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Year: 2014

Cash credits: Section 68: A. Y. 1989-90: Meaning of “any sum”: No explanation regarding particular amount: Addition of sum in excess of such particular amount is not permissible u/s. 68:

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D. C. Rastogi vs. CIT; 359 ITR 513 (Del):

For the A. Y. 1989-90 the assessee could not satisfactorily explain cash entry to the tune of Rs. 15,17,060/-. The Assessing Officer was of the opinion that even the profits returned were not truly disclosed as were other sources of income. He, therefore, proceeded to reject the accounts and complete the assessment on an estimate basis. Accordingly, the Assessing Officer made an addition of Rs. 25 lakh over and above the specific amount of Rs. 15,17,060/-. The Commissioner (Appeals) reduced the estimation to Rs. 17 lakh. This was upheld by the Tribunal.

The Delhi High Court allowed the assessee’s appeal and held as under:

“i) In the case of section 68 of the Income-tax Act, 1961, there cannot be any estimate even if for the rest of the accounts, such an exercise is validly undertaken. This is for the simple reason that the expression “any sum” refers to any specific amount and nothing more.

ii) U/s. 68 any amount other than one found credited in the account books of the assessee could not be estimated and charged to tax.”

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Capital gain: Business profits vs. Capital gains: S/s. 45, r.w.s. 28(i): A. Y. 2006-07: Conversion of stock-in-trade (shares) into investment in 2002 and 2004: Sale of such shares in relevant year: Profit is capital gain and not business income:

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Yatish Trading Co. (P.) Ltd. vs. CIT; 359 ITR 320 (Bom):

218 Taxman 316 (Bom): The assessee was engaged in the business of investments and also dealing in shares and securities. In the A. Y. 2006-07, the assessee declared income under the heads ‘profits and gains of profession’ and also under the head ‘capital gains’. The Assessing Officer noted that a part of the capital gains declared was in respect of transfer of shares/securities which were held by the assessee originally as stock-intrade as a dealer in shares/securities which were converted into investment by the assessee on 1st April, 2002 and 1st October, 2004. He held that the short term and long term gains arising out of the sale of shares which were held originally as stock in trade and converted into investments was to be treated as business income. The CIT(A) and the Tribunal allowed the assessee’s claim. The Tribunal held that it is not in dispute that the conversion of its stock in trade into investment was accepted by the Department in A. Ys. 2003-04 and 2005-06. It is also not in dispute that the shares which were sold and gains from such sales were offered under the head capital gains from the date of conversion from stock in trade into investments and prior thereto as business profits. Further in its books of account the assessee showed the shares on which tax is levied under the head capital gain as investments. Further the fact that the assessee was trading in the shares would not estop the assessee from dealing in shares as investment and offer the gain for tax under the head capital gains. Thus, it is open to the trader to hold shares as stock in trade as well as investments.

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

“i) Once the finding of fact is recorded that the shares sold were held by assessee as investments, the gains arising out of the sale of investment were to be assessed under the head capital gains and not under the head business profits.

ii) In view of the above, we see no question of law arises for our consideration. Accordingly, the appeal is dismissed.”

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Capital gain: Exemption u/s. 54F: A. Y. 2009- 10: Construction of new house commenced before the sale of ‘original asset’: Denial of exemption u/s. 54F not proper:

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CIT vs. Bharti Mishra; [2014] 41 taxmann.com 50 (Delhi):

The assessee, an individual, had sold shares and thereafter the sale proceeds of Rs. 54,86,965/- were invested in construction of house property. Exemption was claimed u/s. 54F of the Income Tax Act, 1961. The Assessing Officer rejected the claim on the ground that the construction of the house had commenced before the date of sale of shares. The Tribunal allowed the claim of the assessee.

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

“i) Section 54F(1) if read carefully states that the assessee being an individual or Hindu Undivided Family, who had earned capital gains from transfer of any long-term capital asset not being a residential house could claim benefit under the said section provided, any one of the following three conditions were satisfied; (i) the assessee had within a period of one year before the sale, purchased a residential house; (ii) within two years after the date of transfer of the original capital asset, purchased a residential house and (iii) within a period of three years after the date of sale of the original asset, constructed a residential house.

ii) For the satisfaction of the third condition, it is not stipulated or indicated in the section that the construction must begin after the date of sale of the original/old asset. There is no condition or reason for ambiguity and confusion which requires moderation or reading the words of the said s/s. in a different manner.

iii) Section 54F is a beneficial provision and is applicable to an assessee when the old capital asset is replaced by a new capital asset in form of a residential house. Once an assessee falls within the ambit of a beneficial provision, then the said provision should be liberally interpreted.

iv) In view of the aforesaid position, we do not find any merit in the present appeal and the same is dismissed.”

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Business expenditure: TDS: Disallowance: Royalty: Section 9(1) Expl. (2), 194J and 40(a)(ia): A. Y. 2009-10: Consideration for perpetual transfer for 99 yrs of copyrights in film is not “royalty”:

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Mrs. K. Bhagyalakshmi vs. Dy. CIT; 2013] 40 taxmann. com 350 (Mad):

The assessee is a person carrying on business in the purchase and sale of Telugu films. For the A. Y. 2009-10, the Assessing Officer, made a disallowance of Rs.7,16,15,000/- for non-deduction of TDS u/s. 194J of the Income-tax Act,1961 by invoking section 40(a) (ia) of the Act on the ground that the purchase of film rights fell under the term “Royalty” and that the agreement entered into between the assessee with respect to purchase of film rights was termed as an assignment agreement and the assignee of the satellite rights and the person who transferred such rights was the assignor and such rights were given for a period of 99 years. Therefore, the Assessing Officer held that it is not a sale but a mere grant of satellite right in the movie produced by the assignor and the payments made for transfer of such rights fall within the meaning of “Royalty”. The CIT(A) allowed the assessee’s appeal and held that the payments made by the assessee could not be termed as ‘Royalty’ as they are not covered by Explanation 2 to Clause (vi) of section 9(1) of the Act and the payment were covered by section 28 of the Act as trading expenses and there was no scope for invoking section 40(a)(ia) of the Act and therefore the CIT(A) held that the payments for acquiring of the film rights were not exigible for deduction of Tax at Source u/s. 194J of the Act as they did not qualify as ‘Royalty’. The Tribunal reversed the decision of the CIT(A) and upheld the disallowance.

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

“i) We have seen the various conditions contained in the sample transfer deed and there is a transfer of copy right in favour of the assessee. Though the agreement speaks of perpetual transfer for a period of 99 years, in terms of section 26 of the Copy Right Act, 1957, in the case of cinematographic film, copy right shall subsist until 60 years from the beginning of the calendar year next following the year in which the film is published. Therefore, the agreement in the case on hand, is beyond the period of 60 years, for which the copy right would be valid, the document could only be treated as one of sale.

ii) We have no hesitation to hold that the findings of the First Appellate Authority was perfectly justified in holding that the transfer in favour of the assessee as sale and therefore, excluded from the definition of “Royalty” as defined under clause (v) to Explanation (2) of section 9(1) of the Act.

iii) In the result, the order of the Income Tax Appellate Tribunal shall stand set aside and the Tax Case(Appeal) is allowed.”

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Business expenditure: Capital or revenue: A. Ys. 1994-95 to 2004-05: Media cost paid for the import of a master copy of Oracle Software used for duplication and licensing is an expenditure of a revenue nature and as such is an allowable deduction:

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Oracle India (P.) Ltd. vs. CIT; [2013] 39 taxmann.com 150 (Delhi):

The Appellant company is a subsidiary of Oracle Corporation USA. The Appellant company entered into a licence agreement with its parent/holding company under which the Appellant was granted non-exclusive non-assignable right and authority to duplicate on appropriate carrier media software products or other products and sub-licence the same to third parties in India. The holding company retained the ownership of the copyright. For the relevant years the Assessing Officer disallowed the claim for deduction of the royalty paid to the holding company treating the same as capital expenditure. The Tribunal upheld the disallowance.

The Delhi Court reversed the decision of the Tribunal, allowed the assessee’s appeal and held that the expenditure was of revenue nature and as such an allowable deduction.

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Assessee in default: TDS: S/s. 194B and 201: A. Ys. 2001-02 and 2002-03: Non-deduction of TDS from lottery winnings in kind: Assessee not in default: Not liable u/s. 201:

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CIT vs. Hindustan Lever Ltd.; 264 CTR 93 (Kar):

The assessee company was engaged in manufacture and sale of certain consumer products. Under its sales promotion scheme the purchasers were entitled to prizes as indicated on the coupons inserted in the packs/containers of their products. The prizes were Santro car, Maruti car, gold chains, gold coins, gold tablas, silver coins, emblems etc. The total amount of prizes distributed valued at Rs. 6,51,238/- for A. Y. 2001-02 and Rs. 54,73,643 for A. Y. 2002- 03. The Assessing Officer held that what has been paid by the assessee as prize in kind is a lottery on which tax was deductible u/s. 194B of the Income-tax Act, 1961 and treated the assessee as an assessee in default on the ground that the assessee neither deducted the tax nor ensured payment thereof before the winnings were released. Accordingly, the Assessing Officer raised a demand of Rs. 3,78, 550/- for the A. Y. 2001-02 and Rs. 17,73,902/- for A. Y. 2002-03 u/ss. 201(1) and 201(1A). The Tribunal cancelled the demand and held that there was no obligation on the assessee to deduct tax at source in respect of prizes paid in kind and in absence of any such obligation no proceedings u/s. 201 could be taken against the assessee.

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

“i) From the plain reading of the proviso to section 194B, it is clear that it does not provide for deduction of tax at source where the winnings are wholly in kind and it simply puts a responsibility to ensure payment of tax, where winnings are wholly in kind. In the present case, admittedly the winnings were wholly in kind.

ii) The combined reading of sections 194B and 201 would show that if any such person fails to “deduct” the whole or any part of the tax or after deducting, fails to pay the tax as required by or under this Act, without prejudice to any other consequences, which he may incur, be deemed to be an assessee in default in respect of the tax. In other words, the provisions contained in these sections do not cast any duty/responsibility to deduct the tax at source where the winnings are wholly in kind. If the winnings are wholly in kind, as a matter of fact, there cannot be any deduction of tax at source.

iii) The proceedings against the person u/s. 201, such as the assessee in the present case, who fails to ensure payment of tax, as contemplated by proviso to section 194B, before releasing the winnings, are not maintainable or the proceedings against such person are without jurisdiction.”

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Assessee in default: TDS: S/s. 192, 201(1) and 201(1A) : A. Y. 1992-93: Short deduction on account of bona fide belief: Assessee not in default: Not liable u/s. 201(1) and 201(1A):

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CIT vs. ITC Ltd.; 263 CTR 241 (All):

Assessee believed that conveyance allowance is exempt and accordingly computed TDS u/s. 192 excluding conveyance allowance. The Assessing Officer treated the assessee as assessee in default and raised demand u/s. 201(1) and also levied interest u/s. 201(1A). The Tribunal allowed the assessee’s appeal and cancelled the demand.

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

“Assessee was under bona fide belief that the conveyance allowance was exempt u/s. 10(14) and tax was not deductible at source and therefore assessee could not be treated as assessee in default for charging interest u/s. 201(1A) of the Act.”

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Export – Deduction u/s. 80HHC – DEPB credit – Matter remanded to the Assessing Officer in accordance with the law laid down in Topman Exports.

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The assessee was a manufacturer-exporter. For the assessment year 2003-04, the assessee filed return of income on 28th November, 2003, showing a total income of Rs. 1,79,80,000. The assessee also claimed deduction u/s. 80HHC of the Act. The claim of the assessee for such deduction included consideration of Rs. 1,54,67,000 upon transfer of the DEPB credit. The Assessing Officer was of the opinion that 90 % of such sum had to be excluded for the purpose of deduction u/s. 80HHC of the Act. He framed the assessment accordingly.

The assessee approached the Commissioner of Income Tax (Appeals), who confirmed the decision of the Assessing Officer, holding that the entire amount received by the assessee towards consideration on transfer of the DEPB credits would be covered u/s. 28(iiid) of the Act. Ninety per cent of the such amount, therefore, had to be excluded for the purpose of working out of the deduction u/s. 80HHC of the Act. The Commissioner of Income Tax (Appeals) observed that the treatment to the DEPB amount should be the same as that of duty draw back. In other words, the entire amount of the DEPB credit would be covered under section 28(iiid) of the Act. The Commissioner of Income Tax (Appeals) was of the opinion that the cost of acquiring the DEPB credit to the assessee was nil.

The assessee carried the issue in appeal before the Tribunal. The Tribunal in the detailed judgment considered various aspects including the interpretation of various clauses of section 28, and in particular, clause (iiid) of section 28 and its co-relation to section 80HHC of the Act. The Tribunal was of the opinion that the face value of the DEPB would be the cost of its acquisition by the assessee. If the assessee sold such DEPB credit at a price higher than the face value, the difference would be the profit of the assessee which would be covered u/s. 28(iiid) of the Act. It is only this element which to the extent of 90 per cent be excluded for the purpose of working out section 80HHC deduction. The Tribunal also referred to Explanation (baa) to section 80HHC, by virtue of which, 90 % of the income referred to in section 28(iiid) of the Act is to be excluded from the total turnover of the assessee for the purpose of working out section 80HHC deduction.

The Revenue carried the matter to the High Court, which on combined reading of the Government of India policy providing for the DEPB benefits, the decision of the Bombay High Court in Kalpataru Colours and Chemicals (2010) 328 ITR 451 (Bom.) and the apex court, in Liberty India vs. CIT (2009) 317 ITR 218 (SC) concluded that the face value of the DEPB credit cannot be taken to be its cost of acquision in the hands of the assessee-exporter.

According to the High Court, the Tribunal committed an error in coming to the conclusion that on transfer of the DEPB credit by an assessee only the amount in excess of the face value therefore would form part of profit as envisaged in clause (iiid) of section 28.

Before the Supreme Court, the learned Additional Solicitor General for the Revenue, fairly submited that in view of the decision of the Supreme Court in Topman Exports vs. CIT [2012] 342 ITR 49 (SC), the civil appeal deserved to be allowed and the matter should be sent back to the Assessing Officer.

The Supreme Court for the reasons given in Topman Exports (supra) set aside the judgement and order of the Gujarat High Court and directed the Assessing Officer to compute the deduction u/s. 80HHC of the Income-tax Act, 1961, in the light of the observations made by it in Topman Exports.

Note: A similar decision was delivered by the Supreme Court in the case of Global Agra Products vs. ITO (2014) 360 ITR 117 (SC)

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Programme Conceived by: Narayan K. Varma Co-ordinators: Uday V. Sathaye and Pradip K. Thanawala

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A Senior Chartered Accountants’ Meet (SCAM) was organised by the Bombay Chartered Accountants’ Society (BCAS) at Hotel Dukes Retreat, Khandala on 24th & 25th May, 2014. This programme was conceived by past President, BCAS, Mr. Narayan Varma. The object was to bring together the Senior Chartered Accountants to share their experience and to discuss various non-technical subjects which was of interest to them. In a departure from the BCAS tradition, the members attended this meet with their spouses. The programme was designed keeping this in mind.

President, Mr. Naushad Panjwani welcomed all the delegates and highlighted the purpose of this programme. He categorically mentioned that, after 60 years of age, one needs to look at things differently. The Chairman of the 4i committee, Mr. Uday Sathaye felt that the BCAS is always ahead in organising different Residential Refresher Courses (RRC). He also mentioned that, for the first time, senior members were attending RRC with their spouses, to enjoy and understand subjects of common interest.


Lighting of Lamp. Seen L to R – Arvind P. Dalal, Uday V. Sathaye and Narayan K. Varma

Ms. Nidhi Thanawala, Assistant Professor and BMM Co-ordinator, H. R. College of Commerce and Economics , Mumbai, made an excellent presentation on the use of Mobile Phones, Computers etc. She demonstrated the use of various applications available in such electronic gadgets which could make life easier and enjoyable.

Mr. Anand Desai from DSK Legal presented his views on succession planning including drafting of a will. This session was interactive wherein everybody participated and shared their experiences.

Mr. Parindra Kadakia, an active member from the Chinmaya Mission, made a presentation on Spirituality. He dealt with the subject ‘Purpose of Life’ and elaborately discussed self-management for excellence.

In the evening, everybody participated in a musical programme. Mr. Mahesh Dube, Hasya Kavi, from Varanasi presented excellent poems composed by him with some of them based on the present scenario of our country. This programme was very refreshing.

The next morning, Dr. Vijaya Venkat, dealt with the health problems particularly related to diet. She explained in detail the need of change in habits to enjoy life more happily. She used the word “Wellness” to greet everybody at all times to emphasise the result of a more disciplined lifestyle.

Thereafter, Ms. Amruta Lovekar, a Gerontologist, made a presentation on the non-financial aspects of a retirement plan. She explained in detail about what a Senior Citizen can pass on to the next generation beyond wealth.

Mr. Shashank, a Yoga teacher from Kaivalyadham demonstrated exercises in yoga that are useful for the Senior citizens.

The SCAM concluded after lunch on a positive note to meet again. Everybody appreciated the innovative idea of bringing seniors together for non-academic subjects useful in day-to -day life.


Participants of SCAM

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Tax Terrorism: India Births a New Kind of Terrorism

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A recent move by the tax department has flummoxed corporates and businessmen who are calling it ‘tax terrorism’ — a phrase that has gained currency after it found its way into BJP’s manifesto. Hundreds of closely held firms, many owned by the country’s top business houses, have been questioned on the premium collected against the sale of shares. In notices served a day before the close of the last financial year, the Incometax (I-T) office, after collecting data from the registrar of companies (RoC), has told them to justify the premium, failing which the amount would be treated as income and therefore taxed. A senior tax official said the department was simply following a new rule that came into force from 2012-13. Its intention is to curb money laundering and bogus transactions where the premium an investor pays per share cannot be explained. But tax practitioners ET spoke to feared the department’s sweeping and hurriedly taken decision to beat the March 31 deadline could mean endless hassles for companies. “First, any such transaction prior to 2012-13 (when the new rule came) should not be taxed, but the department has, nonetheless, gone ahead with a fresh circular. This would be legally challenged. Second, one cannot question transactions simply on the basis of RoC data. There has been no evaluation and there is no evidence that income has escaped assessment.

According to tax circles, close to 200 companies have received notices from the tax office in connection with share premium charged by them. The unstated fear among companies is the possible outcome of reopening of assessment. “There is no guarantee that the I-T department would stop with the share premium issue. It’s very much possible that it may rake up other matters. At present, 2008-09 assessments have been reopened which would become time barred post March 31, 2014. But the department, we believe, is collecting data for subsequent years as well. So, it’s a matter of time more notices would be served. Companies issue shares to financial investors, JV partners, co-promoters and parent companies, and often these are influenced by shareholder agreements. The pricing is on the basis of either book value of the unlisted company or its discounted cash flow which estimates future earnings. All cases where the value of share premium is more than Rs.1 crore have come under the department’s scrutiny. The move to tax unexplained premium is aimed at plugging sham deals priced at bloated valuation to carry out shady transfer of funds. However, the department’s March 28 circular puts a question mark on genuine transactions as well.

(Source: The Economic Times of India, dated 25-04- 2014)

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Well-intentioned laws, courts cripple growth

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A key reason why India’s economic growth has halved from 9% to 4.5% per year is that, in search of inclusive growth, the courts and legislatures have increasingly made legitimate business difficult. It now takes 12 years to open a new coalmine. This is not inclusive growth but paralysis and stagnation.

The new land acquisition law aims at quick, fair acquisition. But the secretary of the department of industrial policy and production says the Act has made it “virtually impossible” to acquire land for roads, ports or other infrastructure. Higher compensation provided in the new law is welcome, but it also mandates a social impact assessment for each project, followed by expert group clearance, followed by an 80% vote of affected persons. Legal challenges are possible at each stage. Instead of quick, fair acquisition, we have dither and delay.

India has become a major global player in clinical trials for new drugs. But complaints have arisen against malpractices by some companies — not informing patients of the risks, not giving insurance cover or compensation, negligence leading to deaths. The obvious answer is to prosecute and jail the guilty, deterring further misdeeds.

But in India the courts take forever to conclude cases, so misdeeds are not deterred. Instead of focusing on quick justice, the Supreme Court has decreed lengthy new procedures for clinical trials, causing huge delays and costs for legitimate activity.

Our courts are under the illusion that good practices are created by a jungle of rules. Sorry, they are actually created by swift punishment that deters the guilty. That’s why clinical trials suffer from fewer malpractices in Europe or Japan.

The Supreme Court should focus on speedy convictions, not ever more regulations.

Despite having the world’s third biggest reserves of iron ore and coal, India has begun importing both. The courts have banned iron mining in some states, and court inquiries into corrupt coal block allocations have frozen fresh mining. Now, illegal mining surely should be stopped. But the right way is to nail the guilty, not stop all legitimate activity. No illegal miners have been convicted beyond appeals, but many legitimate miners have suffered huge losses.

Illegal sand mining is rampant. Sand is essential for making concrete for construction. But the courts have passed increasingly stringent rules, curbing mining from river beds on environmental grounds. This has created a huge shortage of sand, which in some states sells at Rs. 1,800/tonne, more than the price of coal some years ago. Cowed by court strictures and threats of prosecution, many Collectors are playing safe by simply not issuing new sand licenses or renewing old ones that expire.

Faced with public outrage over illegal mining, the Green Tribunal has mandated environmental clearance (and hence delays) for even the smallest patches of sand. Will this check illegal activity? No, but it will reduce legal mining, making India even more dependent on the sand mafia for supplies.

These examples are just the tip of the iceberg. Our courts are not designed for making policy: they are designed to judge whether actions are in accordance with the law. They are not experts in the essentially political function of balancing the needs of production and social protection.

Mis-Governance in India is not just the result of crooked politicians and businessmen. It is also the result of well intentioned but badly designed laws. Above all, it is the result of a dysfunctional police-judicial system. Unending legal delays encourage law-breakers in every walk of life. The solution is not policy takeover by the courts, but quick justice.

(Source: Extracts from an Article by Swaminathan S. Anklesaria Aiyar in the Times of India dated 27-04-2014)
(Comment: Court activism is due to gross Mis- Governance, Dysfunctional Administration and Criminals in Politics & Power, who have acquired effective control of the State!)

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Make anyone who indulges in endless litigation pay: SC After hearing arguments for countless hours for more than two years in the Sahara case, the Supreme Court sent a request to Parliament: please enact a ‘Code of Compulsory Compensation’ (CCC).

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“The suggestion to the legislature is to formulate a mechanism that anyone who initiates and continues litigation senselessly, pays for the same. It is suggested that the legislature should consider introduction of a ‘Code of Compulsory Cost’,” said a bench of Justices K. S. Radhakrishnan and J. S. Khehar.

Citing the Sahara case, the bench said Indian judiciary was grossly afflicted with frivolous litigation and the need was to find ways and means to deter litigants from their compulsive obsession towards senseless and illconsidered claims.

“What is sought to be redressed (through CCC) is a habituation to press illegitimate claims. This practice and pattern is so rampant that in most cases, disputes which ought to have been settled in no time at all before the first court of incidence, are prolonged endlessly, for years and years, from court to court, up to the highest court,” it said.

(Source: The Times of India, dated 07-05-2014)

(Comment: The functionaries of the State, particularly senior officials of the various Revenue Departments should be personally made to pay for frivolous litigation initiated and sanctioned by them)

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The New India We Want by Shri N. R. Narayana Murthy

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Whoever becomes the Prime Minister will be the Prime Minister for every citizen, every resident and every visitor of India. The new PM will have to heal the secular rupture that has taken place. No country can make stellar economic progress unless there is peace at its borders and harmony within. Therefore, the first duty of the new PM will be to create an environment where every dialogue, including those with our neighbours, is on a platform of civility, courtesy, harmony and facts. This is the only way to enthuse and energise Indians of all religious beliefs, political ideologies and social status.

The economy has suffered during the last four to five years. The reputation of India has taken a beating abroad during the last six to eight years. During 1999-2009, when China was mentioned three times in boardrooms abroad, India was mentioned at least once. Today, India is not mentioned even once when China is mentioned 30 times. Good governance rests on seven important attributes: equity, fairness, transparency, accountability, honesty, secularism and a robust, consistent and responsive legal system. Most public governance experts tell me that we have seen the steepest fall in these attributes during the last five years. Therefore, the first task for the new PM is to restore these attributes at least to the level they were during the 1990s.

If we want to raise the hope and confidence of the Indian youth, we have to create jobs for them — jobs with good disposable income. We have to create 150-200 million jobs during the coming decade. The only way we can spend more on social welfare programmes is by collecting more taxes that come from growth in corporate activities. The new PM has to articulate India’s commitment to the seven attributes. Our embassies, immigration and customs officials must be empowered to make the visit of every foreigner a pleasant experience. Our state governments must become active partners in this task.

A trusted and well-informed Cabinet group should visit the global capitals every three months and reiterate these messages and make sure that enough investments come in. We have excellent people to lead such groups on both sides of the aisles. These are modern, well-informed individuals who can raise the confidence of senior corporate leaders.

The new PM must accept that, at this stage of our development, jobs can be created only in urban and semi-urban areas. The need of the day is to make our cities more attractive not just for Indians but for foreigners too. We must keep our ego down and realise that the foreigners have umpteen global options for investment. The PM must make the visit and stay of foreigners hasslefree. It is amusing that the visa-on-arrival facility is not available for even one country that is among our top five trading partners in software. The PM must create a ministry of urban governance. An apolitical expert with a proven track record has to lead this ministry since this is essentially a Centre-state issue.

It is time that we made life better for our poor people. We have to focus on education, healthcare, nutrition and shelter. All programmes that provide such facilities must use Aadhaar identity to deliver services efficiently and without corruption through a voucher scheme. You cannot run any such directed schemes without strengthening Aadhaar. Therefore, the new PM must appoint a smart, modern and a results-oriented technocrat to run UIDAI. While continuing with the right to education ideology, the new government must provide full subsidy to the private sector players in these fields through vouchers without making these institutions debilitated.

Taking about education brings me to initiatives in higher education. The new PM must give top priority to pass Bills on welcoming foreign universities and starting innovation universities. Without adequate focus on research and higher education, India’s future is shaky.

Ever since the mid-1970s, population control has been given up. I have hardly seen any PM speak about it since then. It is time we resurrected this important initiative.

Peace at our borders is extremely important and the new PM must give priority to that task. We have not seen any major move with Pakistan since A B Vajpayee’s time. It is time we acted as the elder brother to Pakistan and helped that country overcome the trauma they are facing. A happy India requires a happy Pakistan.

(Source: Extracts from an article by Shri N. R. Narayana Murthy, Executive Chairman Infosys, in The Economic Times dated 29-04-2014)

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Poor Quality of Our Democracy

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This election season, in the midst of our self-congratulation over the vitality of Indian democracy, we should ask ourselves: What is the quality of our democracy? Democracy cannot simply be a plurality of parties, free elections, peaceful handovers of power, an independent judiciary, constitutional governance, and personal and group freedoms. A healthy democracy must also have and promote substantively rich debate on policy alternatives and choices.

It is striking that through the campaign there has been no debate, of any depth, on everyday policy issues. Indian politicians seemingly have neither the stomach nor the intellectual bandwidth for those kinds of debates. The media too cannot sustain any kind of sensible commentary on key policy choices facing us. You would look in vain for an analysis of hard policy tradeoffs as we confront economic and social challenges.

Nowhere is this more evident than in respect of election manifestos which promise all manner of things. Are the policies they enunciate desirable? And if desirable, are they feasible financially, socially, politically, and culturally? Our media should be trying to answer these questions. Instead, they are preoccupied with who will win the election, who did what during campaigning and what is the last thing Narendra Modi said.

The manifestos of the two major parties suggest both are agreed on a Goods and Services Tax (GST) and encouraging foreign investment. That is worth bringing to the attention of voters. Yet few in the media have bothered to do so. BJP’s opposition to allowing multibrand retailing and its espousal of simpler tax structures has had some mention. Can India repudiate its decision on multibrand retailing? How would foreign investors react to constant policy changes? And how should we simplify our tax structures?

Both parties want to do something for health. Congress wants to pass a right to health bill, increase health expenditures to 3% of GDP and create millions of jobs in that sector. How to define the right to health? How many rights-based bills can we work with (right to education, right to information, right to food)? Is 3% too much or too little, and what would we spend less on? What kinds of jobs does Congress want to create in health?

BJP wants to raise education expenditures to 6% of GDP, encourage online courses and boost vocational training. Is 6% affordable, what are the limitations of online learning and do we have the connectivity for it, and how to energies the moribund vocational sector?

Millions are migrating to towns and cities. Urban policy is therefore a huge challenge. Congress wants to build 100 urban clusters around older or emerging cities to take the pressure off existing conurbations. BJP wants to go further and create 100 completely new cities. Which way is better? Is either feasible given struggles around land rights, a new land acquisition bill and lack of supporting infrastructure?

Speaking of infrastructure, both parties want high-speed trains. Given the horrendous record of Indian railways in managing low-speed trains, how would we move to a different, more exacting system? High-speed trains require new tracks. That means dedicating a lot of land to the project. How will that be achieved when land is at such a premium? BJP thinks that we desperately need freight corridors, industrial corridors and a port-led development strategy. Has anyone weighed up what this would mean, how we would pay for it and where we would locate these installations?

We in India are obsessed with the most superficial, transitory and procedural elements of policy making and with quite a thin conception of democracy and good governance. We pat ourselves on the back for holding elections and over deep, elemental battles in our politics — the secularism debate, or human development versus growth-led development and a host of other relatively abstract, philosophical arguments. On the other hand, we shy away from hard-headed, rigorous engagement with everyday policy challenges. If we continue to neglect these everyday challenges in social and political life, we will see our bubbling democracy subside and then eventually be consigned to the dustbin of history.

(Source: An Article by Mr. Kanti Bajpai in the Times of India, dated 26-04-2014)

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Applicability of PAN requirement for Foreign Nationals

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The Ministry of Corporate Affairs has vide General Circular No. 11/2014 dated 22nd May 2014, has clarified that the PAN details are mandatory only for those foreign nationals who are required to possess “PAN” in terms of provisions of the Income Tax Act, 1961 on the date of application for incorporation while filing Form INC -7 for incorporation of Company. Where the intending Director who is a Foreign National is not required to compulsorily possess PAN, it will be sufficient for such a person to furnish his/her passport number, along with undertaking stating that provisions of mandatory applicability of PAN are not applicable to the person concerned. The form of Declaration is required to be made in the proforma given in the circular.

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Certification of forms under the Companies Act, 2013 by practicing professionals

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The Ministry of Corporate Affairs has vide General Circular No. 10 /2014 dated 7th May 2014, invited the attention of the professional bodies ( ICAI, ICSI, ICWAI) for authenticating the correctness and integrity of documents being filed by them with the MCA in electronic mode. It is required to examine e-forms or non e-forms attached and filed with general forms on MCA portal viz. to verify whether all the requirements have been complied with and all the attachment to the forms have been duly scanned and attached in accordance with the requirement of above said rules.

Where any instance of filing of documents, application or return or petition etc. containing false or misleading information or omission of material fact or incomplete information is observed, the Regional Director or the Registrar as the case may be, shall conduct a quick inquiry against the professionals who certified the form and signatory thereof including an officer in default who appears prima facie responsible for submitting false or misleading or incorrect information pursuant to requirement of above said Rules; 15 days’ notice may be given for the purpose.

The Regional Director or the Registrar will submit his/her report in respect of the inquiry initiated, irrespective of the outcome, to the Governance cell of the Ministry within 15 days of the expiry of period given for submission of an explanation with recommendation in initiating action u/s. 447 and 448 of the Companies Act, 2013 wherever applicable and also regarding referral of the matter to the concerned professional Institute for initiating disciplinary proceedings.

The E-Gov cell of the Ministry shall process each case so referred and issue necessary instructions to the Regional Director/ Registrar of Companies for initiating action u/s 448 and 449 of the Act wherever prima facie cases have been made out. The E-Gov cell will thereafter refer such cases to the concerned Institute for conducting disciplinary proceedings against the errant member as well as debar the concerned professional from filing any document on the MCA portal in future.

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Delegation of powers u/s 458 of Companies Act 2013 to the Regional Directors

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The Ministry of Corporate Affairs has vide notification dated 21st May 2014, delegated the powers and functions of the Central Govt to the Regional Directors at Mumbai, Kolkata, Chennai, Noida, Ahmedabad, Hyderabad and Shillong, for sections :

• Section 8(4)(i)(a) for alteration of Memorandum in case of conversion into another kind of Company

• Section 8(6) for revocation of license granted u/s. 8 in respect of companies with Charitable objects

• Section 13(4) and 13 (5) for shifting of registered office from one state to another

• Section 16 for rectification of name of company
• Section 87 for rectification in the register of charges • Section 111 (3) for circulation of members resolution
• Section 140 (1) for removal of auditor before the expiry of his 5 year term ;and
• Section 399 (1)(i) for inspection, production and evidence of documents filed with prospectus

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Delegation of powers u/s 153 and 154 of Companies Act, 2013 to Regional Director, Noida

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The Ministry of Corporate Affairs has vide notification dated 21st May 2014, delegated the powers and functions of the Central Government in respect of allotment of Director Identification Number (DIN) u/s.s 153 and 154 of the said Act to the Regional Director, Joint Director, Deputy Director or Assistant Director posted in the office of Regional Director at Noida.

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Delegation of Powers u/s. 458 to ROC

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The Ministry of Corporate Affairs has vide Notification dated 21st May 2014 delegated powers for the following sections of the Companies Act, 2013 to the Registrar of Companies

• Section 4(2)(a) – if the Name stated in the Memorandum is not undesirable
• Section 8(1)(b) – for Grant of License to Company on being incorporated with Charitable Objects
• Section 8(4)(i)(c) – For permission for alteration of the Memorandum and Articles of association of Companies incorporated with charitable objects etc. except for conversion into Company of other kind.
• Section 8 (5)- grant of license to existing companies for registration under this section
• Section 13(2)-for approval for change in the name of the Company

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A. P. (DIR Series) Circular No. 130 dated 16th May, 2014

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External Commercial Borrowings (ECB) from Foreign Equity Holder – Simplification of Procedure

This circular provides that, with immediate effect, approval under the Automatic Route will now be granted by the Bank of the borrower and not by RBI in the following cases where ECB has been availed of from FEH (direct holder as well as indirect holders) and group companies of FEH: –

1. ECB by companies belonging to manufacturing, infrastructure, hotels, hospitals and software sectors from indirect equity holders and group companies.

2. ECB by companies in miscellaneous services from direct/indirect equity holders and group companies. Miscellaneous services mean companies engaged in training activities (but not educational institutes), research and development activities and companies supporting infrastructure sector. Companies doing trading business, companies providing logistics services, financial services and consultancy services are, however, not covered under the facility.

3. ECB by companies belonging to manufacturing, infrastructure, hotels, hospitals and software sectors for general corporate purpose (which includes working capital financing) from direct equity holder.

4. Change of lender when the ECB is from FEH – direct/ indirect equity holder(s) and group companies.

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A. P. (DIR Series) Circular No. 129 dated 9th May, 2014

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External Commercial Borrowings (ECB) Policy – Refinance/Repayment of Rupee loans raised from domestic banking system

Presently, subject to certain terms & conditions, Indian companies are permitted to refinance/repay the Rupee loans, raised by them from the domestic banking system, by raising ECB from recognised lenders, subject to conditions.

This circular prohibits with immediate effect eligible Indian companies to raise ECB from overseas branches/ subsidiaries of Indian banks for the purpose of refinance/ repayment of the Rupee loans raised from the domestic banking system in respect of the following:

a. Scheme of take-out financing.
b. Repayment of existing Rupee loans for companies in infrastructure sector.
c. Spectrum allocation.
d. Repayment of Rupee loans.

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A. P. (DIR Series) Circular No. 128 dated 9th May, 2014

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External Commercial Borrowings (ECB) Policy: Re-schedulement of ECB – Simplification of procedure

Presently, prior approval of RBI is required for any elongation/ rollover in the maturity period of an existing ECB.

This circular now permits banks to grant elongation/ rollover of the maturity period of an existing ECB (but not FCCB) availed under the Automatic Route or the Approval Route, subject to the following conditions: –
i. Changes, if any, in all-in-cost (AIC) must only be on account of change in average maturity period (AMP) as a result of re-scheduling of ECB and post rescheduling the AIC and the AMP must be in conformity with the applicable guidelines.
ii. T here must not be any increase in the rate of interest and no additional cost (in foreign currency/Indian Rupees) must be involved due to the re-scheduling.
iii. R e-scheduling is permitted, only once, before the maturity of the ECB.
iv. I f the lender is an overseas branch of a domestic bank, prudential norms applicable on account of rescheduling have to be complied with. v. Changes on account of re-scheduling must be reported to DSIM through revised Form 83.
vi. E CB should be in compliance with all applicable guidelines related to eligible borrower, recognised lender, AIC, AMP, end-uses, etc.
vii. The borrower must not be in the default / caution list of RBI and should not be under investigation of the Directorate of Enforcement.

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A. P. (DIR Series) Circular No. 127 dated 2nd May, 2014

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Foreign Direct Investment (FDI) in India – Reporting mechanism for transfer of equity shares/fully and mandatorily convertible preference shares/fully and mandatorily convertible debentures

This circular states that: –
(a) In cases where the NR investor including an NRI, who has acquired and continues to hold control in an Indian company in accordance with SEBI (Substantial Acquisition of shares and Takeover) Regulations, acquires shares on the stock exchanges under the FDI scheme through a registered broker it is the duty of the investee company to file form FC-TRS with the bank within 60 of the transaction.

(b) Henceforth, banks have to approach the concerned Regional Office of RBI (as against the present system of approaching the Central Office of RBI) to regularise the delay in submission of form FC-TRS, beyond the prescribed period of 60 days.

(c) IBD/FED or the nodal office of the bank has to continue to submit a consolidated monthly statement in respect of all the transactions reported by their branches together with copies of the FC-TRS forms received from their branches to FED, RBI, Foreign Investment Division, Central Office, Mumbai in a soft copy (in MS- Excel).

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[2014] 41 taxmann.com 311 (Ahmedabad – CESTAT) – Dilip Parikh vs. CST, Ahmedabad

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Pre-deposit Waiver – Threshold Exemption is prima facie available to each Co-owner separately.

Facts:
The Appellants were co-owners of a building which was rented out to a person. The said person issued separate cheques to individual Appellant as they were co-owners of the property. The amount received by the individual Appellant was within the threshold exemption limit and therefore no Service tax was paid. The department contended that, for individual purposes and for the purpose of benefit of individual co-owners, the Appellants sought the payment individually, hence the Service tax liability should be considered after taking into account collective rent received by the Appellants.

Held:
The Tribunal after perusing the threshold Exemption Notification and agreements between the parties held that, amount of rent received by individual Appellant is specifically mentioned in the agreement so as to make it specific that individually they are renting out the property to a person. Hence, individually, each of the Appellants would be considered as provider of such service, whose aggregate value did not exceed the threshold limit. Complete waiver of pre-deposit was granted.

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MAT – A Conundrum unsolved..

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Synopsis

Minimum Alternate Tax (‘MAT’) was introduced as an alternative mode of tax with an intent to maintain minimum quantum of tax to be paid by the assessee – company which made profits but offered little or negligible income to tax by virtue of various deductions. While the methodology for computing MAT appears simple , the same has been under the subject matter of controversy due to interpretation of terms contained in section 115JB.

In the following article, the authors have analysed the treatment of a provision for the purposes of MAT and brought out the various dimensions of the issue.

1. Introduction

The era of MAT began as an ‘alternative mode’ of tax. With the efflux of time, the MAT regime has actually left us with no ‘alternative’ but to ‘tax’. Its objective is well known; although the text and content is vexed which often keeps the tax doyens perplexed. This complex provision has thrown out innumerable issues from its Pandora box. In this article, we have attempted to address one such issue through a case study.

2. Case Study

X Limited is an Indian company which acquired 1,00,000 equity shares of Y Limited for a consideration of Rs. 60 crore. In Year 1, X Limited created a “Provision for investment loss” amounting to Rs. 16 crore [by debiting the profit and loss account]. Cost of investment in the balance sheet was reduced to the extent of the provision (ie, Rs. 16 crore). The net loss as per the profit and loss account was Rs. 17 crore.

While computing the book profit under the provisions of section 115JB of the Income-tax Act, 1961 (“the Act”), the Provision for investment loss (i.e. Rs 16 crore) was “added back” to net the loss as per the profit and loss account. The book loss (u/s. 115JB) for Year 1 was accordingly computed at Rs. 1 crore. The loss computed under the regular provisions of the Act was Rs. 50 lakh. The loss computed under regular provisions being lower than the book loss, the return of income for Year 1 was filed with the loss of Rs. 50 lakh.

Subsequently, in Year 2, X Limited sold the 100,000 equity shares in Y Limited for Rs. 68 crore. The sale resulted in a gain of Rs. 8 crore. X Limited recognised this gain as “Profit on sale of investment” in the Profit and loss account along with reversal of Provision for investment loss (pertaining to shares sold during the year) amounting to Rs. 16 crore. Cumulatively, profit on sale of investment recognised in financial statements added up to Rs. 24 crore [ie, 8 crore + 16 crore]. The company paid tax under the provisions of MAT (section 115JB) amounting to Rs. 2 crore [after reducing Rs. 16 crore from the net profit].

In this background, the write-up discusses the appropriateness of the MAT computation carried out by X Limited.

3. Case Analysis

MAT – General principles

Minimum Alternate Tax (“MAT”) computed u/s. 115JB is an alternative regime of taxation. The section provides for an alternate, nay an additional mechanism, of ‘computing the tax liability’ of an assessee apart from the normal computation. A comparison is made between tax payable under the normal provisions of the Act and the tax payable on “book profit”. The higher of the tax payable from out of the two computations would have to be discharged by the assessee company.

S/s. (1) to section 115JB requires a tax (at 18.5%) on book-profit to be compared with income-tax payable on the total income as computed under the Act. Section 115JB is an alternative tax mechanism. This is evident from the section heading which reads – “Special provision for payment of tax by certain companies”. It is thus a special provision for payment of tax. The intent of section 115JB is to maintain the minimum quantum of tax (at 18.5% on book profit) that an assessee-company should be liable to pay. If the tax u/s. 115JB is higher, the “book-profit” is deemed to constitute the total income of the Company.

‘Book Profit’ is defined in Explanation 1 to section 115JB. It is defined to mean the net profit as shown in the profit and loss account prepared as per s/s. (2) to section 115JB as reduced or increased by certain sums specified in the section. S/s. (2) requires the profit and loss account to be prepared in accordance with Parts II & III of Schedule VI of the Companies Act, 1956. In arriving at the net profit, therefore, the principles outlined in Parts II & III of schedule VI of the Companies Act, 1956, shall be followed [Apollo Tyres Ltd (2002) 255 ITR 273(SC) and CIT vs. HCL Comnet Systems & Services Ltd. (2008) 305 ITR 409 (SC)].

Explanation 1 outlines a process of additions and deletions of certain sums to the ‘net profit’ disclosed in the Profit and loss account. Judicial precedents indicate that these adjustments are exhaustive. No other adjustments apart from those outlined in the explanation can be made to the ‘net profit’ to arrive at the “book profit”.

Characteristics of book-profit

S/s. (1) to section 115JB envisages a comparison of taxes. If the tax on book profit is higher than the tax payable under the normal provisions of the Act, then, (i) such book-profit would be deemed to be the total income and (ii) the tax payable shall be the tax on book profit (at 18.5%). A two-fold deeming fiction is envisaged. The total income under the normal provisions is replaced with book profit and the tax payable under the normal provisions paves way for ‘tax on book-profit’. Thus, s/s. (1) visualises a 3 step-approach:

(i) The book profit should be an outcome of the computation envisaged in Explanation 1 wherein, net profit as per the profit and loss account is adjusted by the adjustments specified therein;

(ii) Tax on such book profit should exceed the tax on income under the normal provisions; and

(iii) On satisfaction of the twin characteristics above, the book profit is deemed as the total income and the tax on book profit shall be the tax payable by the assessee.

Step ‘(iii)’ is a natural consequence of steps ‘(i)’ & ‘(ii)’. S/s. (1) of section 115JB is operative only when steps (i) and (ii) result in step (iii). In other words, in the absence of book profit or if tax on income under the normal provisions exceeds or is equal to the tax on the book profit, the deeming fiction in step (iii) is not to be invoked. If step (i) and (ii) do not culminate in step (iii), the computation in step (i) [book profit computation] becomes relevant only for step (ii) [comparison] and not step (iii). This is because, the computation of total income under normal provisions is sustained and the occasion of its replacement by book profit does not occur/ arise.

In case the computation [of book profit] under step (i) results in a negative number (or book loss, step (ii) becomes inapplicable or irrelevant. The comparison envisaged in step (ii) is between ‘tax on total income’ and ‘18.5% on book profit’. A negative book profit will invariably result in tax on total income under the normal provisions not being lower than tax on book profits. This can be explained by looking at the twin possibilities below:

Case 1 – Positive total income and book loss

In the above case, tax on total income under the normal provisions (being a positive number) exceeds the “tax payable” on the negative book profit (or book loss) and consequently results in tax on total income under the normal provisions being higher than 18.5% of book profit. Accordingly, section 115JB(1) is not satisfied.

Case 2 – Nil total income and book loss

Particulars

Amount (Rs)

 

 

Total income under the normal provisions

Nil

 

 

Tax on total income (@ 30%) – (A)

0

 

 

Book loss

(20)

 

 

18.5% on book loss – (B)

(3)

 

 

Tax payable by the
assessee (Higher of A and B)

0

 

 

In the above case, tax on total income (being nil) exceeds the negative tax on the book profit (or book loss) and consequently results in tax on total income being higher than 18.5% of book profit. Accordingly, section 115JB(1) is not satisfied.
In both the situations, “tax” on total income un-der the normal provisions would exceed 18.5% on book loss (or negative book profit). It is a trite to state that ‘total income ’ could either be ‘positive’ or ‘nil’.There cannot be negative total income. Consequently, there cannot be a ‘tax in negative’. For section 115JB to operate, ‘18.5% of book profit’ should be higher than such tax. Even if ‘18.5% on book loss’ is taken to be ‘nil’ in both the aforesaid examples, tax on total income under the normal provisions would not be lower which is the primary condition for section 115JB to be invoked.

Creation of provision for investment loss

In the given case study, X Limited created ‘Provi-sion for investment loss’ which was added back (or adjusted) while computing the book profit u/s. 115JB. The company had filed its return of income in Year 1 with loss (computed under normal provisions of the Act) amounting to Rs. 50 lakh. This loss was lower than the book loss (u/s. 115JB) for Year 1 which was Rs. 1 crore.

Being a book loss, there was no occasion to compute ‘tax on book profit’. Comparison of taxes u/s/s. (1) was not possible. The total income and tax payable could not be deemed as ‘book profit’ and ‘tax on book profit’ respectively for Year 1. Accordingly, operation of section 115JB was not triggered. For Year 1, the ‘Provision for investment loss’ was added back (or adjusted) while computing the “book profit” u/s. 115JB. The net result of the computation was a loss.

The appropriateness of this treatment (i.e, adding back of the provision) can be examined by traversing through the various adjustments housed in Explanation 1. These adjustments can be bisected into ‘upward adjustments’ and ‘downward adjustments’ which increase and decrease the net profit respectively. The opening portion of the Explanation 1 reads – “For the purposes of this section, “book profit” means the net profit as shown in the profit and loss account for the relevant previous year prepared u/s/s. (2), as increased by…”.

The phrase used is ‘net profit’. The expression ‘net profit’ and ‘net loss’ are not synonymous and can-not be used interchangeably. One could argue that the Explanation 1 visualises only a ‘net profit’ and not a ‘net loss’. In other words, the adjustments contemplated under Explanation 1 are not operative where the net result of operation is a loss. This is because the threshold condition to ignite section 115JB, viz. ‘net profit’, is not satisfied.

Further, the opening portion of the Explanation 1 deals with ‘increase’ of ‘net profit’ by certain adjustments. The second portion which deals with downward adjustments deals with reduction of the net profit by certain adjustments. The phrase used therein is “reduced by”. Thus, the law envisages an ‘increase’ and ‘decrease’ of net profits. The legislature has not employed the phrase “adjusted by”. The phrases used in the Explanation 1 have specific connotations. They cannot be understood in any modified manner. This aspect is important because an adjustment which ‘increases’ a ‘net profit’ would arithmetically ‘decrease’ if the start point were to be a ‘net loss’. This opposite numerical consequence indicates that the adjustments in the first portion have to necessarily result in an increase in the base figure and the ones in the latter portion should cause a reduction. Accordingly, the law visualises only ‘net profit’ to be the start point or base figure [and not ‘net loss’].

In the present case study, the net loss as per Profit and loss account in the Year 1 was Rs. 17 crore. Existence of net loss thus excludes X Limited from the clutches of section 115JB. Accordingly, it could be argued that there was no need to carry out any computation u/s. 115JB.

Alternative view

If one were to adopt the aforesaid position [that MAT is operative only on ‘net profit’], then all loss making companies would be excluded from the gamut of MAT computation. Such interpretation, although may be literally correct, would defy the objective of MAT computation. This could encourage the practice of ‘skewing of profits’ or ‘window dressing’ of financial statements.

Having accepted that loss making companies are also subject to MAT provisions (like in the present case), one needs to understand whether the book profit computation carried out by X Limited for Year 1 is in accordance with Explanation 1.

Two adjustments which could be relevant in the present context are clause (c) and (i) of the first part of the Explanation 1. These clauses read as under:

(c)    the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities

……

(i)    the amount or amounts set aside as provision for diminution in the value of any asset

As per clause (c) of Explanation 1, any provision for liability other than ‘ascertained liability’ is to be added to the net profit in order to arrive at the book profit for the purpose of section 115JB. A liability may be capable of being estimated with reasonable certainty though the actual quantification may not be possible. Even though estimation is involved, it would amount to a provision for ascertained liability. The intention of the legislature in inserting clause (c) is to possibly prohibit provision for contingent liability helping in reduction of the book profit. A provision for loss on investment should not be regarded as provision for meeting unascertained liability.

Prior to insertion of clause (i), there was no express provision which dealt with provision for diminution in the value of asset. It amply clarified by the Apex Court in the case of CIT vs. HCL Comnet Systems & Services Ltd. (2008) 305 ITR 409 (SC) that clause
(c)    does not deal with diminution in value of as-sets. The Court observed (although the decision was in the context of provision for doubtful debts) that a provision for doubtful debts is to cover up the probable diminution in value of asset (debtors) and is not provision for a liability. Thus, provision for diminution in value of assets cannot be equated with provision for liabilities. Consequently, clause (c) in Explanation 1 cannot be applied in cases where a diminution in value of investments is contemplated.

Subsequently, clause (i) in second part under Explanation 1 was inserted by the Finance (No. 2) Act, 2009, with retrospective effect from 01-04-2001. Acknowledging that clause (c) was not suitable to rope in provision for loss in the value of assets, clause (i) was inserted to achieve this objective. Clause (i) statutorily affirms the Apex Court decision that provision for diminution in value of assets is different from provision for liabilities.

Clause (i) employs the expression “provision for diminution in the value of any asset”. Both clause (c) and

(i)    use the term ‘provision’. This is possibly because a provision need not necessarily be for a liability and it could also be for diminution in the value of assets or for loss of an asset. This is discernible from the definitions/ description given in the ICAI literature and Company Law provisions. The word “provision” has not been defined in the Act. The Guidance Note on “Terms Used in Financial Statements” issued by the Institute of Chartered Accountants of India defines the term ‘provision’ as under:

“an amount written off or retained by way of providing for depreciation or diminution in value of assets or retained by way of providing for any known liability, the amount of which can-not be determined with substantial accuracy.”

Paragraph 7(1) of Part III of old Schedule VI to the Companies Act, 1956 defines the term ‘provision’ as under:

“the expression ‘provision’ shall, subject to sub-clause (2) of this clause, mean any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy.”

From the above, one can discern that a provision need not necessarily be for a liability. It can also be provision for depreciation or diminution in value of assets. The Mumbai Tribunal in the case of ITO vs. TCFC Finance Limited (ITA No.1299/Mum/2009) held that provision for diminution in the value of investment has to be added for computing book profit, regardless of the fact whether or not any balance value of the asset remains. The Tribunal also defined the meaning of the term “diminution” in the following manner:

“In common parlance the word “diminution” indicates the state of reduction. The Shorter Oxford Dictionary gives the meaning of the word “diminution” as “the action of making or becoming less; reduction “. Accordingly, any provision made for diminution in the value of any asset, is to be added for computing book profit under the provisions of section 115JB”

In the present case-study, the provision was created against loss due to decrease in the realisable value of investment (i.e, shares in Y Limited). It signifies preparedness for a dip in the value of the asset (Y Limited shares). The provision for investment loss after the amendment to the statute would be covered within the precincts of clause (i).

Reversal of provision for investment loss in Year 2

In the present case study, X Limited sold 100,000 equity shares in Y Limited in Year 2 for a gain of Rs. 8 crore. The company reversed the provision for investment loss amounting to Rs. 16 crore. Conse-quently, Rs. 16 crore was included in net profits while computing the MAT liability. After reducing Rs. 16 crore from the net profit, the company discharged its tax liability under MAT.

There is no dispute around inclusion of Rs. 8 crore in the book profit [being gain from the sale of shares]. The question is whether while computing book prof-its under MAT, reversal of “Provision for investment loss” was to be ‘retained’ or ‘reduced’ from the net profits in ascertaining tax on book profit.

As already detailed, Explanation 1 outlines the computation of book profit involving certain additions and deletions (or adjustments) to the ‘net profit’. The start point of such computation is ‘Net Profit as shown in the Profit & Loss Account’. The adjustments contemplated in the definition include ones which increase such net profit (‘Upward Adjustments’) and items which reduce the net profit (‘Downward Adjustments’). One such ‘Downward Adjustment’ is amount withdrawn from any Reserve or Provision, if any such amount is credited to the Profit & Loss Account and had been instrumental in increasing the book profit for any earlier year. Clause (i) of the second part of Explanation 1 which houses this adjustment, reads as under:

(i)    the amount withdrawn from any reserve or provision (excluding a reserve created before the 1st day of April, 1997 otherwise than by way of a debit to the profit and loss account), if any such amount is credited to the profit and loss account:

Provided that where this section is applicable to an assessee in any previous year, the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Explanation or Explanation below the second proviso to section 115JA, as the case may be;

Clause (i) read with the proviso appended to it mandates reduction of net profits by the amount withdrawn from any reserves/provisions if – (a) it is credited to the profit and loss account and (b) the book profit u/s. 115JA / 115JB for year in which such provision was created had been increased by the amount of such provision. In other words, reduction as per Clause (i) is permissible only on satisfaction of twin conditions. Firstly, the amount withdrawn is credited to profit and loss account and secondly at the time of ‘creation’ of reserve, the ‘Book Profit’ had been increased by the amount of the said with-drawal. This was the mandate of the Apex Court in the case of Indo Rama Synthetics (I) Limited vs. CIT (2011) 330 ITR 363 (SC). The ruling advocates a strict reading of the downward adjustment for withdrawal from reserve. The Supreme Court held that if the reserves created are not referable to the profit and loss account and the amount had not gone to increase the book value at the time of creation of the reserve; the question of deducting the amount (transferred from such reserve) from the net profit does not arise at all. The Apex Court held that the objective of clauses (i) to (vii) is to find out the true and real working result of the assessee company.

In the present case, X Limited had credited the re-versal of provision for investment loss to its profit and loss account in Year 2. The reversal of the pro-vision to the profit and loss account satisfies the first condition referred to above. On this, there is no dispute. The doubt is regarding the compliance of the second condition. X Limited has excluded such reversal while computing the MAT liability. To enable such exclusion, the said reversal (of provi-sion) should have ‘decreased’ the book losses in the year of its creation (i.e, Year 1). A reduction of book loss has the same effect as increase in book profit. Accordingly, the second condition is satisfied. The question is whether the said treatment is tenable? Can increase in book profits (in the year of creation) to the extent of provision created by itself, satisfy the stipulated condition? Does such increase necessarily have to culminate in tax being payable under the MAT regime? Should an increase in book profit (on creation of provision) necessarily be accompanied with a tax liability u/s. 115JB?

The answer to this issue has both ‘for’ as well as ‘against’ view points. The analysis would not be complete, unless both the possible views are captured. The following paragraphs discuss these viewpoints:

View I – Increase in book profits should result in payment of tax under MAT

As per this view -point, the increase in book profit should result in tax liability under the MAT provisions. If such increase does not culminate in tax being payable u/s. 115JB, then the reversal of such provision should not be reduced while computing the book profit.

In this regard, it may be relevant to peruse circular no.550 issued by the Central Board of Direct Taxes explaining amendments to Income-tax Act vide Finance Act, 1989. The relevant portion of the same is as under:

“Amendment of the provisions relating to levy of minimum tax on ‘book profits’ of certain companies

24.4 Further, under the existing provisions certain adjustments are made to the net profit as shown in the profit and loss account. One such adjustment stipulates that the net profit is to be reduced by the amount withdrawn from reserves or provisions, if any, such amount is credited to the profit and loss account. Some companies have taken advantage of this provision by reducing their net profit by the amount withdrawn from the reserve created or provision made in the same year itself, though the reserve when created had not gone to increase the book profits. Such adjustments lead to unintended lowering of profits and consequently the quantum of tax payable gets reduced. By amending section 115J with a view to counteract such a tax avoidance device, it has been provided that the “book prof-its” will be allowed to be reduced by the amount withdrawn from reserves or provisions only in two situations, namely :—

(i)    if the reserves have been created or provisions have been made in a previous year relevant to the assessment year commencing before 1st April, 1988; or

(ii)    if the reserves have been created or provisions have been made in a previous year relevant to the assessment year commencing on or after 1st April, 1988 and have gone to increase the book profits in any year when the provisions of section 115J of the Income-tax Act were applicable.” (emphasis supplied)

The Circular clarifies that clause (i) is an anti-abuse provision. It was introduced to prohibit unintended lowering of profits and consequent reduction of tax payable. The intent was to induce parity in tax treatment in the year of creation and withdrawal of reserves. The objective is to plug-in tax leakage. The emphasis is on the payment of correct quantum of tax. The amendment seeks to impact the tax liability under MAT and not the mere arithmetic adjustment of book profit. In this background, it may be pertinent to observe the closing portion of the above quoted circular. It is clarified that the amount withdrawn from reserves or provisions is deductible in MAT computation only if (a) the reserves have been created or provisions have been made for the year on or after 1st April, 1988 and (b) have gone to increase the book profits in any year when the provisions of section 115J of the Income-tax Act were applicable. Twin conditions are visualised by the circular. The first relates to year of creation being on or after 01-04-1998 and the second mandates that the book profits should have been increased in the year in which section 115J is applicable. The latter condition thus requires not only enhancement of book profit but such increment has to occur in the year in which section 115J is applicable. MAT is “applicable” when the final discharge of tax happens under the regime of section 115J. The phrase “is applicable” has to be read in such context. Otherwise, it would have no meaning, as section 115J being a part of the statute would in any way be “applicable” to any company. The circular issued in the context of section 115J should also be applicable to section 115JB purposes, as in substance, the provisions are the same (More on ‘applicability’ of section 115JB later).

The latter condition of book profit enhancement accordingly has to occur in the year in which section 115JB is applicable. Section 115JB is an alternate tax regime. It is applicable only when the tax on book profits exceeds the tax on total income. If the tax on book profits does not ‘exceed’ tax on total income, section 115JB is not applicable.

To conclude, amount withdrawn from reserves or provisions is deductible in MAT computation only if (a) provisions have been made for the year on or after 01-04-1988; (b) such amount has gone to increase the book profit in the year in which taxes were payable under MAT regime (or section 115JB).

This view is supported by the Hyderabad tribunal in Vista Pharmaceuticals Ltd vs. DCIT (2012) 6 TaxCorp (A.T.) 27449 (Hyd). The issue before the tribunal was with regard to direction of the CIT to consider the interest waived to be included in the computation of book profit under section 115JB. The facts of the case were that the assessee computed its book profit u/s. 115JB at ‘nil’ after reducing the amount of interest waived by bank on the ground that it is the amount withdrawn from provision for interest to financial institutions debited to Profit and Loss account in earlier year now credited. The tribunal held as under:

“In the case of the present assessee, the amount withdrawn from reserve or provision i.e., waiver of interest cannot be considered as part of book profit since it was never allowed in the computation of book profit of the company in any of the earlier years since the company never had any book profit being sick industrial undertaking…….

It is also an admitted fact that in the earlier years there is no computation of book profit ex con-sequentia, there was no assessment with regard to computation of book profit u/s. 115JB of the Act. It was held in the case of Narayanan Chettiar Industries vs. ITO (277 ITR 426) that in respect of remission of liability no addition can be made un-less an allowance or deduction is allowed to the assessee in the previous year. Further in the case of Rayala Corporation Pvt. Ltd. vs. ACIT, 33 DTR 249, wherein it was held that returns for earlier years have been found defective by the Assessing Officer and declared to be nonest, as the assessee had failed to rectify the defect in spite of notice issued u/s. 139(9) of the Act, deduction of interest claimed in such returns cannot be deemed to have been allowed and, therefore, interest waived by bank cannot be charged u/s. 41(1) of the Act.

6.    Taking the clue from the above judgments, similarly, unless the provision created by the assessee towards interest liability is allowed as a deduction while computing the book profit u/s. 115JB, when the assessee writes back the same to the Profit and Loss A/c, then it should be considered for determining the book profit. It is nobody’s case that interest liability has been allowed as deduction in earlier years. In other words, an allowance or deduction has been made in earlier years in respect of interest liability while computing the book profit and writing back the same could be added to the book profit. A reading of clause (i) to Explanation 1 to section 115JB(2) gives the above meaning.” (emphasis supplied)

The Hyderabad Tribunal ruled that unless the provision increased the “book profit” in an earlier year, the write back of such provision should continue to be considered for determining the “book profit”. The Tribunal departed from the literal reading of clause (i) and the proviso therein. The clause (and the proviso) stipulates the increase in book profit in the year of creation of provision/reserve. The “increase” is not an exercise in vacuum but one which results in attraction and enhancement of book profit tax. The Tribunal opted to place reliance on the rationale in circular no.550.

In the present case, while computing book profit u/s. 115JB for Year 1, X Limited had decreased the net loss by the provision of Rs. 16 crore made for diminution in the value of investment. In Year 2, the company reversed Rs. 16 crore out of the above referred provision for investment loss.

The provision for investment loss was “added back” while computing book profit (in Year 1). However, there was no net profit as per Profit and loss account in that year. As already explained, in the absence of net profit, it could be argued that section 115JB is not applicable. Tax was also not discharged in that year u/s. 115JB. In effect, there is no addition of provision for diminution in value of investment allowance. Applying the principles of the circular and the Hyderabad Tribunal, X Limited has not suffered tax under MAT on creation of provision for investment loss. Consequently, reversal of such provision would continue to be included in book profits computation. Once section 115JB is not applicable in the year of creation of reserve, reversal of such provision cannot be excluded from book profit computation.

Further, the provision for diminution in value of investments did not result in any additional tax liability under the MAT computation. On the contrary, such provision has decreased/reduced income while computing the total income under the normal provisions of the Act. It is an ‘erosion of capital’ which resulted in a loss. Such loss was claimed as a charge against income chargeable to tax. Subsequently, these investments were sold at a price over and above the original cost of investments/ shares. To clarify:

X Limited purchased shares at Rs. 6,000.  A provision for diminution was created to the extent of Rs. 1,600.  This reduced the value of shares to  Rs. 4,400. On sale of shares at Rs. 6,800, X Limited made a capital gain of Rs. 2,400 [i.e, 6,800-4,400].  This gain of Rs. 2,400 consists of Rs. 800 (being its gain over and above the original cost of the asset) and Rs. 1,600 (being proceeds over and above the revised/ reduced cost of the asset). By creating a provision for Rs. 1,600, X Limited acknowledged and recognised that the value of investment had been eroded or vanished to such extent. Any   consideration exceeding the reduced value but not exceeding the actual cost would amount to ‘recoupment of loss’. It is a refurbishment of losses which were claimed as a charge against the profits in the earlier years.  Such refurbishment (of losses) would amount to income (in the year of reversal of provision).

Accordingly, one possible view is that reversal of provision for diminution in value of investment cannot be excluded under Clause (i) of the second part of Explanation 1 while computing book profits.

View II – Increase in book profits need not result in payment of tax under MAT

Literal interpretation
Clause (i) is permissible only on satisfaction of twin conditions – (i) amount withdrawn is credited to profit and loss account and (ii) at the time of ‘creation’ of reserve, the ‘Book Profit’ was increased by the amount of the said withdrawal. The mandate of the law is clear and unambiguous. Modern judicial approach to interpretation of statutes is often driven by literal rule. Laws and regulations are the intentions of legislators captured in words. Every statute must be read according to the natural construction of its words. The words of a statute are to be understood in their natural and ordinary grammatical sense. The aspect of allowance or deduction discussed by the Hyderabad Tribunal is deviation from the literal reading of the law. Nothing prevented the legislature to lay down law to this effect.  

View-I could result in absurd results Even otherwise, View I appears to revolve around whether the adjustment of provision for investment loss in the year of creation results in a positive book profits.  It could never be the intent of the law to discriminate between companies which have only a nominal value of book profits (post set-off of provision for investment loss) with those companies where the net loss is not completely wiped off by the provision for investment loss in the computation. This can be understood through the below explained illustration:

Particulars

Company A

Company B

 

 

 

Net loss as per Profit and loss

(10,000)

(10,000)

account for Year 1

 

 

 

 

 

Add: Provision for investment

10,100

9,900

loss

 

 

 

 

 

Book
profit/ (Loss)

100

(100)

If the aforesaid provision was reversed in Year 2, Company B would not be able to claim reduction in that year (if View I were to be followed). On the contrary, Company A which has a nominal book profit of Rs. 100 may be allowed reduction of pro-vision reversal in Year 2 (although one could argue that only proportionate reduction will be allowed). Such interpretation would result in unintended consequence.

View I results in tax on capital

In the present case study, consideration received on sale of shares (by X Limited) was over and above the historical or original cost of such shares. The differential between such sale consideration and original cost is a gain and has to be necessarily offered to tax. There is no dispute on this aspect. One could argue that consideration to the extent of reversal of provision is ‘capital’ in nature. This is because, such consideration (i.e, to the extent of reversal of provision) refills the vacuum created by provision. Levying a tax on such consideration would amount to a ‘tax on capital’. In essence, it would culminate in higher effective rate of tax on capital gains. The philosophy of MAT taxation was to provide for an alternate tax regime and not double taxation. A denial of reduction from book profit would compel the taxpayer to pay taxes on income which he never earned.

Section 115JB – wider applicability

Circular no. 550 clarified that the amount withdrawn from reserves or provisions is deductible in MAT computation only if (a) the reserves have been created or provisions have been made for the year on or after 1st April, 1988 and (b) have gone to increase the book profits in any year when the provisions of section 115J of the Income-tax Act were applicable. The latter condition thus requires not only enhancement of book profits but such increment has to occur in the year in which section 115J is applicable.

S/s. (1) to section 115JB deals with the ‘applicability’ of the provision. It is applicable to every “company”. If 18.5% of book profit of such company exceeds tax on its total income then, such amount (i.e, 18.5%) would be the tax payable and book profit would be the total income. Thus, section 115JB is applicable to every company but the liability to pay tax is only in case of certain companies. The ‘certain companies’ are those which are liable to tax under MAT. This is supported by the section heading which reads – “Special provision for payment of tax by certain companies”. Section 115JB deals thus deals with payment of tax ‘by certain companies’. In other words, section 115JB is ap-plicable to all companies but renders only ‘certain companies’[whose tax under MAT exceeds normal tax computation] as liable to tax u/s. 115JB.

Applying this proposition in the present case, section 115JB was applicable to X Limited in Year 1 [although there was a book loss]. The provision for investment loss was “added back” while computing book profits for that year. The adjustment resulted in a reduction of loss. A “reduction of loss” is effectively the same as “increase in profits”. Accordingly, reversal of such provision in Year 2 should be excluded from while computing book profits for the year.

One may, in this connection, refer to the decision of the Kolkata Tribunal in the case of Stone India Limited vs. Department of Income-tax [ITA Nos. 1254/ Kol/2010]. The Tribunal in this case had an occasion to deal with treatment of “Provision for diminution in value of investment” for the purposes of book profits u/s. 115JB. In this case, the assessee debited its Profit and Loss A/c for the year ended 31.03.2001 with certain provision for diminution in the value of investment. In computation of book profit u/s. 115JB of the Act the said provision for diminution in the value of investment was not added back to the book profit. Subsequently, out of the said provision, the assessee wrote back certain amount in the accounts for the year ended 31-03-2006. The question was whether the reversal of provision for diminution in the value of investment was deductible in computation of book profit for AY 2006-07. The Court observed –

“It is also observed that clause (i) of Explanation to section 115JB of the Act says that the amount withdrawn from any reserves or provisions created on or after 01- 04-1997, which are credited to the profit and loss account, shall not be reduced from the book profits, unless the books profits were increased by the amount transferred to such reserves or provisions in the year of creation of such reserves (out of which the said amount was withdrawn). In this case, provision for diminution in the value of investment Rs. 7,05,73,000/ – was created in the financial year 2000-01 relevant to assessment year 2001-02 but book loss of the said year was not appreciated by the said amount in the computation filed u/s. 115JB along with the return. As there is a loss of Rs. 30,008/- prior to providing of prior year adjustment and diminution in the value of investment, no addition has been made u/s. 115JB by the assessee in the assessment year 2001-02 on account of diminution in the value of investment….. and the

exceptional item on account of diminution in the value of investment has not been adjusted while computing the book profit u/s. 115JB. Therefore, we are of the considered opinion that the observation of the Ld. CIT(A)was not justified in directing the assessee…” (emphasis supplied)

In the aforesaid case, provision for investment loss was not added back to the net loss while computing the book profits. The same had been reversed in subsequent year. In the year of provision, there was a net loss. The assessee did not carry out any adjustment. The Tribunal therefore ruled that reversal cannot be reduced from the book profits. The basis or rationale for such decision is that the book profits were not adjusted or appreciated by the provision created.

The Tribunal appears to have laid emphasis on the ‘adjustment or appreciation’ of book profits. The conclusion of the tribunal was driven by the non-adjustment of book profits in the initial year. Applying the ratio of the Tribunal ruling, it appears that if an adjustment of “book profit” had been made in the year of creation of the reserve, it would suffice to exclude the reversal of provisions while computing book profit for a subsequent year.

4.    To conclude

X Limited had a net loss as per Profit and loss ac-count for Year 1. A view could be taken that MAT computation is not applicable in the year of loss and no adjustment contemplated u/s. 115JB is required. A better view would be that MAT provisions are applicable even in the year of loss and accordingly, adjustment of adding back provision for diminution in the value of investment in the Year 1 was appropriate.

As regards, exclusion of reversal of provision from book profit computation in Year 2, there are two views possible. View II appears to be appropriate and therefore reversal of provision should be excluded while computing book profits for Year 2.

5.    Fall out of view-ii

In the present case, there was a provision created for diminution in investment amounting to Rs. 16 crore in Year 1. Such provision reduced the profits (or increased the losses) for the year. Subsequently, in Year 2, such provision was reversed and credited to Profit and loss account. Such credit ‘enhanced’ the profits for the year. While computing book profit for MAT purposes, X Limited reduced such reversal of provision. Thereby ‘enhancement of profit’ was nullified. By this, MAT liability was reduced.

Due to the provision entry in Year 1, the brought forward loss of Year 2 was increased. This enhanced loss translated into an ‘(increased) deduction’ from book profits while computing MAT liability for Year 2.

This is due to a ‘downward’ adjustment as per clause
(iii)    of Explanation 1 to section 115JB which reads –
“the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of ac-count.” In this adjustment, the amount of brought forward losses (or business loss) is compared with unabsorbed depreciation loss; lower of the two is reduced in the book profits computation. The brought forward losses are to be adopted from the books of account. Consequently, an expense/ charge in the earlier years enhances the brought forward losses of the current year.

To sum-up, if View-II were to be adopted, X Lim-ited would avail dual benefit by – (i) reducing the book profits by amount of reversal in provision for diminution in value of investment and (ii) availing accelerated losses (depreciation or business loss whichever is less).

Spirituality in Worldly Life

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Generally, people believe that worldly life and spiritual life are two contradictory matters poles apart from each other. It is a common belief that spiritual living is not possible for a normal person leading a worldly life and worldly life inhibits one from leading a spiritual life. But this is a wrong belief. Spirituality is not something which one gets only by living in a cave or a dense forest. One can lead a spiritual life by remaining in the material world also. It is a mistake to believe that spiritual living is something which is reserved for only ascetics or monks who have renounced the world. Spirituality is science of the sciences and this world is an ideal laboratory for its practical application.

Unfortunately, most people ignore spirituality in their day to day living. In their opinion, whatever little charity or worship they do, is also a thing to be kept separate from their material life. The separation of the spirituality from our daily life is the root cause of diminishing values and erosion of ethical standards in society. Anarchy, corruption, war, disharmony, absence of law and order, tyranny, materialism, selfishness and consumerism are rampant today and due to our failure to synthesise the material life with spirituality. The world and the society is nothing but a group of individuals. When an individual lives his or her life bereft of spirituality, many vices like anger, violence, fear, hatred, greed, selfishness, envy, and enmity breed in him. Individual vices collectively surface on the stage called society and becomes the cause of society’s downfall. If we want to transform the world, establish high standards of ethics and remove vices from society, then we shall have to start with the inner transformation of the individual and only spirituality has the power of transforming that an individual.

Man is by nature self-centered and is interested in only those acts which benefit him. Even from this angle spirituality should be adopted by every individual because it is in the self interest and of immense benefit to persons who adopt it.

Every person is in pursuit of happiness and tries to find it in material wealth, fame and power. This erroneous pursuit for happiness ultimately robs him of peace and happiness and gives restlessness and pain. Many times, these material possessions become the cause of unhappiness.

This physical world is governed by some subtle universal and natural laws established by the Supreme Power whom we call God. Not having the awareness and understanding of these laws, man tries to seek happiness in their breach. These subtle laws are unchanging and autonomous. These laws are:-

1. As you sow, so you reap.
2. You receive what you give.
3. The fruit of the action is according to the intention behind it.
4. What you do unto others shall be done unto you.
5. Every action has a reaction.
6. Every sin shall be punished and every good deed shall be rewarded.

Everyone has heard of the simple laws described above. However, what is important is living these laws. Our universe is governed by these laws but we do not understand this due to our shortsightedness and impatience. Today, we find many persons achieving material success by unethical and dishonest ways. This results in our not believing in the importance of purity of means for material success.

In fact, one gets peace and joy only by living in harmony with these laws. Every material success can be attained by living according to these subtle laws. Spiritual living means practicing ethics and values and living in harmony with the voice of our conscience.

A question naturally arises to us – what about our life hitherto lived in disharmony with these laws? Let us accept that man is imperfect. It is natural for him to commit mistakes. The issue is, is there no respite for the mistakes committed? The answer is “better late than never”. These laws are meant for aspiring us to move towards perfection from imperfection and not to punish us.

I would like to end by quoting Swami Vivekananda, who always advocated practice more than theory. He has said, “Hindu religion does not consist in struggles and attempts to believe in certain doctrine or dogma, but in realising; not in believing, but in being and becoming.”

levitra

Lecture Meetings

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Lecture Meetings
Charitable Trusts – Recent Issues, 15th January, 2014

Speaker Mr. Gautam Nayak, Chartered Accountant, explained at length recent issues related to taxation of Charitable Trusts. In his presentation, he covered various topics including circumstances under which the proviso to section 2(15) is attracted. He explained at length, the meaning of the term “education”, significance of Registration under section 12AA, carrying on of activity before registration, Taxability of Corpus Donations, deductibility of depreciation & Issues Raised in recent CAG Report. More than 300 participants benefited from the expert analysis of the speaker.

The presentation of the speaker is available at www. bcasonline.org for all members and video recording of the lecture is made available at www.bcasonline. tv for the benefit of Web TV subscribers.


L to R: Mr. Gautam Nayak (Speaker), Mr. Naushad Panjwani (President) and Mr. Rutvik Sanghvi

Important Income-tax Rulings of 2013, 29th January, 2014

Speaker Mr. Hiro Rai, Advocate, explained important cases adjudicated in 2013 and their key aspects. In his presentation, he covered important decisions and explained their Implications. BCAS publication “FAQ on e-TDS” was also released at the hands of the speaker in the presence of one of the co-authors of the book, Mr. Ameet Patel, who is also a Past President of BCAS. More than 350 participants attended and benefited from the expert analysis made by the speaker. The video recording of this session is made available at www.bcasonline.tv for the benefit of all Web TV subscribers.


L to R: Advocate Hiro Rai, (Speaker), Mr. Chetan Shah, Mr. Naushad Panjwani (President) and Mr. Nilesh Parekh

Commonly Found Mistakes in Financial Statements and SEBI Review of Qualified Audit Reports, 5th February, 2014

Speaker Mr. Nilesh Vikamsey, chartered accountant, through a PowerPoint presentation, touched upon commonly found mistakes in audited Financial Statements and SEBI Review of Qualified Audit Reports. He specially dealt with various mistakes in relation to SMC & SME under various Acts. He covered various issues and findings of FRRB e.g. Applicability of Accounting Standards, Method of Accounting, Exemptions and Relaxations in Accounting Standards in relation to small companies.


Mr. Nilesh Vikamsey ( Speaker), Mr. Nitin Shingala, Mr. Naushad Panjwani (President) and Mr. Manish Sampat

More than 350 participants attended this meeting and found it extremely useful. The presentation is made available at www.bcasonline.org for all members and video recording of the lecture is made available at www.bcasonline.tv for the benefit of Web TV subscribers.

Interactive Session on Various issues concerning Maharashtra VAT, Central Sales Tax, Profession Tax, Luxury Tax etc, 14th February, 2014

Indirect Taxes & Allied Laws Committee of BCAS arranged this interactive meeting where


L to R: Dr. Nitin Kareer, Commissioner of Sales Tax, Maharashtra, Mr. Nitin Shaligram, Mr. Govind Goyal and Mr. Suhas Paranjpe

Dr. Nitin Kareer, Commissioner of Sales Tax, Maharashtra dealt with various issues concerning Maharashtra VAT, Central Sale Tax, and Profession Tax and Luxury Tax. Nearly 200 participants attended the meeting. The video recording of this discussion is made available at www.bcasonline.tv for Web TV subscribers.

Spirit of Service: Connecting to the Inner-Net, 18th February, 2014

Mr. Nipun Mehta was the guest speaker at the 18th Lecture organised under the auspices of Amita Memorial Trust, jointly with the Chamber of Tax Consultants.

After a welcome by Mr. Pradeep Shah, Past President of the Society, the learned speaker Mr. Nipun Mehta presented a radically different way of looking at life and its purpose.

He also shared real life examples of how each act of kindness, gifts, no matter how small it may be, contributes for improvements in the world. He showed the audience how we can connect people to the path of love, spirit of service and pledge to spread smile on as many faces. Ms. Nandita Parekh shared few words in the loving memory of her sister, Amita and proposed vote of thanks to Mr. Mehta.


L to R: Mr. Naushad Panjwani (President), Mr. Pradeep Shah, Mr. Nipun Mehta (Speaker) and Mr. Yatin Desai

Nearly 200 participants had the benefit of attending this inspiring meeting. The presentation & video recording of the lecture is made available free at www.bcasonline.org & www.bcasonline.tv respectively for the benefit of all members and Web TV Subscribers.

Other Programmes

Seminar on Presumptive Taxation for Non Residents, 18th January, 2014


L to R – Mr. Nitin Shingala (Vice President), Mr. Anil Doshi, Ms. Geeta Jani (Speaker), Mr. Kishor Karia (Chairman, International Taxation Committee) and Mr. Dhishat Mehta

A full-day Seminar on the topic ‘Presumptive Taxation for Non-residents’ was organised by the International Taxation Committee of BCAS. The objective was to update the members on key presumptive tax provisions, make them aware of the controversies to enable them to avoid pitfalls. The topics and speakers were as listed in the earlier table.

103 Participants attended the seminar.

Residential Workshop on Important Provisions of Companies Act, 2013 for HPCL, 30th & 31st January, 2014

The BCAS organised 2 day training on Companies Act 2013 for Hindustan Petroleum Corporation Ltd., a leading PSU and a Fortune 500 company. The training was held at HPCL’s Management Development Institute at Nigdi, Pune. About 30 professionals from compliance, finance and commercial areas of HPCL from across the country attended this residential program. CAs Abhay Mehta, Raman Jokhakar and Manish Sampat carried out the interactive sessions at this event on behalf of the Society.

This was a first of its kind program BCAS held for a company as part of its vision of disseminating knowledge.

12th Leadership Camp/Spiritual Retreat, 30th January to 2nd February, 2014

12th Spiritual Retreat was held from 30th January 2014 to 2nd February 2014 at the picturesque location of “Chinmaya Vibhooti”, spread across in about 62 acres, surrounded by beautiful Sahyadri Mountains at Village Kolwan, (about 40 kms from Chandni Chowk, Pune). 40 participants enrolled for the Retreat. Participants also came from places other than Mumbai. Majority of the participants reached Chinmaya Vibhooti by 12.00 noon on 30th January 2014.


Participants of 12th Leadership Camp/Spiritual Retreat.

The retreat was based on the theme of “Holistic Well-Being”, and it was designed and conducted by Swami Swatmanandaji, an Acharya of Chinmaya Mission Mumbai.

The meetings were held in the state of the art auditorium.

The discussion on the topic was beautifully conducted by  Swamiji, introducing participants to
the seven levels of transformation of an individual. Swamiji’s    powerful    talks    were    effectively    supported by PowerPoint presentations, activities, a movie workshop, and hand-outs, as well as lots of Q & A sessions.

Participants were taken through the process of how transformations can be undertaken in important areas of life: (i) Physical (ii) Emotional (iii) Intellectual (iv) Social/Cultural and (v) Spiritual.

The retreat was a resounding success due to the wonderful synergy between the BCAS participants, Swamiji and his team, and the Chinmaya Vibhooti family.

 Workshop on Photography, 1st February, 2014

 Membership & Public Relations Committee of BCAS organised a Photography Workshop. Mr. Pradeep Ruparel took the participants through the fundamentals of digital photography, using SLR/ DSLR    camera    and    explained    different    terminologies   such as aperture, exposure & ISO etc. Participants, which included members and their family, had   the     benefits     of     learning     practical     as     well     as   theoretical aspects of digital photography from this unique workshop.

Tribute to Shri Bhupendra Dalal, past President of the Society

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The Shloka in Bhagavat Geeta states that everyone who is born in this world is bound to die one day and therefore one need not lament the demise of a person. Whereas, the above maxim is non controvertible, we human beings cannot refrain from doing so. Shri Bhupendra Dalal, the past President of the Society, passed away on 29th January, 2014, leaving behind all his relatives, friends and organisations with which he was intimately connected.

Bhupendra was born on 4th day of September, 1938. He qualified as a Commerce Graduate in 1960 and chose the profession of Chartered Accountancy as his career, qualifying in 1964. He joined the firm of A. H. Dalal & Co. as a Partner in 1964 and retired from the firm in 1994, to establish his own firm of B. V. Dalal & Co., wherein he practiced till the end. Both his sons and daughter also qualified as Chartered Accountants and even his son-in-law is a C. A. Thus, his entire family was deeply connected with the profession.

The most important quality as a professional was his hard-working nature and he was never tired of professional work. Zeal and sincerity characterised his work as a Chartered Accountant. The word ‘impossible’ was not found in his dictionary and he would undertake any professional task which was daunting and challenging. Whatever work he undertook during his career was preceded by a deep study of the subject and research revolving round the same. He would argue the appeals before the Commissioners and the Income-tax Appellate Tribunal and would not give up the arguments before the Tribunal, though, the Hon’ble members of the Tribunal may be against his submissions. Even the audit of corporate and non-corporate entities was characterised by principles and Accounting Standards complied by him. Where necessary, he would qualify the Audit Report appropriately. Perusing the qualifications in Audit Report of companies was his passion, resulting in his authoring a book on the subject for the Society. He displayed a deep study of the Company Law in his professional work and organised Seminars, Residential Refreshaer Courses (RRC) on Company Law and Practice, with great enthusiasm.

His devotion to the Bombay Chartered Accountants’ Society bordered on religion, so that his contribution to the Committees on Accounting & Auditing and Taxation was invaluable. But above all, he edited the Bombay Chartered Accountant Journal for a number of years. He interviewed for the Journal several leading luminaries like Sarvashri Nani Palkhiwala, Morarji Desai, R. K. Laxman, Jayant Narlikar, Justice Krishna Iyer, Prof. Purshottam Mavlankar, Swami Sundaranand. He attended most of the RRCs and Seminars organised by the Society and studied all the papers contributed there thoroughly, by getting up at 4 or 5 a.m. No work relating to Society was too low or insignificant.

Equally eminent were his personal qualities. He was always humble in his work and activities. He was personification of humility and always ready to help other members. But he was a child while he was in the company of children. He had a keen sense of humour, which endeared him to others.

He loved playing instruments like the flute, piano, harmonium and mouth organ. He was fond of Bhajans and sang them with devotion. He loved nature and trekking in the Himalayas was his passion, so that he visited ‘Maan Sarovar’ twice with his family. Very fond of long drives in his car and road trips, he also composed poems particularly in early mornings. He wrote poems on peoples’ achievements, talents and social occasions like weddings, birthdays, etc. He appreciated music, particularly folk songs. At the same time, he was pious by nature and a firm believer in God. It is difficult to find so many qualities and widely varying virtues in a person and the best tribute one could pay to him is to emulate his example.

He will leave his footprints on the sands of time for a long time.

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Govt. Launches Portal To Better Biz Climate.

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The government flagged off the second phase of its ambitious eBiz project, an integrated eBiz portal which would make doing business in India a lot easier.

The portal allows potential entrepreneurs to do most of the formalities online — submitting forms, making payments, among others. They can also track the status of their requests through the portal.

However, the ministries crucial for clearance of projects like the Ministry of Environment & Forests (MoEF) are yet to become part of the project, raising questions on how the hassles in doing businesses would be addressed.

Launching the project, commerce and industry minister, Anand Sharma, said his ministry would soon approach the Cabinet Committee on Infrastructure (CCI) to bring resisting ministries such as the Ministry of Environment & Forests (MoEF), on board.

The project, which was supposed to have been launched in August 2013, is facing stiff opposition from the Central Board of Excise and Customs and the Central Board of Direct Taxes, apart from MoEF.

The eBiz project, first announced in 2009, looks to improve the country’s ease of doing business quotient. According to a recent World Bank ranking, India stood at 134th among 189 countries in terms of ease of doing business.

A commerce ministry statement said the eBiz platform enables a transformational shift in the government’s service delivery approach from being department-centric to customer-centric.

The first phase of the project, which provided information on forms and procedures, was launched on 28th January, 2013. The second phase, launched on Monday, has added two services from the Department of Industrial policy and Promotion – industrial licences and industrial entrepreneur’s memorandum – along with operationalising the payment gateway by the Central Bank of India.

The government has inked a 10-year contract with Infosys Ltd., where a total of 50 services (26 central + 24 states) are being implemented across five states – Andhra Pradesh, Delhi, Haryana, Maharashtra and Tamil Nadu – in the pilot phase. Five more states – Odisha, Punjab, Rajasthan, Uttar Pradesh and West Bengal – are expected to be added over the second and third years.

According to Raghupathi C. N., head of India business at Infosys, the project is slightly delayed due to several departments’ resistance to change. “The project is slowly nibbling away at the resistance; some stability in the political environment is also expected to improve the situation.”

Raghupathi said the departments are used to running their services in the offline and manual way for several decades now. He said the implementation is “slower than expected” because it is tough to expect departments to completely change their modus operandi overnight. “While there are some easy adopters, there are others who clearly do not see the benefit of it.”

The portal will not only create a single-window for all registrations and permits, but will also provide investors with a checklist.

“So far, there was never a checklist, and people were forced to go from department to department filling forms, never knowing what was remaining,” said Raghupathi. “Only 50-60 % of the services were digital, everything else was manual,” he added.

The government hopes to bring online over 200 services related to investors and businesses over the next 10 years on the portal.

(Source: Business Standard, dated 21-01-2014)

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Judiciary – When Laws Can Be Used To Deny Others Justice

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Can justice be denied to a person, just because she had earlier held a judicial office? The concept of ideal justice ought to transcend all caste, creed, sex, religious and national considerations. It would, therefore, not be fair to argue that justice should elude a former judge if any allegation is levelled against him. Such fundamentalism can strike a blow on the independence of the judiciary, the basic feature of India’s Constitution.

Such arguments aim at browbeating all sitting judges. All sitting judges will be retired judges one day. Any possibility of fear instilled in the mind of a sitting judge would be dangerous for the system. All sitting judges have an obligation to maintain the independence of the judiciary at all costs.

It can be nobody’s case that an errant judge — sitting or retired — ought not to be dealt with appropriately. But can a belated one-sided allegation, howsoever grave the allegations, made before a forum not competent to deal with the same, seek a mob-lynch verdict? In Justice Ganguly’s case, the Supreme Court recorded what it did, based only on the allegations levelled by the complainant.

I do not think the Supreme Court committee gave any finding. If the full Supreme Court has decided not to entertain any such complaint in the future, that must be respected. Perhaps the full court’s decision is an admission that such a complaint ought not to have been entertained in the first instance. Indeed, the apex court cannot be converted into an investigating machinery or a prosecuting agency of the state.

Nothing definite can be stated on the allegations without a trial. And a trial has to be in a competent court of law, arising out of an FIR. Let me not be too legalistic about the scope, purport and ambit of amended Sections 354A, 354B, 354C, 354D of IPC, hurriedly enacted without debate in the aftermath of the Nirbhaya crime.

Today, questions are being raised as to the wisdom of enacting such lethal provisions. I don’t know whether this would have the desired effect. What I apprehend, however, is that some innocent persons may possibly be made victims of the law, either deliberately or otherwise.

Law, as Samuel Johnson said, is the ultimate result of human wisdom, acting upon human experience, for the benefit of the public. I am not convinced that the amended IPC 354 satisfies the test of law laid down by the British statesman. What we need is justice, and not addition to a plethora of extant laws. We also need honesty of purpose on the part of those administering the law. In India we have too many laws but very little justice.

And about justice delivered by the administrators, less said the better. Curiously, both the accused judges have always enjoyed great reputation of judicial independence. It is too much of a coincidence that such judges, with a tremendous reputation of judicial impartiality, should have been accused of wrongdoings in discharge of non-judicial function. The Supreme Court of India has been an inconvenient institution to the powers that be. There can possibly be a larger conspiracy to belittle and downgrade the Supreme Court, which is by far the best functional institution of India today.

The faith of the common man in the Supreme Court has remained undiminished despite motivated attacks made from various quarters. The Bar has an overriding responsibility to protect the majesty and dignity of the judiciary.

Let the law take its own course for any allegations levelled against judges. There are proper fora for ventilating grievances for every aggrieved person. Anyone can file an FIR against any person and the police has no choice but to investigate impartially and take the matter to its logical end. But to attempt to burden our Supreme Court to deal with individual complaints would be against the very basic tenets of the rule of law.

Despite allegations levelled against judges, the Supreme Court remains a shining example of rectitude, independence and impartiality. Let us not attempt to destroy the last bastion of hope for the common man. Let us not destroy our democracy!

(Source: Extract from an article by Advocate, Biswajit Bhattacharya in The Economic Times, dated 15 -01-2014)

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IITs and IIMs – Quality, Not Quantity

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Gujarat Chief Minister’s idea to set up an Indian Institute of Technology (IIT), an Indian Institute of Management (IIT) and an All India Institute of Medical Sciences (AIIMS) in every state of the country may earn him some political brownie points when he tours states that still do not house any of these institutes. Superficially, the idea appears great, since people in every state would have access to a world-class institute nearer home. But Mr. Modi’s advisors would do well to look at the state of the eight new IITs already set up by the United Progressive Alliance government between 2008 and 2009, and the six new IIMs set up during 2010-11. After over five years of existence, these IITs still await a permanent campus. And most have failed to fill up even half of the sanctioned posts for permanent faculty.

The story is no better on the placements front. All the new IITs put together achieved a relatively low placement figure of 79%-92%. At many IITs, students were given job offers for a salary as low as Rs. 3.5 lakh per annum, which is below the minimum annual pay package of Rs. 4 lakh even at some National Institutes of Technology (NITs). And in spite of all their chest-thumping, even their older peers have lost a lot of sheen. For example, they have failed to make the grade among top institutions in both the Times Higher Education and the QS World Asian University rankings. The lacklustre rankings reveal, yet again, that Indian universities fail, for most part, to offer world-class education, training and research-based knowledge creation. There are financial issues as well. Setting up a new institute of national importance would cost the government upwards of Rs. 250 crore without the land cost. If this money is pumped instead into improving the quality of existing institutions or is provided to them to hand out more attractive salaries to faculty members, much more can be achieved. The last one is the key, since even at the old IITs, 41% of teaching posts are vacant. One way to raise the bar on quality education at the new IITs is to bring in top-notch faculty, but that is easier preached than done. A typical IIT assistant professor starts at about Rs. 75,000 a month – less than what many engineers from Tier II colleges get as their first pay cheques. The irony is that even trainers in some coaching centers for joint entrance examination for admission to IITs make six times as much, if not more.

A push towards research is another way to counter the faculty shortage. The Anil Kakodkar Committee of 2010, in its strategic recommendations for the IITs, set a target of 10,000 doctoral fellows being produced annually by 2020-2025, up from the current 1,000. The hope was that some of these PhDs would stay to teach at the IITs. But at present, half  of the PhDs leave academics to join industry for better pay. The IIMs, which account for only 3% of India’s output of management students, are facing similar challenges. Autonomy, availability of more resources and enabling better-quality faculty are the key needs of the country’s showpiece institutes. That, rather than mere geographical expansion, would be a better option.

(Source: Business Standard, dated 21-01-2014)

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Independent Directors’ Appointment Norms Need an Overhaul.

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News that eminent people earn in eight digits from independent directorships raises afresh the question of the role of these board members in corporate India. No one should grudge independent directors their fees, and it is healthy that the Companies Act, 2013 has raised the minimum sitting fee from a laughable Rs. 20,000 to Rs. 1 lakh per meeting. The bigger issue, and one that should concern companies and independent directors themselves, is the true value the latter can deliver. The concern arises because independent directors have more substantive responsibilities than ever before. For the first time, their role and responsibilities have been outlined in the Companies Act (the 1956 version of the law did not contain any reference to independent directors; they were mentioned only in Clause 49 of the listing agreement). Under the 2013 law, independent directors are required to sit on audit committees, nomination and remuneration committees, corporate social responsibility committees and also have pretty stringent whistle-blowing responsibilities.

But if all of this sounds like a full-time job for one person in one company, consider also that independent directors are permitted to join a maximum of 10 boards. At this maximum, and given that an independent director is required to attend at least four meetings a year, he or she could end up attending at least 40 meetings a year. If that sounds doable over 12 months, consider that board meetings typically converge around the quarterly results announcements, which means meetings are crowded around four months of the year.

This problem is compounded by the fact that there is a chronic shortage of quality people to staff corporate boards in India – especially since the Act requires independent directors to comprise a third of the board in listed companies. As a result, a few good men and women end up serving on eight to 10 boards. Given that there are 850,000 companies in India, according to Corporate Affairs Minister Sachin Pilot, many of them family-managed, it would probably be helpful to the cause of corporate governance if the maximum limit were, say, halved. In the US, for instance, where governance may not be perfect but the norms for it are more stringent than those in India, most board members do not serve on more than three boards (Rajat Gupta being a notable exception that provided a salutary lesson on the dangers of multiplicity). This may exacerbate the shortage, but it will force companies to widen the pool from which to draw.

One way of attracting more talent (and surely there is no shortage of that in India) could be to liberalise the fee structure, linking it to profit or turnover, in the same manner as CEO fees, and reintroducing stock options, a move that would go a long way towards helping start-ups. Either way, a more realistic approach is urgently needed so that independent directors become genuine custodians of corporate governance.

(Source – Business Standard, dated 07-02-2014)

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The Endorsement dilemma-marketers must seek watertight celebrity contracts.

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Film actor Amitabh Bachchan’s recent comment on his brand endorsements has sparked a fresh debate on the role of celebrities in advertising. During a discussion earlier this week at the Indian Institute of Management, Ahmedabad, Bachchan said that he stopped endorsing Pepsi after a schoolgirl from Jaipur asked him why he pitched a product her school teacher said was “poison”. But the actor had stood by the brand during its darkest period – the pesticides-in-cola controversy of the early 2000s. Naturally, therefore, questions are being asked whether it was too late for him to discover his conscience after peddling the brand for eight long years, till 2006, and becoming richer by over Rs. 24 crore.

According to a study by London-based Brand Finance, these intangibles account for almost twothirds of the value of the top 5,000 listed companies across markets. So obviously, anything that impacts the value of such intangibles has a huge bearing on business strategy, and therefore cannot be swept under the carpet. Firms challenge claims and damages to their intangibles, whether it is a breach of intellectual property or misuse of brand names by business rivals and outsiders. Why should brand sabotage from within be any different?

Two, celebrities have a huge following, and willynilly consumers see them as the personification and custodian of the brand they endorse. Elsewhere, if a celebrity breaches his or her public persona, invariably the brand suffers and marketers are quick to dissociate the brand from the endorser. And they are able to do it because the contracts explicitly spell out such separation conditions. In contrast, marketers in India are often seen to be drawing soft contracts with celebrities that enable them to be less responsible towards the brand and its ethos. The dangers are obvious. Experience from developed markets like the US or European countries points to more robust celebrity contracts that bind them to ‘good brand practices’ long after the cheques stop coming. Needless to say, everyone is entitled to her views. But if you’re an important cog in an enterprise’s value chain, there cannot but be costs and consequences of any viewpoint that has a bearing on the enterprises’ value. For transnationals like Pepsi, with headquarters in one continent, manufacturing in another, and customers in yet another, the glue that binds them comes from intangibles like intellectual property and brands. Any assault on them, by design or default, has to be dealt with firmly.

(Source: Business Standard, dated 07-02-2014)

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Regulatory regime forcing cos’ externalisation’ – Doing Business away from Indian tax oversight and ease of fund-raising among reasons for India Inc’s for India Inc’s tryst with foreign shores.

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With Indian companies rapidly expanding their presence internationally, there has been an increased keenness in companies operating in high growth sectors to migrate their holding company structures from India to reputed offshore jurisdictions. For lack of a better word, let’s refer this process of structuring/ restructuring as ‘externalisation’ as that term may fit the reference better than ‘globalisation’ or ‘internationalisation’, both of which have much wider imports.

There are several drivers for externalisation. First, it moves the businesses away from Indian tax and regulatory challenges into jurisdictions that may be more conducive from an operational standpoint and also substantially mitigates tax leakage and regulatory uncertainty. Unwritten prohibition on ‘put options’, retroactive taxation of indirect transfers, introduction of general anti-avoidance rules fraught with ambiguities, etc., are a few examples why Indian companies may want to avoid direct India exposure.

Second, from a fund raising perspective, it offers Indian companies to connect with an investor base that understands their business potential and, thus values them higher than what they would have otherwise been valued at in domestic markets. Infosys, Wipro, Rediff, Satyam are classic examples of companies which preferred to tap the global capital markets (NYSE and Nasdaq) without going public in India.

Third, with the Indian currency oscillating to extremes, one of the biggest concerns for foreign investors is currency risk. By investing in dollars in the offshore holding company (OHC), foreign investors can be immune from the currency risk and benefit from the value appreciation of the Indian companies. Many foreign investors that invested in 2007 when the Rupee was at around 42 to a dollar have suffered substantially with the Rupee now being at 62 to a dollar.

Fourth, and this is more of a recent issue, with the coming of the new Companies Act, 2013, which provides for class-action suits, enhanced director liability, statutory minimum pricing norms (beyond exchange control restrictions), there will be keenness to flip the structure to an OHC and ring-fence potential liabilities under the Companies Act, 2013.

Lastly, such offshore jurisdictions also provide for great infrastructure and governmental policies that are discussed with businesses and are more closely aligned to growth of the businesses as against meeting revenue targets. With most clients offshore, there may be certain amount of snob value that may be associated with establishment in such offshore jurisdictions.

Indian tax and regulatory considerations play a very important role in externalisation. From a tax standpoint, flipping the ownership offshore may entail substantial tax leakage, and to that extent it is advisable if the flip is undertaken at early stages before the value is built up in the Indian asset. Another challenge from a tax perspective is the choice of jurisdiction for the holding company in light of the impending general anti -avoidance rules that may disregard the holding company structure if it is found lacking commercial substance. To protect the tax base from eroding, some of the developed countries like the US have anti-inversion tax rules which deter US companies from externalising outside the US.

From a regulatory standpoint, one of the challenges is to replicate the Indian ownership in the OHC, especially since swap of shares or transfer of shares for consideration other than cash requires regulatory approval, which may not be forthcoming if the regulator believes that the primary purpose of the OHC is to hold shares in the Indian company. Indian companies may be restricted from acquiring shares of the OHC on account of the OHC likely qualifying as a financial services company and Indian individuals may be restricted to acquire shares of the OHC under the new exchange control norms since OHC will not be an operating company. The extent of operations to be evidenced remains ambiguous. OHCs acquisition of Indian shares will also need to be carefully structured as the OHC will not be permitted to acquire Indian shares at below fair market value from an Indian tax and exchange control perspective.

India has recently allowed Indian companies to directly list on offshore markets, but the conditions that such listing can only be for 51% shares of the Indian company and that the proceeds of such issuance must be used overseas within 15 days may not allow the true potential of offshore listings to be unleashed. The utilisation of the direct listing regime remains to be seen as the SEBI is yet to come out with a circular setting out disclosures required for such listing.

However, considering the challenges faced by India Inc., the need to move away from India for growth seems inevitable in current times.

(Source: Article by Mr. Ruchir Sinha and Mr. Nishchal Joshipura of M/s Nishith Desai Associates, in The Economic Times, dated 15-01- 2014)

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Paulraj Second Indian to Get Marconi Prize.

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Tamil Nadu-born scientist Arogyaswami Joseph Paulraj has become the second Indian to be awarded the Marconi Society Prize, 2014, considered an equivalent to the Nobel Prize for the technology sector. The award recognises his work on developing wireless technology to transmit and receive data at high speeds. Paulraj is credited with the invention and advancement of Multiple Input Multiple Output (MIMO), a key enabler of WiFi and 4G mobile systems.

The 69-year-old is an emeritus professor at the Stanford University and has served 25 years in the navy. He got the Padma Bhushan in 2010. His idea for using multiple antennas at both the transmitting and receiving stations has revolutionised wireless delivery of multimedia services for billions, said the Marconi Society.

By winning the award, Paulraj joins a select group of information technology (IT) pioneers such as Tim Berners-Lee (world wide web), Vint Cerf (internet), Larry Page (Google Search), Marty Hellman (public key cryptography) and Martin Cooper (cellphone).

N. R. Narayana Murthy, executive chairman of Infosys, said, in a release by Marconi Society, “Paulraj’s brilliance and perseverance have revolutionised wireless technology bringing a lasting benefit to mankind.”

Before Paulraj migrated to the US in the early 1990s, he was well known for pioneering the development of sonars for the navy. Paulraj is the founding director of laboratories Centre for Artificial Intelligence and Robotics, Centre for Development of Advanced Computing, Bangalore, and the Central Research Labs of Bharat Electronics.

After moving to Stanford University, he built the world’s leading research group in MIMO, and founded two companies in the Silicon Valley to develop MIMO.

While global chip maker Intel acquired a company in 2003, Broadcom Corporation bought another later.

Named after Nobel laureate Guglielmo Marconi, who invented radio, and set up in 1974 by his daughter Gioia Marconi Braga through an endowment, the Marconi Society annually awards an outstanding individual whose scope of work and influence emulate the principle of “creativity in service to humanity” that inspired Marconi.

After Sir J. C. Bose’s demonstration of the millimetre wave radio in 1895, Paulraj’s invention of MIMO in 1992 is the next major innovation in IT from an Indian-born scientist, notes IndiaTechOnline.com editor, Anand Parthasarathy. The prestigious prize includes $100,000 honourarium and a sculpture. Its honourees become Marconi Fellows.

(Source –Business Standard, dated 24-01-2014)

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“Look For Raw Talent, Not For English Skills” – Management Guru Ram Charan

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“One lousy leader can change everything.” Coming from one of the world’s most influential consultants (named by Fortune magazine), this comment summed up the point Ram Charan was trying to make to a hall packed with Indian CEOs.

Speaking on the topic ‘Leadership in turbulent times’ at an event organised by Great Lakes Institute of Management, he said that China would emerge as the place where a lot of different industries would be anchored from. When someone from the audience asked how long he expected the China influence to last, he replied, “You can have a lousy leader (and everything can change). We are having such a situation here in India, aren’t we?”

Charan said putting a leadership pipeline in place was critical and firms should start identifying talent early. Talent must be spotted along two lines – those who are great individual contributors and those who can be future leaders. “Both are completely different skills. Potential leaders naturally link with people to get work done for them, have a nose for making money, are highly tuned to succeed in their next-in-line jobs and can work with highly diverse sets of data. Firms can use these as indicators to identify such talent,” said Charan.

(Source: Times of India, dated 24-01-2014)

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Indian Economy – Less Fragile, Not Bullet- Proof.

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Let’s give credit where it is due. Over the last six months, the managers of the economy have converted a system in near-crisis into one of the safer places in a battered ’emerging markets’ grouping. Remember that India was seen last summer as one of the worst performing stock and currency markets, with nervousness underlined by a record current accounts deficit and the highest fiscal deficit among the major economies. So, it is a pretty dramatic change when India now presents a reassuring contrast to the traumas engulfing almost all the second-rung economies represented at the G20 high table. The Sensex is about 14% higher than its 2013 trough. The quarterly trade deficit has dropped from $45-50 billion to $30 billion, and the current account deficit from $20-25 billion per quarter to just $5 billion. Capital inflows have held up, so foreign exchange reserves have stopped falling and indeed have gone up by $18 billion in the last four months. When many ‘G20 Junior’ currencies teeter on the edge of crisis – and the roll call is pretty comprehensive – the Rupee is reassuringly stable at a sensible exchange rate. It helps that the Reserve Bank of India is laser-focused on tackling inflation.

But we should hold the celebrations. First, there is a message in the failure of State Bank of India’s share issue this week. Though the asking price was modest, less than $250 million came from abroad, for an issue size that was intended to be over $1.5 billion. If the whole thing was not a fiasco, it was only because domestic public sector entities (banks and insurance) bailed in – and you can guess whether they were following orders. Bear in mind that bad and restructured loans could eventually wipe out the existing share capital of India’s government-owned banks, and they will need many billions of dollars of fresh capital. But if the largest and best of the pack can’t generate foreign investor interest, what are the others going to do? Fall back on taxpayer money at a time of fiscal stress? A financial sector that is short of capital cannot meet the economy’s credit needs, and will constrict growth. The reform of government-run banks has become essential and urgent.

Second, there is the business of government expenditure. At over 7% of gross domestic product (GDP), the fiscal deficit (for Centre plus states) is by far the largest among emerging markets. The outlook is that things may get worse, as state after state rolls back power tariffs, the cooking gas subsidy is increased, and road tolls are attacked. There seems to be an all-party consensus on more government giveaways, and implicitly therefore against fiscal correction. That this translates into higher inflation and macroeconomic instability seems beyond the ken of everyone from Arvind Kejriwal and Rahul Gandhi to Raj Thackeray. Mr. Chidambaram may do everything possible to keep this year’s deficit down to the target of 4.8% of GDP, but something that is artificially compressed by a determined minister is likely to balloon next year.

Finally, there is the business of improving governance. Aadhaar was to have been a game-changer but has been sacrificed at the altar of expediency. If unique identity numbers are not to be used for enabling cash transfers, as a superior alternative to product subsidies that are poorly targeted and prone to large leakages (and cooking gas is a prime example), what is the justification for spending many thousands of crores on Aadhaar? Talk of lack of conviction in reform! India has escaped contagion for now, but the world’s economic troubles are far from over. The antireform consensus could yet undo our future.

(Source: Business Standard, dated 01-02-2014)

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What Satya Nadella’s Appointment As Microsoft CEO Teaches Us?

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The appointment of Satya Nadella as the CEO of the iconic Microsoft has given us a reason to take pride in the success of a fellow Indian.

Not only is Satya Indian by birth, he went to ordinary schools and colleges, got to the top on his own merit and, most of all, remained a nice, normal and humble guy. We can relate to Satya and his journey in a way that we can’t relate to, say, Steve Jobs or Bill Gates, and that’s what is so inspiring. In his success, we see the possibility of our own success. At a time where young people are looking for role models to emulate, Satya is certainly a wonderful one.

Could Satya have become the CEO of a major Indian company? Or did he have to leave India to succeed? Corporate India is dominated by family businesses. The right genes are still an important requisite for ultimate success. But this is changing slowly.

Finally, there are multinationals like HUL, Suzuki and Samsung. In these firms, most important decisions are made outside India and so, a promising leader has to leave India and get back to headquarters to rise. So, it is indeed true that India is still a small pond for an ambitious and talented professional manager. Hopefully, as Indian firms globalise and professionalise and more entrepreneurial firms achieve scale, this will change. But in the short term, the best opportunities for the very best talent are still outside India. For all our complaints about the US’s restrictions on immigration of skilled workers, we ourselves remain quite closed. If we could make India a less challenging place to do business and if we could become more welcoming of high-end talent regardless of nationality, we would reverse the brain drain and become a magnet for innovators and entrepreneurs who would revitalise our economy in unimaginable ways.

Finally, does India have a competitive advantage to grow top talent? We do. First, we have the numbers. When you have so many young people, a numerically large number of us are exceptionally gifted. Second, there is a Darwinian process that results in survival of the fittest. In middle class and even poor homes, educational achievement is the passport to success, and there is pressure on kids to work hard and succeed. Our education system, with all its inadequacies, results in a hypercompetitive environment that has a way of toughening up people.

CEOs may well be India’s most valuable export. Now, what we need to do is make India more of a meritocracy – in business, education, politics and government – so that more talented people don’t just build great businesses in India but apply themselves to solving some of our toughest social, economic and political challenges. It won’t be long before we become a developed nation.

(Source: Extract from an article by Ravi Venkatesan, dated 11-02-2014)

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Legislative Paralysis – Disruptions Of Parliament Have Harmed Indian Democracy.

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Disruptions of Parliament have become such a common occurrence that they hardly give rise to outrage any more. The last session of the 15th Lok Sabha is no exception. Both Houses have already been adjourned daily, amid slogan-shouting, scuffles and placard-waving by various members of Parliament. The worst offenders have been parliamentarians from Andhra Pradesh, protesting the government’s action – or inaction – on the formation of the new state of Telangana. But other issues have also been raised, through slogans and placards: the fate of Tamil fishermen; special status for Bihar; rapes in Kerala; the anti-Sikh riots of 1984. Each of these is, of course, an important issue and deserving of debate. Equally, each is an important issue and therefore not a reason for disrupting Parliament.

The tenure of the 15th Lok Sabha, thus, has been a disappointment. According to data released by the think tank PRS Legislative Research, the average number of Bills passed by Parliament when a Lok Sabha has completed its full five-year term is 317. The current Parliament has passed only 165, thereby torpedoing any chance of meaningful reform under the second term of the United Progressive Alliance (UPA). This is the worst performance of any Lok Sabha since the first one, which had somewhat weightier discussions to undertake. Worst of all, even those Bills that are passed are frequently passed with insufficient debate, demonstrating the degree to which political parties today have debased India’s public sphere. Only 23 % of laws passed by this Lok Sabha have been discussed for more than three hours. Ten Bills were passed in less than half an hour; as many as 20 in just five minutes. Clearly, not enough attention was paid by parliamentarians to the laws that they approved. Meanwhile, the unfinished agenda – including major anti-corruption Bills, the reform of regulatory structures, and so on – just builds up. As many as 126 Bills remain to be passed; more than half – 72 – in the Lok Sabha. Many of these Bills, which were introduced during the current tenure of the Lok Sabha, will lapse after this session, a waste of time and energy.

(Source: Business Standard dated 12-02-2014)

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Report u/s. 394A of the Companies Act, 1956- Taking accounts of comments/inputs from Income Tax Department and other sectoral Regulators while filing reports by RDs.

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The Ministry of Corporate Affairs has vide General Circular No. 1/2014 dated 15th January, 2014, has informed that section 394A of the Companies Act, 1956 requires service of a notice on the Central Government wherever cases involving arrangement/ compromise (u/s. 391) or reconstruction/amalgamation (u/s. 394) come up before the Court of competent jurisdiction. As the powers of the Central Government have been delegated to the Regional Directors (RDs) who also file representations on behalf of the Government wherever necessary.

It is to be noted that the said provision is in addition to the requirement of the report to be received respectively from the Registrar of Companies and the Official Liquidator under the first and second provisos to Section 394(1). A joint reading of sections 394 and 394A makes it clear that the duties to be performed by the Registrar and Official Liquidator u/s. 394 and of the Regional Director concerned acting on behalf of the Central Government u/s. 394A are quite different.

An instance has recently come to light wherein a Regional Director did not project the objections of the Income-Tax Department in a case u/s. 394. The matter has been examined and it is decided that while responding to notices on behalf of the Central Government u/s. 394A, the Regional Director concerned shall invite specific comments from Income-Tax Department within 15 days of receipt of notice before filing his response to the Court. If no response from the Income-tax Department is forthcoming, it may be presumed that the Incometax Department has no objection to the action proposed u/s. 391 or 394 as the case may be. The Regional Directors must also see if in a particular case feedback from any other sectoral Regulator is to be obtained and if it appears necessary for him to obtain such feedback, it will also be dealt with in a like manner.

It is also emphasised that it is not for the Regional Director to decide correctness or otherwise of the objections/views of the Income-tax Department or other Regulators. While ordinarily such views should be projected by the Regional Director in his representation, if there are compelling reasons for doubting the correctness of such views, the Regional Director must make a reference to this Ministry for taking up the matter with the Ministry concerned before filing the representation u/s. 394A.

The Circular in effective from 15th January, 2014.

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USC of word ‘National’ in the names of Companies or Limited Liability Partnerships (LLPs).

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The Ministry of Corporate Affairs has vide Circular No. 2/2014 dated 11th February, 2014 intimated that no company should be allowed to be registered with the word ‘National’ as part of its title unless it is a government company and the Central/State government(s) has a stake in it. This should be stringently enforced by all Registrar of Companies (ROCs) while registering companies. Similarly, the word, Bank may be allowed in the name of an entity only when such entity produces a ‘No Objection Certificate’ from the RBI in this regard. By the same analogy the word “Stock Exchange” or “Exchange” should be allowed in name of a company only where ‘No Objection Certificate’ from SEBI in this regard is produced by the promoters.

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Penalty – Concealment of Income-Voluntary disclosures do not release the assessee from the mischief of penal proceedings.

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Mak Data P. Ltd., vs. CIT (2013) 358 ITR 593 (SC)

Penalty – Concealment of Income – The Assessing Officer during the assessment proceedings, is not required to record his satisfaction for initiation of penalty proceeding in a particular manner.

The appellant-assessee filed his return of income for the assessement year 2004-05 on 27th October, 2004, declaring an income of Rs. 16,17,040 along with tax audit report. The case was selected for scrutiny and notices were issued u/s. 143(2) and 142(1) of the Income-tax Act, 1961.

During the course of the assessment proceedings, it was noticed by the Assessing Officer that certain documents comprising share application forms, bank statements, memorandum of association of companies, affidavits, copies of income-tax returns and assessment orders and blank share transfer deeds duly signed had been impounded. These documents had been found in the course of survey proceedings u/s. 133A conducted on 16th December, 2003, in the case of M/s. Marketing Services (a sister concern of the assessee). The Assessing Officer then proceeded to seek information from the assessee and issued a show-cause notice dated 26th October, 2006. By the showcause notice, the Assessing Officer sought specific information regarding the documents pertaining to share applications found in the course of survey, particularly, blank transfer deeds signed by persons, who has applied for the shares. Reply to the show-cause notice was filed on 22nd November, 2006, in which the assessee made an offer to surrender a sum of Rs. 40.74 lakh with a view to avoid litigation and buy peace and to make an amicable settlement of the dispute. Following were the words used by the assessee :

“The offer of surrender is by way of voluntary disclosure and without admitting any concealment whatsoever or any intention to conceal, and subject to non-initiation of penalty proceedings and prosecution”

The Assessing Officer after verifying the details and calculation of the share application money accepted by the company completed the assessment on 29th December, 2006 and a sum of Rs. 40,74,000 was brought to tax, as “income from other sources” and the total income was assessed at Rs. 57,56,700.

The Department initiated penalty proceedings for concealment of income and not furnishing true particulars of its income u/s. 271(1)(c) of the Income-tax Act. During the course of the hearing, the assessee contended that penalty proceedings are not maintainable on the ground that the Assessing Officer has not recorded his satisfaction to the effect that there has been concealment of income/furnishing of inaccurate particulars of income by the assessee and that the surrender of income was a conditional surrender before any investigation in the matter. The Assessing Officer did not accept those contentions and imposed a penalty of Rs. 14,61,547 u/s. 271(1)(c) of the Act. The assessee challenged that the order before the Commissioner of Income-tax (Appeals), which was dismissed.

The assessee filed as appeal before the Income-tax Appellant Tribunal, Delhi. The Tribunal recorded the following findings:

“The assessee’s letter dated November 22, 2006, clearly mentions that the offer of the surrender is without admitting any concealment whatsoever or any intention to conceal.”

The Tribunal took the view that the amount of Rs. 40,74,000 was surrendered to settle the dispute with the Department and since the assessee, for one reason or the other, agreed or surrendered certain amounts for assessment, the imposition of penalty solely on the basis of the assessee’s surrender could not be sustained. The Tribunal, therefore, allowed the appeal and set aside the penalty order.

The Revenue took up the matter in appeal before the High Court. The High Court accepted the plea of the Revenue that there was absolutely no explanation by the assessee for the concealed income of Rs. 40,74,000. The High Court took the view that in the absence of any explanation in respect of the surrendered income, the first part of clause (A) of Explanation 1 was attracted.

On appeal to the Supreme Court by the assessee, the Supreme Court fully concurred with the view of the High Court that the Tribunal has not properly understood or appreciated the scope of Explanation 1 to section 271(1)(c) of the Act.

According to the Supreme Court, the Assessing Officer should not be carried away by the plea of the assessee like “voluntary disclosure”, “buy peace”, “avoid litigation”, “amicable settlement”, etc., to explain away its conduct. The question is whether the assessee has offered any explanation for concealment of particulars of income or furnishing inaccurate particulars of income. The Explanation to section 271(1) raises a presumption of concealment, when a difference is noticed by the Assessing Officer, between reported and assessed income. The burden is then on the assessee to show otherwise, by cogent and reliable evidence., that income was not concealed or inaccurate particulars were not furnished. When the initial onus placed by the explanation, has been discharged by him, the onus shifts on the Revenue to show that the amount in question constituted the income and not otherwise.

The assessee has only stated that he had surrendered the additional sum of Rs. 40,74,000 with a view to avoid litigation, buy peace and to channelise the energy and resources towards productive work and to make amicable settlement with the Income-tax Department. The statute does not recognise those types of defences under Explanation 1 to section 271(1)(c) of the Act. It is a trite law that the voluntary disclosures do not release the appellant assessee from the mischief of penal proceedings. The law does not provide that when an assessee makes a voluntary disclosure of his concealed income, he had to be absolved from penalty.

The Supreme Court was of the view that the surrender of income in this case was not voluntary in the sense that the offer of surrender was made in view of detection made by the Assessing Officer in a survey conducted 0n the sister concern of the assessee. In that situation, it could not be said that the surrender of income was voluntary. The Assessing Officer during the course of assessment proceedings has noticed that certain documents comprising share application, forms, bank statements, memorandum of association of companies, affidavits, copies of income-tax returns and assessment orders and blank share transfer deeds duly signed, had been impounded in the course of survey proceedings u/s. 133A conducted on 16th December, 2003, in the case of a sister concern of the assessee. The survey was conducted more than 10 months before the assessee filed its return of income. Had it been the intention of the assessee to make full and true disclosure of its income, it would have filed return declaring an income inclusive of the amount which was surrendered later during the course of the assessment proceedings. Consequently, it was clear that the assessee had no intention to declare its true income. It is the statutory duty of the assessee to record all its transactions in the books of account, to explain the source of payments made by it and to declare its true income in the return of income filed by it from year to year. In the opinion of the Supreme Court, the Assessing Officer, had recorded a categorical finding that he was satisfied that the assessee had concealed true particulars of income and was liable for penalty proceedings u/s. 271 read with section 274 of the Income-tax Act, 1961.

According to the Supreme Court, the Assessing Officer has to satisfy whether the penalty proceedings be initiated or not during the course of the assessment proceedings and the Assessing Officer is not required to record his satisfaction in a particular manner or reduce it into writing.

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Clarification with regard to section 185 of the Companies Act, 2013.

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The Ministry of Corporate Affairs has vide General Circular No. 03/2014 dated 14th February, 2014 issued clarification with regard to section 185 of the new Companies Act. This Ministry informs that a number of representations have been received on the applicability of section 185 of the Companies Act, 2013 with reference to loans made, guarantee given or security provided u/s. 372A of the Companies Act, 1956. The issue has been examined with reference to applicability of section 372A of the Companies Act, 1956 vis-a-vis section 185 of the Companies Act. 2013. Section 372A of the Companies Act, 1956, specifically exempts any loans made, any guarantee given or security provided or any investment made by a holding company to its wholly owned subsidiary. Whereas, section 185 of the Companies Act, 2013 prohibits guarantee given or any security provided by a holding company respect of any loan taken by its subsidiary company except in the ordinary course of business.

In order to maintain harmony with regard to applicability of section 372A of the Companies Act, 1956 till the same is repealed and section 185 of the Companies Act, 2013 is notified, it is hereby clarified that any guarantee given or security provided by a holding company in respect of loans made by a bank or financial institution to its subsidiary company, exemption as provided in Clause (d) of s/s. (8) of section 372A of the Companies Act, 1956 shall be applicable till section 186 of the Companies Act, 2013 is notified. This clarification will, however, be applicable to cases where loans so obtained are exclusively utilised by the subsidiary for its principal business activities.

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A. P. (DIR Series) Circular No. 83 dated 3rd January, 2014

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Overseas Direct Investments – Rollover of Guarantees

This circular provides that renewal/rollover of an existing/original guarantee, which is part of the total financial commitment of the Indian Party will not be not to treated/reckoned as a fresh financial commitment, if: –

(a) The existing/original guarantee was issued in terms of the then extant/prevailing FEMA guidelines.

(b) There is no change in the end use of the guarantee, i.e. the facilities availed by the JV/WOS/Step Down Subsidiary.

(c) There is no change in any of the terms & conditions, including the amount of the guarantee except the validity period. The rolled over guarantee has to be reported as fresh financial commitment in Part II of Form ODI. If the Indian party is under investigation by any investigation/enforcement agency or regulatory body, the concerned agency/body must be kept informed about the rollover.

If the above conditions are not met, the Indian party has to obtain, through the designated AD bank, prior approval of RBI for rollover/renewal of the existing guarantee.

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Ghatkopar Jolly Gymkhana vs. Director of Income tax (E) In the Income Tax Appellate Tribunal “G” Bench, Mumbai Before D. Karunakara Rao, (A. M.) and Sanjay Garg (J. M) ITA No.882/Mum/2012 Assessment year:2009 -10. Decided on 23/10/2013 Counsel for Assessee / Revenue : A. H. Dalal / Santosh Kumar

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Section 2(15), 12A and 12AA – Charitable trust carrying on the activities which are in the nature of trade, commerce or business receipts therefrom exceeding the limit prescribed under second proviso to section 2(15) – Action of the AO in cancellation of registration by treating the trust as non-genuine not justifiable.

Facts
The assessee is a club registered u/s. 12A as a charitable trust. The DIT(E) noticed that the assessee was carrying on activities in the nature of trade, commerce or business and its gross receipts there from during the year were in excess of Rs.10 lacs, the limit then prescribed under second proviso to section 2(15). According to him since the activities of the assessee did not fall within the definition of charitable purpose as defined u/s. 2(15), the assessee trust became non-genuine and as such the provisions of section 12AA(3) got attracted. He accordingly cancelled the registration w.e.f assessment year 2009-10 and declared the assessee as non-charitable trust. Before the tribunal the revenue justified the order of the DIT(E).

Held
According to the tribunal, before the insertion of the second proviso from 01-04-2009, the definition of charitable purpose when read with first proviso was very restrictive. However, by the insertion of the second proviso the rigour of the first proviso has been diluted and is not applicable if the trust carries on business activities and the gross receipts therefrom is Rs. 10 lakh or less. Thus, according to the tribunal, from 01-04-2009 the carrying out of the activities of trade, commerce or business by a charitable trust is not barred so as to exclude its activities from the definition of charitable purposes. However, a limitation has been imposed to the effect that the gross receipts from such activities should not be more than Rs.10 lacs. The tribunal further noted that the use of the term “previous year” in the second proviso is also more relevant. It means the benefits will not be available to the assessee for the assessment year in which the gross receipts exceed the limit of Rs. 10 lakh. It does not mean that such benefits will not be available to the trust in the years during which its receipts does not exceed Rs. 10 lakh. According to the tribunal, in cases where the receipts from the activities in the nature of trade, commerce or business exceed the limit of Rs. 10 lakh, the registration of the trust as the charitable institution does not get affected, rather, it is the eligibility of the said trust to get tax exemption/benefits which gets affected that too for the relevant year during which the gross receipts of the trust crosses the limit of Rs. 10 lakh. For the said proposition, the tribunal also relied on the decision of the Jaipur bench of the Tribunal in the case of Rajasthan Housing Board vs. CIT (2012) 21 Taxmann.com77.

Accordingly, the tribunal held that the action of the CIT(A) in relying upon the second proviso to section 2(15) for cancelling the registration of the trust was not correct or justified. The only effect will be that the Assessee will not be entitled for exemption or tax benefits which otherwise would have been available to it being registered as charitable institution, for the relevant year during which its income has crossed the limit of Rs. 10 lakh. Subject to the same, the tribunal ordered the restoration of the registration granted to the trust.

(Editorial Note: By the Finance Act, 2011 the limit prescribed under second proviso to section 2(15) has been revised to Rs. 25 lakh w.e.f. 01.04.2012)

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Interpretation of Provisions of section 10(2A) in cases where income of the firm is exempt -Circular No. 8 dated 31st March 2014 [F.No. 173/99/2013-ITA]

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CBDT has clarified that ‘total income’ of the firm for s/s. (2A) of section 10 of the Act, includes income which is exempt or deductible under various provisions of the Act. The income of a firm is to be taxed in the hands of the firm only and the same can under no circumstances be taxed in the hands of its partners. Accordingly, the entire profit credited to the partners’ accounts in the firm would be exempt from tax in the hands of such partners, even if the income chargeable to tax becomes NIL in the hands of the firm on account of any exemption or deduction as per the provisions of the Act.

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Appeal before Tribunal: Rectification of mistake: Section 254(2): A. Y. 1996-97: Application for rectification: Period of limitation commences from the date of receipt of the order and not the date of the order:

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Peterplast Synthetics P. Ltd. vs. ACIT; 364 ITR 16 (Guj):

The assessee had received the order of the Tribunal dated 20-02-2007 on 19-11-2008. The assessee made an application for rectification u/s. 254(2) of the Incometax Act, 1961 on 09-05-2012. The Tribunal dismissed the application on the ground that the same is barred by limitation u/s. 254(2) as the application has been made beyond the period of four years from the date of the order.

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

“i) Section 254(2) of the Income-tax Act, 1961, is in two parts. Under the first part, the Tribunal may, at any time, within four years from the date of the order, rectify any mistake apparent from the record and amend any order passed by it under s/s. (1).

ii) Under the second part, the reference is to the amendment of the order when the mistake is brought to its notice by the assessee or the Assessing Officer. The statute has conferred the right in favour of the assessee or even the Revenue to prefer a rectification application within a period of four years and, therefore, even if a rectification application/ miscellaneous application is submitted on the last day of completion of four years from the date of receipt of the order, which is sought to be rectified, it is required to be decided on merits and in such a situation the assessee is not required to give any explanation for the period between the actual date of receipt of the order, which is sought to be rectified and the date on which the miscellaneous application is submitted.

iii) The order of the Tribunal sought to be rectified was received by the assessee on 19-11-2007. The assessee preferred the application on 09-05-2012. The application was not barred by limitation.”

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Auditing Opening Balances – How Far Should an Auditor Go?

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Synopsis

When you study SA-510 ‘Initial Engagements Opening Balances’as an auditing standard, the critical points that you, as an auditor need to stress upon, is the verification of opening balances. In the given article, the authors stress on the important areas that an auditor should carefully verify, viz. unaudited prior period balances, reliance on the financial statements audited by the previous auditor.

• For an initial audit engagement, where prior period balances were unaudited, should the auditor be held responsible for opening balances which he never audited?
• Why can’t the auditor rely on work performed by the predecessor auditor where the balances of the prior period were audited by the predecessor auditor?
• Can the auditor request for a review of the work papers of his predecessor?
• Should the auditee be made to undergo ‘fatigue’ once again in assisting the incoming auditor reestablishing the veracity of balances which were already audited by the predecessor auditor in the prior period?

One could easily reach these suppositions on a plain reading of SA 510 Initial Audit engagements – Opening balances. These conjectures gain more relevance in current times, particularly with the requirement of auditor rotation seeming to be a reality as envisaged in the Companies Act, 2013.

SA 510 lays down the guiding principles for performing audit procedures on opening balances where financial statements for the prior period were either not audited or were audited by a predecessor auditor. SA 510 underlines the nature and extent of audit procedures necessary to obtain sufficient appropriate audit evidence regarding opening balances which depend on such matters as follows:

a. the accounting policies followed by the entity;
b. the nature of the account balances, classes of transactions and disclosures and the risks of material misstatement in the current period’s financial statements;
c. the significance of the opening balance relative to the current period’s financial statements; and
d. whether the prior period’s financial statements were audited and, if so, whether the predecessor auditor’s opinion was modified.

SA 510 requires the auditor to obtain sufficient appropriate evidence about whether:

1. Opening balances contain misstatements that materially affect the current period’s financial statements.
2. Accounting policies reflected in the opening balances have been consistently applied in the current period’s financial statements
3. Changes in accounting policies have been properly accounted for, adequately presented, and disclosed in accordance with the applicable financial reporting framework.

Procedures to address these requirements could include:

• Determining whether prior period closing balances are brought forward correctly to the current period or when appropriate, any adjustments have been any adjustments have been disclosed as prior period items in the current year’s Statement of Profit and Loss;
• Determining whether opening balances reflect appropriate application of accounting policies
• Evaluating whether current period audit procedures provide evidence about opening balances
• Performing specific audit procedures to obtain evidence regarding opening balances.

We will try to understand the above requirements with the help of a case study.

Case Study
ABC Limited (‘ABC’) was incorporated on 1 April, 20X0 with an initial paid-up capital of Rs. 15 crores for undertaking the business of production and trading of welding equipments.

ABC took a long-term loan of Rs. 20 crores on 1st June, 20X0 from Universal Bank repayable after 3 years. The loan was taken to fund the setting up of plant for manufacturing welding equipments. The completion of plant set up and commencement of commercial operations was achieved within three months, i.e., by 31st August, 20X0. ABC management was of the view that the project was a qualifying asset and interest on borrowed funds was eligible to be capitalised to the cost of the asset. Interest of Rs. 1 crore for the period 1st June, 20X0 until 31st March, 20X1 payable on the loan from bank was capitalised to the cost of assets as follows:

For depreciating plant and machinery and furniture and fixtures, management adopted the straight line method of depreciation and the estimated useful life was considered as 10 years and 5 years respectively.

Purchases of tools and components were made from local vendors and finished welding equipments are sold through a dealer network. Inventory of raw materials as at 31st March, 20X1 was valued on ‘FIFO’ basis whereas finished goods were valued at cost or net realisable value whichever is lower.

During the year, ABC spent Rs. 5 crore on advertising and launch expenses of its brand – ‘BestWeld’. ABC management capitalised the entire amount of Rs. 5 crore as cost of brand development as an ‘intangible asset under development’. ABC has plans to spend a further amount of Rs. 8 crore during 20X2 towards advertising its brand – BestWeld in the print and other media as well in trade fairs.

The state of affairs of ABC as at 31st March, 20X1 is summarised below.

Statement of Profit and Loss for the year ended 31st March, 20X1

Balance Sheet as at 31st March, 20X1

The statement on accounting policies in the audited financial statements articulates the accounting policies for capitalisation of interest on borrowed funds, accounting for costs of brand development, depreciation and valuation of inventories.

The accounts for the year ended 31st March 20X1 were audited by M/s. PQR & Co., (‘PQR’) a proprietor audit firm and an unqualified opinion was issued thereon. PQR were reappointed as auditors for the year ending 31st March, 20X2 in the annual general meeting of ABC held in September, 20X1.

In the month of February, 20X2, PQR expressed their unwillingness to continue as auditors on account of ill health of the proprietor and tendered their resignation. ABC appointed M/s. XYZ & Associates (‘XYZ’) as their auditors in March, 20X2. XYZ attended the physical count of inventories which was conducted by the management of ABC on 31st March, 20X2. XYZ plans to commence the audit of ABC in the month of May, 20X2.

I. What audit procedures should XYZ perform to comply with the requirements of SA 510?

II. Continuing with the case study, how would the audit approach be different had the fact pattern around inventory been the following?

III. Can XYZ request for a review of the workpapers of PQR?

IV. Would the solution be different if the prior period financial statements were unaudited?

We will evaluate procedures the incoming auditor, XYZ needs to perform to comply with the requirements of SA 510.

Analysis – I

1. As the financial statements for the year ended 31st March, 20X1 were audited by PQR, the present auditors, XYZ could obtain comfort over opening balances by perusing the audited financial statements and could also seek and peruse other relevant documents such as supporting schedules to the audited financial statements for year ended 31st March, 20X1.

2. XYZ would need to trace whether the prior period’s closing balances have been correctly brought forward to the current period. While in a smaller and less complex accounting set-up, this could be relatively straightforward, tracing the opening balances in a multi-locational ERP set-up could pose a challenge entailing involvement of IT experts.

3. Accounting policies – SA 510 requires the incoming auditor to evaluate whether the opening balances reflect the application of appropriate accounting policies. The following points of focus in this case study need consideration:

a. Ordinarily, XYZ could place reliance on the closing balances as contained in the financial statements audited by PQR. However, in the present case, while performing audit procedures on the financial statement captions such as tangible fixed assets and intangible assets under development for the current year, XYZ would need to evaluate the possibility of misstatement of the opening balances, in view of the accounting policies followed for these captions. ABC has capitalised cost of brand development as intangible asset. Cost of internally generated brands is specifically prohibited from being recognised as ‘intangible assets’ under AS 26 – Intangible Assets. Similarly, given
that the plant was set up within a period of four months, it cannot be classified as a ‘qualifying asset’ for capitalisation of the interest costs on related borrowings under AS 16 – Borrowing Costs.
b. In the instant case, the accounting policy followed for the capitalisation of borrowing costs and brand development costs is inconsistent with the requirements of Indian GAAP. As such, the opening balances of fixed assets and intangible assets under development contain a misstatement which affects the financial statements for the year

ended 31st March, 20X2. The amount of interest capitalised to tangible fixed assets (net of the amount written off as depreciation in 20X1) and brand development cost would need to be charged off to the statement of profit and loss for the year ended 31st March, 20X2. ABC would also need to make necessary disclosures in the notes explaining the prior period charge and XYZ would need to ensure that these disclosures are appropriate.

c. It may be noted that the restatement of
the prior period financial statements does
not exist in the Indian scenario, hence the
adjustments to opening balances would need
to be disclosed as ‘prior period items’ in the
current year’s statement of profit and loss.

d. Where the management refuses to make
adjustments as stated above, XYZ would
need to consider issuing a qualified or an
adverse opinion even though the predecessor
auditor had issued an unqualified opinion
for the prior period.

4. For current assets and liabilities, XYZ would need
to obtain some evidence about the opening balances
as part of the audit for the year ended 31st
March, 20X2 to get comfort on assertions such
as existence, rights and obligations, completeness
and valuation. For
e.g., for debtors, XYZ
would need to obtain evidence around collection
of opening debtors. Similarly, for creditors,
evidence around payments to creditors during
20X2 would need to be examined.

5. Inventories – Physical verification procedures
performed on inventories by XYZ as at 31st
March, 20X2 would provide limited assurance on
the opening inventory as at 31st March, 20X1.
Given that appointment of XYZ was made in
latter part of the year 20X2, it may be difficult
to perform a rollback of quantities physically
verified as on 31st March, 20X2 and reconciling
the same to the quantities as at 31st March,
20X1. In such cases, XYZ could consider the procedures
around valuation of opening inventory,
verification of management papers on physical
verification of inventory and cut-off.

6. For non-current assets such as plant and machinery,
furniture and fixtures, audit evidence
relating to these captions obtained during the
course of audit for the year ended 31st March,
20X2 could provide assurance on underlying
opening balances. The title deeds/agreement
for sale could be examined to obtain comfort
over opening balance for land.



7. For long-term debt, review of loan agreement,
charge documents and trail of receipt of funds
could provide evidence of the existence of
the loan as at 31st March, 20X1. The source
and application of loan amounts would also
be reviewed for the purpose of reporting in
the Companies Auditor’s Report Order, 2003
(CARO).

8. XYZ would need to ensure that the accounting
policies which are appropriate for opening balances
are consistently applied to the current
period financial statements, so in the instant
case, the policy on depreciation and inventory
valuation which was followed for the year ended
31st March, 20X1 should be consistently applied
for the year ended 31st March, 20X2 as well.

9. XYZ may consider stating in an Other Matter
paragraph in the auditor’s report that the corresponding
figures (for the year ended 31st
March, 20X1) were audited by another auditor
whose report expressed an unqualified opinion
on those statements. Such a statement does
not, however, relieve XYZ of the requirement
to obtain sufficient appropriate audit evidence
that the opening balances do not contain misstatements
that materially affect the financial
statements for the year ended 31st March, 20X2.



Analysis – II


1. XYZ was appointed as auditors of ABC in March,
20X2 and thus, did not observe the counting
of the physical inventories at the beginning of
the year. XYZ was also unable to obtain assurance
by alternative means concerning inventory
quantities held at 31st March, 20X1 in view of
the database issue. Since opening inventories
enter into the determination of the results of
operations and cash flows from operating activities,
in the absence of adequate alternative
audit procedures, XYZ would need to consider
whether to issue a qualified/modified opinion
for the year ended 31st March, 20X2. 

Analysis – III


1. In India, the Code of Ethics prohibits a
Chartered Accountant in practice from
disclosing information acquired in the course
of his professional engagement to any 



person other than his client. As such, an auditor
cannot provide access to his working papers
to another auditor. Therefore, keeping in view
the requirements of Code of Ethics, XYZ may
not be able to review working papers of PQR.


2. It may be noted that the draft revised Code of
Ethics finalised by the Ethical Standards Board
(ESB) of the ICAI in January, 2014 proposes that
disclosure of client information by a member
would be appropriate where such disclosure is
required by law and is authorised by the client
or where disclosure is required for compliance
with technical standards.


Analysis – IV

1. The fact that previous period’s figures were unaudited
does not absolve XYZ from its responsibility
of obtaining evidence on opening balances.
XYZ should consider including under an Other
Matter paragraph in the auditor’s report stating 
that the corresponding figures are unaudited.


Concluding remarks

Compliance of SA 510 would enable an auditor
to satisfy himself that the opening balances do
not contain misstatements that materially affect
the current period’s financial statements and appropriate
and consistent accounting policies are
followed in both the prior and current periods.
This would also increase the credibility of the financial
statements by ensuring comparability even
though the auditors may have changed during the
year. As is the practice internationally, review of
work papers of predecessor auditor by successor
auditor is a proposition worth considering, more
so in light of audit rotation requirements stipulated
in the Companies Act, 2013. Such disclosure
of client information could be subject to the adequate
safeguards in terms of prior consent with
the client, hold harmless agreements
etc. This is
a subject matter which may gain more traction
in coming times.

ITO vs. Theekathir Press ITAT Chennai `B’ Bench Before Dr. O. K. Narayanan (VP) and V. Durga Rao (JM) ITA No. 2076/Mds/2012 A.Y.: 2009-10. Decided on: 18th September, 2013. Counsel for revenue/assessee: Guru Bhashyam/J. Prabhakar

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Section 40(a)(ia)– Since there is a judicial controversy on whether section 40(a)(ia) applies to amounts that have already been “paid” or it is confined to amounts “payable” at the end of the year, the rule of judicial precedence demands that the view favorable to the assessee must be adopted.

Facts:
The Assessing Officer disallowed the claim of certain expenditure u/s. 40(a)(ia) on the ground that the tax has not been deducted at source. Aggrieved, the assessee preferred an appeal to the Commissioner of Income-tax (Appeals) who allowed the appeal by stating that the amounts `payable’ only attract disallowance u/s. 40(a)(ia) and the amounts already paid would not attract the provisions of section 40(a) (ia).

Aggrieved, the Revenue preferred an appeal to the Tribunal where it relied on three decisions of Calcutta High Court and Gujarat High Court which have held that the law stated by the Special Bench in Merilyn Shipping & Transports vs. Addl CIT is not acceptable.

Held:
The Tribunal noted that the judgment of the Allahabad High Court is in favour of the assessee but the orders of the Calcutta High Court and the Gujarat High Court are against the assessee. It held that in such circumstances, the rule of judicial precedence demands that the view favourable to the assessee must be adopted, as held by the Hon’ble Supreme Court in the case of CIT vs. Vegetable Products Ltd. 88 ITR 192 (SC). In view of the fundamental rule declared by the Hon’ble Supreme Court, the Tribunal following the judgment of the Allahabad High Court, which is in favor of the assessee, held that the disallowance u/s. 40(a)(ia) applies only to those amounts which are `payable’ and not to those amounts which are `paid’.

The appeal filed by the revenue was dismissed.

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A. P. (DIR Series) Circular No. 105 dated 17th February, 2014

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External Commercial Borrowings (ECB) – Reporting arrangements

Annexed to this circular is the new ECB-2 Return. Part E of ECB-2 Return has been modified to capture details of financial hedges contracted by corporates, their foreign currency exposure relating to ECB and their foreign currency earnings and expenditure.

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A. P. (DIR Series) Circular No. 104 dated 14th February, 2014

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Foreign investment in India by SEBI registered FII, QFI and long term investors in Corporate Debt

This circular states that the sub-limit for investment in Commercial Paper by FII, QFI & other long-term investors is reduced from US $3.50 billion to US $2 billion with immediate effect. However, there is no change in the total Corporate debt limit which will continue to be US $51 billion.

The revised position, subject to operational guidelines to be issued by SEBI, is as under: –

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A. P. (DIR Series) Circular No. 103 dated 14th February, 2014

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Import of Gold/Gold Dore by Nominated Banks/ Agencies/Entities – Clarifications

This circular contains clarification with respect to import of Gold as well as Gold Dore as under: –

Import of Gold

1. In case of Advance Authorisation (AA)/Duty Free Import Authorisation (DFIA) issued before 14th August, 2013, the condition of sequencing imports prior to exports will not be insisted upon even in case of entities/units in the SEZ and EOU, Premier and Star Trading Houses.

2. The imports made as part of the AA/DFIA scheme will be outside the purview of the 20:80 Scheme and will be accounted for separately and will also not entitle the Nominated Agency/Banks/Entities to any further import.

3. The Nominated Banks/Agencies/Entities can make available gold to the exporters (other than AA/ DFIA holders) operating under the Replenishment Scheme.

4. Import of gold in the third lot onwards will be lesser of the two:

a. Five times the export for which proof has been submitted; or
b. Quantity of gold permitted to a Nominated Agency in the first or second lot.

A revised working example of the operations of the 20:80 Scheme is Annexed to this circular.

Gold Dore

1. Refiners are allowed to import Gold Dore of 15% of their license for each of the first two months.

2. Where import quantity has already been identified by DGFT for first two lots, import of such quantity must be in compliance with the guidelines issued vide A.P. (DIR Series) Circular No. 82 dated 31st December, 2013.

3. DGFT can include new refiners, and fix license quantity for them.

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A. P. (DIR Series) Circular No. 101 dated 4th February, 2014

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Export of Goods and Services: Export Data Processing and Monitoring System (EDPMS)

This circular states that RB has developed a new comprehensive IT-based system called EDPMS which will facilitate the banks to report various returns like XOS (export outstanding statements), ENC (Export Bills Negotiated/sent for collection) for acknowledgement of receipt of Export documents, Sch. 3 to 6 (realisation of export proceeds), EBW (write-off of export bills), ETX (extension of realisation of export bills) relating to Export transaction through a single platform.

The date of inception of the system along with user credentials and web link for accessing the system will be communicated to the banks through email. However, banks are required to submit a fill-in form (as per format annexed to the circular) through email on or before 10th February, 2014 to obtain user name and password.

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A. P. (DIR Series) Circular No. 102 dated 11th February, 2014

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Foreign Direct Investment – Reporting under FDI Scheme: Amendments in form FC-GPR

Annexed to this circular is the new Form FC-GPR. The change in Form FC-GPR has been made to capture details of FDI as regards Brownfield/Greenfield investments and the date of incorporation of the investee company in Clause No. 1 of the said Form

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A. P. (DIR Series) Circular No. 100 dated 4th February, 2014

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Third party payments for export/import transactions

This circular has, with respect to third party payments for export/import transactions, made the following changes:

1. Removed the conditions that a “firm irrevocable order backed by a tripartite agreement should be in place”. This is subject to the following: –

a. Bank has to be satisfied with the bonafides of the transaction and export documents, such as, invoice/FIRC.

b. Bank has to consider the FATF statements while handling such transaction.

2. The limit of US $100,000 eligible for third party payment for import of goods stands withdrawn. As a result third party payments for imports can be made without any limit.

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A. P. (DIR Series) Circular No. 99 dated 29th January, 2014

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Foreign investment in India by SEBI registered Long term investors in Government dated Securities

Presently, FII, QFI and other long term investors registered with SEBI, viz. Sovereign Wealth Funds (SWF), Multilateral Agencies, Pension/Insurance/ Endowment Funds and Foreign Central Banks, are permitted to invest up to US $30 billion, on repatriation basis, in Government dated securities. Out of the above limit of US $30 billion, a sub-limit of US $5 billion has been marked out for investment by other long term investors registered with SEBI.

This Circular has increased the said sub-limit of US $5 to US $10. As a result, other long term investors registered with SEBI, viz. Sovereign Wealth Funds (SWF), Multilateral Agencies, Pension/Insurance/ Endowment Funds and Foreign Central Banks, can now invest up to US $10 billion in Government dated securities within the overall limit of $30.

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More Delays in Mergers/ Arrangements – A Recent MCA Circular Prescribes Further Requirements for Schemes

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Synopsis

Section 394A of the Companies Act 1956 requires Central Government [powers delegated to Regional Directors] to prepare report on schemes involving arrangement, mergers, amalgamation, etc. of companies for its submissions to Court. Recently, MCA has issued Circular No. 1/2014 dated 15 January 2014 requiring Regional Directors to also seek the representation of the Income-tax Department and/or other sectoral regulators while preparing the aforesaid Report. The learned author in this article explains the new requirements in the Circular, their impact on the schemes and comparison with the existing requirements under the provisions of the Act/ Rules and Companies Act, 2013.

New prescriptions

Mergers have just got a little more complicated and even more time consuming than earlier. Yet another round of notices/objections by statutory authorities have been added to even otherwise a fairly long existing list. Now, the Ministry of Corporate Affairs (MCA) requires that the Regional Director should invite, in certain cases, objections to a scheme of amalgamation/arrangement, etc. (Schemes) from other regulators like Income-tax department, SEBI, RBI, etc. – refer circular number F. No. 2/1/2014 dated 15th January 2014.

Abuse of Schemes

Mergers, demergers, schemes of arrangements/ reduction, etc. have often been used, with the incidental or even main object to circumvent various laws, avoid taxes, window dress accounts, etc. Carried forward losses may be made available to other profit making companies to help reduce their taxes. Reserves otherwise not “free” become so after such schemes. Items of expenditure/losses that should have gone to reduce profits are debited to reserves. The rules relating to listing of shares on stock exchanges may also be sought to be bypassed. Even shareholders’ wealth have been found to be expropriated by schemes such as that for forced buybacks of shares and so on.

The impression – and this is only partly correct – is that the ‘scheme’ing parties are often able to convince the court that, since shareholders/creditors have duly approved the scheme and that there is nothing wrong on the face of the scheme, it should be approved. The court is also sought to be persuaded that its role is limited in such cases and, particularly when the interested parties have not objected before the court, the court should sanction the Scheme. Belated objections are also sought to be rejected.

Interestingly, existing provisions for sanction of such schemes already require a series of approvals under direct supervision of the high court. This is without considering several specific approvals/clearances/filings required under other laws. The schemes almost always require approvals of shareholders/creditors at meetings conducted under court’s supervision. Depending upon the type of scheme, a detailed audit is required to be carried out by a specially appointed auditor. A notice has to be served to the Regional Director seeking his comments, on behalf of the Central Government. Finally, the Court has to sanction the scheme. Often, this ends up being a bureaucratic nightmare with the petitioners having to run from the proverbial pillar-to-post to expedite things.

To add to this, now, the MCA has added yet another window of delay and objections from multiple authorities. Let us understand what the new requirement is.

New requirement of inviting objections from other regulators including income-tax authorities

As stated above, a notice has to be served, as required by section 394A, on the Regional Director (RD) of the proposed scheme. The RD acts for this purpose on behalf of the Central Government. The Court is required into consideration the representations, if any, of the RD.

Other regulators/departments such as the Incometax department usually do not have a direct role in the proceedings though of course they may still object directly to the court. Such other regulators/ departments may of course also convey their views to the RD.

However, it was recently found,by the MCA (so the circular states), that the RD ‘did not project the objections of the income-tax department’ in a particular scheme. Considering this, certain obligations have been placed on the RD.

It is now prescribed that the RD should do two things. Firstly, when it receives such a notice of scheme u/s. 394A, it has to invite specific comments from the income-tax department. If no comments are received within 15 days of receipt of communication from the RD, the RD may presume that the Income-tax department has no objections.

Secondly, the RD should also examine the scheme to consider whether feedback from other sectoral regulators should be obtained. If yes, a similar opportunity should be given to them. Though not named, it appears that comments of regulators like SEBI, RBI, etc. may be invited in appropriate cases. It is quite possible that in practice, the RD may routinely send the scheme to various regulators for their comments.

What should the RD do if comments are received? Does it merely forward them like a post office? The answer is, generally, yes. The RD is not required to decide on the correctness or otherwise of the comments and rightly so. However, the RD is still given some discretion. If it has ‘compelling’ reasons to doubt the correctness of the comments, then it is required to make a reference to the MCA. The MCA, in turn, will take up the matter before the concerned other Ministry before taking a final decision on what approach to take before the Court.

Needless to emphasise, the individual regulators/ departments are free to appear directly before the court and make their objections.

However, the objections/comments of the regulators/ departments are binding on the court. The court has wide power and discretion to examine the specific objections on their merits and may accept or reject the same.

Impact on Schemes

In theory, it may appear that the new requirement is beneficial and does not create any fresh hurdle or delay. It ensures that that the interests of various stakeholders whom the regulator represents are taken into account. The 15-days period for submissions of comments may not, in practice, really add to the overall time taken for attaining sanction of the court. The court would also have the benefit of all views before sanctioning the scheme. The applicants may also have to worry less of regulators raising objection later when irrevocable steps of implementing the scheme may have been taken.

In practice, however, it is quite likely that this would add to the delay and possibly make the matter more litigious. Often, a scheme may involve serious tax implications. It will have to be seen whether the Income-tax department promptly replies with all its detailed objections in 15 days. What would happen if the income-tax department (or other regulator) seeks extension of time?

Interestingly (as also discussed later), there already exist specific requirements for inviting comments from certain authorities. For example, in case of certain schemes involving listed companies, the draft scheme has to be filed with the stock exchange 30 days in advance during which they may give their comments. Courts have held that if the stock exchange does not respond within 30 days, the scheme does not have to be held up and the court may still go ahead and sanction it. Thus, it is possible that the parties may represent before the court to go ahead and consider the scheme in case of delay in receipt of comments. Granting of time to a regulator is at the discreation of the court however in practice it is quite likely that extension of time will be granting resulting overall delay particularly in complex cases. One has also to remember that the delay may come from any of the various regulators/department to whom the RD has sent notice.

Existing requirements of approval/NOCs, etc.

As stated earlier, the new requirement is in addition  to the several existing requirements by various authorities/regulators. In fact, there is a contradiction in approach in several provisions. On the one hand, several provisions give exemption if the restructuring is carried out through the court route. The SEBI Takeover Regulations, for example, give exemptions where the acquisition of shares is through specified    schemes.    The     Income-tax    Act,     1961     too    grants exemptions to transfers made through specified Schemes. At the same time, there are provisions for obtaining clearances/approvals or just a notice
in some laws.

For example, under certain circumstances, prior approval of the Reserve Bank of India would be required in    case    of    mergers    of    non-banking    financial    companies. The Listing Agreement requires listed companies, under    certain    circumstances,    to    file    the    proposed    scheme 30 days in advance with stock exchanges. There is even an overriding requirement that schemes should not be used to circumvent securities laws.

However, the new requirement inreases one general layer    of    scrutiny    whereby    a    specific    notice     is     to    be given to Income-tax department and the RD is also required to generally consider whether notice to other regulators should also be given.

Companies Act, 2013

The    provisions    of     this    Act,     though    not    yet    notified in this respect, provide for a generic, though ambiguously worded, requirement of giving notice. Section 230(5) of the Act requires that a notice with prescribed documents would have to be sent to ‘the Income-tax authorities, the Reserve Bank of India, the Securities and Exchange Board, the Registrar,     the     respective     stock    exchanges,     the    official liquidator, the Competition Commission of India….. and such other sectoral regulators or authorities that    are    likely    to    be    affected    by    the compromise or    arrangement and shall require that representations, if any, to be made by the authorities within a period of thirty days from the date of receipt of such notice, failing which, it shall be presumed that they have no representation to make on the proposals’.

The    scope    of    this    prescription    is    different    from    that set out in the circular. It is wider in some aspects but narrower in others. It requires that a notice has to be    given    to all     the    specified    authorities    and    others too    which    are     likely    to    be    affected    by         the    scheme.    It may sound strange that authorities like SEBI are to be    notified    even     in    cases    where     the    companies involved    may    be    unlisted    or    otherwise    not    affected    by regulations governed by SEBI. Perhaps the intention is, as appears from latter words, that only those    authorities.    who    are     likely     to    be    affected    by a     scheme     should    be     so    notified.   

Conclusion

Authorities/regulators like SEBI, MCA, RBI, Income-tax, etc. do have powers to examine the merger and its implications even after the scheme is sanctioned. If the scheme results in violation of any requirements specified    under     the     respective     laws,     they    can     take appropriate action. For example, the Reserve Bank   of    India    can    initiate    action    if    a    non-banking    financial   company is amalgamated in a manner that any of the requirements of the Act/Directions are contravened. Similarly, SEBI/stock exchanges have powers to examine the implications in case of a merger. Thus, it is not as if that a cheme, on approval, would make the provisions of such laws redundant.

However, at the same time, certain schemes may have consequences which cannot be annuled. For example, there have been schemes of forced buyback of shares whereby shares of even dissenting shareholders or those who have not positively consented    have    been    bought    at     specified    price.    Once this is done, it may be too late for the regulators concerned to take corrective action.

Thus, this new requirement gives an opportunity, to the concerned authorities to examine and present their objections before the court, either directly or through the RD. This would/should avoid subsequent action by the Regulators who were given the requisite notice.

Only time will show whether these new requirement will save time and avoid subsequent action. I believe we don’t need more laws – what is required is better administration.

Jointly Acquired Immovable Property

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Synopsis

‘Joint tenancy’ and ‘tenancy in common’ are two apparently similar sounding but diametrically opposite modes of jointly owning immovable property. The Indian Law in this respect is not codified and is derived from English Law and decisions. This Article examines these concepts, their difference, their termination and their use in Hindu Law, Income-tax Act, Succession Law, etc.

Introduction

Immovable Property may be acquired singly or jointly, i.e., two or more persons together acquire the property. While joint owners are commonly referred to as co-owners, when the property is joint, then a question arises whether the purchasers are owning the property as Joint Tenants or as Tenants in Common? Both these terms may appear similar but in Law, there is a vast difference between the two. Depending upon how a property has been acquired the succession to the same would be determined. It may be noted that although the terms may indicate that this applies only to tenanted properties, they are also used for ownership properties. Hence, it becomes very important while acquiring a property that the document very clearly specifies the manner in which it is being jointly acquired. It is very interesting to note that inspite of this being a matter of such significance, neither the Transfer of Property Act, 1882 nor any other Indian enactment deals with these concepts. These are very popular under English Law and hence, we need to refer to English as well as Indian judgments to understand their essence. These concepts have been impliedly or expressly applied in various Laws. Let us examine some of the facets of these two important concepts in Property Law.

Joint Tenancy

A joint tenancy has certain distinguishing features, such as, unity of title, interest and possession. Each co-owner has an undefined right and interest in property acquired as joint tenants. Thus, no coowner can say what is his or her share. One other important feature of a joint tenancy is that after the death of one of the joint tenants, the property passes by survivorship to the other joint tenant and not by succession to the heirs of the deceased coowner. For example, X, Y and Z are owning a building as joint tenants. Z dies. His undivided share passes on to X and Y. Joint Tenancy is generally resorted to in case of a house purchased by a husband and wife. Hence, after the death of the husband, the wife would become the sole owner, and not the heirs of the husband. This is very popular in England. Property owned by a Hindu coparcenary in which rights of family members pass by survivorship is an example of joint tenancy – Bahu Rani vs. Rajendra Bux Singh, AIR 1933 PC 72. In case of a Will, where property is bequeathed to two or more beneficiaries in an undefined share, then it may be treated as a joint tenancy.

Tenancy-in-Common

This is the opposite of joint tenancy since the shares are specified and each co-owner in a ‘tenancy-in– common’ can state what share he owns in a property. On the death of a co-owner, his share passes by succession to his heirs / beneficiaries under the Will and not to the surviving co-owners. If a Will bequeaths a property to two beneficiaries in the ratio of 60:40, then they are treated as ‘tenantsin- common’.

Section 26 of the Income-tax Act provides that where property consisting of building and land appurtenant thereto is owned by two or more persons and their respective shares are definite and ascertainable, then the income under the head House Property shall not be taxed as if it were an AOP but in their individual hands in accordance with their respective shares. The Supreme Court in Indira Balkrishna, 39 ITR 546 (SC) has held that co-widows inheriting property from their husband in equal shares would be assessed u/s. 26. This section is a recognition of the concept of tenancy-in-common. However, for section 26 to apply, the shares must be fixed or clear. In Sh. Abdul Rahman, 12 ITR 302 (Lahore), it was held that due to a litigation it was impossible to determine the shares of co-owners and hence, the provisions of this section could not be applied.

Transfer of Property Act

Section 45 of the Act provides that where immoveable property is purchased two or more persons and the consideration for the same is paid out of a common fund, their share in the property is in the same ratio as their contributions to the funds. This however, is subject to a contract to the contrary. For instance, A and B’s share in common funds is in the ratio of 55:45 for buying a land. Their shares in the land would also be in the same ratio. If they contribute through separate funds then their share would be in the proportion of their funds. However, if there is no indication as to their share in the fund, then they shall be presumed to be equally interested in the property. Thus, if the shares in the funds are not known, then A and B would be presumed to hold the land equally.

However, this section does not yet fully address the issue as to whether the transferees buy as joint tenants or as tenants-in-common. In cases where the property has been acquired out of a common fund and the intention of the co-owners to own the property as joint tenancy, then it may be treated as one. In cases, where their shares in the fund are clear and demarcated, it may be treated as an acquisition by tenants in common.

What Prevails in India?

Unless a contrary intention appears from the Agreement, the Courts in India always lean in favour of tenancy in common and against joint tenancy. This is so whether the acquisition is by way of an Agreement or under a Will. The main clauses must make it very clear that the property is to be held as joint tenants or else the contrary would always be presumed – Mahomed Jusab Abdulla vs. Fatmabai Jusab Abdulla, 1947 BCI (O) 4 (Bom); Konijeti Venkayya vs. Thammana Peda Venkata Subbarao, 1955 AIR 1957 AP 619.

The Supreme Court in Boddu Venkatakrishna Rao vs. Boddu Satyavathi, 1968 SCR (2) 395 has held as follows in relation to a bequest under a Will to more than one beneficiary:

“The principle of joint tenancy appears to be unknown to Hindu law, except in the case of coparcenary between the members of an undivided family……………………..that there were indications in the will that the intention of the testatrix was that the foster children should take as joint tenants and that this was apparent from the clause in the will which provided that “the entire property should be in possession of both of them and that both of them should enjoy throughout their lifetime the said property and that after their death the children that may be born to them should enjoy the same ……

We do not think that from this one can spell out a joint tenancy which is unknown to Hindu law except as above stated. The testatrix did not expressly mention that on the death of one all the properties would pass to the other by right of survivorship. We have no doubt on a construction of the will that ‘the testatrix never intended the foster children to take the property as joint tenants. The foster children who became tenants in common partitioned the property in exercise of their right.”

The above position of HUF coparcenary property being joint tenancy property is subject to one important exception introduced by section 30 of the Hindu Succession Act, 1956. According to this section, any Hindu may dispose of by a Will his undivided interest in the coparcenary property. Under the uncodified Hindu Law, no karta/coparcener could dispose of his undivided share in the coparcenary property. His share passed by survivorship and not by succession (as is the case with all joint tenancies). Now, section 30 permits a coparcener to make a Will even for such joint property – Jayaram Govind Bhalerao vs. Jaywant Balkrishna Deshmukh 2008(3) Bom. CR. 585; CWT vs. Sampatrai Bhutoria & Sons, 137 ITR 868 (Cal). The Supreme Court in the case of Shyam Lal vs. Sanjeev Kumar (2009) 12 SCC 454, has held that:

“…In so far as the question whether under the custom governing the parties, a Will could be executed in respect of ancestral property is concerned, the same is no more res integra. ………in view of section 30 read with section 4 of the Hindu Succession Act, 1956 a male Hindu governed by Mitakshara system is not debarred from making a Will in respect of coparcenary/ancestral property….”

Even if there is anything contrary in the Act or any other custom, the interest in Mitakshara coparcenary property is capable of being disposed of by way of Will. The bar created by way of custom that the coparcenary property is not capable of being alienated by executing a will by one of the coparceners is    taken    away    and rule    of    survivorship    is    finished    to a limited extent. But the limitation continues to apply in the case of gift and other alienations which are inter vivos – Kartari Devi vs. Tota Ram, 1992(1) SLC 402 (HP).

After the 2005 Amendment to the Hindu Succession Act, even daughters who are coparceners can make a Will for their coparcenary property since they are now at par with sons.    
 
The Indian Succession Act, 1925 states that where a legacy under a Will is given to two persons jointly and one of them dies before the person making the Will, then the other legatee takes the property in its entirety. But if the intention of the testator was to give them distinct shares (i.e., as tenants in common), then the surviving legatees gets only his share. These provisions even apply to a Will by a Hindu – Krishnadas Tulsidas vs. Dwarkadas aliandas, 1936 BCI (O) 47. Thus, unless the Will is very clear that the legatees must not have a determinate share, they will get their bequest as tenants in common.

Terminating Joint Tenancy

Joint tenancy can come to an end by any one of the following modes:
(a)   One of the co-owners selling his undivided share to an outsider;
(b)  Mutual Agreement amongst all the co-owners;
(c)   Partition of joint tenancy
(d)   A manner of dealing/conduct by all co-owners which indicates an end of joint tenancy
(e)   Property vesting in the last surviving co-owner after which it becomes his sole property

Termination of joint tenancy by mutual agreement along with termination by conduct require special attention. Various old as well as very recent English decisions have dealt with this issue of termination of joint tenancy. Once joint tenancy comes to an end, the co-owners continue to hold the property as tenants in common.  Some of the landmark English decisions in this respect are as follows:
(a)  Williams vs. Hensman, 1861 EWHC Ch J87 / 70 ER 862 This is the most important decision which has laid down how joint tenancy can be severed. The High Court of Chancery held as follows:

“A joint-tenancy may be severed in three ways: in the first place, an act of any one of the persons interested operating upon his own share may create a severance as to that share. The right of each joint-tenant is a right by survivorship only in the event of no severance having taken place of the share which is claimed under the jus accrescendi. Each one is at liberty to dispose of his own interest in such manner as to sever it from the joint fund –losing, of course, at the same time, his own right of survivorship. Secondly, a joint-tenancy may be severed by mutual agreement. And, in the third place, there may be a severance by any course of dealing sufficient to intimate that the interests of all were mutually treated as constituting a tenancy in common………………for it must be borne in mind that a joint-tenancy is a right which any one of the joint-tenants may determine when he pleases; and, if all continue to deal on the footing of their interests not being joint, it would be most inequitable to treat it as a joint-tenancy when all the parties, whether in ignorance or not, have dealt with their interests as several.

I am of opinion, therefore, that the continuance of a joint-tenancy is not reconcilable with the covenant of indemnity to which I have referred; and I must, therefore, hold that all the shares were severed.”

(b)   Rugh Burgess vs. Sophia Rawnsley, (1975) EWCA Civ 2
 In this case, it was held that even if an agreement terminating joint tenancy was not in writing and was not specifically enforceable, yet it was  sufficient     to    effect    a    severance.    All     that     is     required    is a clear evidence of intention by both parties that the property should henceforth be held in common and not jointly.

(c)   Wallbank vs. Price (2007) EWHC 3001  (Ch)
The essence of a joint tenancy in equity is that each joint    tenant    holds    the    whole    of    the    beneficial    interest jointly and holds nothing separately.  In this case a declaration by a mother that her daughters should receive her ‘half share’ either on the disposal of the property or at the discretion of the father, was
treated    as    sufficient    evidence    to    indicate    severance    of joint tenancy.

 (d)    Davis vs. Smith, (2011) EWCA Civ 1603
A married couple intended to serve on each other, a notice of severance of joint tenancy over their marital house, but did not. The Court held that, on carefully examining the correspondence between the parties’ solicitors, their conduct and actions, joint tenancy was severed through their course of dealings. The Court added that the conclusion of a split was inevitable and only appropriate considering the course of dealings between them.  This is a very important decision since it held that even though there was no formal severance, tenancy-in-common can be created.    

Termination of Tenancy in Common
Tenancy in Common can be terminated by any one of the co-owners buying out the shares of the other co-owners. Thus, after this the property becomes sole ownership.  This is usually done by way of a Release Deed, under which the releasers release their share in favour of a co-owner, usually for some consideration.

The decision of the supreme Court in TN Aravinda Reddy, 120 IR 46(SC) dealt with a case of termination    of    a    HUF’s     joint     tenancy    property    by    way    of    a partition.     By    way     of     a     partition     deed,     the    HUF property was held by four brothers as tenants-in-common, with each having a 25% interest in the same. Subsequently, three brothers executed a release deed for their respective 25% share for a consideration in favour of the fourth brother, thereby making him the sole owner. The Court held that the acquisition of the shares by way of a release deed amounted to a purchase u/s. 54 of the Income-tax Act by the fourth brother.  

In Maharashtra, a release deed attracts stamp duty as on a conveyance on the fair market value of the share released. However, if the property released is ancestral property and it is released in favour of     certain    defined     relatives,     then     the     stamp    duty is only Rs. 200. Further, in case of a release of property without consideration, the provisions of section 56(2)(vii) of the Income-tax Act, must also be considered in all cases where the parties are not “relatives” within the meaning of the section. Conversely in cases where release is for consideration, capital gains tax incidence on the releaser must be kept in mind.

Tenancy in common can also be converted into joint tenancy by throwing such a property into the joint HUF    hotchpotch    after    which    date    it    would    be    treated    as    HUF    property    where    no    one    member    would    have  a determinate share. However, in such a case, the clubbing provisions u/s. 64(2) of the Income-tax Act should also be factored.   

Conclusion
The Law in respect of jointly acquired immovable property is quite multi-faceted and complex. Since in India, it is entirely case law made, it becomes all the more unique. It would be advisable that while making an agreement for purchasing a property, making a Will, etc., the provisions relating to manner    of     joint    acquisition     is     very     clearly     specified.     If the intention is, for any reason, to acquire it as joint tenancy, then the wordings should be very clear.

PART A: ORDERS OF CIC & THE HIGH COURT

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Personal Information and larger Public interest: Sections 8(1)(j) and 8(2) of the RTI Act:

• Vide RTI dated 31-08-12, Anil Bairwal had sought certain Information claiming copies of Income tax Returns with other documents of Biju Janata Dal for A.Y. 2002-03 to 2011-12.

CPIO/ITO Ward 1(2), Bhubaneswar, vide letter dated 12-09-12, informed the appellant that the information sought related to a third party, their views were sought and the third party had objected to any information being shared. It was pointed out by the party representative that since they do not receive any grant from the government directly or indirectly, u/s. 2(h) of the RTI Act, it is not a “Public Authority” and information regarding the party should not be supplied.

FAA upheld the decision of CPIO and relied on the order of the Hon’ble Supreme Court in the case of Girish Ramchandra Deshpande, [RTIR IV (2012) 216 (SC)], stating that no larger Public Interest is involved. Para of the said decision reads as under:

“14.The details disclosed by a person in his Income Tax Return are ‘personal information’ which stand exempted from disclosure under Clause (j) of section 8(1) of the RTI Act, unless it involves a larger public interest……………………………………”

CIC quoted Paras 38 & 47 of its earlier order of 29-4-2008 wherein Biju Janata Dal was also a party. Same reads as under:

“38.The laws of the land do not make it mandatory for political parties to disclose the sources of their funding, and even less so the manner of expending those funds. In the absence of such laws, the only way a citizen can gain access to the details of funding of political parties is through their Income-tax Returns filed annually with Income-tax authorities. This is about the closest the political parties get to accounting for the sources and the extent of their funding and their expenditure. There is unmistakable public interest in knowing these funding details which would enable the citizen to make an informed choice about the political parties to vote for. The RTI Act emphasises that “democracy requires an informed citizenry” and that transparency of information is vital to flawless functioning of constitutional democracy. It is nobody’s case that, while all organs of the State must exhibit maximum transparency, no such obligation attaches to political parties. Given that political parties influence the exercise of political power; transparency in their organisation, functions and, more particularly, their means of funding is a democratic imperative, and, therefore, is in public interest. Insofar as the Income-tax Returns of political parties contain funding details these are liable for disclosure.”

“47. Thus, information which is otherwise exempt, can still be disclosed if the public interest so warrants. That public interest is unmistakably present is evidenced not only in the context of the pronouncements of the Apex Court but also the recommendations of the National Commission for the Review of the Working of the Constitution and of the Law Commission.”

The Commission then ruled:

“In view of the fact that a larger public interest has been established by the Commission in the judgment referred to above, the disclosure of IT Returns of Biju Janata Dal does not fall in the exemption Clause of section 8(1) (j) of RTI Act. The CPIO is directed to provide the information sought within three weeks of receipt of this order.”

[Anil Bairwal vs. ITO, ward 1(2) and JCIT, Range-I, Bhubaneswar: Decided on 24-12-2013 Citation: RTIR I (2014) 58 (CIC)]

• Gurdev Singh had sought details of the Transfer cases and pending cases since 2005 under GPA/SUB GPA

Vide Order dated 4th July, 2013, CPIO informed the appellant that information sought is not specific in nature and is not available in the compiled form. CPIO further offered an opportunity for inspection.

FAA upheld the decision of CPIO. In the second appeal before the Commission, it decided as under:

“Both sides have presented their arguments. Appellant pleaded for disclosure of this information in the larger public interest as he has alleged that the policy benefits were extended in a most arbitrary fashion through pick-and-choose action and that those who were left out were not given any reasons for having been denied the benefits that were extended to other applicants who had applied along side with them thereby putting them unfairly to great disadvantage. This lack of transparency by the Public Authority in the exercise of its powers, it was argued is contrary to the letter and spirit of the RTI Act and breeds corruption. Commission shares the view that transparency is an essential ingredient for good governance. Decisions of the Public Authorities are required to be taken in the larger public interest and must be uniformly administered in a transparent manner. The present case defies these principles and is couched in the dark shade of secrecy. Therefore, as per the provisions of the section 8(2) of the Act, Commission determines that in this case, the disclosure of information outweighs all arguments made in favour of disproportionate diversion of the scare resources of the Public Authority and under the provisions of section 19(8)(a)(iii) requires the Public Authority through the Chairman, Chandigarh Housing Board to establish adequate infrastructure in terms of computers and manpower so that the information sought by the appellant in his RTI application of 17-06-2013 is compiled and placed on the official website of the CHB before 15-06-2014. Commission has given adequate time for completing this exercise as we accept the contention of the respondents that the information sought is maintained in many separate files and will have to be compiled and collated. Commission will review the compliance of the directions held herein above at a later date which will be intimated separately.”

[Gurdev Singh vs. Chandigarh Housing Board, UT Chandigarh: Decided on 11-12-2013: Citation: RTIR (2014) 51 (CIC)]

• FIEM Industries Ltd.:

FIEM industries Ltd. had challenged before the H.C. the Order of SIC, Haryana and Ors. directing PIO to furnish the information sought by the RTI applicant.

The information sought was details of a raid conducted on the petitioner by the VAT authorities and regarding alleged tax evasions by various companies including the petitioner company.

The petition company relied upon the judgment of the SC, in Girish Ramchandra Deshpande vs. CIC and others.

The Court ruled:

“To my mind the judgment could not be strictly applicable to the facts of the present case.” Consequently, the petition was dismissed.

[FIEM Industries Ltd vs. SIC, Haryana and Ors. Decided by the High Court of Punjab and Haryana on 18.12.2013: Citation RTIR I (2014)104 (P&H)]

BS/C/2012/000279/3569: RTIR IV (2013) 163 (CIC)]

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Limitation – Sale of Minors property without permission of court – Suit not filed by minor within 3 years from date of attaining majority – Barred by limitation : Limitation Act 1963 and Hindu Minority and Guardianship Act, 1956 section 8(2)(3).

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H.M. Rudraradhya vs. Uma & Ors AIR 2014 Karnataka 2.

The plaintiff after her marriage instituted a suit for declaration that the sale deed is not binding on her interest in the suit property and for partition of her share.

The trial court dismissed the suit holding that it is barred by limitation. It was of the opinion that Article 60 of the Limitation Act is applicable to the suit and it was not filed within 3 years from the date of attaining of majority by the plaintiff.

The Hon’ble Court observed that it is not in dispute that the suit property was gifted to Lingarajamma i.e., the mother of the plaintiff and defendants 2 and 3. The father of Lingarajamma, by name Gurusiddappa, had gifted the suit property under the Gift Deed dated 01-04-1975. Therefore, Lingarajamma was the absolute owner of the suit property on the basis of the gift. It is for this reason, it could be safely concluded that the suit land was not a joint family property. Hence, the provisions of sections 6 and 8 of the Hindu Succession Act, 1956 are not applicable as the said provisions either deal with a joint family property or succession to the property of a male. As Lingarajamma was the exclusive owner of the suit property on the basis of the gift by her father it is general rule of succession in the case of female, Hindu, apply, wherein on the death of Lingarajamma it is her husband, the sons and the daughters are entitled to succeed to her interest in the suit land.

The validity of a sale transaction in respect of the joint family property by ‘Karta’ or ‘adult member’ of a joint Hindu Family depends upon the existence of the legal necessity. At the time of its alienation, though a minor in the joint family has an undivided interest in the property alienated, if a suit is instituted challenging such alienation of a joint family property by a ‘Karta’ or an ‘adult member’ of the joint Hindu family and if it is proved that the same was not for legal necessity, the plaintiff who is not a party to the sale transaction could ignore the alienation and claim her share even in the property alienated. In such circumstances, it is the provisions of Article 109 of the Limitation Act which are attracted and the plaintiff can institute the suit within 12 years from date of alienee takes possession of the property.

Admittedly, the sale of the suit property in favour of the 1st defendant was on 04-06-1987. The suit instituted by the plaintiff is not within 3 years of her attaining the age of majority. Therefore, in view of the provisions of Article 60 of the Limitation Act, the suit was barred by time.

When the sale transaction is voidable transaction and it is for the plaintiff, to sue for possession of the property and it is incumbent upon him to pray for such a relief. Even otherwise, the plaintiff has prayed for a declaration that the Sale Deed is not binding on her interest in the suit property and this relief is similar to setting aside the sale, which is contemplated under Article 60 of the Limitation Act and in the absence of the said relief, the suit itself cannot be maintained.

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Limitation – Acknowledgement of debt – By email – constitutes valid and legal acknowledgement: Information Technology Act, section 4.

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Sudarshan Cargo P. Ltd. vs. M/s. Techvac Engineering P. Ltd. AIR 2014 Karnataka 6.

On account of non-payment of the amounts due under the invoices by respondent to the petitioner there was exchange of correspondence by email between the parties. Respondent company by its email dated 14-01-2010 has informed the petitioner that on account of delay in tie up of its funds payments were not made and respondent has also informed the petitioner that it would be sending its statement of accounts for reconciliation and will make arrangements of funds to pay the dues of the petitioner. Subsequently, on 06-04-2010 there was one more email from respondent to petitioner, whereunder, it has categorically admitted that it is in a position to make a commitment of settling the dues of the petitioner starting from the said month. It is also agreed to, thereunder, that first payment would be made between 10th and 15th of the said month namely April, 2010. Respondent has also categorically stated that it would clear all the dues by the end of May, 2010. Having said so, respondent did not pay the amounts to the petitioner and as such a statutory notice came to be issued by the petitioner on 04-12-2012

The petition was filed u/s. 433(e), (f) and 436 read with section 434 of the Companies Act, 1956 seeking winding up of the respondent Company on the ground that it is unable to pay debt due to petitioner.

An objection was raised that alleged debt due to the petitioner by respondent was time barred. It was contended that invoices were raised by the petitioner during September, October and November, 2008 and present petition has been filed in 2013 and as such debt in question is barred by limitation. Elaborating the submissions it was contended that alleged acknowledgement of debt from respondent to petitioner by email dated 06- 04-2010 is not duly signed by respondent and as such it cannot be construed as an acknowledgement of debt since it does not satisfy the criteria prescribed u/s. 18 of The Limitation Act, 1963. Hence, the petitioner is not entitled to recover the amount alleged to be due from respondent.

The Hon’ble Court observed that the word ‘sign’ or ‘signed’ employed in explanation (b) to section 18(2) has not been defined under the Limitation Act, 1963. Explanation merely says ‘signed’ means either personally or by a agent duly authorised in this behalf. It requires to be noticed that even u/s. 3(56) of the General Clauses Act, 1897 the word ‘sign’ has not been defined but has its extended meaning with reference to a person who is unable to write his name to include mark with its grammatical variation and cognate expressions. Undisputedly, an email is a communication addressed to a definite person and it means a person who is intended by ‘originator’ to receive such electronic record as per section 2(b) of IT Act, 2000 and the ‘originator’ would mean a person who sends or transmits any electronic message to any other person as defined u/s. 2(za) of IT Act, 2000. Thus, if an acknowledgment is sent by a ‘originator’ to the ‘addressee’ by email, without any intermediary, it amounts to electronic communication by email which is an alternative to the paper based method of communication. This mode of transaction is legally recognised u/s. 4 of the IT Act, 2000.

A harmonious reading of section 4 together with definition Clauses would indicate that on account of digital and new communication systems having taken giant steps and the business community as well as individuals are undisputedly using computers to create, transmit and store information in the electronic form rather than using the traditional paper documents and as such the information so generated, transmitted and received are to be construed as meeting the requirement of section 18 of the Limitation Act, particularly in view of the fact that section 4 contains a non-obstante clause. Since respondent did not dispute the information transmitted by it is in electronic form to the petitioner by way of message through the use of computer and its network as not having been sent by it to the petitioner, the acknowledgement as found in the emails dated 14-01-2010 and 06-04-2010 originating from the respondent to the addressee namely, petitioner, such emails have to be construed and read as a due and proper acknowledgement and it would meet the parameters laid down u/s. 18 of the Limitation Act, 1963 to constitute a valid and legal acknowledgement of debt due.

Thus, the Hon’ble Court held that an acknowledgement of debt by email originating from a person who intends to send or transmit such electronic message to any other person who would be the ‘addressee’ would constitute a valid acknowledgment of debt and it would satisfy the requirement of section 18 of the Limitation Act, 1963 when the originator disputes having sent the email to the recipient.

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Precedent – Law settled by Supreme Court or Division Bench of High Court – Binding Nature – In case of doubt by another bench, matter to be referred to larger bench: However, the Binding effect will prevail court should not wait for Larger Bench decision:

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Masusmi SA Investment LLC vs. Keystone Realtors P. Ltd. & Ors (2013) 181 Comp Cas. 525 (Bom)

The law laid down by the Supreme Court and the Division bench of the High Court will prevail and is binding on a single judge of the court. An order referring certain issues to be decided by a larger bench does not lay down any law. Only because the correctness of a portion of a judgement has been doubted by another bench, that would not mean that the court should wait for the decision of the larger bench.

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Family Arrangement Document not compulsorily Registrable – Memorandum of family arrangement – Admissible in evidence without being registered or stamped:

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Rasbihart and another vs. The Additional District Judge (Fast Track), Sawai Madhopur, Rajasthan & Others.

The plaintiffs instituted a suit for declaration and cancellation of a registered sale deed dated 11-08- 2004 and mutation No. 1216 dated 20-08-2004 in favour of Bithaldas and consequential injunction. It was the claim of the plaintiff that the suit property was ancestral in nature and hence their predecessor Ballabhdas, arrayed as defendant No. 1 in the suit, had no right to execute the release deed dated 11-08-2004 in favour of Bithaldas defendant No. 3 in the suit.

The plaintiff claimed that this document was a partitition deed and for want of stamp and registration was inadmissible in evidence. According to the plaintiff, from the language of this document, it clearly emerged that it was not a recording of a past event but partition was effected through the document itself and hence as per the provisions of the Stamps Act and Registration Law, the document ought not only to be liable to be properly stamped but registered as well and as the document fell short of both these mandatory requirements, it was inadmissible for all purposes.

The defendant claimed that the document in question was not a partition deed but merely a memorandum of family arrangement and hence was neither required to be stamped nor registered and was admissible for all purposes. It was further contended that the family arrangement had already been acted upon and consequently a second family arrangement was executed and hence the plaintiff cannot challenge the validity of the document dated 23-09-1972.

The court observed that for a document, to be termed as an instrument of partition, leviable to be stamp duty it must be a document effecting transfer. The title to the property in question has to be conveyed under the document. The document has to be a vehicle for the transfer of the right, title and interest. The document has to be the sole repository for the ascertainment of the rights. Each and every document involving the fact of partition cannot be included within the expression ‘instrument of partitition’. A paper, which is recording a fact or attempting to furnish evidence of an already concluded transaction under which the title has already passed, cannot be treated to be such an instrument.

In the instant case, the writing in question was merely a memorandum of family arrangement and not an instrument of partititon requiring levy of stamp duty or required to be compulsorily registered. The property involved was the joint family property of ‘B’ and his three sons and the said fact was admitted in the writing. So, the rights of sons were not created for the first time through this document. The document was not the vehicle for transfer of rights. By the mere fact that the document contained the word like ‘today’ does not make it an instrument of partition, therefore, the writing has held to be a memorandum of family arrangement and admissible in evidence without it being stamped or registered.

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Authorisation Notice not served – Chartered Accountant received the notice on behalf of assessee without authorisation:

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ABG Infralogistics Ltd. vs. State of Maharashtra & Ors Writ Petition (L) No. 2935 and 2936 of 2013 Bombay HC dated 25-11-2013

The Petitioner has raised various contentions including the contention that the petitioner was never served with the notice for the relevant years and that the petitioner or its representative had never appeared before the AO and still the impugned assessment order refers to a Chartered Accountant having attended on 24th June, 2011 and requesting the Assessing Officer for adjournment and considering his request the said Chartered Accountant was called on 26th June 2013, but he did not appear till the date of passing of the asst. order nor any communication was received from him. Hence, the orders were passed u/s. 23(2) of the Maharashtra Value Added Tax Act.

The respondents opposed the petition and submitted that the representative of the petitioner did appear before the Assessing Officer on 24th June, 2013 as mentioned in the ‘roznama’ for the aforesaid two asst. years, 2005-06 and 2008-09, and has therefore received the notice for the asst. years 2005-06 and 2008-09.

The Learned Counsel for the petitioner submits that those two authorisations for the asst. years 2006-07 and 2007-08 were purportedly issued on 28th June 2013, but according to the AO, the said Chartered Accountant appeared for the petitioner on 24th June, 2013 without any authorisation having been produced at the hearing before him.

The Hon’ble Court observed that the petitions involve serious disputed questions of fact as well as questions of law on merits of the controversy and, therefore, it would be appropriate for the petitioner to avail the alternative remedy of filing appeal before the Dy. Commissioner of Sales tax (Appeals). The court directed the petitioner to file appeals before the Dy. Commissioner of Sales Tax (Appeals) within 2 weeks and directed the appellate authority to entertain the appeals and examine all contentions without raising the plea of limitation as far as the filing of appeals was concerned and decide the appeals in accordance with law as expeditiously as possible.

The court further directed that till the appellate authority decided the appeals, the impugned demand notices shall not be implemented or enforced.

As regards the contention of the petitioner that the petitioner had not received any notice for the aforesaid years and had not issued any authorisation in favour of the concerned Chartered Accountant, learned counsel for the respondents has relied upon the authorisation issued by the petitioner in favour of the said Chartered Accountant for the asst. years 2006-07 and 2007-08. The Learned Counsel for the respondents submitted that since the Chartered Accountant was appearing for the petitioner for those two years, the AO proceeded on the basis that the same Chartered Accountant was appearing for the petitioner for the two years under consideration, i.e., 2005-06 and 2008-09.

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Gaps in GaAp – Presentation of Changes in Accounting Policies in Interim Periods

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Synopsis

In this article, the author has touched upon a case of prevailing inconsistencies in the Indian GAAP and the listing agreement. The question raised here is whether changes in accounting policies should be disclosed by way of restatement of results of the earlier periods, while presenting quarterly financial results prepared as per the listing agreement requirements. This question has been analysed by taking into account AS-5, AS-25 and Clause 41 of the Listing Agreement. Read on for the analysis made by the author and a brief comparison with IFRS.

Question

How are changes in accounting policies (other than those required on adoption of new accounting standards) presented in the quarterly financial results prepared as per the listing agreement requirements? Is the impact of change in accounting policy on earlier periods disclosed as a one line item in the current interim period or reflected by restating the financial results of the prior interim periods? Response Let us first consider the requirements of various standards.

AS 5 – Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies

Paragraph 32

Any change in an accounting policy which has a material effect should be disclosed. The impact of, and the adjustments resulting from, such change, if material, should be shown in the financial statements of the period in which such change is made, to reflect the effect of such change.

Paragraph 33

A change in accounting policy consequent upon the adoption of an Accounting Standard should be accounted for in accordance with the specific transitional provisions, if any, contained in that Accounting Standard.

AS 25 Interim Financial Reporting

Paragraph 2

A statute governing an enterprise or a regulator may require an enterprise to prepare and present certain information at an interim date which may be different in form and/or content as required by this Standard. In such a case, the recognition and measurement principles as laid down in this Standard are applied in respect of such information, unless otherwise specified in the statute or by the regulator.

Paragraph 16

An enterprise should include the following information, as a minimum, in the notes to its interim financial statements, if material and if not disclosed elsewhere in the interim financial report:

(a) a statement that the same accounting policies are followed in the interim financial statements as those followed in the most recent annual financial statements or, if those policies have been changed, a description of the nature and effect of the change……..

Paragraph 42

A change in accounting policy, other than one for which the transition is specified by an Accounting Standard, should be reflected by restating the financial statements of prior interim periods of the current financial year.

Paragraph 43

One objective of the preceding principle is to ensure that a single accounting policy is applied to a particular class of transactions throughout an entire financial year. The effect of the principle in paragraph 42 is to require that within the current financial year any change in accounting policy be applied retrospectively to the beginning of the financial year.

Stock Exchange Listing Agreement Clause 41

Clause 41 IV (i)

Changes in accounting policies, if any, shall be disclosed in accordance with Accounting Standard 5 (AS 5 – Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies) issued by ICAI/Company (Accounting Standards) Rules, 2006, whichever is applicable.

Discussion Paper on “Revision of Clause – 41 of Equity Listing Agreement”

Paragraph 4.13

Disclosure of impact of change in accounting policy: If there are any changes in the accounting policies during the year, the impact of the same on the prior quarters of the year, included in the current quarter results, shall be disclosed separately by way of a note to the financial results of the current quarter, without restating the previously published figures.

IV h

Changes in accounting policies, if any, shall be disclosed in accordance with Accounting Standard 5 (AS 5 – Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies) notified under the Company (Accounting Standards) Rules, 2006 (as amended) / issued by the Institute of Chartered Accountants of India (ICAI), as applicable. If there are any changes in the accounting policies during the year, the impact of the same on the prior quarters of the year, included in the current quarter results, should be disclosed separately by way of a note to the financial results of the current quarter without restating the previously published figures. Where the impact is not quantifiable a statement to that effect shall be made.

Executive Summary

1. AS-5 requires the cumulative effect of changes in accounting policies to be disclosed in the current period. The current period could be a financial year or an interim period.

2. AS-25 requires changes in accounting policies to be reflected by restating the financial statements of prior interim periods of the current financial year. Interestingly, AS-25 allows restatement of only prior interim periods of the current financial year. In other words, interim periods of previous financial year are not restated. Therefore under AS-25 results are comparable only with respect to current financial year but not with respect to previous financial years.

3. The appropriate standard for quarterly accounts is AS-25 and not AS-5. However, AS-25 clearly states that regulations will have an overriding effect.

4. The listing agreement and the discussion paper on clause 41 clearly articulate that changes in accounting policies in interim periods are reflected in the current interim period. Comparative interim periods are not restated.

5. In the author’s opinion, clause 41, which is the regulation, will have to be followed. In other words, the cumulative effect of changes in accounting policies is reflected in current interim periods. Comparative interim periods are not restated.

Author’s suggestion

The International Financial Reporting Standards (IFRS) require comparative interim periods to be restated when accounting policies are changed. However unlike AS-25, they require even previous financial year’s interim period to be restated. Even in annual financial statements, IFRS requires previous year results to be restated to give effect to change in accounting policy. This ensures complete comparability.

Restatement of previous period financial statements is a better presentation of changes in accounting policies as it provides comparable numbers based on the new accounting policy. In India, we need to align AS-5, AS-25 and the listing agreement to enforce this comparability in line with IFRS (IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors & IAS 34 Interim Financial Reporting).

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TS-76-AAR-2014 Booz & Company (Australia) Pvt. Ltd. Dated: 14-02-2014

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Provision of Technical and professional employees to the Indian affiliate company (ICo) results in a Permanent establishment (PE) in India; Factors such as interdependency and nature of services rendered considered in arriving at the conclusion.

Facts:
The Booz & Co. Group (Group entities) is a global network of group companies. With the intention of optimising its global business network and expertise, entities within the Group provided as well as availed services from each other.

Accordingly, the Group entities received payments from ICo (Indian affiliate of Group) for provision of technical and professional personnel (personnel).

Features of the arrangement between the Group entities and ICo as appearing in the application and also emphasised by the tax authorities are as follows:

• All projects won by the Group were catered to by a common pool of personnel.

• ICo executed its projects through its own employees and to the extent required, procured the services of personnel of the relevant Group entity.

• The personnel were under the control and supervision of ICo in respect of ICo’s project. However they were bound by the employment agreement entered with, and overall control of, the relevant Group entity. Thus the relevant Group entity had the power to recall and replace its personnel.

• The relevant Group entity provided on-the-job training to such personnel, was answerable to third party claims for infringement of any rights by such personnel.

• The expertise of the relevant Group entities in giving consultancy in the fields that the Group operates, the brand equity the Group enjoys, the capabilities the Group has developed across the globe and services from the Group professionals and experts is needed for ICo to optimally function.

• The Group’s business is manpower-centric in which the only important asset is human resource.

The Group entities contended that in the absence of a Permanent Establishment (PE) of the relevant Group entity in India, the fee received from ICo cannot be taxed as business income in India but should be taxed as Fee for technical services (FTS).

The Tax Authorities contended that ICo is exclusively dependent on Group entities in getting the services of capable personnel as well as their on-the-job training, in order to achieve optimal efficiency. This dependency of ICo on the Group entities blurs the identity of individual entities and thus, ICo constitutes a dependent agent of the Group entities. Additionally, the number and high level of qualification of personnel deployed by the Group entities to ICo clearly establishes that ICo constitutes a service PE. The access given by ICo’s client/ICo to the personnel deployed to ICo in a given space also renders that place a fixed place PE of the relevant Group entities.

Held:
On Fixed Place PE:

Under a Double Tax Avoidance Agreement (DTAA), one of the sine qua non of a fixed place PE is that, the fixed place of business through which the business is carried on should be ‘at the disposal’ of the relevant Group entity.

Conducting trading operations generally requires a fixed place which the taxpayer uses on a continuous basis. However, taxpayers rendering service usually do not require a place to be at their constant disposal and therefore application of ‘disposal test’ is generally more complex in such cases.

In some jurisdictions the ‘disposal test’ is satisfied by the mere fact of using a place. In other jurisdictions, it is stressed that something more is required than a mere fact of use of place.

Various factors have to be taken into account to decide a fixed place PE which, inter alia, includes a right of disposal over the premises. No straight jacket formula applicable to all cases can be laid down.

Generally, the establishment must belong to the foreign enterprise and involve an element of ownership, management and authority over the establishment. Principles were derived from the following decisions on the ‘disposal test.’

• Rolls Royce Plc. [339 ITR 147]
• Seagate Singapore International Headquarters Pvt. Ltd. [322 ITR 650 (AAR)] –
• Motorola Inc. [147 Taxman 39 (SB)] –
• Western Union Financial services [104 ITD 34]

On Service PE:

In terms of the DTAA a service PE is triggered if services are provided in a source State and such services are provided through employees or other personnel. In case of deputation of employees, if the lien over such employees is retained by the deputing company and the employees continue to be on the payroll of the deputing company, a Service PE emerges.

Where a business of a group cannot be carried on exclusively without intervention of another entity, normally that entity must be deemed to be the establishment of the group in that particular country.

On Agency PE:

On the issue of Agency PE, the relevant question is ‘business connection’. The essential features of ‘business connection’ are as follows:

• A real and intimate relation must exist between the activities carried out outside India by nonresident (NR) and activities within India;
• Such relation must contribute directly or indirectly to earning of income by the NR in his business;
• A course of dealing or continuity of relationship and not a mere isolated or stray nexus between the business of the NR outside India and the activity in India, would furnish a strong indication of ‘business connection’ in India.

Apart from the fact that the requirements of agency are satisfied, the facts fulfil the above essential features of ‘business connection’.

On the basis of the above, the AAR ruled that the fact pattern of the Group entities and ICo, a PE of the Group entities does exist in India. Therefore, incomes received by them from ICo are taxable as business profit under Article 7 of the respective DTAAs. Where there is no DTAA, it is taxable under the provisions of the Act.

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TS-78-ITAT-2014(Bang) IBM India Private Limited vs. DIT A.Ys: 2009-2012, Dated: 24-01-2014

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S/s. 9(1)(vii), 195 – Absence of Fee for technical services (FTS) article in the DTAA, does not result in the income being taxed as per the domestic laws in terms of Article 24 of India-Philippines DTAA; Services provided in the course of business covered by business income article; Not taxable in absence of a PE in India; other Income article does not cover such income.

Facts:
The Taxpayer is an Indian Company (ICo) engaged in the business of providing information technology services. The Taxpayer made certain payments to a Philippines Co. (FCo) for certain business information services, work force management, web content management and human resource accounting services without withholding tax at source.

The Taxpayer contended that in absence of FTS Article in India- Philippines DTAA, Article 7 on ‘business profits’ should be applicable, and payment made to FCo is not chargeable to tax in absence of PE in India.

However, the Tax Authorities contended that in the absence of an FTS article in the DTAA, the same should be taxable as per the domestic laws by virtue of Article 24(1) of the DTAA, which provides that the laws of the contracting states shall continue to govern the taxation of income except where provisions to the contrary are made in the DTAA.

Held:
On Applicability of Article 24:

If Article 24(1) is interpreted as conferring right to tax ‘FTS’ in accordance with the domestic laws of a contracting state, then Article 23 dealing with other income and granting exclusive right of taxation to country of residence would become redundant as Article 23 will then cease to be an omnibus clause covering the residuary income.

It is a well settled principle that a clash is to be avoided while interpreting the provisions of a treaty. Hence the scope, context and setting of the articles have to be understood in their proper perspective.

Article 24(1) does not confer a right to invoke the provisions of domestic laws for classification or taxability of income covered by other articles of the DTAA. Article 24 is limited to elimination of double taxation and operates in the field of computation of doubly taxed income and tax thereon in accordance with the domestic laws and is not part of treaty Articles which deal with the classification of income.

On interplay between Article 7 and Article 23:

The services rendered by FCo are in the course of its business and hence covered under Article 7 of the DTAA and not other income Article. Further in the absence of PE in India of FCo, the amount paid is not chargeable to tax in India.

Even assuming that the payments made to FCo are covered by Article 23, the same should also not be taxable in India, by virtue of exclusive taxation rights being provided to the country of residence.

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TS-15-ITAT-2014(Del) Brown & Sharpe Inc. vs. DCIT A.Ys: 2003-2006, Dated: 17-01-2014

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Income attributable to the Liaison office (LO) engaged in promoting sales in India on behalf of its head office is taxable in India.

Facts:
The Taxpayer, a US company, has set up an LO in India with the RBI approval. The RBI approval was granted on the condition that the LO will not render any services, directly or indirectly, in India.

The Tax Authority contended that the LO was not merely a communication channel but it was also promoting the Taxpayer’s product brands in India, which was evident from the fact that the performance incentive of LO’s employees was calculated on the basis of number of orders received by the Taxpayer.

The Taxpayer contended that LO was established only as a communication channel between the Taxpayer and its customers or prospective customers in India. The LO did not render any service for the procurement of order or sale of the product in India. Hence, there was no income earned in India. In this regard, the Taxpayer referred to various decisions like Angel Garment Ltd. [287 ITR 341 (AAR)], U.A.E. Exchange Centre Ltd. [313 ITR 94], and K. T. Corporation [181 Taxman 94 (AAR)] etc.

Furthermore, the payments made to the LO were merely reimbursement of expenses incurred by the LO on behalf of the Taxpayer. Hence, it cannot be liable to tax in India.

Aggrieved, the Taxpayer appealed before the Tribunal.

Held:
The LO was engaged in promoting the Taxpayer’s product and brands in India. Other than the Chief Representative Officer, the LO had also appointed a Technical Support Manager. The employees of the LO were offered sales incentive plan as per which they were to be provided with remuneration, based on the achievement of the sales target of the Taxpayer in India.

The Taxpayer was registered with the Registrar of Companies for carrying on business in India. It had also, on its own volition, filed a return of income declaring loss under the head ‘Profits and gains of business or profession.’ Thus, the Taxpayer itself has taken a stand that it derives income from business in India.

The decisions relied on by the Taxpayer involved, the activities of preparatory and auxiliary nature. Such as:

• LO downloading information contained in the main server located in the UAE; (UAE Exchange Centre (supra))
• LO collecting information and sample of garments and textiles which was passed on to its HO and LO acted as a communication channel between the HO and its customers; (Angel Garment Ltd. (supra))
• LO was merely holding seminars, conferences, receiving trade enquiries, collecting feedbacks and advertising the technology used by its HO (K.T. Corporation (supra)).

However, in the present case, the employees were promoting the sale of the Taxpayer’s goods in India. Thus, income attributable to LO is taxable in India.

Though reimbursement of expenses cannot be treated as income, the receipt, in excess of expenses actually incurred has to be treated as income.

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TS-613-ITAT-2013(Coch) Device Driven (India) Pvt. Ltd. vs. ITO A.Y: 2009-2010, Dated: 29-11-2013

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Section 195 – Assistance in securing orders and in identifying markets, arranging meeting with prospective clients, etc., are not ‘pure’ commissionbased services but are technical services under the Act; Since the service provider (SP) is also the director of the Taxpayer, his office can be treated as a ‘Fixed base’ regularly available to the SP and taxable as per Independent Personnel Service (IPS) Article of the India–Switzerland DTAA.

Facts:
The Taxpayer, an Indian company, was engaged in the development and sale of software. The Taxpayer paid export commission to the SP who was tax resident of Switzerland, and claimed the same as deduction against its taxable profits.

The scope of work for the export commission, as decided between the Taxpayer and the SP covered the following:

• Facilitate marketing of the services and provide support as well as sales expertise for projects to be executed at customer site.
• Generate leads and initiate interaction with end customers in the relevant competency areas of the Taxpayer.
• Support in evaluating the Taxpayer’s presentations and other collateral proposals and contracts.
• Review proposals of the Taxpayer for target prospects and provide advice and assistance, to help securing projects.
• Hold periodic meetings with the Taxpayer to track project progress and status.

The Taxpayer contended that (i) the services rendered by the SP were for marketing assistance/ support and guidance for securing orders from overseas clients and not for rendering any technical expertise/services. (ii) Pure export commission earned by a person for rendering services outside India would not be taxable in India.

The Tax Authority contended that the SP is technically qualified and highly experienced in the software business. Considering the vast experience and technical knowledge, the services rendered by the SP were technical in nature and beyond what a normal commission agent would have rendered. Accordingly, the same was taxable under the Act as Fees for Technical Services (FTS).

Also, as the SP was required to hold regular meetings for monitoring the progress and status of the projects undertaken by the Taxpayer in India, the Taxpayer would have provided a fixed base in the form of office to the director, which triggered tax under IPS Article of the DTAA.

Aggrieved, the Taxpayer appealed before the Tribunal.

Held:
The nature of responsibilities and obligations placed on the director is significantly higher than what would have been placed upon a pure commission agent working in normal business transactions.

Customised software is a highly technical product, which is developed in accordance with the requirements of the customers. Even after the development, it requires constant on-site monitoring so that necessary modifications are carried out in order to make it suitable to the requirements.

Unlike sale of commodities, the role of the commission agent is not limited, but vast technical knowledge and experience is required to understand the needs of the clients, to procure orders, to identify markets, making introductory contacts, arranging meeting with prospective clients, assisting in preparation of presentations for target clients, monitor the status and progress of the project etc. Accordingly, the services rendered are technical in nature.

As the SP is a director of Taxpayer and also the sole foreign marketing agent, he has the responsibility to take care of business interests of the Taxpayer. Director, the SP has every right to look into and is also required to take care of the affairs of the Taxpayer. Further, the certificate/affidavit given by the Taxpayer confirming that it has not provided any fixed base to the SP cannot be of any help due to the closeness of the SP with the Taxpayer. Therefore, there is no infirmity in the Tax Authority’s view that the Taxpayer must have provided a ‘fixed base’ to the SP.

Hence, the office of the Taxpayer can conveniently be treated as a fixed base for the SP. Accordingly payment to the director is taxable in India and warrants withholding.

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Base Erosion and Profit Shifting (BEPS)

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Synopsis

Base Erosion and Profit Shifting (BEPS), a term coined by OECD, proposes 13 action plans to address important issues which the world is facing and/or may face in the field of international taxation and transfer pricing in this decade. BEPS refers to tax planning strategies that exploit gaps and mismatches in tax rules to make profits ‘disappear’ for tax purposes or to shift profits to locations where there is little or no real activity but taxes are low resulting in little or no overall corporate tax being paid. The learned authors vide this article provide insights on BEPS, its action plans and impact on India.

“Base Erosion and Profit Shifting” (BEPS) is a buzz term or expression these days in the arena of International Taxation. What is BEPS? Why do we need to study it? How does it affect us? Why G20 Nations vigorously pursue it? What is the role of OECD in BEPS? These and many other questions naturally arise in readers’ mind. This write-up attempts to put across the concept of BEPS and recent developments in this regard.

Introduction
Developments in national tax laws have not kept pace with developments in global businesses and technology. Physical presence based taxation in traditional ways is simply not adequate to cover all situations of business where the determination of source of income and the tax residence of an entity itself is a challenge. E-commerce or digital economy has changed the ways in which we used to transact businesses. Today, we live in a virtual global village. This, coupled with skewed development of the world economy, where developed countries are worried about the erosion in their tax base, whereas developing countries are more concerned about investments, technology and job creations, compel countries to adopt different tax systems or rules. Differences in tax systems pose challenges to Multi National Enterprises (MNEs) as well as provide an opportunity for tax planning. Proliferation of tax havens and low-tax jurisdictions over the past few decades have only helped MNEs to lower their tax incidence further.

In February 2013, OECD published its report ‘Addressing Base Erosion and Profit Shifting’ which has been a subject matter of much discussion on this topic.

BEPS
Base Erosion and Profit Shifting, (BEPS) in simple words means either erosion of base by claiming dubious allowances/deductions or shifting of profits from a high tax jurisdiction to a low tax jurisdiction/ tax haven by using gaps in the tax laws of the high tax jurisdiction. The FAQ on the OECD website on BEPS gives following meaning:-

“Base erosion and profit shifting (BEPS) refers to tax planning strategies that exploit gaps and mismatches in tax rules to make profits ‘disappear’ for tax purposes or to shift profits to locations where there is little or no real activity but the taxes are low resulting in little or no overall corporate tax being paid.”

Thus, BEPS poses serious questions concerning fairness and equity as MNEs are able to reduce their tax liability through various means, whereas individuals or SMEs (Small and Medium Enterprises) bear the brunt of higher taxes. This discourages voluntary compliance on the part of both individuals and SMEs.

It is said “tax” is an obligation in the home country and a cost in the host country. MNEs try to reduce cost to increase profitability. If MNEs pay the full rate of tax in one country, then also it may not be of much concern, but in reality “some multinationals end up paying as little as 5% in corporate taxes, when smaller businesses are paying up to 30%”. Even though MNEs may be resorting to legal ways to exploit gaps in tax systems of home and host countries, resulting in BEPS, it creates wider economic risks as resources of countries are depleted which may be used for generating employment and other social projects.

BEPS and OECD

BEPS is the result of aggressive tax planning. The OECD has been providing solutions to tackle aggressive tax planning for years. According to OECD, BEPS is not a problem created by one or more specific companies (barring some cases of blatant abuse of tax laws) but is a result of inefficient tax rules. BEPS is the result of gaps arising due to interaction of domestic tax systems of different countries and therefor, unilateral action by any one country will not be able to solve the problem. Therefore, OECD has put in place “BEPS Action Plan” with a view to provide a consensusbased plan to address the issue.

BEPS Action Plan by OECD

OECD’s Action Plan on BEPS will address the issue in a comprehensive and co-ordinated way. These actions will result in fundamental changes to the international tax standards and are based on three core principles, namely, (i) coherence (ii) substance and (iii) transparency. OECD plans to work towards elimination of double non-taxation through BEPS Action Plan and also elimination of double taxation through and including increased efficiency of Mutual Agreement Procedure (MAP) and Arbitration.





BEPS and G20 Nations

OECD’s initiative and work on BEPS has been strongly supported by G20 Nations. Key member countries of G20 which are not part of OECD (i.e. Argentina, Brazil, China, India, Indonesia, Russia, Saudi Arabia and South Africa) were also involved in work related to BEPS, as they all participated in the meeting of the Committee on Fiscal Affairs where the Action Plan was adopted. In order to facilitate greater involvement of non-OECD economies in the ‘BEPS Project’, G20 countries who are not OECD Members will participate in the BEPS project on an equal footing. Other non-G20 and non-OECD members may be invited to participate on an ad hoc basis. The idea seems to be to make the BEPS Action Plan as broad-based as possible so that the Plan becomes effective and practical. India is part of G20 Nations as well as an observer country at OECD and it has actively participated in BEPS Project so far.

BEPS and Double Non-taxation

Countries enter into bilateral agreements with each other in order to avoid double taxation of income and to prevent tax evasion. However, more often than not, MNEs are able to structure their affairs in a manner that the income is not taxed either in home or in a host country and goes totally taxfree resulting into “Double Non-taxation.” Double non-taxation could be a result of aggressive tax planning, hybrid mismatches etc. The focus of BEPS Project is on avoidance of double non-taxation. Double non-taxation may be a result of interaction of domestic tax laws and international tax laws. It may be perfectly legitimate as well. For example, a Mauritius Company deriving dividend income from India or earning capital gains on sale of securities in India would not be paying any tax in India and generally not taxed Mauritius. It would be interesting to see how BEPS Action Plan tackles such issues.

BEPS and India

In India whether tax treaties can result in ‘double non-taxation’  is  an  issue  debated  over  a  number of years. As stated earlier, tax can be a powerful tool for attracting foreign investments. India being a developing country, its priority is to attract for- eign investment and technology for its economic development.  Section  90  of  the  Income-tax  Act, 1961  [the  Act]  was  amended  vide  the  Finance Act,  2003  with  effect  from  1st  April  2004  to  pro- vide that the Central Government may enter into agreement with foreign governments to promote mutual economic relations, trade and investment. These  objectives  are  also  in  line  with  objectives of  bilateral  tax  conventions  as  laid  down  by  the United  Nations.

Keeping in mind the above objectives, it appears that India’s tax treaties with UAE, Malta, Kuwait, Cyprus, Luxembourg etc. have been entered for the purpose of attracting foreign investments than avoiding double taxation. In M.A. Rafik’s case AAR No. 206 of 1994, 213 ITR 317 which related to India- UAETax  Treaty,  the  Authority  for  Advance  Ruling (AAR) observed that “India is also in the process of looking out for foreign countries interested in investing  in  India  and  must  have  considered  the DTAA as providing an opportunity to improve the economic  relations  between  the  two  countries and to encourage the flow of funds from Dubai”. In  its  subsequent  Rulings,  applicability  of  India- UAE  Tax  Treaty  to  UAE  residents  was  upheld  by AAR.  The  Supreme  Court,  in  case  of  UOI  (Union of India) vs. Azadi Bachao Andolan (2003) 263 ITR 706, held that ‘the preamble to the Indo-Mauritius Double  Tax  Avoidance  Convention  (DTAC)  recites that it is for the encouragement of mutual trade and  investment’  and  this  aspect  of  the  matter cannot  be  lost  sight  of  while  interpreting  the treaty  provisions.  These  observations  were  very significant,  whereby  the  Apex  Court  upheld  the economic considerations as one of the objectives of  a  Tax  treaty.

The dissenting judgement by AAR in case of Cyril Pereira (1999) 239 ITR 650 stated that DTAA is not a  device  for  evasion  of  the  only  tax  imposed  by a  country  on  the  income  of  the  person  resident in the another country. In other words, provisions of  DTAA  cannot  result  in  Double  Non-Taxation. However, the said argument was discarded by the Supreme Court in its subsequent ruling in case of Azadi  Bachao  Andolan.  Recently,  the  Apex  Court in  case  of  Vodafone  followed  the  approach  of ‘look  at  rather  than  look  through’  any  transaction  and  interpreted  provisions  of  the  Income Tax  Act  more  liberally  in  favour  of  the  taxpayer. In  essence,  it  gave  weightage  to  the  ‘form’  of  a transaction/entity  rather  than  ‘substance’of  it.  In India, presently, the issue under debate is ‘whether one  needs  to  look  at  the  moral  aspects  while interpreting  tax  laws’.  The  opinion  seems  to  be divided  on  the  issue.

Coming to the trends in the Indian tax treaties, we find India encouraged tax sparing/exemption method by its treaty partner countries (developed nations) in respect of income arising to their resi- dents in India. This was done keeping in mind, that India is a net capital importing country. However, there is a perceptible change in India’s recent tax and treaty policy. India has introduced Article on Limitation of Benefits (LOB) in many of its tax treaties (for e.g. UAE, Singapore, etc.) to prevent their abuses. It is gathered that India is in the process of signing LOB articles with many other countries. Recently, India notified Cyprus as a non co–operative jurisdiction denying treaty benefits to residents of Cyprus. Recent tax treaties signed by India do not carry provisions of Tax sparing.

On  the  domestic  tax  front,  India  amended  the definition  of  section  9  of  the  Act,  pertaining  to royalty  with  retrospective  effect  from  1st  June 1976  to  bring  in  ‘computer  software’  within  its ambit.  It  further  amended  the  definition  of  section 9 to tax the indirect transfer of shares where the underlying value of shares were derived from the  assets  situated  in  India(to  nullify  the  effect of Vodafone decision). India has tightened its tax policy of giving effect to tax treaties by providing mandatory  submission  oftax  residency  certificate for  claiming  treaty  benefits.  Section  206AA  has been  introduced  making  it  mandatory  to  obtain PAN  by  non-residents.  The  domestic  tax  rate  for royalty  and  FTS  is  substantially  increased  from 10  %   to  25  %.  India  proposes  to  introduce  GAAR provision with effect from 1st April 2016. From the above discussion, one can conclude that the Indian Government  has  taken  several  steps  to  prevent BEPS. However, Indian judiciary have been liberal in  giving  benefit  to  the  tax  payers  for  what  may be  called  permissible  tax  avoidance  within  four corners  of  the  law.

Conclusion
There is no doubt that BEPS is not good for any country. However, as pointed out by OECD, BEPS arises due to a variety of reasons and often, unintentional and/or due to legitimate tax planning. When developing countries resort to lower tax rates to attract foreign investment and technology, they are blamed to be supporting BEPS. On the other hand, certain low tax jurisdictions or so called tax heavens, are ruled by Developed Countries. Advocating home truths but not implementing the same in letter and spirit, is self-defeating and cannot promote a healthy order of growth and development.

Perhaps, we have to strike a balance between growth and taxation.

2014 (33) STR 105 (Tri-Mumbai) KPIT Cummins Infosystems Ltd vs. CCE, Pune-I

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Whether services provided by foreign branches
outside India to overseas customers would be subjected to service tax
u/s. 66A of the Finance Act?

Facts:
Appellant was
engaged in providing various services such as Information Technology
Service, Business Support Service, Business Auxiliary Service, Renting
Service etc. Appellant had branches in foreign countries which are
Permanent Establishment abroad. These foreign branches provided
‘Software Development & Consultancy services’ in foreign countries
to various overseas customers. These foreign branches issued invoices
for services rendered and consideration for such services were received
from overseas customers. Excess of income over expenditure was remitted
by these foreign branches to the Appellant. Service tax was demanded on
the entire amount received by these foreign branches under ‘Business
Auxiliary Services’ alleging the

Appellant had rendered the
services. Appellant also remitted certain amounts to these foreign
branches as the Appellant’s personnel had incurred certain expenditure
such as rentals, telephone, insurance charges, conference, event
management etc., while rendering services abroad to overseas customers.
Respondent also issued SCN demanding service tax on amount remitted
overseas under reverse charge.

Held:
Since services
were rendered outside India to overseas customers and also the
consideration was received in foreign currency, these would be treated
as ‘Export of Services”’ and accordingly service tax would not be
applicable. More so, as Appellant was contending that, the said revenue
had already suffered GST/VAT in respective foreign countries. The entire
activities were carried out and consumed outside India and only
reimbursement for certain payments was made from India without receipt
of these services in India. Since the Respondent while passing the
impugned Order did not consider all aspects of the matter, appeal was
allowed by way of remand and stay application was disposed of.

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2014 (33) STR 86 (Tri-Mumbai) Bharati Tele-Ventures Ltd. vs. CCE, Pune-III

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a) Whether sale of SIM cards by mobile service provider is exigible to sales tax or service tax?
b) In a case where payment for service is received in advance and if the rate of service tax is increased at the time of provision of services, which rate will apply – old or new?
c) Whether extended period of limitation will apply where records have been audited by the department?

Facts:
Appellant was a cellular (mobile) service provider. For failure to pay service tax on the gross amount received on the issue of SIM cards to its customers during the period July, 2002 to March, 2006, the demand was confirmed against the Appellant. Appellant discharged the service tax on the value of services involved in the SIM cards and claimed deduction for the value comprising the sale component of the said SIM cards under Notification No. 12/2003 ST. Appellant relied on the Bombay High Court’s decision on identical issue in case of Vodafone India Ltd vs. Commissioner 2013 (30) STR J18 wherein the case was remanded for considering the applicability of Notification No. 12/2003-ST in case of sale of SIM cards. Appellant received certain advances against the services to be provided at a later date. Appellant have discharged the service tax at the rate prevailing at the time of receipt of advance. Later on the service tax rate was increased and at the time of provision of services the service tax rate was increased. Service tax was demanded at the increased rate.

Held:
• Tribunal observed that the issue of inclusion of SIM card value in the taxable value for telecommunication service has already been decided by the Kerala High Court in Commissioner vs. Idea Mobile Communication Ltd. 2010 (19) STR 18 (Kerala) and Andhra Pradesh High Court in State of AP vs. Bharat Sanchar Nigam Ltd. 2012 (25) STR 321 (AP) wherein High Courts held that SIM card is the device through which the customers gets connection from mobile towers. Therefore, SIM card is an integral part required to provide mobile services to customers. SIM card has no intrinsic value or purpose other than use in mobile phone for receiving mobile telephone service from service provider. SIM cards are never sold as goods independent of the services provided, SIM cards are considered part and parcel of services provided and dominant intention is to provide the services and not to sell SIM cards. In view of the observations made in these judgements, it was held that SIM cards are not goods but services and service tax alone can be levied and the Bombay High Court’s judgement in case of Vodafone should be treated as ‘per incuriam’, since the above stated judgments were not brought before its consideration.

• Combined reading of section 66 and section 65(105) of the Finance Act makes it clear that it is the provision of the service which attracts the levy at the rate prescribed in section 66. Only collection of tax is to be done as per rules prescribed. Therefore, service tax is applicable at the time of provision of services and not at the time of receipt of money. While deciding this, Tribunal relied upon the decision of the Gujarat High Court in case of CCE vs. Schott Glass India Pvt. Ltd. 2009 (14) STR 146 (Guj) and the Kerala High Court’s decision in case of Kerala Colour Lab Association vs. UOI 2006 (2) STR 554 (Ker).

• Since the audit of records of the Appellant were carried out in the past, where no allegation of suppression was being made, demand beyond the period of limitation and levy of penalties were held unsustainable.

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2014 (33) STR 81 (Tri-Mumbai) Swagat Freight Carriers Pvt. Ltd. vs. Comm. of Service Tax, Mumbai

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Whether freight forwarding activity would be classifiable under “Clearing & Forwarding Agency” service?

Facts:
The Appellant was engaged in the business of freight forwarding and collected charges for services rendered to its customers by way of documentation charges, transport charges, shipping bill charges etc. The Respondent demanded service tax on the said charges under ‘C & F agent’s services’. This resulted into an impugned order which also levied penalties. According to the Appellant, the said freight forwarding activities did not classify under ‘C & F Agent’s services’ and relied on various decisions and also further stated the period of dispute was prior to 01-07-2003 and they began paying service tax 01-07-2003 onwards under ‘Business Auxiliary Service’.

Held:
Freight forwarding activity is distinct and different from C & F agent’s activities and in the light of Gudwin Logistics vs. CCE, Vadodara 2012 (26) STR 443 (Tri-Ahmd) and other decisions, the same could not be classified as C & F agent’s services and accordingly the appeal was allowed.

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2014 (33) STR 65 (Tri-Mumbai) Suzlon Windfarm Services Ltd. vs. CCE, Pune

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Whether activity of operation, maintenance and security of a windmill would be classifiable under “Consulting Engineering Service”?

Facts:
Appellant entered into an agreement with M/s. Suzlon Energy Limited (SEL) for operation & maintenance of the windmills sold by the said SEL to its customers. As per the sale contract entered between SEL and its customers, SEL would be looking after operation, maintenance & security of the windmills free of cost for the first 5 years from the date of purchases and thereafter with charges. SEL assigned the said operation and maintenance activity to the Appellant for an agreed consideration. The agreement also required them to provide round-the-clock security, monitoring the performance of the windmills, collection & compilation of the data relating to wind speed, energy generation & liaisoning and coordination with various Government departments. Demand of service tax was confirmed under “Consulting Engineering Service” along with imposition of penalties u/s. 76, 77 & 78 of the Finance Act.

Held:
The Tribunal after observing the terms of the agreement entered between Appellant and SEL and the activities carried out by the Appellant, held that an advice, consultancy or assistance in any field of engineering would be classifiable under ‘Consulting Engineering Service’ and not activities which are in the nature of execution. Executory services do not come within the purview of ‘Consulting Engineering Service’ as decided in Rolls Royce Industrial Power (I) Ltd. vs. CCE, Visakhapatnam 2006 (3) STR 292. Further, in the case of Basti Sugar Mills Co. Ltd. vs. CCE, Allahabad 2007 (7) STR 431, the Supreme Court while rejecting department’s appeal held that, since department had not challenged Rolls Royce decision before it, the said decision had attained finality and the appeal thus was allowed.

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Right of Cross Examination – A Crystallised Right

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Synopsis
A question on sellers’ genuineness, leading to nonallowance of Input Tax Credit (ITC) to the buyers, has been frequently faced by sales tax payers. No opportunity for cross examination is afforded to the buyer to test or rebut the evidences used against him for such disallowance. Author throws light on the recent decision of Madras High court on this issue wherein it has been held that right of cross examination is the most essential right and the same cannot be denied to the buyer.

Introduction

There are a number of situations where the Revenue Departments rely upon material collected from opposite/third parties. For example, at present under Maharashtra Value Added Tax Act, 2002, the sales tax department is disallowing Input Tax Credit (ITC) to the buyers on the ground that the seller is non genuine dealer. The department for this purpose relies upon statement of the vendor, as well as his affidavit etc.

It is a common experience that no opportunity for cross examination of the adverse material used, is given to the concerned buying dealer. Further, no opportunity for personal cross examination of the vendor is given.

The issue which arises is whether such procedure is acceptable in the eyes of law?

Recent Madras High Court judgment in case of Thilagarathinam Match Works vs. Commissioner of Central Excise, Tirunelveli (295) E.L.T. 195 (Mad.)

The issue as to whether granting of opportunity for cross examination is necessary or not had arisen in above case.

The facts were that the petitioners in writ petitions challenged orders passed by the Enquiry Officer, rejecting their request for cross-examination of certain officers and persons in an enquiry, in pursuance of the show cause notices, issued u/s. 11A of the Central Excise Act, 1944. In the annexure to the show cause notices, the authorities relied upon the reports of the Energy Auditor as well as the statements of some officers and witnesses. The petitioner made a request for the cross-examination of those officers and witnesses.

Before the High Court, the Excise Authority took objection to the request of the petitioners for cross-examination on following grounds:

(i) that the petitioners prolonged the issue even without submitting an explanation to the show cause notices for more than one and half years;
(ii) that the petitioners have not adduced any reasons for cross-examination of those persons; and
(iii) that none of the witnesses have retracted from their original statements.

Based on above facts, the Hon. High Court held that even if the petitioners had never submitted any explanation to the show cause notices, the conduct of an enquiry becomes necessary and the cross-examination of the officers, who are authors of the statements, crystallises into a right for the petitioners. Thus, the first objection to the request for cross-examination was rejected.

About second objection to the request for crossexamination that the petitioners had not stated any reason for cross-examination of those persons, the Hon. High Court held that no reason need be stated by any person for requiring crossexamination. In an enquiry, a person gets two kinds of rights. The first set of right revolves around the right to peruse the documents relied upon by the department and the right to crossexamine the witnesses on whose statements the enquiry or prosecution is based. The second set of right revolves around the right to produce the witnesses and documents in defence. If a person facing an enquiry seeks to summon some persons to be examined in his defence or seeks to summon some documents to be produced in support of his defence, it is open to the enquiry officer to ask the delinquent to justify such a request by adducing reason. But, insofar as cross-examination is concerned, no justification need be provided in the form of reasons by a delinquent. The very fact that some statements of some officers are relied upon is good enough reason for permitting cross-examination. The very fact that the right of cross-examination is part of the most essential rights is sufficient to grant the request. But, the enquiry officer cannot test the request for cross-examination on the strength of the reasons. Therefore, the second ground on which the request of the petitioners is rejected, also cannot be sustained, held the Hon. High Court.

In respect of the third ground on which the request of the petitioners was rejected was that none of the witnesses had retracted from their original statements. Retraction from an early statement would normally occur only during the course of the enquiry. In the course of the enquiry, witnesses had not been examined. In other words, the respondents have presumed that the right to cross-examine would arise only in cases, where witnesses retract from their early statements. That is a wrong presumption or understanding of the law. The purpose of cross-examination is only to disprove the statements given by the witnesses. If the witnesses had already retracted from their original statements, the petitioners would have been well advised not to ask for cross-examination at all. This aspect has not been appreciated by the respondents, held the Hon. High Court. Therefore, it was held that the third objection also was not sustainable.

Conclusion
The law on the issue of right of cross examination is thus clear. The above principle duly applies to sales tax department. Assuming that the sales tax department may be correct in its investigation, still the department is under obligation to grant opportunity of cross examination as per the law laid down above, as well as to comply with the principles of natural justice. It thus transpires that disallowing ITC without above opportunity is bad in law.

There are two aspects about ITC. If transaction is non-genuine, ITC cannot be allowed even though seller might have paid tax. However, this fact requires to be established by following the above principle of law.

The truth whether transaction was genuine or not, can get established only upon providing an opportunity of cross examination.

The other aspect is that the transaction is genuine but tax is not paid by concerned vendor. In such case disallowing ITC to buyer will be incorrect. The concerned vendor should be first assessed as he is first in sequence. The recovery should be made from him. Without assessing him, jumping upon next buyer will be inappropriate and cannot withstand the legal position.

Hence ascertainment of correct position of transaction is very much necessary and for that purpose cross examination opportunity is mandatory.

Therefore, the one way process adopted today by the sales tax authorities can not be said to be correct as per law. The buyers can expect justice in due course of appeal at higher forum.

levitra

Remuneration to Partners: Whether Payment to a Different Person is Taxable?

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Synopsis

To consider the applicability of
Service Tax on remuneration paid to partner, the authors have analysed
the definition of ‘Service’ defined in Section 65B (44) of Finance Act
2012 alongwith various provisions of Partnership Law, Income Tax law and
considered the various judicial precedents. The authors have also
referred to the relevant case laws on the subject and concluded that
services provided by partners to the firm and remuneration received
thereof from the firm cannot be subjected to Service Tax.

Preliminary
Partnership
continues to be one of the more prominent forms in which businesses are
carried out in the country. Further, it is a very common practice that,
partners are paid salary (either on a fixed basis monthly/annually or
on a basis which is linked to profits earned by the firm). Further,
under the income tax law, salary paid to partners is allowed as
deduction subject to certain specified limits.

The scope of
service tax has been substantially expanded, post introduction of
Negative List based Taxation of Services with effect from 01-07-2012.
The taxability of salary paid by the firm in the hands of partners under
service tax has been a matter of extensive deliberation since
01-07-2012. An attempt is made hereafter to discuss this issue,
considering the provisions of partnership law & income tax law, in
addition to the provisions of service tax law effective 01-07-2012.

Relevant Statutory Provisions

Extracts from Finance Act, 1994 – as amended (FA 12) effective 01/07/2012.

(A) Section 65 B (44) of FA 12

‘Service’
means any activity carried out by a person for another for
consideration, and includes a declared service, but shall not include –

(a) an activity which constitutes merely, –

i) A transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or

ii)
Such transfer, delivery or supply of any goods which is deemed to be a
sale within the meaning of Clause (29A) of Article 366 of the
Constitution; or

iii) A transaction in money or actionable claim;

(b) A provision of service by an employee to the employer in the course of or in relation to his employment;

(c) Fees taken in any Court or Tribunal established under any law for the time being in force.

…………………………….

Explanation 2
– For the purpose of this Clause, transaction in money shall not
include any activity relating to the use of money or its conversion by
cash or by any other mode, from one form, currency or denomination, to
another form, currency or denomination for which a separate
consideration is charged.

Explanation 3 – for the purposes of this Chapter, –

(a)
an unincorporated association or a body of persons, as the case may be,
and a member thereof shall be treated as distinct persons;

(b)
an establishment of a person in the taxable territory and any of his
other establishment in a non – taxable territory shall be treated as
establishments of distinct persons.

Explanation 4 – A
person carrying on a business through a branch or agency or
representational office in any territory shall be treated as having an
establishment in that territory;

(B) Section 65B (37) of FA 12

“Person includes –
(i) an individual, juridical
(ii) a Hindu undivided family,
(iii) a Company,
(iv) a Society,
(v) a limited liability partnership,
(vi) a firm,
(vii) an association of persons or body of individuals, whether incorporated or not,
(viii)Government,
(ix) a local authority,
(x) every artificial juridical person, not falling within any of the preceding sub – Clauses

(C) Charge of Service tax – Section 66 B of FA 12

There
shall be levied a tax (hereinafter referred to as the service tax) at
the rate of twelve per cent on the value of all services, other than
those services specified in the negative list, provided or agreed to be
provided in the taxable territory by one person to another and collected
in such manner as may be prescribed.

Relevant extracts from TRU Circular dated 20/6/12 – “Taxation of Services – An Education Guide” issued by CBEC

Guidance Note 2 – What is Service?

‘Service’ has been defined in clause (44) of the new section 65B and means –

• any activity
• for consideration
• carried out by a person for another
• and includes a declared service.

The said definition further provides that ‘service’ does not include –

•
any activity that constitutes only a transfer in title of (i) goods or
(ii) immovable property by way of sale, gift or in any other manner

•
(iii) a transfer, delivery or supply of goods which is deemed to be a
sale of goods within the meaning of Clause (29A) of article 366 of the
Constitution

• a transaction only in (iv) money or (v) actionable claim

• a service provided by an employee to an employer in the course of the employment.

• fees payable to a Court or a Tribunal set up under a law for the time being in force
………….

Activity

What does the word ‘activity’ signify?

‘Activity’
is not defined in the Act. In terms of the common understanding of the
word activity would include an act done, a work done, a deed done, an
operation carried out, execution of an act, provision of a facility etc.
It is a term with very wide connotation.

Activity could be
active or passive and would also include forbearance to act. Agreeing to
an obligation to refrain from an act or to tolerate an act or a
situation has been specifically listed as a declared service u/s. 66E of
the Act.

………………….

Activity for a consideration

The
concept ‘activity for a consideration’ involves an element of
contractual relationship wherein the person doing an activity does so at
the desire of the person for whom the activity is done in exchange for a
consideration. An activity done without such a relationship i.e.
without the express or implied contractual reciprocity of a
consideration would not be an “activity for consideration” even though
such an activity may lead to accrual of gains to the person carrying out
the activity.

Thus, an award received in consideration for
contribution over a life time or even a singular achievement carried out
independently or without reciprocity to the amount to be received will
not comprise an activity for consideration.

There can be many
activities without consideration. An artist performing on a street does
an activity without consideration even though passersby may drop some
coins in his bowl kept after feeling either rejoiced or merely out of
compassion. They are, however, under no obligation to pay any amount for
listening to him nor have they engaged him for his services. On the
other hand, if the same person is called to perform on payment of an
amount of money then the performance becomes an activity for a
consideration

Provision of free tourism information, access to
free channels on TV and a large number of governmental activities for
citizens are some of the examples of activities without consideration.

Similarly,
there could be cases of payments without an activity though they cannot
be put in words as being ‘onsideration without an activity’
Consideration itself presupposes a certain level of reciprocity. Thus
grant of pocket money, a gift or reward (which has not been given in
terms of reciprocity), amount paid as alimony for divorce would be
examples in this category.

However, a reward given for an activity performed explicitly on the understanding that the winner will receive the specified amount in reciprocity for a service to be rendered by the winner would be   a consideration for such service. Thus, amount paid in cases where people at large are invited to contribute to open software development (e.g. Linux) and getting an amount if their contribution is finally accepted will be examples of activities for consideration.

By a person for another

What is the significance of the phrase ‘carried out by a person for another’?

The phrase ‘provided by one person to another’ signifies that services provided by a person to self are outside the ambit of taxable service. Example of such service would include a service provided by one branch of a company to another or to its head office or vice-versa.

Are there any exceptions wherein services provided by a person to oneself are taxable?

Yes.  Two  exceptions  have  been  carved  out  to the  general  rule  that  only  services  provided  by a  person  to  another  are  taxable.  These  exceptions,  contained  in  Explanation  3  of  Clause  (44) of  section  65B,  are:

  • an establishment of a person located in taxable territory and another establishment of such person located in non-taxable territory are treated as  establishments  of  distinct  persons.  [Similar provision  exists  presently  in  section  66A  (2)]

  •  an  unincorporated  association  or  body  of  per- sons and members thereof, are also treated as distinct  persons.  [Also  exists  presently  in  part as  explanation  to  section  65].

Implications of these deeming provisions are that inter-se provision of services between such persons, deemed to be separate persons, would be taxable. For example, services provided by a club to its members and services provided by the branch office of a multinational company to the headquarters of the multinational company located outside India would be taxable provided other conditions relating to taxability of service are satisfied.

a)Brief analysis of provisions of the Indian Partnership Act, 1932

Some relevant provisions are as under:

  •  the ‘partnership’ is the relation between persons who have agreed to share the profits of  a business carried on by all or any of them acting for all. Persons who have entered into partnership with one another are called individually ‘partners’ and collectively a ‘firm’ and the name under which their business is carried on is called ‘the firm’s name.” [section 4].

  •  a partner is not entitled to receive remuneration for taking part in the conduct of business of the firm subject to a contract between the partners. [section 13(a)]

a partner is the agent of the firm for the purposes of business of the firm. [section 18]

  •  any act of the partner which is done to carry on, in the usual way, business of the kind carried on by the firm, binds the firm. [section  19]

  • every partner is liable, jointly with all the other partners  and  also  severally,  for  all  the  acts  of the firm done while he is a partner. [section 25]

b)    Some judicial considerations

  •  under  partnership  law,  a  partnership  firm  is not  a  legal  entity,  but  only  consists  of  the  individual  partners  for  the  time  being.  It  is  not a  distinct  legal  entity  apart  from  the  partners constituting it and equally, in law, the firm, as such,  has  no  separate  rights  of  its  own  in  the partnership assets. When one talks of the firm’s property or the firm’s assets, all that is meant is property or assets in which all partners have a  joint  or  common  interest.  [Malabar  Fisheries Co.  vs.  CIT  [1979]  120  ITR  49   (SC);  in  CIT  vs. Dalmia Magnesite Corpn. [1999] 236 ITR 46 (SC).]

  •  a partnership concern is not a legal entity like a company. It is a group of individual partners [Comptroller  &  Auditor  General  vs.  Kamlesh Vadilal  Mehta  [2003]  126  Taxman  619  (SC   –  3 Member  Bench).]

  •  law has extended only a limited personality to a  partnership  firm.  A  firm  is  not  an  entity  or a  ‘person’  but  is  an  association  of  individuals, and a firm’s name is only a collective name of those  individuals  who  constitute  the  firm.  A partnership  firm  cannot  enter  into  partnership with another partnership firm. HUF or individual [Dulichand Laxminarayan vs. CIT (1936) 29 ITR 535 (SC  –  3  member  Bench); Mahabir Cold Storage vs. CIT  [1991]  188  ITR  91  (SC).]

  •  a partnership is not a legal entity. Partners are the  real  owners  of  assets  of  the  partnership firm. Firm is only a compendious name given to partnership  for  the  sake  of  convenience.  Each partner is owner of assets to the extent of his partnership  [N.  Khadervali  Saheb  vs.  N.  Gudu Sahib  [2003]  129  Taxman  597  (SC  –  3  Member Bench).]

c)    Other important & relevant Judicial Views

  •  The  Honorable  Supreme  Court  in  the  case of  Champaran  Cane  Concern  vs.  State  of  Bihar [1964]  2  SCR  921,  has  pointed  out  that  in  a partnership  each  partner  acts  as  an  agent  of the  other.  The  position  of  a  partner  qua  the firm  is,  thus,  not  that  of  a  master  and  a  servant  or  an  employer  and  an  employee,  which concept  involves  an  element  of  subordination but  that  of  equality.  The  partnership  business belongs to the partners and each one of them is an owner, thereof. In common parlance the status  of  a  partner  qua  the  firm  is,  thus,  different from employees working under the firm. It  may  be  that  a  partner  is  being  paid  some remuneration for any special attention which he gives  but  that  would  not  involve  any  change of  status  and  bring  him  within  the  definition of  an  employee.

  •  The  Honorable  Supreme  Court  in  the  case  of CIT vs. R. M. Chidambaram Pillai  [1977]  106  ITR 292  has  held  as  under  :

“Here the first thing that we must grasp is that a firm is not a legal person even though it has some attributes of personality. Partnership is a certain relation between persons, the product of agreement to share the profits of a business. “Firm” is a collective noun, a compendious ex- pression to designate an entity, not a person. In Income-tax law a firm is a unit of assessment, by special provisions, but is not a full person which leads to the next step that since a contract of employment requires two distinct persons, viz. the employer and the employee, there cannot be a contract of service, in strict law, between a firm and one of its partners. So that any agreement for remuneration of a partner for taking part in the conduct of the business must be regarded as portion of the profits being made over as a reward for the human capital brought in. Section 13 of the Partnership Act brings into focus this basis of partnership business.”

“…It is implicit that the share income of the partner takes in his salary. This telling test is that where a firm suffers loss, that salaried partner’s share in it goes to depress his share of income. Surely, therefore, salary is a different label for profits, in the context of a partner’s
remuneration.”

“…The matter may be looked at another way too. In law, a partner cannot be employed by his firm, for a man cannot be his own employer. A contract can only be bilateral and the person cannot be a party on both sides, particularly in a contract of personal employment. A supposition that a partner is employed by the firm would involve that the employee must be looked upon as occupying the position of one of his own employers, which is legally impossible. Consequently, when an arrangement is made by which a partner works and receive sums as wages for services rendered, the agreement should in truth be regarded as a mode  of adjusting the amount that must be taken to have been contributed to the partnership’s assets by a partner who has made what is really a contribution in kind, instead of contribution in money.”

  • The  Honorable  Supreme  Court  in  the  case  of Regional  Director,  Employees  State  Insurance Corpn.  vs.  Ramanuja  Match  Industries  [1985]  1 SCC 218 while dealing with the question, wheth- er there could be a relationship of master and servant  between  a  firm  on  the  one  hand  and its partners on the other, indicated that under the  law  of  partnership  there  can  be  no  such relationship as it would lead to the anomalous position  of  the  same  person  being  both,  the master  and  the  servant.

Brief analysis of provisions under income tax law

Under the Income-tax Act, 1961, some relevant provisions which need to be noted, are as under:

  •  A partnership firm (registered or unregistered) is taxed as a separate entity. Share of income of the partner in income of the firm is not included in computing total income of the partner (as it has already been taxed in the hands of partnership firm).

  • In addition to share of income of the firm, working partners can draw salary commission or remuneration from the partnership firm as per provisions of section 184, read with section 40(b). This is allowed as deduction from income of the firm (subject to certain limits) and is treated as an income of the partner for income-tax purposes.

  • According to section 2(23), a firm, partner and partnership  have  the  same  meaning  as  in  the Partnership  Act,  1932.

  •  Explanation   2   to   section   15   specifically states  that  any  salary,  bonus,  commission  or remuneration,  by  whatever  name  called,  due to or received by a partner of a firm from the firm  shall  not  be  regarded  as  ‘salary’.

  • Section 28(V) specifically states that any interest, salary, bonus, commission or remuneration, by  whatever  name  called,  due  to  or  received by a partner of a firm from such firm shall be treated as income chargeable to tax under the head ‘Profits and Gains of Business or Profession.’

  • Provisions  of  TDS  (Section  192)  are  not  applicable to salary paid by the firm to its partners.

Partnership is a “person” by legal fiction for taxation

Though  partnership  is  not  a  legal  person,  yet  a firm  has  been  defined  as  a  ‘person’  u/s.  2(31) of  the  Income-tax  Act,  1961  and  section  65B(37) of  FA  12  effective  01-07-2012,  by  creating  a  legal fiction.  Hence,  once  a  legal  fiction  is  created  by law,  it  has  to  be  taken  to  its  logical  end.  Accordingly, partnership firm and the partners have to  be  ‘deemed’  as  two  different  persons  and  a partner should be deemed to be employee of the partnership  firm.

Conclusion
Based on the foregoing, the following proposi- tions emerge :

  • there is a specific exclusion in the definition of ‘service’ for services provided by an employee to an employer in course of or in relation to his employment. However, there is no relationship of an employee and an employer between the partners and the partnership firm;

  • any agreement for remuneration of a partner for taking part in the conduct of the business is nothing but an additional share of profit remuneration is a different label for profits, in the context of a partner’s remuneration paid by firm to its partners. For services rendered by the partners, to the firm, would have oth- erwise got additional share of profit instead of remuneration.

  •  the partners act as agents of their firm and render the services to themselves,

  • the partnership business belongs to the partners and each of them is an owner thereof, and, hence, the services are rendered by partners to themselves.

Based on the above, it can be reasonably concluded that, since the services are rendered by the partners to themselves and not by one person to another and since services provided by partners to the firm is not covered by the two specific exceptions  in  Explanation  3  to  section  65  B(44)  of  FA 12,  services  provided  by  the  partners  to  the  firm would not constitute “any activity carried out by a person for another” in terms of the definition of ‘service’ u/s. 65B(44) of FA 12, Hence, service tax would not be applicable to remuneration received by  a  partner  from  the  partnership  firm.  Alterna- tively, by deeming fiction if a partner is treated as a different ‘person’ under tax laws overriding the provisions of the partnership law, then a partner would be deemed to be an employee of the firm. If that be the case, services provided by partners to  the  Partnership  firm  would  be  excluded  from the  definition  of  ‘service’  in  terms  of  clause  (b) of section 65 B(44) of FA 12. Hence, the question of  any  liability  to  service  tax,  on  remuneration received  by  partners  from  the  partnership  firm, would  not  survive.

CBEC’s confusing clarification regarding Form VCES-3 and CENVAT credit

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Background
During the nascent period of the commencement of the Voluntary Compliance Encouragement Scheme, 2013 (‘VCES’), the industry and taxpayers were doubtful as regards their eligibility to avail CENVAT credit in respect of the tax dues paid under the VCES, i.e., paid under the reverse charge mechanism and against supplementary invoices raised by their service providers. The CBEC sought to put this uncertainty to rest by issuing clarification in the form of a Circular [No. 170/5/2013-ST dated 08-08-2013] (on issues pertaining to the VCES). In the aforesaid Circular Q. No. 18 (or FAQ No. 22 of the CBEC’s booklet on Frequently Asked Questions relating to VCES issued on 08-08-2013) dealt with the issue of eligibility of CENVAT credit to the recipient of service in respect of the tax dues paid under a supplementary invoice or under reverse charge.

At that time, it was clarified that apart from the restriction imposed by rule 6(2) of the Service Tax Voluntary Compliance Encouragement Rules, 2013 (hereinafter referred to as ‘VCES Rules’), relating to utilisation of CENVAT credit for payment of tax dues under the VCES, all issues relating to admissibility of CENVAT credit shall be determined in terms of the provisions of the CENVAT Credit Rules, 2004 (‘CCR’). It was also clarified that the admissibility of CENVAT credit of; (i) service tax paid by a service recipient under an invoice or a supplementary invoice issued by a service provider for the amount of tax dues paid under VCES, and (ii) tax dues paid by a service recipient under reverse charge mechanism under VCES; shall be determined in terms of rule 9(1)(bb) and 9(1)(e) respectively of the CCR.

Recent clarification
Despite the above, a large section of the tax payers (and declarants under the VCES) felt that the issue was needed more clarity was needed on this issue. Accordingly, clarifications were pursued by trade and industry mainly related to the timing for availment of such CENVAT credit, i.e., whether the credit would be available immediately upon payment of first installment of tax dues or only after payment of tax dues in full and receipt of acknowledgement of discharge in Form VCES-3. In response, recently, the CBEC, vide its Circular No. 176/2/2014-ST dated 20-01-2014 has indicated that CENVAT credit shall be available only upon full payment of tax dues and receipt of Form VCES-3, stated as under:

“3. It would be in the interest of VCES declarants to make payment of the entire service tax dues at the earliest and obtain the discharge certificate within 7 days of furnishing the details of payment. As already clarified in the answer to question No.22 of FAQ issued by CBEC dated 08-08-2013, eligibility of CENVAT credit would be governed by the CENVAT Credit Rules, 2004.

4. Chief Commissioners are also advised that upon payment of the tax dues in full, along with interest, if any, they should ensure that discharge certificate is issued promptly and not later than the stipulated period of seven days.”

Through the above clarification, the CBEC has briefly, professed that, (i) the eligibility for availment of CENVAT credit shall be determined in terms of the CCR and (ii) CENVAT credit shall be available only after full payment of tax dues and receipt of acknowledgement of discharge in Form VCES-3.

Brief Analysis
While the prescribed time permitted under the VCES for payment of tax dues is 30th June, 2014 and 31st December, 2014 with interest, the CBEC has entreated the declarants to earnestly deposit the balance tax dues in order to avail CENVAT credit. Further, the CBEC has maintained that the eligibility of CENVAT credit would be governed by the CCR. In this regard, the CBEC has also urged the Chief Commissioners to ensure that the issuance of acknowledgement of discharge in Form VCES-3 is concluded within the stipulated period of seven days of receipt of information regarding full payment of declared tax dues.

Confusing clarification
Generally, a circular or clarification is issued to put to rest any doubts that may exits on a particular issue. However, it appears that the aforesaid Circular has created more doubts instead of clarifying the existing ones. Here’s why this Circular has created more confusion than clarification.

The CCR allow availment of CENVAT credit on the basis of either (i) an invoice, a bill or challan issued by a provider of input service or (ii) a supplementary invoice, bill or challan issued by a provider of output service, in terms of the provisions of Service Tax Rules, 1994 subject to certain exceptions or (iii) a challan evidencing payment of service tax, by the service recipient as the person liable to pay service tax.

A thorough reading of the relevant Rules in CCR with the aforesaid clarification from a service recipient’s perspective, the following fact situations emerge:

1. Where a supplementary invoice is raised by the service provider for collection of service tax – In terms of the Clarifications stated above, the eligibility to CENVAT credit in such a case shall be determined in terms of rule 9(1)(bb) of the CENVAT Credit Rules, 2004 which permits CENVAT credit availment except where the additional amount of tax became recoverable from the provider of service on account of non-levy or non-payment or short-levy or short-payment by reason of fraud or collusion or willful misstatement or suppression of facts or contravention of any of the provisions of the Finance Act or of the rules made thereunder with the intent to evade payment of service tax. Hence, where fraud, suppression etc., with intent to evade payment of tax does not exist, CENVAT credit may be availed on the basis of receipt of a supplementary invoice.

The question, whether the department can allege fraud, suppression etc., with intent to evade payment of tax in respect of VCES declarations, where the declarants have voluntarily disclosed their tax dues, it is still unclear and open for deliberation as this has specifically not been clarified by the department till date.

2. Where an invoice has not been issued by the service provider at the time of rendering service and an invoice is issued for the first time – The present Circular No. 176/2/2014-ST dated 20-01- 2014 as also the Circular No. 170/5/2013-ST dated 08-08-2013 (hereinafter referred to as ‘Clarifications’) clarify that the eligibility to CENVAT credit shall be determined in terms of the CENVAT Credit Rules, 2004; specifically rule 9(1)(bb) or rule 9(1) (e). Where an invoice is issued for the first time, CENVAT credit can be taken on the basis of the invoice, challan or bill issued in terms of rule 4A of the Service Tax Rules, 1994 and the provisions under the CENVAT Credit Rules, 2004 do not impose any restriction similar to that under rule 9(1)(bb) of CENVAT Credit Rules, 2004 for such availment.

Under normal circumstances, the service recipient is eligible to take CENVAT credit immediately upon receipt of the invoice (subject to the condition that the service provider is paid within the specified period). The case of a service recipient would be no different is the service provider has issued an invoice with the service tax component for the first time. In this scenario, can the service provider be restricted from availing CENVAT on the basis of such invoice? The circular is conspicuously silent on this aspect.

3. Where tax dues have been partially paid under reverse charge – In such a situation, rule 9(1) (e) of the CENVAT Credit Rules, 2004 provides that CENVAT credit may be availed immediately on the basis of a challan evidencing payment of service tax by the service recipient as the person liable to pay service tax without laying down any additional conditions.

This situation is similar to (2) above. Generally, the service recipient becomes eligible to claim CENVAT as soon as he deposits the service tax, on the basis of the tax paid challan.

The circular seems to suggest that even in case of a service recipient having deposited 50% of tax, would not be permitted to avail CENVAT credit unless and until the entire liability declared under the VCES is cleared. Whether such a restriction can be imposed by way of a clarification is open issue.

The CBEC has by virtue of the clarification, put the service recipients into an irrational situation, i.e., they would be entitled to CENVAT credit only after the issuance of acknowledgement of discharge to the declarants, which has till date been at the mercy of the department; more so in the case where the entire amount of tax dues have been paid by the declarant (service provider/recipient, as the case be) but acknowledgement of discharge has not been is- sued within 7 days of intimation to the department. Such a condition for postponement of availment of CENVAT credit is unwarranted on the part of CBEC.

The CBEC has also failed to consider the fact that, except in case of payment of tax dues arising out of reverse charge, the declarants and person entitled to CENVAT credit are different. The payments made by declarants under the VCES, continue to be ‘tax dues’ irrespective of the conclusiveness of the declaration made. The documentary trail showing the collection of service tax by the service provider should meet the requirement of law and the service recipients are not expected to produce any evidence to show that the service provider is actually deposited the dues with the Government.

It is quite likely that to this extent, the aforesaid Circular may be challenged as being ultra vires the provisions of the CENVAT Credit Rules, 2004, VCES and VCES Rules. It is doubtful that this confusing and overstepping clarification by CBEC, will help the declarants in away in getting swift receipt of the acknowledgement of discharge.

Shree Cement Ltd. vs. Addl. CIT In the Income Tax Appellate Tribunal Jaipur Bench, Jaipur Before Hari Om Maratha (J.M.) and N.K. Saini (A.M.) ITA No. 503/JP/2012 Assessment year: 2007-08. Decided on 27th January, 2014 Counsel for Assessee/Revenue: D.B. Desai/A.K. Khandelwal

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Section 80IA(8) – Where more than one market value/Arm’s Length Value is available and the assesse is entitled to adopt the market value of its choice. Section 2(24) – Receipt on account of Carbon credit is capital receipt not liable to tax.
(1) Re: Claim u/s. 80IA:

Facts:
The assessee claimed deduction u/s. 80IA in respect of its Power generation undertaking. Power generated by the power undertaking is predominantly used by the assessee captively at its cement unit. For computing the profitability of the power captively consumed, in terms of provisions of section 80IA(8), the assessee considered the market value or Arm’s Length Value being the value at which independent power supplier had sold power to Power Distribution Companies (DISCOMs) in the State of Rajasthan. While the AO applied the rate at which power is supplied by the State Electricity Grid to assessee’s cement unit and accordingly, re-computed the deduction eligible u/s. 80IA. The CIT(Appeals) upheld the action of the AO.

Before the tribunal, the revenue justified the orders of the lower authorities on the grounds amongst others, that:

• the assessee has adopted market price of its choice in computing the transfer price and such discretion cannot be allowed to the assessee;
• On the point of selection of price from the basket of market values, it submitted that there is no such provision in the act which gives assessee such prerogative.
• Since, the assessee itself is drawing power from the State grid on regular basis, Grid rate is the best market price available which should be adopted for computing deduction u/s. 80IA.

Held:
According to the tribunal, the issue before it is where there are two or more market values available and if the assessee has adopted a ‘value’ which is ‘market value’, whether it is permissible for the Revenue to still replace the same by another ‘market value’. The tribunal, on perusal of section 80IA(8) noted that the statute provides that the assessee must adopt ‘Market Value’ as the transfer price. In the open market, where a basket of ‘Market Values’ are available, the Act does not put any restriction on the assessee as to which ‘Market Value’ it has to adopt. It is purely assessee’s discretion. As long as the assessee has adopted a ‘Market Value’ as the transfer price, that is sufficient compliance of law. Even if assessee’s cement unit has purchased power, also from the Grid or that assessee’s Power Unit has also partly sold its power to grid or third parties that by itself, does not compel the assessee or permit the Revenue, to adopt only the ‘grid price’ or the price at which the Eligible Unit has partly sold its power to grid or third parties, as the ‘market value’ for captive consumption of power to compute the profits of the eligible unit. Any such attempt is clearly beyond the explicit provisions of section 80IA(8) of the Act. The above principles are also supported by the decision of Special Bench of Bangalore Tribunal in Aztec Software & Technology Services Ltd. vs. ACIT 107 ITD 141 as well as Mumbai Tribunal decision in the case of ACIT vs. Maersk Global Service Centre (I) Pvt. Ltd. 133 ITD 543. Since the assesse had adopted a rate at which actual transactions had been undertaken by the unrelated entities and the volumes of transaction as relied upon were also substantial, the appeal filed by the assesse on this ground was allowed.

Re: Receipt from Carbon Credit is capital receipt or revenue receipt:

Facts:
The assessee’s project ‘Optimum Utilisation of Clinker’ had generated CER or Carbon Credit by reducing emissions from clinkerisation and from power generation. The said project generated CERs against which the assessee received Rs. 16,02 crore which has been claimed as ‘capital receipt’. In the assessment order, the Assessing Officer held that cost of acquisition of Carbon Credit is NIL & the entire receipt is taxable as capital gain. However, in the computation, it has been added as Business income. The CIT (Appeals) on appeal held that the receipt was in the nature of benefit arising from the business of the assessee and is taxable as ‘Business Income’ u/s. 28(iv) of the Act.

Before the tribunal the revenue submitted that the receipt on account of carbon credit was related to the business of the assessee and the assessee had undertaken activities which had resulted in the receipt on account of carbon credits. Hence, the amount so received had to be considered as related to the business of the assessee and should either be considered as revenue receipts chargeable to tax as business income, or the net amount after deduction of expenditure if any, incurred for the same should be considered as chargeable to tax under the head capital gains.

Held:
The tribunal relied on the decisions of the Hyderabad Tribunal in the case of  My Home Power Ltd.  vs.  DCIT 151 TTJ 616 (Hyd), the Chennai Tribunal in the cases of Sri Velayudhaswamy Spinning Mills (P.) Ltd. vs. DCIT 40 taxmann.com 141  and  Ambika Cotton Mills Ltd. vs. DCIT I.T.A. No. 1836/Mds/2012 and held that receipt on account of Carbon Credit is capital in nature and neither chargeable to tax under the head Business Income nor liable to tax under the head Capital Gains.  In its above view, the tribunal also drew support from the decision of the Supreme Court in the case of Vodafone International Holdings vs. UOI 341 ITR 1 wherein the Supreme Court held that     treatment     of     any     particular     item     in     different    manner in the 1961 Act and DTC serves as an important guide in determining the taxability of said item. Since DTC by virtue of the deeming provisions specifically    provides    for    taxability    of    carbon    credit    as    business receipt and Income Tax Act does not do so, the tribunal held in favour of the assessee and the addition made by the AO was deleted.

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(2014) 98 DTR 281 (Hyd) Fibars Infratech (P) Ltd. vs. ITO A.Y.: 2007-08 Dated: 03-01-2014

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Section 2(47)(v): Under the development agreement, since no construction activity had taken place on the land in the relevant previous year, it cannot be said that the transferee has performed or was willing to perform its obligation under the agreement in the relevant year and, therefore, provisions of section 2(47)(v) did not apply.

Facts:
During the F.Y. 2006-07, the assessee company transferred certain property for development to M/s MAK Projects (P) Ltd. The development agreement was executed on 15th December, 2006. As per the development agreement, the assessee was entitled to receive 16 villas comprising 9,602 sq. yards of plotted area along with 58,606 sq. ft. of built up area.

However, there was no development activity until the end of the previous year ending 31st March, 2007. Commencement of building process had not been initiated as the building approval was provided only on 6th March, 2007. The Assessing Officer alleged that the transaction under development agreement was a transfer u/s. 2(47)(v) as on the date of entering into the agreement.

Though possession of the property was handed over to the developer, the assessee contended that since there is no amount of investment by the developer in the construction activity during the F.Y. 2006-07, it would amount to non-incurring of required cost of acquisition by the developer. Hence, no consideration can be attributed to the F.Y. 2006-07. As there is no quantification of consideration to be received by the assessee, section 2(47)(v) would not apply.

Held:
The handing over of the possession of the property is only one of the conditions u/s. 53A of the Transfer of Property Act, but it is not the sole and isolated condition. It is necessary to go into whether or not the transferee was ‘willing to perform’ its obligation under these consent terms. When transferee, by its conduct and by its deeds, demonstrates that it is unwilling to perform its obligations under the agreement in this assessment year, the date of agreement ceases to be relevant. In such a situation, it is only the actual performance of transferee’s obligations which can give rise to the situation envisaged in section 53A of the Transfer of Property Act.

In the given case, nothing is brought on record by the authorities to show that there was development activity in the project during the assessment year under consideration and cost of instruction was incurred by the developer. Hence, it is to be inferred that there was no amount of investment by the developer in the construction activity during the assessment year in this project and it would amount to non-incurring of required cost of acquisition by the developer. The developer in this assessment year had not shown its readiness in making preparations for the compliance of the agreement. On these facts, it is not possible to hold that the transferee was willing to perform its obligations in the financial year in which the capital gains are sought to be taxed by the Revenue. This condition laid down u/s. 53A of the Transfer of Property Act was not satisfied in this assessment year. Consequently, section 2(47) (v) did not apply.

Further, it cannot be said that there is any sale in terms of section 2(47)(i). To say that there is an exchange u/s. 2(47)(i) both the properties which are subject matter of the exchange in the transaction are to be in existence at the time of entering into the transaction. It is to be noted that at the time of entering into development agreement, only the property i.e., land pertaining to the assessee is in existence. There is no quantification of consideration or other property in exchange of which the assessee has to get for handing over the assessee’s property for development.

It cannot be said that the assessee carried on the adventure in the nature of trade so as to bring the income under the head ‘Income from business’. This is so, because the assessee has not sold any undivided share in the property to the developer in the year under consideration. The assessee remains to be the owner of the said property and the land was put for development for the mutual benefit. Even if the transaction is considered as business transaction, it would be taxed only when the undivided share in the land is transferred.

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(2013) 96 DTR 220 (Del) ACIT vs. Meenakshi Khanna A.Y.: 2008-09 Dated: 14-06-2013

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Section 56(2)(vi): Lump sum alimony received by a divorcee as a consideration for relinquishing all her past and future claims is not chargeable u/s 56(2) (vi).

Facts:
During A.Y. 2008-09, the assessee received lump sum alimony from her ex-husband. The divorce agreement between the assessee and her exhusband was made in the F.Y. 1989-90. Pursuant to this agreement, the ex-husband of the assessee was required to make monthly payments to his wife over a period of time. However the ex-husband did not pay the same and hence the assessee threatened to take legal action against him. The exhusband, therefore, paid a lump sum amount as full and final settlement in lieu of assessee’s past and future claims. The Assessing Officer held that exhusband was not covered under the definition of relative as provided in exceptions to section 56(2) (vi). He, therefore, treated the amount received by the assessee as income from other sources taxable under the provisions of section 56(2)(vi) and added the same to the income of the assessee. The assessee however contended that she had received the amount against consideration of extinguishing her right of living with her husband. It was further argued that the amount was a capital receipt.

Held:
Though the assessee was to receive monthly alimony which was to be taxable in each year from conclusion of divorce agreement, but the monthly payments were not received and, therefore, were not offered to tax. The receipt by the assessee represents accumulated monthly installments of alimony, which has been received by the assessee as a consideration for relinquishing all her past and future claims. Therefore, there was sufficient consideration in getting this amount. Therefore, section 56(2)(vi) is not applicable. Secondly, amount was paid by way of alimony only because they were husband and wife and the assessee was spouse of the person who has paid the amount and, therefore, payment received from spouse did fall within the definition of relative. Moreover even if it is accepted that the monthly payments of alimony are liable to tax then also in the present case the amount received represents past monthly payments and hence cannot be taxed in the year under consideration. Therefore, it was held that amount received was a capital receipt and not liable to tax.

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The Missing Link between Action and Purpose

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Human beings act out of reason. We do not dig holes and refill them for no reason. The reasons behind our actions are our goals. For most of us, these are ‘unwritten goals’ within the narrow context of our physical and emotional needs. Very few of us have ‘clear written goals’. Mark H. McCormack has given details of a study in his book “What they don’t teach you at Harvard Business School.” The study was conducted at Harvard between 1979 and 1989. The Harvard graduates of 1979 were asked whether they have set clear, written goals for their future and whether they have made plans to achieve them. The responses were: 3% had clear and written goals; 13% had goals, but they had not written them; the majority 84% had no specific goals. After ten years, they found that the 13% earned on an average twice as much as the 84% and the rest 3% were earning 10 times the other 97% put together. The only difference was clear and written goals.

Clarity and purpose is more important than intelligence. An average person who is clear about what he wants is set to achieve more than a confused genius. Goals are derived from our dreams and they direct our actions. Many of us have never defined our goals. We, thus, live without direction and dreams. As needs get satisfied, the ‘unwritten need based goals’ lose their power to motivate. Once we are dry of motivation, we suppose that we have achieved whatever was necessary. It is similar to a situation where your car runs out of fuel and you declare that you have reached your destination.

Frustration, boredom and fatigue are thus inevitable in our lives, and we try to dodge them with sloppy entertainment and possessions. We may have accomplished many ‘unwritten goals’, but we lack the harmony among different roles we play. Our homes are filled with things, but we are unfulfilled within. Our achievements are termed ‘great’, but we are cramped with regrets. We ‘exist’ but have stopped ‘living’– result: a life of ‘unaware mediocrity’. Without an aim we are like a leaf at mercy of the winds.

‘Goal setting’ process is much more than merely a prerequisite for achieving more. It makes you think for yourself. This is the rationale for setting goals – goals define both our needs and purpose. This process shifts our attention from the question “What I want?”, to “Why I want it?”. This shift opens the doors for introspection. You are compelled to answer the question: “What is it that I truly want in life and why”? Your conscience is stirred in the process.

Swami Vivekananda said, “The greatest religion is to be true to your own nature. Have faith in yourselves.” Goal setting is the first step towards authentic thinking about our own self. This process temporarily upsets you from within till you arrive at your own answer. But once the process starts, rest assured, the answer will come. The moment you arrive at something original, that moment is the moment of your rebirth. Your first birth was from the womb of your mother, the rebirth is from the womb of wisdom.

This new ‘YOU’ has found its purpose. Now, instead of being tossed around by life, you take control of life. You transform from bewilderedness to clarity. You now shine with clarity and purpose. You have dropped society’s definition of success, and arrived at your own definition. This sets a new zeal in you. It is a shift from knowledge to wisdom.

Unless our goals are ‘purpose-driven’, they, over a period of time, cease to have either meaning or motivation. Purpose is beyond needs. It is the ardour in you to make a difference. Higher the purpose deeper the depth from which your abilities and capacities be pulled out. Isn’t it sad to go to your grave without knowing what you were born for?

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Income: Deemed profit: Section 41(1): A. Y. 2007-08: Unclaimed liabilities of earlier years which are shown as payable in the accounts are not taxable as income u/s. 41(1) even if the creditors are untraceable and liabilities are non-genuine:

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CIT vs. Bhogilal Ramjibhai Atara (guj); tax appeal no. 588 Of 2013 dated 04-02-2014:

For the A. Y. 2007-08, in the return of income, the assessee had shown an amount of Rs. 37,52,752/- as outstanding debt and the same was shown in the accounts as payable. The Assessing Officer summoned all the creditors and questioned them about the alleged credit to the assesee. In the assessment order he gave a finding that a number of parties were not found at the given address, many of them stated that they had no concern with the assessee and some of them conveyed that they did not even know the assessee. On the basis of such findings and considering that the debts were outstanding since several years, the Assessing Officer applied section 41(1) of the Income-tax Act, 1961 and added the entire sum as income of the assessee. The Assessing Officer held that liabilities have ceased to exist within the meaning of section 41(1) and therefore, the same should be deemed to be the income of the assessee. The Tribunal allowed the assessee’s appeal and deleted the addition.

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

“i) We are in agreement with the view of the Tribunal. Section 41(1) of the Act would apply in a case where there has been remission or cessation of liability during the year under consideration subject to the conditions contained in the statute being fulfilled. Additionally, such cessation or remission has to be during the previous year.

ii) In the present case, both elements are missing. There was nothing on record to suggest that there was remission or cessation of liability that too during the previous year relevant to the A. Y. 2007-08 which was the year under consideration.

iii) It is undoubtedly a curious case. Even the liability, itself, seems under doubt. The Assessing Officer undertook the exercise to verify the records of the so-called creditors. Many of them were not found at all in the given address. Some of them stated that they had no dealings with the assessee. In one or two cases, the response was that they had no dealing with the assessee nor did they know him. Of course, these inquiries were made ex parte and in that view of the matter, the assessee would be allowed to contest such findings. Nevertheless, even if such facts were established through bi parte inquiries, the liability as it stands perhaps holds that there was no cessation or remission of liability and that therefore, the amount in question cannot be added back as a deemed income u/s. 41(1) of the Act.

vi) This is one of the strange cases where even if the debt itself is found to be non-genuine from the very inception, at least in terms of section 41(1) of the Act there is no cure for it. Be that as it may, insofar as the orders of the Revenue authorities are concerned, the Tribunal not having made any error, this Tax Appeal is dismissed.”

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Income: Accrual in India: Non-resident: Fees for technical services: Section 9(1)(vii): A. Y. 1991-92: Sale of design and engineering drawings outside India: Sale of plant: Income does not accrue in India: Not taxable in India:

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DIT vs. M/s. Nisso Lwai Corporation, Japan (AP); ITA No. 612 of 2013 dated 04-02-2014:

The assessee is a non-resident company and it is represented by RINL Visakhapatnam. The assessee company had provided design and engineering services, manufacture, delivery, technical assistance through supervision of erection and commissioning etc., to establish compressor house-I for RINL. The payments were made by RINL separately for each of the services/ equipments provided/supplied by the assessee. It, inter alia, included payment made towards supply of design and engineering drawings. The assessee company claimed that the said payment is not taxable in India as the transaction was of a sale of goods outside India. The Assessing Officer rejected the claim and assessed it as income. The Tribunal allowed the assessee’s claim, deleted the addition and held as under:

“We are of the view that the amount received by the assessee for supply of design and engineering drawings is in the nature of plant and since the preparation and delivery has taken place outside Indian territories, the same cannot be taxed in India.”

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

“i) It appears, the learned Tribunal, on fact, found that there has been no accrual of income in India and this accrual of income has taken place in Japan. As such, the Income-tax Act, cannot be made applicable.

ii) We feel that the decision is legally correct and we do not find any element of law to be decided in this appeal. The appeal is accordingly dismissed.”

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Power to call for information – Powers u/s. 133(6) are in nature of survey and general enquiry to identify persons who are likely to have taxable income and whether they are in compliance with provisions of Act – The notice seeking information from a cooperative Bank in respect of its customers which had cash transactions on deposits of Rs. 1,00,000 and above for a period of three years without reference to any proceeding or enquiry pending before any authority under the Act was valid.

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Kathiroor Service Co-operative Bank Ltd. vs. CIT (CIB) & Ors. [2014] 360 ITR 243 (SC)

The appellant-assessee before the Supreme Court was a service co-operative rural bank. The Incometax Officer (CIB), Calicut, issued a notice on 2nd February, 2009 to the assessee u/s. 133(6) of the Act calling for general information regarding details of all persons (whether resident or non-resident) who have made (a) cash transactions (remittance, transfer, etc.) of Rs. 1,00,000 and above in any accounts and/or (b) time deposits (FDs, RDs, TDs, etc.) of Rs. 1,00,000 or above for the period of three years between 1st April, 2005 and 31st March, 2008. It was expressly stated therein that failure to furnish the aforesaid information would attract penal consequences. The assessee objected to the said notice on grounds, inter alia, that such notice seeking for information which is unrelated to any existing pending proceedings against the assessee could not be issued under the provisions of the Act and requested for withdrawal of the said notice.

The assessing authority addressed to the objections raised by the assessee and accordingly rejected them by letter dated 5th March, 2009. The assessing authority relied on the decision of the jurisdictional High Court in M.V. Rajendran vs. ITO [(2003) 260 ITR 442 (Ker) ] wherein it was held that the Department is free to ask for information about any particular person or to call for general information in regard to any matter they consider necessary. Section 133(6) does not refer to any enquiry about any particular person or assessee, but pertains to the information in relation to ‘such points or matters’ which the authority issuing notices needs. This clearly shows that information of a general nature can be called for and names and address of the depositors who hold deposits above a particular sum is certainly permissible. In fact, as the section presently stands, section 133(6) is a power of general survey and is not related to any person and no banking company including a nationalised bank is entitled to claim any immunity from furnishing such information.

The assessee, aggrieved by the aforesaid, filed Writ Petition before the High Court challenging the notice dated 2nd February, 2009. The learned single judge held that the impugned notice was validly issued under the provisions of the Act and, therefore, dismissed the said petition.

Thereafter, the assessee approached the Division Bench of the High Court by way of Writ Appeal questioning the said notice on grounds, inter alia, that the issuance of such notice u/s. 133(6) was bad in law as section 133(6) only provides for power to seek information in case of pending proceedings under the Act and does not contemplate the powers to seek fishing information which is unrelated to any existing proceedings or which may enable the assessing authority to decide upon institution of proceedings under the Act. The Division Bench has observed that the questions raised therein was no longer res integra in view of the decision of the Supreme Court in Karnataka Bank Ltd. vs. Secretary Government of India [2002] 9 SCC 106, and, accordingly dismissed the said appeal.

Aggrieved by the aforesaid, the assessee went before the Supreme Court in appeal.

The Supreme Court observed that before the introduction of amendment in section 133(6) in 1995, the Act only provided for issuance of notice in case of pending proceedings. As a Consequence of the said amendment, the scope of section 133(6) was expanded to include issuance of notice for the purposes of enquiry. The object of the amendment of section 133(6) by the Finance Act, 1995 (Act 22 of 1995), as explained by the Central Board of Direct Taxes in its circular showed that the legislative intention was to give wide powers to the officers, of course with the permission of the Commissioner of Income-tax or the Director of Investigation to gather particulars in the nature of survey and store those details in the computer so that the data so collected can be used for checking evasion of tax effectively.

The assessing authorities are now empowered to issue such notice calling for general information for the purposes of any enquiry in both cases: (a) where a proceeding is pending, and (b) where proceeding is not pending against the assessee. However, in the latter case, the assessing authority must obtain the prior approval of the Director or the Commissioner, as the case may be, before issuance of such notice. The word ‘enquiry’ would, thus, connote a request for information or questions to gather information either before the initiation of proceedings or during the pendency of proceedings; such information being useful for or relevant to the proceeding under the Act.

The Supreme Court referred to its decision in Karnataka Bank Ltd. vs. Secretary, Government of India [2002] 9 SCC 106, wherein it had examined the proposition whether a notice us/. 133(6) could be issued to seek information in cases where the proceedings are not pending and construed section 133(6) of the Act.

In that case, it was held that it was not necessary that any inquiry should have commenced with the issuance of notice or otherwise before section 133(6) could have been invoked. It is with the view to collect information that power is given u/s. 133(6) to issue notice, inter alia, requiring a banking company to furnish information in respect of such points or matters as may be useful or relevant. The second proviso makes it clear that such information can be sought for when no proceeding under the Act is pending.

In view of the aforesaid, the Supreme Court held that the powers u/s. 133(6) were in the nature of survey and a general enquiry to identify persons who are likely to have taxable income and whether they are in compliance with the provisions of the Act. It would not fall under the restricted domains of being ‘area specific’ or ‘case specific’. Section 133(6) does not refer to any enquiry about any particular person or assessee, but pertains to information in relation to “such points or matters” which the assessing authority issuing notices requires. This clearly illustrated that the information of general nature could be called for and requirement of furnishing names and addresses of depositors who hold deposits above a particular sum is certainly permissible.

In the instant case, by the impugned notice the assessing authority sought for information in respect of its customers which had cash transactions or deposits of Rs. 1,00,000 or above for a period of three years, without reference to any proceeding or enquiry pending before any authority under the Act. The notice was issued only after obtaining approval of the Commissioner of Income-tax, Cochin. The Supreme Court therefore held that the assessing authority has not erred in issuing the notice to the assessee-financial institution requiring it to furnish information regarding the account holders with cash transactions or deposits of more than Rs. 1,00,000.

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Search and Seizure – Section 132B(4)(b) as it stood dealt with pre-assessment period and there is no conflict between this provisions and section 240 or 244A which deals with post-assessment period after the appeal – Assessee is entitled to interest for the period from expiry of period of six months from the date of the order u/s. 132(5) to the date of the regular assessment order in respect of amounts seized and appropriated towards tax but which became refundable as a result of appellate orde<

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Chironjilal Sharma HUF vs. Union of India & Ors. [2014] 360 ITR 237 (SC)

In the search conducted in the house of the appellant on 31st January, 1990, a cash amount of Rs. 2,35,000 was recovered. On 31st May, 1990, an order u/s. 132(5) came to be passed. The Assessing Officer calculated the tax liability and cash seized from appellant’s house was appropriated. However, the order of the Assessing officer was finally set aside by the Tribunal on 20th February, 2004. The Revenue accepted the order of the Tribunal. Consequently, the appellant was refunded the amount of Rs. 2,35,000 along with interest from 4th March, 1994 (date of last of the regular assessments by the Assessing Officer) until the date of refund.

The Appellant (assessee) claimed that he was entitled to interest u/s. 132B(4)(b) of the Act which was holding the field at the relevant time for the period from expiry of period of six months from the date of order u/s. 132(5) to the date of regular assessment order. In other words, the order u/s. 132(5) of the Act having been passed on 31st May, 1990, six months expired on 30th November, 1990, and the last of the regular assessment was done on 4th March, 1994, the assessee claimed interest u/s. 132B(4)(b) of the Act from 1st December, 1990 to 4th March, 1994.

The Supreme Court observed that close look at the provisions of section 132(5) and 132B, and, particularly, clause (b) of u/s. 132B(4) of the Act showed that where the aggregate of the amounts retained u/s. 132 of the Act exceeded the amounts required to meet the liability u/s. 132B(1)(i), the Department is liable to pay simple interest at the rate of 15% on expiry of six months from the date of the order u/s. 132(5) of the Act to the date of the regular assessment or reassessment or the last of such assessments or reassessments, as the case may be. The Supreme Court noted that though in the regular assessment done by the Assessing Officer, the tax liability for the relevant period was found to be higher and, accordingly, the seized cash u/s. 132 of the Act was appropriated against the assessee’s tax liability but the order of the Assessing Officer was overturned by Tribunal finally on 20th February, 2004 and in fact, the interest for the post-assessment period, i.e., from 4th March, 1994, until refund on the excess amount was paid by the Department to the assessee. The Department denied the payment of interest to the assessee u/s. 132B(4)(b) on the ground that the refund of excess amount was governed by section 240 of the Act and section 132B(4)(b) had no application. According to the Supreme Court, however, section 132B(4)(b) dealt with pre-assessment period and there was no conflict between this provision and section 240 or for the matter section 244A. The former dealt with pre-assessment period in the matters of search and seizure and the latter deals with post-assessment period as per the order in appeal.

The Supreme Court held that the view of the Department was not right on the plain reading of section 132B(4)(b) of the Act as indicated above.

The Supreme Court, accordingly, allowed the appeal and set-aside the impugned order holding that the appellant was entitled to the simple interest at the rate of 15% p.a. u/s. 132B(4)(b) of the Act from 1st December, 1990 to 4th March, 1994.

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‘Income’ includes ‘loss’ – a revisit

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‘Income includes loss’ is a phrase found in various judicial precedents in the context of Indian Incometax laws, although commercially ‘income’ and ‘loss’ have always been understood to be antonyms. The gap between the commercial and tax-understanding is intentional. In this context, it is important to know the meaning of the terms ‘income’ and ‘loss’ (along with difference between them).

Income is a term though commonly used; is seldom understood. It has always triggered more questions rather than answers. It cannot be understood with recourse to some accepted tenets, beliefs and established class of propositions. To limit income exclusively to one or any specific sphere would be an unjustified arrest of its reach. Possibly, this is the reason that Income-tax statute also has left the definition of income open-ended.

There are various principles concerning ambit of ‘income’. One among them is ‘income includes loss’. A number of decisions including the Apex Court ruling in the case of CIT vs. J.H. Gotla (1985) 156 ITR 323 (SC) and CIT vs. Harprasad & Co. Pvt. Limited (1975) 99 ITR 118 (SC) has flagged this canon. The attempt in this write-up is to revisit and discern the meaning of the phrase ‘income includes losses’. In this journey, the write-up touches upon various instances in the Act when this principle ‘appears’ to be inapplicable or unworkable. The write-up attempts to initiate a thought whether this principle is to be applied in every situation or this has a restricted application?

Definition of income in the Income-tax Act, 1961 (‘the Act’)

Section 2(24) of the Act provides an inclusive definition of the term ‘income’. It does not define ‘income’ per se. Section 2(24), if paraphrased, would read as under:

(24) “income” includes

• profits and gains
• dividend
• voluntary contributions received by a trust
• the value of any perquisite or profit in lieu of salary taxable
• any special allowance or benefit, other than perquisite included under sub-Clause (iii), specifically granted to the assessee
• any allowance granted to the assessee either to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed or to compensate him for the increased cost of living
• the value of any benefit or perquisite, whether convertible into money or not, obtained from a company or by a representative assessee
• any sum chargeable to Income-tax under Clauses (ii) and (iii) of section 28 or 41 or 59
• any sum chargeable to Income-tax under Clause (iiia) of section 28(iiia)/ (iiib)/ (iiic)
• the value of any benefit or perquisite taxable under clause (iv) of section 28
• any sum chargeable to Income-tax under clause (v) of section 28
• any capital gains chargeable u/s. 45
• the profits and gains of any business of insurance carried on by a mutual insurance company or by a co-operative society
• the profits and gains of any business of banking (including providing credit facilities) carried on by a co-operative society with its members
• any winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever
• any sum received from employees towards ESIC contribution
• any sum received from Keyman Insurance policy
• Gifts or receipts for inadequate consideration.

Section 2(24) enlists various instances of income. First among them is ‘profits and gains’. The terms ‘profits’ and ‘gains’ have not been defined in the Act. It is trite to state that in the absence of statutory definition one could place reliance on the dictionary meaning or normal connotation of term(s). If dictionary meanings are referred, ‘profits’ means excess of revenue over expenditure and ‘gains’ as an increase in amount, degree or value. These twin concepts are indicative of a positive figure. There are judicial precedents to indicate that gains include ‘negative gains’ and we would keep these judicial precedents aside for the time being [and restrict ourselves to terminologies used in the Act].

Other terms used in the definition are ‘received’, ‘granted’, ‘winnings’, ‘obtained’. All these terms also have an element of ‘positivity’ inbuilt in them. Can these terms be used along with ‘losses’? A loss is something different. It is not something which is received or won or granted or obtained. It comes ‘ab-extra’ from outside. The term ‘loss’ generally accompanies verbs such as ‘incurred’, ‘sustained’, ‘computed’, ‘suffered’ etc. The use of these terms in section 2(24) appears to indicate that the law does not visualise any losses to be listed therein. This becomes more evident on a reading of the remaining instances in the definition which confine themselves to incomes which are chargeable to tax. These are obviously not concerned with losses. To conclude, although section 2(24) is an inclusive definition, the instances listed therein do not seem to accommodate ‘losses’ within its stride.

Although section 2(24) is an inclusive definition and its normal meaning should not be curtailed by various items listed therein in its inclusive sweep, it is interesting to observe that the legislature has consciously not included a ‘single’ instance to suggest that income may possibly include a negative face also.

Scope and charge of total income

Section 4 is the charging provision under the Act. The charge is in respect of the total income of a person for any year. The scope of total income is outlined by section 5 which has two sub-sections – one, dealing with residents and other with nonresidents. It enlists incomes which are includible in total income. It recognises those incomes which are to be included in total income on ‘receipt’ or ‘accrual’ or ‘deemed accrual’ basis. Cumulatively, these sections seek to include income within the scope of total income to levy a charge of tax. The question is whether losses can be charged to tax? Can losses be accrued or received or deemed so? The answer is negative in my view.

This is because, the term(s) ‘accrue or arise’ connotes ‘legal right to receive’. It is generally a stage prior to actual receipt (except for advances). The gap between accrual and actual receipt is only a matter of timing difference. It needs no explanation to state that losses cannot be ‘received’. When they cannot be received; how can there be a right to receive them? – Readers may deliberate.

Provisions of clubbing of income

Explanation 2 to section 64 reads – ‘For the purposes of this section, ‘income includes loss.’ This explanation was inserted by Finance Act 1979 whose objective is explained by Circular No. 258, dated 14-06-1979; relevant portion of which is as under:

“17.2 Under the provisions of section 64, the income of the specified persons is liable to be included in the total income of the individual in certain circumstances. The Finance Act, 1979 has inserted a new Explanation 2 below section 64(2) to provide that the term “income” for the purposes of section 64 would include a loss. Hence, for example, where the individual and his spouse are both partners in a firm carrying on a business and the firm makes a loss, the share of loss attributable to the spouse will be included in determining the total income of the individual.”(emphasis supplied)

The intention of the aforesaid amendment/insertion was to include losses in determining total income of the person in whose hands the income gets clubbed.  The inclusion was, therefore, sought to be made in ‘total income’ determination.  Losses of one person (whose income/loss get clubbed) were sought to be set-off against the income of another person (in whose hands the income is getting clubbed).  The explanation seeks to enable set-off of losses of one person in another’s hand. To effectuate this principle the legislature inserted explanation 2 WHEReby income for the purposes of this section includes loss. The important aspect here is the limited scope of this explanation.  The content of this explanation is limited to the context of section 64 only.  It does not travel beyond this. The explicit mention of such an aspect goes on to substantiate that under general principles income does not include losses.  This is a unique provision with a special purpose.

Some of the circulars on the aspect of considering losses for the purpose of set-off against income provide some insight into the purpose of such leg- islation.  In addition to Circular 258 dated 14-06-1979 (referred above) one may refer the C. B. R. Circular No. 20 of 1944 – C. No. 4(13)-I.T/ 44 dated the 15TH July, 1944 which reads as under:
Subject : Section 16(3)(a) – Loss incurred by wife or minor child – Right of set off under section 24(1) and (2).

Attention is invited to the Boards Circular No. 35 of 1941, on the above subject. It was laid down therein that where the wife or minor child of an individual incurs a loss which if it were income would be includ- ible in the income of that individual u/s. 16(3), such loss should be set-off only against the income, if any, of the wife or minor child and if not wholly set-off should be carried forward, subject to the provisions of section 24(2). The Board has reconsidered the question and has decided that, although this view may be tenable in law, the other and more equitable view is at least equally tenable that such loss should be treated as if it were a loss sustained by that individual. Thus, if the wife or minor child has a personal income of Rs. 5,000 which is not includible in the individuals income and sustains a loss of Rs. 10,000 from a source the income of which would be includible in the income of the individual, the loss should be set-off against the income of the individual under section 24(1), and if not wholly set-off should be carried forward u/s. 24(2). The wife or the minor child, would, therefore, be assessable on the personal income of Rs. 5,000. If, in any case, the wife or minor child claims a set-off of the loss against the personal income, it should be brought to the notice of the Board. Boards Circular No. 35 of 1941 is hereby cancelled.” (emphasis supplied)

Thus, losses are included to enable set-off against income. The inclusion is in the total income computation and not in income as such. The inclusion is for the limited purpose of computation. The Direct Tax Law Committee 1978, in its final report, also made some observations on this provision:

“The provisions for aggregating income of the spouse under clause (i) of section 64(1) has led to a dispute in regard to the treatment of losses which may fall to the share of the spouse from the partnership. The Gujarat High Court in Dayalbhai Madhavji Vadera vs. CIT [1966] 60 ITR 551 has ruled that the section contemplates inclusion of income and, accordingly, the share of loss arising to the spouse cannot be set-off against the total income of the other spouse. The Karnataka High Court in Kapadia vs. CIT [1973] 87 ITR 511 has dissented from this view and has held that income in this section includes a loss. On general principles, income from membership in a firm would include a loss and the context of clause (i) of sub-section (1) does not warrant the contrary construction. The liability to assessment cannot alternate from year to year between the individual and the spouse depending on whether there is a profit or a loss…” (emphasis supplied)

The Committee has categorically said that income ‘in this section’ includes loss. To state negatively, otherwise (or under normal circumstances) income does not include loss. The reason for such inclusion is to ensure consistency in the process of aggre- gating the profit or loss with the spouse’s income. It does not indicate income to include loss in all circumstances.

The scope of clubbing section is limited. It provides for clubbing of one’s income in the total income of another. By defining income to include loss, it is suggesting that loss of one person (along with income) may also be included in the total income of another person. The inclusion of loss is expanding the scope of ‘clubbing’ and not ‘income’.

Set-off and carry forward of losses

Chapter VI of the Act deals with aggregation of income and set-off of loss. Section 70 provides for set off of ‘loss’ from one source of income against ‘income’ from another source under the same head. If the losses cannot be fully set-off against income under the same head, they may be set-off against incomes under other heads (section 71). The balance losses remaining after set off against the incomes computed under other heads is carried forward to the succeeding years as per the relevant provisions of the Act. Thus, the Act recognises loss to be different from income. Loss has an effect of reducing income in the process of set-off against income. An increase in loss would reduce the income. They are inversely proportional. The opening portion of section 70 and 71 is broadly similar language which is reproduced below:

Section 70

(1) Save
as otherwise provided in this Act,
where the net
result for any assessment year
in respect of any source
falling under any
head of income, other
than “Capital gains”, is a loss,
the assessee shall
be entitled to have
the amount of such loss
set-off against his
income from any other
source under the
same head.

Section 71

(1) Where
in respect of
any assessment year
the net result of the computation under any
head of income, other than “Capital gains”, is a loss and the assessee has no income
under the head “Capital gains”, he shall, subject to the provisions of this Chapter, be entitled to have
the amount of such loss
set-off against his
income, if any, assessable for that assessment year under any other head.


to absorb the costs/expenditures/ other outlays; an assessee ends up with a situation of unabsorbed costs/ expenditures. This event of income falling short of outflows is called ‘loss’. Can such a situation be termed as ‘in- come’? Loss and Income are names of opposite fiscal situation(s) and cannot be equated with one another. Both the sections deal with set off of loss against income. The legislature itself recognises income and loss to be different and distinct. They are different outcomes having opposite characters. They cannot co-exist. This being the case, can one say that income includes loss?

The term ‘include’ means – ‘to comprise or contain as part of a whole’. Say for instance, if A includes B, then, A either consists of B wholly or partially. On the contrary, if the presence of B negates or diminishes the existence of A, then can we say that A includes B? In the context of clubbing, the legislature required losses (of one person) to be clubbed along with income (of another). This clubbing is to facilitate total income computation. Thus, the inclusion is only ‘quantitative’ and not ‘qualitative’. This being the case, such limited quantitative inclusion of the legislature cannot be understood to be ‘qualitative’ to paint all the incomes with such understanding.

In the context of section 70 and 71, ‘loss’ is a mere outcome in the process of computing income. This is apparent from the language used in these twin sections which read – ‘where the net result….’. Loss is a net result or consequence. The other alternative outcome is ‘income’. To elucidate further, one may look at the structure of the Income-tax Act.

Section 4 creates a charge on total income.  Section 5 (read with section 7 and 9) outline the scope for such total income.  While computing total income certain incomes are excluded by section 10 (along with 11).  Section 14 classifies income into 5 heads for the purpose of total income computation (and charge of Income-tax).  Sections 15 to 59 compute incomes under various heads.   Section 60 to 64 include (or club) certain incomes to assessee’s total income.  The focus is thus on total income computa- tion since the charge u/s. 4 is on it.  While making such computation, when the income is insufficient ‘Loss’ is conceptually different from income.  It is not defined in the Act.  Black’s law dictionary de- fines ‘loss’ as – ‘An undesirable outcome of a risk; disappearance or diminution in value; usually in an unexpected or relatively unpredictable way’.  The definition appears to reflect attributes of involuntary happening.  Although Companies Act of 1956 does not define ‘loss’ there is an indirect inference one could draw from section 210(2) therein which reads :

(2)IN the case of a company not carrying on business for profit, an income and expenditure account shall be laid before the company at its annual general meeting instead of a profit and loss account, and all references to “profit and loss account”, “profit” and “loss” in this section and elsewhere in this Act, shall be construed, in relation to such a company, as references respectively to the “income and expenditure account”, “the excess of income over expen- diture”, and “the excess of expenditure over income”. (emphasis supplied)

The meaning of loss has been explained to be ‘excess of expenditure over income’. It is a differential between expenditure and income. It is an outcome when income is unable to absorb all the expenditure/ costs. In other words, unabsorbed cost is loss. The interplay between income and expenditure results in loss. While computing income, loss could arise if the income falls short of expenditure. Loss is thus a status or situation wherein expenditure exceeds income. It is not a part of income. Something to be included in income, it should be a part of it. Income (net) or losses are two alternatives. They are outcomes. One denotes surplus and other is an epitome of deficit. From an Income-tax standpoint, marriage of these two extremes is impossible sans specific situations such as clubbing or set-off provi- sions (referred above).

Accounting standards also differentiate the two. Accounting Standard 22 [Disclosure and computation of deferred tax] defines taxable income (tax loss) as the amount of the income (loss) for a period, determined in accordance with the tax laws, based upon which Income-tax payable (recoverable) is determined.  Income and loss have been recognised as alternatives.  Loss is an antonym of income.  The question is whether such parallel and unlike concepts overlap under the Income-tax regime?

As stated in the beginning of this write-up, various courts held that income includes ‘losses’. It appears to be a fairly settled proposition. Whether this proposition is applicable in every situation?  Does ‘income’, which is inherently positive, include losses?

In my opinion, the term ‘income’ is not a polymor- phous term having an open texture. Income which indicates ‘coming in’ is an embodiment of positivity. It signifies pecuniary enrichment or accumulation. Loss is indicative of opposite emotions (to income). Loss may take various forms but would always result in deterioration. Indian tax provisions (keeping the judicial precedents aside) actually do not seek to hold these contradictory terms synonymous in every situation. At best, loss can be defined to be ‘loss of income’ and not ‘loss includes income’.

Having gone through the various instances and indications in the Act, the question still persists. The mystery around relationship between income and loss still lingers. Can these instances in the statute shake the law of land (Apex Court rulings)? Readers may deliberate whether INCOME REALLY INCLUDES LOSS?

If this proposition is accepted, can a daring attempt be made to claim that ‘losses emanating from sources of income which are exempt can be set-off against other income?’  Although this proposition is well settled by the Apex Court in the case of CIT vs. Harprasad & Co. Pvt. Limited (1975) 99 ITR 118 (SC), the attempt is to just explore an alternate school of thought:

Loss is not a part of total income

Section 2(45) defines total income to mean total amount of income referred to in section 5 and computed in the manner laid down in the Act. The definition thus contains two limbs which are
as follows:

(a)    The income includible in total income must be ascertained as per section 5; and

(b)    The income must be computed as per provisions of the Act.

‘Total income’ defined in section 2(45) presupposes an existence of ‘income’ referred to in section 5. For the reasons mentioned above, section 5 does not appear to cover losses.   Therefore, section 2(45) can never include loss (since they cannot be ascertained as per section 5).  Section 10 seeks to exclude certain incomes from total income.  When a loss is never included in total income, how can section 10 exclude something which never existed?

Section 10 can never exempt a loss

Section 10 contains provisions for exemption of certain incomes.  It never exempts a loss.  Infact, courts have held that exemptions provided by the legislature itself may furnish an infallible clue to the income character of a particular receipt [Refer All India Defence Accounts Association, In re: Shailendra Kumar vs. UOI (1989) 175 ITR 494 (All)]; although not conclusive.

The apex court in the case of UOI vs. Azadi Bachao Andolan and Another 263 ITR 706 (SC) held that the ‘liability to tax’ is a legal situation; whereas ‘payment of tax’ is a fiscal fact.   A taxing statute does not always proceed to charge and levy tax.  Exemption provisions provide exemption from payment of tax.  One among them is section 10.  The incomes enumerated therein exclude income from the total income.  However, it does not annul the charge of tax.  An exemption cannot dispense with the very levy created under the Act [Refer B.K. Industries vs. UOI (1993) 91 STC 548].  Support for this proposi- tion can be drawn from the Apex Court decision in the case of Peekay Re-Rolling Mills vs. Assistant Commissioner – 2007 (219) ELT 3 (SC) – In this case, the court observed:

“In our opinion, exemption can only operate when there has been a valid levy, for if there is no levy at all, there would be nothing to exempt. Exemption does not negate a levy of tax altogether.” “Despite an exemption, the liability to tax remains unaffected, only the subsequent requirement of payment of tax to fulfill the liability is done away with.” (emphasis supplied)

Taking cue from the aforesaid decision (although rendered in the context of central excise), one could argue that exemption section could operate on only those income which can come within the ambit of Income-tax levy. Loss can never be subject to Income-tax levy; so there is no occasion to take relief of exemption provisions. Moreover, it is a settled principle that exemption provisions have to be construed liberally.  The tax relief granted by a statute should not be whittled down by importing limitations not inserted by the legislature [Refer CIT vs. K E Sundara Mudaliar (1950) 18 ITR 259 (Mad) and others].

With utmost respect for the Apex Court decision in the case of Harprasad & Co. Pvt. Limited case and many other cases which have concurred or followed this proposition, the aforesaid write-up is an attempt to take a deeper insight into these landmark judgments and may be challenge the obvious.

Delays in public life, can the problem be addressed?

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More than two decades after the event, the ghastly assassination of Rajiv Gandhi was once again an issue of discussion and debate. The occasion was the judgement of the Supreme Court to grant a reprieve, to the assassins or those who were part of the conspiracy. This was followed by the controversial decision of the Tamil Nadu government to free the convicted persons. While the unseemly haste with which the Tamil Nadu government acted was uncalled for and was definitely with a collateral purpose, there was no denying the fact that the Supreme Court was reacting to the inordinate delay that was caused in disposing of the mercy petitions of those who were to be sent to the gallows. If an authority with which discretion is vested declines to exercise its discretion either way and leaves a petition undecided for a period of 20 years, then the petitioner is entitled to succeed.

Let us take the case of the unfortunate accident involving two young officers on the naval submarine Sindhuratna. The media reports suggest that there is enormous delay in taking decisions with regard to acquisition of arms and modernising the armed forces. This has resulted in our armed forces operating with ageing equipment. If we are so callous about national security then one shudders to think what must be the fate of other files that gather dust in government departments. The irony is that a government which has been dilly-dallying in regard to acquisitions of arms and material was quick to lay the blame at the door of the Naval Chief, and accepted the Naval Chief’s resignation with alacrity.

Delay has become a part of public life. What is the reason for the snail’s pace in government functioning? Is it that all our bureaucrats are inefficient? I do not think so. While corruption has certainly affected administrative machinery, we do have a fair number of competent and upright public officers. Unfortunately, there seems to be a tendency to judge every decision of a bureaucrat in hindsight. If any incident occurs pursuant to an action of a public officer, the immediate response of a politician is to order an enquiry. By doing so the politician has satisfied public anger but the career of an official may be seriously affected. Consequently, the tendency of many officers is not to take any decision at all. Things have come to such a pass that if an authority acts in time and disposes of matters expeditiously this is looked upon with suspicion. It is almost as if, prompt action is taken only if there is a vested interest. While one must necessarily hold public officials accountable, we must learn to accept honest bonafide mistakes and stop hounding people for committing them. If that happens then decisions will be taken and delays will reduce.

Crossing timelines has become a norm particularly where a government official is involved. If we are to become an economic superpower which we aspire to be, and certainly deserve to be, this issue of delays needs to be addressed on a war footing. There will be a change if the attitude of those at the helm of affairs undergoes a change. If ministers stop brushing inconvenient problems under the carpet and start taking a firm view on various matters, things will change. Once this percolates downstream there will be greater accountability. One way would be to apply the law of limitation in favour of the applicant. If a decision on a petition or application is not taken within the time specified, that application or petition would be deemed to have been granted. Another solution could be that if the approval of a higher authority is pending on a decision taken by his junior, after a certain lapse of time, decision of the junior should be treated as having become final. There will have to be checks and balances when these approaches are incorporated in a statute or regulations but I think they can be built in.

While we are critical of government for the inordinate delays in decision making, we are not free from blame. Very recently I was the speaker at a program which was delayed to accommodate a politician. This resulted in delay of an hour, and apart from the inconvenience it caused me, one hour of more than 200 people in the audience was wasted which meant a loss of 200 man-hours. We must learn to respect the time of others which is an accepted norm the world over. I felt really sad when organising an international conference call, my colleague, warned me that the call was to take place at a schedule time and not ‘Indian Standard Time.’ While many of us do try to adhere to timelines, there are still others who treat the clock with disdain. While they are certainly entitled to their preferences in their private life, while interacting with others in public, delays should be a strict no-no.

And while we are on delays and timelines I realise that I have taken enough time of my readers. I will therefore stop here and return to my professional duties. After all time is money!

Anil J. Sathe
Editor

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[2013] 154 ITD 455 (Pune – Trib.) Bharat Forge Ltd. vs. Addl. CIT A.Y. 2007-08 & 2008-09 Date of Order : 31st January, 2013

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Section 194J – A.Y.2007-08 & 2008-09 – Provisions of section 194J do not apply to sitting fees paid to directors. However, provisions of section 194J(1) (ba) w.e.f. 1st July, 2012 will apply to sitting fees paid to Directors.

Facts
The assesse had paid sitting fees to its resident directors on which no tax was deducted. The assessee had deducted tax from salary and commission paid to non-executive directors and contended that provisions of section 194J are not applicable to sitting fees paid to directors. The AO held that 194J would be applicable on such payments since director is also manager under the provisions of the Companies Act, 1956 and therefore, a technical personnel and thus sitting fees paid to him shall be liable to TDS.

Held
As per Explanation to section 194J, professional services mean services rendered by a person in the course of carrying legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession notified by the Board. Therefore, sitting fees paid to directors do not amount to fees paid for any professional services mentioned in explanation to section 194J. Further, section 194J(1)(ba), effective from 1st July, 2012 states that TDS should be deducted on any remuneration or fees or commission by whatever name called, other than those on which tax is deductible u/s. 192, paid to a director of a company. However, these provisions shall not apply to A.Y. 2007-08 & 2008-09. Thus, no tax is required to be deducted u/s. 194J out of such directors sitting fees for AY 2007-08 & 2008-09.

Tax on payments made by assessee towards testing and inspection charges will be covered u/s. 194C and will not be considered as professional services as per section 194J.

Facts
The assessee had incurred testing and inspection charges on which TDS was done u/s. 194C. The charges were paid for getting the jobs done like testing, inspection of materials, etc., and were in the nature of material and labour contract. However, according to AO, the assessee should have deducted TDS u/s. 194J since the services rendered by the said parties are in the nature of technical/professional service. The CIT(A) upheld the action of AO.

Held
It was held that the nature of expenditure made by the assessee cannot be considered as payment for technical consultancy. The Pune Bench of the Tribunal in the case of Glaxosmithkline Pharmaceuticals Ltd. vs. ITO [2011] 48 SOT 643/15 taxmann.com 163 has held that any payment for technical services in order to be covered u/s. 194J should be a consideration for acquiring or using technical know-how simpliciter provided or made available by human element. There should be direct and live link between the payment and receipt/use of technical services/information. If the conditions of 194J r.w.s. 9(1), Explanation 2 Clause (vii) are not fulfilled, the liability under this section is ruled out. Therefore, it was held that payment by the assessee towards testing and inspection charges cannot be considered as payments towards professional services as per provisions of section 194J and the assessee has rightly deducted tax u/s. 194C.

Payments made for the use of cranes (cranes provided along with driver/operator) is covered under 194C and not under 194-I.

Facts
The assessee had made payments for hire of cranes for loading and unloading of material at its factory. The cranes were provided by the parties along with driver/operator and all expenses were borne by the owners only. The assessee had deducted the tax under 194C. The assessee contended that the hire charges are paid in terms of a service contract and do not amount to rent contract. The AO argued that definition of rent u/s. 194I means ‘any payment, by whatever name called, under any lease, sublease, tenancy or any other agreement or arrangement for the use of (either separately or together) any machinery, plant, equipment, fittings whether or not any or all of the above are owned by the payee’. Thus, AO held that the assessee should have deducted tax u/s. 194I and not 194C. The same was upheld by the CIT(A).

Held
Section 194C of the Act makes provision for deduction of tax at source in respect of payments made to contractors whereas section 194I makes provision for deduction of tax at source in respect of income by way of rent.

The Tribunal, relying on the decisions of the Hon’ble Gujarat High Court in cases of CIT (TDS) vs. Swayam Shipping Services (P.) Ltd. [2011] 339 ITR 647/199 Taxman 249 and CIT vs. Shree Mahalaxmi Transport Co. [2011] 339 ITR 484/211 Taxman 232/ (Guj.), held that provisions of section 194C should be applicable and not section 194I.

Payment towards windmill operation and maintenance, being comprehensive contract, will attract TDS u/s. 194C of the Act and not u/s. 194J.

Facts
The assessee company had made payments towards maintenance of windmill, replacement of parts, implementing safety norms, conduct of training programmes, prevention of damage, etc. at windmill site. The contract was a comprehensive contract for material and labour services required. The AO held that the operation and maintenance of windmill requires technical skills and knowledge and is covered u/s. 194J. The CIT(A) held that the assessee had correctly deducted tax u/s.194C.

Held
The Tribunal upheld the order of CIT(A). Mere fact that technical skill and knowledge was required for rendering services, did not render the amount paid by the assessee company for a comprehensive contract as ‘fees for technical services’. The said payment was of the nature of payment for a comprehensive contract on which the appellant company had rightly deducted tax u/s. 194C and not section 194J. This view is also supported by the decision of Tribunal, Ahmedabad in Gujarat State Electricity Corpn. Ltd. vs. ITO [2004] 3 SOT 468 (Ahd.) wherein it was held that a composite contract for operation and maintenance would come within the ambit of 194C and not 194J.

Payments towards annual maintenance contract (AMC) for software maintenance attracts TDS u/s. 194C and not 194J.

Facts
The assessee had made TDS u/s. 194C on payments for annual maintenance contracts. The AO held that these payments were towards technical, managerial and professional services and hence TDS u/s. 194J will be applicable. The CIT(A) decided the issue in favour of the assessee.

Held
As per the CBDT Circular No. 715, dated 8th August, 1995 routine/normal maintenance contract including supply of spares covered u/s. 194C. Following the decision of Ahemdabad Tribunal in case of Nuclear Corpn. of India Ltd. vs. ITO [IT Appeal No. 3081 (Ahd.) of 2009, dated 30-09-2011] and CBDT circular, the Tribunal held that payments made for AMC cannot be considered as fees for technical services within the meaning of section 194J.

Also refer decision of the Hon’ble Madras High Court in case of Skycell Communications Ltd. vs. Dy. CIT [2001] 251 ITR 53/119 Taxman 496 (Mad.)

Training and seminar expenses do not fall under definition of professional services and hence tax to be deducted u/s. 194C and not 194J.

Facts
The assessee had made payments towards training programmes and seminars organised by various entities including CII towards attending training and seminars by its employees. The assessee had deducted tax at source u/s. 194J. The AO held that the payments made on this account are covered u/s. 194J as the employees were getting training from experts in various fields having professional knowledge to give training and lectures to the employees for the benefit of the company. The CIT(A) held that training and seminar expenses do not    fall    under    the    definition    of    professional    services and accordingly decided the issue in favour of of the assessee.

Held
It was held that the payments made to various organisations towards attending seminars by the
employees of the assessee company cannot be considered as towards rendering of professional services by those training institutes as per the provisions of section 194J. Thus the order of CIT(A) was upheld.

Transfer pricing: International transaction: Arm’s length price: A. Ys. 2004-05 and 2005-06: Marketing services to associated enterprise: Different from services in nature of engineering services rendered by four companies taken as comparables by TPO: Functionally different and not comparable: Addition made by AO on basis of adjustment made by TPO not justified:

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CIT vs. Verizon India Pvt. Ltd.; 360 ITR 342 (Delhi):

The assessee company had entered into a service agreement with its associated enterprise in Singapore for rendering marketing services. The Assessing Officer referred the matter to the Transfer Pricing Officer (TPO) for determining the arm’s length price. TPO compared the services provided by the assessee to its associated enterprise with four companies rendering engineering services for determining the arm’s length price and made adjustments which resulted in the Assessing Officer making additions in respect of both the years. CIT(A) and the Tribunal held that the two services, that is, marketing services and engineering services, were functionally different and were, hence, not comparable and deleted the addition.

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

“(i) The services rendered by the assessee to its associated enterprise were in the nature of marketing services which were entirely different from the set of services in the nature of engineering services rendered by the four comparables.

ii) Consequently, the adjustment arrived at by the TPO and the additions made by the Assessing Officer could not be sustained on the basis of the transfer pricing study with regard to the four companies which were clearly functionally not comparable.

iii) So, no question of law arises for our consideration. The appeals are dismissed.”

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Speculative transaction: Loss: Set off: Section 73: A. Y. 1991-92: Loss on account of purchase and sale of shares from solitary transaction: Transaction not constituting business carried on by assessee: Loss can be set off against profits from other sources:

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CIT vs. Orient Instrument P. Ltd.; 360 ITR 182 (Del):

The assessee company was engaged in the business of trading in crafts paper, installation, job work, consultancy and commission. In the relevant year it incurred loss of Rs. 5,53,500/- on account of a transaction whereby it purchased and sold shares. The assessee claimed set off of the said loss against other income. The Assessing Officer disallowed the claim for set off of the loss holding that the loss is speculation loss. The Tribunal allowed the assessee’s claim.

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

“i) The transaction whereby the assessee purchased the shares and incurred loss on account of fall in the value of the shares was a solitary one.

ii) The finding of the Tribunal that the transaction did not constitute the business carried on by the assessee, could not be termed perverse and unreasonable. The appeal is accordingly dismissed.”

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Speculative transaction: Speculative loss: Section 43(5)(c): Share trading business on own behalf is “jobbing”; Jobbing is not speculative in view of proviso(c) to section 43(5): Loss from jobbing business is not speculative loss:

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CIT vs. Ram Kishan Gupta; [2014] 41 taxmann.com 363 (All):

The assessee is a Member of the U.P. Stock Exchange Association Ltd., and is registered as Stock Broker and carries on the purchase and sale of shares and securities. On scrutiny of the trading profit and loss account filed along with the return of income of Rs. 81,050/-, the Assessing Officer found that a sum of Rs. 8,53,030/- is debited for which the claim of the assessee was that it incurred loss in respect of transactions done by him on the floor of stock exchange with other brokers. The Assessing Officer rated the same as speculation loss as the loss of Rs. 8,53,030/- was on account of transactions for which there was no physical delivery. The assessee submitted before the Assessing Officer that the delivery had been effected on net basis as per the Stock exchange guidelines and no forward trading was allowed therefore there was no question of any speculation loss. The assessee’s plea was also that otherwise the assessee’s transaction was covered u/s. 43(5)(c) of the Income-tax Act , therefore, the transaction carried out by the assessee were specifically exempted to be treated as speculative transactions. However, the Assessing Officer disallowed the loss of Rs. 8,53,030/- treating the same to be speculative loss. The Tribunal allowed the assessee’s appeal and held that the allegation that transactions were settled without actual delivery was not fully established by the Revenue. It was held that if the system provides settlement at net basis in respect of jobbing and the appellant-assessee had been found paying turnover fee on such transactions ever since 1991-92 the assessee’s entire business was of non-speculative nature. The Tribunal also relied on the judgment of the Allahabad High Court in CIT vs. Shri Sharwan Kumar Agrawal; 249 ITR 233 (All) wherein it was held that the assessee who was a share broker was entitled for the exception covered by proviso (c) to section 43(5).

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

“i) We have already observed that purchase or sale of shares periodical or ultimately settled otherwise than by the actual delivery is a speculative transaction as provided u/s. 43(5). The assessee’s categorical case is that losses were suffered on account of non-delivery transactions. Whether the assessee is still entitled to protection under proviso (c) to subsection (5) of section 43, which transactions are non delivery transactions and what is the scope of the proviso in context of speculative transaction have to be examined.

ii) The Tribunal having returned finding that the details of each and every transaction were disclosed by the assessee which were part of the paper book. No discrepancy in any of the transactions can be pointed out by the Assessing Officer nor the bonafide of the transactions were doubted, the transaction thus carried out were part of the ‘jobbing’ within the meaning of proviso (c) to section 43(5).

iii) We are thus of the view that the order of the Tribunal allowing the appeal of the assessee is to be upheld although confined to the ground that the losses suffered by the assessee cannot be termed to be speculative loss by virtue of proviso (c) to section 43(5).”

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Refund: Section 237: A. Y. 2004-05: Belated revised return filed on 08-09-2011 claiming refund on basis of CBDT Circular dated 08- 05-2009: Condonation of delay: Delay to be condoned:

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Assessee entitled to refund: Devdas Rama Mangalore vs. CIT; [2014] 41 taxmann.com 508 (Bom)

The
petitioner, who was an employee of RBI had opted for the Optional Early
Retirement Scheme and had received an amount as per the Scheme in the
year 2004. The RBI had deducted TDS of Rs. 1,64,117/- treating the said
payment as taxable. In the return of income for the A. Y. 2004-05 filed
on 15th October 2004 the petitioner did not claim any refund of tax as
TDS paid by RBI on his behalf nor was the credit on tax utilised to
discharge tax payable on any other income.

On 08-05-2009, CBDT
issued a Circular clarifying that the employees of RBI who had opted for
early retirement scheme during the year 2004-05 would be entitled for
benefit of exemption u/s. 10(10C) of the Income-tax Act, 1961. The
Supreme Court also in Chandra Ranganathan and Ors. vs. CIT; (2010) 326
ITR 49 (SC) held that the amounts received by retiring employees of RBI
opting for the scheme are eligible for exemption u/s. 10(10C) of the
Act. In view of the above, the petitioner filed a revised return of
income on 08-11-2011 claiming benefit of exemption available to the
Scheme u/s. 10(10C) of the Act which consequently would result in refund
of Rs.1.64 lakh paid by RBI as TDS. However, there was no response to
the above revised return of income from the respondent-revenue. The
petitioner in the meantime, also, filed an application with the CIT u/s.
119(2) (b) of the Act seeking condonation of delay in filing his
application for refund in the form of revised return of income for A. Y.
2004-05. The CIT by an order dated 04-02-2013 dismissed the application
u/s. 119(2)(b) of the Act on the ground that in view of Instruction No.
13 of 2006 dated 22nd December, 2006 by the CBDT an application
claiming refund cannot be entertained if the same is filed beyond the
period of 6 years from the end of the assessment year for which the
application is made. In the affidavit in reply dated 19th November 2013
the Commissioner of Income Tax states that he is bound by the above
instructions issued by the CBDT and consequently the claim for refund
cannot be considered.

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

“i)
It is not disputed by the respondent revenue that on merits the
petitioner is entitled to the benefit of refund of TDS as the payment
received under the scheme is exempted u/s. 10(10C) of the Act. The
decision of the Apex Court in the matter of Chandra Ranganathan and Ors.
(supra) concludes the issue. This is also the view of the revenue as
clarified in CBDT Circular dated 8th May, 2009. The application u/s.
119(2)(b) of the Act is being denied by adopting a very hypertechnical
view that the application for condonation of delay was made beyond 6
years from the date of the end of the A. Y. 2004-05. In this case, the
revised return of income filed on 8th September, 2011 should itself be
considered as application for condonation of delay u/s. 119(2)(b) of the
Act and refund granted.

ii) It is to be noted that the
respondent revenue does not dispute the claim of the petitioner for
refund on merits but the same is being denied only on hypertechnical
view of limitation. It will be noted that on 8th May, 2009 the CBDT
issued a circular clarifying and reviewing its earlier decision to
declare that the employees of RBI who opted for early retirement scheme
under the Scheme will be entitled to the benefit of section 10(10C) of
the Act. Soon after the issue of circular dated 8th May, 2009 by the
CBDT and the decision of the Apex Court in Chandra Ranganathan (supra)
the petitioner filed a revised return of income on 8th September, 2011
seeking refund of TDS paid on his behalf by RBI.

iii) In the above view, we allow the petition and direct respondent-revenue to grant refund due to the petitioner.”

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Reassessment: TDS: S/s. 143(3), 147 proviso and 148: A. Y. 2005-06: Disclosure in return of cancellation of assessee’s banking licence: Assessment u/s. 143(3): Reopening of assessment beyond four years on the ground that the assessee was no longer in the banking business is not valid: No failure to disclose truly and fully material facts:

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Charotar Nagrik Sahakari Bank Ltd. vs. Dy. CIT; 360 ITR 373 (Guj):

The petitioner is a co-operative bank in liquidation. For the A. Y. 2005-06, the petitioner had filed its return of income on 31-10-2005, declaring a total loss of Rs. 7,95,82,108/-. Assessment was completed u/s. 143(3) of the Income-tax Act, 1961 by an order dated 27-12-2007 accepting the returned loss. On 15-03-2012, the Assessing Officer issued notice u/s. 148 for treating the loss of Rs. 7,95,82,108/- as non-business loss on the ground that the assessee’s banking licence was cancelled by the RBI on 30-07-2003.

The Gujarat High Court allowed the writ petition filed by the assessee challenging the validity of notice u/s. 148 and held as under:

“i) The fact that the assessee’s licence had been cancelled by the RBI was clearly and in no uncertain terms was brought on record in the return filed by the assessee. The assessee, in fact, asserted that in view of such cancellation of the licence, the banking activities of the assessee were carried out only for the purpose of recovery of advances and payment to the depositors. It was further conveyed that in view of such facts, the profit and loss account was prepared on certain conditions and guidelines indicated therein.

ii) Apart from the declaration and disclosure on the part of the assessee, in the reasons recorded by the Assessing Officer also, he started with the narration, “on verification of the case records, it was found that the assessee’s banking licence was cancelled by the RBI on 30-07-2003”. Thus the Assessing Officer gathered this fact from the verification of the case record and not from any other source.

iii) The crucial fact that the banking licence of the assessee had been cancelled by the RBI was disclosed in the original return itself. Thus, there was no failure on the part of the assessee to disclose truly and fully all material facts. The averment of the Revenue that despite such cancellation of the banking licence, the assessee lodged a false claim, even if it were to be corrected, would not per se indicate that there was any failure on the part of the assessee to disclose truly and fully all material facts. As long as this requirement was satisfied, it was simply not open for the Assessing Officer to reopen the assessment beyond the period of four years from the relevant assessment year.

iv) In the result, the impugned notice is quashed and set aside.”

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Method of accounting: System of accounting: Cash basis: Section 145: Block period 1987-88 to 1995-96: Assessee maintaining accounts on actual receipt basis: Interest income must be taken on receipt basis:

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CIT vs. Dr. K. P. Singh; [2014] 41 taxmann.com 406 (All):

The assessee was following the cash method of accounting. Accordingly, he offered the interest income on FDRs on receipt basis. The Assessing Officer assessed the interest on accrual basis. The Tribunal allowed the assessee’s claim and directed the Assessing Officer to assess the interest on receipt basis.

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

“i) We find no infirmity in the Tribunal’s order, where the Tribunal observed that the interest income must be taken on receipt basis shown by the assessee from the F.D.Rs., Sahara and L.I.C. mutual funds. The assessee is maintaining the accounts on actual receipt basis and he is not maintaining any account on mercantile basis, as appears from the record.

ii) When it is so, then the answer to the substantial question of law is in favour of the assessee and against the Department.”

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Income: Capital or revenue: A. Y. 1985-86: Subsidiary of Government company receiving subsidy from holding company to protect capital investment of parent company: Subsidy is capital receipt and not income:

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CIT vs. Handicrafts and Handlooms Export Corporation of India Ltd.; 360 ITR 130 (Del):

The assessee, a Government company was a subsidiary of the State Trading Corporation of India. It operated as channelising agency for sale of handicrafts and handlooms abroad. In the relevant year, it received subsidy of Rs. 25 lakh from its holding company. The Assessing Officer rejected the claim of the assessee that the receipt is a capital receipt and not income. He held that it is income assessable to tax. The Tribunal held that it was a capital receipt.

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

“i) The sum of Rs. 25 lakh was not paid by a third party or by a public authority but by the holding company. It was not on account of any trade or a commercial transaction between the subsidiary and the holding company. The holding company was a shareholder and the shares were in the nature of capital. Share subscription received in the hands of the assessee was a capital receipt.

ii) The intention and the purpose behind the payment was to secure and protect the capital investment made by the holding company in the assessee. The payment of the grant by the holding company and receipt thereof by the assessee was not during the course of trade or performance of trade, and could be categorised or classified as a gift or a capital grant and did not partake of the character of trading receipt.”

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Interest on refund of tax: Section 244: A. Ys. 1982-83 to 1990-91: Whether whole of interest taxable in the year of grant – No: Has to be spread over the respective AYs to which it relates:

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Shri M. Jaffer Saheb(Decd) vs. CIT (AP); R. C. No. 127 of 1997 dated 19-12-2013:

For the A. Y. 1982-83 the Assessing Officer made additions and raised a demand which the assessee paid. The Tribunal deleted the additions. The Assessing Officer gave effect to the order of the Tribunal and refunded the tax paid by the assessee together with interest of Rs. 79,950/- for the period from 30- 10-1985 to 31-08-1989. The Assessing Officer brought to tax the whole of the interest amount in the A. Y. 1990-91 ignoring the claim of the assessee to spread over the said amount over the respective years. The CIT(A) allowed the assessee’s claim but the Tribunal upheld the decision of the Assessing Officer.

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

“i) The stand of the Department that interest u/s. 244(1A) accrues to the assessee only when it is granted to the assessee along with the order issued u/s. 240 is not correct. Interest accrues on a day to day basis on the excess amount paid by the assessee.

ii) The entitlement of interest is a right conferred by the statute and it does not depend on the order for the refund being made. An order for the refund is only consequential order which in law is required to be made more in the nature of complying with the procedural requirement, but the right to claim interest of the assessee is statutory right conferred by the Act. Accordingly, interest has to be spread over and taxed in the respective years.”

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[2013] 145 ITD 491(Mumbai- Trib.) Capital International Emerging Markets Fund vs. DDIT(IT) A.Y. 2007-08 Order dated- 10-07-2013

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i. Capital Loss from share swapping is allowed.

Facts:
Assessee-company, a Foreign Institutional Investor, was engaged in business of share trading.

The assessee received shares in ratio of 1 : 16 shares held by it in a company. This resulted in long term capital loss. AO disallowed the assessee’s claim of long term capital loss, on swap transaction. When the matter was referred to DRP, it was held that no sound reason was furnished by the assessee to explain as to why it entered in an exchange transaction that resulted in huge loss, that no prudent businessman would enter in to such a transaction, that swap ratio of shares transacted was not done by the competent authority i.e. a merchant banker.

Held:
Swapping of shares was approved by an agency of Govt. of India i.e. FIPB and it had approved the ratio of shares to be swapped. In these circumstances to challenge the prudence of the transaction was not proper. Even if the transaction was not approved by the Sovereign and it was carried out by the assessee in normal course of its business, the Ld AO/DRP could not question the prudence of the transaction. Genuiuness of a transaction can be definitely a subject of scrutiny by revenue authorities, but to decide the prudence of a transaction is prerogative of the assessee. A decision as to whether to do / not to do business or to carry out/not to carry out a certain transaction is to be taken by a businessman. If it is proved that a transaction had taken place, then resultant profit or loss has to be assessed as per the tax statutes. Therefore by casting doubt about the prudence of the transaction, members of the DRP had stepped in to an exclusive discretionary zone of a businessman and it is not permissible.

ii. Set off of short term capital loss subject to STT allowed against short term capital gain not subjected to STT

Facts:
Assessee has claimed set off of short-term capital loss subjected to Securities Transaction Tax(STT) against the short-term capital gains that was not subjected to STT. The AO held that as both the transactions were subject to different rates of tax, the set off of loss is not correct. He held that in order to set off the short term capital loss, there should be short term capital loss and short term capital gain on computation made u/s. 48 to 55. The assessee was entitled to have the amount of such short term capital loss set off against the short term capital gain, if any, as arrived under a similar computation made for the assessment year under consideration.

Held:
The phrase “under similar computation made” refers to computation of income, the provisions for which are contained u/ss. 45 to 55A of the Act. The matter of computation of income was a subject which came anterior to the application of rate of tax which are contained in section 110 to 115BBC. Therefore, merely because the two sets of transactions are liable for different rate of tax, it cannot be said that income from these transactions does not arise from similar computation made as computation in both the cases has to be made in similar manner under the same provisions. The Tribunal therefore, held that short term capital loss arising from STT paid transactions can be set off against short term capital gain arising from non SIT transactions.

Note: Readers may also read following decisions of Mumbai Tribunal:

• DWS India Equity Fund [IT Appeal No. 5055 (Mum.) of 2010]

• First State Investments (Hong Kong) Ltd. vs. ADIT [2009] 33 SOT 26 (Mum)

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The New India We Want by Shri N. R. Narayana Murthy

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Whoever becomes the Prime Minister will be the Prime Minister for every citizen, every resident and every visitor of India. The new PM will have to heal the secular rupture that has taken place. No country can make stellar economic progress unless there is peace at its borders and harmony within. Therefore, the first duty of the new PM will be to create an environment where every dialogue, including those with our neighbours, is on a platform of civility, courtesy, harmony and facts. This is the only way to enthuse and energise Indians of all religious beliefs, political ideologies and social status.

The economy has suffered during the last four to five years. The reputation of India has taken a beating abroad during the last six to eight years. During 1999-2009, when China was mentioned three times in boardrooms abroad, India was mentioned at least once. Today, India is not mentioned even once when China is mentioned 30 times. Good governance rests on seven important attributes: equity, fairness, transparency, accountability, honesty, secularism and a robust, consistent and responsive legal system. Most public governance experts tell me that we have seen the steepest fall in these attributes during the last five years. Therefore, the first task for the new PM is to restore these attributes at least to the level they were during the 1990s.

If we want to raise the hope and confidence of the Indian youth, we have to create jobs for them — jobs with good disposable income. We have to create 150-200 million jobs during the coming decade. The only way we can spend more on social welfare programmes is by collecting more taxes that come from growth in corporate activities. The new PM has to articulate India’s commitment to the seven attributes. Our embassies, immigration and customs officials must be empowered to make the visit of every foreigner a pleasant experience. Our state governments must become active partners in this task.

A trusted and well-informed Cabinet group should visit the global capitals every three months and reiterate these messages and make sure that enough investments come in. We have excellent people to lead such groups on both sides of the aisles. These are modern, well-informed individuals who can raise the confidence of senior corporate leaders.

The new PM must accept that, at this stage of our development, jobs can be created only in urban and semi-urban areas. The need of the day is to make our cities more attractive not just for Indians but for foreigners too. We must keep our ego down and realise that the foreigners have umpteen global options for investment. The PM must make the visit and stay of foreigners hasslefree. It is amusing that the visa-on-arrival facility is not available for even one country that is among our top five trading partners in software. The PM must create a ministry of urban governance. An apolitical expert with a proven track record has to lead this ministry since this is essentially a Centre-state issue.

It is time that we made life better for our poor people. We have to focus on education, healthcare, nutrition and shelter. All programmes that provide such facilities must use Aadhaar identity to deliver services efficiently and without corruption through a voucher scheme. You cannot run any such directed schemes without strengthening Aadhaar. Therefore, the new PM must appoint a smart, modern and a results-oriented technocrat to run UIDAI. While continuing with the right to education ideology, the new government must provide full subsidy to the private sector players in these fields through vouchers without making these institutions debilitated.

Taking about education brings me to initiatives in higher education. The new PM must give top priority to pass Bills on welcoming foreign universities and starting innovation universities. Without adequate focus on research and higher education, India’s future is shaky.

Ever since the mid-1970s, population control has been given up. I have hardly seen any PM speak about it since then. It is time we resurrected this important initiative.

Peace at our borders is extremely important and the new PM must give priority to that task. We have not seen any major move with Pakistan since A B Vajpayee’s time. It is time we acted as the elder brother to Pakistan and helped that country overcome the trauma they are facing. A happy India requires a happy Pakistan.

(Source: Extracts from an article by Shri N. R. Narayana Murthy, Executive Chairman Infosys, in The Economic Times dated 29-04-2014)

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Certification of forms under the Companies Act, 2013 by practicing professionals

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The Ministry of Corporate Affairs has vide General Circular No. 10 /2014 dated 7th May 2014, invited the attention of the professional bodies ( ICAI, ICSI, ICWAI) for authenticating the correctness and integrity of documents being filed by them with the MCA in electronic mode. It is required to examine e-forms or non e-forms attached and filed with general forms on MCA portal viz. to verify whether all the requirements have been complied with and all the attachment to the forms have been duly scanned and attached in accordance with the requirement of above said rules.

Where any instance of filing of documents, application or return or petition etc. containing false or misleading information or omission of material fact or incomplete information is observed, the Regional Director or the Registrar as the case may be, shall conduct a quick inquiry against the professionals who certified the form and signatory thereof including an officer in default who appears prima facie responsible for submitting false or misleading or incorrect information pursuant to requirement of above said Rules; 15 days’ notice may be given for the purpose.

The Regional Director or the Registrar will submit his/her report in respect of the inquiry initiated, irrespective of the outcome, to the Governance cell of the Ministry within 15 days of the expiry of period given for submission of an explanation with recommendation in initiating action u/s. 447 and 448 of the Companies Act, 2013 wherever applicable and also regarding referral of the matter to the concerned professional Institute for initiating disciplinary proceedings.

The E-Gov cell of the Ministry shall process each case so referred and issue necessary instructions to the Regional Director/ Registrar of Companies for initiating action u/s 448 and 449 of the Act wherever prima facie cases have been made out. The E-Gov cell will thereafter refer such cases to the concerned Institute for conducting disciplinary proceedings against the errant member as well as debar the concerned professional from filing any document on the MCA portal in future.

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A. P. (DIR Series) Circular No. 127 dated 2nd May, 2014

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Foreign Direct Investment (FDI) in India – Reporting mechanism for transfer of equity shares/fully and mandatorily convertible preference shares/fully and mandatorily convertible debentures

This circular states that: –
(a) In cases where the NR investor including an NRI, who has acquired and continues to hold control in an Indian company in accordance with SEBI (Substantial Acquisition of shares and Takeover) Regulations, acquires shares on the stock exchanges under the FDI scheme through a registered broker it is the duty of the investee company to file form FC-TRS with the bank within 60 of the transaction.

(b) Henceforth, banks have to approach the concerned Regional Office of RBI (as against the present system of approaching the Central Office of RBI) to regularise the delay in submission of form FC-TRS, beyond the prescribed period of 60 days.

(c) IBD/FED or the nodal office of the bank has to continue to submit a consolidated monthly statement in respect of all the transactions reported by their branches together with copies of the FC-TRS forms received from their branches to FED, RBI, Foreign Investment Division, Central Office, Mumbai in a soft copy (in MS- Excel).

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