsidiary will need to prepare CFS.
Unlike IAS 27, the Bill does not exempt an intermediate unlisted parent company from preparing CFS. Under IAS 27 an unlisted intermediate parent is exempt from preparing CFS if and only if:
a)the parent is itself a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the parent not presenting CFS;

b)the parent’s debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets);

c)the parent did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market; and
d)the ultimate or any intermediate parent of the parent produces CFS available for public use that comply with International Financial Reporting Standards.
Preparation of CFS at each intermediate parent level is likely to increase compliance cost. The Ministry of Corporate Affairs may look into the matter, and provide an exemption on the above similar lines. The said exemption may be incorporated in the rules.
For all companies, CFS should comply with notified Accounting Standards (AS) . Notified AS currently means the Indian GAAP. In the future, it may include Ind-AS for specified entities. This will impact companies that are currently preparing CFS according to IFRS, based on option given in the listing agreement. These companies will have to mandatorily prepare Indian GAAP CFS (Ind-AS in the future), and may choose to continue preparing IFRS CFS on a voluntary basis or stop preparing the same. The Ministry of Corporate Affairs may look into the matter and allow companies to continue preparing CFS using IASB IFRS instead of Indian GAAP or Ind-AS.

There seems to be some confusion with respect to associates and joint ventures. The explanation, to the section 129 of the Bill states that “the word subsidiary includes associate company and joint venture.” Apparently, the following two views seem possible:

(i)a company needs to consolidate associates and joint ventures in accordance with the notified AS using equity/proportionate consolidation method. In other words, CFS is prepared only when the group has at least one subsidiary para

(ii)a company needs to apply equity method/ proportionate consolidation to its associates and joint ventures even if it does not have any subsidiary. In other words, CFS will be prepared when the company has an associate or joint venture, even though it does not have any subsidiary.
The first view seems more aligned to the requirements of notified AS and the current practice. The second view can be supported if the intention of the lawmaker was to require a company to apply equity method/proportionate consolidation method to its associates and joint ventures even if it does not have any subsidiary. ICAI and MCA should provide clarification on this issue. It would be appropriate if the clarification maintains status quo with current requirement, which is essentially view (i).

The definition of control, subsidiary and significant influence as provided in the Bill and the accounting standards are quite different. If the companies to be consolidated under the Bill and the accounting standards are different, because of the differences in the definition, it would create a lot of confusion and difficulty. A comparison of the definitions is given in the Table.

Apparently, the definition of “control” given in the Bill is broader than the notion of “control” envisaged in the definition of the term “subsidiary.” In accordance with definition of “subsidiary,” only board control and control over share capital is considered. However, the definition of the “control”, suggests that a company may control other company through other mechanism also, say, management rights or voting agreements. Further, the definition of “subsidiary”, refers to control over more than one-half of the total share capital, without differ-entiating between voting and non -voting shares. This could lead to a situation where a company is a subsidiary under AS-21, but on which the parent has no control as defined in the Bill. Consider a simple example of a company, which has a share capital of Rs. 100, comprising 40% equity with voting rights held by A and 60% preference shares with no voting rights, held by B. In accordance with AS, A would consolidate the company but in accordance with the Bill, B would consolidate the company. The Bill seems to provide an unacceptable response, where the lender rather than the equity holder would consolidate the company.
There seems to be similar confusion with respect to associates. In accordance with the explanation in the Bill, the term “significant influence” means control over 20% of business decisions. Control over business decisions is an indicator of subsidiary, rather than associate. It appears that the definition in the Bill “controls 20% of business decisions” is wrongly described. The right way to describe it would have been “has significant influence over all critical business decisions”, and “significant influence is evidenced by 20% voting power, representation on the board, or through other means.” The other issue is that the 20% under the standard works as an indicative threshold. In other words, even a lesser percentage may give significant influence and a higher percentage need not necessarily give significant influence. However, under the Bill the 20% requirement works like a rule, rather than a rebuttable presumption.

To resolve all these anomalies, the MCA may clarify that the definitions in the Bill are relevant for legal/ regulatory purposes. For accounting purposes including preparation of CFS, definitions according to the notified AS should be used.

Social Networking – Be Careful Out There – II

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About this Article

This write up is Part 2 of the three part series on the topic. The previous write-up was aimed at creating awareness about some of the myths and misconceptions related to the use of social networking sites.

While the recent events have had the effect of an eye opener for some people, there are many others who throw wind to caution


This article highlights some simple steps and safe practices which may help in making your experience a safe one rather than a sorry one.

Background

The previous write up briefly discussed some of the myths and misconceptions related to the use of social networking sites. It also focussed on the complete lack of awareness on how personal information is stored, accessed and made available on the internet. The more shocking revelation being that the information is, more often than not, revealed with or without the permission of the person who was most likely to be affected by such a revelation.

 The key takeaways from the previous write up were:

• Social networking sites aren’t responsible for your privacy…. you are!!!

• Default settings on the site, may or may not provide adequate protection.

• When social networking sites change their privacy policy, they may or may not tell you about the changes made, more importantly they may not tell you how your “personal” information is about to become a more public.

• The privacy policy of the social networking site does not extend to its partners (i.e. app and other third party service providers).

• When something is provided to you free of cost, it doesn’t mean that there is no cost attached. On the contrary, it means that someone else is footing the bill. And that ‘someone’ is going to extract something of value (like your private info) in return.

• Social networking is a paradox – you are posting data meant to be private on a medium which is meant to be public.

Risks

Very recently, Facebook acknowledged that their servers were hacked. While the company said that there was no data loss/damage done, there is no way of knowing for sure whether that was a fact. This may come as a surprise to some people, however, for others it was something that they always expected to happen.

Given the nature and amount of data collected and stored by some of the social networking sites, it was obvious that sooner or later, they would be targets of cyber criminals.

A curious person would ask what does the social networking site have that may be of interest to anyone other than the users? Or the information posted by me is harmless, what damage can the hacker do to me?

A short list of the risks involved is as under:

• All your private information, either about yourself or your friends, their likes or dislikes will be compromised.

• Someone could use this information to bully you or cyber-stalk you or your friends.

• The information may be used for inappropriate or illegal purposes including phishing, cyber frauds, hacking someone else’s account, etc.

 • It is also possible that your ‘views’ about someone or something may be disclosed to the very person and there would be consequences.

 • Your name, details may be used to spread viruses, spam, malware, etc

• Someone may hijack your email account or Facebook page and post some damaging information.

Steps to Safe Social Networking Experience

 It is important to remind the readers that there is very little we can do against a prolific hacking attack or a skilled scamster. After all, considering that the networking sites with all their resources couldn’t do much, can you do any better? It is therefore imperative that you take steps to reduce the impact of any damage that may be caused. Listed below are a few ‘counter measures’ that may be useful:

Don’t succumb to peer pressure:

Peer pressure is like a double edged sword, at times it forces you to excel and then there are times when you succumb to it and in that moment of weakness, sometimes, it leads to disastrous consequences.

Don’t let peer pressure or what other people are doing on these sites convince you to do something you are not comfortable with. Stay within your limits. Remember, just like the spoken words cannot be taken back, what you post on these site cannot be erased (not very easily). It will remain in the system no matter what.

Keep personal information out:

Generally people have a tendency to post personal information like their phone number, photos of their home or their work place, school or date of birth, etc.

Just stop for a minute and think about it. This is the same information that a hacker would be need to access your bank account, your credit card, etc. Do you really want to leave this information out in the open?

Keep your profile closed, allow only your friends to view the profile. Else, for a skilled hacker or a scamster, you would be a sitting duck, ripe for the kill.

Mask your identity:

Be very wary of posting any personal data. If possible use a nick name or an alias (commonly referred as a ‘handle’).
It’s very easy to set up a separate email account to register and receive information from the site.

The advantage being that should you even feel the need to close the account or stop using the social networking site, you needn’t stop using your primary mail account.


Use strong passwords:

Remember, the password is the weakest link in the chain. Birthdates, location, nicknames are too common, you don’t need to be a super computer to figure out these types of passwords. The hacker will have a look at your profile and the information will be sitting right in front of his eyes.

Make sure that you use a combination of upper and lower case plus numbers and special characters. It doesn’t have to be very difficult.

Common daily use sentences like ‘I travel by western railway’ can also be converted in to a unique password by making use of a combination of upper and lower case characters along with symbols. Something as obvious as BCAS 2013 can be written as ‘8©@S2013’ and it would be become 10 times more difficult to guess or hack, yet easy for you to remember.

Social networking vs. venting out

Social networking and venting out are two seperate things. Remember that what goes online stays online.

Don’t say anything or publish pictures that may cause you or someone else embarrassment.

Never post comments that are abusive, or those that may cause offence to either individuals or groups of society.

Recently, many companies have started (re)viewing current and prospective employees’ social networking pages. The slightest indiscretion and you are likely to be on your way out.

What you say can and will be used against you

Who actually owns and who controls “your” intellectual content that you post is not as clear as you might think. This also raises the question: If you don’t own it, can you really control it?

 Terms of usage vary with every social networking service. It is more likely, that as soon as you sign up, you give up control of how your content may be used.

Be careful in choosing your friends:

It’s an age old advice. Be that as it may, it applies to your offline as well as online friends. Be wary about who you invite or accept invitations from. Be aware of what friends post about you or reply to your posts, particularly about your personal details and activities.

Never disclose private information when social networking. Most importantly be careful of clicking on links on an email or social networking post, even if its from your friend (in some cases specially if its from your ‘friend’)

One of the biggest mistakes you can make is to accept friend requests from people you don’t know. When you do that, you are inviting people you know nothing about to share your personal information.

When your friends share information about you on their networks that you’d rather keep private, contact them and request them to remove the damaging information. Some sites may also permit you to remove any tags that your friends use to identify you in their posts

Guard against phishing:

Be guarded about who you let join your network. Use the privacy network to restrict strangers from accessing your profile. Be on guard against phishing scams, including fake friend requests and posts from individuals or companies inviting you to visit other pages or sites. If you do get caught in a scam, make sure you remove any corresponding likes and app permissions from your account.

Don’t be afraid to block specific users or set individual privacy settings for certain sensitive posts and information.

While all of the above discussed ‘counter measure’ may not offer complete protection, you may be saved from a total disaster. After all, prevention is always better than the cure.

The next write up (the third and concluding part) will deal with the specific issue of changing your privacy settings (i.e. location) and some basic steps on what to do if your account is hacked.

S/s. 5(2), 9(1)(v) – Interest on FCCBs issued outside India neither accrues or arises in India nor is deemed to accrue or arise in India; Where an interest income falls within the ambit of the source rule exclusion specifically dealing with deemed accrual of interest, it cannot be taxed by evaluation within the ambit of “income accrued and arisen in India.

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24. TS-18-ITAT-2013(Ahd)
ADIT (IT) vs. Adani Enterprises Ltd.
A.Y.: 2009-10, Dated: 18-1-2013

S/s. 5(2), 9(1)(v) – Interest on FCCBs issued outside India neither accrues or arises in India nor is deemed to accrue or arise in India; Where an interest income falls within the ambit of the source rule exclusion specifically dealing with deemed accrual of interest, it cannot be taxed by evaluation within the ambit of “income accrued and arisen in India”.


Facts

An Indian Company (Taxpayer) made interest payments to a US Bank on Foreign Currency Convertible Bonds (FCCBs), issued by the Taxpayer. The funds were deployed by the Taxpayer outside India, primarily invested in the foreign subsidiary, which in turn is involved in financing further business abroad. Taxes were not withheld on interest payments made by the Taxpayer. The tax authority held that the interest on FCCBs accrued in India in the hands of non resident investors, as FCCBs were issued by an Indian company and the interest was paid by an Indian company from India and the obligation to pay the interest rested with the Taxpayer. However, CIT(A) ruled otherwise and held that the interest income was not taxable in India. Aggrieved, tax authority appealed before the Tribunal.

Held

Tribunal referred to the Madras HC’s ruling in case of C.G. Krishnaswami Naidu [(1966) 62 ITR 686 (Mad)], and held that the decisive factor in order to determine the place of accrual would be the place where the money is actually lent, irrespective of where it came from. In the present case, the money was actually lent by the non-resident investors in the foreign country and it was not lent in India and therefore, it cannot be said that the interest income has accrued or arisen to the non-resident investors in India. Further payment of interest by an Indian Company is not a decisive factor to determine whether income accrues in India.

Section 9(1)(v) of the Act is applicable for the purpose of determining whether interest income is deemed to accrue or arise in India. As per clause (b) of section 9(1)(v) of the Act interest payment to non-resident investors by an Indian resident, if such interest payment is in respect of amount borrowed outside India and used outside India for investment or for business carried out outside India is excluded from the ambit of taxation in India. In the facts of the case, the above exclusion would squarely apply as the money has been utilised for the business outside India. The Tribunal also pointed out that if an income is said to accrue or arise in India whether the same can be excluded specifically from scope of income deemed to accrue or arise in India, which according to the Tribunal was not correct. Deeming of income accruing or arising in India are those situations where income has not actually accrued or arisen in India, but still it will be deemed to accrue or arise in India. Hence, both the situations are mutually exclusive. If one case is falling within the ambit of income accrued and arisen in India, it cannot fall within the ambit of income deemed to accrue or arise in India and vice versa.

Tribunal ruling in favour of the Taxpayer concluded that, as the interest income in the present case is falling within the ambit of the exclusion clause of “income deemed to accrue or arise in India”, it cannot fall within the ambit of “income accrued and arisen in India” and hence the same was not taxable in India.

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S/s. 9(1)(vii), 195 – Transfer of fabric designs by a UK Company to an Indian Company is in the nature of FTS in terms of treaty and hence liable to withholding tax in India.

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23. TS-18-ITAT-2013(Ahd)
Sintex Industries Ltd. vs. ADIT
A.Ys.: 2009-10 and 2010-11, Dated: 18-1-2013

S/s. 9(1)(vii), 195 – Transfer of fabric designs by a UK Company to an Indian Company is in the nature of FTS in terms of treaty and hence liable to withholding tax in India.


Facts

An Indian Company (Taxpayer) made payments to a UK Company (FCo) for providing fabric designs. As per the agreement, FCo was required to; deliver fabric designs for cotton shirting; show and/make available all documents/reports in relation to fabric designs; provide detailed quantity report in writing along with specific/new design developed, to the Taxpayer. It was also contemplated in the agreement that on expiry or termination, FCo would be required to return all the documents and other internal documents of the Taxpayer. The tax authority held that the payments made were in the nature of FTS under the India-UK DTAA, which was also upheld by the CIT(A). Aggrieved, the Taxpayer appealed to the Tribunal.

Held

The Tribunal did also note that there was no clause in the agreement obliging the Taxpayer to return the design supplied by FCo on expiry or termination of the agreement. It accordingly held that the designs supplied by FCo to the Taxpayer became the property of the Taxpayer, which could be either used by the Taxpayer for its own business or be sold to any outsider for consideration. Accordingly, the Tribunal ruled that FCo was required to transfer the design to the Taxpayer and consequently FCo made available the designs which could be used in the business of the Taxpayer or sold to an outsider and hence, the above services were in the nature of FTS under the India-UK DTAA as it involved transfer of a technical plan or design. Further, the Tribunal also referred to the MOU to India- US DTAA to arrive at the conclusion that the payments made to FCo were for making available technical services. Consequently, the payments made were subject to withholding tax in India.

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S/s. 9(1)(vii), 195(2) – Payments to non-resident for availing automated machine oriented and standard laboratory testing services are not taxable as FTS under the Act as it lacked human intervention.

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22. TS-51-ITAT-2013(Mum)
Siemens Limited vs. CIT Dated: 12-2-2013

S/s. 9(1)(vii), 195(2) – Payments to non-resident for availing automated machine oriented and standard laboratory testing services are not taxable as FTS under the Act as it lacked human intervention.


Facts

An Indian Company (Taxpayer) made payments to a German Laboratory (GL) for carrying out certain laboratory tests on circuit breakers so as to establish that the design and the product meets the international standards. The tests were done automatically by machines without any human intervention and on completion of these tests a certificate was issued by the authorities of GL for the quality of the product tested. The tax authority contented that the amount paid to GL was taxable in India as the payment was for technical services covered u/s. 9(1)(vii) of the Act. The CIT (A) upheld the view of tax authority. Aggrieved, the Taxpayer appealed to the Tribunal.

Held

Relying on Delhi High Court’s (HC) decision in the case of CIT v. Bharati Cellular Ltd [(2009) (319 ITR 139) (Del)] and Madras HC’s decision in the case of Skycell Communications Ltd vs. DCIT [(2001) 251 ITR 53 (Mad.)], Tribunal observed as below:

• The word “technical” as appearing in FTS definition is preceded by the word “managerial” and succeeded by the word “consultancy” and therefore, it takes colour from these words and cannot be read in isolation. Based on the principle of “noscitur a sociis”1 the word technical should be understood in the same sense as the words surrounding it.

• Managerial and consultancy services can be provided by humans only and cannot be provided by means or any equipment. Therefore, the word “technical” has to be construed in the same sense involving direct human involvement, without which technical services cannot be held to be made available.

 • Where simply an equipment or sophisticated machine or standard facility is provided (though that facility may itself have been developed or manufactured with the usage of technology), such a user cannot be characterised as providing technical services.

 • As against that if a person delivers his technical skills or services or makes available any such services through aid of any machine, equipment or any kind of technology, then such a rendering of services may be regarded as “technical services”. In such a situation, there is a constant human endeavour and the involvement of the human interface.

• If any technology or machine is developed by human and the same is put to operation automatically, wherein it operates without any amount of human interface or intervention, then the usage of such technology cannot per se be held as rendering of technical services by human skills. In such a situation, some human involvement could be there but it is not a “constant endeavour of the human” in the process.

Applying the above principles, the Tribunal ruled that the services rendered by GL were not technical in nature, as there was not much human involvement for carrying out the tests in the laboratory which were mostly done by machines, though under observations of technical experts. Further, the services were more of a standard facility through the usage of machines and human activities were limited to providing test certificate and test reports. Therefore, merely because the test was observed and the certificates were provided by the humans, it cannot be said that the services have been provided through human skills.

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Salary: Perquisite/Profit in lieu of salary: S/s 15 and 17: Keyman Insurance policy for employee/directors: Assignment of policy to employee/director receiving surrender value: Difference between actual premia paid and surrender value not assessable as salary:

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[Maturity value of policy not assessable: CIT Vs. Rajan Nanda; 349 ITR 8 (Del):]

The employer company took keyman insurance policies on the lives of two employees/directors in different years. After paying premia for a certain period, they were assigned to the two employees/directors receiving the surrender value from them. For the remaining period of the policies, the insurance premia were paid by the assignees. The Assessing Officer held that the difference between the premia paid by the employer and the surrender value paid by the employee is the benefit to be taxed in the hands of the employees. The Tribunal deleted the addition and held that merely by assignment in a particular year when the policy was still continuing, no taxable event had taken place and, therefore, no tax could be charged. It also held that the amount in question could not be taxed as perquisite so as to fall within the scope of section 17(3).

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

“i) Explanation to section 10(10D) gives the meaning to “keyman insurance policy” and only that sum received under this policy would be treated as income. Sub-clause (ii) of clause (3) of section 17 taxes “any sum received in a keyman insurance policy”. The word “received” assumes significance. The Legislature in its wisdom thought to tax only that payment, which is received by the employee assessee under the keyman insurance policy. The purport of sub-clause (ii) is all together different. Such an amount due or received by the assessee has to be : (a) before joining any employment; or (b) after cessation of its employment. No such contingency occurred when the keyman insurance policy was assigned by the company in favour of the director assessee. The tax event did not occur, as no such amount was received at the time of assignment of the policy by the company as employer to the director assessee, as employee. The amounts were not taxable in the hands of the directors.

ii) There is no prohibition on the assignment or conversion of keyman insurance under the Act. Once there is an assignment, it leads to conversion and the character of the policy changes. The Insurance Company had itself clarified that on assignment, it does not remain a keyman policy and gets converted into an ordinary policy. Hence, the policy in question was not a keyman insurance policy and when it matured, the advantage drawn therefrom was not taxable.”

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Salary: Perquisite: S/s 17(2)(iii) and 17(2)(iv) of I. T. Act, 1961 and Rule 3 of I. T. Rules, 1962: Expenditure on repairs of residential accommodation occupied by employee:

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[Not a perquisite: Scott R. Bayman Vs. CIT; 253 CTR 233 (Del): ]

The assessee was an employee (President and CEO) of a company M/s. GE. In the relevant year, the employer had spent an amount of Rs. 50 lakhs towards repair and renovation of the residential accommodation occupied by the assessee. The Assessing Officer treated this amount as perquisite and added in the salary income of the assessee. The Tribunal confirmed the addition.

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

“i) Express provisions of Rule 3 which elaborates various contingencies in relation to perquisite of rent free accommodation rules out the intention of the Parliament to treat expenses in relation to improvement, repairs or renovation as falling within the meaning of “perquisite”.

ii) Argument on behalf of the Revenue that the repairs and renovation expenses constituted an obligation of the employee, which was borne by his employer is meritless. Lease deed nowhere spells out any obligation on the employee to carry out repairs and renovations. Section 17(2) (iv) cannot be made applicable.

iii If the Assessing Officer had returned a finding that the premises were to be valued at market value (of the rental), in case it is increased as a result of the renovations, the only prescribed mode was to apply the method indicated by Rule 3(a)(iii).

iv) In view of the above, the appeal has to succeed. The impugned order of the Tribunal is hereby set aside. The cost of repairs and renovation shall be deleted from the taxable income of the assessee.”

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Revision: Section 264: A. Y. 2007-08: Claim for exemption in return but by mistake not shown in computation: Intimation u/s. 143(1) denying exemption: Rejection of application for revision: Not justified:

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[Sanchit Software and Solutions P. Ltd. Vs. CIT; 349 ITR 404 (Bom):]

For the A. Y. 2007-08, in the return of income, the assessee made a claim for exemption u/ss. 10(34) and 10(38) in respect of the dividend and long-term capital gains. However, by mistake, included the dividend of the long term capital gain in the total income in the computation. Intimation u/s. 143(1) of the Act denied the exemption. The assessee filed an application for rectification u/s. 154. The assessee also filed revision petition u/s. 264 of the Act which was rejected by the Commissioner.

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

“i) The entire object of administration of tax is to secure revenue for the development of the country and not to charge the assessee more tax than that which is due and payable by the assessee. On April 11, 1955, the CBDT issued a circular directing the Assessing Officer not to take advantage of the assessee’s ignorance or mistake.

ii) The Commissioner committed a fundamental error in proceeding on the basis that no deduction on account of dividend income and income from capital gains u/s. 10 of the Act was claimed. Therefore, there was an error on the face of the order and the order was not sustainable.

iii) The Assessing Officer was directed to treat the application dated 08/02/2010, as a fresh application at the earliest preferably within six weeks of the order.”

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Export profit: Deduction u/s. 80HHC: Retrospective amendment to section 80HHC(3) by Taxation Laws(Second Amendment) Act, 2005 to get over decision of Tribunal is not valid: Amendment prospective:

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[Vijaya Silk House (Bangalore) Ltd. Vs. UOI; 349 ITR 566 (Bom):]

Dealing with the validity of the retrospective amendment to section 80HHC(3) of the Income-tax Act, 1961 the Bombay High Court held as under:

“i) The amendment made by the Taxation Laws (Amendment) Act, 2005, in order to overcome the decision of the Tribunal by insertion of the third and fourth provisos to section 80HHC(3) of the Income-tax Act, 1961, is violative for its retrospective operation and for depriving the benefit earlier granted to a class of assessees whose assessments were still pending, although such benefit will be available to assessees whose assessments have already been concluded. In this type of substantive amendment, retrospective operation can be given only if it is for the benefit of assessees and not in a case where it affects even a small section of assessees.

ii) Accordingly, the amendment could be given effect from the date of the amendment and not in respect of earlier assessment years in case of assessees whose export turnover is above Rs. 10 crore. In other words, the retrospective amendment should not be detrimental to any of the assessees.”

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Capital gains: Section 50C: A. Y. 2003-04: Stamp duty value higher than sale consideration: Reference to DVO: Report of DVO binding on AO:

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[CIT Vs. Dr. Indira Swaroop Bhatnagar; 349 ITR 210 (All):]

In the previous year relevant to the A. Y. 2003-04, the assessee sold an immovable property for a consideration of Rs. 51,75,000/-. The Assessing Officer applied section 50C and substituted the stamp duty value of Rs. 1,38,00,000/- for the consideration. Assessee’s registered valuer valued the property at Rs. 48,37.500/. Assessing Officer rejected the said value and referred the matter to the DVO for determining the market value. The DVO determined the market value of the property at Rs. 58,50,000/- The Assessing Officer rejected the DVO’s report and adopted the stamp duty valuation. The Tribunal held that the valuation by the DVO had to be adopted.

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

“i) Section 50C of the Act provided that where the assessee claims that the value adopted or assessed for stamp duty purposes exceeds the fair market value of the property as on the date of transfer, the Assessing Officer may refer the valuation of the relevant asset to a Valuation Officer in accordance with section 55A. Generally, when the Assessing Officer has obtained the report of the DVO it is binding on him.

ii) The valuation of the DVO had to be adopted.”

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Capital gain: Exemption u/ss. 54 and 54EC: A. Y. 2007-08: Long term capital gain: investment in residential property and bonds: Inclusion of husband’s name as joint owner: Assessee entitled to exemption of entire investment:

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[DI(Int Tax) Vs Mrs. Jennifer Bhide; 349 ITR 80 (Kar):]

In A. Y. 2007-08, the assessee sold her residential property and from the sale proceeds, purchased residential property and bonds. The property and the bonds were purchased in the joint names of herself and her husband. The assessing Officer allowed 50% of the claim for deduction. The Tribunal allowed the full claim.

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

“i) It was nobody’s case that the assessee’s husband had contributed any portion of the consideration for acquisition of the property or the bonds. The source for acquisition of the property and the bonds was the sale consideration.

ii) Once the sale consideration was utilised for the purpose mentioned u/s. 54 and 54EC, the assessee was entitled to the benefit of those provisions. As the entire consideration had flowed from the assessee and no consideration had flowed from her husband, merely because either in the sale deed or in the bond her husband’s name was also mentioned, in law he would not have any right. Therefore, the assessee could not be denied the benefit of deduction.”

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Penalty – Concealment of income – Suit for recovery by bank settled at Rs.42,45,477 as against Rs.52,07,873 outstanding in the assessee’s books of account – Not a case to which section 271(1)(c) would apply.

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Northland Development and Hotel Corpn. V. CIT (2012) 349 ITR 363 (SC)

The assessee took loan from Citi Bank N.A. to buy a hotel (capital asset). Default was committed in repayment of loan. Suit was filed for recovery, which was settled by signing consent decree on 30th April, 1982. The consent decree recited that the borrowers acknowledged their liability to the plaintiff-bank in the sum of Rs.42,45,477, being the outstanding amount in the loan account of the bank as on 30th April, 1982. However, in the books of account of the assessee, the outstanding amount repayable to the bank was Rs.52,07,873 as on 30th April, 1982. Consequently, the Department came to the conclusion that there was a waiver by the bank to the extent of approximately rupees ten lakhs. This amount was sought to be taxed by the Department. The Department also initiated proceedings u/s. 271(1)(c) of the Incometax Act, 1961, against the assessee. The Supreme Court observed that, in the books of account of the assessee, the outstanding amount, as on 30th April, 1982, was Rs.52,07,873, including interest. However, the decree in favour of the bank was for Rs.42,45,477, because that was the amount indicated as the outstanding amount due and payable by the assessee to the bank in its books of account.

According to the Supreme Court it appeared that the bank had not calculated the interest over the years possibly for the reason that, in its accounts, this amount was classified as “NPA”. The Supreme Court held that in the peculiar facts and circumstances of this case, section 271(1)(c) of the Income-tax Act, 1961, was not applicable.

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Exemption u/s. 10A: A. Ys. 2002-03 and 2003-04: Current losses as well as brought forward losses of the non-EPZ unit cannot be deducted or reduced from the profits of the EPZ unit for computing the deduction u/s. 10A:

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CIT vs. Tei Technologies (P) Ltd.; 259 CTR 186 (Del):

In the relevant years, the assessee claimed exemption u/s. 10A, 1961 by computing the exempt amount without setting off the loss of non eligible units. The Assessing Officer computed the amount after setting off the loss from the non -eligible units against the profit of the eligible units. 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) Even after the amendment by the Finance Act, 2000, section 10A has been retained in Chapter III of the Act, notwithstanding the change in the language of s/s. (1) thereof. Secondly, though s/s. (1) provides for a deduction of the eligible profits, it further states that the deduction “shall be allowed from the total income of the assesee”.

ii) Determination of total income is the last point before the tax is charged, and once the total income is determined or quantified, there is absolutely no scope for making any further deduction. If this is the true legal position, it is not possible to understand s/s. (1) of section 10A as providing for a “deduction” of the profits of the eligible unit “from the total income of the assessee”. The definition of the expression “total income” given in section 2(45) cannot be imported into the interpretation of s/s. (1) having regard to the context in which it is used and the scheme of the Act relating to the charge of tax.

iii) The form of the return of income prescribed by the Rules gives a further indication that section 10A provides for an exemption and not merely a deduction. Steps given in the return form ITR-6 are also an indication that the relief u/s. 10A has to be given before the adjustment of the losses of the current year and the brought forward losses from the past years.

iv) Incomes which are enumerated in Chapter III have traditionally been considered as incomes which are exempt from tax rather than as deduction in the computation of total income. The fact that a particular class of income is only partially exempt from taxation does not necessarily mean that it is only a deduction. Admittedly, there is ambiguity and lack of clarity or precision in the language employed in section 10A(1) which says that deduction shall be made from the total income, when the Act contains no provision to allow any deduction from the total income.

v) Thus, it is not impermissible to rely on the heading or title of Chapter III and interpret the section as providing for an exemption rather than a deduction even after the amendment by Finance Act, 2000 w.e.f. 01-04-2001.

vi) S/s. (4) of section 80A cannot defeat such construction. Sole object of s/s. (4), is to ensure that double benefit does not enure to an assessee in respect of the same income, once u/s. 10A or 10B or under any of the provisions of Chapter VI-A and again under any other provisions of the Act. This s/s. does not militate against the view that section 10A or section 10B is an exemption provision.

vii) Contents of Circular No. 5 of 2010 dated 03-06- 2010, accord with the aforesaid view. Therefore, the current losses as well as brought forward losses of the non-EPZ unit cannot be deducted or reduced from the profits of EPZ unit for computing the deduction u/s. 10A.”

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Charitable trust: Certificate u/s. 80G(5): Amendment by Finance Act (No.2) of 2009 and Circular Nos. 5 and 7 of 2010 issued by CBDT: Certificate once granted operates in perpetuity: Withdrawal, if any, should be as per the procedure:

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CIT vs. Bhhola Bhandari Charitable Trust: 259 CTR 279 (P&H):

The assessee, a charitable trust was granted certificate u/s. 80G(5), which was valid upto the F.Y. 2010-11 ending 31-03-2011. The assessee filed an application for renewal on 25-04-2011 which was withdrawn on 30-05-2011 in view of the amendment by Finance Act (No. 2) of 2009 and Circular Nos. 5 of 2010 and 7 of 2010 wherein it was stated that the Certificate granted u/s. 80G(5) which is existing on 01-10-2010 would continue till perpetuity unless it is withdrawn as per law. However, CIT passed order dated 05-12-2011 withdrawing the certificate. The Tribunal set aside the said order.

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

“i) We find that the order of the Tribunal setting aside the order of CIT is based on sound reasoning. The assessee had valid exemption on 01-10-201, when the provisions of section 80G of the Act were amended so as to dispense with the periodic renewal of the exemptions. Such statutory provisions were clarified by Circular No. 5 of 2010 and Circular No. 7 of 2010 issued by the CBDT. Once the statute has given perpetuity to the exemptions granted u/s. 80G(5) of the Act, the same could not be withdrawn without issuing show cause notice in terms of the statutory provisions in the manner prescribed by law.

ii) In view of the said fact, we do not find that any substantial question of law arises for consideration.”

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Charitable trust: S/s. 11(1)(d) and 80G(5): A. Y. 2005-06 to 2007-08: Certificate u/s. 80G(5); Refusal to continue on the ground that the conditions u/s. 11(1)(d) not satisfied: Refusal not proper: Department directed to pay Rs. 1,00,000/- to the trust:

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DIT (Exemption) vs. Sri Ramakrishna Seva Ashram: 258 CTR 201 (Kar):

The assessee, a charitable trust, was registered u/s. 12A of the Income-tax Act, 1961 in May 1991 and was allowed exemption u/s. 11 of the Act since then. A certificate u/s. 80G(5) of the Act was also issued to the assessee trust. The assessee’s application dated 02-02-2009 for continuation of certificate u/s. 80G was rejected on the ground that the donations to the rural project fund are not corpus donations, as such, the same are not credited to corpus account. No details of the donors is furnished in spite of the specific directions. Such donations have not been considered for computation of 85% application u/s. 11(1) of the Act for the A. Ys. 2005-06 to 2007-08. The Tribunal allowed the assessee’s appeal and directed the DIT(Exemption) to grant continuation of the 80G certificate.

On appeal by the Revenue, the following question was raised before the Karnataka High Court:

“If the assessee receives contributions for charitable purposes and does not show them in the statement of account as the ‘corpus fund’, but, shows the said amount under a different specific head, does it cease to be a corpus fund to be eligible for the benefit u/s. 11(1)(d) of the Act.?”

The High Court upheld the decision of the Tribunal, dismissed the appeal filed by the Revenue and held as under:

“i) The word ‘corpus’ is used in the context of IT Act. This can be understood in the context of a capital opposed to expenditure. It is a capital of an assessee; a capital of an estate, capital of a trust; a capital of an institution. Therefore, if any voluntary contribution is made with a specific direction, then it shall be treated as the capital of the trust for carrying on its charitable or religious activities. Then such an income falls u/s. 11(1)(d) and is not liable to tax. Therefore, it is not necessary that a voluntary contribution should be made with a specific direction to treat it as corpus.

ii) If the intention of the donor is to give that money to a trust which they will keep in trust account in deposit and the income from the same is utilized for carrying on a particular activity, it satisfies the definition part of the corpus. The assessee would be entitled to the benefit of exemption from payment of tax levied. From whatever angle it may be seen, the deposited amount cannot be said to be income in the hands of the recipient trust.

iii) Similarly, the assessee after receiving the amount keeps the amount in deposit and only utilises the income from the deposit to carry out the charitable activities, then also the said amount would be a contribution to the corpus of the trust and the nomenclature in which the amount is kept in deposit is of no relevance as long as the contribution received are kept in deposit as capital and only the income from the said capital which is to be utilised for carrying on charitable and religious activities of the institute/corpus of the trust, for which section 11(1)(d) is attracted and the said income is not liable to tax under the Act. In so far as the argument that the person who made these contributions do not specifically direct that they shall form part of the corpus of the trust is concerned, it has no substance. In view of the language employed in section 11(1)(d), the requirement is that the voluntary contributions have to be made with a specific direction. The law does not require that the said direction should be in writing. In the absence of the direction in writing, the only way that one can find out whether there was a specific direction and to find out how the money so paid is utilised. If the money so received by way of voluntary conrtributions, if it is meant to be used for the leprosy patients and is credited to a particular account and from the income from the said capital, the said activity is carried on, the requirement of section 11(1)(d) is complied with.

iv) In the instant case from records it is seen that those people who have paid by way of donation that includes the cheque with a letter with a specific direction, which is in compliance with section 11(1)(d). But, in case the contributions are made without cheque, i.e., by cash, and oral direction has been issued to the trust to utilise the said fund for the purpose of treating the leprosy patients and if such amounts are credited to the account meant for it, even then the requirement of section 11(1)(d) is complied with.

v) The attitude of the IT authorities is surprising who are over-technical in denying the benefit to the deserving institutions which are rendering laudable services to the rural masses. By not granting tax exemption, which they deserve, the authorities have hampered the said social activities of the trust and they are made to waste their precious time, energy and money in fighting this litigation. Unfortunately, the persons who took a decision to file an appeal before this court are wasting the precious time of the trust which could have been used in the social service. Public money and the time of this court is also wasted. This attitude on the part of the Department cannot be countenanced. Therefore, it is appropriate to impose cost incurred by the assessee for fighting litigation so that the Department would be more careful in taking decision to file appeal in such frivolous cases by ignoring the policy of the Government, viz., National Litigation Policy, 2011.

vi) Hence, the appeal is dismissed with cost of Rs. 1,00,000/-, to be deposited by the Department within one month from today in favour of the rural project fund of the assessee trust.”

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Business income or house property income: S/s. 22 and 28: A. Y. 2003-04: Assessee owner of property: Hotel run in property by company of which assessee was director: No lease of property: Share of profits received by assessee: Assessable as business income:

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CIT vs. Francis Wacziarg; 353 ITR 187 (Del):

Assessee was the owner of the property. Hotels were run in the property by a company in which assessee was director. There was no lease agreement. The assessee was entitled to a certain share in the gross operating profit calculated in terms of the agreement. The asessee disclosed the income as business income and claimed deduction of expenditure and depreciation. The Assessing Officer assessed the income as income from house property and disallowed the claim for deduction of expenditure and depreciation. The CIT(A) and 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) The Commissioner (Appeals) had given a detailed factual finding why income earned by the assessee from the three properties was taxable under the head “Income from business or profession” and not under the head “Income from house property”. This finding had been upheld by the Tribunal. The findings were not perverse and were based on documents and material placed on record. This income was assessable as business income.

ii) Once it was held that the income from the three properties was taxable under the head “Income from business or profession” depreciation had to be allowed under the provisions of section 32. Similarly, disallowance of 80% from the expenses deleted by the Commissioner (Appeals)/Tribunal had been explained and supported by cogent reasoning. The depreciation and the expenditure were deductible.”

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Business expenditure: S/s. 2(24)(x), 36(1)(va) and 43B: A. Y. 2001-02: Employees’ contribution towards ESI: Deposited before due date for filing return though after due date prescribed under ESI Act, 1948: Deduction to be allowed: No distinction to be made between employer’s contribution and employees’ contribution: Amendment of section 43B by Finance Act, 2003 deleting second proviso is retrospective:

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CIT vs. Nipso Polyfabriks Ltd; 258 CTR 216 (HP):

For the A. Y. 2001-02, the assessee’s claim for deduction of employees’ contribution to ESI was disallowed by the Assessing Officer on the ground that the same was deposited after the due date prescribed under the ESI Act though it was deposited before the due date for filing the return of income. The Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the following question was raised:

“Whether the Tribunal was correct in holding that amounts received by the assessee from employees for crediting to their accounts in provident fund and ESI but not so credited on or before the due dates specified under the respective statutes, were allowable deductions u/s. 36(1) (va) of the IT Act?”

The Himachal Pradesh High Court upheld the decision of the Tribunal and held as under:

“i) By the Finance Act, 1987 section 2(24)(x) was inserted and the sums collected by the assessee from his employees as contribution to provident funds and ESI were to be treated as income. By the same Act, section 36(1)(va) was introduced. Resultantly, the contribution of the employees collected by the employer was treated as his income. At the same time, the same was allowed as deductible expense if deposited within a particular time. Section 43B was also amended in the year 1987 itself and the two provisos were inserted. As per the amendment, there was no differentiation between the employer’s or employees’ contributions. Both had to be deposited by the due date as defined in the Explanation below cl. (va) of s/s. (1) of section 36. By the Finance Act of 2003, which came into effect from 1st April, 2004, the second proviso to section 43B which specifically made reference to section 36(1)(va) was deleted. The amendment was curative in nature and hence would apply with retrospective effect from 1st April, 1988.

ii) The second proviso to section 43B(b) specifically referred to the due date u/s. 36(1)(va) and as such, it cannot be urged that the provisions of section 43B and section 36(1)(va) should not be read together. It is clear that the law was enacted to ensure that the payment of the contributions towards the provident funds, the ESI funds or other such welfare schemes must be made before furnishing the return of income u/s. 139(1).

iii) Though the amount was not deposited by the due date under the Welfare Acts, it was definitely deposited before furnishing the returns. That is no reason to deny him the benefit of section 43B, which starts with a non obstante clause and which clearly lays down that the assessee can take benefit of deduction of such contributions, if the same are paid before furnishing the return. There is no reason to make any distinction between the employees’ contribution or the employer’s contribution.”

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Bad debts: Section 36(1)(vii): A. Y. 2007-08: Assessee taking all assets and liabilities of two web portals from its holding company as going concerns: Debt due to holding company: Assessee is entitled to write off: Bad debt allowable:

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CIT vs. Times Business Solutions Ltd. 354 ITR 25 (del):

Consequent
upon a scheme of demerger, the assessee company had acquired all the
assets and liabilities of two web based portals that were hitherto being
operated by the assessee’s holding company. The portals were acquired
as going concerns. In the A. Y. 2007-08, the Assessing Officer rejected
the claim for deduction of bad debt of Rs. 3,63,31,432/- on the ground
that these debts related to the years 2003 to 2006 when the web portals
were run and operated by the holding company and that the assessee could
not have written off the bad debts as such contravened section
36(1)(vii). The CIT(A) and 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)
When the original owner would have been entitled to write off the bad
debts, the successor who acquires the assets and liabilities from the
previous owner would also be entitled to treat the bad debts in the same
manner in which the original owner was entitled under law.

ii)
The assesee had acquired all the assets and liabilities of two web based
portals from its holding company. The assessee, for the A. Y. 2007-08,
had written off the bad debts acquired from the holding company.
Therefore, the asessee was entitled to write off the irrecoverable bad
debts related to the years 2003 to 2006 when the web portals were run by
the holding company.

iii) The appeal is dismissed.”

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Prize winning essays from the Essay Competition held by the Society for Students

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Is India progessing or regressing?

Charmi Doshi
1st Prize

“Progress is the activity of today with assurance of tomorrow”, these words were rightly quoted by Sir Emerson. ‘India’, ‘Bharat’, ‘Hindustan’, as many names as many cultures, religions, languages, a complete hotchpotch of diversity and traditions. But being multi-linguistic and extremely diversified just does not make it a fully developed country, but yet, surely it plays a great role in chiselling the structure of the country. The question to be asked today is, ‘Is India capable of becoming a superpower or at least change its title from a ‘developing’ to a ‘developed’ country?’

Well, the answer is crystal clear, ‘Capability is never equal to power unless it is backed by intent and willingness to use the power in the pursuit of ‘National Interest’.

Let me put it this way; you are on a long road trip. Do you always find the road to be smooth and complete the journey without any obstacle? This same concept applies to the journey of a country from an underdeveloped to a developed one. There are always highs and lows, sometimes uneven road; similarly in the entire process of development, the country has to go through all the phases of highs and lows. So, this makes it clear that in the path of progression one has to face regression but, with the condition of bouncing back even higher. No doubt, India has progressed immensely in the past few decades that even our forefathers would have never imagined. Seeing the current scenario, it is definitely clear that India is progressing but, is it exactly how we imagined?

Tall towers in cities like Mumbai and Bangalore, four-lane drive ways in cities like Ahmedabad, monorails and metros in Delhi and Kolkata, sealink as a flyover above the sea, huge dams, constant electric supply, automatic cars, defence equipments matching the World class standards, space-crafts circumnavigating the space etc.. etc.. etc.. all these are the most lively and vibrant examples of tremendous progress the country has made in the past few decades. Today, a man can circumnavigate the globe within 24 hours. This has made the saying very clear that ‘Sky is not the Limit’. India is like the new ‘epitome’ of opportunities in the World. Many multi-nationals and business houses are looking forward to open their businesses in India. Discovery of life saving drugs, excelling in the fields of Science and Mathematics have made the Nation really proud. The most recent development in the field of ‘BPO & KPO’ i.e. business process outsourcing and knowledge process outsourcing.

We all know that in NASA organisation maximum employees are Indian. In each and every part of the World Indians are spreading goodwill and are shining all the way. What would we call all this? This is nothing but splendid performance proving the ability to progress by our Nation. Then, why is it still referred to as ‘stagnant and developing’? No doubt, the country is on its path to success. But with success come many downfalls and negative elements. Who said the developed countries do not face the adverse elements?

Yes! You heard it right, even the superpowers of the World have gone through their ‘Regression’ phase. But, what is important to know is ‘Do the adverse elements of a nation in the path of progress outweigh the favourable elements?’ This is where India is lagging behind. With each step of success comes a number of obstacles and hurdles which pulls back the country to step 1. Pollution, black money, corruption, indiscipline, are the very common hurdles present in this Nation. ‘If you want to get the work done, fill your pockets before going out’, ‘bribe’ the most common terrorist of the Nation. Adulteration in food, using cheap quality materials in building infrastructure just for earning few extra rupees at the cost of endangering the entire country, black money circulating faster than air, money laundering, ill practises like caste discrimination and untouchability. Who can say that the country which has developed so much is still backward that most of its children are malnourished and live below the poverty line? Wealth in hands of few is the ongoing picture. More than five lakh villages are still without power; more than half of the population is still illiterate. Is this exactly what we call ‘favourable progress’? It is high time that we fellow Indians must awaken and sow the seeds of development with minimum chemicals to it.

 In the end, I would like to say that no doubt India is progressing yet, it needs to change and modify its ways.

‘While India is developing to the fullest extent with infrastructure and technology on its peak, our fellow Indians are still living in ‘drudgery’. Progression has to come with regression. But, on the condition of bouncing back even higher.

‘Progress is like a double-edge sword’. It is upon us whether we want to use it to cut vegetables or to kill a person? Thus, India is definitely progressing but it is still a slave to many ill practises giving rise to regression.

Religion & Spirituality

Aneri Merchant
2nd Prize

Every religion stems out of spirituality. Religion becomes rigid and restricts you but spirituality brings that expansion you crave for.

 —Sri Sri Ravi

Shankar Religion and spirituality are the two defining factors in the determination of the higher values of life. These two functions of the inner call of a human being correspond to life in the world and life in God. The relationship between the world and God is also the relationship between religion and spirituality.

A large number of people identify themselves as “spiritual but not religious.” This phrase probably means different things to different people. The confusion stems from the fact that the words “spiritual” and “religious” are really synonymous. Both connote belief in a Higher Power of some kind. Spirituality is about personal experience of a new dimension to life and living by the lessons learned therein. Religion is blind faith in somebody else’s theories, and then conforming to their expectations and demands. Before the 20th century, the terms religious and spiritual were used more or less interchangeably.

The word spirituality gradually came to be associated with a private realm of thought and experience while the word religious came to be connected with the public realm of membership in religious institutions and participation in formal rituals. Since the birth of humankind, our biggest inner struggle has been to achieve a level of complete peacefulness through religion or spirituality.

In India, there is a discipline prescribed for the gradual evolution of the human individual by stages of

 (1) education,

 (2) adjustment of oneself with the demands of natural and social living and,

(3) detachment from the usual entanglements in life and

(4) final rootedness of oneself in God. (Sanyasa)

Every religion has its various restrictions imposed on a person, keeping all human activity confined to specific areas of living, with its several dos and don’ts – ‘do this’ and ‘do not do that’. There cannot be any religion without these two mandates imposed on man.

People in the first two stages of life mentioned above are placed under an obligation to follow these dos and don’ts of religion in social behavior, in personal conduct and dealings with people in any manner whatsoever.

Every religion has these ordinances, defining the duties, which are religious, whether in the form of ritual, worship, pilgrimage, daily diet, and devotion and adherence to the scripture of the religion. These restrictions are lifted in the third stage where the life of a person is mainly an internal operation of thought, feeling and understanding and experiences of the materialistic life.

Even though, religion has evolved and shifted through many individual beliefs, yet the essence of spirituality has always been the same.

Spirituality exists wherever we struggle with the issue of how our lives fit into the greater cosmic scheme of things. This is true even when our questions never give way to specific answers or give rise to specific practices such as prayer or meditation. We encounter spiritual issues every time we wonder where the universe comes from, why we are here, or what happens when we die.

According to one of the religion writers, Malik Khan, Religion is applied to a great variety of human ideas, acts, and institutions. All the attempts to shift out from these common elements, which would represent the “essence” of religion, have ended in failure. Men have fought and died for their religion. Art and literature have flowered forth as expressions of faith. Many people acknowledge religion as the basis for strength, hope, and significance in their lives.

Religion is an institution established by man for various reasons. You confess your sins to a clergy member; go to elaborate churches to worship, you are told what to pray and when to pray All those factors remove you from God.

Spirituality is born in a person and develops in the person. It may be kick started by a religion, or it may be kick started by a revelation. Spirituality extends to all facets of a person’s life. Spirituality is chosen while religion is often times forced.

Sri Sri Ravi Shankar in a recent interview promoted spirituality. According to him, when people become saturated by so many different kinds of experiences, even by various comforts, there is a quest to know something else, something deeper in life.

Spirituality is imbibed in a person. You don’t have to leave or sacrifice anything to have a spiritual life. You can be spiritually and materially abundant. As you become more and more spiritually fulfilled, you act more and more out of a sense of responsibility rather than a sense of greed or attachment. One may achieve financial value but if you gather a lot of stress and tension in the bargain, that affects your own health, your own peace of mind, your own relationships, then what’s the point? What are you gathering all the wealth for?

An expensive bed is no good if you can’t sleep. Losing health to gain wealth and then spending that earned wealth to regain health doesn’t sound like good economics at all.

To sum it up,

•    There is not one religion, but hundreds but there is only one type of spirituality.

•    Religion speaks of sin and of fault while spirituality encourages “living in the present” and not to feel remorse for which has already passed – Lift your spirit and learn from errors.

In the end what matters is faith, faith in an upper power, a divine energy to help us find a light through an empty tunnel in our darkness of lives.

Parliamentarians oppose jail for service tax evaders with dues above Rs. 50 Lakhs

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Attempts by tax officials to garner power of arrest over individuals guilty of not paying service tax exceeding Rs. 50 lakh has run into opposition from members of Parliament (MPs) across parties.

Finance Minister P. Chidambaram’s proposal in the Budget to introduce Section 91, which will empower officials to arrest service tax evaders, has evoked concerns within the ruling party as much as the Opposition over possible misuse of the provision. The measure designed to check tax evasion is likely to lead to harassment of assessees and bring back memories of bad old days of “inspector raj”, critics of the proposal have pointed out.

According to the proposal, failure to deposit service tax will result in arrest by an official not below the rank of superintendent of central excise and imprisonment of up to seven years.

The proposal is one of two in the budget this year empowering tax officials to make arrests. The other proposal, with respect to Customs and excise duties, seeks to overcome a Supreme Court ruling in 2011 that evasion of Customs and excise tax cannot be equated with non-cognisable and non-bailable criminal offences, and that an accused cannot be arrested without a warrant. A threemember bench, headed by Justice Altamas Kabir, had ruled that all offences under the Central Excise Act, 1944, and the Customs Act, 1962, are bailable. A similar proposal was part of Budget 2012-13, but the government was forced to withdraw it. However, it has found its way into this year’s budget as Customs and excise officials insist they need the power of arrest.

Referring to the provision, the leader of the Opposition in Rajya Sabha, BJP’s Arun Jaitley said, “The bail provision was similar to that of the scrapped anti-terror law Pota (Prevention of Terrorism Act). The government was forced to withdraw it.”

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Time for a clean-up act

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Economic policymaking in India has reached a critical stage where any measure to correct one anomaly risks creating complications at the aggregate level. Any attempt, for example, to cut interest rates with the objective of reviving investment and economic growth can end up fuelling inflation and inflationary expectations. Any increase in demand can further aggravate the deficit on the current account, which is already at a record high and is expected to worsen before improving. The pace of output expansion in the economy is at its lowest in a decade and the government has absolutely no fiscal room to revive growth. If anything, the government is likely to cut expenditure, which will affect output in the short term.

It is well known that mismanagement of government finances is the primary reason for the current state of affairs. The rise in consumption expenditures in the form of subsides and social sector spending resulted in a situation where demand constantly outpaced supply by a wide margin, leading to persistent inflationary pressure. Higher inflation forced the central bank to raise the cost of money, reducing the rate of investment, which was also affected by higher government borrowings that pushed yields higher in the bond market.

It is true that the government has an obligation to protect all sections of society, but no government, just like households, can live beyond its means, forever. At some time profligacy will begin to hurt, and that time has arrived. But the worst part of the story is that expenditure will have to be contained and cut at a time when the economy is decelerating at an alarming pace. Further, since much of the non-Plan expenditure, such as defence and interest payments, have limited or no scope of adjustment, the burden of sacrifice will fall on the Plan part of the Budget, which will affect capacity creation.

However, these are not normal circumstances and expenditure needs to be contained, irrespective of the collateral damage in terms of growth. It is also necessary that a balance is maintained between Plan and non-Plan expenditure and some hard decisions are warranted on the non-Plan side, especially on subsides and social sector spending.

It is clear that until the quality of government finances improves and the quantity of its borrowing decreases, any possibility of a real turnaround will remain muted.

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GE, Vodafone CEOs join chorus against India business climate

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The heads of General Electric and Vodafone Plc have added their voices to the growing negative commentary about India’s business climate, piling the pressure on the government to draw a line under this discourse.

GE Chairman and CEO Jeffrey Immelt said there was growing concern among American and European CEOs about India’s business climate and warned against policies that were unfair and bad for much-needed investment.

“If you put yourself in the shoes of an American or a European CEO, most of the articles (in the press) have been negative. That has clearly concerned people,” said Immelt, adding that next week’s budget must address the concern of foreign investors and push infrastructure development.

While the GE boss was measured, the chief of Britain’s Vodafone, which has been locked in a high profile tax dispute with the government. Vodafone CEO Vittorio Colao told the Wall Street Journal in an interview that India’s bureaucracy was “damaging” to the country. “The concern that I have is that this country is a fantastic country with a bright future, given the demography and everything else, but the bureaucracy of this country… It is clearly damaging to India,” Colao told The Wall Street Journal.

“What is happening to us, to Nokia, to Shell, to SABMiller, all the other companies involved-one could be an accident; too many is a pattern. I think that the government is making a good effort to try to change this, but cannot continue with a bureaucracy that wakes up in the morning and decides to give another interpretation of something,” he added.

India ranks 132 in the World Bank’s Ease of Doing Business Index, below countries such as Nigeria, Kenya and Uganda, and 41 ranks below China.

A top executive at UAE’s Etihad Airways said it was revising a proposal to acquire stake in India’s Jet Airways, citing concerns about the safety of its investment in India. Etihad chairman Hamed bin Zayed al-Nahayan sought an investment protection agreement from Commerce Minister Anand Sharma during a meeting in Dubai.

This week oil giant Shell and Finnish handset maker Nokia found themselves at the receiving end of tax claims that they protested publicly. Nokia said it had filed a letter of objection with tax authorities following an income tax raid on its factory near Chennai.

Shell India said it intended to fight the claim. “Indian taxmen’s $1-billion demand on Shell’s $160-million equity infusion in its loss-making Indian arm about four years ago is an absurdity, and the company will contest it,” Shell India chairman Yasmine Hilton said.

(Source: The Economic Times dated 23-02-2013).

Management lesson from politicians: CEOs should use EAs as change agents

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When Reliance Industries came calling to pick two executive assistants (EAs) for its chief, Mukesh Ambani, IIM graduates, unsurprisingly, responded with gusto.

This means two things. First, RIL’s talent hunt for two EAs perhaps indicates that large Indian companies are now more or less sold on the idea of a smart fellow shadowing the boss.

The Tatas were among the pioneers in India Inc in appointing EAs. Other majors took longer to take to the idea. And it is only recently that the EA’s role has changed from making the boss look smart – at an industry chamber conference, for example – to being the boss’s strategy-sounding board. A really talented EA can get fast-tracked real fast. The list of CEOs who started their careers as EAs is set to get longer.

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Strained relations – Government should realise it must engage with global business.

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A strange confusion reigns in the Indian government’s interaction with global big business at the moment. On the one hand, India is more dependent on foreign investment, and the goodwill of multinationals, than it has been for a long time. On the other hand, it has gone out of its way to be an unwelcoming and difficult environment. It seems obvious that these two facts cannot go hand in hand for any length of time – something must give. And when it does, a crisis will be difficult to avoid.

The reasons why India needs multinationals on its side are easy to see. India’s external account is worryingly weak, with the current account deficit at 5.4 per cent of gross domestic product in the second quarter of 2012-13; it might be even higher in the third quarter, and come in at five per cent of GDP for the entire financial year. India’s reserves have not grown sufficiently, and they cover only about seven months of imports. The huge trade deficit, caused by a fall-off of exports and high fuel and gold imports, is essentially being financed by an increase in inflows from foreign institutional investors (FIIs). External commercial borrowing, too, has increased. These are notoriously volatile flows. To minimise the risk of capital flight, therefore, foreign direct investment (FDI), more stable than FII inflows, is needed.

On the other hand, the sources of FDI – big multinational companies (MNCs) – will see little reason to invest in India at the moment. India boosters have long spoken of its growth, its burgeoning market, and so on; but for MNCs, the truth is that you can participate in the India consumption story without suffering the high price and inconveniences of doing business in the country. India has always been difficult for new projects. It has grown even more difficult of late, as high growth in the 2000s directed attention to environmental hurdles, power supply constraints and land acquisition bottlenecks for manufacturing. These are some of the reasons why Indian business is investing abroad. 115 (2013) 45-A BCAJ But the government has made it worse for MNCs in some other ways, just at the time it needs them most. Worries over the fiscal deficit mean the revenue department has a freer hand, and is levying assessment after harsh assessment on MNCs that are being challenged. Some of these may be justifiable. However, the reputation of India’s tax department does not inspire trust in global business, and many will think that the department is in over its head when it comes to taxing complex pricing strategies, for example. In any case, companies will choose to avoid countries that are inconsistent on taxes. Meanwhile, steps taken to protect Indian manufacturing – which has fallen by the wayside in the past 10 years, and especially the past two years – have also caused outrage. For example, the government worried that too much of India’s telecom backbone was being built by strategic rivals; but its consequent attempt to limit the procurement options of the private sector for security reasons will not have pleased global business. Similar objections will attend the special electronics clusters that many see as the only way to ensure that an Indian hardware industry develops.

The government must realise that it should engage with global business and prevent a feeling that nobody in the government is willing to address MNCs’ concerns. While attending to the collapse of domestic manufacturing cannot be de-emphasised, it is crucial that global business gets, at least, a genuine hearing. Inconsistencies in the policy environment, especially on taxes, should be avoided at all cost. If not, the contradictions at the heart of the government’s treatment of MNCs will bring a crisis ever closer.

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China offers lessons for India in downsizing government by cutting ministries

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The Chinese government is preparing to dismantle the ministry that has swaggeringly delivered the world’s largest high-speed network over the last few years. This is just one among many measures China is undertaking to reduce corruption and leakages while boosting efficiency and sending a forward-looking signal to the markets.

It follows on 1 Tarunkumar Singhal Raman Jokhakar Chartered Accountants Miscellanea earlier reforms when more than 40 ministries and commissions in China were cut down to just 29. Now look at India for contrast. The first cabinet of independent India apportioned out only around a dozen portfolios, which had gone up to 42 by 2004. And that number is a whopping 53 now! While such ministerial multiplication has served the cause of coalition politics admirably, it has also encouraged paunchy and improvident governance. This bungling has been worsened by ministries working at cross-purposes. As the cabinet secretariat has said in its annual performance appraisal, most central ministries are working in silos, even though there is no consolation in a team member scoring a double century if the team ends up losing the match.

To take the example of railways, why shouldn’t it be integrated alongside the road transport and highways ministry, the shipping ministry and the civil aviation ministry within a transport portfolio? If only Air India was denationalised back to its status at Independence, as is suitable for a postliberalisation nation, the civil aviation ministry would lose its raison d’etre. Or consider how the energy portfolio is (mis)handled by the ministries of coal, petroleum and natural gas, power, new and renewable energy, heavy industries and public enterprises, et al. With so many ministries splitting up the goal of powering India, the big picture suffers while petty politicking flourishes.

Why, for instance, do we need textiles, steel or information and broadcasting ministries in a liberalised environment? And what on earth, pray, is the job of the ministry of statistics and programme implementation? If other ministries cannot implement their programmes, will setting up a separate ministry dedicated to this help? Add to the incessant setting up of new ministries the innumerable departments and standalone offices that also come up, and you have layers of bureaucracy, each with its own penchant for empire-building, coming in the way of streamlined governance and meaningful work. It’s high time the government indulged its common-sense side rather than its maudlin and inflated side, and reversed the trend of mindless multiplication of ministries.

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Leadership Potential

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In my many years of observing leaders, I have noticed a number of signs that a person has high potential for corporate leadership… Leaders aren’t born with the phenomenal breadth and scope of thinking that characterises successful leaders of big companies, but those with a drive to constantly search for more information and see things from a broader view have the potential for it. Some young leaders exhibit a conceptual ability to rise above the details, to see a broader context than their peers, and to place themselves and their immediate accomplishments within that broader context. Leaders must also be able to make sense of all they take in and set a clear course of action.

After gathering information from multiple sources and shaping several alternatives, they have to be able to sort out what is important, make a decision and act on it. Even at lower levels, information is often muddled and the right path is often unclear, but leaders with high potential find clarity and act decisively despite the uncertainty and ambiguity that stymies others. They take disparate facts and observations and connect the dots to create a clear view of what they think is likely to happen before it does. Because they see the hazy outlines of change before others do, they put their businesses on the offensive. Most highpotential leaders will show an uncommon ability to analyse and synthesise large amounts of data and make a decision based not only on the data but also on intuition.

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Section A: Financial Statements of an NGO

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Section A: Financial Statements of an NGO Compiler’s Note:

Compiler’s Note:

The financial statements and annual report of ‘The Akshaya Patra Foundation’, an NGO based in Bangalore, India has won several awards in India and abroad for the best presented annual report. It is also one of the few NGOs in India who, besides Indian GAAP, also prepares its financial statements under IFRS principles.

The annual report for 2011-12 for Akshaya Patra makes a very interesting reading and can encourage several other NGOs to improve on their financial reporting. The entire annual report can be accessed on www.akshayapatra.org/sites/default/files/Annual- Report-2011-12.pdf. Given below are the significant accounting policies followed by the Foundation.
The Akshaya Patra Foundation (31-03-2012)
Significant Accounting Policies

1.1 Organisation overview
The Akshay Patra Foundation (‘the Trust or TAPF’) is registered under the Indian Trust Act 1882 as a Public Charitable Trust. It was formed on 1st July 2000 and was registered on 16th October 2001. The principal activity for the Trust is to implement the mid-day meal program of the Government of India through respective state governments for the children studying in government and municipal schools.
The Trust is also involved in various other charitable activities such as providing intensive coaching for eligible students after school hours under “Vidya Akshaya Patra Program”, providing subsidised meals to daily wage earners under various schemes like “Akshaya Kalewa program” and “Aap Ki Rasoi Program”, providing food for babies and mothers in Anganwadis and implementing various other programs for the relief of the poor.

 1.2 Significant accounting policies

(i) Basis of preparation of financial statements The balance sheet and income and expenditure accounts are prepared under the historical cost convention and the accounting is on accrual basis. In the absence of any authoritatively established accounting principles for the specialised aspects related to charitable trusts which do not carry out any commercial activity, these statements have been prepared in accordance with the significant accounting policies as described below. There are no trusts or entities over which TAPF exercises controlling interest, thus there is no requirement of consolidating other entities into the TAPF’s financial statements.

(ii) Use of estimates The preparation of the financial statements in conformity with the significant accounting policies, requires that the Board of Trustees of the Trust (‘Trustees’) make estimates and assumptions that affect the reported amounts of income and expenditure of the year and reported balances of assets and liabilities. Actual results could differ from those estimates. Any revision to accounting estimates is recognised prospectively in current and future periods.

(iii) Fixed assets Fixed assets are stated at cost of acquisition or construction, less accumulated depreciation. The cost of fixed assets includes the purchase cost of fixed assets and any other directly attributable costs of brining the assets to their working condition for the intended use. Borrowing costs, if any, directly attributable to acquisition or construction of those fixed assets which necessarily take a substantial period of time to get ready for their intended use are capitalised.

Intangible assets are recorded at the consideration paid for acquisition of such assets and are carried at cost less accumulated amortisation. Fixed assets received as donation in kind are measured and recognised at fair value on the date of being ready for their intended use. Advances paid towards the acquisitions of fixed assets as at the balance sheet date are disclosed under long-term loans and advances.

(iv) Depreciation Depreciation on fixed assets is provided on a straight-line method basis over the estimated useful life as follows:

Class
of assets

Estimated

 

useful life

 

in years

Buildings

15

Kitchen and related
equipments

3

Office and other
equipments

3

Computer equipments

3

Furniture and fixtures

5

Vehicles

3

Distribution vessels

2

Intangible assets

3

 

 
Land is not depreciated. Depreciation on leasehold improvements is provided over the primary lease term or the useful life of assets, whichever is lower.

Depreciation is charged on a proportionate basis for all assets purchased and sold during the year.

Individual low cost assets, acquired for less than Rs.5,000 (other than distribution vessels), are depreciated fully in the year of acquisition.

(v) Inventory

Inventory comprises provisions and groceries which include food grains, dhal & pulses, oils and ghee and other items like spares and fuel. Inventory is valued at cost, determined under the First-In-First Out method.

In case of Government grants of rice and wheat, the inventory cost is determined at the lower of the market price of government regulated price.

Cost of inventory, other than those received as government grants, comprises purchase cost and all expenses incurred in bringing the inventory to its present location and condition.

Inventories received as donation in kind are measured at fair value on the date of receipt.

(vi) Revenue recognition

Donation received in cash, other than those received for depreciable fixed assets, are recognised as income when the donation is received, except where the terms and conditions require the donations to be utilised over a certain period.

Such donations are accordingly recognised rateably over the period of usage. The deferred income is disclosed as “Deferred donation – feeding” under other current liabilities in the balance sheet.

Donation received in kind, other than those received for depreciable fixed assets are measured at fair value on the date of receipt and recognised as income only upon their utilisation.

Unutilised donations are deferred and disclosed as kind donations or grain grants received in advance under other current liabilities in the balance sheet.

Donations made with a specific direction that they shall form part of the corpus fund or endowment fund of the Trust are classified as such, and are directly reflected as trust fund receipts in the balance sheet.

Government grants related to subsidy received in cash or in kind are recognised as income when the obligation associated with the grant is performed and right to receive money is established and reflected as receivables in the balance sheet. The value of subsidies and donations received in kind is determined based on the lower market price or government regulated price of those goods at the time of receipt.

Donations received in cash towards depreciable fixed assets, the ownership of which lies with the Trust, are treated as deferred donation income and recognised as donation income in the income and expenditure account on a systematic and rational basis over the useful life of the asset.

The deferred donations towards depreciable fixed assets (receive both in cash and in kind), being identified as funds which provide long term benefits to the Trust, are disclosed under the Designated Funds in the Balance Sheet.

Income from cultural events, if any, is recognised as and when such events are performed.

Income from receipts for other programs is recognised when the associated obligation is performed and right to receive money is established.

Interest on deployment of funds is recognised using the time-proportion method, based on underlying interest rates.

(vii) Income Tax

The Trust is registered u/s. 12A of the In-come tax Act, 1961 (‘the Act’). Under the provisions of the Act, the income of the Trust is exempt from tax, subject to the compliance of terms and conditions speci-fied in the Act.

Consequent to the insertion of tax liability on anonymous donations vide Finance Act 2006, the Trust provides for the tax liability in accordance with the provisions of Section 115 BBC of the Act, if at all there are any such anonymous donations.

(viii) Foreign exchange transactions

Transaction: Foreign exchange transactions are recorded at a rate that approximates the exchange rate prevailing on the date of the transaction. The difference between the rate at which foreign currency transactions are accounted and the rate at which they are realised, is recognised in the income and expenditure account.

Translation: Monetary foreign currency assets and liabilities at the year-end are restated at the closing rate. The difference arising from the restatement is recognised in the income and expenditure account.

(ix) Provisions and contingent liabilities

The provisions are recognised when, as a result of obligating events, there is a present obligation that probably requires an outflow of resources and a reliable estimate can be made of the amount of obligation.

The contingent liability disclosure is made when, as a result of obligating events, there is a possible obligation or a present obligation that may, but probably will not, require an outflow of resources.

No provision or disclosure is made when, as a result of obligating events, there is a possible obligation or a present obligation when the likelihood of an outflow of resources is remote.

(x) Impairment of assets

The Trust periodically assesses whether there is any indication that an asset may be impaired. If any such indication exists, the Trust estimates the recoverable amount of the asset. If such recoverable amount of the asset is less than its carrying amount, the carrying amount is reduced to its recoverable amount. The reduction is treated as an impairment loss and is recognised in the income and expenditure account. If at the balance sheet date there is an indication that if a previously assessed impairment loss no longer exists, the recoverable amount is reassessed and the asset is reflected at the recover-able amount subject to a maximum of depreciable historical cost.

(xi) Retirement benefits

Provident fund
All eligible employees receive benefit from provident fund, which is a defined contribution plan. Both the employee and the Trust make monthly contributions to the fund, which is equal to a specified percentage of the covered employee’s basic salary. The Trust has no further obligations under this plan, beyond its monthly contributions. Monthly contributions made by the Trust are charged to income and expenditure account.

Gratuity
The Trust provides gratuity, a defined benefit retirement plan, to its eligible employees. In accordance with the Payment of Gratuity Act, 1972, the gratuity plan provides a lumpsum payment of the eligible employees at retirement, death, incapacitation or termination of employment, of an amount based on the respective employee’s basic salary and tenure of employment with the Trust. The gratuity liability is accrued based on an actuarial valuation at the balance sheet date, carried out by an independent actuary.

Compensated absences
The employees of the Trust are entitled to compensated absences which are both accumulating and non-accumulating in nature. The expected cost of accumulating compensated absences is determined by actuarial valuation based on the additional amount expected to be paid as a result of the unused entitlement that has accumulated as at the Balance Sheet date. Expense on non-accumulating compensated absences is recognised in the period in which the absences occur.

(xii) Leases

Assets acquired under lease, where the Trust substantially has all the risk and rewards of ownership, are classified as finance lease. Such assets acquired are capitalised at the inception of lease at lower of the fair value or present value of minimum lease payments.

Assets acquired under lease where the significant portion of risks and rewards of ownership are retained by the lessor are classified as operating lease. Lease rentals are charged to income and expenditure account on a straight line basis over the lease term.

Information supplied was in nature of data. It was not exploitation of know how. Hence, the payment received was business receipt and not Royalty.

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4. P T McKinsey Indonesia vs. DDIT [2013] 29
taxmann.com 100 (Mumbai-trib)
Article 7 and 12 of India-Indonesia DTAA
Asst Year: 2007-2008
Decided on: 16th January 2013
Before Rajendra (AM) and  D K Agarwal (JM)

Information supplied was in nature of data. It was not exploitation of know how. Hence, the payment received was business receipt and not Royalty.


Facts

The taxpayer was an Indonesian company engaged in the business of providing strategic consultancy services. During the year, it had provided information to its group company in India and had received certain amount as consideration therefor. The taxpayer had claimed that the consideration received by it was in the nature of business receipt and since it did not have a PE in India, it was not chargeable into tax in India. According to the AO, the information provided by the taxpayer constituted technical and consultancy services so as to make available technical knowledge, skill, know-how, experience or process and thus, was in the nature of ‘fees for included services’ as covered by Article 12 of the DTAA between India and Indonesia2. The AO held that the fees received by the taxpayer were for consultancy/advisory services without any technology and they constituted Royalty in term of Article 12. The taxpayer approached DRP, which held that provisions of Article 22(3) – ‘other income’ – apply.

Held

The Tribunal observed and held as follows. The AO had nowhere established that the information supplied was arising out of exploitation of the knowhow generated by the skills or innovation of person who possesses such talent. In taxation terminology, the term ‘royalty’ has a distinct meaning. The information received by the Indian group company was in the nature of data and the consideration for the same cannot constitute ‘Royalty’. Article 22 is a residuary head analogous to sections 56 and 57 of I-T Act. Hence, It will not apply if the sum can be taxed under any other Article. With regard to earlier decisions of the Tribunal in respect of similar payments by the Indian group company, the payment should be treated as business profits in terms of Article 7.

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Referral fees received by non-resident for referring international clients does not constitute FTS u/s. 9(i)(vii) of I T Act.

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3. CLSA Ltd vs. ITO [2013] 31 taxmann.com 5  (Mumbai-Trib)
Section 9 r.w. S. 5 of I T Act
Asst Year: 2004-05
Decided on: 18th January 2013
Before P M Jagtap (AM) and D K Agarwal (JM)

Referral fees received by non-resident for referring international clients does not constitute FTS u/s. 9(i)(vii) of I T Act.


Facts

The taxpayer was a company incorporated in Hong Kong. It was a member of a group of companies having global presence. During the year, the Indian group company (“IndCo”) of the taxpayer had made certain payments to the taxpayer which were recorded by IndCo as recovery of overhead expenditure. IndCo had also withheld tax from the payments. The taxpayer contended that the payments were referral fees for referring overseas institutional clients to IndCo and hence, were not FTS in terms of section 9(1)(vii) of I-T Act. Consequently, they were not chargeable to tax. The issue before the Tribunal was: whether the referral fees constitute FTS in terms of section 9(1)(vii)?

Held

The Tribunal observed and held as follows. The Tribunal referred to Advance Ruling in Cushman and Wakefield (S) Pte Ltd., In re [2008] 305 ITR 208 (AAR) wherein, on similar facts, the AAR had held that the referral fees was not FTS1. Following the AAR ruling, the Tribunal held that the referral fees received by the taxpayer were not FTS u/s. 9(1)(vii) of I T Act.

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Search and seizure: Block assessment: S/s. 69A, 80-IB(10) and 158BB: Block Period 1-4- 1995 to 21-2-2002: Assessee in construction business eligible for deduction u/s. 80-IB(10): Disclosure of construction income: Assessee is entitled to deduction u/s. 80-IB(10):

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CIT vs. Sheth Developers (P) Ltd.; 254 CTR 127 (Bom):

The assessee carried on business as a builder and was entitled to deduction u/s. 80-IB(10). In the course of the search action u/s. 132 of the Act, on 21/02/2002, the assessee had made a declaration of undisclosed income of Rs. 7 crore. In the block return, the assessee offered undisclosed income of Rs. 3.5 crore. The assessee claimed that at the time of making the statement, the director of the assessee was unaware of the deduction u/s. 80-IB of the Act. The Assessing Officer did not allow the claim for deduction u/s. 80-IB(10) of the Act and computed the undisclosed income at Rs. 7.68 crore. CIT(A) and the Tribunal allowed the assessee’s claim.

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

“i) Consequent to the amendment by the Finance Act, 2002 with retrospective effect from 1-7-1995, the total income or loss has to be computed in accordance with the provisions of the Act. Consequently, w.e.f. 1-7-1995, the total income/ loss for the block period has to be computed in accordance with the provisions of the Act and the same would include Chapter VI-A. Section 80-IB is a part of Chapter VI-A. In view of the above, while computing the undisclosed income for the block period, the respondent assessee is entitled to claim deduction from its income u/s. 80-IB.

ii) It is not the case of the Revenue that the money found in possession of the assessee could not be explained and/or its source could not be explained to the satisfaction of the Assessing Officer. In the present case, undisclosed income found in the form of cash was explained as having been acquired while carrying on business as builder and this explanation was accepted by the Assessing officer by having assessed the undisclosed income for the block period as income from profits and gains of business or profession.

iii) In the present case, no question of application of sections 68, 69, 69A, 69B and 69C arises as the same has not been invoked by the Department. It is an admitted position between the parties as reflected even in the order of the Assessing Officer that undisclosed income was in fact received by the assessee in the course of carrying out its business activities as a builder. In view of the above, the order of the Tribunal cannot be faulted.”

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Reassessment: S/s. 115AD, 147 and 148: A. Y. 2006-07: Validity to be determined with reference to reasons recorded for belief: Assessment u/s. 143(1) determining Nil income: Notice u/s. 148 on the ground that that section 115AD may be applicable: Not valid:

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Indivest Pte Ltd. vs. Addl. DIT; 350 ITR 120 (Bom):

The assessee company was owned by the Government of Singapore. For the A. Y. 2006-07, in the return of income, the assessee had claimed that the profits earned from the transactions in Indian securities are not liable to tax in India in view of Article 7 of the India-Singapore tax treaty. Accordingly, the assessee had returned Nil income. The assessment was completed u/s. 143(1) of the Income-tax Act, 1961 determining Nil income. Subsequently, the Assessing Officer issued notice u/s. 148 dated 16-3-2011 on the ground that the possibility of escapement of income taxable as STCG under the Act may not be ruled out.

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

“i) The Assessing Officer has power to reopen an assessment, provided there is “tangible material” to come to the conclusion that there is escapement of income from assessment. Reason must have a live link with the formation of the belief. The validity of the notice reopening the assessment u/s. 148 of the Act, has to be determined on the basis of the reasons which are disclosed to the assessee. Those reasons constitute the foundation of the action initiated by the Assessing Officer of reopening the assessment. Those reasons cannot be supplemented or improved upon subsequently.

ii) Reading the reasons of the Assessing Officer, it was evident that there was absolutely no tangible material on the basis of which the assessment for the A. Y. 2006-07 could have been reopened. Upon the return of income being filed by the assessee both in electronic form and subsequently in the conventional mode, the assessee received an intimation u/s. 143(1).

iii) While disposing of the objections of the assessee, the Assessing Officer had purported to state that the assessee had filed only sketchy details in its return filed in the electronic form. The relevant provisions expressly make it clear that no document or report can be filed with the return of income in the electronic form.

iv) The notice was not valid and was liable to be quashed.”

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Industrial undertaking: Deduction u/s. 80-IC: A. Y. 2004-05: Interest received for delay in payment for goods: Is income derived from industrial undertaking: Eligible for deduction u/s. 80-IC:

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CIT Vs. Universal Pipes (P) Ltd.; 254 CTR 311 (Gau):

The assessee was engaged in the manufacture and sale of PVC pipes. The assessee was entitled to deduction u/s. 80-IC. In the relevant year, the assessee had received an amount of Rs. 3,13,19,602/- by way of interest from the irrigation department, as per the order of the High Court, for the delay involved in the payment in connection with delivery of goods. The Assessing Officer disallowed the claim for deduction u/s. 80-IC in respect of this amount. The Tribunal allowed the assessee’s claim.

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

“Interest received from the Irrigation Department as per the order of the Court for the delay involved in the payment in connection with delivery of goods to Irrigation Department constituted income derived from the industrial undertaking of the assessee and is eligible for deduction u/s. 80-IC.”

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Income from undisclosed sources: Reference to DVO: S/s. 69 and 142A: A. Y. 1989-90: Rejection of books of account is prerequisite for valid reference to DVO for valuation u/s. 142A: Report of DVO pursuant to invalid reference could not be a basis for addition u/s. 69:

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Goodeluck Automobiles (P) Ltd. vs. ACIT; 254 CTR 1 (Guj):

In the previous year relevant to the A. Y. 1989-90, the assessee had constructed a building and had declared the cost of construction to be Rs. 13,23,321/-. The Assessing Officer made a reference to the DVO for valuation who computed the cost of construction at Rs. 19,13,100/-. The Assessing Officer made the addition of the difference of Rs. 5,89,779/- as undisclosed income u/s. 69 of the Income-tax Act, 1969. The reference to the DVO and the addition was upheld by the Tribunal.

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

“i) Expression used by the Legislature in the heading of section 142A as well as in the opening part of the said section is “estimate”. Question of estimate arises only when the books of account of the assessee are not reliable. For the purpose of resorting to the provisions of section 142A, the Assessing Officer is first required to record a satisfaction that the assessee has made investments which are not recorded in the books of account. As a necessary corollary, he would then reject the books of account as not reflecting the correct position and then proceed to make the assessment on the basis of the estimation. Thus, it is apparent that the question of estimating the value of any investment would arise only when the books of account are not reliable. Accordingly, the Assessing Officer is first required to reject the books of account before making a reference to the Valuation Officer.

ii) Report of the Valuation Officer cannot form the foundation for rejection of the books of account. In the instant case, the Assessing Officer has categorically recorded a finding to the effect that the assessee’s accounts are duly audited and complete details are available. He made reference to the valuation Officer merely to seek expert advice regarding the cost of construction. There is nothing in the assessment order to suggest that the Assessing Officer had any doubt regarding the cost of construction or that he was not satisfied regarding the correctness or completeness of the books of account.

iii) Prior to making the reference to the valuation Officer, the Assessing Officer has not ascertained what was the defect in the cost of construction disclosed by the assessee in its return. Except for the difference between the estimated cost determined by the Valuation Officer and the actual cost shown by the assessee, the Assessing Officer has not brought any material on record to establish that the assessee has made any unaccounted investment in the construction of the building in question and that the books of account do not reflect the correct cost of construction.

iv) Hence, the reference made to the Valuation Officer not being in consonance with the provisions of law was invalid. Accordingly, the report made by the valuation Officer pursuant to such invalid reference could not have been made the basis of the addition u/s. 69.

v) In view of the above discussion, the Tribunal was not justified in holding that the reference made by the Assessing Officer to the Valuation Officer for estimating the cost of construction was not invalid. The Tribunal was also not justified in holding that the addition made by the Assessing officer u/s. 69 of the Act was correct.”

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Income: Accrual of: Section 5: A. Y. 2004-05: Amount (Rs. 3,037 crore) for transfer of indefeasible right of connectivity for 20 years: Assessee correctly spread the entire fee of Rs. 3,037 crore over a period of 20 years and accordingly paid tax: Entire amount was not assessable during the relevant year:

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CIT vs. Reliance Communication Infrastructure Ltd.; 254 CTR 251 (Bom):

In the previous year relevant to the A. Y. 2004-05, the assessee had received an amount of Rs. 3,037 crore as fees for grant of Indefeasible Right of Connectivity for a period of 20 years. The assessee spread the amount over a period of 20 years and accordingly paid the tax. The Assessing Officer allowed the claim. Exercising the powers u/s. 263 of the Income-tax Act, 1961, the Commissioner held that the entire amount was income accrued to the assessee in the relevant year i.e. A. Y. 2004-05 itself. The Tribunal upheld the assessee’s claim.

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

“i) The Tribunal has on examination of the agreement dated 30-4-2003 entered into between RI Ltd and the assessee concluded that RI Ltd in terms of the agreement had only a right to use the network during the tenure of 20 years agreement. Further, the agreement was liable to be terminated at the sole discretion of RI Ltd. and consequently, the amount received as advance for 20 years lease period would have to be returned on such termination for the balance unutilised period.

ii) Further, the Tribunal held that the agreement dated 30-4-2003 was only in the nature/form of a lease agreement. On application of AS-19 formulated by the ICAI, a lease income arising from operating lease should be recognised in the statement of profit and loss in a straight line method over the term of the lease. Therefore, the assessee had in terms of AS-19 correctly spread the entire fee of Rs. 3,037 crore over the period of 20 years and to pay tax thereon over the entire period.”

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