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In the relevant year, the Assessing Officer disallowed the claim of the assessee for deduction of the amount paid to the clubs for obtaining membership holding the same as capital expenditure. The Tribunal allowed the assessee’s claim.
On appeal by the Revenue, Karnataka High Court upheld the decision of the Tribunal and held that the amount paid to the clubs for obtaining membership is revenue expenditure.
The assessee society had applied for registration u/s. 12AA on 10-7-2008. The Director of IT(Exemption) refused to grant registration on the ground that no charitable activity had in fact taken place since the society was a newly established one. The Tribunal allowed the assesse’s appeal.
On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:
“i) Facially, the provisions of section 12AA would suggest that there are no restrictions of the kind which the Revenue is reading into this case. In other words, the statute does not prohibit or enjoin the CIT from registering trust solely based on its objects, without any activity, in the case of a newly registered trust. The statute does not prescribe a waiting period, for a trust to qualify itself for registration.
ii) Tribunal was right in holding that while examining the application u/s. 12AA(1)(b) r.w.s. 12A, the concerned CIT/Director is not required to examine the question whether the trust has actually commenced and has, in fact, carried on charitable activities.
iii) The appeal is accordingly dismissed.”
For the A. Y. 2002-03, the assessee filed the return of income claiming deduction of Rs. 13.35 crore u/s. 80HHC of the Income-tax Act, 1961. The returned income was accepted by an order u/s. 143(1) of the Act. Subsequently, the Assessing officer issued notice u/s. 148 of the Act and reopened the assessment on the ground that the sale proceeds of the quota was wrongly considered as export turnover and that it was business profits and 90% thereof had to be reduced for computing deduction u/s. 80HHC. The assessee challenged the reopening on the ground that there was no “fresh material” as contemplated by the Supreme Court in the case of CIT Vs. Kelvinator of India Ltd; 320 ITR 561 (SC). The Tribunal accepted the assessee’s contention and held that the Assessing Officer had no jurisdiction to reopen the assessment made u/s. 143(1) of the Act.
On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:
“i) Section 147 permits an assessment to be reopened if there is “reason to believe”. It makes no distinction between an order u/s. 143(3) or an intimation u/s. 143(1) of the Act. Accordingly, it is not permissible to adopt different standards while interpreting the words “reason to believe” vis-à-vis section 143(1) and 143(3). The Department’s argument that the same rigorous standards which are applicable in the interpretation of the expression when it is applied to the reopening of a section 143(3) assessment cannot apply to a section 143(1) intimation is not acceptable because it would place an assessee whose return is processed u/s. 143(1) in a more vulnerable position than an assessee in whose case there is a full-fledged scrutiny assessment u/s. 143(3).
ii) Whether the return is put to scrutiny or accepted without demur is not a matter which is within the control of assessee. An interpretation which makes distinction between the meaning and content of the expression “reason to believe” between a case where a section 143(3) assessment is made and one where an intimation u/s. 143(1) is made may lead to unintended mischief, be discriminatory and lead to absurd results.
iii) In CIT vs. Kelvinator India Ltd; 320 ITR 561(SC) it was held that the term “reason to believe” means that there is “tangible material” and not merely a “change of opinion” and this principle will apply even to section 143(1) intimation.
iv) On facts, the Assessing Officer reached the belief that there was escapement of income on going through the return of income filed by the assessee. This is nothing but a review of the earlier proceedings and an abuse of power by the Assessing Officer. There is no whisper in the reasons recorded of any tangible material which came to the possession of the Assessing Officer subsequent to the issue of the intimation. It reflects an arbitrary exercise of power conferred u/s. 147.
v) Appeal of the Revenue is accordingly dismissed.”
The assessee was engaged in the business of jewellery and money-lending. He was the proprietor of M/s. Sri Velmurugan Financiers, M/s. Sri Raja Jewellery, M/s. Sri Raja Silks and M/s. M.K.S. Finance. He was also the managing director of M/s. Shanmugaraja Chit Funds Pvt. Ltd. and partner in M/s. Sri Raja Chit Funds, M/s. Sri Velmurugan Chit Funds, Coimbatore and M/s. United Fabrics, Tiruppur. A search was conducted in the business premises of the assessee on 31st January, 2001, u/s. 132 of the Income-tax Act, 1961, hereinafter referred to as “the Act”, by the Investigation Unit II, Coimbatore. During the course of the search, various incriminating documents were seized, which indicated that the assessee did not disclose the correct income earned by him in the returns filed by him before conducting such a search. Before the date of the search, the assessee filed returns of income only up to the assessment year 1998-99. Therefore, a notice u/s. 158BC of the Act was issued to the assessee on 28th February, 2001. The search was concluded on 13th March, 2001. On 18th September, 2002, block return in Form 2B was filed by the assessee for the period from 1st April, 1990 to 13th March, 2001, declaring a loss of Rs. 16,47,844. In response to the notices and the letters issued, the assessee made written as well as oral submissions in respect of his income and investments during the said block period. The documents seized from his business premises and the documents produced by him were scrutinised and after hearing the assessee, the Assessing Officer completed the assessment. The Assessing Officer made additions of (i) Rs. 42 lakh on account on-money received from sale of Raja Street properties; (ii) Rs. 60,72,900 being bogus outstanding deposit in jewellery; (iii) Rs. 3,83,000 being bogus outstanding fixed deposits in Sri Velmurugan Finances; (iv) Rs. 26,63,130 in respect of unexplained payments made to various parties, and (v) Rs. 2,00,000/- being sale proceeds of A.P. Lodge.
As against the assessment order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) II, Coimbatore, who by order dated 25th March, 2004, allowed the appeal in part. Aggrieved by the said order of the Commissioner of Income Tax (Appeals), the Revenue filed an appeal before the Income Tax Appellate Tribunal and the assessee filed cross-objection in respect of the disallowed portion. The Income Tax Appellate Tribunal, by its common order dated 23rd November, 2006, dismissed the appeal filed by the Revenue and partly allowed the cross objection filed by the assessee. Challenging the same, the Revenue filed appeal before the High Court.
The High Court allowing the appeal held that
(i) the Assessing Officer had not committed any error in making the addition of Rs. 42 lakh, while completing the block assessment,
(ii) out of Rs. 60,92,900/- a sum of Rs. 21,21,400/- was assessable as undisclosed income,
On appeal to the Supreme Court by the assessee, the Apex Court, after going through the judgment of the High Court, observed that the High Court had overruled the decisions of the Income Tax Appellate Tribunal and of the Commissioner of Income Tax (Appeals) on factual aspects also. By way of illustration, the Supreme Court pointed out that the High Court had stated that cash flow statements submitted by the assessee were not supported by the documents. According to the Supreme Court, in such a case, the High Court should have remitted the case to the Commissioner of Income Tax (Appeals) giving opportunity to the assessee to produce relevant documents. The Supreme Court, for the aforestated reasons, set aside the judgement of the High Court and remitted the case to the Commissioner of Income Tax (Appeals), to decide the matter uninfluenced by the judgment of the High Court.
The assessee, a limited company engaged in the business of extraction of manganese and iron ore had claimed in the return of income filed for the assessment years 1985-86, 1986-87, 1989-90, 1990-91 and 1992-93, deductions for the payments made to Sandur Residential School and Sandur Educational Society.
In the orders of assessments passed for the assessment years 1985-86, 1986-87, 1989-90, 1990-91 and 1992-93, the Assessing Officer disallowed the deductions claimed for the payments made to Sandur Residential School and Sandur Educational Society by applying the provisions of section 40A(9) of the Act r.w.s. 40A(10) of the Act.
The assessee after exhausting the remedy of the first appeal before the Appellate Commissioner, filed the second appeal before the Income Tax Appellate Tribunal. The Tribunal allowed the deductions claimed, on the ground that the expenses had been incurred fully and exclusively for the purpose of business and welfare of the employees’ children. Therefore, the deduction was allowable for the assessment year 1983-84 in view of the non-obstante clause of section 40A(10) of the Act and for the assessment years 1985-86 till 1992-93 in view of section 37(1) of the Act. The Tribunal placed reliance on the decision in the case of Mysore Kirloskar Ltd. vs. CIT [1987] 166 ITR 836 (Karn).
The Tribunal inter alia referred the following question of law to the High Court for its consideration and opinion.
“Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in allowing the payments made by the assessee to Sandur Residential School and Sandur Educational Society as business expenditure for the assessment years 1985-86, 1986-87, 1989-90, 1990-91 and 1992-93?” The High Court held that a reading of the Budget speech of the Finance Minister would indicate that under the provisions of section 40A(9) of the Act, no deduction is permissible on the contribution made by the corporate bodies to the so-called welfare funds, except the contributions made to such funds which are established under the statute or an approved provident fund, superannuation fund or gratuity fund.
The High Court did not accept the view expressed by the Kerala High Court in P. Balakrishnan, CIT v. Travancore Cochin Chemicals Ltd. (2000) 243 ITR 284 (Ker) and by the Bombay High Court in CIT v. Bharat Petroleum Corporation Ltd. (2001) 252 ITR 431 (Bom) in view of the decision of the Supreme Court in Larsen and Toubro Institute of Technology v. All India Council for Technical Education, AIR 1995 (SC) 1585. The High Court answered the question in favour of the Revenue and against the assessee.
On an appeal to the Supreme Court, on the issue of the allowability of the sum spent as welfare expenses towards providing education to its employees’ children, the Supreme Court observed that section 40A(9) was inserted as a measure for combating tax avoidance. The application of section 40A(9) would come into play only after the assessee has established the basic facts. According to the Supreme Court, the facts were not clear inasmuch as the assessee had made payments to other educational institutions and also not only to the school or the society promoted by the assessee. According to the Supreme Court, from each assessment year, the Tribunal would have to record a separate finding as to whether the claim for deduction was being made for payments to the school promoted by the assessee or to some other educational institutions/ schools and thereafter apply section 40A(9). The Supreme Court accordingly restored the matter to Tribunal, for de novo consideration for each of the assessment years and directing it to give a clear bifurcation between payments made by the assessee to Sandur Residential School and Sandur Education Society and payments made to schools other than the above two institutions. The Supreme Court however, refrained from going into the scope and applicability of section 40A(9) in the absence of proper facts.
1 Introduction
1.2 While concluding his Budget Speech, the Finance Minister has, in Para 188, made some predictions as under:
“Any economist will tell us what India can become. We are the tenth-largest economy in the World. We can become the eighth, or perhaps the seventh largest by 2017. By 2015, we could become a $5 trillion economy, and among the [top] five in the world. What we will become depends on us and on the choices that we make. Swami Vivekananda, whose 150th birth anniversary we celebrate this year, told the people: “All the strength and succour you want is within yourself. Therefore, make your own future.”
1.3 In Para 185 of the Budget Speech, it is stated that the effect of changes in Direct Tax Laws this year will bring additional revenue of Rs. 13,300 crore. So far as Indirect Taxes are concerned, the additional revenue will be Rs 4,700 crore.
1.4 In this Article, the amendments made in the Income-tax Act, the Wealth Tax Act and Securities Transaction Tax (STT) are discussed. A new tax viz. “Commodities Transaction Tax” (CTT) is now levied u/s. 105 to 124 of the Finance Act, 2013. This is on the same lines as the STT. The important features of this new tax are also discussed in this Article.
2 Rates of income tax, surcharge and education cess:
2.1 Surcharge on Super-Rich:
There are no changes in the tax slabs, rates of income tax, or rates of Education Cess. In Para 126 of the Budget Speech, the Finance Minister has stated that “Fiscal consolidation cannot be effected only by cutting expenditure. Wherever possible, revenues must also be augmented. When I need to raise resources, who can I go to except those who are relatively well placed in society? There are 42,800 persons — let me repeat, only 42,800 persons — who admitted to a taxable income exceeding Rs. 1 crore per year. I propose to impose a surcharge of 10 percent on persons whose taxable income exceeds Rs. 1 crore per year. This will apply to individuals, HUFs, firms and entities with similar tax status.” In Para 127, he has stated that in the cases of domestic companies, the existing surcharge is 5% if the taxable income exceeds Rs. 1 crore. This will now be 10% if the taxable income exceeds Rs. 10 crore. Similarly, in the case of a foreign company the existing surcharge of 2% will increase to 5% — if the income exceeds Rs. 10 crore. In Para 128, the Finance Minister has stated that the existing surcharge of 5% will increase to 10% in case of tax on dividend distribution. Further, in Para 129 of his speech, he has stated that this additional surcharge will be in force only for one year i.e. financial year 2013-14 (A.Y. 2014-15).
2.2 Rebate from Tax:
In order to give a small relief to Resident Individual Tax Payers, a new Section 87A is inserted in the Income-tax Act (IT Act) w.e.f. A.Y. 2014-15. Under this section, a resident individual whose total income does not exceed Rs. 5 lakh, will be entitled to receive a rebate of Rs. 2,000/- or the income tax payable (whichever is less) from the income tax payable by him. It may be noted that this rebate cannot be claimed by an HUF.
2.3 Rates of Income-tax and Surcharge:
(i) For Resident Individuals, HUF, AOP, BOI and Artificial Juridical Person, as stated above, there are no changes in the tax slabs, rates of Income tax or rates of Education Cess. The only change is about levy of 10% surcharge on tax if the income exceeds Rs. 1 crore. The rates of tax for A.Y. 2013-14 and A.Y. 2014-15 (Accounting years ending on 31-03-2013 and 31-03-2014) are the same as stated below):
• In A.Y. 2014-15 Surcharge @ 10% of the tax will be payable if income of the assessee exceeds Rs. 1 crore.
• An Individual having gross total income below Rs 5 lakh will get rebate upto Rs. 2,000/- from tax in A.Y. 2014-15 u/s. 87A.
• Education Cess of 3% (2%+1%) of the tax is payable for both the years.
(ii) The following table gives figures of tax payable by Resident Individual, HUF, AOP, BOI etc. in A.Y. 2013-14 and A.Y. 2014-15.
(a) Tax payable in A.Y. 2013-14 (Accounting year ending on 31-03-2013)
• In the first two items (Rs. 3 lakh and Rs. 5 lakh) in the case of an Individual having income below Rs. 5 lakh, the tax payable will be reduced by Rebate of Rs. 2,000/- u/s. 87A.
• The last item (Rs. 125 lakh) includes surcharge of 10%.
• The above tax is to be increased by 3% of tax for Education Cess.
(iii) Other Assessees (excluding companies)
The rates of taxes (including rate of Education Cess) for the other assesses (excluding companies) for A.Y. 2013-14 and A.Y. 2014-15 are the same. No surcharge on tax was payable by Co-operative Societies, Firms, LLP or Local Authority in A.Y. 2013-14. However, in A.Y. 2014-15, if the income of the above entities exceed Rs. 1 crore, Surcharge @ 10% of tax will be payable.
(iv) For Companies:
The rates of Income tax for Companies for A.Y. 2013-14 and A.Y. 2014-15 are the same. For domestic companies, surcharge of 5% of tax is payable in A.Y. 2013-14 if the total income exceeds Rs. 1 crore. In A.Y. 2014-15, the rate of surcharge will be 5% if the total income exceeds Rs. 1 crore but does not exceed Rs. 10 crore. If the total income exceeds Rs. 10 crore, the rate of surcharge will be 10% of the tax payable on the entire income.
In the case of a foreign company there is no change in the rates of income tax in A.Y. 2013- 14 and A.Y. 2014-15. As regards surcharge, the rate is 2% of the tax if the total income exceeds Rs. 1 crore in A.Y. 2013-14. In A.Y. 2014-15, the rate of surcharge will be 2% if the total income exceeds Rs. 1 crore but does not exceed Rs. 10 crore. If the total income exceed Rs 10 crore the rate of surcharge will be 5% of the tax payable on the entire income.
In both the above cases, Education Cess @ 3% of tax is payable in A.Y. 2013-14 and A.Y. 2014-15.
(v) Rate of Tax u/s. 115JB (MAT)
The rate of tax (i.e. 18.5%) will be payable on the book profits of a company computed u/s. 115JB (MAT) in A.Y. 2013-14 and A.Y. 2014-15. The surcharge will be payable on this tax as stated in (iv) above. Education Cess @ 3% of the tax plus applicable surcharge will be payable as at present.
(vi) Rate of Tax u/s. 115JC (AMT)
The rate of tax (i.e. 18.5%) will be payable on the adjusted total income of non-corporate assesses u/s. 115JC (AMT) in A.Y. 2013 -14 and A.Y. 2014-15. The surcharge and Education Cess will be payable on this tax as stated in (iii) above.
(vii) Dividend Distribution Tax:
Dividend Distribution Tax or Income Distribution Tax payable u/s. 115O, 115QA, 115R or 115TA shall be pay-able as provided in these section. The surcharge at 10% of tax will be payable in respect of the above tax for A.Y. 2014-15. The Education Cess @ 3% of the tax shall also be payable on the above tax. It may be noted that surcharge @ 10% of tax will be payable irrespective of the amount distributed under these sections.
(viii) Rate of Tax on Dividends from Specified Foreign Companies:
The concessional rate of 15% plus applicable surcharge and Education Cess which was applicable for A.Y. 2013-14 u/s. 115BBD has been extended for one more year i.e. for A.Y. 2014-15.
2.4 Education Cess:
As in the earlier years, Education Cess of 3% (including 1% Higher Education Cess) of the income tax and applicable surcharge is payable by all resident assessees and non-resident assessees. No Education Cess or surcharge is applicable on TDS and TCS from payments to all resident corporate and non-corporate assesses. However, if tax is deducted from
(a) payments to foreign companies, (b) payments to non-residents or (c) salary to residents or non-residents, Education Cess at 3% of the tax and applicable surcharge is to be deducted.
3. Tax deduction and collection at source (TDS and TCS)
3.1 In the case of a resident assessee or a domestic company, where tax is required to be deducted or collected at source, no surcharge or Education Cess of the applicable rate of tax is to be considered. However, in the case of a non -resident or a foreign company while deducting or collecting tax at source, under the provisions of the Income-tax Act during the period commencing from 01-04-2013, the applicable rate of tax is to be increased by the applicable rate of surcharge and Education Cess. As stated earlier, in the case of non-residents (other than foreign companies), if the total income exceeds Rs. 1 crore, the rate of surcharge is 10% of the tax. In the case of a foreign company, if the total income is more than Rs. 1 crore but less than Rs. 10 crore, the rate of surcharge is 2% of the tax. If the income is more than Rs. 10 crore, this rate is 5% of the tax on total income. In all cases, the rate of Education Cess is 3% of the tax (including applicable surcharge).
3.2 TDS on transfer of immovable property:
(i) Section 194-1A – This new section is inserted in the Income-tax Act w.e.f. 01-06-2013. It provides that any person (transferee) who purchases any immovable property (whether residential or commercial) for a consideration, shall now deduct tax at source at the rate of 1% of the amount paid to a resident seller (transferor) if the said consideration exceeds Rs. 50 lakh. For this purpose, the term “Immovable Property”, is defined to mean any land (other than Agricultural Land) or any building or part of a building. It may be noted that the section will apply in both cases i.e. when the purchaser is purchasing the property as a capital asset or as stock-in-trade.
(ii) This section will apply to all assessees, whether resident or non-resident, who purchase any immovable property in India from a resident. In other words, the obligation for deduction of tax is on every purchaser of immovable property, whether he is required to get his books of accounts audited u/s. 44AB or not. It will not be necessary for the purchaser to obtain Tax Deduction Account Number (TAN) u/s. 203A.
However, the purchaser will have to file TDS Return and deposit TDS amount with the Government as provided in Section 200. The seller of the property must provide his PAN to the purchaser. If this is not done, tax on the sale consideration will have to be deducted at 20% as provided in section 206AA. It may be noted that the option of obtaining certificate from the A.O. u/s. 197 prescribing NIL rate or lower rate of TDS is not available in the above case.
(iii) If the purchase of the immovable property is from a non-resident, the tax will be deductible by the purchaser at the applicable rate u/s. 195 as at present. This new section will not apply to such a purchase. Similarly, this new section will not apply to payment of compensation on acquisition of immovable property to which the provisions of TDS u/s. 194LA are applicable.
(iv) It may be noted that a similar provision for TDS was proposed to be introduced by the insertion of section 194LAA in the Income-tax Act by the Finance Bill, 2012. Under this provision, it was proposed that the purchaser of an immovable property for a consideration exceeding Rs. 50 lakh in the specified area and Rs. 20 lakh in other areas shall deduct tax at source @ 1% of the consideration. For this purpose, the consideration was to be considered as specified in the Sale Deed or stamp duty valuation u/s. 50C whichever was higher. The registering authority was directed not to register the document unless the evidence for payment of TDS amount was produced before him. There was a lot of protest against the introduction of such a provision last year. Therefore, this provision was dropped before passing the Finance Act, 2012. A similar provision is again introduced this year and in the absence of any serious debate the same has been now brought into force from 01-06-2013.
(v) This new provision is likely to raise some issues as under:
(a) The definition of immovable property only covers land (other than agricultural land) or building or part of the building. This will mean that any right in a building such as tenancy right, leasehold right etc. will not be subject to this TDS provision. [Refer: Atul G Puranik vs. ITO 132 ITD 499 (Mum)]
(b) If a person has booked a flat in a building under construction, either the flat is booked before 01-06-
2013 or after that date, and makes payment for the same, a question will arise whether he is required to deduct tax at source under this section. It is possible to take the view that by the agreement with the builder the purchaser gets a right to get the flat when constructed. Therefore, when the instalment payments are made to the builder there is no transfer of immovable property. [Refer: ITO vs. Yasin Moosa Godil 147 TTJ 94 (Ahd)] The transfer of flat will take place only when possession is given.
Therefore, the obligation to deduct tax will arise under this section only when the last instalment is paid against possession of the flat. However, TDS @ 1% will have to be deducted on the entire consideration for the flat at that time.
(c) Since there is no specific mention in this section that if the amount of stamp duty valuation u/s. 50C is more than the actual consideration, the stamp duty valuation will be considered as consideration for TDS purposes, it can be concluded that tax is to be deducted from the actual consideration payable as per the sale deed. As stated earlier, in the Finance Bill, 2012 the proposed section 194LAA specifically provided for considering stamp duty valuation if that was more than the consideration stated in the Sale Deed. There is no such provision in this new section 194-1A.
(d) Section 199 of the Income-tax Act provides that credit for TDS amount will be given against the income in respect of which such tax is deducted. In a transaction of sale of immovable property, the seller will be showing income from such sale under the head “Capital Gains” or “Income from Business or Profession”. It may so happen that an individual selling his immovable property may claim exemption u/s. 54 or 54F due to reinvestment in another property or u/s. 54EC by reinvestment in Bonds. In all such cases, credit for TDS under this new section will be available even if the income computed under the head “Capital Gains” is NIL.
(e) If the property is purchased by two or more persons as co-owners, the tax will be deductible by each co-owner in respect of his/her share of the consideration paid if the total consideration for the property exceeds Rs. 50 lakh. This section also applies in respect of purchase of property from a relative.
(f) It may be noted that there is no provision for disallowance of purchase price of the property u/s. 40(a)(ia) in the case of a purchaser who has purchased the property as stock-in-trade.
3.3 tds from interest income of FII or qfi:
Section 194LD: This is a new Section inserted in the Income-tax Act w.e.f. 01-06-2013. This Section provides that any person paying interest to a Foreign Institutional Investor (FII) or a Qualified Foreign Investor (QFI) in respect of the following investment shall deduct tax at source at the rate of 5% plus applicable surcharge and Education Cess.
(a) Interest on a Government Security
(b) Interest on a rupee denominated bond of an Indian Company, provided that the rate of interest does not exceed the rate notified by the Central Government.
It may be noted that consequential amendments have been made in Sections 115A, 115AD, 195 and 196D. However, no consequential amendment is made in Section 206AA and, therefore, in the case of any FII or QFI, if PAN is not furnished tax will be deductible @ 20% plus applicable surcharge and Education Cess.
3.4 Section 206AA: This section is amended w.e.f. 01-06-2013. By this amendment, it is now clarified that in respect of interest paid to a non-resident or a foreign company on long term infrastructure bonds issued by an Indian Company in foreign currency as provided in section 194LC, the provisions of section 206AA will not apply from 01-06 -2013. Therefore, if such foreigner lender does not furnish PAN, the tax will be deducted at 5% plus applicable surcharge and Education Cess u/s. 194LC and not at the rate of 20% as provided in section 206AA.
It is surprising that similar concession is not given u/s. 206AA to tax deductible u/s. 194LD as discussed in Para 3.3 above.
3.5 Section 206C – Tax collection at source (TCS)
This section was amended last year w.e.f. 01-07-2012 by inserting s/s. (1D) in section 206C providing for TCS @ 1% of the sale consideration for bullion purchased by a buyer if the consideration exceeded Rs. 2 lakh and was paid in cash by the buyer. It was provided that for this purpose, the term “Bullion” shall not include any coin or any other article weighing 10 grams or less. This provision is now amended by the Finance Act, 2013, and it is provided that w.e.f. 01-06-2013, the exemption given from TCS provision to a coin or other article of bullion weighing 10 grams or less shall not be available. Therefore, tax will have to be collected @ 1% if the buyer of bullion (including any coin or other article) pays amount exceeding Rs. 2 lakh in cash.
4. Exemptions and Deductions:
4.1 Agricultural Land Section 2(1A) and 2(14):
These two sections of the Income tax Act have been amended w.e.f. A.Y. 2014-15.
(i) Section 2(14) defines the term “Capital Asset”.
As per the provisions of the section before the amendment, agricultural land situated within the jurisdiction of a Municipality, Cantonment Board etc. having population of more than 10,000 was considered as a Capital Asset. Similarly, agricultural land situated within the distance (not exceeding 8 kms) from the local limits of a Municipality, Cantonment Board etc. as notified was also considered as Capital Asset.
(ii) Section 2(14) has now been amended to provide that the agricultural land situated in any area within the following distance, measured aerially, from the local limits of any Municipality, Cantonment etc. shall be considered as a Capital Asset.
(a) Within 2 kms having population of more than 10,000 but less than 1 lakh;
(b) Within 6 kms having population of more than 1 lac but less than 10 lakh;
(c) Within 8 kms having population of more than 10 lakh.
In other words, agricultural land situated outside the above territory will not be considered as Capital Asset u/s. 2(14).
(iii) The population for the above purpose is defined to mean population according to the last preceding census of which the relevant figures have been published before the first day of the Financial Year. The distance for the above purpose is to be measured “aerially”. This provision appears to have been made to settle the controversy about the method of measurement. In the case of CIT vs. Satinder Pal Singh 188 Taxman 54 (P&H) it was held that the distance should be measured by approach road and not by a straight line distance on a horizontal plane.
(iv) Section 2(1A) has similarly been amended w.e.f. A.Y. 2014-15.
Income derived from any building and situated in the immediate vicinity of the agricultural land is presently exempt as agricultural income, subject to certain conditions u/s. 2(1A). By amendment of this section, it is now provided that income from such building falling within the area specified in (ii) above will not qualify for exemption as agricultural income.
4.2 Keyman Insurance Policy – Section 10(10D)
(i) Section 10(10D) grants exemption to any sum received under a life insurance policy, subject to certain conditions. Amount received on maturity of Keyman Insurance Policy is not exempt u/s. 10(10D). There was a controversy whether the Keyman Insurance Policy assigned to the beneficiary continues to be a Keyman Insurance Policy. Delhi High Court held in the case of CIT vs. Rajan Nanda 349 ITR 8 that the Keyman Insurance Policy becomes an ordinary policy on the life of the beneficiary on assignment and therefore the amount received under this policy will be exempt if other conditions of section 10(10D) are complied with. To overcome this decision, Explanation 1 to the section is now amended w.e.f. A.Y. 2014-15 to provide that the Keyman Insurance Policy which has been assigned to the beneficiary during its term, with or without consideration, will be considered to be a Keyman Insurance Policy u/s. 10(10D) and exemption under that section will not be available in respect of the amount received on maturity. It may be noted that for A.Y. 2013-14 and earlier years the exemption can be claimed on the basis of Delhi High Court decision in the case of CIT vs. Rajan Nanda 349 ITR 8.
(ii) One of the conditions for granting exemption provided in section 10(10D)(d) is that the annual premium payable in respect to a life insurance policy should not exceed 10% of capital sum insured. This percentage of the premium is increased to 15% in the case of insurance policy issued on or after 01-04-2013 on the life of (a) a person with disability stated in section 80U or (b) a person who is suffering from a disease or ailment specified u/s. 80DDB. Consequential amendment is made in section 80C also.
4.3 Securitisation Trusts: New Sections 10(23DA), 10(35A), 115TA to 115TC
(i) New Scheme for taxation of Income of Securitisation Trust (Trust) has been introduced from A.Y. 2014-15. For this purpose, new sections 10(23D), 10(35A), 115TA, 115TB and 115TC have been added. The terms “Securitisation Trust”, “Securities”, “Securitised Debt Instrument”, “Instruments” “Investor” and “Special Purpose Vehicle” are defined in section 115TC. These terms have the same meaning as given to them in SEBI (Public Offer and
Listing of Securitised Debt Instruments) Regulations, 2008 or the Guidelines on the securitisation of standard assets issued by RBI.
(ii) Under the new scheme the provisions can be summarised as under:
(a) Any income of the Trust from the activity of securitisation will be exempt from tax u/s. 10(23DA);
(b) Income received by the Investor holding any securitised debt instrument or securities issued by the Trust will be exempt in the hands of the Investor u/s. 10(35A);
(c) Trust will be liable to pay at the following rates on the income distributed to the investor u/s. 115TA.
• In the case of Individual or HUF – 25% Income tax plus applicable surcharge and Education Cess;
• In the case of others – 30% Income tax plus applicable surcharge and Education Cess;
• In the case of a person who is not liable to pay tax on such income – No tax is payable by the Trust.
The provisions for payment of the above tax on income distributed to Investors are contained in section 115TA to 115TC. These provisions are similar to tax payable on distribution of dividend by a company and tax payable on distribution of income by a Mutual Fund.
(iii) Section 115TA also provides for filing of Statement of income distributed and tax paid thereon, charging of interest for the delayed payment of tax and treating a person responsible for compliance with these provisions as an assessee in default for the non-compliance with provisions of sections 115TA to 115TC.
(iv) If one compares the existing provisions with the above new scheme, it will noticed that under the above scheme the total tax liability of the trust and Investors, put together, will be more.
4.4 Investor Protection Fund: New Section 10(23ED)
This is a new section inserted w.e.f. A.Y. 2014-15. This section grants exemption to any income, by way of contribution received from a Depository by an Investor Protection Fund (Fund) set up in accordance with the regulations notified by the Central Government. It may be noted that Depositories (NSDL or CDSL) are required to set up Investor Protection Fund as provided in SEBI (Depositories and Participants) Regulations, 1996. The above exemption is now provided to the Fund in respect of contribution by the Depository. It is also provides that if the Fund shares any amount with the Depository in any year, out of such exempt income, the amount so shared will be taxable in its hands. This section is on the same lines as section 10(23EA) which grants exemption to amount contributed by a recognised Stock Exchange to its approved Investor Protection Fund.
4.5 Venture Capital Fund: Section 10(23FB):
This section provides for exemption to any income of Venture Capital Company (VCC) and Venture Capital Fund (VCF) from investment in Venture Capital Undertaking (VCU). Essentially, this section treats VCC and VCF as pass-through entities. U/s. 10(23FB), the income of VCC and VCF is exempt but is taxable directly in the hands of investors in these entities u/s. 115U. The SEBI (VCF) Regulations, 1996, have been replaced by the SEBI (Alternative Investment Funds) Regulations, 2012 w.e.f. 12-05-2012. By amendment of Section 10(23FB), w.e.f. A.Y. 2013-14, the existing explanation has been substituted to provide as under:
(i) The pass-through status can be enjoyed by VCC and VCF that has been granted registration as category I Alternative Investment Fund;
(ii) VCC and VCF registered and governed by old VCF Regulations will continue to enjoy the pass through status;
(iii) VCC/VCF will have to comply with the conditions stated in the Explanation. Shares of the VCC and Units of the VCF should not be listed on any recognised stock exchange. 2/3rd of the investible funds should be invested in unlisted equity shares or equity linked instruments of a VCU. Further, the VCC should not invest any funds in a VCU in which its directors and substantial shareholders (10% or more holding) hold more than 15% of paid-up equity share capital of the VCU. Similar conditions are provided for VCF also.
4.6 Section 10(48):
Under this section, any income received in India in Indian currency by a foreign company on account of sale of crude oil to any person in India is exempt from tax, subject to certain conditions. The scope of this exemption is now expanded w.e.f. A.Y. 2014-15 and it is now provided that this exemption can be claimed by a foreign company in respect of income from sale to any person in India of crude oil, any other goods or rendering of services as may be notified by the Central Government.
4.7 New Section 10(49):
This new Section is inserted in the Income -tax Act to provide for exemption from tax to any income of the National Financial Holding Company Ltd., a company set up by the Central Government on 07-06-2012. This exemption is granted for A.Y. 2013-14 and for subsequent years.
4.8 Recognised Provident Fund:
One of the conditions in Schedule IV – Proviso to Rule 3 of Part A is that a Provident Fund will be considered as recognised under the Income tax Act only if the establishment for which the Provident Fund is set up is also exempted u/s. 17 of the P.F. Act. The date for obtaining such exemption under the P.F. Act which expired on 31-03-2013 under Rule 3 has now been extended by amendment of Rule 3 to 31-03-2014.
4.9 Rajiv Gandhi Equity Savings Scheme (RGESS): Section 80CCG:
At present, a resident individual, who is a first time retail investor, investing in listed equity shares under RGESS Scheme, is allowed a one time deduction of 50% of the eligible investment upto Rs. 50,000/- in the A.Y. 2013-14. Thus, the maximum deduction allowable under this section is Rs. 25,000/- if the gross total income of such individual does not exceed Rs. 10 lakh.
Now this section is amended w.e.f. A.Y. 2014-15 to provide as under:
(i) Limit of gross total income of the individual is increased from Rs. 10 lakh to Rs 12 lakh.
(ii) The scope of investment in eligible investment is extended to include listed units of an equity fund specified in RGESS. This includes investment in eligible shares, ETFs and Mutual Fund Units which has such eligible shares as the underlying assets.
(iii) The deduction upto Rs. 25,000/- (50% of investment upto Rs. 50,000/-) will now be available for each of the 3 consecutive assessment years beginning with the year in which such investment was first made.
(iv) There is a lock-in period of 3 years for such investment.
(v) If the prescribed conditions of RGESS are violated, the deduction originally granted will be deemed to be the income of the year in which such violation takes place.
4.10 Contribution to Health Scheme: Section 80D:
At present deduction u/s. 80D can be claimed in respect of premium on Mediclaim Policy upto Rs. 15,000/- (Rs. 20,000/- for Senior Citizens) by an individual or an HUF. Such deduction is also allowable for any contribution made to the Central Government Health Scheme or for preventive health check-up subject to the above limit. By amendment of this section the above benefit is now extended w.e.f. A.Y. 2014 -15 to contribution to such other Health Schemes as may be notified by the Central Government.
4.11 Additional Deduction for Interest on Housing Loans: Section 80EE:
This is a new section inserted in the Income tax Act w.e.f. A.Y. 2014-15. Under this section, one time deduction upto Rs. 1,00,000/- will be allowed to an individual for interest paid on Housing Loan taken for acquiring a residential house. This deduction will be over and above the deduction allowed for interest paid for the housing loan u/s. 24(b) of the Income-tax Act. This deduction can be claimed subject to following conditions.
(i) Housing Loan should be taken from a Bank, Financial Institution or a Housing Finance Company as defined in Section 80EE (5);
(ii) Housing Loan should have been sanctioned between 01-04-2013 to 31-03-2014;
(iii) Housing Loan sanctioned should not exceed Rs. 25 lakh;
(iv) The value of the residential house should not exceed Rs. 40 lakh;
(v) The individual claiming this deduction should not own any residential house on the date of sanction of the housing loan;
(vi) If the interest payable on the above loan, in A.Y. 2014-15, is less than Rs. 1,00,000/-, the assessee can claim deduction for the balance amount paid in A.Y. 2015-16. In other words, deduction allowable for interest on the housing loan in the A.Y. 2014-15 and 2015-16 cannot exceed Rs. 1,00,000/-.
It may be noted that this deduction cannot be claimed by an HUF. Further, there is no condition that the residential house should be self occupied. The assessee can let out the residential house. It also appears that if a residential house is purchased by two or more co-owners, each co-owner can claim the deduction for interest under this section against his share of income from the joint property.
4.12 Donation u/s. 80G:
This section is amended w.e.f. A.Y. 2014-15. At present, donation to National Children’s Fund is eligible for deduction u/s. 80G at the rate of 50% of the amount of the donation. This section is now amended to provide that 100% of the donation to National Children’s Fund made on or after 01-04-2013 will be eligible for deduction u/s. 80G.
4.13 Donation to Political Parties: Sections 80GGB and 80GGC.
These two sections provide for deduction from gross total income of 100% of the amount donated by any company, individual, HUF, firm, LLP or other specified persons to recognised Political Parties or Electoral Trusts. Now, it is provided, by amendment of these sections, that no such deduction will be allowed if such donation is made in cash on or after 01-04-2013. It may be noted that in sections 80G and 80GGA donation to approved trusts can be made in cash upto Rs. 10,000/-. So far as Political Donations are concerned, it is now provided that no cash donations will be eligible for deduction under the above sections.
4.14 Power Sector undertakings: Deduction u/s. 80IA.
This section provides for deduction of income of certain undertakings. This includes undertaking which commences its business of generation and/or distribution, transmission or distribution of power, or substantial renovation and modernisation of the existing transmission or distribution lines on or before 31-03-2013. By amendment of this section, the above time limit for commencement of business by such an undertaking is extended upto 31-03-2014.
4.15 Additional deduction for wages paid to New Workmen: Section 80JJAA:
Under the existing section, deduction is allowed to an Indian Company of an additional amount equal to 30% of the wages paid to new regular workmen employed by the Company in an industrial undertaking engaged in the manufacture or production of an article or thing, subject to certain conditions specified in this section.
This section is amended w.e.f. A.Y. 2014-15 to provide as under:
(i) Now the above deduction can be claimed by an Indian company only if it is deriving income from the manufacture of goods in a factory. For this purpose, the word “Factory” shall have the same meaning as in section 2(m) of the Factories Act, 1948;
(ii) The new regular workmen should be employed by the company in such factory;
(iii) This deduction can be claimed by the company in the year in which appointment is made and for two subsequent assessment years;
(iv) Such deduction is not allowable to the company in case the factory is hived off, transferred from another existing entity or acquired as a result of an amalgamation.
5. Income from Business or Profession:
5.1 Investment Allowance: New Section 32AC: This is a new section inserted in the Income tax Act w.e.f. A.Y. 2014- 15. The section provides for a one time deduction (Investment Allowance) to a company. This deduction can be claimed if the following conditions are complied with:
(i) This deduction can be claimed by a company engaged in the business of manufacture or production of any article or thing.
(ii) Such a company should acquire and install specified new asset between 1-4-2013 to 31-3-2015 for an aggregate cost exceeding Rs. 100 crore. If the specified new asset is acquired before 1-4-2013, this deduction cannot be claimed.
(iii) The above deduction is allowable at the rate of 15% of the actual cost of the specified new asset acquired and installed during the accounting year 2013-14 (A.Y. 2014-15) if the actual cost of such asset exceeds Rs. 100 crore. If such actual cost is less than Rs. 100 crore no deduction will be allowed in A.Y. 2014-15.
(iv)The company can claim deduction of 15% of the actual cost of such new asset acquired and installed during accounting year 2014-15 (A.Y. 2015-16) if the aggregate cost of the new asset during the period 1-4-2013 to 31-3-2015 exceeds Rs. 100 crore.
In other words, deduction of 15% can be claimed as under:
(vi) This being a special incentive for encouraging industrial companies which invest more than Rs. 100 crore in specified new assets, the amount of deduction allowed is not to be deducted from W.D.V. of the block of assets.
(vii) Further, this deduction is not for depreciation and, therefore, for the purpose of carry forward of losses, it will form part of business loss and not “unabsorbed depreciation”.
(viii) Since no provision for this deduction of 15% (investment allowance) is required to be made in the books of the company, deduction for this amount cannot be claimed for computation of Book Profits u/s. 115 JB.
(ix) For the purpose of this section, specified new asset means new plant and machinery. This will not include (a) ship or aircraft, (b) second hand plant and machinery (whether imported or not), (c) plant and machinery installed in office premises or residential premises (including guest house), (d) office appliances, (including computers or computer software), (e) vehicles, and (f) plant and machinery in respect of which 100% deduction by way of depreciation or otherwise is allowed in any previous year. It may be noted that intangible assets are not excluded from the definition of specified new asset. Therefore, any intangible asset attached to a plant and machinery can be considered as a specified new asset.
(x) It may be noted that this deduction will not be allowable to companies engaged in the business of hotel, hospital, road, bridge and other construction businesses.
(xi) There is a lock-in period of 5 years for the above specified new assets. If such asset is sold or transferred within 5 years of the date of installation, then the amount allowed as deduction in the earlier years will be taxable as profit or gain from business in the year of such sale or transfer. This will be in addition to the taxability of capital gains (if any) arising on such sale or transfer of such assets.
(xii) The above provision of lock-in period as stated in (xi) above, will not apply if the transfer of such asset is as a result of an amalgamation or a demerger. However, the Amalgamated Company or the Resulting Company will have to ensure that such new asset is not sold or transferred by it within 5 years from the date of installation by the Amalgamating Company or the Demerged Company.
5.2 Deduction of Bad/Doubtful Debts to Indian Banks: Section 36(1)(vii) and 36(1)(viia) – (i) Under the existing provisions of section 36(1)(viia), banks and financial institutions, depending upon their categories, are entitled to claim deduction for provision for bad and doubtful debts made for Urban and Rural Branches at specified rates. Similarly, a bank/financial institution is also entitled to claim deduction for bad debts actually written off u/s. 36(1)(vii) to the extent it is in excess of the credit balance in Provision for Bad and Doubtful Debts A/c made u/s. 36(1)(viia). Some doubts had arisen about the interpretation of the provisions of these two sections. In the case of Catholic Syrian Bank Ltd v/s CIT 343 ITR 270 the Supreme Court held that banks are entitled to full benefit of write off bad debts, written off u/s. 36(1)(vii) in addition to the deduction for the provision for bad and doubtful debts made u/s. 36(1)(viia). It is also held that, in the case of rural advances, there will be no double deduction for provision made u/s. 36(1)(viia). The proviso to section 36(1)(vii) limits its application to the bank which has made such provision u/s.6(1)(viia). The provision of section 36(1)(vii) and 36(1)(viia) and 36(2)(V) should be construed together. Thus, they form a complete scheme for deduction and prescribe the extent to which deduction is available to banks.
(II) For removal of doubts, section 36(1)(vii) has been amended from A.Y. 2014-15 by adding an Explanation that for the purpose of proviso to this section, the account referred to therein shall be only one account in respect of provision for doubtful debts u/s. 36(1)(viia). In other words, no distinction will be made for provision for urban and rural advances made u/s. 36(1)(viia). Therefore, in such cases, the amount of deduction in respect of bad debts u/s. 36(1)(vii) shall be limited to the amount by which the same exceeds the credit balance of the provision made u/s. 36(1)(viia).
5.3 Commodities Transaction Tax (CTT): Section 36(1) has been amended from A.Y. 2014-15 and it is now provided in section 36(1)(xvi) that the amount equal to CTT paid by the assessee in respect of the taxable commodities transactions entered by it in the course of its business will be allowed as its business expenditure.
5.4 Disallowance of certain payments by State Government Undertakings: Section 40(a)(iib) -This new clause has been added in section 40(a) from A.Y. 2014-15. Disputes had arisen in income tax assessments of some State Government Undertakings (SGU) as to whether any amount paid by SGU to the State Government by way of Royalty, Licence Fees, Service Fee, Privilege Fee, Service charges or any similar Fee/charge is deductible as business expenditure. It is now provided by this amendment that any such fee or charge which is levied exclusively on the SGU or is directly or indirectly appropriated from the SGU by the State Government will not be allowed as business expenditure to SGU. For this purpose, Explanation to the section defines SGU. (It includes a company in which the State Government has more than 50% of equity).
5.5 Commodity Derivative Transactions:
Section 43(5) – This section defines a “Speculative Transaction”. At present, it excludes from this definition certain transactions, including eligible transactions in respect of derivative transactions carried out in a recognised Stock Exchange. In view of introduction of MCX as a recognised association for commodities transactions, this section is now amended from A.Y. 2014-15 to provide that eligible transactions in Commodity Derivatives entered into through a recognised association will not be considered as speculative transactions.
5.6 Full value of consideration of Immovable Property held as Stock-in-Trade: New section 43CA
– (i) This new section is inserted from A.Y. 2014-15. Therefore, it will apply to real estate transactions entered into on or after 1st April, 2013. U/s. 50C, in the case of transfer of an immovable property (land, building or both) which is held by the seller as a capital asset, if the consideration is less than the market value adopted (assessed or assessable) for the purpose of payment of stamp duty, such stamp duty valuation is considered as the full value of the consideration u/s. 50C. Thus, the capital gain in the hands of the seller is computed on that basis as provided u/s. 50C. This provision was not applicable to immovable property held by the seller as stock-in-trade.
(ii) By introduction of this new section 43CA, it is now provided that the above concept of section 50C of adopting stamp duty valuation as full value of consideration will apply for computation of business income in the hands of seller who holds such property as stock-in-trade. The provisions of section 50C are made applicable w.e.f. 01-04-2013, to the extent applicable, to such transactions. This new provision will apply to Builders, Developers and Dealers engaged in real estate transactions. The provision will apply according to the method of accounting followed by the assessee. It may be noted that this new provision will not apply when the assessee makes a slump sale of the business as a going concern.
(iii) It is also provided in this Section that if there is a time gap between the date of the agreement of sale and the date of registration. The full value of the consideration will be determined with reference to the stamp duty valuation assessable on the date of the agreement of sale provided that full or part of the consideration stated in the agreement was paid, otherwise than in cash.
(iv) It may be noted that the definition of immovable property for the purpose of this section or section 50C does not include any right in the immovable property such as leasehold or tenancy right etc. If the assessee has booked a flat in a property under construction, the right to get possession of the flat is not covered under the section. However, when the property is constructed and the possession of the flat is taken, the section will apply with reference to the Agreement for sale when executed.
(v) It may be noted that section 56(2)(vii)(b) has been amended as discussed in Para 6 below. Effect of this amendment is that w.e.f. 01-04-2013, in the case of a purchaser of an immovable property, if the difference between the stamp duty valuation and the actual consideration paid as per the agreement of sale is more than Rs. 50,000/-, such difference will be considered as “income from other sources” in the hands of such purchaser. However, this provision will not apply if the purchase is from a relative as defined in Explanation to section 56(2)(vii). From this provision, it will be noticed the difference between the stamp duty valuation and actual consideration will be taxable in the hands of the seller as well as the purchaser if such difference exceeds Rs. 50,000/-.
6. Income from other sources: Section 56(2)(vii)(b) – (i) This section is amended from A.Y. 2014-15. This section provides for levy of tax on certain gifts received from non-relatives. This amendment comes into force in respect of transactions relating to purchase of immovable property i.e. land, building or both made on or after 01-04-2013. Prior to 31-03-2013, if an immovable property was received by an Individual or HUF from a non-relative, without consideration, the market value (based on the stamp duty valuation) on the date of the gift, if it exceeds Rs. 50,000/-, was treated as income from other sources in the hands of the assessee. There is no change in this provision. However, it is now provided, w.e.f. 01-04-2013, that if the purchase of an immovable property by an Individual or HUF is made for consideration which is less than the stamp duty valuation assessed or assessable by the stamp duty authorities, the difference will be taxable as income in the hands of the purchaser. This provision will apply only if such difference is more than Rs. 50,000/-.
(ii) It is now also provided by this amendment that if there is a time gap between the date of the agreement for purchase of the property and date of registration of the agreement, the stamp duty valuation assessable on the date of the agreement will be considered for this purpose. This concession will apply only if the full or part of the consideration stated in the agreement is paid by the purchaser by any mode other than cash before the date of registration.
(iii) For this purpose, the term “Immovable Property” is defined to mean “Land, Building or Both”. This will mean that any right in the immovable property will not be covered by this provision. Therefore, any tenancy right, leasehold right or similar right will not be considered as Immovable Property. If a flat in a building under construction is booked by the individual or HUF, the right to get possession of the flat will not be considered as purchase of immovable property under this section. Therefore, the consideration paid for this right as per the agreement will not be covered by this section.
(iv) If the stamp duty valuation is disputed, the provisions of section 50C for reference to Valuation
Officer will apply.
(v) It may be noted that if the difference between the stamp duty valuation and actual consideration exceeds Rs. 50,000/- tax will be payable on such notional amount by the seller as well as the purchaser under the following sections:
(a) In the case of the seller who is holding the immovable property as stock-in-trade as business income under new section 43CA – w.e.f. 01-04-2013.
(b) In the case of the seller who is holding the property as a capital asset, as capital gain u/s. 50C.
(c) In the case of Individual or HUF purchaser, under amended section 56(2)(vii)(b) – w.e.f. 01-04-2013 as income from other sources.
(vi) It may be noted that in the hands of the individual or HUF, if such property is held as “Capital Asset”, then such an assessee will be entitled to claim that the stamp duty valuation of the property adopted for taxation u/s. 56(2)(vii)(b) should be deemed to be the cost of acquisition of such property. To this extent there will be some deferred benefit to such individual or HUF. This benefit is provided u/s. 49(4). This benefit will not be available to a person who purchases an immovable property and treats it as stock-in-trade of his business.
(vii) It may be noted that amendment similar to what has been made, as stated above, in section 56(2)(vii)(b) was made in section 50(2)(vii)(b) by the Finance (no.2) Act, 2009, w.e.f. 01-10-2009. When it was pointed out to the Government that such a provision is unjust as both the seller and the purchaser of the immovable property will have to pay tax on this same notional addition, it was realised by the Government and in the Finance Act, 2010, this provision for levying tax on the purchaser was deleted with retrospective effect from 01-10-2009. This year the same amendment is made to tax the purchaser w.e.f. 01-04-2013, which has the effect of levying tax on the seller as well as the purchaser on the same notional addition. No reasons are given in the Explanatory Statement issued with the Finance Bill, 2013, for reintroducing this provision.
7. Buy-back of shares and Dividend Distribution Tax: Sections 10 (34A), 115-O, 115 QA to 115QC and 115R:
7.1 (i) At present, when a company buys back its shares from shareholders u/s. 77A of the Companies Act the shareholder is liable to pay tax u/s. 46A on the difference between the amount received from the company and the cost of acquisition of shares as provided u/s. 48 under the head “Capital Gains”. This provision will continue to apply in the case of shares which are listed if such buy back is not through a Recognised Stock Exchange.
(ii) A new section 115QA is inserted w.e.f. 01-06-2013 which provides as under.
(a) This section applies to buy back of shares which are not listed by a domestic company (whether public or private) u/s. 77A of the Companies Act on or after 01-06-2013.
(b) The consideration paid by the company to its shareholders for such buy-back of shares will now be liable to additional tax in the hands of the company at the rate of 20% plus 10% surcharge on tax (i.e. 2%) and 3% Education Cess on the tax (i.e. 0.66%) (Aggregate 22.66%). This tax is to be paid on the amount of such consideration after deduction of the amount received on the issue of such shares.
(c) The shareholder receiving this consideration on buy back of shares will not be liable to pay capital gains tax u/s. 46A as provided in the new section 10(34A) introduced w.e.f. A.Y. 2014-15.
(d) The above tax is to be deposited with the Government within 14 days of the payment of the consideration by the company to the shareholders.
(e) No credit for such tax can be claimed by the shareholder or the company against any tax liability.
(f) The above provision is on the same lines as Dividend Distribution Tax payable u/s. 115-0.
(iii) New section 115QB is also inserted to provide that interest at the rate of 1% p.m. for each month or part of the month shall be payable for the delay in payment of tax as required u/s. 115QA. Further, under new section 115QC provision is made for considering the company as assessee in default if it does not comply with the provisions of section 115QA. These provisions are similar to existing sections 115P and 115Q.
(iv) In section 115QA, it is stated that from the consideration paid by the company for buy-back of shares, the amount received on issue of shares should be deducted and the tax @ 20% is to be paid on this net amount. The question for consideration is as to how the amount received on issue of shares will be worked out in the following cases:
(a) When shares are issued at a Premium.
(b) When shares are issued as Bonus shares.
(c) When shares are issued on conversion of debentures.
(d) When shares are issued to employees at concessional rate under ESOP scheme.
(e) When shares are issued at a discount or there is reduction in face value of shares to write off losses under a High Court Order.
(f) When shares are issued on amalgamation or on demerger.
In all the above cases, it will not be possible to determine the exact amount received on the issue of a particular share which the shareholder has offered for buy-back. This practical difficulty will have to be resolved by the tax authorities by a issuing a clarification.
(v) In the above scheme of taxation of the net consideration paid on buy-back of shares, it will be noticed that the tax is payable by the company. However, at present, the shareholder holding shares as a Capital Asset, is pays tax on such buy-back on the surplus, after the following deductions, under the head capital gains, at applicable rate.
(a) Actual cost of shares or Indexed cost (if long term asset) is deductible from the consideration.
(b) Set off of other capital loss or brought forward loss can be claimed against such capital gain.
(c) Benefit of deduction u/s. 54EC or 54F is available if the consideration is invested in Bonds or purchase of a residential house.
Taking into consideration the above, it will be noticed that incidence of tax under the new section 115QA will be higher as compared to the present provisions. In the case of a person holding such shares as stock-in-trade he will not get benefit of deduction of actual cost or set off of business losses or set off of carried forward losses.
7.2 Section 115-0: This section deals with Dividend Distribution Tax (DDT) payable by a Domestic company on dividend distributed by it. Section 115-0 (1A) has now been amended w.e.f. 01- 06-2013 to provide that no DDT will be payable on the amount relatable to dividend received from a foreign subsidiary company on which tax is paid by the domestic company at 15% u/s 115 BBD.
7.3 Section 115R: (i) This section deals with the payment of additional tax by a Mutual Fund (other than an equity oriented mutual fund) on the income distributed to the unit holders. This section is amended w.e.f. 01-06-2013. Hitherto such additional tax payable in respect of income distribution to Individual or HUF unit holders (excluding Money Market Fund or liquid fund) was 12.5%. Now from 1-6-2013 such tax will be payable by Mutual Fund at the rate of 25%. This will mean that the amount to be distributed to such unit holders will be reduced.
(ii) There is also an amendment in the section from 1-6-2013 to the effect that the rate of tax payable in the case of income distribution by an Infrastructure Debt Fund Scheme to a Non-Resident (including foreign company) unit holder shall be 5% only.
(iii) Surcharge at the rate of 10% of tax and Education Cess at the rate of 3% of tax will also be payable on the above tax.
8. Tax Residency Certificate for Non-Residents(TRC): Sections 90 and 90A
(i)These two sections empower the Central Government to enter into Agreements with any foreign country, Specified Territory or certain specified/Notified Associations in Specified Territories for avoidance of double taxation (DTAA). The Finance Act, 2012, had amended section 90 by insertion of sub- section (2A) w.e.f. 01-04-2013 to provide that the provisions of new sections 95 to 102 dealing with General Anti Avoidance Rule (GAAR) will be applicable even if the provisions of DTAA are more favourable to the assessee. In other words, where GAAR is invoked the assessee cannot seek protection of beneficial provision of DTAA. Similar amendment was also made in section 90A.
(ii) These two sections have now been amended to provide that section 90(2A) as well as 90A(2A) will now apply w.e.f. A.Y. 2016-17 because applicability of the provisions of sections 95 to 102 dealing with GAAR has now been postponed to A.Y. 2016-17.
(iii) (a) In section 90(4) as well as 90A(4), last year an amendment was made to provide that a Non Resident cannot claim benefit of DTAA unless Tax Residency Certificate in the form prescribed is obtained from the foreign country/specified territory with which India has entered into DTAA. In this certificate, such Foreign Country/Territory was required to certify the place of residence and such other particulars which the Indian Tax Department may require to decide where the benefit claimed under a particular DTAA is available to the Non Resident assessee.
(b) Some doubts were expressed about the effect of the amendment on the evidential value of TRC. Subsequently, the CBDT issued a press release clarifying the issue as under. “The Tax Residency Certificate produced by resident of contracting state will be accepted as evidence that he is a resident of that contracting state and the Income tax Authorities in India will not go behind the TRC and question his residential status.”
(c) To give effect to the above assurance section 90(4) as well as 90A(4) have been amended and the requirements about the Tax Residency Certificate containing the prescribed particulars about the assessee being resident of the contracting foreign country/specified territory has now been removed with retrospective effect i.e. A.Y. 2013-14. After removal of the above requirements s/s. (5) has been added in section 90 as well as 90A to provide that the Non-Resident which has obtained TRC from the foreign country/specified territory shall provide such other documents and information as may be prescribed. This amendment is made w.e.f. A.Y. 2013-14.
9. Taxation of Non-Residents: Sections 115A and 115AD
9.1 Section 115A: This section deals with tax on Dividends, Royalty and Technical Service Fees in the case of a Non-Resident. This section is amended w.e.f. A.Y. 2014-15 as under :
(i) It is now provided that the tax on interest referred to in section 194LD from Rupee Denominated Bonds of Indian Company as discussed in para 3.3 above will be payable @ 5% plus applicable surcharge and the Education Cess.
(ii) Under the existing section 115A(i)(b), the rate of tax on Royalty and Fees for Technical services is 10%. With effect from 1-4-2013 (A.Y. 2014-15) that rate is increased to 25% plus applicable surcharge and the Education Cess.
9.2 Section 115AD : This section deals with taxation of Foreign Institutional Investors. By an amendment of this section, w.e.f. A.Y. 2014-15, it is now provided that the tax on interest referred to in section 194LD from Rupee Denominated Bonds of an Indian company, as discussed in para 3.3 above, will be payable @ 5% plus applicable surcharge and the Education Cess.
10. General Anti-Avoidance Rule (GAAR)
10.1 This was a new concept introduced in the Income tax Act by the Finance Act, 2012. Very wide powers were given to the tax authorities by these provisions. In new Chapter X–A, sections 95 to 102 were inserted. In para 154 of the Budget Speech, while introducing the Finance Bill, 2012, the Finance Minister had stated that “I propose to introduce a General Anti-Avoidance Rule (GAAR) in order to counter aggressive tax avoidance schemes, while ensuring that it is used only in appropriate cases, enabling review by a GAAR panel.”
10.2 The reasons for introducing GAAR provisions in the Income tax Act were explained in the Explanatory Notes attached to the Finance Bill, 2012 as under:
“The question of substance over form has consistently arisen in the implementation of taxation laws. In the Indian context, judicial decisions have varied. While some courts in certain circumstances had held that legal form of transactions can be dispensed with and the real substance of the transaction can be considered while applying the taxation laws, others have held that the form is to be given sanctity. The existence of anti-avoidance principles are based on various judicial pronouncements. There are some specific anti-avoidance provisions but general anti-avoidance has been dealt only through judicial decisions in specific cases.
In an environment of moderate rate of tax, it is necessary that the correct tax base be subject to tax in the face of aggressive tax planning and use of opaque law tax jurisdictions for residence as well as for sourcing capital. Most countries have codified the “substance over form” doctrine in the form of General Anti Avoidance Rule (GAAR).
In the above background and keeping in view of the aggressive tax planning with the use of sophisticated structures, there is a need for statutory provisions so as to codify the doctrine of “substance over form” where the real intention of the parties and effect of transaction and purpose of an arrangement is taken into account for determining the tax consequences, irrespective of the legal structure that has been superimposed to camouflage the real intent and purpose. Internationally several countries have introduced, and are administering statutory General Anti Avoidance Provisions. It is, therefore, important that Indian taxation law also incorporates a statutory General Anti Avoidance Provisions to deal with aggressive tax planning. The basic criticism of statutory GAAR which is raised worldwide is that it provides a wide discretion and authority to the tax administration which at times is prone to be misused. This vital aspect, therefore, needs to be kept in mind while formulating any GAAR regime.”
10.3 There was large scale opposition to the introduction of this provision in the form suggested in the Finance Bill, 2012, and the DTC Bill, 2010, pending consideration of the Parliament. This opposition was voiced by various Trade and Industry bodies in India and abroad. The Finance Minister responded to the various suggestions made by members of the Parliament and various Trade and Industry bodies while replying to the debate in the Parliament on 7th May 2012, in the following words.
“Certain provisions relating to a General Anti-Avoidance Rules (GAAR) have also been proposed in the Finance Bill, 2012. After examining the recommendations of the Standing Committee on GAAR provisions in the DTC Bill, 2010, I propose to amend the GAAR provisions as follows:
(i) Remove the onus of proof entirely from the tax payer to the Revenue Department before any action can be initiated under GAAR.
(ii) Introduce an independent member in the GAAR approving panel to ensure objectivity and transparency. One member of the panel now would be an officer of the level of Joint Secretary or above from the Ministry of Law.
(iii) Provide that any tax payer (resident or non-resident) can approach the Authority for Advances Ruling (AAR) for a ruling as to whether an arrangement to be undertaken by the assessee is permissible or not under the GAAR provisions.
To provide greater clarity and certainty in the matters relating to GAAR, a Committee has been constituted under the Chairmanship of the Director General of Income Tax (International Taxation) to give recommendations for formulating the rules and guidelines for implementation of the GAAR provisions and to suggest safeguards so that these provisions are not applied indiscriminately. The Committee has already held several rounds of discussion with various stakeholders including the Foreign Institutional Investors. The Committee will submit its recommendations by 31st May, 2012.
To provide more time to both tax payers and the tax administration to address all related issues. I propose to defer the applicability of the GAAR provisions by one year. The GAAR provisions will now apply to Income of Financial Year 2013-14 and subsequent years.”
10.4 For the reasons stated above, special provisions relating to GAAR were made in sections 95 to 102 in the Income tax Act from A.Y. 2014-15 (Accounting Year ending 31-3- 2014) and onwards. These provisions applied to all assesses (Residents or Non-Residents) in respect of their transactions in India as well as abroad. Wide powers were given to the tax authorities to disregard any agreement, arrangement or any claim for expenditure, deduction or relief.
10.5 The GAAR provisions contained in sections 95 to 102 (chapter X-A) and in section 144-BA which were introduced by the Finance Act, 2012, w.e.f. A.Y. 2014-15 have now been withdrawn and replaced by another set of provisions in new chapter X-A (sections 95 to 102) and new section 144-BA by the Finance Act, 2013, w.e.f. A.Y. 2016-17 (Accounting year 01-04-2015 to 31-03-2016).
10.6 In para 150 of the Budget Speech while introducing the Finance Bill, 2013, the Finance Minister has stated as under:
“150. Hon’ble Members are aware that the Finance Act, 2012 introduced the General Anti Avoidance Rules, for short, GAAR. A number of representations were received against the new provisions. An expert committee was constituted to consult stakeholders and finalise the GAAR guidelines. After careful consideration of the report, Government announced certain decisions on 14-01-2013 which were widely welcomed. I propose to incorporate those decisions in the Income tax Act. The modified provisions preserve the basic thrust and purpose of GAAR. Impermissible tax avoidance arrangements will be subjected to tax after a determination is made through a well laid out procedure involving an assessing officer and an Approving Panel headed by the Judge. I propose to bring the modified provisions into effect from 01-04-2016.”
10.7 In the Explanatory Statement presented with the Finance Bill, 2013, the reasons for introducing the new provisions are explained as under:
“The General Anti Avoidance Rule (GAAR) was introduced in the Income tax Act by the Finance Act, 2012. The substantive provisions relating to GAAR are contained in Chapter X-A (consisting of section 95 to 102) of the Income tax Act. The procedural provisions relating to mechanism for invocation of GAAR and passing of the assessment order in consequence thereof are contained to section 144 BA. The provisions of Chapter X-A as well as section 144 BA would have come into force with effect from 1st April, 2014.
A number of representations were received against the provisions relating to GAAR. An Expert Committee was constituted by the Government with broad terms of reference including consultation with stakeholders and finalizing the GAAR guidelines and a road map for implementation. The Expert Committee’s recommendations included suggestions for legislative amendments, formulation of rules and prescribing guidelines for implementations of GAAR. The major recommendations of the Expert Committee have been accepted by the Government, with some modifications. Some of the recommendations accepted by the Government require amendment in the provisions of Chapter X-A and section 144 BA.”
GaarProvisions
10.8 In view of the above discussion, the existing sections 95 to 102 and 144BA have been now deleted. New set of Sections 95 to 102 and 144BA have been inserted in the Income tax Act w.e.f. F.Y.: 2015-16 (A.Y. 2016-17). These new provisions are discussed below broadly.
10.9 Section 95 : This section provides that an arrangement entered into by an assessee may be declared to be an impermissible avoidance arrangement. The tax arising from such declaration by the tax authorities, will be determined subject to provisions of sections 96 to 102. It is also stated in this section that the provisions of sections 96 to 102 may be applied to any step or a part of the arrangement as they are applicable to the entire arrangement.
10.10 Impermissible Avoidance Arrangement (Section 96) :
(i) Section 96 explains the meaning of Impermissible Avoidance Arrangement to mean an arrangement, the main purpose of which is to obtain a tax benefit and it –
(a) Creates rights or obligations which would not ordinarily be created between persons dealing at arm’s length.
(b) Results, directly or indirectly, in misuse or abuse of the provisions of the Income-tax Act.
(c) Lacks commercial substance, or is deemed to lack commercial substance u/s. 97, in whole or in part, or
(d) is entered into or carried out, by means, or in a manner, which are not ordinarily employed for bonafide purposes.
(ii) An arrangement whereby there is any tax benefit to the assessee shall be presumed to have been entered into or carried out for the main purpose of obtaining tax benefits, unless the assessee proved otherwise. It will be noticed that this was a very heavy burden cast on the assessee. The Finance Minister has, however, declared on 07-05-2012 that the onus of proof will be on the department who has to establish that the arrangement is to avoid tax before initiating the proceedings under these provisions.
10.11 Lack of Commercial Substance (Section 97) :
(i) Section 97 explains the concept of Lack of Commercial Substance in an arrangement entered into by the assessee. It states that an arrangement shall be deemed to lack commercial substance if:
(a) The substance or effect of the arrangement, as a whole, is inconsistent with, or differs significantly from, the form of its individual steps or a part of such steps; or
(b) It involves or includes:
– Round Trip Financing
– An accommodating party.
– Elements that have the effect of offsetting Or cancelling each other; or
– A transaction which is conducted through one or more persons and disguises the value, location, source, ownership or control of funds which is the subject matter of such transaction.
(ii) It involves the location of an asset or a transaction or the place of residence of any party which is without any substantial commercial purpose. In other words, the particular location is disclosed only to obtain tax benefit for a party, or
(iii) It does not have a significant effect upon the business risks or net cash flows of any party to the arrangement apart from any effect attributable to the tax benefit that would be obtained.
(iv) For the above purpose, it is provided that round trip financing includes any arrangement in which through a series of transactions –
(a) Funds are transferred among the parties to the arrangement, and,
(b) Such transactions do not have any substantial commercial purpose other than obtaining tax benefit.
(iii) It is further stated that the above view will be taken by the tax authorities without having regard to the following:
(a) Whether or not the funds involved in the round trip financing can be traced to any funds transferred to, or received by, any party in connection with the arrangement.
(b) The time or sequence in which the funds involved in the round trip financing are transferred or received, or
(c) The means by, manner in, or mode through which funds involved in the round trip financing are transferred or received.
(iv) The party to such an arrangement shall be treated as “Accommodating Party” whether or not such party is connected with the other parties to the arrangement, if the main purpose of, direct or indirect tax benefit under the Income tax Act.
(v) It is clarified in the section that the following factors may be relevant but shall not be sufficient for determining whether the arrangement lacks commercial substance.
(a) The period or the time for which the arrangement exists
(b)The fact of payment of taxes, directly or indirectly, under the arrangement.
(c) The fact that an exit route, including transfer of any activity, business or operations, is provided by the arrangement.
10.12 Consequence of Impermissible Avoidance Arrangement (Section 98) :
Under the newly inserted section 144BA, the Commissioner has been empowered to declare any arrangement as an impermissible avoidance arrangement. Section 98 states that if an arrangement is declared as impermissible, then the consequences, in relation to tax or the arrangement shall be determined in such manner as is deemed appropriate in the circumstances of the case. This will include denial of tax benefit or any benefit under applicable DTAA. The following is the illustrative list of consequences and it is provided that the same will not be limited to the list.
(i) Disregarding, combining or re-characterising any step in, or part or whole of the impermissible avoidance arrangement;
(ii) Treating, the impermissible avoidance arrangement as if it had not been entered into or carried out;
(iii) Disregarding any accommodating party or treating any accommodating party and any other party as one and the same person;
(iv) Deeming persons who are connected persons in relation to each other to be one and the same person;
(v) Re-allocating between the parties to the arrangement, (a) any accrual or receipt of a capital or revenue nature or (b) any expenditure, deduction, relief or rebate;
(vi) Treating (a) the place of residence of any party to the arrangement or (b) situs of an asset or of a transaction at a place other than the place or location of the transaction stated under the arrangement.
(vii) Considering or looking through any arrangement by disregarding any corporate structure.
(viii) It is also clarified that for the above purpose that tax authorities may re-characterise (a) any equity into debt or any debt into equity, (b) any accrual or receipt of Capital nature may be treated as of revenue nature or vice versa or (c) any expenditure, deduction, relief or rebate may be recharacterised.
10.13 Section 99 : This section provides for treatment of connected persons and accommodating party.
The section provides that for the purposes of sections 95 to 102, for determining whether a tax benefit exists –
(i) The parties who are connected persons, in relation to each other, may be treated as one and same person.
(ii) Any accommodating party may be disregarded.
(iii) Such accommodating party and any other party may be treated as one and same person.
(iv) The arrangement may be considered or looked through by disregarding any corporate structure.
10.14 It is further provided in section 100 that the provisions of sections 95 to 102 shall apply in addition to, or in lieu of, any other basis for determination of tax liability. Section 101 gives power to CBDT to prescribe the guidelines and lay down conditions for application of sections 95 to 102 relating to General Anti-Avoidance Rules (GAAR). Let us hope that these guidelines will specify the type of arrangements and transactions in relation to which alone the tax authorities have to invoke the provision of GAAR. Further, it is necessary to specify that if the tax benefit sought to be obtained by any arrangement is, say Rs. 5 crore or more in a year, then only the tax authorities will invoke these powers.
10.15 Section 102 : This section defines words or expressions used in sections 95 to 102 as stated above. Some of these definitions are as under:
(i) “Arrangement” means any step in, a part or whole of any transaction, operations, scheme, agreement or understanding, whether enforceable or not, and includes the alienation of any property in such transaction, operation, scheme, agreement or understanding.
(ii) “Connected Person”, in relation to a person who is an Individual, Company, HUF, Firm, LLP, AOP or BOI is defined in more or less the same manner as the term “Related Person” is defined in section 40A(2). It may be noted that, for this purpose, the definition of the word “Relative” is wider in as much as the definition of “Relative” given in Explanation to section 56(2)(vi) is adopted, whereas in section 40A(2) the narrower definition of “Relative” given in section 2(41) is adopted.
(iii) “Fund” includes (a) any cash, (b) cash equivalents and (c) any right or obligation to receive or pay in cash or cash equivalent.
(iv) “Party” means any person, including Permanent Establishment which participates or takes part in an arrangement.
(v) “Relative” has the same meaning as given in section 56(2)(vi) – Explanation. It may be noted that this definition is very wide as compared to the definition given in section 2 (41) which is adopted for the purpose of explaining related person in section 40 A (2).
(vi) The definition of a person having substantial interest in the company and other non-corporate bodies is the same as given in section 40A (2).
(vii) “Tax Benefit” includes (a) a reduction, avoidance or deferral of tax or other amount payable under the Income tax Act, (b) an increase in a refund of tax or other amount under the Act, (c) a reduction, avoidance or deferral of tax or other amount that would be payable under the Act, as a result of tax treaty, (d) an increase in a refund of tax or other amounts under the Act as a result of tax treaty, (e) a reduction in total income or (f) increase in loss in the relevant accounting year or any other accounting year.
(viii) “Tax Treaty” means Agreements entered into by the Government with any foreign country, territory or Association u/s. 90 or 90A.
10.16 Section 144 BA : Procedure for declaring an arrangement as impressible u/s. 95 to 102 is given in this section. This section will come into force from A.Y. 2016-17.
(i) The Assessing Officer can, at any stage of assessment or reassessment, make a reference to the Commissioner for invoking GAAR. On receipt of reference the Commissioner has to hear the tax payer. If he is not satisfied by the submissions of the taxpayer and is of the opinion that GAAR provisions are to be invoked, he has to refer the matter to an “Approving Panel”. In case the assessee does not object or reply, the Commissioner can issue such directions as he deems fit in respect of declaration as to whether the arrangement is an impermissible avoidance arrangement or not.
(ii) The Approving Panel has to dispose of the reference within a period of six months from the end of the month in which the reference was received from the Commissioner.
(iii) The Approving Panel can either declare an arrangement to be impermissible or declare it not to be so after examining material and getting further inquiry to be made. It can issue such directions as it thinks fit. It can also decide the year or years for which such an arrangement will considered as impermissible. It has to give hearing to the assessee before taking any decision in the matter.
(iv) The Assessing Officer (AO) can determine consequences of such a positive declaration of arrangement as impermissible avoidance arrangement.
(v) The final order, in case any consequences of GAAR are determined, shall be passed by the AO only after approval by Commissioner and, thereafter, first appeal against such order shall lie to the Appellate Tribunal.
(vi) The period taken by the proceedings before Commissioner and the Approving Panel shall be excluded from time limitation for completion of assessment.
(vii) The Central Government has to constitute one or more Approving Panels. Each Panel shall consist of 3 members, including a chairperson. The constitution of the Panel shall be as under.
(a) Chairperson – He shall be a sitting or retired judge of a High Court.
(b) Members – One member shall be IRS of the rank of CCIT or above.
– One member shall be an academic or scholar having special knowledge of matters such as direct taxes, business accounts and international trade practices.
The term of the Panel shall ordinarily be for one year and may be extended from time to time upto 3 years. The Panel shall have power similar to those vested in AAR u/s. 245U. CBDT has to provide office infrastructure, manpower and other facilities to the Approving Panel’s members. The remuneration payable to Panel members shall be decided by the Central Government.
(viii) In addition to the above, it is provided that the CBDT has to prescribe a scheme for efficient functioning of the Approving Panel and expeditious disposal of the references made to it.
(ix) Appeal against order of assessment passed under the GAAR provisions, after approval by the appropriate authority, is to be filed directly with the ITA Tribunal and not before CIT(A). Section 144C relating to reference before DRT does not apply to such assessment order and, therefore, no reference can be made to DRT when GAAR provisions are invoked.
10.17 The above GAAR provisions will have far reaching consequences for assessees engaged in the business with Indian or Foreign parties. GAAR is not restricted to only business transactions. Therefore, all assessees who are engaged in business or profession or who have no income from business or profession will be affected by these provisions. It appears that any assessee having any arrangement, agreement, or transaction with a connected person will have to take care that the same is at Arm’s Length Consideration. In particular, an assessee will have to consider the implications of GAAR while (a) executing a WILL or Trust, (b) entering into a partnership or forming an LLP, (c) taking controlling interest in a company, (f) entering into amalgamation of two or more companies, (c) effecting demerger of a company, (f) entering into a consortium or joint venture, (g) entering into foreign collaboration, or (h) acquiring an Indian or Foreign company. It may be noted that this is only an illustrative list and there may be other transactions which may attract GAAR provisions.
10.18 From the wording of the above provisions of sections 95 to 102 and 144BA it appears that the provisions of GAAR can be invoked even in respect of an arrangement made prior to 01-04-2015. The CIT or the Approving Panel can hold any such arrangement entered into prior to 01-04-2015 as impermissible and direct the AO to make adjustments in the computation of income or tax in the assessment year 2016-17 or any year thereafter. As stated in para 15.15 of the report of the Standing Committee on Finance on the DTC Bill, 2010 it would be fair to apply GAAR provisions prospectively so that it is not made applicable to existing arrangements/transactions. Even in the Press Note issued by the Central Government on 14-01-2013 it was stated that transactions entered into prior to 30-08-2010 will not made subject to GAAR provisions. This has not been provided in the above sections and, therefore, the above GAAR provisions will have a retrospective effect.
10.19 In section 101, it is stated that CBDT will issue guidelines to provide for the circumstances under which GAAR should be invoked. Let us hope that these guidelines will specify that GAAR provisions will apply to all arrangements or transactions entered into after 01-04-2015 and also the type of arrangements or transactions to which GAAR will apply. It is also necessary to specify that GAAR provisions will be invoked only if the tax sought to be avoided is more than Rs. 5 crore, in any one year. This is also suggested by the Standing Committee on Finance in their report on the DTC Bill, 2010. Even in the Press Note dated 14-01-2013, the Government had stated that there will be monetary threshold of Rs. 3 crore of tax benefit in a year for invocation of GAAR.
10.20 It may be noted that the above revised set of provisions for invoking of GAAR which will come into force on 01-04-2015 do not contain provisions relating to following decisions of the Government announced in the Government Press Note dated 14-1-2013.
(i) GAAR will not apply to an FII which does not avail treaty benefit.
(ii) GAAR will not apply to Non-Resident Investors in FII.
(iii) Where GAAR and SAAR are both in force, only one of them will apply subject to prescribed guidelines.
(iv) GAAR will be restricted to only “PART” of the arrangement which is impermissible and not to the whole arrangement.
Let us hope that these issues will be considered when CBDT issues the Guidelines for invocation of GAAR.
11. Assessments, Reassessments and Appeals:
11.1 Section 132B : This section, which deals with application of seized or requisioned assets, is amended w.e.f. 01 -06-2013. This section provides that the “existing liability” under the Income tax Act, Wealth tax Act, etc. and the amount of liability determined on completion of assessment under 153A and the assessment of the year relevant to the previous year in which search is initiated or requisition is made, or the amount of liability determined on completion of assessment for the block period (including any penalty levied or interest payable in connection with such assessment) may be recovered out of assets seized u/s. 132 or requisitioned u/s. 132A if such person is in default or is deemed to be in default. It was debatable as to whether the assets seized or requisitioned could be adjusted against advance tax payable. With effect from 01-06-2013, an Explanation 2 is inserted to this section to provide that the “existing liability” does not include advance tax payable in accordance with the provisions of the Income-tax Act.
11.2 Section 139(9) : This section explains when the return of income filed by the assessee u/s. 139 will be considered as defective. If these defects are not removed within the prescribed time, the A.O. will consider that the assessee has not filed the return. This section is now amended w.e.f. 01- 06- 2013. As per section 140A of the Act tax payable on the basis of return of income i.e. self assessment tax, along with interest payable, if any, is required to be paid by the assessee before furnishing the return of income. With effect from 1st June, 2013, non-payment of self assessment tax together with interest, if any, payable in accordance with the provisions of section 140A, before furnishing the return of income, shall make the return of income a defective return. This defect will have to be rectified on receipt of defect notice u/s. 139(9) within the prescribed time.
11.3 Section 142(2A) : This section empowers the CIT to order a Special Tax Audit of Accounts of the assessee in specified circumstances. At present, order for such audit can be passed having regard to the nature and complexity of the accounts of the assessee and taking into consideration the interest of the revenue. The scope of this section is now expanded w.e.f. 01-06-2013. By amendment of this section such order for Special Audit can be passed by the CIT having regard to –
(i) Volume of the accounts,
(ii) Doubts about the correctness of the accounts,
(iii) Multiplicity of transactions in the accounts and
(iv) Specialised nature of business activity of the assessee.
This new provision will cover a large number of assessees and although the accounts of large companies are audited by Statutory Auditors as well as Tax Auditors, they can be subjected to this Special Audit.
It may be noted that the CIT has to fix fees of the Chartered Accountant for such special audit on the basis of guidelines contained in Rule 14B and the same is payable by the Central Government.
11.4 Section 153 : This section deals with the time limit for the completion of Assessments and Reassessments. Some issues were arising in computation of this time limit. To resolve these issues the following amendments are made in this section with effect from different dates as stated below.
(i) If income of the assessee was first assessable in A.Y. 2009-10 or any subsequent year, and the matter is referred to the Transfer Pricing Officer (TPO) u/s. 92 CA, the time limit for completion of assessment will be 3 years from the end of the assessment year instead of 2 years. This amendment is effective from 01-07-2012.
(ii) In the case of reassessment where notice u/s. 148 is issued on or after 1-4-2010 and the case is referred to TPO u/s. 92CA, the time limit for completion of reassessment will be two years instead of 1 year. This is effective from 01-07-2012.
(iii) Where order of ITA Tribunal is received by CIT or where CIT has passed order u/s. 263 or 264 on or after 01-04-2010, and while passing the fresh assessment order, a reference is made to TPO u/s. 92CA, the time limit for completion of the fresh assessment will be two years instead of 1 year. This is effective from 01-07-2012.
(iv) Explanation 1(iii) to this section is amended from 01-06-2013. At present, in computing time limit for completion of assessment in a case in which AO has issued direction for special Audit u/s. 142(2A), the period from the date on which such direction is issued to the date on which the assessee is required to furnish report of the special Audit is to be excluded. It is now provided that, if the above direction is challenged in any court, the period upto the date on which such order is set aside by the court will also be excluded.
(v) Explanation 1(viii) to this section is amended w.e.f. 01-06-2013. It is now provided that while computing the time limit for completion of assessment the time taken for obtaining information from a foreign country/territory of foreign specified Association u/s. 90 or 90A will be excluded. This will be subject to a maximum of one year.
(vi) A new clause (ix) is added to Explanation 1 to the above section, effective from 01-04-2016. This relates to GAAR provisions as discussed in para 10 above. It is provided in this clause that the period from the date on which reference for declaration of an arrangement to be an impermissible avoidance arrangement is received by CIT u/s. 144BA and the date when direction from the CIT or the Approving Panel is received by the A.O. will be excluded for computing the period for completion of the assessment.
11.5 Section 153B : This section provides for time limit for completion of assessment in cases of Search and Seizure u/s. 153A. The section is amended from 01-07-2012, 01-04-2013 and from 01-04-2016 as stated in para 11.4 above. These amendments for computation of time limit for completion of the assessment or the reassessment are on the same lines as amendments in section 153 discussed in para 11.4 above.
11.6 Section 153D : This section provides for prior approval for assessment in cases of search or Requisition. This section is amended w.e.f. 01-04-2016. It is now provided that in cases of assessments or reassessments in respect of any of the years mentioned in section 153(1)(b) or the assessment year referred to in section 153B(1)(b), where the Assessing Officer has made a reference to the Commissioner to declare an arrangement as an impermissible avoidance arrangement and to determine the consequence of such an arrangement within the meaning of Chapter X- A, dealing with GAAR, the Assessing Officer shall pass the order of assessment or reassessment with the prior approval of the Commissioner. In such cases, the prior approval of the Joint Commissioner shall not be required.
11.7 Sections 167C and 179 : These sections deal with recovery of taxes due from partners of an LLP in liquidation and directors of a private limited company in liquidation respectively. These sections are amended w.e.f. 01-06-2013. Section 167C allows recovery from the partners of any tax due from an LLP in certain cases. Similarly, section 179 allows recovery from the directors of any tax due from a private company in certain cases. In certain decisions [e.g. Dinesh T. Tailor vs. TRO 326 ITR 85 (Bom.)] it has been held that the “Tax due” will not comprehend within its ambit a penalty or interest. Now, an Explanation is added to both these sections to provide that the expression “Tax due” shall include penalty, interest or any other sum payable under the Act. It would, therefore, be possible for tax authorities to recover not only the tax but also the penalty and the interest dues of an LLP or private company from its partners or directors respectively.
11.8 Sections 245N and 245R :(i) Section 245N(a) defines “Advance Ruling”. In view of the amendments relating to GAAR as discussed in para 10 above, section 245N(a)(iv) has been amended w.e.f. 01-04-2015 (A.Y.: 2016-17). It provides that a Non-Resident can obtain Advance Ruling under XIX-B in respect of determination or decision by Authority for Advance Ruling (AAR) whether an arrangement, which is proposed to be undertaken by a Resident or Non-Resident, is an impermissible avoidance arrangement as referred to in GAAR provisions. Consequential amendment is made in section 245N(b) also.
(ii) Section 245R is also amended effective 01-04-2015 to provide that AAR will not allow an application where it finds that the transaction is designed prime facie as arrangement which is impermissible avoidance arrangement.
11.9 Section 246A: This section provides for appeal to CIT(A). Clauses (1)(a)(b)(ba) and (c) of section 246A have been amended w.e.f. 01-04-2016 to provide that an assessment or reassessment order passed u/s. 143(3), 147 or 153A with the approval of CIT u/s. 144BA(12) or any order passed u/s. 154 or 155 in relation to such an order shall not be appealable before CIT(A). In all such cases, direct appeal before ITA Tribunal can be filed.
11.10 Section 252: This section deals with the constitution and appointment of the ITA Tribunal Members. This section is amended w.e.f. 01-06-2013. After this amendment, it is provided that the Central Government shall appoint a President of ITA Tribunal out of the following persons.
(i) A sitting or retired High Court Judge who has completed 7 years or more of service as such High
Court Judge.
(ii) Senior Vice President or one of the Vice Presidents of ITA Tribunal.
11.11 Section 253: This section provides for the list of orders against which appeal can be filed before the ITA Tribunal. Effective from A.Y. 2016 -17, it is now provided that such appeal can be filed directly before the ITA Tribunal against an assessment order passed u/s. 143(3) in regular case, in reassessment proceedings u/s. 147 or in search proceedings u/s. 153A with the approval of CIT u/s. 144BA. Even orders passed u/s. 154 or 155 to rectify mistakes in such proceedings u/s. 144BA will be subject to such appeals before ITA Tribunal u/s. 253.
11.12 Section 271FA: This section provides for levy of penalty for failure to furnish “Annual Information Return” (AIR). This section is amended effective from 01-04-2013 (A.Y. 2014-15). As per the existing provisions, in case of failure in furnishing AIR a penalty of Rs. 100 is leviable for each of day of default after the prescribed date. i.e. 31st August. If the Income tax authority issues notice requiring any person, who has failed to furnish an AIR to submit such return and such person does not furnish such return within the time provided in the notice then the enhanced penalty of Rs. 500 per day is now leviable for the period of such default after the expiry of time provided to furnish the return in the notice issued by AO.
12. Wealth tax act :
12.1 Section 2(ea): Explanation 1(b) defines “Urban land”. The existing definition is modified w.e.f. A.Y. 2014-15 in such a manner that Urban Land within the area as stated in the amended section 2(1A) of the Income tax Act (as discussed in para 4.1 above) will be included in the definition of Urban Land.
The Finance Minister has stated in his speech while replying to Budget discussion that no wealth tax will be levied on Agricultural Land as at present.
12.2 Sections 14A, 14B and 46 : These sections are amended w.e.f. 01-06-2013. So far provision for electronic filing of returns are applicable to returns filed under the Income tax Act.p Now, sections 14A, 14B & 46 of WT Act are inserted to facilitate electronic filing of annexure – less return of net wealth. Under these provisions, rules will be made for the following:
(i) The class of person who shall be required to furnish the return electronically.
(ii) The form and manner in which returns can be filed electronically.
(iii) The computer resource or the electronic record to which the return may be transmitted electronically.
(iv) The exemption from furnishing the documents, statements, reports, etc. along with the return filed in an electronic form.
13. Commodities transaction tax (ctt)
(i) The Finance Act, 2013 has introduced a new tax called Commodities Transaction Tax (CTT) to be levied on Taxable Commodities Transactions entered into in a recognised association. A transaction of sale of commodity derivatives in respect of commodities, other than agricultural commodities, traded in recognised associations is considered as Taxable Commodities Transaction.
(ii) CTT is leviable on sale of Commodities Derivatives at the rate of 0.01 per cent and the same is payable by the seller.
(iii) Section 36 of the Income-tax Act is amended to provide that CTT paid in the course of business shall be allowable as deduction if the income arising from such taxable commodities transactions is included in the income computed under the head “Profits and gains of business of profession”.
(iv) This tax is to be levied from the date on which Chapter VII of the Finance Act, 2013 relating to CTT comes in to force by way of notification by the Central Government.
(v) Sections 105 to 124 (Chapter VII) of the Finance Act, 2013, make detailed provisions for the levy of CTT, collection, filing of returns, assessments, appeals, rectifications, penalties etc. on the same lines as chapter VII of the Finance (No.2) Act, 2004 relating to STT.
14. Securities Transactions Tax (stt)
With effect from 1st June, 2013, the rates of STT have been revised as under:
15.1 This year’s budget being the last effective budget of the present Government can be considered as a soft budget. The provisions relating to GAAR which were to come into force from the current year have been postponed by two years. The provisions relating to the constitution of the Approving Panel and resolution of GAAR disputes have been strengthened. However, unless the mindset of the persons administering these provisions is changed, the tax payers will have to face hardships and they will face unending litigation. For implementing such complex provisions, the tax authorities have to implement these provisions by taking into consideration the ground realities of business and industry in our country. In implementing such provisions the tax authorities should not only consider the letter of the law but should consider the spirit behind this legislation. For this purpose, the CBDT will have to consider the business realities while framing the tax payer friendly guidelines for implementing these provisions.
15.2 As stated above, the Finance Minister has addressed the issue relating to GAAR to some extent. However, the provisions relating to taxation of Non-Residents introduced last year with retrospective effect have not been addressed. These provisions have affected our relationship with many foreign countries. This will affect our global trade in the long term. Disputes have arisen in some cases of large Multinationals and the Government is trying to resolve these disputes by enactment of separate legislation. When the Government has recognised that these disputes have arisen due to these retrospective amendments, it should have amended these provisions and given them only prospective effect.
15.3 One disturbing feature relates to the amendments made this year relating to TDS from consideration paid or payable on purchase of an Immovable Property under new section 194-IA. This will put tax payers and those who are not liable to pay tax into many practical difficulties of collecting 1% tax at source, depositing the same with the Government and filing return of TDS. There will be some issues relating to the date on which such tax is to be deducted when a flat is booked prior to 01-06-2013 or after that date in a building under construction and payments are made in instalments.
15.4 Amendment made in section 56(2)(vii)(b) levying tax on the notional amount of difference between stamp duty valuation of an immovable property sold and the actual consideration paid by an Individual or HUF (Purchaser). This will mean levying tax on the same notional amount in the hands of the seller as well as purchaser. It may be noted that such tax is not payable if the purchaser is a firm, LLP, company or persons other than individual or HUF. Similar tax was levied in 2009 but was withdrawn in 2010 with retrospective effect. It is unfortunate that the Government has again levied this type of tax which is payable by individual/HUF purchaser and seller of the property on the same notional amount. This is a very harsh and unjust provision in the Income-tax Act.
15.5 Provision made last year, effective from 01-04-2012 relating to “Specified Domestic Transactions” has increased the compliance cost of assessees. Transfer Pricing provisions have been made applicable to some domestic transactions. Although one year has passed since these provisions have come into force, there is no clarity about the type of transactions to which these provision will apply. No adequate data about comparable prices is available. In particular, there is no clarity as to how the assessing officers will compare the managerial remuneration paid to connected persons while making disallowance u/s. 40A(2). CBDT has not framed any separate Rule prescribing the information or documents required to be maintained by the assessee to whom this provision is applicable. No separate Form of Audit Report to be obtained u/s. 92E by the assessee to whom these provisions apply has been prescribed. We are informed that the provisions of Rule 10D and 10E and Form 3CEB of Audit Report prescribed for International Transactions can be used. If we refer to these Rules and the Form it will be noticed that there is no mention about Specified Domestic Transactions in these Rules or Form. It is not clear as to how specific requirements of these Domestic Transactions are to be reported in the Audit Report.
15.6 It may be noted that the present Finance Minister mooted the idea of replacing the present Income-tax Act and the Wealth Tax Act by Direct Taxes Code (DTC) in 2006-07. The DTC Bill, 2009 was circulated on 12.08.2009 for public debate. After considering the suggestions from various quarters, the DTC Bill, 2010, was introduced in the Lok Sabha and was to come into force w.e.f. 01.04.2012. The Bill was referred to the Standing Committee of the Finance. Since its report was delayed, DTC could not be passed in 2011 and hence its implementation was delayed. In Para 154 of the Budget Speech the Finance Minister has stated that DTC is work-in-progress. He has also stated that the report of the Standing Committee is received. The same is being examined and the revised Bill will be introduced in the budget session of the Parliament. This has not happened and it appears that this important legislation may not be passed during the present term of the UPA II Government.
15.7 Another legislation viz. Goods and Service Tax (GST) in the field of Indirect Taxes, was announced by the Finance Minister in 2007-08. He has referred to this in Para 186 of the Budget Speech this year. Due to differences in the views of various States, the required legislation has not been introduced in the Parliament. The Prime Minister has admitted that GST, which is to replace Excise Duty, Customs Duty, Service Tax and VAT laws in our Country may be enacted in 2014 after the elections by the new Government which may come to power.
15.8 Another major reform measure in the field of Corporate legislation relates to replacement of the Companies Act, 1956 by the Companies Bill, 2011. This Bill has been passed by the Lok Sabha in December, 2012. It is pending in the Rajya Sabha. The impression given to us was that this Bill will be passed in this year’s Budget Session and will come into force soon. This Bill is pending before the Rajya Sabha and this important legislation is also delayed.
15.9 The above three legislations are being discussed for the last more than five years but our Parliament is not able to legislate the same. We are assured that these new legislations will simplify our tax and Corporate Legislation and make the life of all stakeholders hassle free. Let us hope the Parliament in its wisdom legislates these provisions before the end of the current Financial Year.
(Acknowledgement: S.M. Jhaveri, Chartered Accountant and Dalpat H Shah, Chartered Accountant have assisted the Author in the preparation of this Article)
It triggered public outrage — understandably so — and led to the shutting down of Britain’s biggest Sunday paper, the arrests of the Prime Minister’s spokesman and several journalists and senior newspaper executives, the resignation of the country’s highest-ranking police officer, and the setting up of a public inquiry under Lord Justice Leveson.
A debate has raged since about whether the media should be subjected to greater regulation – not just in the UK, but in democracies around the world. Sections of the political class have, not surprisingly, supported the idea of stricter oversight and punishment.
There is often a thin line between regulation and control. In India, there have been periodic efforts at muzzling the media, most infamously during the Emergency. It is as much the public’s responsibility as it is the media’s to ensure that every such attempt is vigorously resisted. The media is meant to act as a watchdog; it has a duty to tell people things their governments don’t want them to know (barring genuinely sensitive information). This perforce casts it in an adversarial role.
The idea of democracy is predicated on freedom of the press (‘media’ and ‘press’ are used interchangeably here, and include print, broadcast and online). As the First Amendment of the US Constitution said, “Congress shall make no law…abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble…” And while our own Constitution does not specifically refer to freedom of the press, it is implied in Article 19, which lists freedom of speech and expression as one of our fundamental rights. Various courts have over the years emphasised the centrality of freedom of the press to the democratic process.
Does that mean the media should not be held accountable for what it writes or broadcasts? Absolutely not.
Every industry and profession has a responsibility to its customers and clients. Just as an automobile manufacturer needs to answer for faulty brakes or a pharmaceutical company for substandard drugs or a CA firm for the quality of its audits, a newspaper or a TV channel must answer for inaccurate and irresponsible reporting.
Unlike say, a builder or a doctor, a journalist cannot directly cause a person’s death. But his incompetence or dishonesty can cause damage that some, especially the more righteous, might consider a fate worse than death – loss of reputation.
Yes, there are laws against defamation, slander and libel. While article 19(1)(a) guarantees free speech and expression, 19(2) specifies the grounds for “reasonable restrictions” on free speech (defamation, public order, incitement to an offence, etc).
But in practice, the media is protected, more by default than design, by the glacial speed at which things move through our judiciary. Most journalists know it takes years for a defamation case (like most other cases) to reach legal closure — unless the aggrieved party has the resources to hasten the process. By then the damage has been done. Punitive action, either in the form of compensation or an apology, a decade later is cold consolation for a person whose standing in society has been dented (although increasingly, it would appear that people don’t care).
There is also the Press Council of India, set up as a statutory body under a 1978 Act, to ensure freedom of the press and to hear complaints against newspapers. While Wikipedia describes it as an “extremely powerful body”, truth is, very few newspapers quake at the thought of being censured by the council.
A parliamentary standing committee recently submitted a report recommending either a single regulatory body for print and electronic media or a diarchy in which the Press Council has enhanced powers and there is a similar statutory body for the electronic media.
Such proposals have obviously not found great favour with the media, whose contention has always been: We don’t need outsiders to regulate us, we can do it ourselves.
There is reason to oppose external controls. What is the guarantee that the hidden hand of government will not seek to strangle a newspaper or channel that it considers inimical to its interests? Governments have been known to exert influence over institutions that are supposed to be completely independent. As it is, governments across the country routinely try to browbeat newspapers that run unfavourable stories by cutting off advertising — which amounts to abuse of power because it is taxpayers money they are using as leverage to block the people’s right to information. Many small and financially fragile papers, which depend on such advertising for survival, are often forced to fall in line.
Much of the credit for exposing corruption in high places must go to the media. It has acted, at least in some small way, as a check on governments, public officials and corporations from subverting the system.
But while the media is often quick to demand accountability from the executive and the legislature, who does it answer to? The obvious answer is: To the public in general and to its readers/viewers in particular.
As we all know, practice doesn’t always measure up to principle. Ministers and legislators can also seek refuge behind a similar defence by claiming, “We are elected by the people, and we answer to them. If they don’t like us, if they think we have lost the right to hold office, they can always vote us out.” But take a look at the scandals around us: Does it look like our politicians shiver with fear at the thought of their less-than-ethical practices inviting electoral backlash?
TV channels and newspapers like to claim that their viewers/readers have the freedom to switch out/unsubscribe, which would be bad for subscription and advertising revenue. So, if for nothing else, they’ll stay honest because it makes business sense.
There is some merit in this line of argument, but only up to a point. Corruption, whether at an individual or an institutional level, does not follow the laws of ethical business as they are taught in B-schools. When a journalist writes with mala fide intent, he is obviously not concerned about damaging reputations — of others, or his own.
One would like to believe that such dishonesty exists only on the fringes of established mainstream media, and that an overwhelming majority of us cannot be influenced to write in lieu of monetary or other favours. (We are leaving aside intellectual dishonesty, which is a separate subject by itself. Also, sponsored features or ‘advertorials’ do not fall under this category.)
So why do newspapers and TV channels still make so many mistakes, including some that can hurt people and their reputations? Much of it has to do with subject ignorance, lack of application (which is a polite way of saying ‘laziness’), inadequate fact-checking, and the rush to be first at any cost. A few unintentional, genuine mistakes are perhaps inevitable, even pardonable, given the tight deadlines newspapers and channels have to race against day in and night out — so long as those mistakes don’t end up hurting innocent people. And so long as we in media are prompt in acknowledging our mistakes.
The media’s challenge is to strike a delicate balance between being aggressive, sceptical and independent on one hand, and sensitive, decent and knowledgeable on the other. Combining so many attributes might seem like a tall order, but we need to hold ourselves to a higher standard. The paper I work for has taken a decision to play down news of school students committing suicide during exams and results. We are aware that other papers might choose to splash such ‘stories’ on front page, and we might look like we have missed them, but so be it. We believe it’s the right thing to do.
At the end of the day, we in the media need to do the right thing. This might sound simplistic, to the point of naivete. How can anyone expect a growing, fragmented, competitive industry that lies at the intersection of politics, business and a society in churn to develop the collective conscience to do the ‘right thing’? Surely, we’re expecting too much? Perhaps. But if an overwhelming majority of the media can learn to be fair and responsible, the law as it exists today is good enough to deal with a few rogue elements. Every industry has its seamy underbelly, but that cannot be a reason for any government to bring an AK-47 to a wrestling match.
If however the public comes to believe the media is incapable of managing its own house, we could be opening ourselves up to calls for tougher legislation and regulation. Recent developments in cricket should serve as a cautionary tale for all of us.
When Mr. Pranab Mukherjee took over as the Finance Minister, he lost no time in reversing some of the amendments made to the Income Tax Act during the tenure of Mr. P. C. Chidambaram. Mr. Mukherjee withdrew the controversial Fringe Benefit Tax, rolled back the time limits for completing the assessments and introduced Service Tax on legal services which Mr. Chidambaram had refrained from doing.
It is Mr. Chidambaram’s turn to undo what Mr. Mukherjee did before he was elevated to the Rashtrapati Bhavan. Soon after donning the cap of the Finance Minister, Mr. Chidambaram ordered a review of the GAAR and the retrospective amendments made to the Income Tax Act. It is also mentioned that he directed the tax officers to complete the time-barring assessments before December, 2012 although the statutory limit is March 2013.
In this background, one is curious as to what is in store in the ensuing Budget. Will the Finance Minister again bring back the Fringe Benefit Tax or introduce a new controversial tax? Will he withdraw the GAAR or defer it by a few more years? What will be the fate of the retrospective nature of the amendments that were introduced during Mr. Mukherjee’s tenure? Will Mr. Chidambaram continue the shadow boxing match with Mr. Mukherjee? The Finance Minister has been talking like a socialist; he mentioned about the desirability of introducing inheritance tax. (Remember, till 1985 we had the Estate Duty.) There is a flurry amongst the wealthy for arranging their affairs, to consult professionals for succession planning to minimise the impact of inheritance tax, just in case it is actually introduced in the forthcoming Budget.
The Finance Minister has hinted at increasing the tax burden on the so-called super rich. Will he do that? What will be the burden and who will be considered as super rich in the Indian context?
The Government has been talking about various reforms. But at the ground level, very little has been done. Except for formally permitting FDI in multi-brand retail, while leaving the final decision to the State Governments and a marginal increase in the diesel prices, there is hardly anything that one can talk about as reforms. The investment climate has not been very conducive and confidence of India Inc. and foreign investors is low.
The next General Elections are due in 15 months, in 2014. Depending on when the elections are held, this may turn out to be the last full-fledged Budget of the present Government. So, there will always be a temptation to present a populist budget.
Mr. Chidambaram, intelligent and unpredictable that he is, has kept everybody guessing. Recently, while addressing foreign investors in London and elsewhere, he stated, `the Budget that will be presented in February will be a responsible Budget’. One doesn’t know what he means by a responsible Budget. Did he mean that the earlier Budgets presented by his predecessor were irresponsible? Everybody is keeping their fingers crossed and waiting!!
In this issue, we bring you an article relating to corruption by Mr. Hardayal Singh, former Income Tax Ombudsman. We always talk about the gap between what the society expects from auditors and what auditors can deliver. There is a similar expectation gap between the system combating corruption and what the society expects. The author mentions that the story he is narrating has an important lesson for those who expect instant solutions. When one reads the article, one is left wondering whether the system really delivered if an honest officer had to go through the prosecution, conviction and sentencing by a lower court before being acquitted by the High Court. Or whether the officer indeed acted under pressure of a politician and was guilty, at least, to that extent.
While rules and systems are extremely important, they should prevent corruption; yet not be such that they stifle the decision making process itself. In appropriate cases, the officer must be able to exercise and should have the courage to exercise discretion and take decisions. Today, honest officers avoid taking decisions out of fear that they will be implicated for the decision that they took. Is it a solace to the officer that ultimately some higher court will acquit him?
Nonetheless, the article brings to us a point of view which we need to think about.
So, one has a choice; of simply Existing in this world or of Living, in the real sense of the word. But how do we do this?
So, if we plan to teach moral values to our children, we, in our life, need to become a role model. To influence and inspire people — setting an example is not only necessary but it is THE ONLY WAY!
Let us just see one example from his book. He gave tough questions to a bunch of seemingly highly respected people from different walks of life and after they completed the same, he asked them to destroy the answer sheet. He then asked them to state how many they had answered. They were not aware that hidden cameras were recording everything. It was found that almost all inflated the answer!
So the question is, how moral are we when nobody is looking! If not, then how do we expect honesty from others! He further shows that how many of these, when caught, tried to rationalise by saying — stealing a needle is not as same as stealing an elephant! Can anybody teach such persons? Or can they teach anything to anybody? Learning, like charity, has to begin from self. So as Gautama Buddha said — Ap divo bhava – everybody has to be his own candle. Be the change you want to see.
Further, to do something worthwhile in one’s life, one must know that it is easier to criticise but difficult to improve. There is this famous story of the painter who painted a superb painting and then placed it on the road with a request to the patrons to point out mistakes or suggestions for improvement, if any. Soon, he was flooded with hundreds of suggestions. He was quite perturbed and felt very inadequate. But his friend had an idea. On his prodding, he again painted a new painting and placed it there with a request to patrons to themselves correct/paint the mistakes if any. This time there were hardly any suggestions! Great men concentrate on the work on hand and not waste time criticising others.
We have to leave the chalta hai, hota hai attitude! In India, we celebrate mediocrity. People are happy and accept work half done. Sweepers not cleaning properly, driver not cleaning cars properly… while those who try to do jobs fully are ridiculed as fastidious and perfectionists! Should we accept this? It is because we accept this, which is why the country, our cities, villages or whole society is in bad shape. Let us resolve to be different. Once we take up any task, let us do it with our heart and soul! Let us become role models.
“We are what we repeatedly do. Excellence then, is not an act, but a habit” – said Aristotle
Essentially, it means, excellence in any field is not a onetime feat. It is a cumulative outcome of a series of acts performed by an individual over a period of time in pursuit of excellence. We cannot hope to be excellent in one field, say our workplace while we are sloppy in our personal life or the way we interact with people.
The trick to live then, is doing things with excellence, finding fulfilment in doing whatever we are working on and having extreme gratitude to the almighty for making our life meaningful and not shallow and mindless. I hope we all can live with this spirit and enrich our life!
In terms of membership strength, there has been phenomenal growth in the last one decade and consider-able number of members has been taking up employment in preference to public practice on account of enlarging opportunities in the industry. The following data demonstrates the shift in strength from public practice (COP) to employment (No COP) which also drives home the point that the profession is gaining more recognition in the in-house decision making and administration positions within the business segment. Instead of merely providing inputs for decision making, many of our members have attained positions whereby they are the decision makers for the business enterprise at the helm of affairs. There are many members who are CEOs and CFOs rendering yeomen service to the Industry segment of the Economy. The data also indicates that about 50% of them have entered the profession in the last one decade and therefore they all must be below the age of 35 years.
Out of the 1.2 billion population in India, only 2.17 lakh are qualified members of the profession. About a million students are pursuing the curriculum of our profession in various stages. Considering the fact that 47.5% of the 1.2 billion are youth below the age of 25 years, India has the demographic advantage of possessing substantial size of young population. Our profession can embrace good number of this segment in order to enable them to emerge as Chartered Accountants. This proposition may be fraught with two apprehensions namely, increase in number might lead to degeneration in standards and emergence of more professionals might lead to unemployment. Both these concerns do merit attention but can be effectively addressed by taking appropriate measures. We must ensure that quantity does not result in compromising of quality. The content of the curriculum, the examination and evalu-ation methodology and above all practical training and orientation should be constantly reviewed, monitored and implemented to match with the best expectations of the market. Further, the blending of technological skills with professional skills should be seamlessly and progressively done to equip the members to plunge into newer areas of services.
India has immense potential to emerge as a strong economic power being the third fastest growing economy next only to China and Indonesia. Although the present scenario is worrisome with GDP touching 4.8% growth in the fourth quarter of the last fiscal, our economy will bounce back soon to catch up with the desired 8% growth by 2015-16. Consequently, we should not have any inhibition to scale up with quality as otherwise persons with less competence and no accountability will strive to occupy the positions that would get generated with the growth of the economy. Further, our profession can contribute in a modest manner to the endeavour of reaping the demographic dividend by producing capable young finance professionals. India has the potential of emerging as the human resource hub for the rest of the world. There are already over 30,000 CAs settled abroad serving different economies. We must continue to produce professionals who are nurtured in India, but groomed for the world.
Knowledge Management and Innovation
The profession today stands on the threshold of dynamism and change. We need to be diligent in knowledge management and innovation. Any laxity on our part could be fatal. The government, the regulators, the society and the clients do expect the profession to take proactive measures for knowledge updating and skill upgradation. Both in the core areas of our practice such as assurance function as well as in the non-core areas such as consultancy/advisory functions, we need to be empowered consistently. Any inaction can create a void which will be filled by those outside our profession. John F Kennedy said that there are risks and costs to action but they are far less than the long range risks of comfortable inaction. We just cannot afford to be indifferent or ignorant of the developments around us. Practising the accountancy profession is like riding a bicycle and one does not fall off unless one stops pedalling. Learning is akin to pedalling. No other factor can inspire more confidence and faith of the stakeholders in our profession than the demonstrative quest for knowledge and competence gained out of it. The profession owes to the stakeholders an assur-ance that its members are the most competent and empowered lot to deliver services with quality. The profession can ill afford to be negligent on this aspect of the accountability.
Quality in service leads to excellence, which is a definite attribute that paves way for growth and development of the profession. However, there are limits to the excellence we can achieve on a narrow base. The profession needs to innovate and re-engineer itself to a new trajectory of divergence and efficiency. The profession needs to evolve new products, new services, new systems procedures and methodologies to maximise utility but minimise the cost. Excellence is like the summit of a pyramid, larger the base higher the summit. We should not spare any endeavour to broaden the base of the quality of our services with skills, standards and values and build the pyramid of excellence, the summit of which is unmatched by that of any other profession.
Capacity Building of Firms
It is common knowledge that Indian entrepreneurs are consolidating their businesses to grow big and face global competition. Multinationals are establishing subsidiaries of large size in India. Takeovers, mergers, amalgamations and collaborations are the order of the day. Professionals should also become conscious of this factor and gear up to restructure their firms, reorient their skills and expand their firm size. When an enterprise or a business group grows and the professional firm rendering service to it does not, the chances of replacement by a bigger firm cannot be ruled out.
On a closer look at the following data relating to the composition of the firms in our profession, it is not difficult to realise that most of them are small and medium practitioners (SMPs). Although there is commendable improvement in the growth and expansion of the firms over the last one decade, still we have a long way to go. To the growing Indian business enterprises, our profession is accountable to assure that our firms would measure up to the size that is required to ably cater to the array of services expected by them.
Unlike a few other professions where the accountability is primarily to the client, in our profession the account-ability extends to various stakeholders. For instance, when a member of the profession is exercising the assurance function in the nature of statutory audit and appends his signature, he is not only accountable to the shareholders who are the owners of the company but also to the investors, depositors, lenders – banks and institutions, regulators, customers and all those who make decisions relying on the authenticity of the financial statements so attested. Expression of independent and qualitative opinion is imperative for securing and fulfilling the accountability aspect of the profession. Attest function is the exclusive domain of our profession. We have been given this recognition on the faith that we will discharge it with utmost care and competence. Considering the fact that audit is not a privilege but a responsibility, it requires to be shouldered carefully by skilled and credible hands. Besides, audit is a time-bound exercise and, therefore, adequate trained manpower, infrastructure and audit tools and manuals are inevitable for a firm to acquit it creditably in discharging such function. Assurance function demands excellence, integrity and independence and when properly discharged commands unshakable faith, respect and image.
If warranted, based on facts and figures, we should have the mettle to express an adverse opinion on the financial statements of the client who ends up paying for such an opinion. Any dereliction in this regard might dilute our significance and exclusivity. When we consciously discharge our duties to meet with the genuine expectations of the stakeholders, our stature and rights get automatically preserved and cherished. Rights which flow from duties not done properly are not worth having.
Adherence to various standards governing the profession; ensuring proper documentation of work done and resorting to expression of opinion without fear or favour leaves no room for a gap in performance. Succumbing to pressure of a branch manager of a bank to complete an audit in undue haste or to classify certain NPAs as good debts may at best please him but undoubtedly erodes the image of the professional even in his mind. Losing sight of the significance of quality in work may result in short term gains to that professional but brings disrepute to the entire profession. If the nation’s interest is upheld and protected while serving a client, it brings greater glory to the profession and the brand image is enhanced by reinforcing stronger faith and instilling greater confidence.
The signature of any professional is an expression of credibility. So is the case with the signature of a member of our profession which is truly trusted and highly respected. The status of the signature of a person becomes elevated and turns out to be a precious one on acquiring professional qualification as a Chartered Accountant. Even if a miniscule section of the society perceives that the signature of a member of our profession is available for the asking or solely for a consideration that would be a dreadful scenario and could lead to erosion of goodwill which our forefathers have so strenuously built over six decades.
Ethical values
Some members of the profession strive and survive on account of the goodwill created by our forefathers. Many members contribute to and enhance such good-will by their exemplary conduct, impeccable integrity and qualitative delivery of services. Unfortunately, the conduct of a few has diminishing effect on the goodwill of the profession. We need to introspect as to which category we should belong to and the answer is obvious. Fee based approach in everything we do would be fatal in the long run whereas value based approach would enhance our reputation. Mahatma Gandhi said that there is enough for every one’s need but not for the greed. The Father of the nation also indicated that ‘ends’ do not justify the ‘means’. It might pay to be unethical in the short run, but in return one loses self-esteem and peace of mind, which is too precious a price one should dread to pay and suffer.
Lord T.B. McCauley said, “the measure of man’s real character is what he would do if he knew he would never be found out”. Everyone aspires to grow and reach greater heights. It will be nice to always bear in mind that ability may take us to the top but it requires character to stay there. Quality in service without compromising on ethical values begets not only prosperity in the long run but undoubtedly helps us to build image and command respect. In matters of innovation and empowerment, one should swim with the current, but in matters of values and principles, one should stand like a rock.
Challenging Environment
With the passage of time, business practices are getting corrupted. Government departments are difficult to deal with when straightforward approach is adhered to. The business philosophy and practices are degenerating in values due to which many frauds and scams are surfacing. There is lack of transparency and accountability in the usage of resources by the governments as well as entrepreneurs. Manipulations and fudging in matters of finance and accounts are resorted to for various reasons and more particularly for evading tax outflows. In such an environment it is a challenge for the accounting profession to discharge the duties upholding standards and values. A profession like ours owes it to the society to possess the courage of conviction and perform our role in the best interest of the economy in order to establish unblemished track record for the posterity to inherit.
The audit reports of C&AG on allocation of spectrum in the telecom sector as well as natural resources such as coal has brought in accolades from the public and created enormous awareness among the masses on the need for good governance and has served as a warning for those involved in the decision making process to be accountable. Many of our members have been instrumental in bringing out frauds and manipulations. The future is going to be tougher in this regard and all the same we need to gear up to face the challenge and ensure that there is no performance gap. No other profession can boast of having as proximate a role and nexus as ours with the economic development of our country. Let us reinvent the significance of our role in partnering, participating and partaking in building a credible economy in the incredible India.
Professional Social Responsibility (PSR)
A member of our profession is considered to belong to the elite segment of the Indian society. About 27% of the Indian population is perceived to be below the poverty line. We owe it to the society to contribute in uplifting the lives of the downtrodden and under privileged masses. The standing and respectability of the profession can touch lofty heights only if the profession is able to positively contribute to the socio-economic development of the society. Several measures can be resorted to as part of PSR initiatives and some of them can be readily spelt out. Firstly, ICAI and professional forums like BCAS can enhance the level of contribution in the policy formulations by various ministries of the Central Government and of the State Governments on socio economic reforms and their effective implementation. Secondly, senior members of the profession and other members with requisite exposure, aptitude and inclination, can plunge into public life in large numbers; accept positions such as trustees of public charitable trusts and institutions, become governing board members of educational, health care institutions and not for profit organisations, assume leadership in chambers of commerce, management and trade associations. Thirdly, every medium and large firm can establish a charitable institution and carry out activities to meet societal needs in a small way.
It is well known that ICAI has a Benevolent Fund for the members of the profession, which goes to the rescue of the distressed, in times of need. Another similar measure was conceptualised as ‘Fund for Education and Welfare of Students’ during 2006-07 but seemed to have been lost sight of down the line.(Please refer page 1186 of February 2007 Journal, The Chartered Accountant). If properly taken up, this fund would assist meritorious but poor students to be financially supported and counselled to pursue and qualify as members of our profession. CA. Prema earned wide acclaim by achieving All India First rank in the November 2012 examination in spite of hailing from a humble background with her father being an auto rickshaw driver in Mumbai. Many such students could be ably supported and made members of our profession. We should reach out to those bright students who might not otherwise take up higher studies and thereby change the profile of their families by the power of our professional qualification. This can be yet another measure worth pondering over to be acted upon as part of the PSR initiative.
Conclusion
As we continue our glorious journey, it’s time that we take stock of the socio-economic changes unfolding around us and adjust the course of our journey accordingly for larger benefit of the society and the nation. We may not have the ability to change the course of the wind but we can set the sail appropriately to proceed in the noble path we choose to progress. French philosopher Jean-Paul Sartre said that we have no destinies other than those we forge ourselves. Let us make the society feel proud of our profession and thereby justify our existence.
Very often the lay person raises a question as to how a lawyer could defend a particular person or a particular action of his client which in the lay mind was indefensible. The Bar Council of India has framed a code of conduct to be followed by all advocates. One of the duties of an advocate is to accept a brief in the Courts or Tribunals in or before which he normally practices. If, however, his brief requires him to argue contrary to his beliefs and there is a conflict of duty to his client and to himself then, his duty to himself may justify his returning the brief. It is not for him to choose which is a good case and which is not. The central function of a lawyer is to represent his client and to say in legal parlance what the client would have said if he was to argue his own case and had the required legal acumen. James Boswell in his Life of Samuel Johnson records having asked the great man “What do you think of supporting a cause which is known to be bad?” Dr. Johnson’s reply was to the effect: “Sir, you do not know it to be good or bad till the judge determines it. You are to state facts clearly, so that your thinking or what you call knowing a cause to be bad must be from reasoning, must be from supposing your arguments to be weak and inconclusive …”
Lord Macmillan in “Law and Other Things” has said that the advocate by the rules of his profession has, theoretically at least no choice in the selection of the cases he takes up. He quotes Erskine as saying that if an advocate is permitted to say that he will not stand between the Crown and the subject arraigned in the Court on the basis of his opinion above the correctness of his client’s stand “from that moment the liberties of England are at an end.”
It is the duty of an advocate to uphold the interest of his client by all fair and honourable means without regard to any unpleasant consequences to himself or to any other. An issue which sometimes arises is whether in discharging this duty there would be a conflict with the advocate’s duty to the Court. Whilst he must uphold in all ways the interest of his client at the same time he must not put forward as a fact when he knows (as distinct from what he suspects) to be untrue. For example, if the client has told him that he has done something the advocate cannot urge that he has not done it though he would be justified in taking the stand that it is for the other side to prove that his client had indeed done the act as alleged by the other side. Many people take the view that this is a facetious distinction which lawyers draw. However, the rule of law requires that it is for the plaintiff or the prosecutor to establish his case with acceptable evidence and if the lawyer does not take this stand he would be cutting at the root of the rule of law. It is also urged that a lawyer’s duty to society requires that he should not defend someone who he believes to be guilty of what is alleged against him. Those who would so urge should ponder over whether if a man sentenced to death for murder falls sick whilst in jail should a doctor attend to him or decline to do so in the belief that Society would be well served by his early demise. A lawyer’s duty is to his client and to the Court and if one may say so to the law. In my opinion these override any amorphous duty to Society which is spoken of so glibly. An advocate’s loyalty is to the law and the law requires that no man should be punished without adequate evidence. The cynic may counter that it is fortunate that people are born whose moral standards are sufficiently flexible to enable them to practise the calling of law!
Section 126 of the Indian Evidence Act provides that except with the client’s consent a lawyer cannot disclose any communication made to him by the client or to reveal the contents of any document to which he has become privy in the course of his professional employment or disclose the advice tendered by him to his client. Contrary to this specific provision of law the activist, who champions the lawyers so called duty to Society, would urge that the lawyer must not keep secret his knowledge about an illegality committed by his client. In my view there is no such duty and the importance of complete and free communication between a lawyer and his client is itself for the welfare of Society at large.
An interesting issue arises when a client wants to know the consequences of his acting in a manner which is contrary to the law. It would appear that it is the lawyer’s duty to explain what would be the decision in law if the misdeed is discovered but he should in no way be a party to facilitate on such misdeed. A fine issue arises – is it the duty of the lawyer to tell the client that what he proposes to do is contrary to the law and he ought not to embark on the act. It would appear (though there may certainly be two views on the issue) that it is not for the lawyer to be a moralist but leave it to the client to decide whether knowing the consequences ethical and otherwise, of what he proposes to do, he should still go through with his earlier scheme. Here also the protagonist of “duty to Society” may take a contrary view.
An arguing Counsel owes a duty to his client and to the Court for attending the hearing of an appeal from the beginning to the end. It is not enough that the lawyer attends Court only at the time his turn comes to argue the case for his client and thereafter on completing the argument leaves the Court with some excuse or the other proffered to the judge. The lawyer’s defence is that he owes a duty to other clients for whom also he is to appear on the very day. I feel that unless the lawyer is present throughout the hearing of the appeal and has heard the arguments of the opposing Counsel he would not be able to give off his best to the client or to render full assistance to the Court. He should choose which case he will attend to and return the other briefs in good time or have the other hearing adjourned. In a witness action the position may be different.
Sometimes a possible conflict arises when a judge seeks Counsel’s opinion on a particular matter which is in issue between the contesting parties. If the lawyer was to express his opinion or what he believes to be the right position in law he may be acting adversely to his client’s interest. He would therefore be justified in politely declining the judge’s request to give his opinion. Some purist may contend that in taking this stand the lawyer is not discharging his duty to the Court. Though the lawyer’s duty to the client is certainly not more important than his duty to the Court, nevertheless the “inquisitive” judge should have realised that the duty of the lawyer is to argue his case and not to express his opinion on the issue involved. Undoubtedly, tact of a high degree is required in meeting such a situation. People must realise that what a lawyer believes and what he argues are not the same.
A related issue is to what extent the duty of a lawyer to the Court compels him to cite all possible decisions which he is aware of even though some of them may be contrary to what he is briefed to argue. Whilst the lawyer must bring to the notice of the Judge any judgement which is binding on the judge like that of the Supreme Court of India or of the Federal Court or the Privy Council (when the opinion of the Privy Council is as of a point of time when the same was binding on the Indian Courts). He will also have to disclose to the Court any judgement of the High Court of the state where he is arguing the matter as the same may be binding or if the judge wants to take a contrary view he may have to refer the matter to a larger Bench. It is not the duty of the lawyer to cite decisions rendered by other Courts which are not binding. It is for the opposing lawyer, if he so thinks fit, to bring such decisions to the notice of the Court. This shows that the lawyer can honour his duty both to the Court and to the client in respect of a particular matter without infringing either.
Sometimes a very piquant situation arises. A judge recuses himself from a case on the ground that one of the parties has “approached” him. Should the lawyer of the alleged defaulter also opt out of the case? In my opinion, he should first of all satisfy himself that indeed a representative on behalf of his client had approached the judge, with the client’s authority to do so. Unfortunately, there are today people who without being instructed by the client to do so approach a judge in a pending matter of which they are aware and then approach the client with the offer of procuring a favourable judgement. Once he is satisfied that the judge was indeed approached under his client’s instructions he should return the brief though it is possible that this may prejudice the client adversely if the brief is returned in the midst of a hearing. It would also show his client in poor light. This sort of situation really calls for a fine balance being drawn between the lawyer’s duty to the client and to the Court.
When discharging his duties to his client the lawyer often is faced with matching the same to his duty to the profession and to his co-professional. Though it may be in the interest of his client for the lawyer to interrupt the other side’s Counsel so as to distract him from his trend of thought or interfere with the flow of his arguments, it would be a breach of his duty to a co-professional and he must not indulge in it. I must say that I have found that in the southern states of India the respect for the right of the opposing professional to have full uninterrupted opportunity to express his views is far more evident than in the northern and, may I add, western states?
It is undoubtedly the duty of the lawyer to the Court always to be courteous and deferential to the judge but that does not mean he has to be obsequious. If for any reason it appears that the judge is acting un-reasonably and making comments which are wholly uncalled for either against the litigant or the lawyer or the legal profession it is his duty to stand up to the judge and, as politely as possible, to correct him. It is not the lawyer’s duty to the Court to submit to insults to himself or his profession or to fawn for petty favours. I remember an occasion when a judge was unreasonably giving a junior lawyer a tough time. As the Court rose for lunch a senior lawyer, who was wait-ing for his case to be called out got up and suggested that perhaps the junior lawyer deserved a more patient hearing. The judge – full marks to him – saw reason and his attitude changed post lunch. It is remarkable that the senior lawyer really did not know the junior at all but the incident shows the importance of stand-ing up to a judge even when it does not affect the lawyer personally.
It sometimes happens that a “succeeding” lawyer in the course of his argument takes a stand different from what his predecessor, who was then representing the client, had taken. If it is in the client’s interest for him to take a contrary stand he should do so but without in any way decrying or condemning the stand previously taken by the predecessor lawyer. In this manner he fulfills his duty both to the client and to the profession.
Sometimes a lawyer may feel that it would be advis-able for a client to consult another lawyer or even to brief another lawyer rather than himself. He should frankly advise the client to do what is in client’s interest though it may conflict with his own pecuniary interest. A lawyer is sometimes asked to recommend the name of a junior to assist him. The lawyer should either leave it to the client to choose the junior lawyer or suggest 3 or 4 names preferably not only from his chamber and leave it to the client to decide who should be briefed. This would fulfill the duty of the lawyer to his co-professional by not depriving a junior outside his chamber from being briefed.
In the practice of the profession sometimes peculiar situations arise which have a bearing on conflict of duties. It may happen that after a case is heard and decided the advocate reliably learns that the judgement was improperly procured. This would mean that even though the client may not himself be guilty of any improper conduct there was a miscarriage of justice. Is it the duty of the advocate in these circumstances to bring these facts to the notice of the Court for considering whether to order a retrial? The purist would undoubtedly say that it is advocate’s duty to do so but there may be practical difficulties.
An interesting instance of conflict of duties may arise when a lawyer accepts a directorship. It may happen in this way: the company of which he is a director may be confronted with a particular problem and looking to the facts of the case the company may have to adopt a particular stand in law and the director would have voted in favour of taking such a stand. In the light of this peculiar position his view of what is the correct position may get warped and he may not be able to render independent advice to another company facing a similar problem. For a similar reason, a lawyer who is a director of a company must not appear in Court for the company as he may not be able to maintain the sense of independence and detachment required of him. In similar vein a firm of solicitors, a partner of which is a director on the Board of a company, is not allowed to represent the company in Court. This is sometimes overcome by the solicitors firm interposing a dummy lawyer. But that is really a case of failure of duty to one’s conscience!
A common source of conflict is where each of two partners of a firm represents persons arraigned against each other. They build some sort of a Chinese wall to urge that they both function independently. However, there is no gainsaying the fact that there is bound to be at some stage a conflict of duties and the firm may tilt in favour of the client who is more important to it; namely, from whom it hopes to earn a larger fee in the long run.
It goes without saying that an advocate cannot be a party to procuring evidence by inducement. By procur-ing evidence the advocate may further the cause of justice but may he be guilty of breach of his duty to the Court or the profession and perhaps even to society. For example, a suit is filed by A claiming damages from B who had assaulted him. X was the only witness to the incident. When the matter is to be heard in Court X suggests to A’s lawyer that he may not come to give evidence and if he is summoned he may plead that he did not remember what exactly happened. He may slyly add that he could be induced to state the truth. If the lawyer spurns X’s suggestion it may mean that his client who was entitled in law to succeed may not be able to prove his case. On a strict view of the matter it would appear that the advocate is in breach of his duty to the Court and the profession if he suc-cumbs to the suggestion made by the witness. If he does not succumb to X’s demand is he in breach of his duty to the client because the client may fail in a cause where he deserved to succeed? The puritan will undoubtedly opine that upholding the process of law and justice is more important than an individual client’s obtaining of damages for the wrong done to him. On the other hand, one may think that it is reasonable to do a little wrong to achieve a higher good in the form of a person justly succeeding in the litigation launched by him. It appears that whichever way he acts the lawyer may later have pangs of conscience. A self saving action on the part of the lawyer may be to tell his client to contact X if he so deemed fit. Of course this would mean that the lawyer would have to live with the disconcerting fact that he, at least passively, was a party to “procuring” evidence.
An advocate undoubtedly owes a duty to his fellow professional: not to run him down or attempt to take over his brief. Does it mean that he should not appear in a matter in which his fellow professional is sued? The answer obviously is that his duty to his client, who claims relief against a professional brother, is higher than his duty to a fellow professional or to the profession. If a lawyer declines to appear against a brother lawyer it would mean that the affected party may not be able to find a lawyer to represent him.
Sometimes a client realises that he is bound to fail in his plea before the Court but he would like to postpone the evil day. It would appear that the advocate’s duty to the client permits him to obtain an adjournment on whatever grounds are available but without putting forward a false excuse. The fact that thereby there is a delay which is adverse to the interest of the other side does not mean that the advocate is in breach of his duty to the profession or to the Court.
The lawyer’s duty to the client does not extend to car-rying out all his instructions. For example it is not his duty to oppose the grant of an adjournment sought by the other side because his client says so or to urge an argument the client insists on even though the lawyer feels it would be counter productive or not ethical to do so, then, the advocate’s duty to himself, to the Court and to the profession must prevail. However, he should communicate his decision to the client in good time and he should give the client the option to brief another Counsel. In similar light is the case where the opposing side’s Counsel has slipped up. Should the advocate take advantage of that position? The classical view would be he should not. I do not know how far that is practical because surely it is not Counsel’s duty to say that his co-professional has made a slip in not pressing a particular point or not pressing it forcefully enough and the judge should consider the same.
I have referred above to a lawyer’s duty to Society. It would be apt to mention Society’s duty to “law.” Nowadays the media pronounces upon a case and lawyers comment on a case in progress. This may prejudice the interest of one of the litigants in the case. Society and all of us owe a duty to law and its fair administration and to desist from action which can conflict with a litigant’s right to a fair and free trial. I am conscious that if it were not for the interest taken by the media several matters of grave concern which involve prominent politicians and other personalities may have gone unattended to. Even so one should try to reconcile duties of the media to law and to Society.
Finally, does the advocate-writer of an article owe a duty to his reader not to bore him even though his personal vanity tempts him to continue? I should think so and so in deference thereto and to fulfill a higher duty I shall wind up this piece!
Not only should the opportunity of cross examination be made available, but it should be one of effective cross examination, so as to meet the requirement of the principles of natural justice. In the absence of such an opportunity, it cannot be held that the matter has been decided in accordance with law, as cross examination is an integral part and parcel of the principles of natural justice.
This circular provides that exporters in a SEZ must now realize and repatriate within a period of twelve months from the date of export the full value of goods/software/services exported by them. In case they require any extension of time beyond the above stipulated period they have to obtain specific permission of RBI.
The appellant pleaded to quash the said notification in so far as it sought to subject the activities of business of chit fund companies to the levy of service tax to the extent of 30% of the consideration received for the services when the law itself provides that such services were not taxable at all in the first place and they contented that vide Explanation 2 to section 65B(44), the consideration charged for services of foreman in chit business, are also excluded from the charge of service tax. Further, the explanation provided in the Education Guide issued by the CBEC at para 2.8.2. also was not correct having regards to the proper interpretation of the statutory provisions.
Held:
Allowing the appeal, it was held that the function of an Explanation was to explain the meaning and effect of the main provision and to clear up any doubt or ambiguity in it. It’s the intention of the legislature which was paramount and a mere use of a label cannot control or deflect such a function. Any ambiguity or doubt in the interpretation of the exclusionary part of the definition of the “service” gets cleared up on a careful examination of the implications of Explanation 2. This Explanation was enacted only “for the purposes of this clause” and since it was placed below clause (c), strictly speaking it was relevant only for the purpose of the aforesaid clause. Further, the answer given at para 2.8.2. of the Education guide was also not correct having regards to the proper interpretation of the statutory provision. Hence, no service tax was chargeable on the service rendered by the foreman in a business of chit fund.
Facts
The
appellant was an Aircraft maintenance engineering training school
approved by Director General of Civil Aviation (DGCA) for providing
Aircraft maintenance engineering (AME) training and conducting
examination wherein the course was approved by the DGCA under relevant
statutory provisions of Civil Aviation Requirement (CAR). Based on the
Board’s Instruction No. 137/132/2010- ST dated 11-05-2011, the
department raised demand. The appellant contended that they issued a
certificate approved by DGCA which fully controlled such training
institutes by prescribing syllabus, regulating number of seats per
session, manner of conduct of exam etc. and that the instruction (supra)
was in contravention of section 65(105) (zzc) read with section 65(27)
of the Act and Notification dated 25-04-2011. The respondents contended
that the appellant did not issue any certificate, degree or diploma
recognised by law but only issued a certificate of course completion
that the AME course was not approved by DGCA but they only issued a
Certificate of Approval to impart training but not to issue any degree,
diploma or certificate recognised by law. In view thereof, the exclusion
provided in the definition of Commercial Training & Coaching was
not applicable to the appellant as their role was limited to train
candidates to appear for the examination conducted by the DGCA and that
DGCA itself did not qualify as an institute recognised by law. Revenue
also contended that the instructions were not binding on quasi-judicial
authorities and thus the writ remedy was not available to the appellant.
The DGCA in its counter affidavit stated that being a
subordinate office of Ministry of Civil Aviation, Government of India it
is a regulatory body in the field of civil aviation primarily dealing
with safety issues with respect to air transport services, enforcement
of civil air regulations, air safety and air worthiness standards. They
further stated that in accordance of the CAR, AME institutes were
required to issue course completion certificates to the students who had
successfully passed, the format of which was approved by DGCA and that
DGCA was not empowered to grant/recognise degree or diploma course
offered by any institute/organisation.
Held
After
perusal of the Act and Rules along with CAR, it was held that not every
institute could offer such course and impart training without the
approval as per the Act, Rules and CAR. The DGCA regulated the course
content offered by such institute and gave relaxation to the successful
candidates by way of grant of authority/license to render services of
aircraft repair and maintenance and to certify the aircraft’s
airworthiness. The Hon. High Court interpreted the expression
“recognised by law” to have a wide meaning and thus held that even if
the certificate/degree/diploma/qualification was not the product of a
statute but had approval of some kind in ‘law’, it would be considered
as exempt. The reasoning in the impugned instruction mixes up and
confuses ‘qualification’ with “a license to practice on the basis of the
qualification”. An educational qualification recognised by law would
not cease to be recognised by law merely because for practicing in the
field, a further examination held by a body is required to be taken. In
view thereof, the instruction, being contrary to section 65(27) and
notification dated 25/04/2011, was quashed.
[Note: Earlier, on
the above issue, an advance ruling was decided against the assessee in
CAE Flight Training (India) Pvt. Ltd. vs. Commission of Service Tax,
Bangalore 2010 (18) STR 785 (AAR). Similarly, the CESTAT Mumbai also
decided against the assessee in Bombay Flying Club vs. CST, Mumbai-II
2013 (29) STR 156 (Tri.-Mumbai). These decisions appear to have been
overruled by the above.]
The provisions of the Act were applicable only to place-related entertainment. In other words, the Act covered an entertainment which takes place in a specified physical location to which persons are admitted on payment of some charge. The legislative history and the amendments introduced by the state in the said Act further substantiated the above fact.
The activity of DTH Broadcasting was not covered by the provisions of section 3 read with section 2(a), 2(b) and 2(d) read with section 4 of the said Act and thus, the provisions of the Act cannot be extended to cover DTH operations carried out by the appellant. Further, it was elementary that a notification issued in exercise of powers under the Act should not amend the Act. Moreover, the notification merely prescribed the rate of entertainment duty at 20 percent in respect of every payment for admission to an entertainment other than cinema, video cassette recorder and cable service. The notification could not enlarge either the charging section or amend the provision of collection under section 4 of the Act read with the Rules. It was, therefore, clear that the notification in no way improved the case of the State. Lastly, if no duty could be levied on DTH operation under the Act prior to the issuance of the notification, then duty cannot also be levied under the said Act after the issuance of the notification.
There are a number of cases wherein the issue about validity of retrospective amendment in Fiscal Statues has been dealt with. One such situation arose under the Maharashtra Value Added Tax Act, 2002 (MVAT Act).
The background is that the State of Maharashtra has notified incentive schemes, popularly known as Package Scheme of Incentives (PSI). The schemes were notified from time to time in about 5 years interval.
A similar scheme was announced in the year 1993. Normally, the original unit coming up in the notified backward area is eligible for the benefits of such scheme/s. However, the Government also granted such benefits for expansion of units subject to compliance of certain requirements about minimum capital investment/increase in productions etc.
These units were issued Eligibility Certificate by the Implementing Agency like District Industries Centre and for sales tax purpose the Entitlement Certificate was issued by the Sales Tax Department. Based on such Entitlement Certificate, the eligible units were entitled to enjoy sales tax benefits by way of exemption from payment of tax or were given an option to have deferment facility, whereby they could collect the tax and pay the same to the Government after certain number of years as per the Scheme. The units had the option to choose the method, i.e. either exemption or deferment, for enjoying the benefits.
Pro-rata Method for Expansion
The issue arose where the unit was already holding Entitlement Certificate as an Original Unit (Existing Unit) and it was also granted further Entitlement Certificate for Expansion. The understanding of the Expansion Unit was that they were entitled to avail the benefit of Scheme for all the production of the unit, i.e. production relating to the Existing Unit as well as the Expansion.
However, the approach of the Sales Tax Department was that the Expansion unit can enjoy the benefit to the extent of ratio of Expansion. In other words, it was contemplated by theDepartment that out of the full production, only pro-rata production relating to the Expansion could enjoy PSI benefit. They clarified pro -rata method to work out such turnover by way of a circular. As per the said circular, unit can take benefit in proportion of capital increase to the total capital or production increase to the total production.
The issue was contested by the dealers since 2001 and in case of Pee Vee Textiles (App. No. 48 and others of 2000 dated 17.3.2001) MST Tribunal held that even in case of Expansion, the unit is entitled to enjoy benefit for the full production and the monetary limits should be adjusted accordingly. The issue was further contested before the Hon. Bombay High Court. The Hon. Bombay High Court in the case of Commissioner of Sales Tax vs. Pee Vee Textile (26 VST 281)(Bom) confirmed the decision of the Tribunal. The said judgment of the Hon. Bombay High Court was further confirmed by the Hon. Supreme Court in July 2009.
Retrospective Amendment
On this background, certain amendments were brought in the MVAT Act, in August 2009, by way of an Ordinance. Section 93 of the MVAT Act, 2002 was amended and other amendments were made providing the ratio method for pro-rata working in case of Expansion. Impliedly, the said amendment was effective from 01-04-2005. The period under BST Act was not touched and it remained governed by the above judgments of the High Court and Supreme Court. However, under VAT period effect was given from 01-04-2005.
Since the operation of the amendment was retrospective, it was challenged before the Hon. High Court on the ground of Constitutional Validity. Amongst others, following were the main contentions of the petitioners:
– There was no amendment in the original PSI and the changes are only in the Act which is not permissible.
– The retrospective amendment can be justified only when it is meant for removing the defect shown by the judiciary.
– The retrospective amendment will affect units harshly, since they have already enjoyed the benefits and now have no opportunity to pass on the burden to the buyers and the ultimate customers.
– There was conscious decision by the government from time to time not to implement the pro-rata method. The non-implimentation of section 41BB under BST Act and section 93 in the MVAT Act by not prescribing Rules for pro-rata method was stressed upon. It was shown that even the Rule for pro-rata method proposed in the draft Rules was withdrawn while publishing the Final Rules in 2005.
On behalf of government the submissions were as under:
– That there was intention to provide benefits on pro-rata method.
– There is no vested right to enjoy windfall benefits.
– In Pee Vee Textiles, the Hon. High Court confirmed the judgment of the Tribunal on the ground that inspite of having powers u/s. 41BB to provide pro -rata method, the same is not implemented by prescribing Rules. The legislature has now corrected the said position by the above retrospective amendment. Thus it is for curing the lacuna.
Judgment of the High Court in the case of Jindal Poly Films and Others (W.P.No.313 of 2010 and others dt. 10-10-2013).
After considering the arguments of both the sides, the Hon. High Court referred to a number of judgments about retrospective amendment in the Act. And the Hon. High Court observed that there is ample power for retrospective provision except that it should be reasonable. Like, if the levy is a surprise then it can be considered as invalid.
In particular facts of the above case, Hon. High Court felt that the amendment is not a surprise amendment, but it is to cure the basis of the judgment in the case of Pee Vee Textile. In a nutshell, the Hon. High Court has observed as under:
“32. Essentially, the issue before the Court is as to whether the validating legislation has cured the vice that was noted in the judgment of this Court. Alternately, whether the same judgment could have been rendered despite the amended provisions of the law. The judgment of the Division Bench in Pee Vee Textiles noted that the legislative intent embodied in Section 41BB of the Bombay Sales Tax Act, 1959 could not be effectuated in the absence of rules framed by the State Government prescribing the ratio for the grant of proportionate incentives. This anomaly has been corrected by the state legislature by the enactment of the Maharashtra Act 22 of 2009. The fact that a draft rule which had been formulated at an anterior point in time had not been converted into an operative piece of subordinate legislation cannot possibly override the power of the state legislature to enact legislation which falls within its legislative competence. There can be no estoppel against the legislature. It is legitimately open to the legislature to enact validating legislation with retrospective effect to cure a deficiency which was noted in the judgment of the Court as a result of which the legislative intent of granting incentives pro-rata could not be effectuated. The legislature has stepped in to cure the deficiency. The validating legislation and the amendment lay down the manner in which proportionate incentives would be computed. Such a course of action is legitimately open and cannot be regarded as being arbitrary or as violative of Articles 14 or 19(1)(g) of the Constitution. The principle of allowing pro-rata incentives subserves the object of the legislation. If the legislature has, as in the present case, determined that the purpose of the Package Schemes of Incentives should or would be achieved by allowing incentives to be computed on a proportional basis, that legislative assessment cannot be regarded as unconstitutional.”
The Hon. High Court accordingly upheld the retrospective validity and also justified levy of interest. However, the levy of penalty was held to be invalid for the period prior to the amendment. Accordingly, the Hon. High Court disposed of the petitions.
Significant amendments have been made by the Finance Act, 2013 through introduction of provisions for imposing penalties on directors/ managers/etc. of a company and making certain offences cognisable thereby empowering tax authorities to arrest a person without warrant. These amendments which have far reaching implications, are discussed hereafter.
Penalty for failure to register:
Presently, u/s. 77 of the Finance Act, 1994 (‘Act’), penalty for failure to register within the due date, is the higher of the following:
? Rs. 10,000/- or
? Rs. 200/- per day during which the default continues.
Section 77 of the Act is amended with effect from 10-05-2013, to restrict the maximum amount of penalty for failure to register to Rs. 10,000/-. Though the penalty is still on the higher side, the amendment is a welcome one.
Penalty on directors, managers, secretary or other officers for certain contraventions by a company:
The Finance Act, 2011, with effect from 08-04-2011, made section 9AA of the Central Excise Act 1944 (‘CEA’) applicable to service tax. This section provides that if an offence is committed by a company (which includes a firm), the persons liable to be proceeded against and punished are:
• the company;
• every person, who at the time the offence was committed was in charge of and was responsible to the company for the conduct of the business except where he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence; and
• any director (who in relation to a firm means a partner), manager, secretary or other officer of the company with whose consent or connivance or because of neglect attributable to whom the offence has been committed.
In addition to the above, a new section 78A is introduced with effect from 10-05-2013, for imposing a financial penalty upto Rs. 1,00,000/- on directors, managers, secretary or other officers in charge of the company for specified contraventions committed by a company namely :
• evasion of service tax; or
• issuance of invoice, bill or challan without provision of taxable services contravening the provisions of the Rules prescribed under the Act;
• availment and utilisation of credit of taxes/ duty without actual receipt of taxable service or excisable goods either fully or partially in violation of the Credit Rules;
• failure to pay to the Government any amount collected as service tax beyond a period of six months from the date on which such payment became due.
The aforesaid persons would be liable to penalty only if:
• at the time of such contravention they were in charge of and responsible to the company for the conduct of business; and
• they were knowingly concerned with such contravention.
The terminology “in charge of and responsible to the company for the conduct of the business of the company” has been a subject of interpretation by the Supreme Court as well as High Courts from time to time. Some judicial considerations are given hereafter:
In Girdhari Lal Gupta vs. D N Menta, Collector of Customs (1971) 3 SCR 748, it was held that, the words “in charge of” must mean in overall control of the day to day business of the company or the firm;
In State of Karnataka vs. Pratap Chand 1981 (1) FAC 374, it was observed that, a partner who was not in overall control of the day to day business of the firm could not be proceeded against merely because he had a right to participate in the business of the partnership firm under the terms of the partnership deed.
In light of the foregoing, it would appear that, whether or not a director/manager/etc. of a company was “in charge/responsible”, would depend upon the facts and circumstances of a given case. Hence, it would be very difficult to lay down specific parameters as to the precise situations under which penalty would be imposable.
In this regard, it may be noted that for the contraventions mentioned in case of evasion, issuance of bogus invoices and non-payment amount collected as service tax, such persons may also be liable to be prosecuted in terms of section 89 of the Act read with section 9AA of CEA in addition to suffering a financial penalty u/s. 78A of the Act.
Further, in the absence of a corresponding amendment in section 80 of the Act, the defense of “reasonable cause” available under the said section would not be available against imposition of penalty u/s. 78A of the Act.
Failure to pay tax collected beyond 6 months – maximum imprisonment increased from 3 years to 7 years:
Presently, failure to pay to the Government any amount collected as service tax beyond a period of six months from the date on which such payment became due is a punishable offence. The quantum of punishment for this offence is increased with effect from 10-05-2013. Section 89 of the Act, as amended, prescribes the quantum of punishment separately in respect of first offence and second offence and also in cases where amount exceeds Rs. 50 lakh and other cases. The quantum of punishment for various offences as applicable from 10-05-2013 is summarised in the Table at the end:
Cognizance of offences and power to arrest:
Amendments in brief:
Significant amendments are made with effect from 10-05-2013 by introducing provisions relating to arrest of persons for offences under the Act. These provisions are summarised hereafter :
Offences are divided into two categories viz:
• Cognisable offences i.e. where the person can be arrested without ‘warrant’; and
• Non-cognisable offences [i.e. offences other than the above].
Failure to pay tax collected beyond 6 months from the due date where the ‘amount’ exceeds Rs. 50 lakh is the only cognisable offence. All other punishable offences (viz. knowingly evading service tax, availing bogus credits, supplying false information, etc.) are non-cognisable offences.
If the Commissioner of Central Excise (‘CCE’) has reason to believe that any person has committed an offence u/s. 89 of the Act where the ‘amount’ exceeds Rs. 50 lakh he may by general or special order authorise any officer of Central Excise not below the rank of Superintendent of Central Excise to arrest such person.
Where a person is arrested for any cognisable offence, every officer authorised to arrest a person shall inform such person of the grounds of arrest and produce him before a magistrate within 24 hours.
• In the case of a non-cognisable and bailable offence, the Assistant/Deputy Commissioner, shall for the purpose of releasing an arrested person on bail or otherwise have the same powers and be subject to the same provisions as an officer in charge of a police station has, and is subject to u/s. 436 of the Code of Criminal Procedure Code, 1973 (‘CrPC”).
• All arrests shall be carried out in accordance with the provisions of the CrPC.
Some considerations under Central Excise:
Provisions relating to power to arrest have been existing under Central Excise/Customs laws. Some considerations under the said laws are set out hereafter. The same could serve as a useful guide for the purpose of the service tax.
Powers to arrest:
U/s. 13 of CEA, an Excise Officer (EO) not below the rank of Inspector, is empowered to arrest a person whom they have “reason to believe” to be liable to be punished under provisions of CEA. Such arrest can be only with prior approval of the Commissioner.
EO can arrest and inform the concerned person as to the ground of arrest. The person arrested has to be forwarded to the Magistrate and must be produced before a Magistrate within 24 hours. The Magistrate may grant the bail on bond or refuse the bail and remand him to custody. Bail is at the total discretion of Court.
As per Section 50 of CrPC, a person arrested should be informed full particulars of the offence and his rights about the bail.
In Sunil Gupta vs. UOI (2000) 118 ELT8 (P&H), it was held that, even if offences under Central Excise are not cognisable, EO duly empowered u/s. 13 of CEA can arrest a person without a warrant.
However, these restrictions are only to police officers. Section 13 of CEA confers substantive powers of arrest. These powers can be exercised by a duly authorised EO without a warrant of arrest. [Refer Sunil Gupta vs. UOI (2000) 118 ELT 8 (P&H)].
Arrest can be made only as per the provisions of section 46 of CrPC. Under this section, the person making arrest shall actually touch or confine the body of person to be arrested, unless the persons submit to the custody. If he resists the arrest, all necessary means may be applied to effect the arrest. However, this does not give right to cause death of a person, unless the accused of the offence is punishable to death or with imprisonment for life.
Arresting authority should make all efforts to keep a lady constable present. But in circumstances if a lady constable is not available or delay in ar-rest would impede the course of investigation, arresting officer, for reasons to be recorded in writing, can arrest a lady for lawful reasons at any time of day or night, even in absence of a lady constable [State of Maharashtra vs. Christian Community Welfare Council 2003 AIR SCW 5524.]
EO can make enquiry even after the arrest. In Badaku Joti Savani vs. State of Mysore – AIR 1966 SC 1746, it has been held by the Supreme Court that, though EO has the powers of a police officer, he is not a “police officer” unless he has powers to lodge a report u/s. 173 of CrPC. Statements made before EO even after arrest are not hit by section 25 of the Indian Evidence Act and these statements can be used as evidence against the accused.
Procedure after arrest:
The person arrested has to be forwarded to the EO who is empowered to send the arrested per-son to a Magistrate. If such empowered EO is not available within reasonable distance, the person may be sent to officer-in-charge of the nearest police station. Superintendent of CE has been empowered for this purpose. [Section 19 of CEA].
EO of the rank of Superintendent or above will make enquiry into the charges against the person arrested. While making enquiry, he has the same powers as an officer–in–charge of a police station [Section 21(1)(b) of CEA]. If he is of the opinion that there is sufficient evidence or reasonable ground of suspicion against the accused person, he can forward the person to Magistrate for bail or custody, [Proviso (a) to Section 21(2) of CEA].
EO making arrest has powers to release a person on executing a bond with or without sureties, and make a report to his superior officer. He can do so if it appears to him that there is no sufficient evidence or reasonable ground of sus-picion against the accused person [Proviso (b) to section 21(2) of CEA]. Superintendent of CE and officers above him have been empowered for this purpose vide Notification No. 9/99-CE(NT) dated 10-02- 1999. However, if he is of the opinion that there is sufficient evidence or reasonable ground of suspicion, he shall either admit him to bail to appear before a Magistrate having jurisdiction in the case or forward him in the custody of such Magistrate [Proviso (a) to section 21(2) of CEA].
Section 20 of CEA prescribes that the police officer shall either admit him to bail to appear before a Magistrate having jurisdiction, or in default of bail, forward him in the custody of such Magistrate. The arrested person must be produced before a Magistrate within 24 hours of the arrest.
Granting ‘Bail’:
‘Bail’ means a “security for prisoner’s appearance, on giving which he is released pending trial”. If offence is ‘bailable’, grant of bail is automatic and can be given by a police officer in charge of a police station or by a Court, on bond or with-out bond. Court has no discretion in the matter. In case of non–bailable offence, accused can be released on bail, unless the offence is punishable with death or imprisonment for life, Court has discretion whether to release on bail or not in respect of non–bailable offences.
The considerations which normally weigh with the Court in granting bail in non–bailable offences are basically – (a) nature and seriousness of offence (b) character of the evidence (c) circumstances which are peculiar to the accused (d) a reasonable possibility of the presence of the accused not being secured in the trial (e) reasonable apprehension of witnesses being tampered with (f) larger interest of public or State and (g) other similar factors which may be relevant in the facts and circumstances of the case [Jayendra Saraswathi Swamigal vs. State of Tamil Nadu AIR 2005 SC 716 (SC 3 Member Bench)].
The basic rule is in favour of granting a bail ex-cept where the course of justice being affected, gravity or heinous nature of the crime, risk of non appearance at the trial, influencing or intimidation of witnesses and similar other possibilities exist [State of Rajasthan vs. Balchand AIR 1977 SC 2447].
In Chaman Lal vs. State of UP 2004 AIR SCW 4705, it was considered that Court dealing with the bail application should be satisfied as to whether there is a prima facie case, but exhaustive exploration of the merits of case is not necessary. It is necessary for the Court dealing with application for bail to consider among other circumstances, the following factors before granting bail – (a) Nature of accusation and severity of punishment in case of conviction and nature of supporting evidence (b) Reasonable apprehension of tampering the witness or apprehension of threat to the complainant (c) Prima facie satisfaction of the Court in support of the charge.
Since the words used in section 20 of CEA are “shall admit the arrested person to bail”, it was argued that the Magistrate must release the person on bail. He has no power to keep the person in judicial custody, if he gives necessary bail bond. There were divergent opinions about whether Magistrate can detain him or he must release the arrested person on bail. Finally, in Director of Enforcement vs. Deepak Mahajan (1994) 70 ELT 12 (SC) Supreme Court has held that the Magistrate has jurisdiction u/s. 167(2) of CrPC to authorise detention of a person arrested under Customs Act etc. as provisions are identical. Thus the Magistrate may grant the bail on bond or refuse the bail and remand him to custody. Bail is at the total discretion of the Court.
In Sankarlal Saraf vs. State of West Bengal (1993) 67 ELT 477 (Cal), a division bench has held that power to grant bail, by necessary implication, includes power to refuse bail, Thus, Magistrate can refuse bail and order custody, police, jail or otherwise.
As per section 167 (2) of CrPC, a person can be kept in judicial custody for 60 days. If investigations are not completed within 60 days, the person arrested should be released on bail. The period is 90 days when offence is punishable with death, imprisonment for life or imprisonment of 10 years or more.
Section 438 of CrPC makes provision for “anticipatory bail”. Court should grant or refuse bail after exercising its judicial discretion wisely [Director of Enforcement vs. PV Prabhakar Rao (1997) AIR 1997 SC 3868 (3 Member Bench) – quoting Gurbaksh Singh vs. State of Punjab (1980) AIR 1980 SC 1632 (SC Constitution Bench).]
Conclusion
The amendments relating to penalties, prosecution & powers of arrest discussed above have been a subject of widespread expression of concerns by the trade & industry and the tax paying fraternity inasmuch as the provisions could be misused to cause undue harassment by the tax authorities.
In para 3 of TRU Circular No DOF No. 334/3/2013 TRU dated 28 -02-2013, it is clarified that policy wing of CBEC will issue detailed instructions in due course of time. It is felt that CBEC should issue a draft circular and seek views of trade & industry and all affected persons before finalising such instructions.
Table —Summary of Punishment for various offences
Facts:
The assessee was an individual engaged in the occupation of goldsmith. In his return of income he had declared a total income at Rs. 0.80 lakh. The AO, in assessment made u/s.143(3) found that during the year under consideration the assessee had purchased a property worth Rs. 50.35 lakh. The AO treated this impugned investment as unexplained and made an addition of Rs.50.35 lakh u/s.69. On appeal, the CIT(A) confirmed the action of the AO.
Before the tribunal, the assessee submitted that he had acquired tenancy right as per Agreement dated 09-04-2001 for a sum of Rs. 4 lakh. Thereafter, pursuant to the agreement dated 07-10-2005, the assessee was allotted a flat in another building in lieu of surrender of his tenancy right. The value of the flat allotted in lieu of surrender of tenancy right was Rs. 50.35 lakh as per the valuation done by the Stamp Duty Authorities, while registering the agreement. He further submitted that the consideration on the surrender of the tenancy rights, equal to the value of the new flat, stood fully invested in a residential flat, the Long Term Capital Gain arising on the said transaction was not chargeable to tax u/s.54F. The contention of the revenue was that the assessee had not been able to prove that he had received the flat by virtue of the surrender of tenancy rights.
Held:
The tribunal agreed with the assessee that the agreement dated 07-10-2005 clearly indicated that the new flat was acquired by the assessee in lieu of surrender of his tenancy right in the old building. The perusal of the agreement dated 09-04-2001, also indicated that the old tenants transferred the tenancy rights in respect of the said property to the assessee for a consideration of Rs. 4 lakh. Secondly, as regards the reasoning of the CIT(A) that the acquisition value of Rs. 4 lakh had not been paid by the assessee, the tribunal found merit in the contention of the assessee that the same had been by way of constructive payment made by the builder on behalf of the assessee, which according to it was not a new practice of the developer in business of construction industry. Thirdly, regarding the finding of the lower authorities as to the difference in values between the consideration for relinquishment of rights by the old tenant (Rs.4 lakh) and the market value of the new flat (more than Rs.50 lakh), the tribunal opined that it was beyond the purview of the lower authorities to suspect a transaction solely on the ground of adequacy/inadequacy of consideration in the absence of any other corroborating evidence and thereby making any adverse inferences. Further, the value as adopted by AO was based on the valuation determined by the stamp duty authorities while registering the agreement dated 07-10-2005. Therefore, it held that mere suspicion without evidence on record could not be the basis for making an addition to income u/s. 69 and hence, the addition made was deleted.
Held:
The tribunal placed reliance upon the following decisions of the Delhi tribunal:
i. DCIT vs. Cosmo Films Ltd. 139 ITD 628
ii. ACIT vs. Sil Investment Ltd. 54 SOT 54
The tribunal noted that as per the Delhi tribunal, there was no restriction on allowing balance of one time incentive in the subsequent year if the provisions are constructed reasonably, liberally and in a purposive manner. According to it, the additional benefit was intended to give impetus to industrialisation and in that direction the assessee was entitled to get the benefit in full when there was no restriction in the statute to deny the benefit of balance 50% when the new plant and machinery was acquired and put to use for less than 180 days in the immediately preceding year. Accordingly, it was held that the assessee was entitled to depreciation in the subsequent year if the entire depreciation was not allowed in the first year of installation.
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 after having considered the provisions of section 40(a)(ia) and section 201(1A) of the Act held as follows :
In section 201(1A) the legislature intended to levy interest even in case of short deduction of tax. In other words, if any part of the tax which was required to be deducted was found to be not deducted then interest u/s. 201(1A) can be levied in respect of that part of the amount which was not deducted whereas the language of section 40(a)(ia) does not say that even for short deduction disallowance has to be made proportionately. Therefore, the legislature has clearly envisaged in section 201(1A) for levy of interest on the amount on which tax was not deducted whereas the legislature has omitted to do so in section 40(a)(ia) of the Act. In other words, provisions of section 40(a)(ia) do not enable the AO to disallow any proportionate amount for short deduction or lesser deduction.
The Mumbai Bench found that short deduction of TDS, if any, could have been considered as liability under the Income-tax Act as due from the assessee. Therefore, the disallowance of the entire expenditure, whose genuineness was not doubted by the AO is not justified. A similar view was also taken by the Kolkatta Bench of the Tribunal in the case of CIT vs. S. K. Tekriwal. In this case, on appeal by the revenue, the Calcutta High Court confirmed the order of the Kolkatta Bench of the Tribunal (ITA No. 183 of 2012, GA No. 2069 of 2012 judgment dated 3.12.2012).
Section 40(a)(ia) does not envisage a situation where there was short deduction/lesser deduction as in case of section 201(1A) of the Act. Therefore, in case of short/lesser deduction of tax, the entire expenditure whose genuineness was not doubted by the AO cannot be disallowed.
This ground of appeal was decided in favour of the assessee.
In the A. Y. 2009-10, M paid salary to the employees of the assessee on behalf of the assessee and also deducted tax at source as per law. The assessee reimbursed the amount to M. The Assessing Officer disallowed the payment made to M relying on the provisions of section 40(a)(ia), on the ground that no tax was deducted at source on such payment to M. The CIT(A) allowed the assessee’s appeal and held that since M had deducted tax at source on salaries paid by it on behalf of the assessee, the assessee was not required to deduct tax at source on reimbursement made by it to M, and when the expenses incurred by the assessee were totally paid and did not remain payable as at the end of the accounting period, the provisions of section 40(a) (ia) of the Act were not applicable. The Tribunal affirmed the decision of the CIT(A).
On appeal by the Revenue, the Allahabad High Court upheld the decision of the Tribunal and held as under:
“i) Tax was deducted at source from the salaries of the employees paid by M, and the circumstances in which such salaries were paid by M for the assessee were sufficiently explained. For disallowing expenses from business and profession on the ground that tax has not been deducted at source, the amount should be payable and not which has been paid by the end of the year.
ii) The Tribunal had not committed any error in recording on facts, and no question of law arose for consideration in appeal.”
Test reports provided by the Singapore company did not ‘make available’ technical knowledge, etc., and therefore, the payment did not constitute FTS under Article 12(4) of the India-Singapore DTAA.
The taxpayer was a tax resident of Singapore (“SingCo”). The taxpayer provided services for testing of toxicity level in animal feeds to Indian companies. The Indian companies were forwarding products’ samples to the laboratory of the taxpayer in Singapore. After testing, the taxpayer forwarded the reports to the Indian company. In consideration, the Indian company paid service fee to the taxpayer. Admittedly, the taxpayer did not have PE in India. The issue before the Tribunal was whether the services provided by the taxpayer ‘made available’ any technical knowledge, experience, skill, knowhow or process in terms of Article 12(4)(b) of the India-Singapore DTAA?
Held
The Tribunal observed and held as follows: The expression ‘make available’ has been examined by various judicial authorities. There is a difference between section 9 of I-T Act and Article 12(4)(b). While Article 12(4)(b) requires the services to be ‘made available’, section 9 has no such requirement. In terms of Article 12, the payment would constitute FTS only if the service provider provides the services in a manner which equips the recipient to independently perform his functions in future without any help from the service provider. Since the test reports provided by SingCo did not ‘make available’ technical knowledge, etc. to the Indian company, the payments made for such reports were not FTS.
Taxpayer is a foreign partnership firm established in Germany, having a branch office in India through which it renders management and technical consultancy services. During the relevant year, taxpayer obtained services from overseas group entities and the consideration for services was shown as ‘payable’ in the books of accounts. However, the actual payments were not made, as Reserve Bank of India (RBI) approval for the same was not obtained.
The taxpayer was incurring losses and did not have sufficient funds and therefore did not even make an application to RBI seeking its approval to remit the amount. These amounts were debited to Profit & Loss Account of PE of taxpayer in India and deduction on the same was claimed.
The tax authority treated the taxpayer to be the representative assessee of the recipient group entities and considered the amounts payable by the taxpayer as income in the hands of recipients. CIT(A) upheld tax authority’s order. Aggrieved, the taxpayer appealed to the Tribunal.
Held 1:
Income on account of amounts payable by the taxpayer to the overseas group entities could be said to have accrued to the said entities only on receipt of the required approval from RBI and there being no such approval received during the year under consideration, the same could not be taxed as income in that year. Reliance was placed on the Bombay High Court decision in the case of Kirloskar Tractors Ltd. [(1998) 231 ITR 849) (Bom)] and in the case of Dorr-Oliver (India) Ltd. [(1998) 234 ITR 723 (Bom)], wherein it was held that accrual of income takes place only on obtaining of necessary approval required from RBI.
S/s. 9, 90 – In respect of recipient from treaty country, income in the nature of FTS should be ‘paid’ during the relevant previous year to be taxed in the hands of recipients.
Facts 2:
In addition to the above, taxpayer had received certain technical services from other overseas entities, amounts for which were also ‘payable’ during the year. However, the same was not offered to tax on the premise that as per the relevant tax treaties the same was taxable only on actual receipt. The tax authority brought these amounts to tax as FTS in the hands of these overseas entities.
Held 2:
Following the decision of Bombay High Court in the case DIT (IT) v. Siemens Aktiengesellschaft [TS-795-HC- 2012(BOM)] as well as the decisions of the Tribunal in the case of DCIT vs. UDHE GmbH [(1996) 54 TTJ 355 (Bom)] and in the case of CSC Technology Singapore Pte. Ltd. vs. ADIT [(2012) 50 SOT 399 (Del)], Tribunal held that the amounts payable by taxpayer to the overseas group entities could not be brought to tax in India during the year under consideration as FTS as per the relevant provisions of the tax treaties, since the same had not been ‘paid’ to the said entities.
Facts:
The Appellant entered into a conducting agreement for use of its plant, machinery & equipments by the other company for consideration. The department contended that tax was leviable on the same under “support services of business or commerce”.
The Appellant contended that the said activity became taxable with effect from 01-06-2007 under the category of “Renting of Immovable Property Service” and discharged service tax accordingly. It further relied on Fine Switchgear vs. CCE, 2012 (25) STR 443 wherein it was held that when a new entry was carved out subsequently for the purpose of service tax, it had to be held that the same was not covered by any prior existing category of service.
Held:
The Hon. High Court allowing the appeal held that the appellant made out a prima facie case on merits raising a serious triable issue and hence it is eligible for complete waiver of pre-deposit.
Facts:
The applicant, an Indian company (wholly-owned subsidiary of a Singapore company) with the objective of strengthening and enhancing sales of the products of Tandus USA and Tandus China to its Indian customers against consideration receivable in freely convertible foreign exchange, agreed to provide services of marketing and promotion of products to Indian service recipients. The services also included demonstration of products, communication with customers, management of dealer accounts, coordination with representatives of customers, etc. The applicant sought advance ruling on the following questions:
• What would be the place of provision of the marketing and support services provided in India by the company to Tandus US and Tandus China in terms of the Place of Provision of Service Rules 2012 (introduced vide Notification No. 28/2012–S.T. dated 20-06-2012)?
• Whether the said services would also qualify as export of taxable services under Rule 6A of the Service Tax Rules, 1994?
Held:
Considering the case of service proposed to be provided from Indian territory to a business entity located outside India and referring to Circular No.111/5/2009 dated 24-02-2009, it was observed that the benefit of service accrued outside India. Accordingly, in terms of the applicable Place of Provision of Services Rules, 2012, the Hon. Authority held that the service so provided by Tandus India was covered under the default Rule 3 which stipulated that the place of provision shall be the location of the service recipient i.e., Tandus USA and Tandus China and thus service was deemed to be provided in a non-taxable territory. Further, referring to Rule 6A of the Service Tax Rules, 1994, the Hon. Authority held that since the applicant satisfied all the conditions of the said Rule, the services so provided would tantamount to export.
The difficulties are much more with the issue of ‘hawala’ dealers having surfaced. Everyone is now well aware that the Sales Tax Department has put up a list of more than 2,000 dealers as suspicious dealers, commonly described as ‘hawala’ dealers, on the website. In respect of ‘hawala’ dealers, no set-off is allowed irrespective of producing confirmation or any other supporting document. Neither assessment orders of the said vendors (so-called havala dealers) are passed nor crossexamination, to rebut the charge of non-genuine transactions etc., is allowed. Such actions of disallowing setoff, in the hands of purchasers, are against the principles of natural justice and invalid in the eyes of law.
Judgment in case of Mahalaxmi Cotton Ginning Pressing and Oil Industries, Kolhapur vs. The State of Maharashtra & Ors. (51 VST 1)(Bom)
In almost all such cases, the Department is relying on the judgment of the Hon’ble Bombay High Court in the above case. No doubt, in the above judgment, the Hon’ble High Court has upheld the Constitutional validity of section 48(5) of the MVAT Act, which provides that the ITC should not exceed the amount of tax paid on the said goods into the State Treasury. However, the Sales Tax Department is taking a stand that after above judgment the Department has nothing to do with vendors. Once the Department’s records show that there is no payment by the vendor, set-off can be disallowed without complying with any other process. For this purpose, the Department is verifying tax payment of vendors by their own means like non-filing of returns, non-availability of vendor or listed suspicious (hawala) dealer, etc.
We understand that if the Government has not received money on the same goods in its treasury than the set-off can be disallowed to the buyer as per the above judgment. But the disallowance cannot be a unilateral action. The Department has to follow the principles of natural justice.
It may be worthwhile to note that in above judgment Hon’ble High Court has not directed disallowance of set-off in the hands of all the buyers without assessment of vendor/s or without giving other opportunities as per law to the claimant buyer/s.
Ascertainment of tax payment on transactions is required
Therefore, the present procedure adopted by the Sales Tax Department is grossly erroneous. As per law, no set-off can be disallowed without ascertainment of tax payment on the given transaction and more particularly on the ‘goods’ involved.
The above position is reiterated as per the recent judgment of the Hon’ble Maharashtra Sales Tax Tribunal.
Gallery 7 vs. State of Maharashtra (VAT S.A. No.120 of 2011 dated 17-12-2012)
This is the judgment in which, amongst others, the issue of disallowance of set-off in relation to ‘hawala’ dealer is discussed and considered by the Hon’ble Tribunal. There were different reasons due to which set-off was disallowed on various purchase transactions. One of the purchases, on which set-off was disallowed, was from a declared ‘hawala’ dealer namely, M/s. Venkatesh Mercantile Pvt. Ltd. In the first appeal the set-off disallowance was confirmed. Therefore, this second appeal was filed before the Hon’ble Tribunal. After discussing the facts, the Hon’ble Tribunal has remanded the matter back to the first appellate authority with following directions:-
“14. We have considered the rival submissions. We have gone through the record underlying the assessment and the audit done by the assessing officer. We have also gone through the record underlying the appeal order.
i) The main issue in this appeal is about the claim of set-off. The levy of interest u/s. 30(3) is consequent to the dues of taxes which have arisen from disallowance of the claim of set-off. Quantum of penalty u/s. 29(3) is also dependant on the quantum of dues of tax and also the amount of set-off claimed in excess. It would therefore, be necessary to deal with the issue of claim of set-off. It is seen from the perusal of both the assessment order and the appeal order that this issue was not handled seriously by both the assessing officer and the appellate officer. While, in certain instances, the claim of set-off was disallowed by the assessing officer on the ground of non-production of tax invoice, it was allowed by the appellate officer on the ground that the seller was not traceable as reported by the sales tax inspector, the claim was allowed by the appellate officer just by observing that it could not be said that the seller was not doing business in the financial year 2006-2007 and there was no report of the sales tax inspector stating that no returns were filed and no tax was paid by the supplier. Without actually examining whether tax collected from the appellant was in fact paid by the supplier into the government treasury, set-off of an amount of Rs. 78,0375/- which was disallowed by the assessing officer was granted by the appellate officer. We are of the view that, it was necessary for the appellate officer to examine the claim and decide the admissibility of the claim not only on the basis of production or non-production of tax invoice but also after examining whether tax charged in the invoice by the supplier were paid into the government treasury or not. We are of the view that for proper appreciation of the issue, it would be necessary to remand the matter to the appellate officer with direction to him to examine the entire claim of set-off afresh in the light of the provision of section 48(5) of the MVAT Act. It would also be necessary to remand the matter to the appellate officer with the view to examine the appellants claim made in the written submission to grant further set-off in respect of the transactions of purchases allegedly effected by the appellant from M/s. Akshila Trade Ltd. and M/s. Bahubali Trading Pvt. Ltd. and M/s. Venkatesh Mercantile Pvt. Ltd. who were found to have defaulted in paying taxes allegedly collected from the appellant.” (Emphasis supplied)
This judgment lays down the correct position in respect of disallowance of set-off including where there is allegation of ‘hawala’ purchases. Unless there is ascertainment of tax payment on the transaction, the set-off cannot be disallowed. It clearly shows that merely on an allegation of the dealer being a hawala dealer set-off cannot be disallowed. It is expected that the lower authorities will follow the above decision and avoid disallowing set-off on a mere allegation of hawala purchase.
Assessment of hawala dealer
It is surprising that the Sales Tax Department is not taking any interest in the assessment of so called ‘hawala’ dealers or just avoiding the assessment of the suspicious vendors on the ground that they are declared ‘hawala’ dealers by them.
Devyani Trading Company vs. The State of Maharashtra (S.A.No.684 to 687 of 2010 dated 15-09- 2012)
In this judgment, the Hon’ble Tribunal has dealt with a similar situation where the vendor has submitted that his transactions are not of sale/ purchase, but financial transaction. In fact the registration of the vendor was cancelled on account of not doing genuine business.
In spite of the above, the dealer was assessed by the Enforcement Officer. In the second appeal, the stand was repeated that there was no genuine business and no tax should be levied. The Tribunal observed that there are transactions with other dealers and therefore, the stand of the appellant that he has not done genuine business cannot be accepted. The Hon’ble Tribunal observed as under:-
“6. The appellant has routed huge transactions through these banks and the State has definitely lost huge tax. The appellant were provided number of opportunities by the appellate Assistant Commissioner to prove that the transactions on financial transactions not involving sales. The transactions entered into or through the bank account of the appellant and the appellant cannot plead that he is not aware about the nature of these transactions. Crores of rupees transactions have been routed through these bank accounts and the appellant cannot say that these are financial transactions not liable to tax. In fact, the existence of these accounts and concealment of the information about their existence gives rise to mens rea.
The appellants have randomly taken various inspections of accounts and not cooperated with the department in explaining the matter in payment of tax and is squarely liable to pay the tax. Accordingly, we confirm the order passed by the Assistant Commissioner of Sales Tax (Appeals) and reject the Second Appeal petitions. Hence, the order.”
The legal position that emerges is that, under the name of ‘hawala’ no dealer can escape the legal liability. The Sales Tax Department not assessing the vendors under the name of ‘hawala’ is really illegal and it is causing great loss to the Government Treasury. It is expected that the Department will follow the above dictum of the Hon’ble Tribunal and avoid big loss of revenue to the Government. This will also save innocent buyers from illegal disallowance of set-off.
Conclusion
ITC is the lifeline of the VAT system. It has to have a sound, strong and logical apparatus. The dealer, while selling his goods considers the availability of set-off of taxes paid on his purchases. Any disallowance of set-off will be a direct loss to him. Therefore, before disallowing set-off u/s 48(5), due legal process is required to be followed by the Department. The above two judgments in relation to the issue, should certainly be taken as guidance by the Sales Tax Department.
Recent corporate scams put to question the usefulness of independent directors (IDs). At one end there are IDs who play a minimalist role, on the other there are examples where the IDs had to take the reins of the company in their own hands and run the company. Take the case of Singapore listed Sino Environment Technology Group. The IDs initiated an investigation over suspicious transactions entered into by the management to buy materials and for investments. The investigation initiated by the ID’s revealed that no raw material or equipment was delivered and no significant work was done at the projects the group had invested in. This ultimately led to the resignation of the executive directors (EDs) leaving the running of the company in the hands of the IDs.
The behaviour of the Boards in India generally tends to be between the two extremes, one where ID’s play a ceremonial role and the other where they play a significant role. This article takes a look at various matters relating to IDs, alongside the requirements of clause 49 of the Listing Agreement, the Companies Bill and SEBI’s Consultative Paper on Review of Corporate Governance Norms in India. The annexure at the end of this article also contains a detailed comparison of the above three documents with regard to matters relating to IDs. At the time of writing this article, the rules have neither been notified nor available for public comment and hence the comments with respect to the requirements of the Companies Bill may not be complete.
Can Independence be defined?
Obviously, an ID has to be independent. The next question is independence from what. The independence is from affiliation of any kind which is likely to prejudice his decisions. As can be seen in the annexure, though the goal is to prevent affiliation of any kind, the three documents differ on the details. The Companies Bill goes farther than the SEBI Guidelines in imposing stricter norms for independence which may go a long way in establishing the role of the ID as an “outside guardian”, which investors currently perceive to be a ceremonial position. Nonetheless, it would be fair to say that independence is a state of mind, and can be legislated only up to a point. For example, whilst a relative of a promoter cannot be appointed an ID under the Bill, a friend of the promoter can be appointed as an ID. Appointing a friend instead of a relative, may be far worse from a point of view of independence. Ultimately, it is the ID’s personality and moral compass that will determine his independence. But that does not mean that legislation has no role to play in this matter. The Companies Bill definition provides a sound basis for ensuring that IDs are independent, and that conflict of interest is minimised. Ultimately it is not the law in itself, but a proper implementation of the law and suitable regulatory intervention from time to time, that may firmly establish independence on the Boards. Implementation cannot be replaced by more legislation.
Whose interest does the ID serve?
The normal expectation globally of the role of an ID is essentially two fold; advisory and monitoring. The ID is supposed to contribute his business expertise which could be a good value addition to a company. On the other hand, the IDs are also expected to serve as a watchdog and protect the interest of the minority shareholders. The role of a strategic advisor and a watchdog are not easy to balance and may run at odds with each other at times.
In India, most IDs view their role principally as that of strategic advisors to the promoters. Relatively, most IDs do not perceive their role to be that of a watchdog over the promoters and the management. An ID is not willing to put on the hat of a watchdog because either he or she does not have the necessary time or the skill sets or is not remunerated enough to specifically take on that responsibility. Very often IDs develop close bonding with the promoter group, which makes it difficult for them to ask uncomfortable questions to the Board. But things have changed in recent times due to high profile instances of fraud in India. IDs are taking a direct interest in reviewing the fraud risk management framework put in place by their organisations for mitigating the risk of fraud. For ID’s of global companies, the risk of non-compliance increases significantly due to certain onerous global legislations such as the US Foreign Corrupt Practices Act and the UK Bribery Act.
In countries such as the US and UK, where shareholding in companies is largely public, the IDs can merely take into account shareholder interest as a common factor. However, in countries such as India, where shareholding is concentrated, there would be two factions; the controlling group and the minority shareholders. The controlling group could extract value from minority shareholders through dubious related party transactions or self dealing transactions, for example, through freeze-out mergers, where the controlled company is merged with another company in which the controlling group has a 100% stake. In the case of dispersely held companies, the challenges are different such as restrictions on control contests, shareholder voting procedures, executive compensation and director’s independence from the management. These differences cause the nature of frauds to be different. For example, frauds like Enron and WorldCom where management misrepresents financial performance to cover up poor performance or to influence compensation are more likely in dispersely held companies. Frauds like Satyam and Parmalat where the controlling group covers up expropriation of funds through financial misstatements are more likely in controlled companies.
In the case of controlled companies, even though the IDs may not have the voting power to stop wrongdoings of the controlling shareholder, he or she has the power to make public any wrongdoing. While the controlling shareholder can remove the ID, such actions are likely to cause unwanted public scrutiny. The press may pick up such resignations, but experience tells us that investor’s memory is too short, and other than in a serious fraud such as Satyam, it is unlikely to be an effective tool, though it may relieve the ID from an onerous engagement. Despite the general perception of the public that IDs should act as a watchdog, it appears that given the actual functioning of the Boards, the supremacy of the controlling group and the few Board/Audit committee meetings (assume average of 6 in a year), the watchdog function is not exhaustively performed. IDs argue that they should not be seen as a panacea for everything and a tool to fix all the wrongdoings.
Which of these two groups, the IDs should represent? Clause 166(2) of the Companies Bill requires directors of the company (which includes IDs90) to act in good faith for the benefit of the members as a whole, the company, its employees, the community and the environment. This requirement goes even beyond protecting the interest of the minority and extends to protecting the interest of the general public at large. This provision is far more onerous than it appears at first reading. For example, minority shareholders may argue that the promoters’ decision in favour of an acquisition, caused them huge losses, which the IDs should compensate them for, as they failed to protect the minority interest.
Schedule IV Code for Independent Directors of the Com-panies Bill requires an ID to safeguard the interest of all stakeholders; particularly the minority shareholders. It is a strange irony that IDs appointed by promoters have to protect the interest of the perceived adversaries of the promotersthe minority shareholders. The ID may not have the time, energy, power, gall or the inclination to set things right and in some cases, after exhausting all efforts to discipline the management, the only realistic option available would be to offer his or her resignation. Just because the Bill sets out the responsibilities of the IDs in greater details, does not necessarily mean that IDs will have adequate powers or remunerated commensurately to fulfill those responsibilities.
Liability of an ID
In the aftermath of Satyam, many IDs resigned from their position across India. Whilst some of the resignations may have been a knee-jerk reaction, it is also possible that the IDs were aware of wrong doings by the company which could not be corrected or they were not provided with enough information to make an appropriate judgment on how the company was being run. More importantly, after realising the onerous nature of his assignment he or she was not prepared to take on those responsibilities. The
position of an ID was no longer going to be an easy occupation for those seeking a comfortable retirement occupation.
There are various legislations that can be used against IDs, some of which are criminal violations and may trigger imprisonment. These include:
1. Violation of clause 49 requirements could generate financial and criminal sanction for directors and IDs under the Securities Contract (Regulation) Act 1956; though this has been infrequently targeted against IDs.
2. The Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, contains various prohibitions on manipulative, fraudulent and unfair trade practices in securities and a prohibition on dealing in securities in a fraudulent manner or using any manipulative or deceptive device in connection with the purchase or sale of securities.
3. Section 12A and 15G of the SEBI Act prohibit insider trading.
4. Section 62 and 63 of the Companies Act 1956, could hold directors liable for certain misstatements in a prospectus to raise capital. SEBI can also impose sanctions for similar violations under the Takeover Code.
5. Under IPC for breach of trust (section 406), theft and cheating (section 420).
6. Under clause 245 of the Companies Bill, a minority group of members or deposit holders can file a class action suit against the directors and claim damages or compensation for any fraudulent, unlawful or wrongful act or omission or conduct.
7. Under clause 447 of the Companies Bill, a director can be imprisoned for a maximum period of 10 years for any fraudulent conduct.
Clause 149(12) of the Companies Bill clarifies that IDs and other non EDs shall be liable only in respect of such acts of omission or commission by a company that had occurred with his or her knowledge, attributable through Board processes, and with the consent or connivance or where he or she had not acted diligently. From this, it appears that the clause seeks to provide immunity to IDs from civil or criminal action in certain cases. However, clause 166(2) of the Bill seems to be a contradiction. It states that the whole Board is required to act in good faith, in order to promote the objects of the company for the benefit of its members as a whole and in the best interest of the company, its employees and shareholders, the community, and for the protection of the environment. This clause narrows the distinction between IDs and EDs, and so does the definition of an “officer in default” under clause 2(60) of the Bill. Whilst an ID is not key managerial personnel under the Bill, he could be an officer in default. An officer in default under clause 2(60) of the Bill is broadly defined, and includes (a) any person in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act, other than a person who gives advice to the Board in a professional capacity; (b) every director, in respect of a contravention of any of the provisions of this Act, who is aware of such contravention by virtue of the receipt by him of any proceedings of the Board or participation in such proceedings without objecting to the same, or where such contravention had taken place with his consent or connivance.
Whilst there is some kind of immunity, for example, in the case of a bounced cheque where the ID can plead that it was done without his knowledge, certain events have sent confusing signals. The Nimesh Kampani and the AMRI hospital fire event in Kolkata where IDs were imprisoned suggest that there may be no immunity to IDs, even when they were not the cause of or responsible for the problem.
IDs operate in an environment of high uncertainty and confusion over their role. They are not clear whether their action or inaction while serving on the Board could subject them to potential imprisonment for violations and frauds committed by the management or the auditors. Many IDs had probably been served arrest warrants arising out of frivolous claims or bouncing of a cheque. This discourages potentially talented candidates from joining as IDs. Clear principles that attempt to replicate some of the fiduciary duty concepts drawn from Delaware law may provide IDs with more comfort that their actions in good faith will not land them up in prison. Directors’ & Officers’ (D&O) insurance is one means to cover IDs for financial liability, but that does not save them from imprisonment.
IDs argue that when a promoter pays a bribe to win a contract, those matters are not escalated to the Board and there is no way an ID would have known about it. To make the ID responsible for such an act would be highly unacceptable. The MCA general circular no. 8/2011 dated 25th March 2011, probably exonerates the IDs in such situations. The circular requires the ROC to exercise due care while including a non ED as an “officer in default”. It specifically states that an ID of a listed entity would not be held liable for any act which occurred without his knowledge or where he acted diligently in the Board process. Whilst these provisions are also contained in the Companies Bill, the exoneration is based on judgment where there is always a scope for interpretation. Besides the Company law, there are several other legislations in India that may cause havoc in the lives of the IDs.
Remuneration of an ID
IDs generally feel that they are inadequately compensated, given the perceived or real risks post the Satyam and Nimesh Kampani episodes. The existing Companies Act requirement (Rule 10B of the Companies (Central Governments) General Rules and Forms, 1956) prescribes sitting fees for independent directors. For companies with a paid up share capital and free reserves of Rs. 10 crore or more or turnover of Rs. 50 crore and above, sitting fees should not exceed the sum of Rs 20,000 and in case of other companies sitting fees should not exceed Rs 10,000. At the time of writing this article, the rules have not yet been framed under the new Companies Bill. In addition to sitting fees, the IDs are also entitled to a profit related commission. The Bill prohibits an ID from receiving stock options. SEBI’s consultative paper has proposed to amend the listing agreement to also prohibit IDs from receiving stock option.
There is overall support to the provision prohibiting an ID from receiving stock options as that directly impeaches his independence. But most people do agree that for the risks that an ID takes, he or she is not commensurately compensated.
Selection of the ID
The appointment of IDs in a controlled company presents unique challenges. The controlling shareholder has majority voting power and can nominate or replace the ID at their discretion. Therefore, the process of hiring and retaining an ID appears to inherently create dependency of the ID on the promoter group. There has been considerable emphasis in India, on whether one should allow minority shareholders to appoint one or more IDs on the Board, though this could be contrary to basic company law principles of one share, one vote. Further, an overzealous ID could become a deterrent, and may end up causing more harm than good to the minority shareholders. An alternative to minority shareholders appointing IDs is to delegate the director nomination process to an independent nominating committee. This practice is already prevalent in many companies in India. The fact that nomination of IDs is directed solely by an independent committee may result in IDs being more independent, than if they were nominated directly by the promoter group.
In the Companies Bill, a listed company may have one director elected by small shareholders. Under clause 178, every listed company and other prescribed class shall constitute a nomination committee. The nomination committee shall identify persons who are qualified to become directors, and recommend them to the Board. Under clause 150, IDs may be selected from a data bank of eligible and willing persons, maintained by a body notified by the Central Government. Thus there are sufficient provisions in the Bill to ensure that the selection process creates greater independence on the Boards.
Rotation of IDs
Sometimes, familiarity breeds complacency. A long tenure may indicate that the IDs have got too friendly with the promoters and over the years have lost their ability to play the role of watchdogs. On the other hand, the longer the ID has been on the company’s Board, he becomes an expert on the company and that industry and his judgment gets better. An ID that is completely new to the company, has less experience, but comes with a fresh pair of eyes and fresh blood. As can be seen, there are pros and con of rotating IDs, and the arguments are not very different from rotating auditors of a company. The Companies Bill requires rotation of IDs, the requirements of which can be seen in the attached annexure. Overall, it appears to be a step in the right direction.
To sum up
The business of life cannot go on if people can’t trust those who are put in a position of trust. However, from the perspective of IDs, there are a number of questions dogging their minds. What are the stakeholders’ and regulators’ expectations from him? How can he fulfill those expectations in the absence of any effective powers? How does he redress the wrong doings? How much trust should be placed on the information presented to him? How much reliance should be placed on experts, such as lawyers, auditors or valuers? What is the extent of due diligence he should carry out? What is the time he should provide to each company where he is an ID? What should be his remuneration? What is he ultimately liable for? Lack of clarity in these areas will only scare away good talent from taking up the position of an ID, and becoming a scapegoat for the misdeeds of management. The Companies Bill with all its good intention to ensure good corporate governance, does not provide any concrete answers to all the above doubts of IDs.
The office of the ID should neither be a bed of roses, nor a bed of thorns. Everyone agrees with that, but there is no agreement on what is the right balance.
Facts:
The assessee filed return of income declaring nil income. In the course of assessment proceedings u/s. 147 of the Act, the Assessing Officer (AO) noticed that under the scheme of amalgamation approved by the Andhra Pradesh High Court u/s. 391 and 394 of the Companies Act the manufacturing division of the assessee company was transferred to M/s. Novopan Industries Ltd. with all its assets and liabilities as per the terms of scheme of amalgamation approved by the High Court. The assessee in return for the transfer of assets and liabilities received the investments of Rs. 25,24,05,000 besides the allotment of 38 equity shares of Rs. 10 each to the shareholders of the assessee company for every 100 equity shares held in the assessee company. The net worth of the assessee company as on 31-3-2006 was Rs. 681.22 lakh.
The AO held the transfer of manufacturing division to M/s. Novopan Industries Ltd to be a `slump sale’ within section 50B attracting liability of capital gains. He computed long-term capital gain by adopting full value of consideration to be Rs. 31,52,12,500 being aggregate of Rs. 6,28,07,500 (being shares issued to shareholders) and Rs. 25,24,05,000. He considered Rs. 6,81,22,000 to be the cost of acquisition. Accordingly, he determined long-term capital gain to be Rs. 24,70,90,500. He rejected the contention of the assessee that there was no monetary consideration and therefore the transfer under consideration was not a slump sale.
Aggrieved, the assessee preferred an appeal to CIT(A) who allowed the assessee’s appeal.
Aggrieved, the revenue preferred an appeal to the Tribunal.
Held: The Tribunal, having noted the facts, observed that there is no monetary consideration received by the assessee company for transfer of manufacturing division. To qualify as a slump sale u/s. 2(42C), two conditions have to be satisfied viz., (1) there must be transfer of one or more undertaking as a result of sale and (2) the sale should be for a lumpsum consideration without values being assigned to the individual assets and liabilities. The Tribunal noted the ratio of the decisions of the Supreme Court in the case of CIT vs. Motors & General Stores Pvt. Ltd. 66 ITR 692 (SC) and also CIT vs. R. R. Ramakrishna Pillai 66 ITR 725 (SC) wherein it was held that where a person carrying on business transfers assets to a company in consideration of allotment of shares, it would be a case of exchange, but not sale.
The Tribunal held that since there is no monetary consideration involved in transferring the manufacturing division with all its assets and liabilities to M/s. Novapan Industries Ltd. under scheme of amalgamation approved by the Andhra Pradesh High Court, it cannot be considered to be a slump sale within the meaning ascribed u/s. 2(42C) of the Act so as to attract the liability of capital gains u/s. 50B of the Act. The Tribunal did not find any reason to interfere with the finding of CIT(A).
The appeal filed by the revenue was dismissed.
Facts: The assessee, a partner of the firm M/s. Madhav Constructions, in its return of income for assessment year 2008-09, filed u/s. 139(4), returned a total income of Rs. 1,31,19,140. The returned income included a sum of Rs. 1,25,00,000 declared by it in the statement recorded u/s. 132(4) of the Act in the course of search action on Madhav Group. In an order passed u/s. 143(3) r.w.s. 153A, the income returned by the assessee was accepted by the Assessing Officer (AO). Thereafter, the AO initiated proceedings u/s. 271(1)(c) on the ground that the income was offered only as a consequence of search and the return of income in which it was declared was filed after due date u/s. 139(1). He held that the assessee’s case was covered by Explanation 5A to section 271(1)(c). He rejected the assessee’s contention that the sum of Rs. 1,25,00,000 declared was offered voluntarily on an estimated basis and the same was accepted in the assessment order and hence the provisions of section 271(1)(c) are not applicable.
Aggrieved, the assessee preferred an appeal to the CIT(A) who allowed the appeal filed by the assessee on the ground that income was offered on an estimated basis and therefore the additional income so offered and accepted could not be held to be concealed income nor could it amount to furnishing of inaccurate particulars.
Aggrieved, the revenue preferred an appeal to the Tribunal.
Held:
In Explanation 5A, the legislature has not specified the due date as provided in section 139(1) but has merely envisaged the words “due date”. This “due date” can be very well inferred as due date of filing of return of income filed u/s. 139 which includes section 139(4). Where the legislature has provided the consequences of filing of return of income u/s. 139(4), then the same has also been specifically provided for eg., section 139(3). Thus, the meaning of the words “due date” sans any limitation or restriction as given in clause (b) of Explanation 5A cannot be read as “due date as provided in section 139(1)”. The words “due date” can also mean date of filing of the return of income u/s. 139(4).
The Tribunal also noted that in the context of sections 54F and 54(2), in the case of CIT vs. Rajesh Kumar Jalan (286 ITR 276)(Gau); CIT vs. Jagriti Aggarwal (339 ITR 610)(P & H) and CIT vs. Jagtar Singh Chawla (ITA No. 71 of 2012, order dated 20th March, 2013), it has been held that provisions of section 139(4) are actually an extension of due date of section 139(1) and therefore due date for filing return of income can also be reckoned with the date mentioned in section 139(4).
The Tribunal held that the assessee gets the benefit/ immunity under clause (b) of Explanation to section 271(1)(c), because the assessee has filed its return of income within “due date” and therefore, the penalty levied by the AO cannot be sustained on this ground. It held that it is not affirming the findings and conclusions of CIT (A). However, the penalty levied was deleted in view of the interpretation of Explanation 5A to section 271(1)(c).
The appeal filed by the revenue was dismissed.
Facts:
The assessee company, a member of Multi Commodity Exchange of India (MCX) was engaged in online business of trading in commodities. The transactions carried on by the assessee were speculative in nature. The bills issued by the Exchange on a daily basis represented mark to market bills and not actual sales/purchase turnover. The transactions were without taking delivery. The entire transaction was squared off at the end of the day or was carried forward to the subsequent day. The net amount, as per contract notes, was either debited or credited to the account of the assessee.
The Assessing Officer (AO), considering the value of the transactions carried out by the assessee on MCX to be the sales figure, invoked section 271B for violation of section 44AB. He held that the turnover of the assessee was more than Rs. 40 lakh, being the limit prescribed u/s. 44AB for getting the accounts audited and obtaining and furnishing the report as required by the Act.
Aggrieved, the assessee preferred an appeal to CIT(A) who upheld the action of the AO.
Aggrieved, the assessee preferred an appeal to the Tribunal where it placed reliance on the following decisions:
Banwari Sitaram Pasari HUF vs. ACIT (29 Taxmann 137) (Pune ITAT)
Growmore Exports Ltd. vs. ACIT (72 TTJ 691) (Mum ITAT)
CIT vs. Growmore Exports Ltd. (Appeal No. 18 to 20 of 2001) (Mum HC).
Held:
The Tribunal noted that the Pune Bench of ITAT has in the case of Banwari Sitaram Pasari (supra), following the decision of Mumbai Bench of the Tribunal in the case of Growmore Exports Ltd. (supra) held that the transaction of buying and selling of commodities where no physical delivery is taken or given is a speculative activity and there is no element of turnover in such transactions.
The Tribunal also noted that the view taken by the Tribunal in the case of Growmore Exports Ltd. has been confirmed by the Bombay High Court vide decision dated 19-12-2007 and speaking order has been passed in the connected case of CIT vs. Harsh Estate Pvt. Ltd. where the Court has observed as under:
“In other words the finding by the Commissioner (Appeals) that the purchase was coupled with delivery has been reversed by the order of ITAT. Nothing has been brought to our attention from the record that the said finding of reversal is perverse warranting this court to take a view different from the view of the Tribunal. We, therefore, proceed on the footing that though there was transaction of shares it was not coupled with delivery. Once there was no delivery, the sale price of the shares could not have been considered as the turnover but only the difference between the price at which the shares were purchased and consequently sold by the broker…
Considering the findings on merits namely that there was no delivery and consequently the sales prices of the shares could not have been considered, it is not necessary to go into the other aspects. In the light of the above, we find no merit in this appeal which is accordingly dismissed.”
The Tribunal considering the above mentioned decisions held that the value of sale transaction of commodity through MCX without delivery cannot be considered as turnover for the purpose of section 44AB. It deleted the penalty levied u/s. 271B.
The appeal filed by the assessee was allowed.
DAY 1:
The RRC began with the Group Discussion on the paper written by Mr. Rajan Vora on Domestic Transfer Pricing and some issues of International Transfer Pricing.
In the Inaugural function which was held in the evening, Mr. Deepak Shah, President of the Society, welcomed the members and gave an overview of the activities which are conducted by the Society.
General of India and former Lokayukta, Karnataka by lighting the traditional lamp. Mr. N. Santosh Hegde expressed his views with regard to various issues including the changes in moral values, political scenario, governance and values in life.
Mr. Salil Lodha, Convenor of the Seminar Committee, proposed a hearty Vote of Thanks.
After the inaugural session, Mr. Rajan Vora made his presentation covering all the issues related to his topic. His clinical analysis on the controversies and his forthright views were of immense benefit to the participants. The session was ably chaired by Mr. Anil Sathe, Past President of the Society.
The day ended with a sumptuous dinner in the traditional “Village” ambience on the lawns of the Hotel.
DAY 2:
After the breakfast, the participants discussed the paper written by Mr. Sunil Lala on Case Studies in Taxation. The Group Discussion was followed by an excellent presentation paper by Mr. Prashanth K. L. who expressed his views on Effective Harnessing of Information Technology. His command over the subject and presentation skills made the session very lively. This session was chaired by Mr. Rajesh Kothari, Past President of the Society. Thereafter, Mr. Sunil Lala dealt with his paper and analysed the implications and rationale of various Tribunal, High Court, and Supreme Court Judgments. He explained that every decision of the judgment forum is with respect to a set of facts and it is important for the reader to appreciate these facts before using the judgment for any purpose. He covered brilliantly all the queries raised by the participants in his address.
This session was chaired by Mr. Gautam Nayak, Past President of the Society. In the afternoon, the participants played some management games. The participants took keen interest and enjoyed the unique experience.
In the evening, an additional session was held for the benefit of all the participants on the very important and relevant topic “Networking Session” by Mr. August J. Aquila (From USA) and Mr. Vaibhav Manek. Both the speakers did a masterly analysis of the important changes which are relevant to a Chartered Accountant. This session was chaired by Mr. Ameet Patel, Past President of the Society. The day ended with a dinner at the pool side in a very cool and pleasant atmosphere.
DAY 3:
After breakfast, the participants discussed the paper written by Mr. Sudhir Soni on “Case Studies in Accounting and Auditing”. The session on
“The Future of Indian Chartered Accountancy Firms” was chaired by Mr. Pranay Marfatia, Past President of the Society. Thereafter, Mr. August J. Aquila and Mr. Vaibhav Manek presented paper on “The Future of Indian Chartered Accountancy Firms”. Their mastery over the subject made the presentation very informative and useful. Before their presentation, the latest publication of the BCAS – “CA Firm of the Future”, authored by Mr. August J. Aquila and Mr. Vaibhav Manek, was released.
DAY 4:
In the morning, the Brain Trust Session was conducted with Mr. Rajesh Kapadia and Mr. H. Padamchand Khincha as the Trustees for Income Tax and Advocate Mr. V. Raghuraman as the Trustee for Service Tax. They analysed all the issues in great detail. Their command over the subject coupled with their crisp and flawless analysis was of great help to all the participants. This session was ably chaired by Mr. Pradip Kapasi, Past President of the Society.
The Indian Constitution was based on western models. We borrowed parliamentary democracy and an independent judiciary from England, federalism and the fundamental rights from the Bill of Rights in the US Constitution, the Directive Principles of State Policy from the Irish Constitution, etc. Thus we borrowed a modern Constitution from western models, and transplanted it from above on our largely backward, feudal society.
Democracy is a feature of an industrial, not feudal, society. But the intention of our founding fathers – Pandit Nehru and his colleagues – was that democracy and other modern principles, such as liberty, equality, freedom of speech, freedom of religion, liberty or equality, as well as modern institutions such as Parliament and independent judiciary, etc would pull our backward, feudal society into the modern age.
They set up a heavy industrial base (which the British had prohibited). Consequently India became partially industrialised and made some progress since 1947. However, midway between 1947 and now our democracy was hijacked by the feudals.
Caste and religious vote banks, which could be craftily manipulated by many of our politicians to serve their selfish ends, emerged and became a normal feature of elections and other political activity in most parts of India.
It is for this reason that many persons with criminal background have often been elected. Democracy was never meant to be run in this manner, and this has blocked our progress. Hence fundamental social and political changes are now required.
The unfortunate truth is that most of our people are still intellectually very backward, with faith in casteism, communalism and superstitions. ‘Honour’ killing, dowry deaths, female feticide, etc are prevalent in large parts of India. Unemployment is massive in India, with even postgraduates seeking a peon’s job. Healthcare for the masses is abysmal. Poor people in India can hardly afford doctors or medicines, and hence they resort to quacks. Education is in a shambles.
Our national aim must be to make India a modern, powerful, secular, highly industrialised country, in which all its people (and not just a handful, as is the case today) get decent lives, and the great social evils like poverty, malnutrition, unemployment, skyrocketing prices, lack of healthcare and good education, etc which are widespread today in India are abolished forever. Backward and feudal ideas like casteism, communalism and superstitions must be replaced by modern scientific and rational thinking. How is this to be achieved? To my mind this can be achieved by the struggles of the people using their creativity.
All patriotic people in India must strive for this goal, and join in this great historical task. This will no doubt call for great sacrifices, and will probably require a long, painful and sustained struggle for about 20 years or so. But if we do not do this we will be cursed by our descendants for having betrayed the nation.
However, it lowers the country’s financial savings and also widens the current account deficit. The need is for a financial instrument that would protect the capital invested against erosion by inflation and also offer a positive real rate of interest. With consumer price inflation over 10%, practically no fixed-income option offers an investor a positive real rate of interest, the nominal rate less the rate of inflation. True, there were hardly any takers for similar bonds in the 1990s.
However, the poor demand was due to flaws in the design: only principal repayments at the time of redemption were indexed to inflation. RBI now proposes to redesign the scheme, indexing both the principal and the coupon to the inflation rate. This makes eminent sense. It means the payout will increase when prices rise and vice versa, thereby ensuring that the purchasing power of an investor’s earnings remains intact. IIBs would help investors diversify their asset portfolio and also ensure investment in more productive assets.
These bonds can also be a huge draw for pension, insurance and other institutional investors. This should dampen the demand for gold to an extent. We also need to make our financial markets more attractive to investors. One, the government should take steps to develop a well-functioning corporate bond market that allows appropriate risk-return pricing and more access to credit. Two, regulators must ensure that financial products are simple, easy to understand and supported by stable incentives.
Three, it is also imperative for the government to incentivise distributors of products such as the National Pension System (NPS) that has the institutional framework to generate superior returns on old-age savings. Subscribers of the Employees’ Provident Fund Organisation must be allowed to voluntarily migrate to the NPS. It will create a larger pool of funds that can be invested across asset classes.
The International Monetary fund (IMF) has warned India against licensing corporate entities to step into the business of commercial banking, saying the risks associated with such a move potentially outweigh the benefits of creating more banks.
IMF’s Financial System Stability Assessment Update said it would be prudent for India to first put in place and gain sufficient experience in implementing a comprehensive framework for the purpose before considering the entry of conglomerates into banking.
Its prime finding is that standards of reading, writing and arithmetic skills have gone from bad to worse. In 2010, one in two children in the fifth standard could read the texts meant for the sec- 780 (2013) 44-B BCAJ ond standard; two years later, the proportion was two out of five. Similarly, in 2010, nearly three out of four students could do two-digit subtraction, and in 2012 only one in two students could do so.
The only good news has been on the enrolment front, especially in rural India, where it’s at a record high of 96%. Effectively, the Right to Education has been reduced to a right to schooling.
In Hong Kong on Tuesday he promised a dream budget: not only will it avoid any increase in direct tax rates, at the same time the government will be able to protect spending on social sector programmes. In Singapore, he reiterated the message. Investors are loving it.
However, in Singapore he also had a warning; an investment bank advisory quotes him as saying that the biggest threat to reforms was an unstable government in 2014.
The implicit message is that the FM believes that 2014 is likely to throw up a very fragmented verdict. Clearly, policy uncertainty will be par for the course.
“It is not only the funding which is a problem; it is about the time being exclusively dedicated to mentoring and grooming future talent which is missing across Indian companies. Not many organizations are employing trained coaches and mentors, an efficient and professional method which has been successfully proven internationally for years,” says Nishchae Suri, managing director at Mercer India.
According to an estimate, only 0.4% of the Budgetary outlay is allocated to the judiciary. “Is justice delivery so unimportant that there is only 0.4% of the gross domestic product [GDP] as Budget for the judiciary?” a Supreme Court judge asked recently at a Delhi meeting.
In contrast, the allocation for the justice system is 1.2% in Singapore, 1.4% in the US and 4.3% in the United Kingdom. Unlike in other departments of the government, more than half of the amount spent on the judiciary is raised from the judiciary itself through collection of court fees, stamp duty and miscellaneous matters.
The situation facing the judiciary is grim. There are 30 million cases pending before the courts. Against the Law Commission recommendation of 50 judges for one million people, the present ratio is 10.5 for one million. Then, there are unjustifiable percentage of vacancies in courts and tribunals. Talented people do not opt for a judicial career for many reasons. Thus, brilliant lawyers have to argue before less-endowed judges.
The infrastructure and working conditions of the judicial and administrative personnel are so poor that these are issues before the Supreme Court in public interest cases. One such case, All India Judges Association vs. Union of India, has been going on since 1989 and is heard almost every week. The government has to be nudged at every step to comply with the orders. Some state governments do not file replies before chief secretaries are summoned. Different benches of the court have monitored these problems for years but are still far from achieving the goals.
Nearly 60% of the cases involve Central laws and, therefore, the Central Budget should take care of the expenses. Laws passed by Parliament normally do not talk about the expenses involved in their implementation, like additional infrastructure and personnel. Since the expenses are shared unequally by the Central and state governments, there is constant squabble over the liability to finance the courts and tribunals. Registrars of high courts are often seen panhandling before law secretaries.
If the present imbroglio is not solved, the system is bound to crash. In the past, reports of committees like those headed by Justice Jagannatha Shetty and E Padmanabhan have warned the government about the pathetic condition of the judiciary. In a recent study, it was found that appeals from more literate states exceed by far those from the less literate ones. If education spreads and people realise their rights and start asserting them, the docket explosion will be unmanageable in times to come. Imagine the golden chain of justice with 60 bells set up by emperor Jahangir ringing every nano-second.
Without any prodding, hard-headed European businessmen have decided to put their money where they believe future global growth will originate. Not in Europe, but in India. Remember, Unilever already had control of HUL, with its existing 52.5% equity. So, the main reason for pumping in the money is to invest in future growth and to get a bigger share of the dividends that will come with it. And, HUL is only the latest in what is proving to be a trend of large multinationals hiking stakes in their Indian arms.
Over the last few years, German engineering giant Siemens, Swiss major ABB, drugmaker GlaxoSmithKline and several others have bought larger stakes in their Indian arms. Expect others, like Colgate-Palmolive and Suzuki, to follow suit. Indian regulations let each parent to raise its stake up to 75%.
Some people fret that these could lead to a delisting of HUL and the other multinationals. However, these fears could prove to be baseless. Once listed in India, our takeover and tax rules make it near-impossible for a company to delist. Even if some ingenious accountants finds a way for some to get off our bourses, as they did with Cadbury, that would be no great tragedy.
Though multinational stocks have been steady performers, to develop a vibrant equity culture, India needs more local companies that operate for the long term, without worrying much about the quarterly opinions of analysts. Once our companies start thinking long term, without looking over their shoulders all the time, the equity market will become vibrant and robust.
The new rules are effective from April 1. Earlier, those who didn’t pay taxes in India, owing to the provisions under the double taxation avoidance agreement between India and the country of origin concerned, didn’t have to file the return in India.
“A person claiming any relief of tax under section 90 or 90A or deduction of tax under section 91 of the Income Tax Act, shall furnish the return for assessment year 2013-14 and subsequent assessment years,” the Central Board of Direct Taxes said in a notification. The move would primarily impact majority of the investors from Mauritius who claim treaty benefits and don’t file returns on the pretext that their income isn’t taxable in India.
Experts said though the move would increase the compliance burden on assessees, the government would have a lot of information to assess whether treaty relief claimed by people was valid or not. Now, taxpayers would have to report foreign income separately, under a new schedule. They would have to bifurcate the foreign income to which provisions of a tax treaty apply and quote the tax identification number (TIN) in case tax has been paid in a foreign country. If the TIN is not allotted by that country, the assessee would have to furnish his passport number. For instance, if a taxpayer earns income from interest on bank deposits in India, as well as abroad, he would have to state the interest earned on foreign income separately.
Taxpayers may claim tax benefits under a tax treaty or the Income Tax Act, whichever provides greater benefits. In Finance Act, 2012, the government had said a tax residency certificate (TRC) would be required to prove the taxpayer was the resident of the tax treaty country concerned. It had said TRC would be a necessary, but not a sufficient condition for availing of treaty benefits.
The new rules also make it mandatory for taxpayers with total annual income of more than Rs. 25 lakh to declare their domestic assets, including land, buildings, bank deposits, shares, insurance policies, loans, jewellery, bullion, drawings, paintings, yachts, boats, etc. Now, as part of foreign asset reporting norms, assessees also have to state their foreign bank account number and the details of the trusts in which they are trustees.
Corruption is not a new problem in India. Kautilya had bluntly talked about 40 methods of embezzlement in the Arthashastra, his famous treatise on government. President Rajendra Prasad had written to prime minister Jawaharlal Nehru in the early days of the republic to warn him about the growing incidence of corruption in government. A committee headed by K. Santhanam was formed in 1962 to suggest ways to reduce corruption. The first Bill for a Lokpal was tabled in Parliament in 1968. Institutions such as the Central Bureau of Investigation and the Central Vigilance Commission were set up in those years. And add to that the flurry of legislation that sought to check corruption.
At least some of the corruption in the socialist era was linked to the discretionary powers vested with the government. C. Rajagopalachari often lashed out against the insidious way that the licence raj was undermining honesty across the country. The Santhanam committee also tried to establish a link between economic controls and corruption. There is undoubtedly a lot of truth in their observations. The advent of economic reforms in 1991 reduced corruption in a lot of sectors; one does not hear of cement allocation scams these days. A transition to auctions could have prevented the telecom spectrum scam.
But it is also true that economic reforms have not stamped out corruption. The nature of the beast has now changed, with massive amounts of money being made in public procurement, land deals, welfare schemes, infrastructure projects and the like. Anecdotal evidence suggests that the size of the loot has also multiplied. The Bofors deal seems like a pittance today, even after taking inflation into account.
The venality within government is mind-boggling, from the national minister in New Delhi caught with his hands in the till to the district official who demands a bribe to help a farmer access his land records. Yet, it would be wrong to pretend that the problem is restricted to the innards of government. Dishonesty has become ubiquitous in India: the corporate sector, education, the legal system and the media, for example. It would not be far from the truth to say that India suffers from a crisis of values.
The fact that corruption is an old disease, it is ubiquitous and has become culturally acceptable should not lead to the pessimistic conclusion that nothing should be done about it, that silent rage is the only rational response. Many countries have won the battle against corruption, at least against the sort of pervasive corruption we see in India.
The most natural place to begin is the political system. In 1967, Atal Bihari Vajpayee had pointed out with his trademark irony that every parliamentarian begins his career with a lie, when he reports the size of his election fund. The lies multiply after that.
The main attack against corruption in the political system has to begin at the top, just as there is little hope of cleaning up the corporate sector if the focus is on the small entrepreneur rather than large business houses.
There has been enough discussion in recent decades on the solutions: reform of electoral funding, independent watchdogs, greater autonomy for the Central Bureau of Investigation, the Right to Information, more transparent public procurement and ombudsmen such as the Lokpal, for example. Of equal importance is a political culture that respects these institutions rather than treats them as instruments of political control.
The Manmohan Singh government has preferred to distract national attention whenever a corruption scandal has erupted rather than try to address the problem. Also, the Prime Minister has used his reputation of personal probity to protect himself against being equated with several corrupt ministers in his cabinet; but it is high time this layer of Teflon was ripped off. The buck should stop with him.
The time to be impressed with his weak platitudes about corruption has gone.
Both you and your bank/broker would soon be required to report this to the Internal Revenue Service (IRS), the US tax authority. The Securities and Exchange Board of India (Sebi) is giving finishing touches to a draft inter-governmental agreement (IGA), to be signed between India and the US under the Foreign Account Tax Compliance Act (FATCA). The three-year-old US law seeks to improve tax compliance involving foreign financial assets and offshore accounts. Under FATCA, US taxpayers with specified foreign financial assets exceeding certain thresholds must report those to IRS.
FATCA also requires foreign financial institutions (FFIs), such as banks, fund houses and brokers, to report directly to IRS information about financial accounts held by US taxpayers, or foreign entities in which US taxpayers hold a substantial ownership interest. These provisions will become applicable to Indian financial institutions once the Indian government signs IGA with Washington under the Act.
The law is expected to come into force in January 2014.
While the Reserve Bank of India (RBI) was earlier asked to prepare the draft IGA, Sebi has now sought feedback from market participants on the key changes required to be made in the draft. These suggestions will be forwarded to the Centre for incorporation in IGA.
Since the issue is of “vital importance” and, once implemented, will have “impact on the securities market”, Sebi has sought specific suggestions from market participants on changes needed in the “text of the Model-1A of IGA”, those suggested in the due diligence procedures for a reporting entity and any exempted entity and product that needs to be incorporated in IGA.
Sebi has also called for a meeting of key intermediaries next week to discuss and iron out issues.
Under FATCA, withholding agents must withhold tax on certain payments to FFIs that do not agree to report certain information to IRS about their US accounts or accounts of certain foreign entities with substantial US owners. An FFI may agree to report certain information about its account holders by registering to be FATCA-compliant.
An FFI registered to be FATCAcompliant and issued a global intermediary identification number (GIIN) will appear on a published FFI list. Withholding agents may rely on an FFI’s claim of FATCA status based on checking the payee’s GIIN against the published FFI list. This list is scheduled to be published monthly, beginning December 2013.
Greek tragedy has the concept of a fatal flaw. Manmohan Singh’s is malleability when deciding what is right and wrong. It isn’t easy to spot the flaw because he masks it with his ability to argue either side with a display of equal conviction. And he uses it to great effect to ensure the survival of his government and himself. So, despite obvious differences with his party chief on economic policy, he has mostly suppressed his instincts and gone with hers despite the damage it has caused. On allowing coalition partners to run amok, he said something like: “I am not in the business of losing my government’s majority” (though, ironically, that is exactly what he has done, after losing coalition partners at the rate of one every two years). As for protecting the public interest, when the petroleum minister warned of the fiscal consequences of awarding a big jump in gas prices to a private party, the minister was packed off to earth sciences. When the sports minister warned him two years before the Commonwealth Games that a financial scandal was building up, that minister too got changed. The coal secretary wrote to him as coal minister, warning of a scam and asking for a mine auctioning policy. The old one, garnished with the usual favouritism to favourites, continued.
The Opposition likes to attribute all this to weakness in the prime minister, but that cannot explain the reluctance to take action, even when prodded, as a response to misdemeanor by a political nonentity like Ashwani Kumar, or by a lightweight like Pawan Bansal from single-Lok Sabha-seat Chandigarh. Nor can he plead the compulsions of coalition politics. Could it be “nonpolicy paralysis”? Let’s face it, the more likely explanation in at least some cases is complicity.
A micron-thin Teflon coating remains despite repeated acquiescence in the face of wrongdoing because, unlike many of his ministerial colleagues, Dr Singh has no nephews, sons and sons-in-law, feeding like vultures off rotten flesh. What gives him public standing also are his innate civility and a deceptive air of humility that hides a calculating brain. The abiding mystery is why a natural instinct to preserve his place in India’s economic history has not prevented him from bringing the economy to its knees, with about the worst set of macroeconomic indicators for any major economy. Nor, while he makes his robot-like speeches, has he uttered a word of regret about the mismanagement. Does he think that he is not complicit in that too?
The Jain Commission, in its ‘Report of the Commission on Review of Administrative Laws’ (September 1998), commented: “There is a perception among many people that despite a fairly extensive state intervention and a regulatory regime in our country, there is no real deterrence and effective enforcement for the benefit of society in general and the average citizen in particular.”
Under the Factories Act, 1948 — which with its statespecific rules reeks of the license raj — business entities have to ‘suffer’ inspections from various different government departments, and notices for even minor lapses are sent directly to directors. No wonder the World Bank’s ‘Ease of Doing Business’ ranking leaves India at 132nd place out of 183 countries.
The Jain Commission admitted that multiplicity and complexity of laws and rules, as well as lack of information about them leads to misuse (read facilitates corruption) and hampers growth. It sought repeal of over 1,300 central laws (including 11 British statutes). The Commission admitted that there isn’t even a rough estimate of similar state laws, which could run into several thousands. Since the Acts and the rules neither recognise current realities, nor do they facilitate compliance, there is a tendency to evolve mechanisms which are not in the interest of employees, employer or even the state. Harassment and circumvention emerge as the key conduct.
The National Law Commission down the years has also been giving its recommendations for repeal or revision of laws. Yet, apart from a one-stroke repeal of 315 Amendment Acts in March 2002, progress is pathetically slow. Owing to our legislative framework, a law or Act never dies unless specifically repealed.
As no one wants to take responsibility for repeal of old laws, the Jain Commission suggested adoption of the US or UK model. The UK, then, had in place a Deregulation and Contracting Out Act, 1994, which permitted the authorised minister to amend the provision of a legislation or repeal it through administrative orders (after inviting objections) so long as this reduced the burden imposed by that legislation. However, an outcry over dilution of the sanctity of the UK Parliament led to the repeal of this Act. Today in the UK, under The Legislative and Regulatory Reform Act, 2006, legislations can be repealed by a Parliament resolution (a full-fledged time-consuming debate is not required).
The Jain Commission also suggested the US model with its sunset clauses. “There is no general or comprehensive requirement at the US federal level that all laws, or even specific categories of laws, must be reviewed, renewed, modified or set to expire. At the state level, however, sunset requirements are more common.
“While giving unprecedented rights to a minister for repeal of an Act may prove dangerous and even unconstitutional, perhaps the sunset clause mechanism could be explored,” says M. L. Bhakta, senior partner of law firm Kanga & Co. (Source: The Times of India dated 29-11-2012)
All of this exemplifies the vice-like grip of politicians over Indian sports. Elections to the various sports bodies are straightforward political contests with little thought given to electing the right man for the right job. In several cases the same political personality is seen to be holding critical administrative positions in multiple sports federations for years together. Ironically, politicians who rarely see eye to eye on public policy matters have no qualms about collaborating on sports. Hence, tainted Congress leader Suresh Kalmadi is seen supporting INLD’s Chautala’s candidature in the IOA. This incestuous politicians’ clique is eating away at the innards of Indian sport.
Noxious politicisation is the primary reason why a country of 1.2 billion people produces so few champions. Funding for sports bodies is a waste, as politicians and their appointees use it to disburse patronage. The existing system needs to be dismantled and a new one put in its place. Politicians have no business governing sports and must give way to former sportspersons or other professionals associated with sport. With their knowledge of and feel for sport they can mentor young athletes and raise sporting standards many times over.
(Source: The Times of India dated 10-12-2012)
Take India. TI ranks it 94th out of 174 countries. But of the 93 countries that have a better corruption ranking, as many as 86 also do better on per capita income. Only seven countries that are poorer than India manage to do better on corruption. Six of them, interestingly, are in Africa (Rwanda, Lesotho, Liberia, Zambia, Malawi and Burkina Faso), so parts of that continent are doing some things better than us in India. Look then at the South Asia corruption scores, and the picture is generally consistent: corruption perceptions usually improve as incomes rise. Bhutan has the second highest per capita income (INR127,050) and also the best corruption rank (33). That is followed by Sri Lanka (INR178,228 and rank of 79), and then India (INR93,508 and corruption rank of 94). The poorer neighbours (Pakistan, Bangladesh, Nepal) also do worse on corruption, ranking between 139 and 144. The moral in the numbers seems to be clear: get rich and your country is also likely to become clean (or at least cleaner).
(Source: “Weekend Ruminations” by T.N. Ninan in Business Standard dated 08-12-2012)
“Never before has India had that kind of image,” Tata said in an interview. India has been “hurt” by scams, court process and some of the retrospective taxation acts which had given “a sense of uncertainty to investors in terms of the credibility of the government”, he said.
“You get FIPB approval to invest in India and to own a company, you get a licence to operate and then, three years later, the same government… tells you that your licences are illegal and that you have lost everything. This leads to a great deal of uncertainty. Never before has India had that kind of image. So that really rattled me because then anything can happen,” the Tata patriarch said.
India must give an “irreversible commitment” that law of the land has sanctity and the government approval cannot be taken lightly, he emphasised, adding “otherwise India would be taken lightly”. (Source : The Times of India dated 10-12-2012)
The executive body of the 27-member European Union has drawn up an action plan to combat tax evasion and avoidance and wants member states 530 (2013) 44-B BCAJ to adopt a common general anti-avoidance rules, or GAAR.
India has deferred the implementation of GAAR by a year after domestic and foreign investors voiced concerns, and it could be pushed to 2016-17 if the country accepts recommendations of the review committee.
The recommendations are with Manmohan Singh, but a decision has been difficult because of opposition from tax authorities that are not in favour of any further delay in the rules that they feel is necessary to curb tax evasion.
Shome committee had suggested a three-year deferral, arguing that the administrative machinery was not ready. GAAR rules seek to deny tax benefit to any arrangement that is entered into with the sole objective of avoiding taxes. Though primarily targeted at foreign investors coming into India through the tax havens and Mauritius, the rule could well apply to domestic structures as well, which has worried the domestic industry. Worried foreign investors had pressed sales in stock markets fearing the law would apply to their investments routed through Mauritius. India Incs biggest fear was that the rules would leave too much discretionary powers in the hands of income tax officials leading to their harassment.
(Source: The Economic Times dated 10-12-2012)
Presently, banks can offer facility to repatriate export related remittances by entering into standing arrangements with Online Payment Gateway Service Providers (OPGSP) for export of goods and services for value not exceeding US $ 3,000 per transaction.
This circular has increased this limit from US $ 3,000 to US $ 10,000 per transaction. Hence, banks can now offer facility to repatriate export related remittances by entering into standing arrangements with Online Payment Gateway Service Providers (OPGSP) for export of goods and services for value not exceeding US $ 10,000 per transaction.
On 20th February, 1982, the assessee, being the absolute owner of 6000 fully paid up equity shares of the face value of Rs. 25 each of M/s. Hero Cycles (P) Ltd., executed a deed of revocable transfer in favour of M/s. Yogesh Chandran and Brothers Associates (the transferee). Under the deed the assessee could, on completion of 74 months from the date of transfer but before the expiry of 82 months from the said date, exercise the power of revoking the gift. In other words, the assessee left a window of eight months within which the gift could be revoked.
The deed of revocable transfer specifically stated that the gift shall not include any bonus shares or right shares received and/or accruing or coming to the transferee from M/s. Hero Cycles (P) Ltd. (the company) by virtue of ownership or by virtue of the shares gifted by the assessee and standing in the name of the transferee. Effectively therefore, only a gift of 6,000 equity shares was made by the assessee to the transferee.
On 29th September, 1982, the company issued bonus shares and since the transferee was a holder of the gifted equity shares, 4,000 bonus shares of the said company were allotted to the transferee by the company. Similarly, on 31st May, 1986, another 10,000 bonus shares were allotted to the transferee by the company.
Thereafter, during the window of eight months, the assessee revoked the gift on 15th June, 1988, with the result that the 6,000 shares gifted to the transferee came back to the assessee. However, the 14,000 bonus shares allotted to the transfree while it was the holder of the equity shares of the company continued with the transferee.
Assessment proceedings for the assessment year 1982-83
For the assessment year 1982-83, the Gift-tax Officer passed an assessment order on 17th February 1987, in respect of the assessee. He held that the revocable transaction entered into by the assessee was only for the purpose of reducing the tax liability. As such, it could not be accepted as a valid gift. For arriving at this conclusion, the Assessing Officer relied upon McDowell and Co. Ltd. vs. CTO [1985] 154 ITR 148 (SC). Accordingly, the Assessing Officer, while holding the gift to be void, made the assessment on a protective basis.
Feeling aggrieved by the assessment order, the assessee preferred an appeal before the Commissioner of Gift Tax (Appeals), but found no success. The Commissioner of Gift-tax (Appeals) however, held that since the gift was void, a protective assessment could not be made.
The assessee then preferred a further appeal to the Tribunal and by its order dated 23rd August 1991, allowing the appeal; the Tribunal held that the revocable gift to be valid. It was noted the concept of a revocable transfer by way of gift was recognised by section 6(2) of the Gift-tax Act, 1958 (“the Act”). The value of the gift in such a case was to to calculated in terms of rule 11 of the Gift-tax Rules 1958.
Feeling aggrieved by the decision of the Tribunal, the Revenue took up the matter in appeal before the Punjab and Haryana High Court. By its judgement and order in CGT vs. Satya Nand Munjal [2002] 256 ITR 516 (P&H) the High Court dismissed the appeal and held:
“It is a legitimate attempt on the part of the assessee to save money by following a legal method. If on account of a lacuna in the law or otherwise the assessee is able to avoid payment of tax within the letter of law, it cannot be said that the action is void because it is intended to save payment of tax. So long as the law exists in its present form, the taxpayer is entitled to take its advantage. We find no ground to accept the contention that merely because the gift was made with the purpose of saving on payment of wealth tax, it needs to be ignored.”
Assessment proceedings for the assessment year 1989-90
On 30th January, 1996, the Gift-tax Officer issued a notice to the assessee u/s. 16(1) of the Act to the effect that for the assessment year 1989-90 the gift made by the assessee was chargeable to gift-tax and that it had escaped assessment year. The assessee responded to the notice by simply stating that there is no gift that had escaped assessment.
On 24th March, 1998, the Assessing Officer passed a reassessment order for the assessment year 1989-90. While doing so, he framed two issues for consideration: firstly, whether the transferee becomes the owner of the bonus shares particularly because the shares have been received by it as a result of a revocable transfer; secondly, whether the bonus shares received by the transferee could be described as a benefit by the transferee from the transferred shares.
The Assessing Officer held that the transferee does not become the owner of the gifted shares until the transfer is an irrevocable transfer. Proceedings on this basis, it was held that the 14,000 bonus shares allotted to the transferee were a part and parcel of the gifted shares and the assessee only took back 6,000 shares from the transferee pursuant to the revocable gift. Consequently, it was held that the assessee had surrendered his right to get back 14,000 bonus shares which were treated as a gift by the assessee to the transferee in view of the provisions of section 4(1)(c) of the Act. The assessee was taxed accordingly.
Feeling aggrieved by the reassessment order, the assessee preferred an appeal to the Commissioner of Gift-tax (Appeals). By his order dated 8th September, 1998, the Commissioner held that since there was no regular transfer of the bonus shares, the transferee could not claim any ownership of the shares. The Commissioner also referred to McDowell and Co. Ltd. and held that the assessee had carefully planned his affairs in such a manner as to deprive the Revenue of a substantial amount of gift-tax. The reassessment order was accordingly upheld.
The assessee then took up the matter with the Tribunal which held in its order dated 23rd May, 2000, that in view of the assessment to gift-tax made in respect of the assessee for the assessment year 1982-83, the notice issued u/s. 16(1) of the Act was merely a change of opinion and, as such the reassessment proceedings could not have been taken up. On the merits of the case, it was noted that neither the dividend income on the bonus shares nor their value had been taxed in the hands of the assessee. Consequently, the assessee was liable to succeed on the merits of the case also. The gift-tax reassessment was accordingly quashed by the Tribunal. The Revenue then came up in appeal before the High Court with the following substantial question of law:
“Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in quashing the gift tax assessment in the assessee’s case?”
In the impugned order, the High Court held that the assessee was liable to gift-tax on the value of the bonus shares which were a gift made by the assessee to the transferee. It was held that the bonus shares were income from the original shares by relying upon Escorts Farms (Ramgarh) Ltd. vs. CIT [1996] 222 ITR 509 (SC). Accordingly, the order of the Tribunal was set aside and the reassessment order upheld.
On appeal to the Supreme Court by the assessee, the Supreme Court observed that the fundamental question before the High Court was whether there was in fact a gift of 14,000 bonus shares made by the assessee to the transferee. According to the Supreme Court the answer to this question lay in the interpretation of section 4(1)(c) of the Act, but a perusal of the impugned judgment and order facially indicated that there had been no consideration of the provisions of section 4(1) (c) of the Act.
The submission of the learned counsel for the assessee is that on an interpretation of section 4(1)(c) of the Act, it could not be said by any stretch of imagination, that the assessee had made a gift of 14,000 bonus shares to the transferee in the previous year relevant to the assessment year 1989-90.
The Supreme Court however, was not inclined to decide this issue finally since it did not have the view of the High Court on the interpretation of section 4(1)(c) of the Act. Nor did it have the view of the High Court on the applicability or otherwise of the principle laid down in McDowell and Co. Ltd.
As far as the applicability of Escorts Farms is concerned, the Supreme Court observed that the question that arose for consideration in that case was the determination of the cost of acquisition of the original shares when bonus shares are subsequently issued. That is the second part of section 4(1)(c) of the Act and that question would arise (if at all) only after finding is given by the High Court on the first part of section 4(1)(c) of the Act.
Under the circumstances, the Supreme Court remanded the matter for de novo consideration by the High Court keeping in mind the provisions of section 4(1)(c) of the Act as well as the orders passed in the case of the assessee for the assessment year 1982-83.
The assessee a public limited company, classified by the Reserve Bank of India (RBI) as a non-banking finance company was engaged in the business of hire purchase, leasing and real estate, etc. The vehicles, on which depreciation was claimed, were stated to have been purchased by the assessee against direct payment to the manufactures. The assessee as a part of its business, leased out their vehicles to its customers and therefore, had no physical affiliation with the vehicles. In fact, lesse were registered as the owners of the vehicles, in the certificate of registration issued under the Motor Vehicles Act, 1988 (hereinafter referred to as “the MV Act”).
In its return of income for the relevant assessment years, the assessee claimed, among other heads, depreciation in relation to certain assets, (additions made to the trucks) which, as explained above, had been financed by the assessee but registered in the name of third parties. The assessee also claimed depreciation at the higher rate on the ground that the vehicles were used in the business of running on hire.
The Assessing Officer disallowed claims, both of depreciation and higher rate, on the ground that the assessee’s use of these vehicles was only by way of leasing out to other and not as actual user of the vehicles in the business of running them on hire. It had merely financed the purchase of these assets and was neither the owner nor used of these assets. Aggrieved, the assessee preferred appeals to the Commissioner of Income-tax (Appeals). In so far as the question of depreciation at normal rate was concerned, the Commissioner (Appeals) agreed with the assessee. However, the assessee’s claim for depreciation at higher rate did not find favour with the Commissioner.
Being aggrieved, both the assessee and the Revenue carried the matter further in appeal before the Income-tax Appellate Tribunal (for short “the Tribunal”). The Tribunal agreed with the assessee on both the counts.
Being aggrieved, the Revenue preferred an appeal to the Bombay High Court u/s. 260A of the Act. The High Court framed the following substantial questions of law for its adjudication :
“Whether the appellant (assessee) is the owner of the vehicles which are leased out by it to its customers and whether the appellant (assessee) is entitled to the higher rate of depreciation on the said vehicles, on the ground that they were hired out to the appellant’s customers.”
Answering both the questions in favour of the Revenue, the High Court held that in view of the fact that the vehicles were not registered in the name of the assessee, and that the assessee had only financed the transaction, it could not be held to be the owner of the vehicles, and thus, was not entitled do claim depreciation in respect of these vehicles.
On an appeal to the Supreme Court by the assessee, it was held that the provision on depreciation in the Act reads that the asset must be “owned, wholly or partly, by the assessee and used for the purposes of the business”. Therefore, it imposes a twin requirement of “ownership” and “usage for business” for a successful claim u/s. 32 of the Act.
Before the Supreme Court, the Revenue attacked both legs of this portion of the section by contending: (i) that the assessee is not the owner of the vehicles in question, and (ii) that the assessee did not use these trucks in the course of its business. It was argued that depreciation can be claimed by an assessee only in a case where the assessee is both the owner and user of the asset.
The Supreme Court dealt with the second contention before considering the first. The Revenue argued before the Supreme Court that since the lessees were actually using the vehicles, they were the ones entitled to claim depreciation and not the assessee. The Supreme Court was not persuaded to agree with the argument. According to the Supreme Court, the section requires that the assessee must use the asset for the “purposes of business”. It does not mandate usage of the asset by the assessee itself. As long as the asset is utilised for the purpose of business of the assessee, the requirement of section 32 will stand satisfied notwithstanding non-usage of the asset itself by the assessee. The Supreme Court held that in the present case, the assessee was a leasing company which leased out trucks that it purchased. Therefore, on a combined reading of section 2(13) and section 2(24) of the Act, the income derived from leasing of the trucks would be business income or income derived in the course of business, and has been so assessed. Hence, it fulfilled the aforesaid second requirement of section 32 of the Act, viz., that the asset must be used in the course of business. The assessee did use the vehicles in the courses of its leasing business. In the opinion of the Supreme Court, the fact that the trucks themselves were not used the assessee was irrelevant for the purpose of the section.
Dealing with the first requirement, i.e., the issue of ownership, the Supreme Court held that no depreciation allowance is granted in respect of any capital expenditure which the assessee may be obliged to incur on the property of other. Therefore, the entire case hangs on the question of ownership. If the assessee is the owner of the vehicles, then he will be entitled to the claim on depreciation, otherwise, not.
The Supreme Court noted that definitions of ‘owner’, ‘ownership’ and ‘own’ given in Black’s Law Dictionary (Sixth Edition) and observed that these definitions essentially made ownership a function of legal right or title against the rest of the world. However, as seen therein, it is “nomen generalissimum, and its meaning is to be gathered from the connection in which it is used, and from the subject-matter to which it is applied.”
According to the Supreme Court scrutiny of the material facts at hand raised a presumption of ownership in favour of the assessee. The vehicle, along with its keys, was delivered to the assessee upon which, the lease agreement was entered into by the assessee with the customer.
The Supreme Court noted that the Revenue’s objection to the claim of the assessee was founded on the lease agreement. It argued that at the end of the lease period, the ownership of the vehicle is transferred to the lessee at a nominal value not exceeding 1 per cent of the original cost of the vehicle, making the assessee in effect a financier. However, the Supreme Court was not persuaded to agree with the Revenue. According to the Supreme Court as long as the assessee had a right to retain the legal title of the vehicle against the rest of the world, it would be the owner of the vehicle in the eyes of law. A scrutiny of the sale agreement could not be the basis of raising question against the ownership of the vehicle. The clues qua ownership lie in the lease agreement itself, which clearly pointed in favour of the assessee.
The Supreme Court observed that the only hindrance to the claim of the assessee, which was also the lynchpin of the case of the Revenue, was section 2(30) of the Motor Vehicles Act, which defines ownership as follows:
‘Owner’ means a person in whose name a motor vehicle stands registered, and where such person is a minor, the guardian of such minor, and in relation to a motor vehicle which is the subject or hire-purchase agreement, or a agreement of lease or an agreement of a hypothecation, the person in possession of the vehicle under that agreement.”
The Supreme Court noted that the general open-ing words of the aforesaid section 2(30) say that the owner of a motor vehicle is the one in whose name it is registered, which, in the present case, is the lessee. The subsequent specific statement on leasing agreements states that in respect of a vehicle given on lease, the lessee who is in possession shall be the owner. The Revenue before the Supreme Court thus, argued that in case of ownership of vehicles, the test of ownership is the registration and certification. Since the certificates were in the name of the lessee, they would be the legal owners of the vehicles and the ones entitled to claim deprecation. Therefore, the general and specific statements on ownership construe ownership in favour of the lessee, and, hence, were in favour of the Revenue.
According to the Supreme Court, there was no merit in the Revenue’s arguments for more than one reason:
(i) Section 2(30) is a deeming provision that creates a legal fiction of ownership in favour of lessee only for the purpose of the Motor Vehicles Act. It defines ownership for the subsequent provisions of the Motor Vehicles Act, not for the purpose of law in general. It serves more as a guide to what terms in the Motor Vehicles Act mean. Therefore, if the Motor Vehicles Act at any point uses the term owner in any section, it means the one in whose name the vehicle is registered and in the case of a lease agreement, the lessee. That is all. It is not a statement of law on ownership in general. Perhaps, the repository of a general statement law on ownership may be the Sale of Goods Act;
ii) Section 2(30) of the Motor Vehicles Act must be read in consonance with s/s. (4) and (5) of section 51 of the Motor Vehicles Act. The Motor Vehicles Act in terms of s/s. (4) and (5) of section 51 mandates that during the period of lease, the vehicle be registered, in the certificate of registration, in the name of the lessee and, on conclusion of the lease period, the vehicle be registered in the name of the lessor as owner. The section leaves no choice to the lessor but to allow the vehicle to be registered in the name of the lessee. Thus, no inference can be drawn from the registration certificate as to ownership of the legal title of the vehicle; and
(iii) If the lessee was in fact the owner, he would have claimed depreciation on the vehicles, which, as specifically recorded in the order of the Appellate Tribunal, was not done. It would be a strange situation to have no claim of depreciation in case of particular depreciable asset due to a vacuum of ownership. The entire lease rent received by the assessee is assessed as business income in its hands and the entire lease rent paid by the lessee has been treated as deductible revenue expenditure in the hands of the leassee. This reaffirms the posision that the assessee is in fact that owner of the vehicle, in so far as section 32 of the Act is concerned.
Therefore, in the facts of the present case, the Supreme Court held that the lessor, i.e., the assessee was the owner of the vehicles. As the owner, it used the assets in the course of its business, satisfying both requirements of section 32 of the Act, and, hence, was entitled to claim depreciation in respect of additions made to the trucks, which were leased out.
With regard to the claim of the assessee for a higher rate of depreciation, the Supreme Court held that the import of the same term “purposes of business”, used in the second proviso to section 32(1) of the Act gained significance. According to the Supreme Court the interpretation of these words would not be any different from that which it ascribed to them earlier, u/s. 32(1) of the Act. Therefore, the assessee fulfilled even the requirements for a claim of a higher rate of depreciation, and hence, was entitled to the same.
In this regard, the Supreme Court inter alia endorsed the following observations of the Tribunal, which clinched the issue in favour of the assessee.
“15. The Central Board of Direct Taxes, vide Circular No.652, dated 14th June, 1993, has clarified that the higher rate of 40 per cent in case of lorries, etc., plying on hire shall not apply if the vehicle is used in a non-hiring business of the assessee. This circular cannot be read out of its context to deny higher appreciation in case of leased vehicles when the actual use in hiring business.
Perhaps, the author meant that when the actual use of the vehicle is in hire business, it is entitled for depreciation at a higher rate.”
The assessee firm came into existence on 25th June 1992. On 23rd February, 1996, a search operation u/s. 132 of the Act was carried out at the premises of another concern, viz., M/s. A.R. Mercantile P. Ltd. During the course of the search, certain books and documents pertaining to the assessee, i.e., M/s. A.R. Enterprises, were seized. On scrutiny, the Assessing Officer found that though the assessee had taxable income for the assessment year 1995-96, no return of income had been filed (due to be filed on or before 31st October, 1995) till the date of the search. Based on the material seized by virtue of the aforesaid search, the Assessing Officer was satisfied that the assessee had not disclosed its income pertaining to the assessment year 1995-96. Accordingly (without recording any reasons for his satisfaction), he initiated action u/s. 158BD of the Act requiring the assessee to file its return of income. The assessee, after filing return for the block period (ten years preceding the previous years), which covered the assessment years 1993-94 to 1995- 96, pointed out that it had already filed returns for the assessment years 1993-94 and 1994-95. It objected to action initiated under Chapter XTV-B of the Act on the ground that in relation to the assessment year 1995-96, advance tax had already been paid in three installments and, therefore, income for that period could not be deemed to be undisclosed.
Rejecting the plea of the assessee, the Assessing Officer formed the opinion that the assessee had failed to file the return as on the date of search, and the seized documents did show income, which had not been or would not have been declared. Accordingly, he proceeded to compute the total undisclosed income for the block period 1993-94 to 1995-96 (up to the date of search), treating the income returned by the assessee for the period 1995-96 as nil, as stipulated in section 158BB(1)(c) of the Act.
Against the said order, the assessee preferred an appeal before the Tribunal. Accepting the stand of the assessee, the Tribunal allowed the appeal, and held that having paid the advance tax, the assessee had disclosed his income for the relevant assessment year.
Aggrieved, the Revenue preferred an appeal before the High Court of Madras u/s. 260A of the Act, questioning the validity of the order of the Tribunal.
Before the High Court, the stand of the Revenue was that since the return for the assessment year 1995-96 had not filed by the due date, by filing the return after the search, the assessee could not escape the consequences as stipulated in Chapter XIV-B of the Act. It was contended that payment of advance tax by itself did not establish the intention to disclose the income.
The Revenue’s plea did not find favour with the High Court. It observed that payment of advance tax itself necessarily implies disclosure of the income on which the advance is paid.
The short question for consideration before the Supreme Court was therefore whether payment of advance tax by an assessee would by itself tantamount to disclosure of income for the relevant assessment year and whether such income can be treated as undisclosed income for the purpose of application of Chapter XIV-B of the Act?
The Supreme Court held that “undisclosed income” is defined by section 158B as that income “which has not been or would not have been disclosed for the purposes of this Act”. The Legislature has chosen to define “undisclosed income” in terms of income not disclosed, without providing any definition of “disclosure” of income in the first place. The Supreme Court was of the view that the only way of disclosing income, on the part of an assessee, is through filing of a return, as stipulated in the Act, and, therefore, an “undisclosed income” signifies income not stated in the return filed. According to the Supreme Court, it seemed that the Legislature had clearly carved out two scenarios for income to be deemed as undisclosed : (i) where the income has clearly not been disclosed, and (ii) where the income would not have been disclosed. If a situation is covered by any one of the two, income would be undisclosed in the eyes of the Act and, hence, subject to the machinery provisions of Chapter XIV-B. The second category viz, where income would not have been disclosed, contemplates the likelihood of disclosure, it is a presumption of the intention of the assessee since in concluding that as assessee would or would not have disclosed income, one is ipso facto making a statement with respect to whether or not the assessee possessed the intention to do the same. To gauge this, however, reliance must be placed on the surrounding facts and circumstances of the case.
One such fact, as claimed by the the assessee, is the payment of advance tax. However, in the opinion of the Supreme Court, the degree of its material significance depended on the time at which the search is conducted in relation to the due date for filing return. Depending on which side of the due date the search was conducted, material significance of payment of advance taxes vacillated in construing the intention of the assessee. If the search was conducted after the expiry of the due date for filing return, payment of advance tax was irrelevant in construing the intention of the assessee to disclose income. Such a situation would find place which the first category carved out by section 158B of the Act, i.e. where income has clearly not been disclosed. The existence of an intention to disclose did not arise since, as held earlier, the opportunity of disclosure had lapsed, i.e., through filing or return of income by the due date. If, on the other hand, search was conducted prior to the due date for filing return, the opportunity to disclose income or, in other words, to file return and disclose income still existed. In which case, payment of advance tax may be a material fact for deciding whether an assessee intended to disclose. An assessee is entitled to make the legitimate claim that even though the search or the documents recovered, show an income earned by him, he has paid advance tax for the relevant assessment year and has an opportunity to declare the total income, in the return of income, which he would file by the due date. Hence, the fulcrum of such a decision is the due date for filing of return of income visà- vis date of search. Payment of advance tax may be a relevant factor in construing the intention to disclose income or filing return as long as the assessee continues to have an opportunity to file return and disclose his income and not past the due date of filing return. Therefore, there can be no generic rule as to the significance of payment of advance tax in construing the intention of disclosure of income. The same depends on the facts of the case, and hinges on the positioning of the search operations qua the due date for filing returns.
Thus, according to the Supreme Court, the question that whether payment of advance by an assessee per se is tantamount to disclosure of total income, for the relevant assessment year, at the very outset had to be answered in the negative. On further scrutiny, according to the Supreme Court there was yet another reason to opine so. Payment of advance tax and filing of return are functions of completely different notions of income i.e. estimated income and total income respectively. The payment of advance tax is based on an estimation of the total income that is chargeable to tax and not on the total income itself. According to section 209(1)(a), the assessee shall first estimate his “current income” and thereafter pay income tax calculated on this estimated income on the rates in force in the relevant financial year. This income is an estimation that is made by the assessee and may not be the exact income, which may ultimately be declared u/s. 139 and assessed u/s. 143. The payment of advance tax does not absolve an assessee from obligation to file return disclosing total income u/s. 139. Hence, the ‘disclosure of income’ is the disclosure of the total income in a valid return u/ s. 139, subject to assessment and chargeable to tax under the provisions of the Act.
The Supreme Court noted that in the instant case, after the search was conducted on 23rd February 1996, it was found that for the assessment year 1995-96, the assessee had not filed its return of income by the due date. It was only when the block proceedings were initiated by the Assessing Officer, that the assessee filed its return for the said assessment year on 11th July, 1996 u/s. 158BC showing its total income at Rs. 7,02,768. The Supreme Court held that since the assessee had not filed its return of income by the due date, the Assessing Officer was correct in assuming that the assessee would not have disclosed its total income.
Note 1: During the course of hearing, the counsel for the assessee relying upon the decision in Asst. CIT vs. Hotel Blue Moon (2010) 321 ITR 362 (SC) for the first time contended that the Revenue did not have jurisdiction to invoke Chapter XIV-B against the assessee as the Assessing Officer had not recorded his satisfaction that any undisclosed income belonged to the assessee or that the assessee did not have the intention to disclose their income before initiating proceeding u/s. 158BD. The Supreme Court however was unable to appreciate the submission since the same was never urged before the High Court and the Tribunal and refrained from making any observations on it.
Note 2: In CIT vs. Nachammai [C.A. No.2580 of 2010], a companion appeal, the issue was whether tax deduction at source amounts to disclosure of income. The Supreme Court held that since the tax to be deducted at source is also computed on the estimated income of an assessee for the relevant financial year, such deduction cannot result in the disclosure of total income.
Since the section does not specifically mention the consequences of non-disposal of the application by the Commissioner within the specified time limit, a controversy has arisen as to what would be the consequences in such a situation. One view is that the trust shall not be made to suffer for the inaction of the Commissioner and the registration shall be deemed to have been granted. The other view is that the trust shall not be granted the exemption from tax, since the same is not registered. One more view is that the time limit prescribed in section 12AA is not mandatory and the Commissioner can and should proceed with the application and take appropriate decision even after the expiry of the time limit and such decision shall have retrospective effect. While the Allahabad High Court has taken the view that in the event of such failure to pass an order, within the specified time by the Commissioner, registration shall be deemed to have been granted u/s. 12AA, as the time limit provided in the section is mandatory and no decision on the application can be taken on expiry of the time limit thereafter, a contrary view has been taken by the Madras and Orissa High Courts to the effect that such a time limit is not mandatory, and that non-disposal of the application shall not result in the deemed registration of the trust and till such time as registration is granted, the trust shall be treated as not registered and non-registration of the trust shall result in denial of the exemption from tax so however the Commissioner shall pass the appropriate orders on the application of the assessee at the earliest though after the expiry of the prescribed time. In short, according to the latest view, the registration cannot be deemed to have been granted and the Commissioner is empowered to deal with and should deal with the application even after the expiry of the time specified in section 12AA.
Society for the Promotion of Education Adventure Sport’s case:
The issue came up before the Allahabad High Court in the case of Society for the Promotion of Education Adventure Sport & Conservation of Environment vs. CIT 216 CTR (All) 167.
The assessee was a society running a school, whose income was entitled to exemption u/s. 10(22). On omission of section 10(22), it applied for registration u/s. 12A. No decision however was taken by the Commissioner on its application within the time limit of 6 months fixed by section 12AA (2), and in fact, no decision was taken, even after a lapse of almost 5 years. On account of such delay, large tax demands were raised on the assessee. The assessee filed a writ petition in the Allahabad High Court challenging the tax demands.
On behalf of the assessee, it was contended that the registration
should be deemed to have been granted after the expiry of the period
prescribed u/s. 12AA(2), if no decision had been taken on the
application for registration. Reliance was placed on various decisions
of the Allahabad High Court, which had held that where an application
for extension of time was moved, but was not decided, it would be deemed
to have been allowed; that given the fact that the CIT was required to
give an opportunity to the applicant before refusing registration and
that reasons for refusal were required to be given by the CIT in his
order, the absence of any such opportunity and the order of the CIT
should be taken to mean that he had not found any reason for refusing
registration;, that the legislative intent wasevident by the fact that the order of the CIT granting registration, was not appealable by the Income Tax Department and that the laches and lapses on the part of the Income tax Department could not be to its own advantage by treating the application for registration as rejected.
On behalf of the Department, reliance was placed on a decision of the Supreme Court in the case of Chet Ram Vashisht vs. Municipal Corporation AIR 1981 SC 653, where the Court examined the effect of the failure on the part of the Delhi Municipal Corporation to decide an application for sanction to a layout plan within the period specified in section 313(3) of the Delhi Municipal Corporation Act, 1957.
The Allahabad High Court observed that what had to be examined was the consequence of such a long delay on the part of the Income tax authorities in not deciding the assesssee’s application for registration. It noted that admittedly after the statutory limitation, the CIT would become functus officio, and he could not, on expiry of the time limit, thereafter pass any order either allowing or rejecting the registration. Obviously, the application could not be allowed to be treated as perpetually undecided. Therefore, the key question, in the opinion of the court, was whether upon lapse of the six-month period without any decision, the application for registration should be treated as rejected or it should be treated as allowed.
The Allahabad High Court distinguished the Supreme Court decision cited on behalf of the revenue, in Chet Ram Vashist’s case (supra), by pointing out that the said decision dealt with a different statute and that one of the important aspects considered by the Supreme Court for taking view in that case that the sanction of the layout was mandatory and could not be deemed to have been granted on expiry of the time limit, was the purpose and objective behind of the provision requiring sanction of the layout plans. The High Court noted that under the relevant provision of the said statute, there was involved an element of public interest, namely, to prevent unplanned and haphazard development or construction to the detriment of the public and any sanction or deemed sanction of a layout plan entailing constructions being carried out, would create an irreversible situation. The Allahabad High Court noted that in the case before it, there was no such element of public interest in the case before it under the provisions of section 12A; that taking a view that non-consideration of the registration application within the time limit would result in deemed registration might, at the worst, cause loss of some revenue or income tax, payable by that individual trust.
The Allahabad High Court compared the act of non-disposal of an application with a situation where the assessing authority failed to make assessment or reassessment within the prescribed limitation, which also led occasionally to loss of revenue from that individual assessee. It observed that taking the contrary view and holding that not taking of a decision within the time limit was of no consequence would leave the assessee totally at the mercy of the tax authorities, as the assessee had not been provided any remedy under the Act against non-decision by the Commissioner on an application by the assessee.
The Allahabad High Court observed that taking the view of deemed registration did not create any irreversible situation, because the CIT had the power to cancel registration u/s. 12AA(3) if he was satisfied that the objects of such trust were not genuine or the activities were not being carried out in accordance with its objects and the only drawback might be that such cancellation would operate only prospectively. The deemed registration, in the court’s view, furthered the object and purpose of the statutory provision.
Considering the pros and cons of the two views, the Allahabad High Court held that the non-consideration of the application for registration within the time fixed by section 12AA(2) led to the deemed grant of registration as there was no good reason to make the assessee suffer merely because the Income Tax Department was not able to keep its officers under check and control and take timely decisions in such simple matters such as consideration of applications for registration, even within the long six-month period provided by section 12AA(2).
The Allahabad High Court therefore directed the Commissioner to treat the assessee as an institution approved and registered u/s. 12AA, to recompute its income by applying the provisions of section 11, and to issue a formal certificate of approval forthwith.
Sheela Christian Charitable Trust’s case:
The issue later also came up before the Madras High Court in the case of CIT vs. Sheela Christian Charitable Trust 354 ITR 478 (Mad).
In this case, the trust created in August 2003, made a delayed application for registration u/s. 12AA in August 2005 without a specific request for condonation of delay being filed. It had not filed the accounts since its inception along with the application. Since details of activities and copy of accounts were not filed with the Commissioner, he merely lodged the application and did not process the same. A second application was made in April 2007, seeking retrospective registration from April 2005. This application was rejected by the Commissioner. On appeal, the Tribunal set aside the order of the Commissioner and remitted the matter back to the Commissioner to decide the matter afresh, after giving opportunity to the assessee.
The Commissioner, as directed by the tribunal, gave an opportunity to the assessee and considered the matter afresh. This time the Commissioner granted the registration to the trust but with prospective effect. He rejected the assessee’s request to grant registration with effect from April 2005, holding that there was no just and reasonable cause for delay in filing the application.
On appeal to the Tribunal, the Tribunal held that so far as condonation of delay was concerned, a pragmatic approach should be adopted and substantial cause of justice should not be denied merely on pedantic reasons. The Tribunal noted that the order granting or refusing registration should have been passed before the expiry of 6 months from the end of the month in which the application was received, and since the Commissioner kept the application pending beyond the permitted time, and it was neither accepted nor rejected within the period of 6 months, the registration should be assumed to have been granted. Reliance was placed by the Tribunal on the decision of the Allahabad High Court in the case of Society for Promo-tion of Education Adventure Sport and Conservation of Environment (supra). It therefore held that the original application of August 2005 was to be treated as accepted, and registration u/s. 12AA should be deemed to have been granted to the trust.
On behalf of the Department, on appeal against the said order of the tribunal, it was argued before the Madras High Court that the Tribunal ought to have held that the trust could not agitate the inaction of the Commissioner on its earlier application in a subsequent application filed by it for registration u/s. 12AA. It was further contended that the tribunal erred in holding that there was a deemed registration by relying on the decisions of the Orissa High Court in the case of Srikhetra, A. C. Bhakti-Vedanta Swami Charitable Trust vs. Asst. CIT (2006) 2 OLR 75 and of the Madras High Court in the case of Anjuman-E-Khyrkhah-E-Aam 354 ITR 474, for the proposition that there was no concept of deemed registration u/s. 12AA(2).
The Madras High Court analysed the provisions of section 12AA(2) and the decision of the Orissa High Court referred to above. It agreed with the Orissa High Court that the time frame laid down u/s. 12AA(2) was only directory and not mandatory and that the Commissioner could pass an order even after the expiry of the statutory time limit. It observed that section 12AA(1)(b)(i) and (ii) made it clear that there was a statutory mandate imposed on the Commissioner to pass an order in writing either registering the trust or refusing to register the trust. It noted that the Madras high court in Anjuman’s case (supra), where the Commissioner had passed an order on the last day of the time limit neither accepting nor rejecting the application but lodging the complaint instead, had rejected the concept of deemed registration and remitted the matter back to the Commissioner to afford an opportunity of hearing to the trust and to decide the matter afresh.
In view of the above, and noting that the counsel for the trust also fairly submitted to the Court that there was no question of “deemed registration” and that the matter be remitted back to the Commissioner for consideration of the matter afresh, the Madras High Court held that non-consideration of the registration application, within the prescribed time, did not amount to “deemed registration” of the trust. The Madras High Court therefore set aside the matter and remitted it back to the Commissioner for consideration of the application afresh, to pass orders after affording sufficient opportunity to the trust.
This decision of the Madras High Court was also followed by it in a subsequent decision in the case of CIT vs. Karimangalam Onriya Pengal Semipu Amaipu Ltd 354 ITR 483, where also a similar concession was given by the counsel for the trust and there also, the Madras High Court remitted the matter back to the Commissioner for consideration afresh.
Observations
The decisions of the Madras High Court seem to have been significantly influenced by the decision of the Orissa High Court in Bhakti-Vedanta Swami Charitable Trust’s case. In that case, the delayed application was made in August 2004, but was claimed to have been misplaced by the tax authorities and was made significantly without a request for condonation of delay. The Orissa High Court observed in that case, as under:
“In our view, the period of 6 months as provided in s/s. (2) of section 12AA is not mandatory. Though the word “shall” has been used, but it is well known that to ascertain whether a provision is mandatory or not, the expression “shall” is not always decisive. It is also well known that whether a statutory provision is mandatory or directory has to be ascertained not only from the wording of the statute, but also from the nature and design of the statute and the purpose which it seeks to achieve. Herein the time-frame under s/s. (2) of section 12AA of the Act has been so provided to exclude any delay or lethargic approach in the matter of dealing with such appli-cation. Since the consequence for non-compliance with the said timeframe has not been spelt out in the statute, this Court cannot hold that the said time limit is mandatory in nature, nor the period of six months has been couched in negative words. Most of the time, negative words indicate a mandatory intent. This Court is also of the opinion that when public duty is to be performed by the public authorities, the time limit which is granted by the statute is normally not mandatory but is directory in the absence of any clear statutory intent to the contrary. See Montréal Street Railway Company vs. Normandin AIR 1917 PC 142. Here, there is no such express statutory intent, nor does it follow from necessary implication.”
In this case, the Orissa High Court directed the authorities to complete the statutory exercise of deciding on the application within a period of six months from the date of the court order, and that if the registration was granted, it would relate back to the date of application. The court also levied costs on the officer for his careless attitude taken and the misleading stand taken before the court by the Department.
The Orissa High Court proceeded on the basis that the task being performed by the Commissioner was a public duty, and therefore took the view that it did that no time limit could be laid down in such a situation. On the other hand, the Allahabad High Court rightly distinguished the process of registration for a trust and noted that in such process, there was merely a tax liability of an individual trust involved, and no public element or public interest involved.
If one would take the decision of the Orissa High Court to its logical conclusion, it would mean that in every case where the time limit was exceeded, the trust would have to approach the High Courts for extending the time limits, since the Commissioner would take the stand that he cannot pass an order once the time limit has expired under the law. This would create untold difficulty for such trusts, for no fault of theirs.
The Orissa High Court decision also ignores the fact that the statute has expressly laid down a time limit for disposal of the application for registration — whereas the High Court’s view seems to be that such a time limit cannot be laid down, but is merely a guidance. As against this, the Allahabad High Court has rightly tried to sub- serve the purpose of laying down the time limit by the legislature, which is to avoid undue delays in processing of applications, which was the norm earlier.
A note may also be taken of the following observations in the decision of the Special Bench of the Income Tax Appellate Tribunal in the case of Bhagwad Swarup Shri Shri Devraha Baba Memorial Shri Hari Parmarth Dham Trust vs. Commissioner of Income Tax 111 ITD 175, while upholding the concept of deemed registration on failure to pass an order within the specified period:
“If the application for registration is to abate because the CIT did not pass an order thereon and the assessee is asked to file another application again that would be putting, the assessee to the grind all over again for no fault of his. That consequence should be avoided. If the application is to be treated as pending, then again the CIT would be getting an extended period of limitation which the section does not allow. Further, it would be uncertain as to how long the period can be extended. The assessee cannot be kept waiting to the end of time. If it is held that the application must be deemed to have been refused, obviously the assessee must be in a position to file an appeal against the refusal to the Tribunal but it will not be able to do so in the absence of a written order containing the reasons for refusal; the appeal remedy would be rendered illusory. That consequence cannot be countenanced. Therefore by a process of exclusion, the conclusion is that the CIT must be deemed to have allowed the registration if he has not passed any order within the time prescribed. That way, the rights of the Department are also protected in the sense that it would be open to the CIT to cancel the deemed registration by invoking s/s. (3) to section 12AA, if it is otherwise permitted and the procedure prescribed therefor is followed. The assessee, if aggrieved by the cancellation of registration, has a right to appeal to the Tribunal u/s. 253(1)(c)…..
It would be incongruous to hold that while the condition that the trust or charitable institution must be registered with the CIT is mandatory or absolute, the provision that the CIT shall pass an order thereon within six months from the end of
the month in which the application was filed is merely directory, leaving it to the convenience of the CIT to pass the order at any time he likes disregarding the time-limit prescribed. That would introduce an element of uncertainty and con-fusion in the administration of the Act and may even compel trusts or institutions claiming exemption u/s. 11 to invoke Art. 226 of the Constitution. Such consequences have to be avoided. The assessments of the trust or charitable institution may in the meantime be completed rejecting the claim for exemption on the ground that it is not registered, even though the trust/charitable institution is found by the AO to satisfy the other conditions such as application of income, investment of the funds and so on. In other words, by not passing the order within the time-limit, the claim of the trust/charitable institution can be frustrated, albeit unintentionally. There is no good ground shown, nor does any appear to exist in the scheme of the Act, to hold that the time-limit within which the CIT has to pass an order on the application for registration of the trust or institution is merely directory. It is not merely a question of prejudice being caused to the assessee, but it is something which goes to the very root of good administration and obedience to the law. It could not have been the intention of the law that the CIT could pass the order granting or refusing registration at any time. Any provision has to be so interpreted as to advance the cause and suppress the mischief.”
The one thing that is clear is that an assessee cannot be altogether denied the benefit of tax exemption on account of the laches of the Commissioner in dealing with the assessee’s application in time; he also cannot refuse to pass an order on the application on the ground that the law prevents him in doing so after the statutorily prescribed time. In short he cannot take benefit of his lapses by inflicting punishment on the assessee. Even under the view of the Orissa and Madras High Courts, not so favourable to the assessees, the need for the Commissioner to dispose the application remaining undisposed, is not dispensed with. The courts have clearly hauled up the authorities for their inaction by awarding the costs and have directed the authorities to dispose the application within the extended time after affording opportunity to the assessee. Importantly, the courts have held that the decision of the authorities when taken shall have retrospective effect, thereby ensuring that no undue harm is caused to the assessee for no fault of his. What perhaps remains to be ensured is that the tax demand, if any, in the intervening period is not pursued and enforced and the assessee is saved the trouble of moving the courts to make the Commissioner act on his application.
The purposive interpretation adopted by the Allahabad High Court, that registration should be deemed to have been granted, however, seems to be the far better and practical view of the matter, fulfilling both the requirements of the provision and its intention. The view is strengthened by the presence of the Proviso to section 12AA(1) which provides for giving an opportunity of hearing to the assesseee, by the Commissioner, before rejecting his application for registration which in turn clearly conveys that the denial of registration on account of non disposal of application is altogether ruled out. This view has the effect of satisfying the law abiding assessee who has made the application in time and is otherwise equitous in as much as the law provides for no condonation of delay in application of the assessee.
Facts
AO exercised option u/s. 92CA(1) to calculate ALP with reference to the transaction between the assessee and ABN Amro Asia (Mauritius) Ltd (Associated Enterprise). The assessee had provided stock broking services in respect of clearing house trade to Associated Enterprise (AE) and had earned brokerage at the rate of 0.24%. The assessee had provided the same service to FIIs @ 0.408% & to FIs @ 0.22%. The AO contended that AE being FII should have charged @ 0.408%. The AO levied penalty u/s. 271(1)(c) under Explanation 7 to section 271(1)(c). The AO rejected TNMM on the ground that CUP method could be applied to facts of case and accordingly rejected the method without any specific reasons for inapplicability of said method and on the ground that direct method was preferable.
Held:
ALP (Arms Length Price) was computed by assessee in accordance with section 92C in good faith and due diligence as per rule 10C. AO’s view is that ALP could be computed correctly by CUP method only and hence, it cannot be the proper ground to invoke provisions of section 271(1)(c). As the assessee was of the view that TNMM was the appropriate method to determine ALP and the same was derived by assessee in accordance with the provisions of section 92C and as per Rule 10C, deeming fiction under 271(1)(c) cannot be invoked.
Facts:
The assessee company was mainly engaged in the business of providing loans and advances that formed about 68% of the income. The original assessment dated 30th September, 1998 was passed assessing the total income at Rs. 8,58,522/- This was eventually followed by a revision order passed which stated that the assessee dealt in shares and hence Explanation to section 73 was attracted since the main income did not consist of “Interest on securities, income from House Property, Capital Gains or Income from Other sources.” The assessee had appealed to the tribunal which remanded the matter back to CIT to re-examine certain aspects. The matter was then remanded back to the AO. In the fresh assessment, the assessee submitted that it was mainly engaged in the business of providing loans and advances and rediscounting bill. And therefore, Explanation to section 73 was not applicable. The AO however, objected to assessee’s contention that it was in business of granting loans and advances on the basis that main object of the memorandum of association was only to acquire, hold or deal in stocks and shares. Further, he also held that the activity of bill rediscounting cannot be called as granting of loans and advances.
Held:
What is important is not the object stated in the memorandum of association, but it is also important to look at the actual activity of the assessee. Therefore, merely because the business of granting loans was not mentioned in the memorandum, would not mean that actual nature of business cannot be looked at. It was even concluded that the activity of bill rediscounting has to be treated as only granting of loans. This was because the word “discount”, in regard to financial transactions, represents interest.
While computing tax liability u/s. 115JB, the assessee deducted income of its Mumbai unit which was a SEZ unit and eligible for tax benefit u/s. 10A. The Assessing Officer disputed the claim of the assessee on the ground that the Finance Act, 2007 amended section 115JB w.e.f. A.Y. 2008-09 for bringing the amount of income to which provisions of section 10A or 10B apply within the purview of MAT.
Held:
By SEZ Act, 2005 w.e.f. 10th February 2006, a new section 10AA has been inserted which provides exemption to the units located in SEZ. Section 2 of SEZ Act, defines SEZ as under:
“(za) Special Economic Zone means each Special Economic Zone notified under the proviso to s/s. (4) of section 3 and s/s. (1) of section 4 (including free trade and warehousing zone) and includes an existing Special Economic Zone.”
It is evident from the relevant provisions that an existing SEZ unit will also be governed by SEZ Act, 2005. Therefore, the benefits which are to be provided to the newly established unit in SEZ as per section 10AA will also be available to the existing units in SEZ. Moreover, section 4(1) of SEZ Act provides that an existing SEZ unit shall be deemed to have been notified and established in accordance with provisions of SEZ Act and the provisions of SEZ Act shall apply to such existing SEZ units. It is also observed that by the SEZ Act, s/s. (6) to section 115JB was also inserted providing that provisions of section 115JB shall not apply to the income accrued C. N. Vaze, Shailesh Kamdar, Jagdish T. Punjabi, Bhadresh Doshi Chartered Accountants Tribunal news or arisen on or after 1st April, 2005 from any business carried on, or services rendered, by an entrepreneur or a developer, in a unit or SEZ, as the case may be. Hence, income of units located in SEZ will not be included while computing book profit for the purpose of MAT as per section 115JB(6). In view of above, irrespective of the fact that amendment has been made in clause (f) of Explanation 1 to section 115JB(2) to apply the provisions of MAT in respect of units which are entitled to deduction u/s. 10A or section 10B, the units which are in SEZ will continue to get benefits from the applicability of provisions of MAT in view of s/s. (6). Section 115JB(6) does not refer section 10A or section 10AA but it only refers that provisions of section 115JB will not apply to the income accrued or arisen on or after 1st April, 2005 from any business carried on in a unit located in SEZ. Hence, the unit in SEZ will be covered by s/s. (6) to section 115JB irrespective of the fact that those units were claiming deduction u/s. 10A.
For the A. Y. 2006-07, the Chief Commissioner rejected the assessee’s application for waiver of interest u/s. 220(2A) of the Income-tax Act, 1961 on the ground that the assessee blocked recovery by obtaining stay against attachment notices and the assessee had not cooperated in recovery proceedings and payment of interest would not cause any genuine hardship to the assessee.
On a writ petition challenging the rejection order, the Division Bench of the Kerala High Court directed the Assessing Officer to reduce 25% of interest and held as under:
“i) Section 220(2A) is an incentive to defaulter assessee to co-operate with the Department and to remit the tax voluntarily at the earliest and, therefore, compliance should be rewarded by taking a liberal view and approach. What is indicated by the provision is that relief to be granted u/s. 220(2A) should be proportionate to the extent of satisfaction of the conditions stated therein. In other words, if the conditions are partially satisfied, the assessee should be given partial relief, i.e. partial waiver which should be in proportion to the extent of satisfaction of the conditions.
ii) The right to move for stay against recovery during pendency of an appeal is a statutory right, exercise of which cannot be said to be an indication of assessee’s lack of co-operation. Lack of co-operation happens when the assessee makes recovery difficult for the Revenue by transferring or siphoning off his assets leading to protracted enquiry and continuation of recovery proceedings by the Department.
iii) The assessee voluntarily remitted the entire amount of tax before the Department started chasing the assessee with steps for recovery such as attachment of movables and immovables, sale thereof in public auction etc. In fact, the entire arrears were paid within six months from the date of payment based on the assessment. During the pendency of the stay, the assessee was not required to remit the tax which was contested in appeal. Therefore, all the three conditions were to some extent satisfied and the refusal of the Chief Commissioner to grant reduction in interest was not justified. Partial relief had to be granted, taking into account the amount of tax paid by the assessee on the interest earned on term deposits, the retention of which delayed payment of tax that led to levy of default interest.”
The Committee constituted for formulating accounting standards for notification under section 145(2) of the Income Tax Act, 1961 has submitted its final report. We give below our comments and suggestions on the recommendations of the committee. General
1. It is submitted that there is absolutely no need for notifying a different set of Tax Accounting Standards (TAS) for the purpose of computing income under the provisions of the Income-tax Act.
Though phased introduction of Ind-AS would mean that some taxpayers would be following Ind-AS while others would be following AS notified under the Company Rules, even today the position is that corporates are following Accounting Standards notified under the Company Rules, while non-corporates are following Accounting Standards issued by ICAI. Each set of taxpayers may be permitted to compute their taxable income as per the relevant accounting standards applicable to each of them.
2. One of the stated purposes of TAS is to harmonise the accounting standards issued by ICAI with the direct tax laws in India. It is submitted that the accounting standards are already in harmony with the provisions of the direct tax laws in India, since the commencement of computation of business profits, is from the profit as per the profit and loss account. The deviations from the accounting standards are in relation to specific allowances and disallowances provided for under the Income Tax Act. If the desire is really to harmonise the two, then it is the Income Tax Act which really needs to be amended to remove such artificial allowances and disallowances from the profits declared in the accounts prepared in accordance with accounting standards, and not have TAS which increases the number of differences between the profits as per accounts and the taxable income.
3. TAS are now meant to be the basis of computation of taxable income by a mere notification. This will open the door to amendments in the law without requiring amendments in the Act, and thereby the executive will be encroaching on the powers of the legislature. This would also amount to excessive delegation of authority.
4. It needs to be kept in mind that accounting standards have to follow commercial reality. Having accounting standards which are completely at variance with the commercial reality, such as TAS, will cause untold hardship to businesses.
5. From the recommendations of the Committee, it appears that the provisions of TAS are being utilised to overcome the ratio of various judgments, which were in favour of taxpayers, without having to take recourse to make amendments in the law, rather than for any harmonisation or to handle the transition to Ind-AS. The recommendations of the Committee are therefore not in accordance with its terms of reference. It is suggested that rather than having TAS which indirectly effect such amendments in the law, the law itself should be amended to overcome the ratio of those judgments, wherever it is thought that the law needs to be otherwise.
6. TAS will give rise to an enormous amount of litigation, as issues are likely to arise as to the meaning of various provisions of TAS. It is therefore suggested that there is no need for separate TAS, and amendments to the law would serve the purpose far better.
7. If at all TAS is to be introduced, all the TAS should not be introduced simultaneously. TAS should be introduced in a phased manner, over a few years, making it applicable first only to large companies, which have the wherewithal to implement TAS. Thereafter, applicability to other taxpayers may be considered, after taking into account the experience of implementation of TAS by large companies.
8. There are various disclosure requirements in various TAS. If accounts are not required to be drawn up in accordance with TAS, the question of any disclosure should not arise, particularly as there is currently no scope for any disclosures in the return of income. The disclosure requirements should therefore be deleted from TAS.
9. The notification No 9949 dated 25th January 1996 notifying the earlier two accounting standards under section 145(2) had clarified that those accounting standards applied only to taxpayers following the mercantile system of accounting. The interim draft of TAS also had such clarification. Such clarification is missing in the present draft, and needs to be rectified by clarifying that TAS do not apply to taxpayers following the cash method of accounting.
10. It is accepted internationally that small and medium enterprises should not have to follow the same complex accounting standards as those required for large companies, and there are therefore different and simpler accounting standards for such entities, besides exemption from certain standards. It is suggested that small and medium enterprises should be exempted from TAS as well, as they do not have the infrastructure or expertise to handle complex adjustments required by TAS.
11. It needs to be clarified that not following of TAS should not result in rejection of books of account under section 145(3), but result only in adjustment to the total income. Section 145(3) needs to be amended accordingly.
Chapter 3 – App roach Provision (1)(i) To avoid the requirement of maintaining two sets of books of account by the taxpayer, the Committee recommends that the accounting standards notified under the Act should be made applicable only to the computation of taxable income and a taxpayer should not be required to maintain books of account on the basis of accounting standards to be notified under the Act. Comments While such recommendation of not having to maintain separate books of account under TAS is laudable in theory, it is practically unworkable. The proposed Tax Accounting Standards (TAS) would result in wide variance between the figures as per the books of accounts and the figures for taxation purposes. Many of the recommended TAS would require maintenance of separate books of accounts in order to ensure that the computation is correct and proper.
For example, TAS (AP) removes the concept of materiality. Therefore, the expenditure debited in the books of accounts would be different from the expenditure claimed for tax purposes. In order to ensure that the valuation of stock under TAS (VI) takes into account all such expenditure claimed under TAS only, and not expenditure debited in the books of accounts, it would be necessary to maintain separate books of accounts under TAS. Similarly, in the case of TAS (CC), the requirement of expenses being capable of measured reliably is not a condition as it is under AS 7. There are various other deviations in the case of TAS (CC) from AS 7, which cannot effectively be computed properly without maintaining books of accounts in accordance with TAS. This would place an enormous compliance burden on all businesses, which are already suffering from excessive compliance requirements necessitating substantial expenditure and whose profitability is already under severe pressure on account of the global slowdown. This additional compliance burden will further reduce the competitiveness of Indian business.
Provision
(5) For ensuring compliance with the provisions of TAS by the taxpayer, the Committee recommends appropriate modification in the return of income. For tax audit cases, the Form 3CD should also be modified so that a tax auditor is required to certify that the computation of taxable income is made in accordance with the provisions of TAS.
Comments
The requirement of having a tax auditor certify that the computation of income is in accordance with TAS would add significantly to the costs of tax audit for taxpayers.
Further, currently the basis of the tax audit report is the books of account and the final accounts prepared from such books, which final accounts are certified or identified by the tax auditor. Since computation of income is not part of the books of account, it would not be possible for a tax auditor to certify that such computation is in accordance with TAS.
It would also be too onerous and an impossible obligation for an auditor to certify compliance with all TAS. Currently, an auditor expresses a true and fair view on the accounts, which are based on accounting standards, because it is impossible to express a true and correct view in respect of accounts. Given the fact that TAS does not recognize the concept of materiality, the auditor would have to certify compliance with each and every clause of TAS, which is an impossibility.
Chapter 4 – Harmonisation of Accounting Standards
AS 14 – Accounting for Amalgamations
Provision
4.4.2.3 The Committee also recommends that suitable amendments be made to the Act to provide certainty on the issue of allowability of depreciation on goodwill arising on amalgamation.
Comments
The Supreme Court, in the case of CIT v Smifs Securities Ltd 348 ITR 302, has already provided certainty on the issue, by holding that depreciation is allowable on such goodwill. There is therefore no need for any further certainty on the issue.
Annexure-D – Tax Accounting Standards [TAS]
Specific Standards
TAS (AP) – Accounting Policies
Provision
2(c) “Accrual’ refers to the assumption that revenues and costs are accrued, that is, recognised as they are earned or incurred (and not as money is received or paid) and recorded in the previous year to which they relate.
Comments
If TAS is not to be followed in maintenance of books of accounts, the question of recording such revenues and costs does not arise.
Provision
5.2.1.ii [of Chapter 5] AS- 1 recognises the concept of materiality for selection of accounting policies. Since the Act does not recognise the concept of materiality for the purpose of computation of taxable income, the same has not been incorporated in the TAS (AP).
Comments
Removal of the concept of materiality would result in substantial, impossible and non-productive work of determining adjustment of minor and trivial amounts, the compliance cost of which would far exceed the likely revenue from such adjustments. Besides, any such adjustments would be nullified in the subsequent year, and would ultimately be revenue neutral.
Provision
5(i) The treatment and presentation of transactions and events shall be governed by their substance and not merely by the legal form.
Comments
When TAS is not to be followed in maintenance of books of account, the question of presentation of a transaction or event should not arise. Also, it would be impossible to look at the substance of each and every transaction. The meaning of substance could also be subjective. Tax laws need to be specifically amended to provide for cases where substance is to be seen, rather than the form. For instance, would redeemable preference shares be regarded as borrowing for tax purposes, and dividend thereon be allowed as a deduction in computing taxable income? Would a holding company and its wholly owned subsidiary have to file consolidated tax returns?
Provision
5(ii) Marked to market loss or an expected loss shall not be recognised unless the recognition of such loss is in accordance with the provisions of any other Tax Accounting Standard.
Comments
The purpose seems to be to incorporate Instruction No. 3 of 2010 dated 23.3.2010 in respect of forex derivatives in the TAS. However, it is so widely worded that its scope is not restricted only to marked to market loss from foreign exchange derivative transactions. The words ‘marked to market loss’ or ‘expected loss’ are also not defined expressly in the TAS.
There could be various other situations, which may be interpreted as ‘marked to market loss’ or ‘expected loss’, such as valuation of investments, loss incurred due to fire or fraud, etc.
The provision for ‘marked to market loss’ or ‘expected loss’ should apply only in respect of derivatives transactions and not to any other transactions.
TAS (VI) – Valuation of Inventories
Provision
2(1)(a) Inventories are assets:
……
(iii) in the form of materials or supplies to be consumed in the production process or in the rendering of services.
Comments
The TAS proposes to include service providers also within its ambit, unlike AS-2 which did not cover service providers. Most professional service providers follow cash method of accounting. Accounting for inventory would be contrary to the cash method of accounting followed by them. It needs to be clarified that this provision would not apply to professional service providers, or service providers following cash method of accounting.
Provision
None
Comments
It needs to be kept in mind that valuation of inventory is a commercial concept, which is carried out as an interim measure to break up the income into different accounting periods. Any changes in inventory valuation have an opposite and equal effect in the next accounting period. There is therefore no need to have a separate tax treatment for valuation of inventory, which is different from that followed for accounting purposes. Given the fact that such valuation is tax neutral, the amount of effort required for computing inventory on a separate basis would add to administration costs without any corresponding benefit.
It is therefore suggested that there should be no separate TAS for valuation of inventory.
Provision
None
Comments
The TAS has eliminated Standard Cost as a method of valuation of inventory with a view to reduce litigation and alternatives. However, there has been hardly any litigation on account of an entity following Standard Cost method of valuation of inventory.
Standard cost method is being widely used by most large taxpayers. It is a well recognised method. Many large entities also use ERP like SAP. In such cases it will be next to impossible without incurring unreasonable cost to value inventory on Standard Cost basis for books of account and value the same again on either FIFO basis or Weighted Average basis for TAS.
Standard Cost method should be a permitted alternative under TAS.
TAS(PP) – Prior Period Expense
Provision
3 (2) Prior period expense shall not be considered as allowable deduction in the previous year in which it is recorded unless the person proves that such expense accrued during the said previous year.
Comments
The condition for allowability contained in subparagraph (2) can never be satisfied since, by definition in para 3(1), prior period expense is an error or omission, and therefore cannot have accrued in the previous year.
The portion beginning with “unless” and ending with “the said previous year” is accordingly meaningless, and should be deleted.
TAS(CC) – Construction Contracts Provision
2(1)(d) “Retentions” are amounts of progress billings which are not paid until the satisfaction of conditions specified in the contract for the payment of such amounts or until defects have been rectified.
9. Contract revenue shall comprise of:
(a) the initial amount of revenue agreed in the contract, including retentions;
Comments
Retentions can never be income, because the right to receive such amounts comes into existence only after fulfilment of the specified conditions. It is therefore suggested that retentions should not be treated as part of contract revenue. Further, if retentions are not released but are adjusted, due to the fact that the specified conditions are not met and if retention is regarded as contract revenue under TAS, subsequent non-realisation cannot be claimed as a deduction, since such retentions would not appear in the books of account and cannot be written off in the books of account.
Provision
13. Contract costs include the costs attributable to a contract for the period from the date of securing the contract to the final completion of the contract. Costs that are incurred in securing the contract are also included as part of the contract costs, provided
(a) they can be separately identified; and
(b) it is probable that the contract shall be obtained.
Comments
There could be litigation as to whether costs can be separately identified or not, and whether there is a probability or not that the contract shall be obtained. It is suggested that costs incurred in obtaining the contract should therefore be allowed as a deduction in the period in which they are incurred.
Provision
15. Contract revenue and contract costs associated with the construction contract should be recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the reporting date.
16. The recognition of revenue and expenses by reference to the stage of completion of a contract is referred to as the percentage of completion method. Under this method, contract revenue is matched with the contract costs incurred in reaching the stage of completion, resulting in the reporting of revenue, expenses and profit which can be attributed to the proportion of work completed.
17. The stage of completion of a contract shall be determined with reference to:
(a) the proportion that contract costs incurred for work performed up to the reporting date bear to the estimated total contract costs; or…..
Comments
Under the percentage of completion method, revenue is recognized depending upon stage of completion which in turn is determined with reference to costs incurred. Therefore, the question of recognising costs incurred by reference to stage of completion of the contract activity at the reporting date, as is mentioned in para 15, does not arise and should be deleted.
Provision
17. The stage of completion of a contract shall be determined with reference to:
(a) the proportion that contract costs incurred for work performed up to the reporting date bear to the estimated total contract costs; or
(b) surveys of work performed; or
(c) completion of a physical proportion of the contract work.
Comments
Para 17 of TAS provides for 3 methods of determining stage of completion. Controversies are likely to arise in case the assessee determines the stage of completion by one method and the AO wants to determine the same by another method. The different methods followed may lead to different stages of completion resulting in different amounts to be recognized as contract revenues. The TAS should expressly provide that it shall be the choice of the assessee to follow any one of the above methods.
TAS(RR) – Revenue Recognition Provision
4. Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim for escalation of price and export incentives, revenue recognition in respect of such claim shall be postponed to the extent of uncertainty involved.
Comments
The TAS does not allow postponement of recognition of revenue (other than claims for price escalation and export incentives) in a case where the ability to assess the ultimate collection with reasonable certainty is lacking. This is clearly against the principle of accrual, where there has to be reasonable certainty of receipt for an income to have accrued; and also against the principle of prudence. This is also against the commercial reality of business, whereby an amount which is unlikely to be realized, is not treated as income.
Furthermore, in such cases, the assessee may not be able to make a claim for bad debts, since bad debts are now allowable only in the year in which they are written off in the accounts of the assessee and in the instant case, no write off would be effected in the books of account of the assessee.
It is therefore suggested that the requirement of reasonable certainty of ultimate collection should be the basis for revenue recognition for all types of income.
Provision
5. Revenue from service transactions shall be recognised by the percentage completion method.
Comments
The TAS states that revenue from service transaction sshall be recognised by the percentage completion method, as against AS 9 whereby the revenue from service transactions is recognised either by the proportionate completion method or by the completed service contract method. It is suggested that, in view of complications that may be involved in computing revenue as per the percentage completion method, especially in the case of persons having large number of small independent service contracts, an option may be kept open to the assesses to recognise the revenue from service transactions by the completed service contract method. This is at best a timing issue and as it is for bigger contracts covered by the TAS on Construction contracts, the percentage completion method is mandatory. If at all the percentage completion method is to be mandated, the same should be so mandated only where the total income of the assessee, or the contract value, exceeds a certain threshold, or for long duration contracts, in order to avoid computational hardships.
Professionals and other service providers following cash method of accounting should be excluded from the requirement of following the percentage of completion method.
TAS(FA) – Tangible Fixed Assets
Provision
19. The record of tangible fixed assets shall be maintained in the tangible fixed asset register containing the following details:
……………..
Comments
Currently, there is no statutory requirement of maintaining a fixed assets register by non-corporate entities. Many non-corporate entities may not be able to prepare such a register in the absence of details of Fixed Assets acquired in the past. Further, this does not serve any purpose, since the Income Tax Act does not recognise the individual identity of assets, but treats them as a block of assets. This requirement should be dispensed with, as it would unnecessarily add to compliance costs of small businesses.
Further, as clarified, TAS is not required to be followed in maintenance of books of account. That being the position, how is it possible to maintain fixed assets register under TAS, since fixed assets register is also a book of account?
TAS(FE) – Effects of Changes in Foreign Exchange Rates
Provision
9. The financial statements of an integral foreign operation shall be translated using the principles and procedures in paragraphs 4 to 7 as if the transactions of the foreign operation had been those of the person himself.
10.(1) In translating the financial statements of a non-integral foreign operation for a previous year, the person shall apply the following:
(a) the assets and liabilities, both monetary and non-monetary, of the non-integral foreign operation shall be translated at the closing rate;
(b) income and expense items of the non-integral foreign operation shall be translated at exchange rates at the dates of the transactions; and
(c) all resulting exchange differences shall be recognised as income or as expenses in that previous year.
Comments
In most cases, it would be impossible to convert each and every income and expenditure transaction of an integral or non-integral foreign operation into rupees by applying the daily rates. It needs to be kept in mind that the accounts are maintained by the branch, and not by the Head Office, and this will involve an enormous amount of work of conversion, which may take weeks, if not months, in many cases, adding tremendously to compliance costs. It is suggested that where there are no significant fluctuations in exchange rates, adoption of periodical rates, such as a weekly rate or a monthly rate should be permitted, as permitted under AS 11.
Provision
12(5) Premium, discount or exchange difference on contracts that are intended for trading or speculation purposes, or that are entered into to hedge the foreign currency risk of a firm commitment or a highly probable forecast transaction shall be recognised at the time of settlement.
Comments
Provision that `marked to market’ gains or losses will be recognised only on settlement should be eliminated. This only increases divergences between books of account kept on recognised accounting principles.
If at all, such provision should be restricted to contracts intended for trading or speculative purposes, and not to contracts to hedge the foreign currency risk of a firm commitment or a highly probable forecast transaction.
TAS(GG) – Government Grants Provision
6. Where the Government grant relates to a non-depreciable asset or assets of a person requiring fulfillment of certain obligations, the grant shall be recognised as income over the same period over which the cost of meeting such obligations is charged to income.
Comments
Such a grant is of a capital nature, and cannot therefore be recognised as income at all. The character of a receipt cannot be changed from capital to revenue, through a mere provision of a TAS.
Provision
4(2) Recognition of Government grant shall not be postponed beyond the date of actual receipt.
6. Where the Government grant relates to a non-depreciable asset or assets of a person requiring fulfillment of certain obligations, the grant shall be recognised as income over the same period over which the cost of meeting such obligations is charged to income.
Comments
The above two provisions are contradictory to each other, in that, one requires accounting for the grant on receipt, while the other permits spreading over of the grant over the period of fulfillment of obligations.
TAS(BC) – Borrowing Costs
Provision
2(1)(b) “qualifying asset” means:
(i) land, building, machinery, plant or furniture, being tangible assets;
(ii) know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets;
(iii) inventories that require a period of twelve months or more to bring them to a saleable condition.
Comments
Under AS -16, Qualifying Asset is defined to mean an asset that necessarily takes a substantial period of time to get ready for intended use or sale. Substantial period of time is taken to be generally twelve months. Under TAS (BC), all tangible fixed assets and intangible assets are Qualifying Assets. The condition of twelve months to bring the asset to saleable condition is restricted only to items of inventory.
As a result, borrowing costs will have to be capitalised even when there is a short interval between time when funds are borrowed and the asset is put to use. Where the entity has borrowed generally, borrowing costs will have to be capitalised in nearly all cases. This will only complicate the workings and also lead to litigation on account of quantum to be capitalised. This is also contrary to the proviso to s.36(1)(iii), where interest paid for acquisition of an asset only for extension of existing business or profession is not treated as a revenue expenditure.
Provision
3. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset shall be capitalised as part of the cost of that asset.
Comments
TAS (BC) contemplates capitalisation of borrowing cost to land as well. This will lead to substantial litigation on difference in view regarding the point of time when land is put to use. Will capitalisation cease once construction work commences on the land acquired for setting up a project or will it continue till the construction is complete? If some portion of the land is vacant for future expansion, will capitalisation of borrowing costs continue till expansion project is taken up?
It is suggested that borrowing costs relating to purchase of land should not be capitalised to the cost of the land.
Provision
6. “To the extent the funds borrowed generally and utilised for the purposes of acquisition of a qualifying asset, the amount of borrowing costs to be capitalised shall be computed in accordance with the following formula namely :-”
Comments
Paragraph 5.2.11(iv) of the Final Report states that AS-16 provides that judgement should be used for determining whether general borrowings have been utilised to fund Qualifying Assets. For this reason, the Final Report provides for a specific formula.
The formula comes into play only in cases where there are generally borrowed funds and these have been utilised for the purposes of acquisition of a qualifying asset. Accordingly, even under TAS, judgement will have to be used for determining whether borrowed funds have been utilised for acquisition of assets.
The formula prescribed by paragraph 6 of TAS for computing the amount to be capitalised in respect of generally borrowed funds is irrational. It does not take into account the period between the time when funds are borrowed and the asset is put to use (point of time of cessation of capitalisation), and would therefore often give absurd results.
It is therefore suggested that the requirement of capitalisation of general purpose borrowings should not be introduced. It is also contrary to the provisions of section 36(1)(iii).
Provision
None
Comments
Paragraph 5.2.11(v) of the Final Report states that to align with judicial precedents, provision regarding income on temporary investments of funds borrowed has been removed from TAS. During construction period, borrowed funds are utilised for making deposit as margin money, advance to contractors. Such interest earned goes to reduce the amount of interest paid. It is only the net interest paid which should be capitalised. This aspect should be incorporated in TAS.
TAS(IA) – Intangible Assets
Provision
10. When an intangible asset is acquired in exchange for shares or other securities the asset shall be recorded at its fair value or the fair value of the securities issued, whichever is lower.
13. When an intangible asset is acquired in exchange for another asset, its actual cost shall be recorded at its fair value or the fair value of the asset given up, whichever is lower.
[Refer Chapter 7, para 7.1.1]
Comments
It is true that throughout all the TAS, wherever there is an exchange of asset for another asset or securities, lower of the fair market value of the asset acquired and securities or asset given up is adopted. However, in case of an intangible asset, it is difficult to ascertain the fair market value where there is exchange.
Consequentially, it would be difficult to arrive at value which is lower. This would only increase litigation.
TAS(PC) – Provisions, Contingent Liabilities & Contingent Assets
Provision
11. Contingent assets are assessed continually and when it becomes reasonably certain that inflow of economic benefit will arise, the asset and related income are recognised in the previous year in which the change occurs.
Comments
By recognising contingent assets on reasonable certainty in tax computation, but not in books of account, on subsequent non-realisability of such asset, the taxpayer will never get a deduction for write off of such amount, since no entry for such asset is passed in the books of account on account of the fact that there was no virtual certainty when it was recognised for tax purposes.
Mr. Nilesh Vikamsey central council member of the ICAI in his, the Keynote address , gave a very inspiring presentation titled “Power of Dream & Power of Positivity”.
To mark the Annual Day four competitions were held, namely, Essay Writing, Elocution, Debate and Talent Showcase. The results are as given below. 1.
Essay Writing Competition
The judges Mr. Vipin Batavia, Ms. Sangeeta Pandit and Mr. Mukesh Trivedi evaluated essays written by 59 students and prizes were awarded to the following three :
| Award | Name of the Participant | Name of the Firm |
|---|---|---|
| First Prize | Charmi Doshi | Pradip Kapasi & Co. |
| Second Prize | Aneri Merchant | Rashmi Modi & Co. |
| Third Prize | Mudit Yadav | NMAH & Associates |
The Elocution Competition was organised under the auspices of Smt. Chandanben Maganlal Bhatt Foundation and was graced by the presence of
Mr. Mukesh Bhatt, a family member, who presented the trophies to the winners.
Out of thirty-six students who participated in the elimination round, eight students made it to the final round. The judges of the elimination round were Ms. Shruti Shah, Mr. Nitin Shingala, and Mr. Mihir Sheth.
The judges for the final round were Mr. Suresh Prabhu, Mr. Atul Bheda, and Mr. Shrikant Kanetkar. As the competition was intense the Judges in their discretion awarded 5 prizes as against 3 normally declared.
The winners are as follows:
| Award | Name of the Participant | Name of the Firm |
|---|---|---|
| First Prize | Kartik Srinivasan | Pankaj Parekh & Co |
| Second Prize | Shweta Agarwal | Churuwala & Associates |
| Third Prize | Mudit Yadav | NMAH & Associates |
| Consolation Prize | Amishi Vora | Pradip Kapasi & Co. |
| Consolation prize | Kush ganantra | Paras Sheth & Associates |
The winners are as follows:
Out of the twelve nominations, nine participants were selected for the final round of the Talent Show that was judged by Mr. Suril Shah and Mr. Nipun Nayak. The following three performers were adjudged winners.
The winners are as follows:
The participants and the audience bonded over a sumptuous and delicious dinner and left home refreshed by joyful learning and a fun-filled experience.
The CJI’s remarks can be seen as both introspection and a cautionary note to courts which have been very active of late in policy areas. The top court itself is dealing with several challenges to policy whether it be FDI in retail, coal block allocations or environmental clearances to major industrial projects.
The top court’s decision to set aside 2G spectrum licences over irregularities had marked a remarkable departure from courts’ reluctance to interfere in policy matters. Responding to a question about the proposed Judges’ Accountability Bill, which has a clause that bars judges from commenting on unrelated issues while dealing with a case, the Chief Justice said: “Unnecessary comments should not be made. I agree on that.”
Singh provided a clear sense of how he looks at the current economic situation. There was little to fault there in terms of economic analysis, though one cannot miss the hidden irony that he spoke as if the policy mess created by his government since 2004 has no role in the current slowdown.
There are three significant points he made.
First, the general economic slowdown cannot be dealt with unless there is a revival in private sector investment. Singh believes investment depends on the psychological mood, or what John Maynard Keynes called animal spirits of entrepreneurs.
Second, Singh did well to highlight the absolute necessity to bring down the fiscal deficit, not only because of its inevitable inflationary consequences but also its role in undermining the India growth story. Once again, there was no mention of why we are close to a fiscal crisis. The fiscal deterioration began before the crisis, with the farm loan waiver in February 2008.
Finally, Singh warned that the current account deficit, still the single biggest risk to economic stability, will be higher than acceptable for at least a few more years. “We have to accept that our exports will be weak and our current account deficit…higher than it should be,” he said. “We have to learn to cope with these problems.” He added that India will have to plan to finance a high current account deficit for a few years.
Singh’s speech had professorial clarity of analysis but lacked a strong agenda one expects from a national leader. That is an old problem.
However, the CAG can do justice to this role only if he is competent, independent and suitably empowered. Sadly, the current framework compromises this, leaving room for abuse in appointments, as well as limiting the CAG’s authority to effectively perform his constitutional duties. This is particularly important now, as the appointment of a new CAG looms on the horizon.
The CAG’s appointment process is a legacy from the pre-Independence ‘not-accountable-to-Indians’ mindset, whereby it is entirely at the government’s discretion. Given the governing coalition’s exasperation with the incumbent, it is probable that this time around it will look for someone who is likely to be favorably inclined towards the government, or at the least be ineffective.
To ensure that the independence of the CAG does not depend on the morals of the government of the day, his appointment should reflect real checks and balances. My formula would have the CAG appointed by a committee consisting of the Speaker, the prime minister and the two leaders of the opposition in the Lok Sabha and the Rajya Sabha. Their choice should be by simple majority and, in the event of a tie, it should be referred to the Chief Justice of India to cast the deciding vote.
Many infrastructure projects are now undertaken in the PPP mode, involving transfer of public assets (for instance, oilfields) and revenue sharing between the government and the private sector. Many of these newer structures are presently outside the ambit of the CAG. This reduces oversight and creates avenues for corruption. Therefore, the scope of the CAG’s powers must be expanded to include such arrangements.
i) Exemption by way of auxiliary educational services and renting of immovable property is restricted only to services provided by any person to specified educational institutions and thus auxiliary education service or renting of immovable property provided by educational institution will not be exempted.
ii) Temporary transfer or permitting the use or enjoyment of a copyright relating to original literary, dramatic, musical, artistic works or cinematograph films had, were exempted by the notification No. 25/2012; this benefit of exemption is now restricted to films exhibited in cinema halls only.
iii) Services provided by all the restaurants, eating joints or mess having the facility of air condition during any time of the previous year is now under the service tax net.
iv) The exemptions available to transportation of goods by railway or a vessel under Sl. No. 20 and services provided by a goods transportation agency (GTA) under Sl. No. 21 are being amended. Accordingly, exemption to transportation of petroleum and petroleum products, postal mails or mail bags and household effects by railways and vessels will not be available, while the benefit of transportation of agricultural produce, foodstuffs, relief materials for specified purposes, chemical fertilisers and oilcakes, registered newspapers or magazines, relief 4 materials meant for victims of natural or manmade disasters, calamities, accidents or mishap and defense equipments will be available to GTAs. v) The exemptions in respect of Vehicle Parking Service to general public is being withdrawn. vi) The exemption of services provided to Government, a local authority or a governmental authority for repair or maintenance of an Aircraft is being withdrawn. vii) Definition of Charitable Activities as given in Clause (k) in Paragraph 2 of Mega Notification No. 25/2012-ST dated 20-06-2012 is being amended so that there will be no separate threshold limit for granting the exemption from payment of service tax to activities relating to advancement of any other object of general public utility. MVAT UPDATE Notification No VAT.1512/CR-149/Taxation-1 dated 02.02.2013 It is notified that w.e.f. 15-02-2013 government will collect tax at source from dealer who has been awarded the rights for excavation of sand. Prescribed tax collection authority is District Collector or Cantonment Board or any other authority under the State government or Central government having jurisdiction over the area. Rate of tax collection is 10% of the auction amount to be collected in addition to the amount fixed for the auction of sand. Maharashtra Ordinance No . V of 2013 MVAT Act, 2002 has been amended by extending the period of limitation for the order of assessment for the years 2005-06 and 2008-09 from 31st March, 2013 to 30th June, 2013.
• Residential properties having a carpet area above 2000 sq. ft. and where the amount charged is equal to or more than Rs. 1 crore,
• Commercial properties. This notification is applicable from 1st March, 2013.
The dealer was assessed for the period 1991-92 under The Tamil Nadu General Sales Tax Act, 1959. The assessing authority levied tax on estimation of turnover of sales based on quotations raised against which no sale bills were issued. The Tribunal in appeal, observing that there was no material to prove that the assesse had sold any goods to any individual or contractor, passed the order deleting the levy of tax on estimated turnover of sales. The Department filed appeal petition before the Madras high Court against the impugned order of the Tribunal.
Held
As observed by the Tribunal, there was no material for treating the quotations as sale bills and estimating turnover on the basis of the quotation. As rightly held by the Tribunal, the assessing authority had not probed the matter beyond treating quotation book as sale bill. Accordingly, the High Court confirmed the order of the Tribunal and dismissed the appeal filed by the Department.
In the assessment for the period 2004-05, the claim of the dealer for concessional rate of tax against form C was disallowed for want of required C forms, but the Tribunal permitted production of C forms received subsequently and the matter was remanded back to the assessing authority for verification of the forms. Subsequently, the dealer received four more C forms and produced before the assessing authority with a request to consider those forms also. This prayer was rejected by the assessing authority on the ground that there was no evidence of those forms having been produced before the Tribunal at the time of hearing of the appeal. The dealer filed writ petition before the Punjab and Haryana High Court, against the refusal by the assessing authority to consider the claim of concessional rate of tax for production of additional C Forms before him on the ground that forms can be produced at any stage.
Held
The explanation of the dealer was that the forms were issued by the purchasing dealers in question after the decision of the appellate authority and on that ground, the same could not be produced earlier. During the hearing before the Tribunal, the forms were sought to be produced, but this was not allowed. In view of explanation given by the petitioner that the forms were received late, it could be held that there was sufficient cause for the petitioner for not producing the same before the assessing and appellate authority. This was no bar to the same being produced before the Tribunal. Accordingly, the writ petition filed by the dealer was allowed by the High Court to permit the petitioner to produce the Forms in accordance with law.
Dealer engaged in selling motor cycles collected service charges or handling charges from customer for registration of motor cycles under Motor Vehicles Act, 1988. The VAT authorities levied VAT on such amount which was contested before The Maharashtra Sales Tax Tribunal. The Tribunal held that such charges did not constitute a part of ‘sale price’ within the meaning of ‘sale price’ defined in section 2 (25) of the MVAT Act, 2002. The Department filed an appeal before the Bombay High Court against the decision of the Tribunal, setting aside the levy of VAT on such handling charges collected by the dealer from the customer at the time of sale of motor cycles.
Held
The High Court held that transfer of property in the goods, in pursuance of the sale contract, took place against the payment of price of the goods. Delivery of the goods was affected by the seller to the buyer. The obligation under the law to obtain registration of the motor vehicle was cast upon the buyer. The service of facilitating the registration of the vehicles rendered by the selling-dealer was to the buyer and in rendering that service, the seller acted as an agent of the buyer. The handling charges which were recovered by the respondent could not, therefore, be regarded as forming part of the consideration paid or payable to the dealer for sale of goods. Those charges cannot fall within the extended meaning of the expression “ sale price”, since they did not constitute sum charged for anything done by the seller in respect of the goods at the time of or before the delivery thereof. The High Court accordingly dismissed the appeal filed by the department and confirmed the order of the Tribunal.
The appellant, a developer of SEZ Special Economic (SEZ) Zone having operations from units in SEZ filed refund claims towards the service tax paid on services consumed within the SEZ and services used for the authorised operations of the SEZ units. The refund claims were considered and partly sanctioned. The appellant appealed against the order and again the refund was partly allowed. Appellant filed an appeal before Tribunal for balance of Rs.19,80,569/-. It involved two components, viz. Rs.6,66,794/-, rejected on the ground that various services did not bear a direct nexus with the authorised operations undertaken by the appellant and Rs.13,13,775/- related to services wholly consumed within the SEZ during July to September, 2009.
Held:
As regards the claim rejected on the ground that the services did not have direct nexus with the authorised operations, the Tribunal held that the Approval Committee issued a specific certificate indicating various services received by the appellant and justification for use of such services in relation to the authorised operations. The jurisdictional Commissioner of Central Excise was also a member of such Approval Committee. In view thereof, it was unwarranted for the adjudicating and appellate authority to go into the question and come to their own findings in the matter. Thus, this rejection was set aside.
As regards the latter claim, the question was whether the appellants could be granted refund under Notification No. 09/2009-ST as amended by Notification No.15/2009-ST dated 20-05-2009 through which one condition was inserted stating that the refund procedure prescribed under the said Notification shall apply only in the case of services used in relation to the authorised operations in the SEZ; except for services consumed wholly within the SEZ.
Tribunal held that Notification No. 09/2009-ST exempted the taxable services specified in Clause (105) of section 65 of the Finance Act, 1994 which were provided in relation to the authorised operations in a SEZ and received by a developer or units of a SEZ, whether or not the said taxable services are provided inside the SEZ, from the whole of the service tax leviable thereon u/s. 66 of the Finance Act, 1994.
In the case of services which were wholly consumed within the SEZ, there was no necessity to discharge the service tax liability ab initio. That did not mean that where service tax liability had been discharged, the appellant was not entitled for refund. If the appellant was eligible otherwise for refund u/s. 11B, then it cannot be denied because the claim was made under Notification No.09/2009- ST and there was no dispute about the services being in relation to authorised operations of the appellant within the SEZ. The records showed that the refund claim was lodged within the time prescribed u/s. 11B and the appellant had borne the incidence of taxation.
Services provided to a SEZ or unit in the SEZ were deemed as export in terms of the SEZ Act, 2005 and entitled for exemption from payment of service tax on the services used or provided to a unit in the SEZ. Further, vide section 51 of the said Act, SEZ provisions prevail over the provisions of any other law. Accordingly, a broader view of the provisions relating to refund had to be taken.
Accordingly, the orders were set aside with consequential relief.
Facts: The Appellant entered into an agreement for engaging 3 persons to carry out manufacturing on job work basis. The respondent argued that the object of the agreement was to provide skilled labourers for carrying out the activity and statutory liability under labour laws was of the Appellant and hence such act comes under the purview of manpower supply.
Held: Observing the agreement, the Hon. Tribunal allowed the appeal holding that the persons employed remained under the control of job worker and not of the service receiver and that there was no objective to provide supply of manpower, without carrying out manufacturing activity. 2013-TIOL-1441-CESTAT-DEL Commissioner of Service Tax, Delhi vs. Pentagon Financial Consultants Pvt. Ltd. Where even a part amount of interest was not paid before the issue of Show Cause Notice, penalty u/s. 76 upheld.
Facts: The Assessee short-paid Rs. 2,36,479/- for which the department issued a Show Cause Notice dated 04-03-2008 along with interest and equal penalty and confirmed the demand thereon. The assessee appealed to the Commissioner (Appeals) and contended that since the whole amount of service tax was paid on 23-04-2007, much before the issue of Show Cause Notice, no penalty u/s. 76 ought to have been levied which the Commissioner (Appeals) ordered in favour. The department, being aggrieved by the order contended that for the waiver of entire penalty, the assessee should have paid the entire service tax along with entire interest. In the instant case, the assessee failed to deposit part amount of interest of Rs. 771/- before the issue of Show Cause Notice and deposited the same on 04-04-2008. Thus, no waiver of penalty should have been allowed.
Held: The Hon. Tribunal observed that full payment of interest was an integral part for waiver of penalty which the assessee did not fulfil. Further, perusing the provisions of section 73 and CBEC Circular No. 137/167/2006-CX4 dated 03-10-2007, the Tribunal set aside the order of the Commissioner (Appeals) and held that the benefit of exemption of penalty could not be given.
Facts:
The assessee engaged in providing aircraft parts/ equipments to various airlines on lease for a fixed period against monthly lease charges entered into agreements which did not provide any option to own or entitlement to own the aircraft parts at the end of leasing period. The department, considering it as financial lease demanded tax under “Banking & Financial Services” and contended that prior to 01-06-2007 there was no provision that financial lease must have a clause giving option to the lessee to own the asset at the end of lease period and that the amendment made w.e.f. 01/06/2007 was retrospective in nature.
The assessee contended that there was no service tax on operating lease for the period prior to 01- 06-2007 as after 01-06-2007, an explanation was inserted in the definition of “Banking & Financial service” whereby an operating lease was included along with financial lease in the purview of the definition of B & F services.
Held:
Observing that the leasing agreements did not contain any provision entitling the customer to own the goods leased or an option to own the goods leased, the Hon. Tribunal relying on Association of Leasing and Financial Services Companies vs. UOI 2010-TIOL-87-SC-ST-CB held that when the lease agreements were not financial lease agreements, the same would not be exigible to service tax under the Finance Act prior to 01-06-2007.
Facts: The appellants received application money/advances from prospective buyers of space/shop/ office in a commercial complex to be constructed by them which the department contended to tax under the category of “commercial and industrial construction services”.
The department concluded that although the title to property in space/shop/office had not been passed to the prospective buyers, since advances were received and the appellants were constructing the complex, they were liable to pay service tax.
Held:
Relying on the decision of the Hon. High Court in Maharashtra Chamber of Housing Industry vs. UOI 2012 (25) STR 205 (Bom) and Hon. Tribunal in C.C.E., Chandigarh vs. Skynets Builders, Developers, Colonizer 2012 (27) STR 388 (Tri.-Del), wherein it was observed that the explanation introduced to section 65(105)(zzq) of the Finance Act, 1994 with effect from 01-07-2010 was to expand the scope of levy and therefore, prior to its introduction, a mere agreement to sell would not create any interest in the property in favour of the prospective buyer and the title of property was with the builder which constituted self-service. Since the issue was prior to the introduction of explanation, no services were provided to another person and thus, not liable to service tax.
Facts:
The respondents engaged in providing clearing and forwarding services, claimed certain reimbursement of expenses which were rejected by the revenue. The respondents contended that even if the case is adjudicated in favour of department, the respondents be allowed CENVAT credit of service tax paid on procurement of such services and since the respondents had filed Balance Sheets and returns, there was no suppression of facts by the respondents. Further, since the law was in a debatable stage levy of penalty was not justified.
Relying on Larger Bench’s decision in case of Sri Bhagavathy Traders 2011 (24) STR 209 (Tri.-LB), the revenue contested that the expenses, which are essentially required and are integrally connected to the services, cannot be excluded while determining value of taxable services.
Held:
The Hon. Tribunal, partly allowing the appeal, held that expenses incurred to provide services shall form part of assessable value if such expenses were inseparable and integrally connected with the performance of taxable services and thus tax was required to be paid on the same. However, CENVAT credit would be allowed subject to verification of records and evidences presented by the assessee. Mere filing of Balance Sheets and Returns would not amount to disclosure of facts. However, since the issue was litigative as the same travelled till Larger Bench to attain finality, penalty would not be levied.
Facts:
The petitioner challenged the validity of Circular No.148/17/2011–ST dated 13-12-2011 on the following issues:
• It seeks to create a new entity and has made the transaction between the new entity, theatre owner, distributor or producer liable to service tax. The Finance Act does not contemplate any such joint venture and the circular attempts to create an artificial person, when the nature of arrangement between a distributor and an exhibitor is on a principal-to-principal basis wherein revenue sharing arrangement exists.
• The circular directs and binds the assessing authority in effect to hold all transactions in which there is revenue sharing to be a joint venture liable to service tax.
• In the light of section 66D(j) and Notification No.25.2012-ST dated 20-06-2012, Circular No.148/17/2011-ST alone becomes otiose and liable to be quashed.
Held:
• The Circular contemplated a situation where an exhibitor not only provided theatre to distributor (in his capacity as owner), but also provided other services for the purpose of exhibiting film by entering into revenue sharing agreements. In such arrangements, there was a possibility of the existence of new entity. Once the conclusion was arrived that there was a new entity, it was to be seen independently as to whether such services rendered by the new entity would fall within any of the entries for levy of service tax.
• Considering the second contention as baseless, the High Court observed that the arrangements referred to in the impugned circular can at best be taken as an illustration and cannot be termed as an exhaustive or a comprehensive list of arrangements. Further, the circular itself clearly spells out that the nature of transaction is a question of fact, which the exhibitor/ distributor/producer has to place before the department and such arrangement was to be examined on its merits. The circular does not restrict the powers of the officials to decide a particular dispute in a particular manner and the impugned circular is not violative of section 37B.
• As regards the third contention, the High Court held that, by a combined reading of section 66D(j), Notification Nos.25/2012-ST dated 20- 06-2012 and 03/2013-ST dated 01-03-2013, it was clear that what is exempted is only an admission to entertainment events or access to amusement facilities or exhibition of cinema in a theatre. The variant modes of transaction between the distributor/sub-distributors of films and exhibitors of movie and the revenue sharing arrangement between them are neither in the “Negative List Services” nor exempted.
Facts:
The department disputed assessee’s valuation method and passed an adjudication order confirming the demand. The assessee filed a protest letter under Rule 233B during the course of adjudication. Preferring an appeal before the Commissioner (Appeals), the matter was decided in assessee’s favour.
During the pendency of Appellate proceedings, the assessee paid the duty for subsequent period based on the valuation method adopted by the 21 adjudicating authority for the period under dispute. Later, the assessee applied for refund covering period under dispute as well as subsequent period which was rejected by the department on the ground of limitation. Relying on Mafatlal Industries Ltd. vs. Union of India 1997 (89) ELT 247 (SC), the assessee appealed against the order rejecting refund and was decided in its favour.
Held:
Dismissing the department’s appeal and relying on the Hon. Supreme Court’s decision in Mafatlal Industries (supra), the Hon. High Court observed that the payment made when the assessee was challenging the earlier levy of duty was deemed to be made under protest and not otherwise and that no limitation period was applicable to the payment made under protest.
Facts:
The Commissioner (Appeals) rejected the Appellant’s Appeal on the ground that it failed to deposit the amount as required under the provisions of the Central Excise Act.
The Appellant contended that since it reversed the appropriate amount from unutilised CENVAT credit and gave this information along with the copy of Form-RG 23A Part II to Commissioner Appeals, it has complied with the conditions of pre-deposit.
Held:
Analysing Rule 3 of the CENVAT Credit Rules, 2004 (CCR), the Hon. High Court held that since the law allows the assessee to take the benefit of the credit under any category as mentioned under Sub-Rule(1) of Rule 3 of the CCR and that it does not prohibit the assessee to adjust the said credit against its liability created by an order which was sought to be challenged in appeal requiring the deposit of the amount u/s. 35F of the Central Excise Act, the petition was allowed.
Facts:
The department conducted a search in the applicant’s premise on 31-05-2013 and detected payment of Rs. 60 lakh against service tax dues and thus issued a notice for recovery dated 07-06-2013. The applicant did not deny the liability but applied under VCES on 20-06-2013. The department contended that it was within its rights to initiate recovery proceedings and to issue a notice for the same and further stated that unless the application was found to be valid the petitioner was not entitled to any relief against the said dues. Held: Observing that the applicant had fulfilled the conditions as prescribed for application under VCES, the Hon. High Court held that unless the application was considered and decided by the Competent Authority, no recovery proceedings would be allowed to continue. They further stated that if the recovery was allowed to proceed, the object behind VCES would be defeated.
Facts:
The Appellant preferred an appeal against the order of ITAT confirming first appellate authority’s order which held that TDS u/s. 194J of the Income Tax Act, 1961 (I T Act) would not be applicable on service tax component paid separately in respect of professional fees. They further argued that the ITAT had illegally relied on the CBDT Circular dated 28-04-2008 while deciding the present appeal.
Held:
Referring to section 194J of the I. T. Act and the Circular dated 28-04-2008, the Hon. High Court held that section 194J of the I. T. Act used the words “Any sum paid” which related to the fees for professional or technical fees and would not include the service tax which was to be paid separately. As per the terms of the agreement, service tax was to be paid separately and was not included in the fees payable. Since the ITAT and lower authority had considered the wordings of section 194J of the I. T. Act while deciding the appeal, even if the Circular dated 28-04-2008 was held to be not applicable in the present case, then also the order passed was in accordance with the law and needed no intervention. Further, since no substantial question of law was involved, the appeal was dismissed.
The assessee discharged its service tax liability along with full interest before the issue of SCN. The department issued a Show Cause Notice and passed an order confirming tax along with interest and penalty u/s. 76 and 78 of the Finance Act, 1994.
The department argued that since the assessee paid service tax and interest, the penalty was also quantifiable and that it should have deposited 25% penalty within 30 days of the issue of SCN.
Held:
Ordering levy of penalty of not more than 25% (Note: appears contradictory to the circular dated 03-10-2007), the Hon. High Court relying on Circular No.137/167/2006-CX dated 03-10-2007 and referring to section 73(1A) held that since the service tax and interest was deposited before issuance of SCN and at that time, neither any penalty was levied nor quantum of penalty was fixed, the respondents were not required to deposit penalty amount.
Facts
It was contended by the Appellant that the entire function of facilitating campus recruitments was carried out by “Students Placement Committee” headed by a professor of the institute and the institute per se did not have any role in the process other than collecting the charges and fees. The Appellant relied on the Board Circular and its own case 2011 (23) STR 132 (Tri-Bang) for the period 1st May 2006 to 30th September 2009.
Held
The definition of management and manpower supply and recruitment services has been amended w.e.f. 1st May 2006. The circular and the case law relied on by the Appellant were in relation to the period prior to amendment and therefore could not be considered. Pre-deposit of Rs. 16 lakh was ordered.
Introduction
Relevance of various Documents
Table-1 shows the different Succession Documents and their applicability to various situations. Let us now examine each one of them in detail.
Necessity: According to the Indian Succession Act, no right as an executor or a legatee can be established in any Court unless a Court has granted a probate of the will under which the right is claimed. This provision applies to all Christians and to those Hindus, Sikhs, Jains and Buddhists who are/whose immovable properties are situated within the territory of West Bengal or the Presidency Towns of Madras and Bombay. Thus, for Hindus, Sikhs, Jains and Buddhists who are /whose immovable properties are situated outside the territories of West Bengal or the Presidency Towns of Madras and Bombay, a probate is not required. It also applies to Parsis who are/whose immovable properties are situated within the limits of the High Courts of Calcutta, Madras and Bombay. However, absence of a probate does not debar the executor from dealing with the estate.
Procedure: To obtain a probate, an application needs to be made to the relevant court along with the original will. The executor has to disclose the names and addresses of the heirs of the deceased. Once the Court receives the application for probate, it would invite objections, if any, from the relatives of the deceased. The Court would also place a public notice in a newspaper for public comments. The petitioner would also have to satisfy the Court about the proof of death of the testator and the proof of the will. Proof of death could be in the form of a death certificate. However, in case of a person who is missing or has disappeared, it may become difficult to prove ‘death’. U/s. 108 of the Indian Evidence Act, 1872, any person who is unheard of or missing for a period of seven years by those who would have naturally heard of him if he had been alive, is presumed to be dead unless otherwise proved to be alive.
On being satisfied that the will is indeed genuine, the Court would grant probate specimen of the probate is given in the Act) under its seal. The probate would be granted in favour of the Executor/s named under the Will. The Supreme Court has held in the cases of Lalitaben Jayantilal Popat v Pragnaben J Kataria (2008) 15 SCC 365 and Syed Askari Hadi Ali v State (2009) 5 SCC 528, that while granting probate, the Court must not only consider the genuineness of the will but also the explanations, objections and proof given by the parties of the suspicious circumstances surrounding the execution of the ‘Will’. The onus of proving the will is on the propounder. The propounder has to prove the legality, execution and genuineness of the will by proving absence of suspicious circumstances and also proving the testamentary capacity and the signature of the testator. When suspicious circumstances are said to exist the onus is on the propounder to explain their non-existence to the court’s satisfaction and only when such onus is discharged the court would accept the will and grant probate – K. Laxman v T. Padmining (2009) 1 SCC 354. Probates can be granted after a minimum time of 7 days from the death of a person. No maximum period has been specified. A registered Will improves the chances of getting a Probate faster. In the case of a registered Will, no one can allege that the Will is fraudulent. However, registration does not mean that it is the last Will of the deceased. Hence, a challenge on the count of it not being the last Will remains open.
Opposition: If any relative, heir of the deceased, or other person feels aggrieved and objects to the grant of a probate, then he must file a caveat before the Court opposing the will. Once a caveat has been filed, the Courts would hear the aggrieved party and he would have to prove that he would have a share in the estate of the testator if he had died intestate.
Why does one need a probate? One of the questions which almost always arises is “why is the probate required?” A probate is a certificate from the High Court certifying the genuineness and finality of the will. Some of the reasons why a probate is required are as follows:
• It is necessary to prove the legal right of a legatee under a will in a court.
• Some listed / limited companies insist on a probate for transmission of shares.
• Similarly, some co-operative housing societies insist on a probate for transmission of the flat.
• The Registrar of Sub-Assurances would insist on a probate usually for registration of immovable properties.
However, it would not be correct to say that no transfer can take place without a probate. There are several companies, societies, etc., which do transfer shares, flats, etc., even in the absence of a probate. They may, as a precaution, insist upon a release deed from the other heirs in favour of the legatee who is the transferee. Sometimes, the company/society also insist on an indemnity from the legatee in its favour against any possible claims/law suits from the other heirs of the deceased.
Effect: A probate of a Will when granted establishes the Will from the death of the testator and validates all intermediate acts carried out by the executor. It is conclusive evidence of the representative title of the executor – Harmusji v Dosabhai ILR 12 Bom 164.
Special Factors : Some of the rules in respect of obtaining a probate are as under:
(a) For obtaining a probate, the applicable court fee stamp would be payable as per the rates prescribed in different states. For instance, for obtaining a probate in the city of Mumbai, the application has to be made to the Bombay High Court and the court fee rates prescribed under the Bombay Court-Fees Act, 1959 would apply which are as follows:
(b) A probate cannot be granted to a minor or a person of an unsound mind.
(c) If there are more than one executors, then the probate can be granted to all of them simultane-ously or at different times.
(d) If a will is lost since the testator’s death or it has been destroyed by accident and not due to any act of the testator and a copy of the will has been preserved, then a probate may be granted on the basis of such a copy until the original or an authenticated copy has been produced. If a copy of the will has not been made or a draft has not been preserved, then a probate can be granted on its contents or of its substance, if the same can be proved by evidence.
(e) A probate petition requires the following con-tents:
• A copy of the will or the contents of the will in case the will has been lost, mislaid, destroyed, etc.
• The time of the testator’s death – proof of death.
• A statement that the will is the last will and testament of the deceased and that it was duly executed.
• Details and value of assets mentioned or covered in the Will for purposes of computing the Court Fees.
(v) A statement that the petitioner is the executor of the will.
(vi) That the deceased had a fixed place of residence or some property within the jurisdiction of the Judge where the application is moved.
(vii) It must be verified by at least one of the witnesses to the will. It must be signed and verified by the petitioner and his lawyer.
Letters of Administration
Meaning: When a person dies intestate, i.e., without making a will, then in order to succeed to the property of the deceased, the heir(s) would require letters of administration. If the deceased was a Hindu, Muslim, Buddhist, Sikh or Jain, then the Letters may be granted to any person who according to the Rules for Intestate Succession is entitled to succeed to the estate of the deceased. If more than one person is entitled, then the Court would be at discretion to grant the letters to one or more of them. If no person applies for such Letters, then the Court can grant them even to a creditor of the deceased. In case the intestate belonged to any community other than that specified above, say, Parsis, Christians, etc., then the Indian Succession Act, 1925 lays down a separate set of rules for granting letters of administration.
Other Situations when Letters are granted: Under one situation, letter of administration may also be granted in case there is a Will. If a Will has been probated in a Court outside the State of residence of the deceased or in a Foreign Court and a properly authenticated copy of such a Will is produced, then ‘letter of administration’ may be granted on the basis of copy of the Will and probate e.g., a Hindu’s Will is probated in London and it includes property situated in Mumbai. Letters may be granted in respect of such a probated Will.
Some of the other scenarios when letter of administration may be granted are as follows:
• In case an executor of a Will fails to take up his executorship or if a valid executor has not been appointed or if the executor dies before the testator and there is no successor executor, then instead of a probate letters of administration would be required.
• Again if no Will is produced but there is a reason to believe that there exists a Will, then letters of administration may be granted as a stop gap arrangement till such time as the Will is produced.
• When executor is absent from State in which application for probate is made.
• When minor is a sole executor.
• Where residuary legatee survives the testator but dies before the estate has been fully bequeathed.
• Where executor cannot be found and residuary legatee cannot be identified, then it is treated as if the deceased died intestate.
Effect: Letters of administration entitle the administration (i.e., the person in whose name the letters are granted) to all the rights belonging to the deceased as if he been granted those rights immediately on his death. However, they do not validate any acts of the administrator which tend to damage the estate of the deceased. They have effect over all the property and estate, whether movable or immovable of the deceased throughout the State in which they have been granted. They are conclusive as to the representative title against all debtors of the deceased and all persons holding property which belong to the deceased. They afford full indemnity to his debtors and persons delivering up such property to the holder of the letters.
Ineligibility: Letters cannot be granted to a minor, person of unsound mind, etc.
Application: An application for letters of administration should be made to the District Judge of the district in which the deceased had a fixed abode at the time of his death. The petition shall be made stating amongst other things, the time and place of death, his family members, details of assets of the deceased, right which petitioner claims etc. The application must also state that to the best of the belief of the applicant, no other application has been made for grant of letters. Letters can be granted after a minimum time of 14 days from the death of a person. No maximum time has been specified. An appeal against the District Judge’s Order lies to the High Court. However, High Court also has concurrent jurisdiction with District Judge and hence, in the cities of Mumbai, Kolkatta and Chennai, the High Court would exercise the jurisdiction.
Opposition: If any relative, heir of the deceased, other person feels aggrieved by the grant of letters, then he must file a caveat before the Court opposing the application. Once a caveat has been filed, the Courts would hear the aggrieved party and the party would have to prove that he would have a share in the estate of the intestate.
Succession Certificate
Meaning: A succession certificate is a certificate granted by a High Court in respect of any debt due to the deceased or securities owned by him. In case the deceased died living behind a will which only empowered the beneficiaries to collect his debts and securities, then the courts would grant a succession certificate instead of a probate. It merely empowers the grantee to collect the debts owed to the deceased. A succession certificate would not be granted if the Indian Succession Act mandatorily requires a probate or letters of administration. Thus, a succession certificate cannot be granted in respect of a flat in a co-operative society of the deceased. It can be used only for debts and securities and no other type of property. Thus, it would cover dues, shares, debentures, provident fund balances, etc.
Application: An application for a succession certificate must be made, along with the payment of requisite Court fees, to a District Judge giving inter alia the following particulars:
• Proof of death and time of death of the de-ceased
• Proof of ordinary residence of deceased
• Details of family members
• Right in which the petitioner claims
• Details of Debts and securities in respect of which the certificate is applied for.
If the Judge is satisfied, then he would grant a succession certificate. The certificate would specify the debts and securities set forth in the application and would empower the recipient of succession certificate to receive interest or dividends and/or negotiate or transfer all or any of the specified securities.
A certificate may be revoked if it was proved that the same was obtained by fraud, the application was defective, etc.
An appeal can be filed to the High Court against the District Judge’s order granting, refusing or revoking the certificate.
Effect of succession certificate: A certificate granted would have validity throughout India. The certificate granted with respect to the debts and securities specified in the certificate, shall be conclusive as against the persons owing such debts or liable on such securities. Further, it affords full indemnity to all persons as regards all payments made, or dealings had, in good faith, with the certificate holder in respect of the debts or securities of the deceased.
Legal Heir Certificate
Meaning: A legal heir certificate or a certificate of heirship is a different kettle of fish altogether and is sometimes required. It is granted under the Bombay Regulation No. VIII of 1827, a pre-independence Order of the then Governor General of India. This is a requirement which several legal practitioners are also unaware about and practically, it can be quite a task to obtain one. Generally, it is issued by a tehsildar. However, in the city of Mumbai, the City Civil Court would issue such a certificate.
It is issued to provide formal recognition of heirs, executors and administrators and for appointment of administrator and managers of the deceased’s property by the courts. The Regulation states that it is generally desirable that the heirs, executors or legal administrators of persons deceased should, unless their right is disputed, be allowed to assume the management or sue for the recovery in Courts of justice. Yet in some cases it is necessary or convenient that such heirs, executors or administrators, in order to give confidence to persons in possession of, or indebted to the estate to acknowledge and deal with them, should obtain a certificate of heir-ship, executorship, or administratorship, from the competent Court.
In Anthony Fernandez and others, 1993(1) Bom.C.R. 580 the Bombay High Court has held that Bombay Regulation VIII of 1827 continues to be in force and the provisions thereof are supplemented in certain respects by the Indian Succession Act, 1925. Conse-quently, an application for recognition of a person as an heir of the deceased can be made under this Regulation.
Effect of Certificate: If an heir is desirous of having his legal heir right formally recognised by a Court in order that it is safer when he deals with persons, then he can apply to the Court for recognition as the ‘legal heir’. The Judge would then invite objections within one month from the date of Notice. If the Judge is satisfied that there are no objections or they are not sufficient, then he would grant recognition in the form of a Certificate in the form contained in Appendix B to the Regulations. The Certificate would regonise the person named as the legal heir, executor or administrator of the deceased.
An heir, executor or administrator, holding a proper certificate, may do all acts and grant all deeds competent to a legal heir, executor or administrator, and may sue and obtain judgment in any Court in that capacity.
An heir, executor or administrator, holding a certificate, shall be accountable for his acts done in that capacity to all persons having an interest in the property, in the same manner as if no certificate has been granted.
Certificate creates No Title: R.8 provides that the Certificate confers no right to the property, but only indicates the person who, for the time being, is in the legal management thereof, the granting of such certificate shall not finally determine nor injure the rights of any person; and the certificate shall be an-nulled by the Court, upon proof that another person has a preferable right.
In Aloysius Manuel D’souza v Mary Kamala William Manuel D’souza, 2006(6) Bom.C.R. 56(O.S.), a Division Bench of the Bombay High Court held that the grant of heirship certificate does not establish the right of a party in property of the deceased by itself. The right, if any, of a person claiming ownership in the property of the deceased are not taken away by grant of an heirship certificate to an heir. On the other hand, the Regulation makes it clear that heir-ship certificate holder is accountable to all persons having an interest in the property for the acts done by him. Based on the heirship certificate simplicitor the heirship certificate holder cannot be said to have acquired any right, title or interest in the estate of the deceased.
In Group Grampanchayat v Sunanda Shamrao Bandishti, 2011 (5) Bom.C.R. 162, it was held that the grant of an heirship certificate to the respondents would not in any way affect the right, title or interest, if there be any, of the petitioner in any of the properties of the deceased. In proceedings for heirship certificate, the Court is not required to determine title of the deceased to any property. It is required only to consider whether the persons claiming heirship certificate are heirs of the deceased. If any person comes forward to claim nearer kinship than the applicants, the rival claims for the applicant and the person claiming nearer kinship and to be an heir would be considered by the Court. The Court may decline to grant heirship certificate to an applicant and come to the conclu-sion that the applicant is not an heir of the deceased or that there are other nearer kins who are entitled to the heirship certificate. The question of title to the property allegedly held by the deceased is alien to such enquiry. Whether the deceased had any title to the property is not and indeed cannot be decided by the Court in an application for ‘heirship certificate’ made under the Regulation.
Required For: It may be required for transferring electricity meter, telephone connection, bank account, etc., of the deceased in the name of the legal heir. It may also be required if a person is buying property belonging to the deceased to establish that the sellers are the true legal heirs.
One other important area where the legal heir certificate is required is for efiling the Income-tax Return of the deceased u/s. 159 of the Income-tax Act. Thus, for the period starting from 1st April of the year in which the assessee expired till the date of death, his legal representative would be assessed u/s. 159. A new feature has been introduced in case of efiling for registering the legal heir to do efiling on behalf of the deceased assessee. The documents required for registering a person as a legal heir are copy of the Death Certificate, Copy of PAN card of the deceased, Self attested PAN card copy of the heir and the legal heir certificate. Thus, this cumbersome certificate is required by the Income-tax Department. This is one area where representations need to be made to the CBDT to do away with the requirement of furnishing a legal heir certificate for efiling the return of a deceased assessee.
Conclusion
As would be evident from the above discussion, there are several succession documents which one comes across when a person dies. Obtaining them can be quite an arduous task for the family of the deceased. Just as the Government has introduced efiling in several areas, such as, income-tax, service tax, company law, etc., time has come for introducing online applications for several of these documents. If that is too much to ask then let us have a separate fast track Court dedicated to obtaining all these succession documents. Why not have an one-stop shop concept for all things related to succession? Till such time as India reaches an utopian situation, I leave you with my modified version of the famous saying, “Where there is a Will, there is a Way” : I conclude by saying:
“Where there is a Death, there is a Succession,
Where there is a Succession, there may be an Argument,
And if there is an Argument, there is a need for a Succession Document!!”
Appellant was providing following services against consideration:
• Bus Reservation agreement (BRA) – wherein Appellant supplied ordinary buses (other than tourist vehicles) to other tour operators and non-commercial concerns on rent.
• Seat Reservation agreement (SRA).
• Nashik Darshan (ND).
• Tour extension (TE).
Respondent issued SCN demanding service tax of Rs. 1,03,65,342/- on BRA from 01-04-2001 to 31-03- 2006 and on other services from 01-04-2001 to 09-09-2004 under the category of “tour operator” and equal amount of penalty u/s. 78 was imposed. Appellant contended that they provided buses on rent to IDTC who was a tour operator and IDTC discharged the service tax under the category of “tour operator” and hence service tax cannot be demanded twice on the same activity.
Held:
Since appellant was neither holding tourist permits nor having tourist vehicles, they are not subject to service tax in respect of all activities concerned till 09-09-2004. Appellant was not liable for service tax on BRA where buses were hired to IDTC and service tax was paid by IDTC. However where buses were hired to non-commercial concerns like schools etc., appellant was liable to pay service tax from 09-09-2004. Held, penalty imposed u/s. 78 was waived as issue involved was of interpretation of law.
Appellant, a co-operative society of agriculturists lost land due to setting up of a plant by ONGC. Appellant provided renting of cab service to ONGC. Initially ONGC did not reimburse the service tax and disputed the same and hence, Appellant did not deposit the tax. This fact was intimated to the Respondent. Later on the tax was deposited. SCN was issued to demand the tax and recovery of penalties. Tribunal confirmed the penalties without paying any heed to the Appellant’s contention of bonafide belief and absence of suppression of facts.
Held:
Tribunal committed error in not accepting the plea of bonafide belief of the Appellant even though the service tax on renting of cabs was new one and there were conflicting judgments of different Tribunals. The Tribunal has not taken into consideration the correspondence between Appellant and Respondent wherein Appellant had intimated the reason for non-payment of tax. Further, there was no fraud or misrepresentation or suppression by the Appellant. Therefore, it was held that extended period was not invokable and also did not justify levying of penalty.
Appellant, a company incorporated under the Companies Act 1956 is engaged in the business of trading in stock and securities and was registered with the service tax authority under the categories of “stock broking”, “banking & other financial service” and “business auxiliary service” from the year 2004. Appellant company was not financed out of the funds or loans from the Central Government or State Government. However, they were served with the notice by the Principal Director of Audit, Central Kolkatta for audit by CERA audit team, an audit team under CAG to audit the service tax records, accounts and other related documents. Appellant challenged the said notice.
Held:
To carry out an audit of a non-governmental company which is neither financed nor run out of loan from Central/State Government by CAG, the condition precedent to such audit is request from the President of India or Governor of State u/s. 20 of the CAG Act, 1971 where it is carrying on its operation. And when such audit is on request of President/Governor, the obligation of the assessee under Rule 5A of the Service Tax Rules, 1994 and Rule 22 of the Central Excise Rules, 2002 is to provide the records to the audit party deputed by CAG. However, it does not oblige the assessee to agree to unauthorised audit of its accounts by CAG. Under Rule 5A(1) of the Service Tax Rules, 1994 an officer authorised by the Commissioner shall have access to the premises for the purpose of carrying out any scrutiny, verification and checks as may be necessary for safeguarding the interest of revenue. Rule 5A(2) of the said Rules requires assessee to make available records to the officer authorised by the Commissioner or CAG on demand for scrutiny of the said officer.
Therefore, the said Rule read with section 94(2) of the Finance Act, 1994 does not empower the CAG to audit the accounts of non-Government assessee, but it casts an obligation to make records and documents as specified therein available to the officer deputed by CAG. However, on being pointed out by the Counself for the Respondent to an unreported judgement and order passed by a Single Judge Bench of the Court in W.P.2762 of 2000 (M/s. Berger Paints India Ltd. & Others vs. Joint Commissioner Audit) Central Excise Calcutta- II where the vires of Rule 173G(6)(c) of Central Excise Rules which is pari materia with Rule 5A of the Service Tax Rules was under challenge, the court deemed it appropriate to refer the matter to a Division Bench for adjudication.
Stamp Duty payable for registration of Articles of Association in Kerala revised from Rs.1,000/- to Rs.10,000/- with effect from 01-04-2013 vide THE KERALA FINANCE BILL 2013.
“(x) any amount raised by the issue of bonds or debentures secured by the mortgage of any fixed assets referred to in Schedule VI of the Act excluding intangible assets of the Company or with an option to convert them into shares in the Company:
Provided that in the case of such bonds or debentures secured by the mortgage of fixed assets referred to in Schedule VI of the Act excluding intangible Assets the amount of such bonds or debentures shall not exceed intangible assets the amount of such bonds or debentures shall not exceed the market value of such fixed assets : Rule 11A of “The regional director of the Department of Company Affairs shall be authorised officer to make complaints under s/s. (2) of section 58AAA of the Act.”
is substituted as follows:
“The Regional Director or Registrar of Companies or any other officer of the Csdddddentral Government shall be authorised to make complaints under s/s. (2) of section 58AAA of the Act.
“Full version of the Circular can be accessed on http://www.mca.gov.in/Ministry/pdf/noti_ Rules_20130010_dated_21mar2013.pdf
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Memorandum of Instructions governing money changing activities
This circular permits Authorised Money Changers (AMC) to sell, to foreign tourists/visitors, Indian rupees against International Credit Cards/International Debit Cards and obtain prompt reimbursement for the same through normal banking channels.
CIRCULAR 1 OF 2013 – D/o IPP F. No. 5(1)/2013-FC.I Dated the 05-04-2013
Consolidated fdi policy
The Government of India Ministry of Commerce & Industry Department of Industrial Policy & Promotion (FC Section) has issued a new Circular laying down the Consolidated FDI Policy. This Circular replaces the earlier Circular and is effective from 5th April, 2013.
The unprecedented nature of the SEBI Order is that the SEBI has ordered the Board of Directors to give what is effectively a personal guarantee to SEBI, for an amount to cover those funds that have been used for purposes other than for which approval of shareholders was given.
Facts as per Order of SEBI
The Zenith case has been in the news for more than a year now. But a brief summary of the allegations leading to this Order may be worth recounting. It appears that Zenith was not in a position (despite supposedly having large liquid assets in its balance sheet) to repay the first tranche of its FCCBs that had become due for repayment. This, incidentally, caused default of 2nd of FCCBs tranche too on account of acceleration clause. To meet these liabilities, the Company approached shareholders for obtaining their approval for raising large sums of monies by borrowings and through sale of its divisions. SEBI states in its Order that the Company specifically communicated to shareholders that raising of funds through this manner was for repayment of FCCBs. Pursuant to this, the Company sold a division. This sale was in a fairly convoluted way for reasons not clear from the Order. More curiously, this also involved a series of related party transactions. Apparently, the division was first sold to a related party where the Promoters had a 60% stake. It appears (if one reads this Order with certain press reports), the division was eventually sold to a foreign entity.
However, the net sale proceeds of $ 48 million even through this route were not wholly and directly received by the Company. They were only partly received by the Company and the rest by a foreign subsidiary. Zenith received $21 million while the foreign subsidiary received $ 27 million. The Order states that such amount was paid to the foreign subsidiary “as consideration for Software & Intellectual Property Rights of MSD Division held by it”. A further consideration in the form of 15% of shares of another Company with the value of such shares, as stated by Zenith, was $7.4 million, was paid, again, to the foreign subsidiary.
Even after receipt of monies, these were used for payment mainly to related parties for purposes not wholly clear, for payment to creditors (not FCCBs holders) and purchase of capital assets. In other words, as SEBI alleges, not a rupee was paid to FCCBs holders.
Worse, SEBI alleges that the Company made several misleading/false statements and omissions though eventually it admitted the facts. The share price halved twice, once till the date of Company making disclosure and again after such date. In barely a few months, the price of the shares reduced from 190 to 45.
There were other allegations of false disclosures/ non-disclosures under the listing agreement, the SEBI Insider Trading Regulations, etc. Legal proceedings by the FCCBs holders for winding up, etc. are before the court.
Order of SEBI
SEBI passed an interim order directing two things. Firstly, it banned the specified Promoters from accessing the capital markets and dealing in securities.
Secondly, it directed the Board of Directors of the Company to give a bank guarantee in favor of SEBI within 30 days for the amount of $ 33.93 million allegedly diverted for uses other than repayment of FCCBs. The guarantee shall be valid for at least one year during which SEBI may invoke it to compensate the Company in case of adverse findings.
As is discussed later, the Board is not allowed to use the assets of the Company for giving this guarantee making it like a personal guarantee. As the Order states, the Board shall give such guarantee “without using the funds of ZIL or creating any charge on assets of ZIL”.
Effectiveness of laws in such situations
The manner in which the transactions were carried out raises questions once again as to the effectiveness of laws relating to companies. The Company allegedly used funds for purposes other than for what the shareholder approved. However, the consequences of this are curious. Firstly, this does not necessarily mean that the transactions carried out are null and void. Secondly, it is arguable that such transactions can be ratified in a subsequent general meeting and since the Promoters held 64% shares, this should have been easy. Thirdly, the punitive consequences under the Act on the Company, its Board and the Promoters are not stringent. This is of course assuming that the payments were genuine and not diversion/siphoning off of the funds as SEBI alleges. SEBI states:-
“…I note that the promoters/directors of ZIL have in a devious manner attempted to take away the assets of a listed company directly and indirectly for their own benefit or for benefit of entities owned and controlled by them. Such conduct of promoters /directors not only defeats the whole purpose of seeking shareholders’ approval for crucial decisions but also jeopardises the integrity of the securities market.”
However, even if there was diversion/siphoning off, there are no quick remedies for recovery of the monies, repayment to creditors and punishing the directors/promoters concerned.
The provisions concerning related party transactions again get highlighted. The restrictions on them seem flimsy in law and even flimsier in enforcement. Often, companies may get away by mere disclosure.
Direction to the Board of Directors to give guarantee
Coming to the SEBI direction for bank guarantee, many things are curious. Does SEBI have the power in the circumstances to direct the Board to give such a bank guarantee without using the Company funds? On first impression, this appears not only justified but the only appropriate way. The shareholders had authorised the Board to use the sale proceeds for repayment of FCCBs. However, they were used for other purposes. Thus, the Board ought to compensate the Company and for this purpose, giving a bank guarantee that SEBI may invoke to compensate the Company or perhaps directly the FCCBs holders may make sense. Nonetheless, several questions arise.
• Firstly, does SEBI have such powers at all? The powers are to be seen from several angles. Whether SEBI has the have power to punish/ remedy a violation of a provision of the Companies Act, 1956? Whether it has the power to direct the Board of Directors in this manner?
• Secondly, can it direct the Board of Directors as a whole without making a specific finding that it was they who approved such uses of funds? Or that they were negligent in monitoring the use of such funds?
• Thirdly, why not allow the Company, at least as an alternative, to get the funds back? Why insist only on a guarantee?
• Fourthly, even if assuming that the funds were used for other purposes, what if such uses were genuine? For example, if the funds were used for payment to creditors, acquisition of capital assets, etc. There are no findings on record thatthese were bogus, just that these purposes were not for which the Company took approval.
• Fifthly, what if the Company had (and still can, though this is highly unlikely now) obtained ratification of shareholders which, considering the 64% holding of Promoters, would have been quite easy?
• Sixthly, is an Order to the Board as a whole without making a finding of role of the Promoters on one hand and the non-promoter directors on the other, fair and valid? How would it be enforced and punitive action taken, if they are unable to provide such a guarantee? Will the liability be joint and several?
Role of Auditors
While the Order, perhaps because it is directed towards role of the Board, does not discuss the Auditors’ role, if any. However, several press reports had stated that as per the audited accounts, the Company had huge amount of liquid assets, which was more than the total liability under both the tranches of the FCCBs. The Company still defaulted and in fact proposed to raise further funds.
While the SEBI Order does not discuss this, the memory of the Satyam’s case is too recent and one remembers how a large amount of liquid assets shown in that case turned out to be not genuine. One will have to see whether there are any problems in this case too and the implications on this on the role of the Auditors.
All in all, this case, assuming many of the allegations are found true, presents a murky and sordid state of affairs in listed companies and the ineffectiveness of laws, even though they are many and complex.
The case is likely to result in further developments soon, since SEBI has provided post-decision hearing and SEBI may pass a revised order. 30 days are given to the Board to furnish this guarantee and it is possible that they are unable to so provide. It appears quite likely that the Promoters/ Board may appeal to SAT. It will be worth seeing whether this case creates good precedents in law for keeping malpractices in check or it again shows that the action and remedies will be prolonged and perhaps finally ineffective for some or all of the parties who have lost money.
The Bhopal hospital has been at the centre of a long standing controversy over carrying out drug trials on poor gas victims but had refused to reveal information claiming confidentiality of the client- the drug companies, the hospital and the patients. The CIC has over-ruled the objections by the hospital and ordered it to reveal all information.
The hospital also contended that the trials were conducted when it was run by a trust – an autonomous body – and was not getting any grants from the Central or the State Government. It noted that the hospital had been taken over by the Government only in July 2010 since when the RTI rules should apply.
The CIC held, “Even if the patients do not agree to disclosure of the requested information, it is still open to this Commission to order disclosure of information in the larger public interest.”
Police Manual:
Maharashtra Chief Information Commissioner, Ratnakar Gaikwad has set at rest the prolonged debate over whether the Police Manual is confidential or otherwise. In a land mark order, Gaikwad held that within the meaning of the Right to Information Act, the Police Manual is not a confidential document and copy of it should be provided to applicant P K Tiwari.
“The police manual does not fall within the category of documents, which have been exempted from disclosure. The applicant should be allowed to inspect the manual and be provided the relevant papers. The director general of police should put up the entire manual on the website of the state police within a month.” Gaikwad said in his two page order.
“Taking into consideration the provisions of Section 8 of the RTI Act, it appears that refusal to provide the police manual is wrong. The view taken by the public information officer is contrary to the spirit of the RTI Act. It is essential for the common man to know the provisions of the police manual. Competent authorities should put up all such information on the website in larger public interest,” Gaikwad observed.
Motor Vehicles Tax:
The activist Sujit Nadkarni stumbled upon the scam under which the dealers of vehicles dupe the Government. The Modus operandi was
• On sale of a car, give customer a tax invoice showing that motor vehicle tax has been paid.
• Make a facsimile of the invoice, watering down the actual cost of the car and tax payable on it.
• Give the first invoice to the customer, and the second to the Government
• Pocket the difference in the amount, duping both customer and state exchequer
It was experienced by Nadkarni that when he purchased a Maruti Swift VDI on 30th March, 2008, he was issued an invoice, which said the car’s actual price was Rs. 4,35,886 and the final amount after taxes Rs. 4,90,349.
Nadkarni, however, noticed that another copy of the invoice was prepared by the car dealer for submission to the road transport authorities. The price of the car in this copy was shown as Rs. 4,21,766, while the final amount was Rs. 4,74,487.
While selling the car to Nadkani, the car dealer prepared two invoices with same number, one for the customer and the other for submission to RTO. The motor vehicle tax of Rs. 1,110 was thus evaded, although the same was collected by the car dealer from Nadkarni.
Nadkarni then conducted a sample survey of tax evasion by fraudulent invoicing. Under the Right to Information Act, he requested the Nashik RTO to furnish copies of all vehicle invoices sold in the area during 2006, 2007 and 2008.
There was, prima facie, a loss to exchequer of Crores of rupees. The transport commissioner is to conduct a detailed inquiry and file a report,” the division bench of justices A. M. Khanwilkar and A. P. Bhangale ordered.
Appellant was engaged in providing cellular telephone services in Jaipur circle. It was registered and paying service tax under “telephone services”. Appellant was consuming various input services and availing entire service tax credit as per Service Tax Credit Rules, 2002. Appellant was also receiving roaming charges from other telephone operators and was not paying service tax on the same during the period May, 2003 to August, 2004.
SCN was issued proposing to recover the service tax on the ground that Appellant should have restricted the utilisation of CENVAT towards payment of service tax on output service in terms of Rule 3(3)/3(5).
Tribunal upheld the demand of tax and also confirmed the invocation of extended period of limitation and upheld the penalties levied u/s. 76 and 78. Appellant contested the invocation of extended period of limitation stating absence of deliberate suppression.
Held:
When CENVAT credit was availed in excess of prescribed limits, facts ought to have been disclosed clearly by Appellant which is a professionally managed corporate. Failure to make the disclosures in returns or submitting entire facts by any letter accompanying the returns appears to be a case of wilful suppression. Extended period of limitation was rightly invoked. No substantial question of law is involved in the appeal and hence dismissed.
Background:
Whether a transaction for supply of food and/or beverages in a restaurant or a hotel is a contract for sale of food or a composite contract for sale and services was a subject of controversy vis-à-vis leviability of Sales Tax (now VAT) under the sales tax law in the states for many years. The Supreme Court in Northern India Caterers (India) Ltd. vs. Lt. Governor of Delhi (1978) 42 STC 386 (SC) held that service of meals whether in a hotel or restaurant does not constitute a sale of food for the purpose of levy of sales tax but must be regarded as the rendering of a service in the satisfaction of a human need or ministering to the bodily want of human beings. It would not make any difference whether the visitor to the restaurant is charged for the meal as a whole or according to each dish separately.
This led to the amendment in article 366(29A) of the Constitution, whereby the 46th amendment included within its scope “the supply, by way of or as part of any service, of food or any drink for cash, deferred payment or other valuable consideration” as a deemed sale. Subsequent to the constitutional amendment, VAT is being paid on the sale of food in hotels. However, the question that arose was on what value of the consideration should VAT be paid.
The five member Bench of the Supreme Court in the case of K. Damodarasamy Naidu & Sons Ltd. vs. State of TN (2000) 117 STC 1 (SC) interestingly held that the entire value should be deemed to be the consideration towards the sale. While delivering its judgment, the Honourable Supreme Court observed as under:
“In our view, therefore the price that the customer pays for the supply of goods in a restaurant cannot be split up as suggested by learned counsel. The supply of food by the restaurant owner to the customer though it may be a part of service that he renders by providing good furniture, furnishing and fixtures, linen, crockery and cutlery, music, a dance floor, and a floor show, is what is the subject of levy. The patron of a fancy restaurant who orders a plate of cheese sandwiches whose price is shown to be Rs. 50/- on the bill of fare knows very well that the innate cost of the bread, butter, mustard and cheese in the plate is very much less, but he orders it all the same. He pays Rs. 50/- for its supply and it is on Rs. 50/- that the restaurant owner must be taxed.”
In East India Hotels Ltd. & Another vs. UOI & Another (2001) 121 STC 46 (SC), it was held that “when all movable properties, materials, articles or commodities are goods, food in a restaurant has necessarily to be regarded as goods. …………. The moment the dish is supplied and the sale price paid, it would amount to sale”. It is also interesting to note that the Supreme Court in Tamilnadu Kalyan Mandapam Assn. vs. UOI 2006 (3) STR 260 (SC) observed, “In case of catering contracts, service element is more weighty; visible and predominant and it cannot be considered as a case of sale of food and drink in a restaurant”. Admittedly, there was no question before the Hon. Supreme Court in this case, to examine whether sale of food in a restaurant was a service or otherwise. Nevertheless, service tax on the service in relation to serving of food or beverage including alcoholic beverage was introduced with effect from 01-05-2011. However, this remained restricted to air-conditioned restaurants which also had a license to serve alcoholic beverages. To justify the levy in this regard, the TRU in its letter dated 28-02-2011, clarified that the tax is levied on the service element and it should not be confused with the sale of food. The levy is intended to be confined to the value of services contained in the composite contract and shall not cover either the meal portion in the composite contract or mere sale of food by way of pick up or home delivery as also goods sold at MRP. Subsequently, on the onset of negative list based taxation of services with effect from 01-07-2012, the list of declared services in section 66E of the Finance Act, 1994 in sub-clause (i) included, the service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity. However, the restaurants other than fully or partially air-conditioned/centrally heated and not having license to serve alcoholic beverages remained exempted as the mega exemption Notification No. 25/2012-ST dated 20-06-2012 provided for the same at entry 19.
In many cases under the Service category of “Outdoor catering”, it has been held that it is possible to take deduction of material component in terms of Notification 12/2003. However, the Delhi CESTAT in the case of Sayaji Hotels (2011) 24 STR 177 has held that, in case of a composite contract of a “Mandap keeper” the hotel cannot artificially divide the contract and levy Service tax merely on the value of services so identified. In essence, the Delhi CESTAT rejected the theory of splitting between the value of services and goods and held that the only option the appellant had was to pay tax on the abated value as provided for in Notification 1/2006 dated 01-03-2006.
It would appear that after the rescinding of Notification 12/2003 w.e.f. 01-07-2012, the Service tax in relation to food contracts may have to be paid on the abated value as provided for or on the entire value of the contract inasmuch the new scheme of Valuation under Rule 2C does not provide for an option for claiming deduction of goods as it is provided for “Works Contract” under Rule 2A of the Valuation Rules. However, the larger issue is whether or not tax the taxing entry (i) u/s. 66E (Declared Services) which specifies service portion in an activity, can include value of goods supplied at all this is a matter that is being extensively debated. It needs to be noted that Rule 2C refers only to a “Restaurant” and does not Specify “eating joint or mess”. This appears to be inadvertent.
In addition, other valuation issues like charge of VAT on Service tax component (and vice versa), charge on other service charges (due to introduction of definition of service w.e.f. 1st July 2012) etc., are likely to be faced, which would ultimately increase the final cost to the consumer substantially.
Implication of amendment with effect from 01-04-2013:
Now, vide the Notification No. 3/2013-ST, the said entry no.19 in the Notification No. 25/2012 is amended to delete the condition for the restaurant to have a license to serve alcoholic beverages. Consequently, the amendment will have a tremendous impact, as a large number of eating places including fast food chains, coffee shops, pizza places, ice-cream parlours, cafeteria in hospitals, educational institutions or corporate offices, airports, multiplex cinema houses, book shops, auditoria, canteens in factories, food courts in shopping malls, clubs etc. are covered.
The entry 19 in the Notification No. 25/2012-ST describes a restaurant or eating joint other than those having the facility of air-conditioning or central heating in any part of the establishment, at any time during the year. This will consequentially include all the above stated illustrations including simple cafes or restaurants having a small portion or a mezzanine portion air-conditioned and will come under the service tax net. Further, even non air-conditioned portion of the café serving food would be subject to the levy. If a small ice-cream/yoghurt parlour has an air-conditioner in any part of their premises, it would be subjected to the levy. In large departmental/chain stores or book shops, small kiosks/bakeries/prepared food corners are often provided with a few tables and chairs. Since the book shop, the store or the mall has common area air-conditioned and even if the food or snacks, beverages or ice-cream are provided through “self-service” counters/desks in a tray and without the use of crockery, the exemption under entry 19 will not be available as some part of the establishment is air-conditioned. Many or most of these contracts of providing food are predominantly ‘sale’ contracts as ‘service’ element is present in a negligible proportion. In India, we have the system of ‘thali’, places serving only meals in thalis. They are known as Bhojanalayas and only lunch or dinner is served very quickly. These servings have a very little ‘service’ element. Yet, all and sundry would be subject to service tax once the turnover crosses the threshold limit of ten lakh rupees. The value of service however, in accordance with Rule 2C of the Service Tax (Determination of Value) Rules, 2006 is to be taken at 40% or in other words, after considering 60% presumptive abatement. This value is effective from 01-07-2013, as earlier 70% abatement was provided.
When the food is not consumed in the restaurant premises but packed or parcelled from the counter, there is no setup of the eating house enjoyed or used by the person collecting cooked food/meal. As referred above, the TRU circular dated 28-02-2011 clarified that on mere sale of food by way of pick-up or home delivery, no service tax would be attracted. However, there are cafes/restaurants which charge “delivery charges” for small orders or all orders as the case may be. The question therefore arises as to whether or not such “delivery charge” is a part of “sale contract” or in the negative list based taxation, it amounts to consideration for a service of providing food at the doorstep. This is because the food is supplied at home by a delivery boy which itself is a service and a separate charge is recovered for the same. It would mean a composite yet divisible contract of sale of food and service of providing home delivery of such food and thus the service components would be exigible to service tax. So far as cafeteria/canteens in corporate offices or factories are concerned, it is relevant to note the views expressed in the Draft Circular dated 25-07-2012 vide F. No. 354/127/2012-TRU issued by Tariff Research Unit of Ministry of Finance. Paras 8, 9 and 10 of the said circular read as follows:
“8. A number of activities are carried out by the employers for the employees for a consideration. Such activities fall within the definition of “service” and are liable to be taxed unless specified in the Negative List or otherwise exempted.
9. One of the ingredients for the taxation is that such activity should be provided for consideration. Where the employees pay for such services or where the amount is deducted from the salary, there does not seem to be any doubt. However, in certain situations, such services may be provided against a portion of the salary foregone by the employee. Such activities will also be considered as having been made for a consideration and thus liable to tax. CENVAT credit for inputs and input services used to provide such services will be eligible under extant rules. The said goods or services would now not be construed to be for personal use or consumption of an employee per se and rather shall be a constituent to the taxable service provided to an employee. The status of the employee would be as a service recipient rather than as a mere employee when consuming such output service. The valuation of the service so provided by the employer to the employee shall be determined as per the extant rules in this regard.
10. However, any activity available to all the employees free of charge without any reduction from the emoluments shall not be considered as an activity for consideration and will thus remain outside the purview of the service tax liability (facilities like crèche, gymnasium or a health club which all employees may use without any charge or reduction from the salary will be outside the tax net). However the CENVAT credit for such inputs and input services will be guided by the extant rules.”
The above comments are a part of the Draft Circular which is yet not finalised. However, in the context of a canteen facility extended by an employer and in a case when consideration for the food served in the canteen is recovered by the employer and if the canteen is in the establishment, any part of which is air-conditioned, may need to examine service tax liability depending on the facts of each case.
Considering a mushroom growth of cafeteria, food courts, coffee shops, fast food chains and ice-cream parlours in all large and medium sized cities and towns of India, the number is alarmingly high and therefore, there would be widespread implications of the amendment, considering that eating out is a part of daily routine or a necessity of the young and middle-aged working population of the country.
• Service of construction of complex:
Service of construction of a complex, building or civil structure or any part thereof provided by a builder or a developer was notified as taxable service with effect from 01-07-2010. Although this generated tremendous controversy, the Honourable Bombay High Court in case of MCHI vs. UOI 2012 (25) STR 305 (Bom) rejected the challenge on the ground of constitution validity. Similarly, earlier the P&H High Court also dismissed the petition in GS Promoters vs. UOI 2011 (21) STR 100 (P&H) wherein the plea was made to declare the levy of service tax on builders as unconstitutional. This category, like the service portion of activity of supplying food, is included as declared service in section 66E, unless the entire consideration for the constructed unit is received post issuance of completion certificate. Vide Notification No. 26/2012-ST dated 20-06-2012 at serial no.12, the abatement of 75% subject to prescribed conditions continued.
Implication: Amendment with effect from 01-03-2013:
Alongside the budget proposals, amendment in the rate of abatement from 75% to 70% in certain cases vide Notification No. 2/2013-ST is already effective from 1st March, 2013 and plain reading of the substituted entry no. 12 in the said Notification No. 26/2012-ST reads as shown in the Table:
Table: Substituted entry no.12 in Notification No. 26/2012-ST
a) 75% abatement subject to fulfillment of conditions will continue in two cases, viz.,
• Construction of residential unit having car-pet area upto 2000 square feet or less OR
• Construction of residential unit where the amount charged is less than Rs. 1 crore.
Meaning thereby that for a flat of 2500 sq. feet, if the amount charged is Rs. 80 lakh, it is entitled for abatement @ 75%. Conversely, even for a flat of 800 sq. feet, if the amount charged is Rs. 3 crore, the abatement is available @ 75%. In ef-fect, only one of the conditions mentioned above is required to be fulfilled — either the area of the residential unit is less than 2000 sq. feet or the amount charged is less than Rs. 1 crore.
b) The abatement of 75% will no longer be available to a complex, building, civil structure or part thereof not covered by the above two categories. As such, a distinction is now made for commercial and residential construction and abatement of only 70% is available for commercial constructions irrespective of the amount charged or the area. Even if the amount charged is less than Rs. 1 crore or the area is less than 2000 sq. feet, the abatement available is 70% and the effective rate of service tax is thus 3.708% in place of 3.09%.
In this context, the words used by the Finance Minister while announcing his proposals in his Budget speech are worth taking note of:
“182. Homes and flats with a carpet area of 2,000 sq.ft. or more or of a value of `1 Crore or more are high-end constructions where the component of ‘service’ is greater. Hence, I propose to reduce the rate of abatement for this class of buildings from 75 percent to 70 percent. Existing exemptions from service tax for low cost housing and single residential units will continue.”
The above extract from the speech of the Finance Minister indicated that the reduction in abatement was to be restricted to certain residential premises. However, the language of the notification does not support that and conveys clearly that the abatement of 75% will not be available except in two cases referred above.
• Copyright for cinematographic films:
In Notification No.25/2012-ST, entry no.15 exempted “Temporary transfer or permitting the use or enjoyment of a copyright covered under clauses (a) or (b) of s/s. (1) of section 13 of the Indian Copyright Act, 1957 relating to original literary, dramatic, musical, artistic works or cinematograph films” with effect from 01-07-2012. It is relevant to note in this context that actors, directors and various other technicians are brought under the net of service tax vide the new definition of service and the negative list based service tax regime from 1st July, 2012. Accordingly, a film producer is required to pay various actors, technicians and/ or other professionals their charges along with service tax and thus there is a cost addition of 12.36% to the producers. However, such producer of the film, the owner of copyrights of his film was not liable to pay service tax on his services of transferring or permitting use of such copyright in favour of distributors and/or theatre owners on account of the entry prior to amendment.
Implication of amendment with effect from 01-04-2013:
• Now, this entry of exemption is restricted to “cinematograph films for exhibition in a cinema hall or cinema theatre”.
Thus, the exemption in respect of original literary, dramatic, musical or artistic work is retained without any change. However, grant of copyright is restricted only to transfers or permissions for the use of exhibition in a cinema hall or a cinema theatre.
• The intention for the amendment is explained in CBEC letter dated 28-02-2013 as follows:
“The benefit of exemption u/s. No. 15 of the notification in relation to copyrights for cinematograph films will now be available only to films exhibited in a cinema hall or theatre. This will allow service providers to pass on input tax credits to taxable end-users”.
Now, when a film producer grants copyrights or temporarily transfers these to distributors for exhibition of the film in theatres, the producer is still not liable for service tax. However, when rights are granted for direct to home (DTH) exhibition or to broadcasting agencies viz. TV channels, satellites etc., the film producer is liable to service tax and in turn broadcasting TV channels already being under the tax net would be eligible to CENVAT credit of the service tax paid for temporary transfer of copyrights in their favour. However, film producers paying service tax to actors, technicians etc. would be eligible for only proportionate credit as they would be providing taxable service in respect of DTH or broadcasting rights whereas services of transfer of rights for exhibition in cinema continue to be exempt. The CBEC letter therefore appears to be only partially correct considering the above discussion.
• Renting of immovable property and auxiliary education services provided by specified educational institutions:
Background:
Entry No. 9 in the Notification 25/2012-ST exempted service to or by an educational institution in re-spect of education exempted from service tax by way of renting of immovable property or education auxiliary service. The term “auxiliary educational service” is defined in the said Notification 25/12-ST itself as follows:
“(f) “auxiliary educational services” means any services relating to imparting any skill, knowledge, education or development of course content or any other knowledge – enhancement activity, whether for the students or the faculty, or any other services which educational institutions ordinarily carry out themselves but may obtain as outsourced services from any other person, including services relating to admission to such institution, conduct of examination, catering for the students under any mid-day meals scheme sponsored by Government, or transportation of students, faculty or staff of such institution”
Education which is not taxable under the negative list in section 66D appears at entry (1) and reads as follows:
“(l) services by way of-
(i) pre-school education and education up to higher secondary school or equivalent;
(ii) education as a part of a curriculum for obtaining a qualification recognized by any law for the time being in force;
(iii) education as a part of an approved vocational education course”
Implication of amendment with effect from 01-04-2013:
Exemption will not continue for services provided by such institutes to other persons for the said services. However, such other persons providing auxiliary educational services or renting of immovable property services to the educational institutes would continue to be exempt. Educational institutions imparting education recognised by law such as university-affiliated colleges or any higher secondary school often provides its premises like halls, auditoria or ground on hire for any official, social, cultural or political functions. Prior to the introduction of the negative list from 01-07-2012, this service was covered under the category of mandap keeper. In the negative list taxable categories have ceased to exist and entry no.9 exempted renting of immovable property. Therefore letting off of institution’s immovable property was declared exempt. Now again, this becomes taxable. Even when the schools provide small counters/ place to banks in their premises for facilitating students/parents to pay school fees, this was taxable prior to 01-07-2012 and is noe taxable again. The definition of auxiliary educational services is such that generally services provided by others or those outsourced by the specified educational institutes would get covered. For instance, admission process outsourced by a university or the services of bus contractor etc. Nevertheless, if a school owns its transport vehicles and recovers charges from students for these facilities, it now will attract service tax. Similarly, if a place for canteen is let out to a contractor, it will attract service tax. If a training programme is conducted by a school for persons other than to specified education institutions, it will also become taxable as the scope of entry 9 is substantially narrowed. Further, educational institutions conduct a large number of extra-curricular courses (in addition to basic education) which are usually charged sepa-rately. These could get hit unless they fall under Entry No. 8 of Notification 25/2012- ST i.e., recreational activities in relation to arts, sports, etc.
• Charitable activity of advancement of object of general public utility:
Background:
The Notification 25/2012 at entry 4 exempts services by an entity registered u/s. 12AA of the Income -tax Act, 1961 by way of charitable activities and in turn the said notification contains definition of “charitable activities” at 2(k) as follows:
“(k) “charitable activities” means activities relating to –
(i) public health by way of –
(a) care or counseling of (i) terminally ill persons or persons with severe physical or mental disability, (ii) persons afflicted with HIV or AIDS, or (iii) persons addicted to a dependence-forming substance such as narcotics drugs or alcohol; or
(b) public awareness of preventive health, family planning or prevention of HIV infection;
(ii) advancement of religion or spirituality;
(iii) advancement of educational programmes or skill development relating to,
(a) abandoned, orphaned or homeless children;
(b) physically or mentally abused and traumatised persons;
(c) prisoners; or
(d) persons over the age of 65 years residing in a rural area;
(iv) preservation of environment including watershed, forests and wildlife; or
(v) advancement of any other object of general public utility up to a value of,
(a) Rs. 18,75,000 for the year 2012-13 subject to the condition that total value of such activities had not exceeded Rs. 25,00,000 during
2011-12;
(b) Rs. 25,00,000 in any other financial year subject to the condition that total value of such activities had not exceeded Rs. 25,00,000 during the preceding financial year;
Implication of amendment from 01-04-2013:
Now, the last sub-clause (v) is omitted. As it is, the term charitable activity is defined in a restrictive manner to include only a few specific activities. Some other activities of general nature like public awareness programmes etc., conducted by any 12AA registered organisation would not qualify to be exempt anymore.
• Others:
Exemption in respect of transportation of goods by rail and vessel is contained at entry 20 and transportation of goods by road at entry 21 of the Notification 25/2012-ST. Amendments are made in both these entries to bring exemption in respect of all the modes of transport at par. Transportation of petroleum or petroleum products, postal mail or mail bags and household effects by rail or vessel was exempted at entry 20. This is now withdrawn. Therefore, transportation of petroleum/ petroleum products, postal mail or household effects by any mode of transport is now liable for service tax. Under entry 21 for goods transportation by road, transportation of fruits, vegetable, eggs, milk, food grain and pulses only was exempt. Now, in its place and like in the case of rail or vessel transportation, the exemption is redefined and scope is expanded to include the following products:
• Agricultural produce
• Foodstuff including flours, tea, coffee, jaggery, sugar, milk products, salt and edible oil, excluding alcoholic beverages
• Chemical fertilisers and oilcakes
• Registered newspapers or magazines, relief material for victims of natural or man-made disasters
• Defence equipments.
The existing exemption in respect of consignment of single goods carriage for Rs. 1,500/- or less and consignment for a single consignee for Rs. 750/- or less continues to remain exempt.
• Exemption provided at entry no.24 in Notification 25/2012-ST for vehicle parking services to general public stands withdrawn from 01-04-2013 and therefore parking charge recovered from general public now is liable for service tax.
