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Year: 2014

[2014] 150 ITD 48 (Bangalore) Smt. T. Gayathri vs. CIT(A) A.Y. 2009-10 Order dated – 8th Aug 2013

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Section 2(47), read with section 45- Amount received by assessee pursuant to a Court decree in lieu of her share in self acquired property of father who died intestate, cannot be said to result in ‘transfer’ as the provisions of section 2(47)(i) or (ii) of the Income-tax Act are not attracted.

Facts:
‘B’ died intestate leaving behind 4 sons and 6 daughters including the assessee, who filed a suit for partition of self acquired property of their father. The suit was ultimately compromised between the parties duly recognised by Court, according to which each daughter was to receive their 1/10th share in property coming to Rs. 87.5 lakh (for each daughter) from their brothers in cash.

The assessee’s brothers subsequently entered into a joint development agreement of the property, in terms of which, the developer directly paid Rs. 87.5 lakh each to the daughters of ‘B’ including assessee therein. On receiving the amount, the daughters of ‘B’ executed a release deed of disputed property in favour of their brothers.

During the relevant assessment year, the assessee did not offer this Rs. 87.5 lakh to tax under the head ‘Capital Gain’. The assessee took a stand that the amount was received as a result of a family arrangement, and therefore there was no transfer of asset to attract the provisions of section 45.

The assessing officer was of the view that the daughters of ‘B’, including the assessee, have sold the property to the developer and therefore, it was a case of transfer within the meaning of section 2(47), giving rise to long term capital gain, and hence he made certain additions to asseessee’s income under the head ‘capital gain’.

The Commissioner (Appeals) confirmed the order of Assessing Officer.

On second appeal.

Held:
The 4 daughters of late ‘B’ filed suit claiming 1/10th share each over the properties left behind by ‘B’. The claim was on the basis that as class-I legal heirs under the Hindu Succession Act, 1956, they are entitled to 1/10th share each over the properties of late ‘B’ who died intestate and in respect of the properties which were his self-acquired properties. The 4 sons claimed that the properties were joint family properties comprising of the 4 sons and late ‘B’. The trial court found the plea to be not acceptable and the plea of the daughters for 1/10th share each over the properties of the deceased was decreed.

The compromise recorded before the High Court recognises/ accepts the decree of the trial court and a decree in terms of the compromise was passed. The plaintiffs (4 daughters) and the 2 other daughters of the deceased gave up their right to mesne profits and took their share of the property in kind and not by way of division by metes and bounds. The compromise decree does not have any ingredients of a family arrangement and hence the money received by the assessee is not pursuant to a family arrangement.

Now, it is to be examined as to whether the money received pursuant to a court decree in lieu of a share in the properties, can be said to result in a transfer attracting the provisions of section 2 (47) (i) or (ii) of the Act, though the other clauses of 2(47) of the Act are admittedly not applicable to the present case.

One of the reasons given by the learned CIT(A) is that u/s. 47(i) of the Act, it is only distribution of capital assets on the total or partial partition of a Hindu undivided family is not regarded as transfer and therefore in the present case which was not a case of partition of an HUF, there is a transfer u/s. 2(47) of the Act.

However, the view expressed by the CIT(A) is not acceptable. The provisions are intended to clarify that when a partition is made, no gains are made by the HUF and therefore levy of tax on capital gain, which can only be on the transferor, does not arise at all. Even in the absence of such a provision the revenue cannot seek to levy tax on capital gain because tax on capital gain can be imposed only on transferor and the HUF on a partition receives nothing. Therefore it cannot be said that provisions of section 47(i) of the Act by implication can justify levy of tax on capital gain wherever there is a partition between co-owners of properties which does not involve a HUF.

Partition is any division of real property or Personal Property between co-owners, resulting in individual ownership of the interests of each. In the present case, on death of Mr. B and his wife, their 10 children, 4 sons and 6 daughters became entitled to 1/10th share each over the property by way of intestate succession. A partition of the share of each of the 1/10th co-owner was effected through Court. Since a physical division by metes and bounds of each of the 1/10th share was not possible, the 4 sons took the property and the 6 daughters took money equivalent of their 1/10th share each over the property.

The sum received by the assessee is thus traceable to the realisation of her rights as legal heir on intestate succession and not to any sale, relinquishment or extinguishment of right to property. This is clear from the terms of the memorandum of compromise dated 11.1.2008 entered into between all the legal heirs of late Mr. B, which ultimately was recognised by the Court and a decree in terms of the compromise recorded and passed.

As per clause-2 of the compromise the property was valued at Rs. 8.75 crore. The sons agreed to take the property and further agreed that they would deposit Rs. 5.25 crore being the value of 6/10th share of the property. As per clause 4 of the memorandum of compromise the 6 daughters agreed that they would receive Rs. 87.50 lakh each towards their 1/10th share each over the property. Under clause-5 of the memorandum of compromise the daughters agreed to execute a release deed after the receipt of Rs. 87.50 lakh each by them. It is thus clear that the release deed which was later executed by the 6 daughters in favour of the 4 sons on 23.7.2008 was only to confer better title over the property and that document did not create, extinguish or modify the rights over the property either of the sons or the daughters.

Ultimately, the sum of Rs. 87.50 lakh was paid only through the Court and not at the time of registration of the deed of release. It is also significant to note that the document of release is between the 6 daughters and the 4 sons and the developer is not a party to the document. The developer is also not a party to the suit for partition. Therefore the conclusions of the revenue authorities that there was a conveyance of the share of the daughters in favour of the developer based on statement of the sons and the developer is contrary to the written and registered document and cannot be sustained.

The issue can be looked at from another angle as well. Suppose the deceased had left behind him deposits in a Bank Account and the bank pays l/10th each of such deposits to the legal heirs, would the receipt be chargeable to tax as income in the hands of the legal heirs. The answer is obviously in the negative. Suppose money is received in lieu of a share over immovable property of the deceased, as in the present case, it cannot be brought to tax, as it is not in the nature of income. In such an event it is not possible to compute the capital gain as there would be no cost of acquisition. The provisions of section 55(2) (b) & section 55(3) of the Act which provides for determining cost of acquisition in different situations cannot also be applied because, those provisions are applicable only for the purpose of section 48 and 49 of the Act. Section 48 and 49 of the Act would apply only when section 45 of the Act applies i.e., there is a transfer of a capital asset giving raise to capital gain. The AO was therefore not right in computing the capital gain in the manner in which he did so.

For the aforesaid reasons, the money received
pursuant to a court decree in lieu
of a share in the properties, cannot be said to result in transfer as it does
not attract the provisions of section 2 (47) (i) or (ii) of the Income-tax Act and the revenue authorities were not justified in
bringing to tax amount in question as capital gain in the hands of the
assessee.

(2014) 108 DTR 255 (Pune) Malpani Estates vs. ACIT A.Ys.: 2008-09 to 2010-11 Dated: 30-01-2014

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Sections 80-IB(10) & 153A : Assessee is eligible for deduction u/s. 80-IB(10) in relation to undisclosed income offered in a statement u/s. 132(4) in course of search and subsequently declared in return filed in response to notice u/s. 153A(1)(a)

Facts:
The assessee is a partnership firm engaged in construction business. It was subject to a search action u/s. 132(1) on 6th October, 2009. In the course of search, the partner of the assessee-firm in a statement recorded u/s. 132(4), admitted certain undisclosed income in relation to a housing project undertaken by the firm. The additional income declared was on account of on-money received from the customers to whom flats were sold in the said project. The assessee duly reflected such additional income in the returns of income filed in response to notice issued u/s.153A(1)(a) for the captioned assessment years as the profits from its housing project, and since the said housing project was eligible for deduction u/s. 80-IB(10), it claimed deduction u/s. 80-IB(10) in relation to such additional income.

The Assessing Officer did not allow the claim of the assessee for deduction u/s. 80-IB(10). Firstly, according to the Assessing Officer enhancement of claim u/s. 80- IB(10), was not permissible in an assessment u/s. 153A. Secondly, the on-money received by the assessee on sale of flats was not taxable as ‘business income’ and hence assessee was not eligible for deduction u/s. 80-IB(10).

The Commissioner (Appeals) affirmed the action of the Assessing Officer in denying the deduction u/s. 80-IB(10). As per the Commissioner (Appeals), the claim of the assessee was not maintainable because (i) the undisclosed income declared by the assessee could not be assessed under the head ‘business income’ but under the head ‘income from other sources’; and, (ii) the benefits of Chapter VI-A, which include section 80-IB(10), are not applicable to assessments made u/s. 153A to S. 153C.

The learned Departmental Representative submitted that the assessment in cases of search action or requisition are made u/s. 153A or 153C of the Act in order to assess undeclared incomes and such provisions are for the benefit of the Revenue and therefore a claim u/s. 80IB(10) of the Act cannot be considered in such proceedings, especially when such a claim was not made in the return of income originally filed u/s. 139 of the Act.

Held:
It is not in dispute that the assessee has derived income from undertaking a housing project, which is eligible for section 80-IB(10) benefits. In the return of income originally filed u/s. 139(1), assessee had claimed deduction u/s. 80-IB(10) in relation to the profits derived from the said housing project and the same stands allowed even in the impugned assessment which has been made u/s. 153A(1)(b) as a consequence of a search action u/s. 132(1).

It cannot be denied that the additional income in question relates to the housing project undertaken by the assessee. The material seized in the course of search; the deposition made by the assessee’s partner during search u/s. 132(4); and, also the return of income filed in response to notice issued u/s. 153A(1)(a) after the search, clearly show that the source of impugned additional income is the housing project. The aforesaid material on record depicts that the impugned income is nothing but unaccounted money received by the assessee from customers on account of sale of flats of its housing project. Clearly, the source of the additional income is the sale of flats in the housing project. Therefore, once the source of income is established the assessability thereof has to follow. The nature of income, thus on facts, has to be treated as ‘business income’ albeit, the same was not accounted for in the account books. In this manner, the stand of the Assessing Officer or of the Commissioner (Appeals) that the said income is not liable to be taxed as ‘business income’ cannot be accepted.

In terms of clause (i) of the Explanation to section 153A(2), it is evident that all the provisions of the Act shall apply to an assessment made u/s. 153A save as otherwise provided in the said section, or in section 153B or S. 153C.

Section 153A(1)(b) requires the Assessing Officer to assess or reassess the ‘total income’ of the assessment years specified therein. Ostensibly, section 80A(1) prescribes that in computing the ‘total income’ of an assessee, there shall be allowed from his ‘total income’ the deductions specified in Chapter VI-A. The moot point is as to whether the aforestated position prevails in an assessment made u/s. 153A(1)(b) or not?

Having regard to the expression ‘all other provisions of this Act shall apply to the assessment made under this section’ in Explanation (i) of section 153A, it clearly implies that in assessing or reassessing the ‘total income’ for the assessment years specified in section153A(1)(b), the import of section 80A(1) comes into play, and there shall be allowed the deductions specified in Chapter VI-A, of course subject to fulfillment of the respective conditions.

The other argument of the Ld. CIT-DR to the effect that the return of income was not accompanied by the prescribed audit report on the enhanced claim of deduction is too hyper-technical, and superficial. Pertinently, the Assessing Officer has not altogether denied the claim of deduction and in any case, the claim was initially made in the return originally filed, which was duly accompanied by the prescribed audit report.

The learned Departmental Representative supported the disallowance of claim on the basis of the judgment of the Hon’ble Supreme Court in the case of Sun Engineering Works (P.) Ltd. In the case before the Hon’ble Supreme Court, assessee wanted to set-off loss against the escaped income which was taxed in the re-assessment proceedings and the claim of such set-off was not made in the return of income originally filed. According to the Hon’ble Supreme Court, the claim was not entertainable because the said claim not connected with the assessment of escaped income. The judgment of the Hon’ble Supreme Court in the case of Sun Engg. Works (P.) Ltd. (supra) only precludes such new claims by the assessee which are unconnected with the assessment of escaped income. In the present case, the claim of deduction u/s. 80IB(10) of the Act was made in the return of income originally filed and in the return filed in pursuance to the notice u/s. 153A(1)(a) of the Act, the claim u/s. 80IB(10) of the Act is only enhanced and therefore, it is not a fresh claim. Therefore, the assessee’s claim for deduction u/s. 80- IB(10) even with regard to the enhanced income was well within the scope and ambit of an assessment u/s. 153A(1) (b) and the Assessing Officer was obligated to consider the same as per law.

Further, the claim for deduction u/s. 80-IB(10) with regard to the additional income declared for A.Y. 2010-11 stands on an even stronger footing than in the other assessment years because in A.Y. 2010-11 there was no return of income originally filed but only a single return has been filed as per the provisions of section 139, though after the search action.

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(2014) 107 DTR 357 (Mum) Ramesh Gunshi Dedhia vs. ITO A.Y.: 2008-09 Order dated: 14-03-2014

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Section 80-IB(10): Notification No. 1/2011 dated 5-1-2011 restricting eligibility of section 80- IB(10) deduction to projects approved under Slum Rehabilitation scheme on or after 1-4- 2004 and before 31-3-2008 is inconsistent/ contrary to proviso to clauses (a) and (b) of section 80-IB(10)

Facts: The assessee had claimed deduction u/s. 80IB(10) in respect of profit from development of three housing projects under the Slum Rehabilitation Scheme (SRS) of the Government of Maharashtra. The details of three projects under SRS projects are as under:—

The Assessing Officer denied the claim of the assessee on the ground that the conditions prescribed under clause (b) of section 80-IB(10) regarding minimum area of 1 acre of the plot had not been satisfied by the assessee. The assessee claimed that all the three plots of land should be considered as one project for the purpose of deduction u/s. 80-IB(10). The Assessing Officer did not accept the contention of the assessee and disallowed the claim of the assessee.

On appeal, apart from merging all the plots, the assessee had also contended that the slum rehabilitation scheme had been notified by the Board vide notification dated 05- 01-2011 and, therefore, the condition of minimum area of 1 acre of land was not applicable in the case of the assessee.

The CIT(A) noted that under the notification dated 5.1.2011 the slum redevelopment scheme of the Government of Maharashtra has been notified subject to the condition that the projects approved before 01-04-2004 do not fall under the scheme notified by the CBDT and since assessee’s project was approved before 01-04-2004, he confirmed disallowance.

Held: For the assessment years 2003-04 to 2005-06, the Tribunal had considered and held that assessee had not fulfilled the conditions laid down u/s. 80-IB(10) because assessee carried out development on three different plots; each of those plots was less than one acre. These plots were not contiguous to each other. Though these plots were located at Dharavi, Mumbai, they were at different places. In other words, there were other slums in between these three slum areas which were rehabilitated by the assessee.

For the assessment year 2006-07, the Tribunal by following the earlier order of this Tribunal has decided this issue.

The issue of merger of three plots for the purpose of area of plot being 1 acre had been decided against the assessee consistently by this Tribunal. Following the earlier years order of this Tribunal, there was no error or illegality in the impugned order of Commissioner (A).

As regards the benefit of proviso to section 80-IB(10), the conditions enumerated in clauses (a) & (b) are relaxed if the housing project is carried out in accordance with the scheme framed by the Central or State Government for reconstruction/redevelopment of slum area declared therein. However, such schemes are required to be notified by the Board in this behalf. It is pertinent to note that in the earlier years when this matter came before the Tribunal this scheme was not notified by the Board and only on 5-1-2011, the Board has notified the scheme.

As per this Notification, the Board has stated that this notification shall be deemed to apply to the projects approved by the local authority under the SRS scheme on or after 1-4-2004 and before 31-3-2008. It was further clarified that the income arising from such projects was eligible for deduction u/s. 80-IB(10) from the assessment year 2005- 06 onwards. The question arises whether while notifying the scheme the Board can attach any condition for the eligibility of the project to avail the benefit of proviso to section 80-IB(10)(a) and (b).

The deduction u/s. 80-IB(10) is available to the housing project which fulfils the conditions stipulated thereunder. One of the conditions is that the project is on the size of plot of land which has a minimum area of 1 acre under clause (b) of section 80-IB(10). An exclusion has been carved out under the proviso to clauses (a) and (b) of section 80-IB(10) whereby the condition stipulated under clauses (a) and (b) shall not apply to the housing project carried out in accordance with the scheme framed by the Central Government or State Government for reconstruction or redevelopment of area declared as slum area under the law. The projects of the assessee are under the slum rehabilitation scheme framed by the State Government which has been notified by the board vide notification dated 5-1-2011. The plain reading of the proviso inserted by the Finance Act, 2004 to clauses (a) and (b) of sub-section (10) of section 80-IB clearly manifests the requirement of notification of the scheme so framed either by the Central Government or by the State Government. Also, it is relevant to see the intent of the Legislature while amending the provisions of section 80-IB(10), to relax the condition for such project under the slum rehabilitation scheme. The memorandum explaining the provisions in the Finance Bill, 2004 states that with a view to increase the redevelopment of slum dwellers, it has proposed to relax the condition of minimum plot size of 1 acre in case of housing project carried out in accordance with the scheme framed by the Central Government or State Government for reconstruction or redevelopment of existing building and notified by the board in this behalf. Thus, the intent of legislature is to exempt the condition of minimum of 1 acre plot size in the case where the housing project is carried out in accordance with the slum reconstruction scheme framed by the Central Government or State Government and such scheme is notified by the Board. Therefore, to avail the benefit of the proviso to clauses (a) and (b) of section 80-IB(10), the following requirements are to be satisfied, viz., (i) the housing project is carried out in accordance with the scheme of reconstruction or redevelopment of slum area (ii) such scheme is framed by the Central Government or State Government (iii) such scheme is notified by the Board in this behalf.

There is no dispute that the projects in question are carried out in accordance with the scheme for redevelopment of the slum area as framed by the State Government of Maharashtra and the same has been notified by the Board vide notification dated 5-1-2011. The second part of this notification contemplates a new condition which is not provided even under clause (a) of section 80- IB(10). The condition inserted in the notification says that the notification shall be deemed to apply to the projects approved by the local authority on or after 1-4-2004 and before 31-3-2008. This condition contemplated under the notification is repugnant to the conditions provided u/s. 80-IB(10). The proviso in question has been inserted to relax the condition provided under clauses (a) & (b) of section 80-IB(10) and not for adding any new condition which is otherwise not required for housing projects for availing the benefit of deduction u/s. 80-IB(10). Even otherwise the condition as stipulated in clause (a) of section 80-IB(10) with respect to sanction of the project is only for the time period of completion of the project and there is no such condition that if a project is approved prior to 1-4-2004, it is not entitled for the benefit u/s. 80-IB(10). Once the scheme is notified all projects carried out in accordance with such scheme are entitled for the benefit of the proviso whereby the conditions prescribed under clauses (a) and (b) are relaxed. Thus the second part of the notification dated 5-1-2011 is inconsistent/contrary to the proviso of clauses (a) and (b) of section 80-IB(10) as well as to the intent of the Legislature inserting the said proviso. The Board cannot insert a new condition in the provisions of a statute which is repugnant to the provisions itself as well as
against the very object and scheme of the said provision of the statute.
Accordingly the assessee was entitled for benefit of the proviso to clauses and (b) of
section 80-IB(10) and, therefore, was eligible for deduction u/s. 80-IB(10) if
the other conditions as prescribed under clauses (c) to (e) are satisfied.

Income – Deemed dividend – Section 2(22)(e) – Loan to shareholder – Assessee shareholder let out premises to company – Company incurred substantial expenditure on repair and renovation of premises – Not a case of advance or loan – No deemed dividend in the hands of the shareholder:

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CIT vs. Vir Vikram Vaid; 367 ITR 365 (Bom):

The assessee holding 76.26% of the shareholding of a company had let out a premises owned by him to the company. The company incurred expenses of Rs. 2.51 crore towards construction and improvement of the premises which it continued to use. The Assessing Officer held that the amount of Rs. 2.51 crore was paid on behalf of the assessee. He therefore treated the sum of Rs. 2.51 crore as deemed dividend u/s. 2(22)(e) of the Income-tax Act, 1961 and made the addition. The Tribunal deleted the addition and held that it is not deemed dividend.

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

“i) No money had been paid to the assessee by way of advance or loan nor was any payment made for his individual benefit. The fact that the company had spent money had not been called into question. Thus, it was deemed that the company did spend Rs. 2.51 crore towards repairs and renovation on the premises owned by the assessee. There was no dispute about the fact that the company had taken the premises on rent.

ii) Thus, it was a case where the asset of the assessee may have enhanced in value by virtue of repairs and renovation but this could not be brought within definition of the advance or loan to the assessee. Nor could it be treated as payment by the company on behalf of the assessee shareholder or for the individual benefit of such shareholder.”

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Income: Deemed dividend – Section 2(22)(e) – A. Y. 2008-09: Assessee having current account with company and earning interest income by advancing funds to company – Credit balance only for a period of 55 days – No tax evasion – Section 22(e) not applicable:

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CIT vs. Suraj Dev Dada; 367 ITR 78 (P&H):

The
assessee was having a current account with a company DM and was earning
interest income by advancing money to the company as per its need. The
assessee was a shareholder of the company. The assessee’s account with
the company showed credit balance for a period of 55 days. In view of
the said credit balance, the Assessing Officer made an addition of Rs.
2,75,00,000/- u/s. 2(22)(e) of the Income-tax Act, 1961 for the A. Y.
2008-09. The CIT(A) and the Tribunal deleted the addition.

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

“i)
The assessee had a running account with the company and had been
advancing money to it. The provisions of section 2(22)(e) of the Act
were not attracted in the present case as this provision was inserted to
stop the misuse by the assessee by taking the funds out of the company
by way of loan advances instead of dividend and thereby avoid tax.

ii)
In the present case, the assessee had in fact advanced money to the
company and there was a credit for only 55 days for which the provisions
of section 2(22)(e) of the Act could not be invoked.

iii) No substantial question of law arises in this appeal. Appeal is dismissed.”

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Capital gain – Expenditure incidental to sale – Section 48 – A. Y. 2006-07 – Expenditure for cancellation of earlier sale is deductible u/s. 48 as expenditure incidental to sale:

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CIT vs. Kuldeep Singh; 270 CTR 561 (Del):

In the return of income for the A. Y. 2006-07, the assessee had disclosed capital gain on sale of residential house on which exemption u/s. 54 was claimed. In computing the capital gain the assessee had claimed a deduction of Rs. 7,50,000/- as expenditure incidental to the sale. Out of this amount, Rs. 5,00,000/- was the cancellation charges for cancelling the earlier agreement for sale and the balance Rs. 2,50,000/- is the brokerage paid for the same. The Assessing Officer disallowed the claim. The Tribunal allowed the claim.

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

“i) The finding of the Tribunal is that the assessee had entered into an earlier agreement to sell the property and had recovered Rs. 10,00,000/- from one AS. However, this agreement was cancelled to enable the assessee to enter into the transaction resulting in the capital gain. Rs. 10,00,000/- was refunded to AS and Rs. 5,00,000/- was paid as cancellation charges. Rs. 2,50,000/- was paid to one RK who acted as a broker in the first deal.

ii) The payments cannot be challenged on the ground that they were not genuine or were not made. Findings of the Tribunal are factual and cannot be categorised or treated as perverse. Similarly, it cannot be said in the facts of the present case that these payments were not directly relatable to the transaction for sale dated 03-06-2005, which had resulted in income by way of capital gains.

iii) By cancelling earlier transaction and ensuring that the rights created by the earlier agreement to sell do not obstruct the sale transaction, payments of Rs. 5,00,000/- to AS and Rs. 2,50,000/- to AK, have been made. Finding of the Tribunal in the said aspect is quite clear and on the basis of the said facts, the Tribunal has rightly held that the expenditure was incurred and was wholly connected with the sale transaction dated 03-06-2005. We do not think that any substantial question of law arises and thus the present appeal is dismissed.”

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Capital gain – Computation: Reference to DVO – Sections 48, 50C and 55A – A. Y. 2006-07 – Sale of immovable property in July 2005 – Consideration more than stamp duty valuation – Reference to DVO not justified:

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CIT vs. Gauranginiben S. Sodhan: 367 ITR 238 (Guj):

In July 2005, the assessee had sold an immovable property for a consideration of Rs. 8,51,00,000/- which was more than the stamp duty value of the property. In the course of the assessment proceedings for the A. Y. 2006-07, the Assessing Officer referred the case to the DVO for valuation as on the date of sale and also as on 01-04-1981. The DVO valued the property as on the date of sale at Rs. 13,73,90,000/-. The DVO also valued the property as on 01-04-1981 at Rs. 94,00,000/- as against Rs. 1,03,00,000/- determined by the registered valuer of the assessee. As a result the Assessing Officer made an addition of Rs. 81,57,643/- to the total income. CIT(A) deleted the addition on the ground that the reference to the DVO was not valid. This was affirmed by the Tribunal.

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

“i) The sale consideration reflected in the sale deeds was higher than the valuation adopted by the stamp valuation authority. The reference to the DVO for ascertaining the fair market value of the capital asset as on the date of sale in the present case was wholly redundant.

ii) The reference to the DVO for ascertaining the fair market value as on 01-04-1981 also was not competent. The assessee had relied on the estimate made by the registered valuer for the purpose of supporting its value of the asset. Any such situation would be governed by clause (a) of section 55A of the Act and the Assessing Officer could not have resorted to clause (b) thereof.”

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Business expenditure: Accrual of liability – A. Ys. 1988-89 to 1994-95 – Disputed enhanced power tariff – Amount not paid to electricity board – No acknowledgment of liability – No accrual of liability – Amount not deductible:

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Coromandal Garments Ltd. vs. CIT; 367 ITR 144 (T&AP):

In the year 1988-89, the A. P. Electricity Board had revised the power tariff. The assessee challenged the revision of the power tariff by filing a writ petition which was dismissed. The assessee preferred an appeal before the Supreme Court. The assessee had not paid the enhanced tariff. In the A. Y. 1994-95, the assessee claimed a deduction of Rs. 4,53,83,917/-being the difference in tariff for the period from 1988-89 to A. Y. 1994-95. The Assessing Officer and the Tribunal disallowed the claim.

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

“i) The stand of the assessee was wavering throughout. In the three or four assessment years, for which the liability accrued, deduction was not even claimed. Except that the provision was made, it was neither stated that the amount was paid to the electricity supplier or that the liability had been acknowledged.

ii) It is only when the actual accrual takes place, that allowance can be permitted, irrespective of the actual payment. Such accrual would take place only when the matter is settled amicably between the parties to the contract or the adjudication has reached finality. Admittedly, nothing of that had taken place. Therefore, the appellate authorities had rightly rejected the claim of the assessee.”

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TS-482-ITAT-2014(Mum) GECF Asia Limited vs. DDIT A.Y: 2007-08, Dated: 06.08.2014

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Services such as accounting and legal support, sales and marketing, human resource services etc rendered from own knowledge and experience without imparting the know-how/experience to the other person does not constitute royalty under the India-Thailand Double Taxation Avoidance Agreement (DTAA ).

Facts:
The Taxpayer, a Thailand tax resident, entered into a master agreement with Indian company (I Co) to provide various services such as accounting and finance support, legal and compliance services, sales and marketing services, etc.

The Taxpayer filed NIL return for the relevant assessment year on the ground that the income accrued to him on account of above services qualifies as business income and the same cannot be taxed under Article 7 of India–Thailand DTAA in the absence of a Permanent Establishment (PE) in India.

The Tax Authority, in its draft order, held that the fee received by the taxpayer from I Co qualifies as fees for technical services (FTS) under the Income-tax Act, 1961 (Act) and alternatively such fee would also fall within the definition of “royalty” under the India – Thailand DTAA . Thus such income would be taxable in India.

Aggrieved, the Taxpayer filed its objections before the Dispute resolution panel (DRP). However, the DRP also concluded that the fee received by the Taxpayer is for providing industrial, commercial or scientific experience and, hence, the fee constituted “Royalty” under the DTAA , and hence it would be taxable in India. Aggrieved the Taxpayer appealed to the Tribunal.

Held:
Royalty is defined under India-Thailand DTAA to include payments of any kind received as a consideration for the use of, or the right to use, information concerning industrial, commercial or scientific experience. Consideration for information concerning industrial, commercial, scientific experience to be regarded as royalty should allude to the concept of knowhow. There should be an element of imparting of know-how to the other, so that the other person can use or has right to use such knowhow.

If services are being rendered simply as an advisory or consultancy, then it cannot be termed as “royalty”, because the advisor or consultant is not imparting his skill or experience to other, but rendering his services from his own knowhow and experience. All that he imparts is a conclusion or solution that draws from his own experience.

If there is no “alienation” or the “use of” or the “right to use of” any knowhow i.e., there is no imparting or transfer of any knowledge, experience or skill or knowhow, then it cannot be termed as “royalty”.

The services may have been rendered by a person from own knowledge and experience but such knowledge and experience has not been imparted to the other person as the person retains the experience and knowledge or knowhow with himself, which are required to perform the services to its clients. In principle, if the services have been rendered de– hors the imparting of knowhow or transfer of any knowledge, experience or skill, then such services will not fall within the ambit of royalty.

Accordingly, the matter was restored back to Tax Authority to examine the nature of services based on the above principles.

levitra

International Taxation-Recent Developments in USA

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In this Article, we have given information about
the recent significant developments in USA in the sphere of
international taxation. Since many Indian Corporates have substantial
business interests in and dealings with USA, we hope the readers would
find this information useful. This will help to create awareness about
impending important changes in law and practices in USA.

1. IRS issues FATCA guidance and final FFI agreement for foreign financial institutions

The
US Internal Revenue Service (IRS) has issued Revenue Procedure 2014-13
to provide guidance to foreign financial institutions (FFIs) entering
into FFI agreements directly with the IRS to be treated as participating
FFIs under the Foreign Account Tax Compliance Act(FAT CA). Revenue
Procedure 2014-13 also provides guidance to FFIs and branches of FFIs
treated as reporting financial institutions under an applicable Model 2
inter governmental agreement (IGA) (reportingModel2FFIs) on complying
with the terms of the FFI agreement, as modified by the Model 2 IGA.

Revenue
Procedure 2014-13 includes a final FFI agreement for participating FFIs
and for reporting Model 2 FFIs. The FFI agreement finalises the draft
FFI agreement that was released on 29th October, 2013 as section V of
IRS Notice 2013-69.

Revenue Procedure 2014-13 states that the
FFI agreement generally does not apply to a reporting Model 1 FFI, or
any branch of such an FFI, unless the reporting Model 1 FFI has
registered a branch located outside of a Model 1 IGA jurisdiction so
that such branch may be treated as a participating FFI or reporting
Model 2 FFI. In such a case, the terms of the applicable FFI agreement
apply to the operations of such branch.

Revenue Procedure 2014-13 is effective on 1st January ,2014.

2. Public comments requested on source of income from sales of natural resources and other inventory

The
US IRS and the Treasury Department have issued a notice requesting
comments on the existing regulations (TD8687) that provide rules for
allocating and apportioning income from sales of natural resources or
other inventory produced in the United States and sold outside the
United States or produced outside the United States and sold in the
United States. The regulations were issued u/s. 863 of the US Internal
Revenue Code (IRC).

Under the regulations, gross receipts equal
to fair market value of natural resources at the export terminal are
allocated to the location of the farm, mine, well, deposit, or uncut
timber, with the source of gross receipt from such sales in excess of
the product’s fairmarket value at the export terminal allocated to the
country of sale.

The regulations also provide rules for
allocating and apportioning income from inventory sales other than
natural resources where the taxpayer produces property in the United
States and sells outside the United States, or produces property outside
the United States and sells in the United States. Such income is
treated in part as USsource income and in part as foreign-source income
under one of the three methods described in the regulations: the 50/50
method, the independent factory price method, and the books and records
method.

The information collected under the regulations issued
by the IRS to determine on audit whether the tax payer has properly
determined the source of its income from export sales.

3. Updated IRS Publication 80 issued–Federal Tax Guide for Employers in US possessions

The
US IRS has released the revised IRS Publication 80, Circular SS
(Federal Tax Guide for Employers in US Virgin Islands, Guam, American
Samoa, and the Commonwealth of the Northern Mariana Islands). The
publication is dated 17th December, 2013 and is intended for use in
preparing 2014 tax returns.

Publication 80 provides information
for employers whose principal place of business is US Virgin Islands,
Guam, American Samoa, and the Commonwealth of the Northern Mariana
Islands (CNMI), or who have employees subject to income tax withholding
in these US possessions. Publication 80 notes that employers and
employees in these jurisdictions are generally subject to US social
security and Medicare taxes under the US Federal Insurance Contributions
Act (FICA), and summarises employer responsibilities to collect, pay,
and report these taxes. Additionally, Publication 80 provides employers
in the US Virgin Islands with a summary of the irresponsibilities under
the US Federal Unemployment Tax Act (FUTA ).

Revised Publication 80 provides information on new rules, including:

– The social security wage base limit (ceiling) for 2014 is $117, 000

– The social security tax rate remains 6.2% for each of the employer and employee;

– The Medicare tax rate remains 1.45%for each of the employer and employee;

–
Beginning 1st January, 2014, any entity assigned an employer
identification number (EIN) must file IRS Form8 822-B (Change of Address
or Responsible Party—Business) to report the change in the identity of
its responsible party; and

– IRS Notice 2013-61 provides special
administrative procedures for claims for refund or adjustments of over
payments of social security and Medicare taxes resulting from
recognition of certain same-sex marriages

Revised Publication 80 also provides reminders, including:

–
Employers are required to withhold an Additional Medicare tax of 0.9%
from wages paid to an employee in excess of $ 200,000 in a calendar
year;
– The IRS will not assert that an employer has understated
liability for FICA taxes by reason of a failure to treat services
performed before 1st January, 2015 in the CNMI by residents of the
Philippines as “employment” u/s. 3121(b)of the USIRC; and
– CNMI government employees are subject to social security and Medicare taxes beginning in the fourth quarter of 2012.

Publication 80 includes a calendar with the due dates for the IRS filing requirements.
In addition, Publication 80 refers to other IRS publications that are relevant in this context, Including:

– P ublication 15, Circular E (Employer’s Tax Guide) for information on US federal income tax withholding;
– P ublication 509 (Tax Calendars); and
–
P ublication 570 (Tax Guide for Individuals With Income From US
Possessions) for information on the self-employed tax. Publication 80 is
available on the IRS website.

4. IRS publishes quarterly list of individuals who have expatriated: Q2/2014

The
US IRS published on 7th August, 2014 a quarterly notice with a list of
US citizens and long-term US residents (green cardholders) who have
renounced their citizenship or resident status for tax avoidance
purposes.

The notice is dated 18th July, 2 014, and is based on
information that the US Treasury Department received during the quarter
ending 30th June, 2014.

The notice is required u/s. 6039G of the
USIRC. The list contains the name of each individual losing US
citizenship or long-term resident status within the meaning of IRC
sections 877(a) or 877A, dealing with the tax treatment of individuals
who are deemed to have expatriated from the United States for tax
avoidance purposes.

5 Public comments requested on treatment of compensatory stock options under transfer pricing rules

The us irs and the us treasury department have is- sued a notice requesting comments on information collection requirements imposed by the existing final regulations (td9088) dealing with the treatment of compensatory stock options under the transfer pricing rules of section 482 of the us IRC. the notice was published in the federal register on 7th august, 2014.

The final regulations, which were issued on 26th August, 2003, provide guidance on the treatment of stock-based compensation for purposes of the transfer pricing rules governing qualified cost sharing arrangements and for purposes of the comparability factors to be considered under the comparable profits method.

The final regulations adopted with modifications the proposed regulations (reG-106359-02 ) issued on this subject on 29th july, 2002. the irs requested that comments be submitted no later than 6th october, 2014. The mailing address and other contact information are given in the notice.

6.    IRS updates FAQs on FATCA registration System

The  us  irs  has  released  updated  frequently  asked Questions  (FAQs)  on  the  FATCA under  the  heading  of FATCA registration system. the FAQs indicate a last reviewed or updated date of 1st august, 2014.

The fAQs provide guidance on the following topics:
–    FATCA registration system–overview;
–    registration system resource materials;
–    General system questions;
–    fatCa account creation and access;
–    Registration status and account notifications;
–    Expanded Affiliated Groups (EAG);
–    registration updates;
–    sponsoring entity;
–    ffi list;
–    paper registrations;
–    Global Intermediary Identification Number (GIIN)–
overview; and
–    GIIN format.
The update is made by adding:
–    Question 1 to the topic, fatCa account creation and access;
–    Questions 6 and 7 to the topic, registration status and account notifications; and
–    Question 7 to the topic, registration updates.

The IRS notes that additional fAQs are available for the FATCa–FAQs General (last reviewed or updated on 29th july, 2014) and fAtCa FFI list (last reviewed or updated on 1st august, 2014).

7.    IRS updates FAQs on FATCa FFI List

The  us  irs  has  released  updated  frequently  asked Questions  (fAQs)  on  the  fatCa under  the  heading  of irs ffi list fAQs. the fAQs indicate a last reviewed or updated date of 1st august, 2014.

The FFI list is a list that is issued by irs and that includes all financial institutions and branches that have submitted a registration and have been assigned a Global interme- diary Identification Number (GIIN).

The fAQs provide guidance on the following topics:
–    FFI list overview;
–    registration deadline;
–    FFI List fields;
–    FFI list;
–    downloading;
–    searching;
–    legal entity name; and
–    XML/CSV files.

Rhe  update  is  made  by  adding  questions  1  and  2  to the  topic,  ffi  list,  and  adding  question  2  to  the  topic, searching.

8.    IRS further updates countries with residence waiver for foreign earned income exclusion for 2013

The  us  irs  released announcement  2014-28  on  30th july, 2014 to update the list of foreign countries for which the residence requirement for the us foreign earned income exclusion u/s. 911 of the us irC can be waived for 2013 due to adverse conditions that prevented the normal conduct of business. the original list for 2013 was provided in revenue procedure 2014-25.

Announcement 2014-28 adds south sudan, effective for departure on or after 17th december, 2013.

IRC section 911 permits qualified individuals to exclude a limited amount of foreign earned income ($97, 600 for 2013, see united states-5, news 23rd october, 2012) from us taxation and to claim an exclusion or deduction for certain foreign housing costs if a foreign residence re- quirement is met.

The  residence  requirement  can  be  waived  for  an  indi- vidual who left the listed countries on or after the stated departure date if:

–    There are adverse conditions, such as war, civil un- rest, or similar conditions, that prevent the normal con- duct of business in the countries; and

–    The individual can establish a reasonable expectation of meeting the residence requirement but for the ad- verse conditions.

9.    IRS issues revised instructions  for  requesters  of withholding certificates (Forms W-8) to implement FATCA

The US IRD has released revised irs instructions for the requester of forms W-8Ben, W-8eCi, W-8eXp, and W- 8imy to implement the fatCa. the instructions are dated 16th july, 2014.

The revised instructions supplement the instructions for the following forms:

–    Form W-8BEN (Certificate of Foreign Status of Ben- eficial Owner for United States Tax Withholding (Indi- viduals));

–    Form W-8BEN-E (Certificate of Status of Beneficial owner for united states tax Withholding and reporting (entities));

–    FormW-8ECI (Certificate of Foreign Person’s Claim that income is effectively Connected With the Conduct of a trade or Business in the united states);

–    FormW-8EXP (Certificate of Foreign Government or other foreign organisation for united states tax Withholding); and

–    Form W-8IMY (Certificate of Foreign Intermediary, foreign flow-through entity, or Certain us Branches for united states tax Withholding).

A withholding agent or a foreign financial institution (FFI) may need to request, and obtain, a withholding certificate (i.e., form W-8series) in order to:

–    establish the status of a payee or an account holder under chapter 4 of the us irC (dealing with the fat- Ca provisions)or the payee’s status under irC chapter 3 (dealing with the regular withholding on us-source income paid to foreign persons); or
–    Validate a payee’s or an account holder’s claim of for- eign status when there are us indicia associated with the payee or the account.

The revised instructions provide, for each form, notes to assist withholding agents and ffis invalidating the forms for chapters 3 and 4 purposes. The revised instructions also outline the due diligence requirements applicable to withholding agents for establishing a beneficial owner’s foreign status and claim for reduced withholding under an income tax treaty.

10.    Guidance issued on FTC limitations for foreign asset acquisitions

The IRS and the us treasury department have issued notice 2014-44 to announce their intention to issue regulations addressing the limitations of foreign tax credits (FTCs) related to certain foreign asset acquisitions u/s. 901(m) of the irC. notice 2014-44 was released on 21st july, 2014.

FTCs may be limited by IRC section 901(M)if the FTCs result from certain foreign asset acquisitions, referred to as “covered asset acquisitions” (Caas), in connec- tion with which taxpayers may elect to claim a higher tax basis in the “relevant foreign assets” (RFAS) for us tax purposes than for foreign tax purposes. as a result of the difference, the amount of taxable gain from the rfas, and potentially the tax, is higher in the foreign jurisdiction than in the united states.

IRC  section  901(m)  disallows  the  portion  of  the  ftC (the”disqualifiedportion”) that is attributable to the tax basis difference in the rfas to the extent the basis dif- ference is allocated to the taxable year. The disqualified portion of any ftC is allowed as a deduction. irC section 901(m)(3)(B)(i) allocates the basis difference to taxable years using the applicable cost recovery method for us income tax purposes.

IRC section 901(m)(3)(B)(ii) provides that, if there is a dis- position of an rfa, the basis difference allocated to the taxable year of the disposition (the “dispositionamount”) is the remaining (i.e., unallocated) basis difference, and no basis difference will be allocated to any subsequent taxable years (the “statutory disposition rule”).

To prevent taxpayers from avoiding the purpose of irC section 901(m) by invoking the statutory disposition rule, notice 2014-44 provides that, for purposes of section 901(m), a disposition means an event (for example, a sale, abandonment, or mark-to-market event) that results in gain or loss being recognised with respect to an rfa for purposes ofus income tax or a foreign income tax, or both. Notice 2014-44 clarifies that a disposition does not occur from a tax-free deemed liquidation that arises when an acquired foreign target corporation makes an entity classification election to become a disregarded entity for us tax purposes under the us check-the-box regulations.

Notice 2014-44 applies two separate rules for determin- ing the disposition amount, depending on whether or not the disposition is fully taxable for both us and foreign income tax purposes. in addition, notice 2014-44 contains special rules with re- gard to a Caa that is an acquisition of an interest in a partnership that has an election in effect under irC section 754, i.e., an election that permits the inside tax basis of partnership assets to be increased under irC section 743 following the acquisition of an interest in the partnership. notice 2014-44 also provides that IRC section 901(m) continues to apply to an rfa until the entire basis difference in the rfa has been taken into account using the applicable cost recovery method or as a disposition amount (or both), regardless of a change in the ownership of an RFA.

The rules provided in notice 2014-44 will generally apply to dispositions occurring on or after 21st july, 2014, subject to exceptions described in section 5 of the notice.

11.    Joint Committee on Taxation issues report on proposal store form taxation of multinational corporations

The  joint  Committee  on  taxation  of  the  us  Congress (JCT) has released a report on recent proposal store form the us taxation of multinational corporations.

The report is entitled present law and Background re- lated to proposals to reform the taxation of income of multinational enterprises. the report is dated 21st july, 2014, and is designated jCX-90-14.

The report includes the following:
–    a description of present us tax law applicable to in- bound investment (the us activities of foreign persons) and outbound investment (the foreign activities of uspersons);
–    a description of current policy concerns related to the taxation of multinational corporations;
–    Background on recent global activity related to the taxation of cross-border income; and
–    descriptions and a comparison of recent proposal store form the us international taxs ystem.

The report was prepared in connection with a public hear- ing that the us senate Committee on finance held on 22nd july, 2014 with regard to the taxation of cross-bor- der income.

12.    Final regulations issued regarding information re- porting by US passport applicants

The us treasury department and the irs have issued final regulations (td9679) to provide guidance on information reporting rules for certain individuals that apply for us passports (including renewals) u/s. 6039e of the us IRC. The final regulations were published in the Federal register on 18th july, 2014.

IRC section 6039e requires individuals applying for permanent residence (i.e., a green card) in the united states or for a us passport to include certain tax information in their applications. the us federal agency, to which the applica- tion is made, must provide such information to the IRS.

On 24th december, 1992, proposed regulations (intl- 978-86,reG-208274-86) were issued with guidance for both passport and permanent residence applicants to comply with information reporting rules under irC section 6039e. the 1992 proposed regulations also indicated the responsibilities of the specified US Federal agencies to provide certain information to the irs.

On 26th january, 2012, new proposed regulations (reG- 208274-86, rin1545-aj93) were issued to withdraw the 1992 proposed regulations and to provide guidance on information  reporting  by  passport  applicants.  the  2012 proposed regulations did not provide rules for information reporting by applicants for permanent residence. The final regulations adopt the 2012 proposed regulations with minor revisions.

The final regulations provide that a passport applicant, other than an applicant for an official passport, diplomatic passport, or passport for use on other official US government business, must provide his or her full name (including previous name, if applicable), permanent address and, if different, mailing address, tax payer identification number (TIN), and date of birth. a penalty of $ 500 may be imposed for non-compliance.

The final regulations further provide that a passport appli- cant who fails to provide the required information has 60 days (90 days for an applicant outside the united states) from the date of the irs’s written notice of the potential penalty assessment to respond to the notice if the appli- cant wishes to avoid the penalty. the applicant must do this by establishing that the failure is due to reasonable cause and not due to willful neglect.

The final regulations are designated Treasury Regula- tion section 301-6039e-1. they are effective on 18th july, 2014, and apply to passport applications submitted after 18th july, 2014.

13.    Final regulations issued regarding source rules for allocation and apportionment of interest expenses

The us treasury department and the irs have issued final regulations (td9676) to provide guidance on the allocation and apportionment of interest expenses between us and foreign sources u/s. 861 and 864(e) of the us IRC. The final regulations were published in the Federal register on 16th july, 2014.

The final regulations provide guidance on a number of is- sues, including the allocation and apportionment of interest expenses by corporations and individuals that own a 10% or greater interest in a partnership, as well as rules for valuing debt and stock of related persons. The final regulations also update the interest allocation regulations to conform to the statutory amendments regarding the al- location and apportionment of interest expenses by us corporate groups that include certain affiliated foreign cor- porations for purposes of irC section 864(e).

IRC section 864(e) provides that interest expenses of us corporate groups are to be allocated and apportioned between us and foreign sources as if all members of the group were a single corporation, and further that such allocation and apportionment are to be made on the basis of the assets of the corporate group (i.e., us and foreign) rather than on the basis of the gross income of the group. the amended irC section 864(e)(5)(a) treats a qualifying foreign corporation as a member of a US affiliated group for interest allocation purposes, and thus all the assets and interest expenses of the foreign member are taken into account, if specified 80% stock ownership and 50% us gross income/effectively Connected income (ECI) requirements are met.

The final regulations adopt, with no substantive change, the temporary regulations (td9571) issued on 17th january, 2012, as well as the portions of the earlier temporary regulations (td8228), issued on 14th september, 1988, that were not amended by the 2012 temporary regulations.

The final regulations amend provisions within Treasury regulation sections 1.861-9, -9t, -11, and-11t.

The final regulations are effective on 16th July, 2014, and generally apply to taxable years beginning on or after 16th july, 2014.

14.    IRS issues Memorandum on withholding on pay- ments to beneficial owner that fails to file income tax returns

The Office of Chief Counsel of the IRS has issued a memorandum that discusses the us withholding consequences of a beneficial owner’s failure to file US income tax returns after claiming a withholding exemption for us effectively connected income.

In the facts of the Memorandum, a Beneficial Owner (BO) provided a Withholding agent (WA) with irs formW-8eCi (Certificate of Foreign Person’s Claim That Income Is Effectively Connected With the Conduct of a trade or Busi- ness in the united states) to claim an exemption from us withholding tax on payments of income effectively con- nected with the conduct of a us trade or business (eCi). the Wa did not withhold on the payments made to the Bo in reliance on the form W-8eCI.

The BO certified in the FormW-8ECI that the amounts re- lated to the claim of exemption were ECI and were includible in the us gross income. the formW-8eCI includes a note that “Persons submitting this form must file an an- nual us income tax return to report income claimed to be effectively connected with a us trade or business.” the BO, however, did not file a US income tax return for any of the taxable years at issue.

Sections 1441 and 1442 of the irC require a withholding agent to withhold 30% of US-source fixed or determin- able, annual, or periodical (fdap) income paid to a foreign person. irC section 1441(c)(1), however, exempts withholding for eCi that is included in the gross income of the recipient. the consequence of this procedure is that the foreign person reports the eCi on a us income tax return and computes us income tax liability on a net in- come basis (i.e., gross income less allowable deductions) using the regular progressive us income tax rates rather than computing US tax liability at a flat 30% rate (or lower treaty rate) on the gross amount of the payment.

Under treasury regulation (treas. reg.) section 1.1441- 7(b)(1), a withholding agent may rely on a claim of exemption  contained  in formW-8eCi,  but a withholding  agent that receives a valid formW-8eCi must still withhold if it has actual knowledge or reason to know that the claim of exemption is incorrect.

The memorandum concludes that, because the BO made a claim of exemption for ECI and failed to file US tax

Returns including such amounts in gross income, the irs can determine the claim to be “incorrect” and provide direct notification to the WA under Treas. Reg. section 1.1441-7(b)(1) that it cannot rely on the Bo’s claim of exemption. the memorandum further states that the Wa will not be able to rely on the Bo’s claim of exemption beginning on the date that is 30 calendar days after the Wa receives such a notification, as described in Treas. Reg. section 1.1441-7(b)(1).

The  memorandum  is  designated  ilm201428007.  the memorandum is dated 7th may, 2014, and indicates are lease date of 11th july, 2014.

15.    IRS updates FaQs on general FATCA issues

The  us  irs  has  released  updated  frequently  asked Questions  (faQs)  on  the  FATCA  under  the  heading of  FATCA–fAQs  General.  the  fAQs  indicate  a  last reviewed or updated date of 10th july, 2014.

The  updated  fAQs  provide  guidance  on  the  following topics:

–    Qualified Intermediaries (QIs)/Withholding foreign partnerships(Wps)/Withholding foreign trusts (Wts);
–    inter Governmental agreement (iGa) registration;
–    Expanded Affiliated Groups (EAGs);
–    sponsoring/sponsoredentities;
–    Responsible  Officers  (ROs)  and  Points  Of Contact
(POCS);
–    financial institutions (FIS)
–    Exempt beneficial owners;
–    non-financial foreign entities (NFFES);
–    registration updates;
–    Branches/disregarded entities;
–    FFI and AGG changes;
–    General compliance;
–    additional supports; and
–    FATCA registration system technical supports.

The  update  was  made  with  regard  to  NFFES,  FFI  and EAG changes, and registration updates.

16.    IRS issues instructions to withholding certificate for foreign entities (FormW-8BEN-E) for FATCA

The us irs has released irs instructions for irs formW- 8BEN-E (Certificate of Status of Beneficial Owner for united states tax Withholding and reporting (entities)) to implement the fatCa. the instructions are dated 20th june, 2014.
the irs previously issued the new irs form W-8Ben- E (Certificate of Status of Beneficial Owner for United states  tax  Withholding  and  reporting  (entities))  to  be used by entities.

IRS formW-8Ben-e is used by a foreign entity:

–    To certify its status as a beneficial owner or payee of a payment for purposes of chapter 3 of the us irC (dealing with the regular withholding on income paid to foreign persons);

–    To claim income tax treaty benefits, if applicable, for the purpose of IRC chapter 3;

–    to certify its status under irC chapter 4 (dealing with the fatCa provisions); and

–    to submit to a payment settlement entity (pse) re- questing the form if the entity receives payments that would trigger information reporting for the pse under irC section 6050W (i.e., payments made in settlement of payment card transactions and third-party network transactions) unless the payee is a foreign person.

A foreign entity must furnish irs form W-8Ben-e to the withholding agent or payer when:

–    the  foreign  entity  receives  a  withholdable  payment from a withholding agent;
–    the foreign entity receives a payment subject to chap- ter 3 withholding; and
–    a foreign financial institution (ffi) with which the for- eign entity maintains an account requests the form.

IRS form W-8Ben as in use for 2013 and previous years was completed by both individuals and entity beneficial owners of the income to which the form related. the re- vised 2014 IRS FormW-8BEN (Certificate of Foreign Sta- tus of Beneficial Owner or United States Tax Withholding (individuals)) is for use exclusively by and entities should use the new irs form W-8BEN-E.

17.    IRS revises instructions to Form 1042-S for reporting foreign persons’ US source income to include FATCA requirements

The  us  IRS  has  released  revised  irs  instructions  for form   1042-s   (foreign   person’s   us   source   income subject to Withholding). the instructions are dated 24th june, 2014. the irs previously issued revised irs form 1042-s. irs Form 1042-S has been modified to accommodate report- ing of payments and amounts withheld under chapter 4 of the us IRC, commonly known as the fatCa, in addition to those amounts required to be reported under irC chap- ter 3. IRC chapter 3 deals with the regular withholding on US-source income paid to foreign persons, including fixed or determinable annual or periodical (fdap) income.

When a financial institution reports a payment made to its financial account, IRS Form 1042-S also requires the reporting of additional information about a recipient of the payment, such as the recipient’s account number, date of birth, and foreign tax payer identification number, ifany. For withholding agents, intermediaries, flow-through entities, and recipients, irs form 1042-s requires that the chapter 3 status (or classification) and/or the chapter 4 status be reported on the form according to codes provided in the instructions.

In addition, IRS Form 1042-2 must be filed to report specified Federal procurement payments made to foreign persons that are subject to withholding under IRC section 5000C and to report distributions of us effectively Connected income (ECI) by a publicly traded partnership or nominee.

18.    IRS issues instructions for FATCA reporting form

The  us  IRS  has  released  IRS  instructions  for  form 8966  (fatCa report).  the  instructions  are  dated  20th june, 2014.

The irs previously issued new irs form 8966. irs form 8966 is required to be filed under chapter 4 of the US IRC, commonly referred to as the FATCA, to report information with respect to certain us accounts, substantial us owners  of  passive  non-financial  foreign  entities  (nffes), us accounts held by owner-documented foreign financial institutions (FFIS), and certain other accounts as applicable based on the filer’s chapter 4 status.

Filers of irs form 8966 include a participating FFI (PFFI), a us branch of a PFFI that is not treated as a us person, a registered deemed-Compliant (RDC) ffi (including a reporting model 1 FFI), a limited branch or limited ffi, a reporting Model 2 FFI, a Qualified Intermediary (QI), a Withholding foreign partnership (Wp), a Withhold- ing  foreign  trust  (Wt),  a  direct  reporting  nffe,  and  a sponsoring entity. for calendar years 2015 and 2016, irs form 8966 is also filed by PFFIs, RDCFFIs, and reporting Model 2 FFIs to report certain amounts paid to their account holders that are non-participating ffis.

The initial filing of IRS Form 8966 will be required to be made on or before 31st march, 2015 for the 2014 calen- dar year.

19.    IRS releases addendum to user guide for FATCA online registration

The us IRS has released publication 5118a (addendum to the fatCa online registration user Guide). the addendum is dated july, 2014.

The addendum serves as a supplement to, and should be  used  in  conjunction  with,  publication  5118  (FATCA online   registration   user   Guide,   rev.12-2013).   the user  guide  provides  instructions  for  using  the  FATCA registration system to complete the fatCa registration process online.

The  addendum  describes  new  functionality  introduced since the last revision of the use rguide. Specifically, the addendum updates 6.6 appendix e: Country look up table of the user guide (pages 116 through 121) by adding the West Bank and Gaza (numeric Code: 275).

20 IRS announces changes to its offshore voluntary compliance programmes

The us irs has announced major changes in its off shore voluntary compliance programmes that will allow a broader group of us tax payers to participate so that they can come into compliance with their us tax obligations. The announcement was made in an irs news release (IR- 2014-73) dated 18th june, 2014. the irs Commissioner has also issued a statement dated 18th june, 2014.

The  changes  include  an  expansion  of  the  streamlined filing compliance procedures announced in 2012 and modifications to the 2012 Offshore Voluntary Disclosure program(oVdp).

Expansion of streamlined filing compliance procedures the expanded streamlined procedures are intended for us tax payers whose failure to disclose their offshore assets was non-wilful.

The changes to the streamlined procedures include:

–    extending eligibility to include us taxpayers residing in the united states, in addition to us taxpayers resid- ing broad;

–    eliminating a requirement that the taxpayer have usd 1,500 or less of unpaid tax per year;

–    eliminating the required risk questionnaire; and

–    requiring the taxpayer to certify that previous failures to comply were due to non-willful conduct.

Modifications to OVDP

The modified OVDP is designed to cover US taxpayers whose failure to comply with reporting requirements is considered willful in nature, and who therefore do not qualify for the streamlined procedures.

The modifications to the 2012 OVDP include:

–    Requiring additional information from taxpayers apply- ing for the programme;

–    Eliminating the reduced 5% and 12.5% penalties for certain non-wilful taxpayers in light of the expansion of the streamlined procedures;

–    Requiring taxpayers to submit all account statements and pay the offshore penalty at the time of the oVdp application;

–    Enabling an electronic submission of records; and

–    Increasing the offshore penalty from 27.5% to 50% if, before the taxpayer’s OVDP pre-clearance request is submitted, it becomes public that a financial institution where the taxpayer holds an account or another party facilitating the taxpayer’s offshore arrangement is under investigation by the irs or the us department of justice.

Related items
The IRS has also released the following related items:

–    a factsheet (fs-2014-6) with highlights of the irs offshore voluntary programmes since 2009;

–    A factsheet (FS-2014-7)with tax filing information for us taxpayers with offshore accounts; and
–    OVDP documents and forms.

Results of offshore evoluntary programmes

The  IRS  notes  that  its  three  voluntary  programmes  in 2009, 2011, and 2012 have resulted in more than 45,000 disclosures and the collection of approximately USD6.5 billion in taxes, interest and penalties.

21.    IRS releases guidance on options for US taxpay- ers with undisclosed foreign financial assets

The us IRS has issued guidance on options for us tax- payers who have previously failed to comply with us tax and information return obligations with respect to their non-us bank accounts and other foreign investments. the guidance indicates a last reviewed or updated date of 18 june 2014.

The guidance includes the following options:

–    the 2012 offshore Voluntary disclosure program (oVdp);

–    streamlined filing compliance procedures;

–    delinquent fBar submission procedures; and

–    delinquent international information return submission procedures.

The OVDP is specifically designed for taxpayers with ex- posure to potential criminal liability and/or substantial civil penalties due to a wilful failure to report foreign financial assets and pay all tax due in respect of those assets. The OVDP is designed to provide such taxpayers with protection from criminal liability and sets out the terms for resolving their civil tax and penalty obligations.
The streamlined filing compliance procedures are available to taxpayers who certify that their failure to report foreign financial assets and pay all tax due in respect of  those  assets  did  not  result  from  wilful  conduct.  the streamlined procedures are designed to provide such tax- payers with a streamlined procedure for filing amended or delinquent returns and set out terms for resolving their tax and penalty obligations.

The   delinquent   FBAR   submission   procedures   are intended for taxpayers who:
–    have not filed a required Report of Foreign Bank and financial accounts (FBAR) (finCen form 114, previously form TD f 90-22.1);
–    are not under a civil examination or a criminal investi- gation by the irs; and
–    have not already been contacted by the irs about the delinquent fBars.

The  delinquent  international  information  return  submis- sion procedures are available to taxpayers who:

–    have not filed one or more required international infor- mation returns;
–    have reasonable cause for not timely filing the infor- mation returns;
–    are not under a civil examination or a criminal investi- gation by the irs; and
–    have not already been contacted by the irs about the delinquent information returns.

For a report on the recent announcement of changes to the 2012 oVdp and the streamlined procedures, see united states-1, news 23rd june, 2014.

22.    Final and proposed regulations issued on IRS Form 5472 reporting requirements

The us treasury department and the irs have issued final regulations (TD9667) and proposed regulations (reG–114942–14) u/s. 6038a and 6038C of the us irC to provide guidance on the requirements to file IRS Form 5472  (information  return  of  a  25%  foreign-owned  us Corporation or a foreign Corporation engaged in a us trade or Business). the form is used by the irs to collect information on transfer pricing transactions between related parties.

IRC section 6038a requires information reporting by a 25% foreignowned domestic corporation  with  respect to certain transactions between such corporation and related parties.

IRC section 6038C imposes a similar reporting requirement on a foreign corporation engaged in a trade or business within the united states.

Final  regulations  (td8353)  were  issued  on  19th  june, 1991 to provide that:
–    a reporting corporation under irC sections 6038a and 6038C is required to file Form 5472 with its US income tax return by the due date of the return with respect to each related party with which the corporation has had any reportable transaction during the taxable year;
–    Such reporting corporation is also required to file a duplicate form 5472 with the irs Centre in philadel- phia, pa (i.e.,the duplicate filing requirement); and
–    if a reporting corporation’s income tax return is not timely filed, Form 5472 nonetheless I required to be filed (with a duplicate to the IRS Centre in Philadel- phia, pa) at the irs Centre where the return is due (i.e.,the untimely filed return provision), and, when the income tax return is ultimately filed, a copy of Form 5472 must be attached to the return.

Temporary  regulations  (TD9529)  were  issued  on  10th June, 2011 to remove the duplicate filing requirement on the ground that advances in electronic processing and data collection in the irs made it no longer necessary.

The new final regulations (TD9667)adopt the 2011 temporary regulations without substantive change as final regulations. The final regulations are designated Treasury regulation (treas.reg.) section 1.6038a-1, and -2. the final regulations are effective on 6th June, 2014.

In addition, the new proposed regulations (reG–114942–14) Eliminate the untimely filed return provision to promote efficient tax administration and consistency with other similar international reporting obligations applicable to us persons. as a result, the proposed regulations require a reporting corporation to file Form 5472 only with its in- come tax return by the duedate (including extensions)of the return.

The  proposed  regulations  are  designated  treas.reg. section 1.6038a-1, -2, and-4. the proposed regulations will apply to taxable years ending on or after the date on which the proposed regulations are published as final.

23.    IRS releases its first list of FATCA compliant financial institutions

The US IRS released the first IRS Foreign Financial Institution (FFI) list. the irs has also issued a related statement dated 2nd june, 2014.

The IRS FFI list is a list of financial institutions (FIS) and other entities (e.g. direct reporting non-financial foreign entities and sponsoring entities) that have completed fatCa registration  with  the  irs  and  obtained  a  Global Intermediary Identification Number(GIIN).

The first FFI List includes FIs in approved status as of 23rd May, 2014. The FFI List is updated on the first day of each month and will only include fis that are approved five business days prior to the first day of the month.

The FFI list search and download tool can be used to look for fis and their branches to determine if they are on the FFI list. the tool can download the entire FFI list or search for a particular fi by its legal name, GIIN,or country. no login or password is required to search or download the ffi list. the results will be displayed on the screen and can be exported in CSV, Xml, or pdf formats.

The IRS previously issued the following related items:

–    publication 5147 (FFI list search and download tool: UserGuide);
–    fatCa FFI  list  resources  and  support  information Webpage; and
–    FFI list frequently asked Questions(fAQs).

24.    Regulations issued to amend FaTCa provisions and coordinate FaTCa regulations with pre-existing tax rules

The  us treasury  department  and  the  IRS  issued  temporary regulations  (TD9657) on 20th february, 2014 to make additions and clarifications to the previously issued regulations on implementation of the FATCA. the treasury department and the irs also issued additional temporary regulations (TD9658) on the same day to provide guidance to coordinate FATCA rules with pre-existing reporting and withholding requirements under other provisions of the us IRC.

The treasury department issued a related press release dated 20th february, 2014, together with a factsheet on the new regulations.

Amendments to prior FATCA regulations

The first regulations (TD9567) contain over 50 amend- ments and clarifications to the previous FATCA regulations that were issued on 17th january, 2013 (TD9610) in response to certain stakeholder comments regarding ways to further reduce compliance burdens. Key changes include those relating to:
–    the  accommodation  of  direct  reporting  to  the  irs, rather than to withholding agents, by certain entities regarding their substantial us owners;
–    the treatment of certain special-purpose debt securi- tisation vehicles;
–    the treatment of disregarded entities as branches of
foreign financial institutions (FFIs); –    The definition of an expanded affiliated group; and
–    transitional rules for collateral arrangements prior to 2017.

Coordination of FATCA with pre-existing reporting and withholding rules

irC chapter 3 contains reporting and withholding rules relating to payments of certain us-source income (e.g. dividends on stock of us corporations) to non-us per- sons. irC chapter 61 and irC section 3406 impose the reporting and withholding requirements for various types of payments made to certain us persons (us non-ex- empt recipients).

the second regulations (td9568) coordinate these pre- fatCa regime with the requirements under fatCa to in- tegrate these rules, reduce burden (including certain du- plicative information reporting obligations), and conform the due diligence, withholding, and reporting rules under these provisions to the extent appropriate. Specifically, the coordinating rules make changes that are intended:

–    to remove inconsistencies in the chapter 3 and fat- Ca documentation requirements relating to the identi- fication of payees (including inconsistencies regarding presumption rules in the absence of valid documenta- tion);
–    to ensure that payments are not subject to withhold- ing under both irC chapter 3 and ftCA, or under both IRC section 3406 and FATCA;
–    to  relieve  non-us  payors  from  chapter  61  report- ing to the extent the non-us payor reports on the account in accordance with the fatCa regulations or an applicable inter governmental agreement (iGa);
–    to provide a limited exception to reporting under irC chapter61 for both us payors and non-us payors that  are  ffis  required  to  report  under  fatCa or  an applicable iGa, with respect to payments that are not subject to withholding under irC chapter 3 or irC section 3406 and that are made to an account holder that is a presumed (but not known) us non-exempt recipient;
–    to  provide  a  limited  exception  from  reporting  under irC chapter 61 for us payors acting as stock transfer agents or paying agents of distributions from certain passive foreign investment companies (PFICS) made to us persons; and
–    to make other conforming changes.
Effective  date:  the  regulations  will  become  effective when published as final

25.    IRS releases Transfer Pricing audit roadmap

The   transfer   pricing   operations   (TPO)of   the   large Business  and  international  (lB  &  I)  division  of  the  us irs  has  released  the  transfer  pricing  audit  roadmap (roadmap)to the public. The irs also issued a statement announcing   the   release   of   the   road   map   on   14th february 2014.

TPO is a dedicated team of transfer pricing specialists that is established by the lB & i of the irs and that encompasses both the advance pricing and mutual agreement program (APMA) and the transfer pricing practice (TTP).

TPO  has  developed  the  road  map  to  provide  the  irs transfer pricing practitioner with audit techniques and tools to assist with the planning, execution, and resolution of transfer pricing examinations. the road map is organised around a notional 24-month audit timeline.
The IRS notes that the road map is not intended as a template, but rather serves as a toolkit that provides recommended audit procedures and links to useful reference material. the road map also provides the public within sight into what to expect during a transfer pricing exami- nation.

The IRS also states that TPO will review the road map and make changes over time as new techniques arise or additional reference materials become available.

[Acknowledgement/Source: We have compiled the above information from the Tax News Service of IBFD for the period 01-01-2014 to 09-08-2014]

TS-211-ITAT-2014(Mum) Renoir Consulting limited vs. DIT A.Y: 1997-1998 and 1999-2000 Dated: 11-04-2014

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On the facts, premises of the client or the hotel where the employees stayed could be regarded as a fixed place permanent establishment (PE) through which the business of the Taxpayer was carried on.

Facts:
The Taxpayer (FCo) is a non-resident company registered in Mauritius. It entered into a contract with an Indian Company (ICo) for rendering services in relation to planning and implementing Performance Index Programme which would help in improving the management performance of ICO, by improving the work methods/services and providing efficient management control.

FCo deputed its employees comprising consultants and principal consultants to India. The duration of the contract was 50 weeks and it required 874 man days of consultants and 81 days of principal consultants’ time to be spent in India. There was no office available for these personnel to work in India.
FCo contended that the hotel rooms/accommodation used by its employees were only for stay, i.e., for residence and were not used as an office. Hence, it did not have any place of business in India.

It was also argued that employees in India were only carrying out preparatory and auxiliary services by only gathering and collating the data and transmitting the same to FCo and they worked as per directions of the Board of directors situated in Mauritius. Thus, the place of management of FCo was situated in Mauritius where the entire decision-making powers were located.

The Tax Authority contended that the hotel rooms where the FCo’s employees stayed in India from where they carried out their activities in India must be regarded as a Fixed Place PE of FCo in India and the income received from ICo should thus be taxed in India.

The finding of the Tax Authority was upheld by the First Appellate Authority. Aggrieved by the order of the First Appellate Authority on this issue, FCo appealed to the Tribunal.

Held
The right to use a fixed place of business may be owned, rented or otherwise acquired in any other manner. Further, a right which is not legal in its nature may, therefore, be of no adverse consequence. In the instant case, whether the hotel rooms could be legally or contractually used for business purposes was not ascertained. Even if such use was proscribed, but was factually used, it could be considered as a PE.

Also, in the present case there is no doubt that the use of hotel rooms and ICo’s premises is only for business purposes.

The modus operandi used by FCo for executing ICo’s contract clearly shows that it required extensive execution, continuous interaction with ICo and a detailed study followed by actual implementation in India. All this required FCo’s presence in India.

The claim of FCo that work performed in India was merely preparatory or auxiliary was incorrect and was inconsistent with facts where principal consultants came to India on frequent visits.

Further, the Fixed Place of business is not confined to a place where the top management of the company is located.

The contention that there is no Fixed Place because the personnel are operating from different places is without merit. The personnel are required to operate from different places due to the nature and requirement of the contract and is similar to a situation of a salesman.

It is for the FCo, to specify as to how and from where it has performed its work. If the employees have not performed their work from ICo’s premises, then there has to be some other place from where they had performed their activities during the time period that spans over 874 man-days for the consultants and 81 days for the principal consultants. One cannot perform activities in vacuum.

Thus, the fact that some place is at the disposal of the FCo or its employees during the entire period of their stay in India is manifest and eminent and follows from the work nature/profile and the modus operandi followed. Thus, the FCo had a Fixed Place PE in India.

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TS-327-ITAT-2014(Pun) Shaan Marine Services Private Limited vs. DIT A.Y: 2012-13 Dated: 27-05-2014

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“Effective management” of one-man shipping Company is situated in Cyprus as it is registered and headquartered in Cyprus; shipping income from transportation of cargo is not taxable in India as per India-Cyprus DTAA.

Facts:
Article 8 of the Cyprus DTAA governs taxation of income from shipping business and it provides that profits derived by an enterprise, registered and having headquarters (i.e., effective management) in Cyprus, from the operation of ships in international traffic shall be taxable only in Cyprus.

Place of effective management has been defined by OECD Model convention as the place where key management and commercial decisions that are necessary for the conduct of entity’s business as a whole are in substance made.

Ship Co, a company registered in and a tax resident of Cyprus, was engaged in the shipping business. Ship Co was a one-member company having no employees or a big office establishment as most of its work was outsourced to other entities. Ship Co was contracted by a client in the United Arab Emirates (UAE) to transport cargo from India to UAE. Ship Co chartered a ship from another company (Charter Co) for this purpose.

Ship Co engaged the Taxpayer, an Indian company (ICO), as its agent for handling, loading and other operations, obtaining necessary clearances from the court, customs, income tax, immigration etc., in India. It was argued on behalf of the taxpayer that as a business practice, Ship Co carried out its major business activities through outsourcing. Hence, the factor that there were no employees in India should not be given undue importance.

ICo, in the capacity of agent, filed the return of income (ROI) of Ship Co in India and declared NIL income relying upon Article 8 of the Cyprus DTAA which provides taxation right only to Cyprus.

The Tax Authority did not accept the above claim and contended that Ship Co was merely interposed as a charterer to conduct business on behalf of Charter Co and to take benefit of the Cyprus DTAA and the Tax Residency Certificate (TRC) furnished by Ship Co alone cannot be sufficient to conclude that the place of effective management was in Cyprus.

The First Appellate Authority also ruled against Ship Co and accordingly filed an appeal before the Tribunal.

Held:
All the documents indicate that Ship Co played a definite role in transporting cargo from India to the UAE.

• The UAE client has made a contract with Ship Co to transport cargo.
• The bill of lading is in the name of Ship Co and recognises it as the ship charterer.
• Ship Co’s annual report records all profits/revenues from the shipping business.

The Tax Authority has attempted to rewrite contracts, which is not permissible. It cannot be said that Ship Co was merely a “paper company” and did not play any role in transporting cargo.

If the Tax Authority’s contention is accepted that Ship Co is merely interposed to take benefit of the Cyprus DTAA by Charter Co, then, the freight income should be taxable in the hands of Charter Co and such income cannot be taxed in the hands of ICo who is the agent of Ship Co.

Ship Co did not have any establishment outside of Cyprus and, hence, its “effective management” is situated in Cyprus only.

Accordingly, Ship Co is entitled to benefits of the Cyprus DTAA and income of Ship Co from transportation of cargo is not taxable in India under the Cyprus DTAA .

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TS-343-ITAT-2014(Del) Karan Thapar vs. ACIT A.Ys: 2000-2001, 2002-2004, 2006-07, 2009-10 Dated: 09-05-2014

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Family pension received from the UK employer of deceased wife is duly covered under Article 23(3) of the India – UK DTAA; the phrase ‘may be taxed’ means that the income can be taxed only in source state.

Facts:
Taxpayer’s (Mr. A), wife was employed by a UK Co. On her demise, UK Co decided to pay family pension to Mr A as per UK Co’s family pension scheme. The family pension was to be paid to Mr. A until his death.

The Tax Authority contended that the family pension received by Mr. A was taxable in India under Article 23(1) of the DTAA between India and UK.

On Appeal the First Appellate Authority held that the family pension is not taxable in India in view of Article 23(3) of the India-UK DTAA which provided that the same ‘may be taxed’ in source state and hence country of residence had no right of taxation. Aggrieved the Tax Authority appealed before the Tribunal.

Held:
“Pension” is received from the ex-employer by the employee in his lifetime while “family pension” is received by the spouse or family members or legal dependent of the deceased employee from the employer of that deceased employee.

Article 20 of India-UK DTAA has no relevance in case of family pension which is generally received by the spouse or family members or legal dependent.

Article 23(1) of India-UK DTAA stipulates that the items of income beneficially owned by the residents of a contracting state (India) wherever arising shall be taxed in the resident state (India).

Article 23(2) is neither related to pension nor related to family pension. Article 23(3) covers items of income which are not included in the forgoing articles and arising in a contracting state (UK) “may be taxed in that other state”. The expression “may be taxed in that other state” mentioned in Article 23(3) authorises only the source state to tax such income and by necessary implication, the state of residence is precluded from taxing such income, especially when the tax has been deducted by the UK as source state.

Taxation by both residence as well as source state would render the object of double tax avoidance agreement infructuous and the provisions stipulated in the Indo-UK DTAA would be otiose.

Reliance was placed on Delhi ITAT decision in the case of Mideast India Ltd. (28 SOT 395) and Mumbai ITAT decision in the case of Ms. Pooja Bhatt (26 SOT 574).

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TS-317-ITAT-2014(Hyd) Pirelli Cavi E Sistemi vs. ACIT A.Y: 2000-2001, Dated: 28-05-2014

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Income from offshore supplies is taxable in India only to the extent of the profits attributable to the operations in India.

Facts:
The Taxpayer, an Italian Co (FCo), entered into three separate contracts with an Indian Co (ICo) for offshore supply, onshore supply and onsite services in relation to setting up a fiber optic system in India.

FCo obtained requisite permission for execution of onshore supply and service contract and for setting up a project office in India.

FCo filed its return of income and offered to tax income from the contracts relating to onshore supplies and services contract while maintaining that the income from offshore supplies was not taxable in India as the same was concluded outside India.

The Tax Authority contended that the three contracts are to be treated as a single composite contract and the offshore supplies are also taxable in India.

On Appeal, the First Appellate Authority held that the offshore supplies was taxable in India, because the activities relating to signing of the contract, installation and training of employees of ICo was undertaken by the project office in India.

Held:
There is no dispute with reference to the fact that income from the offshore contract is taxable only to the extent of profits attributable to the operations in India which are clearly defined in the Act as well as the DTAA between India and Italy. This position does not change even if all the three contracts signed by the parent company are treated to be single or composite contract.

The project office was set up after the contract for offshore supplies was entered into and hence there is no corelation between the signing of the contract in India and the Project office. Consequently, no income accrues or arises to the PE in India due to signing of contract in India.

The offshore contract was merely for supply of cables and not for providing the service of installation and hence no part of the income can be attributable to the PE in India.

Further training provided to ICo’s employees was claimed to be incidental to the offshore supplies though a separate amount was charged for such training from ICo. Alternatively, even if training fee needs to be considered as part of Project office, the training work was outsourced and fee paid for outsourcing was more than the amount received from ICo for such training. Hence, no income was earned by FCo in this regard.

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M/S. Glaxo Smithkline Pharmaceuticals Ltd. vs. State of Kerala, [2012] 50 VST 486 (Ker)

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Sales Tax- Goods Return – Return of Medicines Sold by Retailer on Expiry- Beyond Prescribed Period of Three Months-Not Allowed-It is Not Unfructified Sale, Rule.9(1)(b) of The Kerala General Sales Tax Rules, 1963.

Facts
The petitioner company, the manufacturer of medicines, sold medicines in the State of Kerala to retailers through distributors. As per trade practice followed by all manufacturers, the company took back from the retailers through distributors, the unsold medicines after its expiry and destroyed by the company later. During the assessment for the period 2001-02 and 2002-03, the company claimed deduction from turnover of sales for such return of goods as goods return. The assessing authority disallowed the claim of goods return being beyond prescribed period of three months from the date of sale as provided in Rule 9(1)(b) of The Kerala General sales Tax Rules, 1963. The disallowance was also confirmed by the Tribunal. The Company filed revision petition filed before the Kerala High Court against the decision of tribunal.

Held
The Kerala Sales Tax Act or Rules do not provide any specific provision for grant of refund or adjustment of tax paid in respect of sale of medicines which have lost potency at the hands of dealer and which have been collected and destroyed by the manufacturer company. The only provision for deduction under the Rule is deduction for sales return within the prescribed period of three months from the date of sale. Since the goods are not returned within the prescribed periodthe deduction for sales return is not permissible.

The High Court also did not accept the alternate plea of the company that the transaction should be treated as unfructified sales. However, the High Court felt that this is a genuine problem of the medicines dealers which State has to address. In the result the revision petition filed by the company was dismissed.

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Bhattacharjee Pharmaceuticals & Co. Ltd. And Another v. ACST, Corporate Division, Kolkata, [2012] 50 VST 435 (WBTT)

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VAT- Rate of Tax- Drugs and Medicine- Medicated Toothpaste – Taxable as Drugs And Medicines, Entry 25A of Schedule C of The West Bengal Value Added Tax Act, 2003.

Facts
The applicant company was a distributor and consignment agent of different pharmaceutical companies. The company had sold Thermoseal, R.A. Thermoseal and Hexigel, a medicated toothpaste and paid 4% tax applicable to drugs and medicines covered by entry 25A of Schedule C of the WB VAT Act. The department did not accepted the classification of above goods as drugs and medicine and levied tax at 12.5% applicable to general good. The company filed application before the West Bengal Taxation Tribunal assailing the assessment order passed by the assessing authority levying 12.5% tax on sale of above items.

Held
The item drug is not defined under the WB VAT Act. It is defined in section 3(b) of the Drugs and Cosmetics Act, 1940. The disputed items are drugs used for prevention of any diseases or disorder in human teeth. Under the West Bengal Sales Tax Act, 1994 there was a separate entry for toothpaste, but under the vat act there is no such separate entry for tooth paste. In the event of deletion of special entry, all the items of special entry come under the purview of general entry from the date of deletion of special entry. Under the West Bengal Sales Tax Act, entry 24 covered drugs and medicines and entry 54 covered toothpaste (whether medicated or not) along with other items. Under the WB VAT Act, there is no such entry like toothpaste. As a result, the medicated toothpaste shall come under purview of drugs and medicines covered by entry 25A of Schedule C liable to 4% tax and non medicated toothpaste shall be covered by the Schedule CA liable to tax at 12.5%. The Tribunal accordingly allowed the application filed by the company.

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2014 34 STR 418 (Tri-Chennai) International Clearing & Shipping Agency P. Ltd vs. CST Chennai

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Whether clarificatory Circular of CBEC can be applied retrospectively? Held, Yes.

Facts:
Appellant provided Custom House Agent (CHA) services. Service tax was demanded on certain reimbursements incurred by the Appellant. Appellant prayed that as per CBEC Circular, though issued for the period subsequent to the period in dispute, certain expenditure would be excludible for the value of taxable services on the satisfaction of certain conditions. Accordingly, in view of the said Circular, service tax demand should be NIL.

Held:
The Tribunal after observing the CBEC Circular to be clarificatory in nature, held that Circular can be applied retrospectively since it only clarifies the provisions of law already in existence. Accordingly, the order was set aside and remitted back for fresh determination.

Note-The Readers may note here that the Supreme Court in Suchitra Components Ltd. vs. CCE Guntur 2007 (208) ELT 321 (SC) held that a beneficial circular has to be applied retrospectively while an oppressive circular has to be applied prospectively.

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2014 (34) S.T.R. 437 (Tri-Del) Bechtel India Pvt. Ltd. vs. Commissioner of Central Excise, Delhi

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Whether for the purpose of claim of refund, export of services is completed on the date of export of services or the date of receipt of convertible foreign exchange? Held, Date of receipt.

Facts:
The appellants, Consulting Engineer export services under the provisions of the Export of Services Rules, 2005. The appellants filed applications for refund of service tax on input services used from July, 2005 to September, 2005 during various dates vide Notification No. 5/2006-ST dated 1st March, 2006. The claim was rejected on the ground that it was not filed in accordance with section 11B of the Central Excise Act, 1944 and that Rule 5 of the CENVAT Credit Rules, 2004, dealing with refund of service tax, was made applicable to service providers only with effect from 14th March, 2006.

Held:
Section 11B of the Central Excise Act, 1944, prescribes relevant date for refund of export as the date of export. Rule 5 of the CENVAT Credit Rules, 2004 read with Notification No. 5/2006-ST dated 1st March, 2006 provides for refund of service tax, provided the output service is exported and payment is received in convertible foreign exchange. Having regard to the Export of Services Rules, 2005, export of services is completed only when amount is received in convertible foreign exchange and therefore, relevant date u/s.11B of the Central Excise Act, 1944, to be considered would be the date when payment was received. In the present case, since all refund applications were filed within one year from the date of receipt of convertible foreign exchange, the claim was held not to be time barred.

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[2014] 45 taxmann.com 107 (New Delhi – CESTAT) – CCE vs. Amarjit Aggarwal & Co.

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Whether benefit of small scale service provider’s exemption notification is applicable, if value of services after deducting sales portion is below threshold exemption limit – Held – Yes.

Facts:
In this case, Show Cause Notice was issued to assessee holding that services provided by it were classifiable as “maintenance & repairs service” upto 15-06-2005 and thereafter under “cleaning services.” The assessee preferred appeal before the Commissioner (Appeals) who held that, services provided by the assesse are in the nature of works contract and accordingly gave relief to the assessee. Revenue preferred appeal before the Tribunal.

Held
The Tribunal observed that the work order relied upon by department for the purpose of issue of Show Cause Notice gives an impression of execution of works contract. The contract was a lump sum contract and it also exhibits that there was an element of sale of goods being incorporated in different services dealt by the contract. The Tribunal also observed that, there was a specific plea recorded in the adjudication order from the assesse that once the value of goods sold is excluded from the value of works contract, the value of taxable service rendered would be below Rs. 4 lakh for the financial year 2005-07 and the Respondent would be eligible for exemption for small service providers under Notification No. 6/2005-S.T. On this ground, it was held that the appeal was filed without considering the basic plea of the Respondent, a small service provider and accordingly dismissed the same.

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2014 (34) STR 383 (Tri.-Chennai) Marine Container Services (South) P. Ltd. vs. CCE (ST) Tirunveli.

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Whether margins earned by a steamer agent by booking space on shipping line through another steamer agent is exigible to service tax under “Steamer Agent Service” service? Held, Prima facie, No – Stay granted.

Facts:
Appellant was steamer agent of a particular shipping line and was paying service tax on the services rendered to the said shipping line. Appellant also billed to certain customers who approached them for booking space on a different shipping line. Appellant arranged the booking through another steamer agent and charged its customers extra amount over and above that was paid to another steamer agent. Service tax was demanded on the said margin under “Steamer Agent Service.”

Held:
The Tribunal held that in absence of any evidence that services were provided to shipping lines and payment was received from shipping lines, service tax demand cannot be sustained under “Steamer Agent Service” and accordingly, allowed the stay applications.

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2014 (34) STR 353 (Tri-Delhi) Satake Engineering P. Ltd. vs. CCEx, ST, Delhi

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Whether failure of adjudicating authority to consider and refer to the decisions of judiciary relied on by the Appellant, is a ground for quashing the Order of adjudicating authority? Held – Yes.

Facts:
Appellant was registered under Business Auxiliary service (BAS), Management Maintenance & Repairs service (MMRS) and Erection & Commissioning service. Appellant had filed an appeal against an Order of adjudicating authority confirming SCN wherein service tax demand was raised under the first two categories on the services rendered to its foreign associate companies/ subsidiaries.

The Appellant filed an exhaustive reply on various grounds and relied on various judgements which included the full bench judgement of the Delhi Tribunal on the similar facts and urged that in terms of the Export of Services Rules, the service provided by the Appellant was not liable for service tax. Adjudicating authority while confirming the demand had though adverted to some of the decisions relied by Appellant, did not consider the full bench judgement of the Delhi Tribunal and no analysis was made to any judgement relied by the Appellant.

Held:
• An Adjudicating authority, even though is a departmental officer, while performing judicial function must, bring minimum standards of fairness, neutrality and professionalism in discharge of his function. A judicial function requires a neutral appreciation of facts, due and conscious reference to the material on records, careful and precise statement of competing contentions and precedents, if any, relied upon by either party, analysis of relevant facts and applicable provisions of law.
• An order which fails to adhere to the basic principle of discipline is a non-speaking order. Quashing the order, the matter was rendered for fresh determination.
• The Tribunal directed the Respondent to pay Rs.10,000/- to Appellant for unnecessarily burdening the Appellant with litigation.

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[2014] 45 taxmann.com 188 (Bombay) CST vs. SGS India (P) Ltd.

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Whether Technical Inspection and Certification/ Technical testing and Analysis service provided prior to 16-08-2005 (the date of introduction of Export of Services Rules, 2005) are treated as export, if all activities are performed by Indian service provider in India, but a mere report is sent to a client located abroad and consideration is received in convertible foreign exchange? Held – Yes.

Facts:
The respondent provided Technical Inspection and Certification Agency Service and Technical Testing and Analysis Agency Service at different places in India in respect of goods imported by their customers located abroad. For such services, the respondent received consideration in convertible foreign exchange. The dispute pertains to the period 01-07-2003 to 19-11-2003 (i.e., prior to issue of Notification No.21/03-ST dated 20-11-2003 exempting all taxable services specified u/s. 65(105) of the Finance Act provided to any person in respect of which payment was received in India in convertible foreign exchange). The demand was confirmed on the ground that, services provided by the respondent were performed in India though test reports thereof were sent outside India and therefore Circular dated 25-04-2003 clarifying service tax on export of service was not applicable. The Tribunal decided in favour of the Assessee.

Before the High Court, Revenue contended that, in the present case, the exporter is in India. The importer is abroad. The respondent renders services by testing the samples in India. The certification after such testing is in India. The origin of the goods is in India. Hence, the assesse is not entitled to exemption.

The Respondent contended that, value of services is taxable u/s. 66 of the Finance Act only if the taxable event occurs in India, i.e., only if the place of provision of service is in India. It was further submitted that, although there was no provision in the statute which laid down the place of provision of services, there were clear administrative guidelines to the effect that service tax will not be applicable if services are consumed outside India. It is submitted that in the absence of any statute or judicial pronouncement to the contrary, such administrative guidelines should be considered to be the applicable legal position in this regard. For this, respondent relied upon Circular dated 25-04-2003 and the FM’s Speech, emphasising that service tax being location-based or destination-based consumption tax, transaction was outside the purview of service tax net.

Held
The High Court noted that the Tribunal has observed that although the tests are conducted in India, certificates have been forwarded to the clients abroad. It is in such circumstances the Tribunal concluded that the facts in the case of CST vs. B.A. Research India Ltd. [2010] 25 STT 110 (Ahd. – CESTAT) which was followed by the Tribunal’s single member in the case of KSH International (P.) Ltd. vs. CCE [2010] 25 STT 307 (Mum. – CESTAT) are identical. The High Court further observed that, since the delivery of the report to the foreign client was considered to be an essential part of the service that the demand of service tax was set aside. It was held that, paragraph 4 of the April 2003 Circular has clarified the taxability of secondary services which are used by primary service provider for the export of services, and in these circumstances, the Tribunal has not committed any error in holding that the services provided by the respondent were not taxable. Since the benefit of the services accrued to the foreign clients outside India, it was termed as “export of service.” The High Court empathetically held that the Tribunal merely applied the principal laid down by Apex Court in the case of All India Federation of Tax Practitioner’s case to facts and circumstances of this case. In that case Apex Court was of the view that, service tax is a value added tax which in turn is destination based consumption tax. The Hon’ble Bombay High Court therefore held that, if the emphasis is on consumption of service then the order passed by the Tribunal does not raise any substantial question of law.
The High Court therefore dismissed the appeal on the ground that no substantial question of law arises and appeal is devoid of any merits.

Note: Readers may note that, this case pertains to period where Export of Service Rules, 2005 were not in place. In case of B.A. Research India Ltd.’s case (supra), the Tribunal decided the matter in the light of Rule 3(1)(ii) of the Export of Service Rules, 2005 and held that, delivery of the report is an essential part of their service and the service is not complete till they deliver the report. Further as reports were delivered to the clients outside India, it amounts to taxable service partly performed outside India. w.e.f. 01-07-2012, under the Place Of Provision Rules, 2012, place of provisions of such service shall be the place where performance on goods takes place. Further, Rule 7 of POPS Rules has done away with the benefit conferred by Rule 3 (1)(ii) of the Export Rules, and hence decision of B.A. Research would not be applicable w.e.f. 01-07-2012. The facts of this case may be distinguished from Goa Shipyard Ltd.’s case [2014] 45 taxmann.com 285 (GOI) wherein facts did not record any requirement for submission of report by the service provider abroad to the service receiver in India. On the contrary it provided that service receiver’s officers were to visit service provider’s facility abroad for witnessing the test carried out by the foreign entity. Accordingly, it was held that, no part of the service was performed by foreign service provider in India.

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[2014] 45 taxmann.com 377 (Uttarakhand) Valley Hotel & Resorts vs. CCT.

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Whether the State has right to levy VAT on 40% of the bill amount, if the said portion is treated as service portion liable to service tax under the Service Tax laws? Held – No.

The revisionist provides lodging and boarding facilities and restaurant service to its customers. On 06-06-2012, the Government of India, Ministry of Finance issued a notification amending the service tax (Determination of Value) Rules, 2006 by virtue of which 40% of the billed value to the customer, for supply of food or any other article of human consumption or any drink in restaurant, was made liable to service tax. Thereafter, the revisionist moved an application u/s. 57 of the VAT Act, 2005, requesting not to charge VAT on 40% billed amount to the customer, as the same has already suffered service tax. The said application was rejected by the Commissioner, Commercial Tax, against which appeal was filed before the Commercial Tax Tribunal. The same was also dismissed. Aggrieved thereby, the present revision was filed.

The High Court held that Value Added Tax can be imposed on sale of goods and not on service, since service can be taxed only by service tax law. It further held that, the authority competent to impose service tax has also assumed competence to declare what is service and that the State has not challenged the same. Therefore, where element of service (i.e., 40% of the bill amount) has been so declared and brought under the service tax, no value added tax can be imposed thereon.

The High Court therefore set aside the order of the Tribunal and CCT later was directed to pass order afresh.

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[2014] 45 taxmann.com 215 (Uttarakhand) R.V. Man Power Solution vs. CCE

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Whether, order u/s. 87 freezing bank accounts of the assesse can be passed pending adjudication against him? Held – No.

Facts
The petitioner was served with Show Cause Notice dated 27-11-2012 alleging liability to pay huge demand of service tax and file a reply within 30 days. The assessee replied to the said SCN vide letters dated 04-01-2013 and 11-02-2013 which were pending adjudication. Without deciding the matter finally and without calling for any hearing, the respondent authority issued order dated 06-02-2013 directing the bank to freeze the accounts of the petitioner, invoking power u/s. 87 Clause (b) of the Finance Act, 1994. The petitioner challenged legality of this order passed u/s. 87 of the Finance Act, 1994.

On behalf of the Revenue, it was contended that, the petitioner is merely trustee to hold the amount and this amount is due and payable by him, therefore, adjudication, so to say, is a mere formality as the amount has already been adjudged by the respondent. It was further contended that, even provisional adjudication is good enough to invoke the provision of section 87 of the Finance Act.

Held
The High Court held that, the amount mentioned in the Show Cause Notice is merely a demand and not even the tentative adjudication. Referring to section 87 (b) of the Finance Act, it held that, any amount payable referred in that section means such amount adjudged after hearing the Noticee and the provision of section 87 is one of the methods of recovery of the amount due and payable after adjudication is done. It further held that, from the language of Clause (b), it can be said that there is no power to freeze the bank account. At the most, if it is applied, the money can be claimed from the bank itself. Such claim can be made only when the final adjudication has been done after quantifying the amount due and payable by the assessee. The High Court therefore set aside the impugned order holding the same as not sustainable in the eyes of law.

However, in the interest of justice, the petitioner was directed to file reply within 15 days and the assessing authority was directed to decide the matter in four weeks. Further, order restraining the petitioner from transferring, alienating, disposing of the fixed asset and properties save in usual course of business till the final adjudication is completed, was also passed by the High Court.

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[2014] 45 taxmann.com 217 (Allahabad) – Bhagwati Security Services (Regd.) vs. UOI, BSNL

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Whether service receiver is liable to remit service tax to service provider, even in the absence of Clause to that effect in the agreement? Held – Yes

Facts
Petitioners entered into agreement with respondent No. 2, i.e., BSNL for providing security service. Subsequently, service tax was demanded from the petitioner which was deposited by the petitioner. The petitioner applied before respondent No. 2 for reimbursement of the service tax, which request was denied by the respondent No. 2 on the ground that the reimbursement of the service tax was not contemplated in the service agreement.

Held
High Court held that, service tax is statutory liability which is required to be collected by the service provider from the person to whom service is provided, and thereafter to be deposited with the Government treasury within the prescribed time.Thus, essentially the statute is being imposing the tax upon the person to whom service is being provided, and the service provider is merely a collecting agency. The High Court therefore directed BSNL to make reimbursement of service tax to the petitioner without further delay.

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[2014] 45 taxmann.com 541 (Madras) CCE vs. Strategic Engineering (P.) Ltd.

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Whether mere taking of CENVAT credit facility
without actually using it, would carry interest as well as penalty prior
to 17-03-2012? Held – No.

Facts
The respondent was
a manufacturer of fibre glass and some other products. During the
relevant period (prior to amendment in Rule 14 of CCR w.e.f.17-03-2012),
the respondent took CENVAT credit facilities erroneously and also
reversed the same before utilisation.The question of law raised before
the High Court was, whether a mere taking of CENVAT credit facility
without actually using it, would carry interest as well as penalty?

The
Department relied upon the decision of the Apex Court in the case of in
Union of India vs. Ind-Swift Laboratories Ltd. [2011] 30 STT 461/9
taxmann.com 282 (SC), wherein the Apex Court had held that, the mere
taking of credit would also entail interest and penalty.

Held
The
High Court observed that the said decision of the Apex Court was
subsequently considered in CCE & ST vs. Bill Forge (P.) Ltd. 2012
(26) STR 204 (Kar). The High Court also observed that, Rule 14 of the
CENVAT Credit Rules has been subsequently amended, wherein the
expression “taken or utilised” was substituted by “taken and utilised.”
Relying upon Bill Forge decision (supra), the High Court held that,
since the subsequent amendment has cleared all doubts existed earlier in
respect of Rule 14 of the said Rules, it is clear that, the mere taking
itself would not compel the assessee to pay interest as well as
penalty.

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2014 (34) STR 327 (Ker.) Union of India vs. Kasaragod District Parallel College Association

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Is activity of teaching by non-affiliated colleges taxable under “commercial training or coaching service”? Held – No.

Facts:
Association of Parallel Colleges filed a writ petition challenging constitutional validity of levy of service tax treating parallel colleges as “commercial training and coaching centres.” The learned Single Judge had held that provisions of the Act authorising levy of service tax on Parallel Colleges was arbitrary and violative of Article 14 of The Constitution of India, also that there was no difference between regular colleges and Parallel Colleges. It was also clarified that the judgment was rendered on peculiar facts of the case which was applicable only to the petitioners and the section was not declared as unconstitutional. Service tax officials, herein the appellants, filed writ petition challenging the Judgment. The Revenue relied on various Apex Court Judgments deciding that the Court has a very limited power to intervene in such economical matters. The Revenue also tried to distinguish between regular colleges and parallel colleges.

Held:
It was observed that the section 65(27) of the Finance Act, 1994 defining commercial and coaching centre had 2 limbs, the inclusion part and the exclusion part. Exclusion was given only to such establishments which issue any certificate recognised by any law. It was observed that none of the regular colleges or parallel colleges were issuing any certificate/s. It was also observed that the object of the provisions of sections 65(26) and 65(27) of the Finance Act, 1994 was to prepare students for obtaining certificate recognised by law. Hence, interpretation of provision in consonance with the object was not violative of the Statute. Students, being economically and intellectually weak, were opting for Parallel Colleges and levy of service tax will ultimately fall on such students. On the other hand, an exemption was provided to affiliated colleges which was discriminatory and thus, violating Article 14 of the Constitution of India. Though the section was not held to be unconstitutional, the colleges appearing before the Court were held to be not liable to pay service tax.

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Rethinking Education!

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Two unrelated events of the recent past have been the triggers for this editorial. The first is the grants announced by the Finance Minister in the recent budget, for setting up of various educational institutions across the country. The second was my experience at a traffic signal, one morning. With the traffic in full flow, two collegegoing youths on a bike crossed a red signal with gay abandon and laughed at an old man crossing the road, who was scared out of his wits. We have gone wrong somewhere, and it is a time to rethink.

I have touched upon four issues in this piece, the structure of the education pyramid, the efficacy and the reach of subsidies, the focus of education and its objective.

It appears to me that far greater attention is given to the post-graduation institutions, as compared to primary education. The quality and coverage of school education is abysmal. We still have a large population of the rural India which has very limited or no access to basic education. Primary schools have inadequate infrastructure, both in terms of physical facilities and human resources. So while we have single teacher schools with leaking roofs, we also boast of the state of the art IITs and IIMs which are temples of higher learning for students across the world. The education pyramid appears to be inverted, with an alarming scarcity of schools and a proliferation of higher education institutions where education is big business. This has to change. In a country where resources are scarce, there needs to be a rethink of priorities. The government must concentrate on funding primary and secondary education for the masses. These schools for the public survive on government support alone. For the time being development of higher education institutions can be left to public private partnerships or other modes of funding with the government acting as a regulator and facilitator.

While on resources, there also needs to be a revisit on whether the subsidies that the state gives are reaching those who deserve them. For example, in aided institutions, education for the girl child up to higher secondary level is virtually free. One wonders whether it is really necessary to provide such a universal subsidy. I fully support a subsidy to the deserving girl child to ensure that she does not drop out of school, but should this benefit the girl who visits McDonald’s after she walks out of school? Further, governments must also formulate consistent policies in funding. Today, there is a newspaper report stating that a State Government is contemplating commencing non-salary grants after a school runs for 10 years. If this stand is taken, how can schools survive for 10 years when there is restriction on fees which they can charge? The second aspect to consider is, whether our country gets the return it deserves when it subsidises education in certain higher education institutions. Take the case of a doctor or engineer who studies in a government-aided college, and having completed his education goes abroad for higher studies and subsequently migrates. While our country has borne the cost of his education, another will reap the benefits of his skills. Should the country not be compensated for this loss in some manner? I am deeply conscious that this is easier said than done, but maybe some thinking in this regard is called for.

Then, let us look at the focus of education. It is true that India has a very young population. If these young people are to be contributors in nation building, it is necessary for them to acquire skills sets. It is therefore right to have skill development as the focus. Having said that, I believe that if the country is to become an economic powerhouse and retain that status, then substantial attention has to be paid to fundamental research, something which has not happened in the past 4 to 5 decades. Skills are required to solve problems “for now”, while basic research will solve them permanently. One finds that state support to fundamental research is limited. When budgets are pruned, research institutions’ grants are immediately cut. Even industry support to basic research is not very encouraging. This is probably because governments have a “five year” perspective while industry is averse to investment in projects with long gestation periods and uncertainty of results. With the government investing in or subsidising higher education, the area of research is one which deserves the maximum attention.

It also needs to be considered as to what the objective of education is. The obvious objective of education is the acquisition of knowledge. But is the acquisition of knowledge which will enable one to make a better living the only object? Our education must endeavour to make students better human beings and fine citizens. It is in school that empathy and respect for the views for others, tolerance and morals can be imbibed. What needs to happen is a concentrated effort to inculcate values. This is undoubtedly a difficult task. If a child is taught values in school but they are trampled on at home, and in the society that he lives in, a child is likely to be confused. Even then it is necessary to make such an attempt. The endeavour of all of us is to leave material wealth for the next generation. Instead if our schools teach values and make our students good citizens, the world will be a better place to live in. In the words of Abraham Lincoln, “the philosophy of the school room in one generation will be the philosophy of the government in the next”.

Anil.J.Sathe
Editor

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Jai Surgicals Ltd. vs. ACIT ITAT “D”, New Delhi Before R. S. Syal, (A.M.) and C. M. Garg, (J.M.) ITA No.844/Del/2013 A.Y.: 2009-10. Decided on: 26-06-2014 Counsel for Assessee/Revenue: Sanjay Jain/S.N. Bhatia

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Explanation to section 37(1) – Payments to Related Party made without obtaining prior approval of the Central Government in accordance with the provisions of section 297 of the Companies Act, 1956 was merely an irregularity and cannot be disallowed treating the same as an offence or prohibited by law.

Facts:
The assessee is engaged in the business of manufacture and export of surgical blades. The AO noted that the assessee had entered into transactions of payment of job work charges to a related party, viz., M/s. Razormed Inc. during thefinancial year relevant to the assessment year under consideration without obtaining prior approval of the Central Government inaccordance with the provisions of section 297 of the Companies Act, 1956. The assessee submitted that the post facto approval for the said transactions was obtained from the Company Law Board on payment of compounding charges for the condonation of delay and hence, there was no violation of law. However, the AO opined that the facts of post facto approval and the condonation of delay were not relevant because on the day of payment of such expenditure, there was no prior approval of the job charges paid to M/s. Razormed Inc., which triggered the Explanation to section 37(1) of the Act. He accordingly, added the sum of Rs. 41.24 lakh paid by the assessee towards job work charges. On appeal, the CIT(A) confirmed the order of the AO.

Held:
The Tribunal referred to the provisions of section 297 of the Companies Act, 1956 more particularly s/s. (5) of the said provision. As per the said provisions if the consent is not accorded to any contract under the section, then anythingdone in pursuance of the contract is voidable at the option of the Board of the Company. Thus, according to the Tribunal, if the Board, despite no prior sanction, agrees to go ahead with the contract referred to in s/s. (1) of section 297 of the Companies Act, such contract would be valid. In the case of the assessee, the tribunal noted that the Board had not objected to the contracts between the assessee and Razormed Inc., thus making such contract for doing of job work valid. Thus, there was no violation of section 297 of the Companies Act inasmuch as the so-called violation as per s/s. (1) stood regularised by s/s. (5) of section 297 to the Companies Act, 1956, thereby making this transaction of payment of job charges in accordance with the provisions of the Companies Act.

Thus, according to the Tribunal, the payment made by the assessee was neither an offence nor prohibited by law, but it only committed a breach by not obtaining the necessary approval from the Central Government in time.Thus, the payment is otherwise for a lawful purpose. Further, referring to Explanation to section 37(1), the Tribunal observed that in order that the said provisions is applied, it is essential to examine the object and consideration for the expenditure incurred. If the purpose of the expenditure is either an offence or is prohibited by law, then it would suffer disallowance. If, however, the purpose of the expenditure is neither to commit an offence nor is prohibited by any law, then there can be no question of disallowance. Thus, according to it, if the expenditure is otherwise lawful and neither amounted to offence nor is prohibited by law, but the procedural requirements for incurring it were not complied with, only the irregularity will creep in, but such irregularity would not make the expenditureitself as unlawful so as to be brought within the scope of the Explanation.

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2014-TIOL-324-ITAT-MUM Javed Akhtar vs. ACIT ITA No. 39/Mum/2011 A.Y.: 2006-07. Date of Order: 07-05-2014

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Section 37 – Where the professional and residential set up of an assessee are in the same apartment, that portion of cost of lift installed by the assessee, in the premises of the society, which can be considered to be for professional purposes can be claimed as revenue expenditure.

Facts:
The assessee, a lyricist and well known film personality, operated his profession from the premises on 6th and 7th floor of Juhu Sagar Samrat Co-op. Housing Society Ltd. The building of the society was an old seven storied building having one lift. Since the lift used to get out of order very frequently, it caused substantial hardship to the persons visitng the assessee for professional purposes. Since the society was reluctant to spend money to replace the lift, the assessee spent a sum of Rs. 17,32,436 for installation of a new lift. This sum was debited to P & L Account as Society Development Expenditure and was claimed as a deduction.

The Assessing Officer (AO) disallowed the claim on the ground that lift was an essential part of the building and therefore, the expenditure was capital in nature. However, since the ownership thereof did not belong to the assessee, he denied even depreciation thereon.

Aggrieved, the assessee preferred an appeal to CIT(A) who held that 50% of expenditure claimed by the assessee be capitalised and depreciation thereon be allowed.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The Tribunal noted that the building in question was consisting of 7 floors and 14 flats out of which the assessee was owner of two flats. From one flat the assessee was doing his professional work and the other flat was used for residential purposes.

The advantage and facility of the new lift is not restricted exclusively for the professional activity of the assessee but it was also enjoyed by assessee as well as family members of the assessee other than the professional purpose. The usage of the lift by the other members of the society was not considered to be relevant for the purpose of allowablity of deduction. The assessee had incurred the expenditure keeping in view its professional and family requirements. For allowing the expenditure u/s. 37 of the Income Tax Act, the mandatory condition is that the expenditure has to be laid out wholly and exclusively for the purpose of business or profession of the assessee. However it should not be on the capital field. Since the assessee did not acquire any advantage in the capital account or any new asset for its professional purpose and the lift in question is not an apparatus of generating the professional income, therefore, the Tribunal held that it cannot be considered as an expenditure of capital nature as it does not create any new asset belonging to the assessee. It agreed with the view of the CIT(A) to the extent that 50% of the expenditure to be considered for professional purpose. Therefore, 50% of the total expenditure which was considered to be for professional purposes and was held to be allowable as revenue expenditure.

The Tribunal partly allowed the appeal filed by the assessee.

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2014-TIOL-391-ITAT-AHM General Mechanical Works vs. ACIT ITA No. 2032 /Ahd/2010 A.Y.: 2002-03. Date of Order: 14-03-2014

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S/s. 28, 37(1) – A reasonable amount of profit is to be estimated and taxed when purchases are found to be bogus. The entire amount of purchases found to be bogus cannot be disallowed.

FACTS:
The assessee was engaged in the business of undertaking contract for mechanical work viz., fabrication and erection of steel structures, piping, stop log gates, coarse screens, travelling water screens mainly for various Thermal Power Projects undertaken.

The Assessing Officer (AO) observed that in an inquiry conducted by the Department in the case of M/s. Prakash Marbles Engineering Company, for AY 2002-03 it was found that bogus purchase by way of accommodation bills for purchase of material (without the material being received) were procured from Shri Jabbarsingh Chauhan, Proprietor of M/s. Girnar Sales Corporation and Shri Navin Raval, proprietor of M/s. Shiv Metal Corporation. It was found that these parties had issued bogus bills to various parties in the market and the assessee was one of them. During the financial year relevant to assessment year 2002-03 the purchases of the assessee from these two parties amounted to Rs. 14,32,750.

The AO relying on the affidavit of the persons who had issued the bills and observing that the assessee had failed to prove the genuineness of purchases by way of furnishing confirmation from the seller concerned or producing the seller for taking necessary statement disallowed the sum of Rs. 14,32,750 representing aggregate amount of bogus purchases from these two parties.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The Tribunal noted the decision of the co-ordinate `A’ Bench of ITAT in the case of Shri Alap Shirishbhai Derasary vs. ACIT (ITA No. 1101, 1102 & 1103/Ahd/2009 for AY 2002-03, 2003-04 and 2004-05, order dated 21-09- 2012) where the Bench confirmed addition @ 12.50% on the bogus purchases. It also noted that the decision relied upon by the DR in the case of ITO vs. Shri Gumanmal Misrimal (ITA No.s. 2536 & 2537/Ahd/2008 for AY 2003- 04 & 2004-05) where the Bench was dealing with a case where bogus purchases from very same parties viz., Girnar Sales Corporation and M/s. Shiv Metal Corporation. The Bench in this case confirmed profit of 30% of the amount of bogus purchases.
The Tribunal observed that the assessee had not proved the purchases to be genuine. The supplier had given affidavits that they have given bogus bills to the assessee. Therefore, the burden was heavily on the assessee to prove that the transactions are genuine which was not established by it. It is established fact that these are bogus purchases to the extent of Rs. 14,32,750. It held that the decision in the case of Shri Gumanmal Misrimal (supra) squarely applies to the facts of the present case. The Tribunal directed the AO to calculate 30% net profit on bogus purchases.
The appeal filed by the assessee was partly allowed.

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2014-TIOL-396-ITAT-COCHIN Kerala Vision Ltd. vs. ACIT ITA No. 794/Coch/2013 A.Y.: 2009-10. Date of Order: 06-06-2014

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S/s. 40(a)(ia), 194J – In a case where non-deduction of tax at source was supported by the ratio of the decision of a HC, disallowance u/s. 40(a)(ia) of the Act cannot be made on account of non-deduction of tax due to a retrospective amendment.

FACTS:
The assessee company was engaged in the business of distributing cable signals. The assessee was liable to make payment to various channel companies like Star Den Media Ltd., Zee Turner Limited, M.S.M. Discovery P. Ltd., etc., for receiving from them, satellite signals in its capacity as a multi system operator. During the previous year relevant to the assessment year 2009-10, the assessee paid amounts aggregating to Rs. 163.30 lakh as “Pay Channel Charges” to satellite companies.

In view of the ratio of the decision of Madras High Court in the case of Skycell Communications Ltd. (251 ITR 53) (Mad) and the decision of Delhi High Court in the case of Asia Satellite Telecommunications Co. Ltd. vs. DIT (332 ITR 340)(Del) the assessee did not deduct tax at source from payment of Pay channel charges to various satellite companies.

The Assessing Officer (AO) held that the payment of Pay channel charges is ‘royalty’ and consequently such payment is liable for deduction of tax at source. He also held that the decision rendered by the Madras High Court in the case of Skycell Communications Ltd. (supra) is not applicable to the facts of the assessee’s case. He disallowed a sum of Rs. 163.30 lakh u/s. 40(a)(ia) of the Act.

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

Aggrieved the assessee preferred an appeal to the Tribunal where it contended that the disallowance u/s. 40(a)(ia) should not be made on the basis of a subsequent amendment made with retrospective effect.

HELD:
Transmitting television channels or signals by receiving these signals through satellite is included in the definition of “Process” under Explanation 6 which has been inserted by the Finance Act, 2012 with retrospective effect. Therefore, payment made by the assessee as “Pay Channel Charges” falls in the category of “royalty” as defined in Clause (i) of Explanation 2 to section 9(1) of the Act.

The Tribunal noted that that the view entertained by the assessee that the pay channel charges cannot be considered as royalty gets support from the decision rendered by the Delhi High Court in the case of Asia Satellite Telecommunication Co. Ltd. (supra). It also noted that the following decisions have held that the assessee cannot be held to be liable to deduct tax at source relying on the subsequent amendments made in the Act with retrospective effect –

Sonata Information Technology Ltd. vs. DCIT (2012-TII-132-ITAT -MUM-INTL)

Infortech Enterprises Limited vs. Addl CIT (2014-TII- 26-ITAT -HYD-TP)

Channel Guide India Ltd. vs. ACIT (2012-TII-139- ITAT -MUM-INTL)

The Tribunal held that though the Explanation 6 to section 9(1)(vi) inserted by the Finance Act, 2012 is clarificatory in nature, yet in view of the fact that the view entertained by the assessee gets support from the decision of the Delhi High Court, the assessee cannot be held to be liable to deduct tax at source from the Pay Channel Charges. The AO was not justified in disallowing the claim of Pay Channel Charges by invoking the provisions of section 40(a)(ia) of the Act. The Tribunal set aside the order passed by CIT(A) and directed the AO to delete the impugned disallowance.
The appeal filed by the assessee was allowed.

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[2013] 148 ITD 70 (Ahmedabad – Trib.) GE India Industrial (P.) Ltd. vs. CIT(A) A.Y. 2004-05: Date of order: 04-01-2013

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Section 271(1)(c), section 275(1)(a) – CIT(A)
enhanced assessee’s income and initiated penalty proceedings –
Assessee’s plea to keep penalty proceedings in abeyance till disposal of
appeal by Tribunal was rejected – Held – as per section 275(1)(a), the
CIT(A) will get six months time to dispose of penalty proceedings from
end of month in which order of Tribunal is received by Commissioner or
Chief Commissioner – The CIT(A) was directed to keep penalty proceedings
in abeyance till disposal of quantum appeal by Tribunal.

Facts:
Assessment
u/s. 143(3) was completed by the AO by making a few disallowances. On
further appeal, the CIT(A) deleted certain disallowances but also
enhanced the income of the assessee. The CIT(A) initiated penalty
proceedings u/s. 271(1)(c) of the Act for disallowances made by him.

The
assessee contended before the CIT(A) that since the assessee proposed
to file an appeal before the Tribunal on the quantum proceedings, the
penalty should be kept in abeyance till the disposal of appeal by
Tribunal. Reliance was placed on the section 275(1)(a), wherein it is
provided that where an appeal has been filed before Tribunal, the time
limit for disposal of penalty proceeding is six months from the end of
the month in which the order of the Tribunal is received by the
Commissioner/Chief Commissioner. However, the request of the assessee
was not accepted by ld. CIT(A) and hence the assessee filed a stay
petition.

Held:
As per the section 275(1)(a) of the
Act, the AO cannot pass an order imposing penalty u/s. 271(1)(c) of the
Act till relevant assessment is subject matter of appeal before ld.
CIT(A) (i.e., the first appellate authority). By the same analogy, the
assessee’s prayer for stay of penalty proceedings undertaken by ld.
CIT(A) till the disposal of appeal by the Tribunal does not appear to be
unreasonable.

If the CIT(A) is allowed to proceed with the
penalty proceedings, prejudice will cause to the assessee as it will
have to face multiplicity of the proceedings. In case assessee succeeds
in quantum appeal, the penalty order passed by CIT(A) will have no legs
to stand while in a situation the assessee fails, CIT(A) will get ample
time of six months to dispose of the penalty proceedings. Therefore, to
prevent multiplicity of proceedings and harassment to the assessee, the
CIT(A) was directed to keep the penalty proceedings in abeyance till the
disposal of quantum appeal by the Tribunal.

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(2014) 105 DTR 1 (Del) Sahara India Financial Corporation Ltd. vs. DCIT A.Y.: 2009-10 Date of order: 10-01-2014

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Disallowance of expenditure u/s. 14A cannot exceed the exempt income earned.

Facts:
The assessee earned exempt income amounting to Rs. 68,37,583 against which the assessee voluntarily disallowed the expenses of the investment division on pro rata basis amounting to Rs. 26,646. However, the Assessing Officer applied the provisions of Rule 8D and added Rs. 2,16,51,917 representing the excess of the expenses disallowable as per Rule 8D over the expenses already disallowed by the assessee. While doing so, the Assessing Officer also disallowed the proportionate interest expenditure rejecting the claim of the assessee that it had sufficient interest-free funds in the nature of share capital and reserves. The CIT (A) also upheld the said disallowance and revised it upward marginally to Rs. 2,19,47,772.

Held:
If the method of Rule 8D is applied mechanically, it leads to manifestly absurd results in as much as for tax-free income of Rs. 68,37,583, disallowance of Rs. 2,16,51,917 [enhanced by CIT(A) at Rs. 2,19,47,772] is made u/s. 14A which exceeds the exempt income. The interpretation of provisions of section 14A r/w Rule 8D is leading to unanticipated absurdities which cannot be the intention of legislature. Under these circumstances, help of external aids of construction for interpretations of statute is called for. Looking at the varying interpretation offered by various courts and benches of tribunal in relation to section 14A, it is difficult to precisely decide the issue. The Tribunal followed the decision of Chandigarh Tribunal in the case of Punjab State Co-op & Marketing Federation Ltd. [ITA No. 548/Chd/2011] and held that disallowance u/s. 14A cannot exceed tax free income. A holistic view is required to be taken that disallowance in terms of section 14A can be maximum to the extent of exempt income which is Rs. 68,37,583 in this case. It implies that reasonable expenditure less than the exempt income can be disallowed. Therefore, in the interest of justice it was held that it will be reasonable to estimate and disallow, 50% of exempt income as relatable to exempt income u/s. 14A r/w Rule 8D.

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(2014) 104 DTR 289 (Del) DCIT vs. Messe Dusseldorf India Pvt. Ltd. A.Y.: 2005-06 Date of order: 19-03-2014

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Amount received by the assessee-company from its parent company towards its erosion of net worth constitutes capital receipt.

Facts I:
The assessee had received an amount of Rs. 34,511,880 from its promoters which were foreign companies, which was treated as capital receipt and classified under capital reserve in the accounts. It was claimed that the said amount was received to resurrect the financial position and to rejuvenate the company. The amount was received essentially for restoration of its capital structure, i.e, net worth required for the revival of company in. However, the Assessing Officer held that the receipt in question was in the revenue field. Before the ITAT also, it was argued by the Department that the amount is a non-refundable, non-distributable and non-convertible contribution by a shareholder, and was used for the purpose of its current business and hence, was required to be regarded as a revenue receipt. It was further pointed out that the RBI permitted the assessee to receive the amount in question for recoupment of accumulated losses.

Held:
It was held that the amount was received for restoration of the capital structure by recoupment of net worth. The assessee company had incurred accumulated losses and this has resulted in erosion of net worth. It received non refundable financial assistance from its shareholder company. The RBI also approved the same with subjectmatter given as “financial assistance towards erosion of net worth.” Therefore, the ITAT , upholding the factual finding of the CIT (A) that the amount was received towards erosion of net worth of the company, held that it should be regarded as a capital receipt.

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Refund: Interest: S/s. 237 and 243 : A. Y. 2010-11: Assessee, a civil contractor, receiving payments from Govt. Depts. after TDS: CPC issuing only part of refund: Mismatch between details uploaded by deductor and details furnished by assessee in return: Mismatch not attributable to assessee: Assessee entitled to refund with interest:

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Rakesh Kumar Gupta vs. UOI; 365 ITR 143 (All):

The
assessee is a civil contractor. In the previous year relevant to the A.
Y. 2010-11, the assessee had received certain payments from Government
Departments from which a total sum of Rs. 3,14,766/- was deducted as tax
at source by the Government Departments. The assessee filed the return
of income and claimed refund of Rs. 2,32,370/-. The Central Processing
Centre, Bangalore, issued a refund of Rs. 43,740/-. No intimation was
given to the assessee as to why the balance amount of Rs. 1,88,630/- was
not refundable. Assessee’s application u/s. 154 of the Income-tax Act,
1961 for refund of the balance did not get any response.

Therefore,
the assessee filed a writ petition praying for a writ of mandamus for
the balance refund with interest. The Allahabad High Court allowed the
writ petition and held as under:

“i) No effort was made by the
Assessing officer to verify whether the deductor had made the payment of
the tax deducted at source in the Government account. There was a
mismatch between the details uploaded by the deductor and the details
given by the assessee in the return. The assessee suffered the tax
deduction at source but had not been given due credit in spite of the
fact that he had been issued a tax deducted at source certificate by a
Government Department.
ii) T here was presumption that the deductor
had deposited the tax deducted at source amount in the Government
account especially when the deductor is a Government Department.
iii)
Denying the benefit of the tax deducted at source to the assessee
because of the fault of the deductor not only caused harassment and
inconvenience but also made the assessee feel cheated.
iv) T here was
no fault on the part of the assessee. The fault, if any, lay with the
deductor. Nothing had been indicated that the fault lay with the
assessee in furnishing false details. Therefore, the authority was to
refund an amount of Rs. 1,88,631/- with interest in accordance with the
law.”

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Recovery of tax: Stay of recovery: A. Ys. 2007-08 and 2008-09: Tribunal rejected the stay application only on the ground that the assessee had not made out a case of irreparable loss without considering the other issues raised by the assessee:

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Rejection not proper: Coca-Cola India P. Ltd. vs. ITAT: 364 ITR 567 (Bom):

When the appeal for the A. Ys. 2007-08 and 2008-09 were pending before the Tribunal, the Assessing Officer rejected the stay application made by the assessee without considering the issues raised by the assessee. The Tribunal also rejected the stay application only on the ground that the assessee had not made out a case of irreparable loss which could not be compensated in terms of money in case the stay was not granted, without considering the issues raised by the assessee.

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

“i) I n an application for stay, though the Assessing Officer is not expected to analyse the entire evidence there must be some consideration of the facts and an indication thereof in the order. The Assessing Officer did not advert to any of the factors indicated in the order of the Special Bench in the case of L. G. Electronics India P. Ltd.
ii) T he Appellate Tribunal also in its order did not address itself to the relevant facts and issues. It merely rejected the application on the ground that the assesee had not made out a case of irreparable loss which could not be compensated in terms of money in case the stay was not granted.
iii) T he question of irreparable loss is not the only consideration while dealing with an application for stay. The assessee had serious issues to urge, some of which had so far not been dealt with either in the assessment order or in the orders on the stay application. The orders in question are liable to be quashed.
Iv) The rule is made absolute in terms of prayers (a) and (b).”

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Income: Business income or house property income: S/s. 22 and 28(i) : A. Y. 1996-97: Assessee owned a shopping mall: Let out a portion of mall and used balance portion for its business: Rental income is business income and not house property income:

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CIT Vs. Prakash Agnihotri; [2014] 46 taxmann.com 145 (All):

The assessee owned an immovable property, i.e., a shopping mall. During relevant year, assessee let out a portion of said mall. The assessee claimed that rental income derived from mall was taxable as income from business. The Assessing Officer rejected the claim and assessed the rental income under the head “Income from house property.” The Tribunal allowed the assessee’s claim.

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

“i) T he law is well settled that whether a particular letting is a business has to be decided in the circumstances of each case and each case has to be looked into from the businessman’s point of view to find out whether letting was the doing of business or exploitation of his property by an owner.

ii) There being categorical findings of fact by the appellate authority as well as the Tribunal that letting out was for the purposes of business after considering all relevant facts and the fact that the premises City Centre, the Mall, has been taken back by the assessee and further in major portion of the premises assessee was already carrying out his own business, it is opined that assessee has rightly shown his rental income as business income.”

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Income: Capital or revenue receipt: A. Y. 2007-08: Assessee engaged in generation of power: Sale of carbon credits: Not an offshoot of business: No asset generated in the course of business but generated due to environmental concerns: Sale receipt is a capital receipt: No cost of acquisition: Profit is not assessable to tax:

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CIT vs. My Home Power Ltd.; 365 ITR 82 (AP):

The assessee was carrying on the business of power generation. In the A. Y. 2007-08, the assessee claimed that the receipts on sale of carbon credits is a capital receipt and not income. The assesee further claimed that there was no cost of acquisition and accordingly that the profit on sale of carbon credit is not assessable to tax. The Assessing Officer rejected the claim and assessed the receipts as business income. The Tribunal allowed the assessee’s claim.

In appeal before the High Court, the Revenue contended that the generation of carbon credits is intricately linked to the machinery and processes employed in the production process by the assessee. The Revenue also contended that the Tribunal is not correct in holding that there is no cost of acquisition or cost of production to get entitlement for the carbon credits. The Andhra Pradesh High Court upheld the decision of the Tribunal and held as under:

“i) T he Tribunal has factually found that ‘carbon credit is not an offshoot of business but an offshoot of environmental concerns. No asset is generated in the course of business but it is generated due to environmental concerns.’
ii) We agree with this factual analysis as the assessee is carrying on the business of power generation. The carbon credit is not even directly linked with power generation.
iii) O n the sale of excess carbon credits the income was received and hence as correctly held by the Tribunal it is capital receipt and it cannot be business receipt or income.
iv) In the circumstances, we do not find any element of law in this appeal. The appeal is accordingly dismissed.”

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Assessment: S/s. 143(3) and 144C: A. Y. 2009- 10: Transfer pricing proceedings: Pursuant to order of TPO, AO passed a final order u/s. 143 (3) instead of passing a draft assessment order u/s. 144C: There being a failure on part of AO to adhere to statutory provisions of Act, impugned order was to be quashed: AO could not cure defect existing in impugned order:

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Vijay Television (P) Ltd. vs. Dispute Resolution Penal: [2014] 46 taxmann.com 100 (Mad):

The
case of the petitioner company was taken up for scrutiny assessment for
the A. Y. 2009-2010. Since the petitioner company had entered into
international transactions during the relevant year, the case was
referred to the Transfer Pricing Officer (TPO) for determination of the
arm’s length price. The TPO passed an order on 30-01-2013 and pursuant
to the said order, the Assessment Officer, instead of passing a
provisional order u/s. 144C of the Income-tax Act, 1961, passed a final
assessment order u/s. 143(3) on 26-03-2013. After realising the folly
that a final order ought not to have been passed pursuant to the order
passed by the TPO, the Assessment Officer issued a Corrigendum on
15-04-2013 modifying the final order of assessment passed on 26-03- 2013
to be read as a draft assessment order purported to have been passed
u/s. 144C of the Act. On receipt of the corrigendum, the petitioner
company filed their objections before the Dispute Resolution Panel,
Chennai on 26/04/2013 specifically questioning the validity of the
corrigendum issued by the Assessing Officer. It was specifically
contended that the corrigendum issued by the Assessing Officer is
without jurisdiction and such an order was passed beyond the period of
limitation. The Dispute Resolution Penal refused to entertain the
objections filed by the petitioner company. The assessee-petitioner
filed writ petition challenging the orders.

The Madras High Court allowed the writ petition and held as under:

“i)
U /s. 144C of the Act, it is evident that the Assessing Officer is
required to pass only a draft assessment order on the basis of the
recommendations made by the TPO after giving an opportunity to the
assessee to file their objections and then the Assessing Officer shall
pass a final order. According to the learned senior counsel for the
petitioners, this procedure has not been followed by the Assessing
Officer (second Respondent) inasmuch as a final order has been
straightaway passed without passing a draft assessment order.
ii) A s
rightly pointed out by the learned senior counsel for the petitioners,
in the order passed on 26-03-2013, the second respondent even raised a
demand as also imposed penalty. Such demand has to be raised only after a
final order has been passed determining the tax liability. The very
fact that the taxable amount has been determined itself would show that
it was passed as a final order. In fact, a notice for demand u/s. 156 of
the Act was issued pursuant to such order dated 26-03-2013 of the
second respondent. Both the order dated 26-03-2013 and the notice for
demand thereof have been served simultaneously on the petitioner.
Therefore, not only the assessment is complete, but also a notice dated
28-03-2013 was issued thereon calling upon the petitioner to pay the tax
amount as also penalty u/s. 271 of the Act. Thereafter, the petitioner
was given an opportunity of hearing on 12-04-2013. Subsequently, the
second respondent realised the mistake in passing a final order instead
of a draft assessment order which resulted in issuing a corrigendum on
15-04-2013. In the corrigendum it was only stated that the order passed
on 26-03-2013 u/s. 143(3) of the Act has to be read and treated as a
draft assessment order as per section 144C r.w.s. 93CA (4) r.w.s. 143
(3) of the Act. In and by the order dated 15- 04-2013, the second
respondent granted thirty days time to enable the assessee to file their
objections.
iii) S uch an order dated 26-03-2013 passed by the
second respondent can only be construed as a final order passed in
violation of the statutory provisions of the Act. The corrigendum dated
15-04-2013 is also beyond the period prescribed for limitation. Such a
defect or failure on the part of the second respondent to adhere to the
statutory provisions is not a curable defect by virtue of the
corrigendum dated 15-04-2013. By issuing the corrigendum, the
respondents cannot be allowed to develop their own case. Therefore,
following the order passed by the Division Bench of the Andhra Pradesh
High Court in the case of Zuari Cement Limited vs. Assistant
Commissioner of Income Tax, Circle 2 (1) passed in WP No. 5557 of 2012
dated 21-02-2013, which was also affirmed by the Honourable Supreme
Court by dismissing the Special Leave Petition filed thereof, on
27-09-2013, the orders, which are impugned in this writ petition are
liable to be set aside. Accordingly, the orders, which are impugned in
this writ petition are set aside and the writ petition is allowed.”

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Assessment: Time limit for completion of assessment: Limitation: Extention of period: Section 153 Expl 1(ii): A. Y. 1986-87 to 1989- 90: Stay of assessment proceedings by order of Court: Limitation restarts immediately on vacation of the stay order and not on receipt by the Department of the order vacating the stay:

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CIT vs. Chandra Bhan Bansal; [2014] 46 taxmann.com 108 (All):

On 08-11-1989, the Assessing Officer issued notices u/s. 148 of the Income-tax Act, 1961 for reopening of the assessment. Assessee filed writ petition challenging the reopening. The Allahabad High Court admitted the petition by an order dated 24-03-1992 and granted stay of the assessment proceedings. Thereafter, on 01-08-1995 the High Court dismissed the petition and accordingly stay was vacated on that day. The Assessing Officer passed the reassessment order on 04-01-1996. The assessee challenged the validity of the reassessment order on the ground that the reassessment order passed on 04-01- 1996 is barred by limitation since a valid reassessment order could have been passed only upto 30-09-1995. The Tribunal accepted the assessee’s claim.

In the appeal, it was contended by the Revenue that the order vacating the stay was communicated to the Assistant Commissioner of Income Tax (Investigation) on 18-12-1995 and accordingly, the reassessment order passed on 04-01-1996 is within the period of limitation and hence is a valid order. The Allahabad High Court upheld the decision of the Tribunal and held as under:

“i) T he statutory scheme of Explanation 1(ii) of section 153 clearly indicates that for computing the period of limitation the period during which the assessment proceedings is stayed shall be excluded. In excluding the above period, the concept of communication of the order of the Court cannot be imported. The exclusion of the period has been provided because of stay or injunction by any Court during which the assessment proceedings are stayed

ii) T he submission of the revenue that the limitation will start again only when the order is communicated to the Department cannot be accepted. The other reason for not accepting the above submission is equally potent. Explanation 1(v) and (vi) to section 153 are also part of the same statutory scheme. In Explanation 1(v) and (vi) to section 153 the statutory scheme provides for computing the period of limitation from the date when the order under s/s. (1) of section 245D and 245Q is received by the Commissioner.

iii) T hus, the legislature has provided for excluding the period from the date of communication of the order where they so intended. The use of concept of communication of receiving the order in the same provision which is absent in Explanation 1(ii) concerned clearly indicates that for the purposes of Explanation 1(ii), the communication of the order of the Court vacating the stay or injunction is not contemplated.

iv) In view of aforesaid, the Tribunal is justified in law in coming to the conclusion that the assessments made by the Assessing Officer was barred by limitation on 30-9-1995.

v) The question is answered in favour of the assessee and against the Revenue. The appeal is dismissed.”

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Leaving A Legacy

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“The only thing that you take with you when you are gone is what you leave behind.”

– John Allison

All of us know that we have to go some day. We are temporary residents of this world, and sooner or later we have to quit this place and depart. We also equally know that just as we came into this world empty handed, we have to go from this world empty handed. Even Alexander the Great directed that, on his death, his empty hands should be displayed outside his coffin, to give this message. No matter how much one may amass, and how so powerful one may be, someday one has to go and one cannot take anything with oneself. The only choice with us, then, is to choose what should happen to one’s wealth when one goes away. Whom to give? How much to give? And to decide on how much to dispose off while one is alive and how much to amass to leave it for one’s heirs.

It is human to leave behind one’s wealth for one’s children. One wants to provide for the future needs of the children. One wants to provide not only for the needs and comforts, but even luxuries. However, this may not be in the best interest of our children.

One has to remember what our scriptures teach us. They teach us that “Lakshmi” is “Chanchal” – volatile and does not like to stay at the same place for long. Our elders also tell us that rarely does wealth stay in a family for three generations. The first one gathers wealth, the second manages to preserve it, and the third squanders it. History tells us that people usually squander any money that they inherit and if they don’t squander it, their children surely will. Will this be the fate of what we leave behind for our children?

Hence, one has also to think of how much one should leave for them so that they do not lose all their initiative to work and excel in life. The dilemma is, how much is sufficient to look after their needs and comforts. The next issue is, how to distribute this wealth. How much should go to each of the heirs. Most of the time the wealth left behind itself becomes a source of discord, disharmony, quarrels, and even litigation.

I am reminded of the Chinese proverb that says, “Give a man a fish and you feed him for one day. Teach a man how to fish and you feed him for a life time.” The same is also true about wealth. It is better to spend and teach a child to earn a living than to provide him with enough wealth.

All these point to one thing. Leave behind legacies for children but make them fit to be able to use it judiciously and not to squander it. It should help them to be better human beings. If one has wealth more than what one’s children will ever need, better give away the excess during one’s lifetime or, through one’s wills, to charities. There are enough people who need money even to provide for their basic needs.

While it is important to provide for the needs of our children, it is equally important to teach them about money itself. They must understand that money beyond a certain basic level of providing one’s needs cannot bring true happiness. Properly handled it can ensure one’s financial future, but if not handled carefully it can fly off in no time. In our lifetime we must imbibe in them the right values of earning, preserving and spending money. It is only then that wealth will remain in the family. It is not only on how to invest money, but also how to earn it and spend it that are important.

I conclude by quoting:

“If you have just two pennies in the world, spend one on a loaf of bread; the other on a flower. The bread will give you the means to live, the flower a reason for living.”

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President’s Page – Readers Respond

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We have had the privilege of going through the ‘President’s Page’ before it is published in the journal.

This year, the year of Naushad Panjwani’s ‘President’s Page’, amazed us with the style and contents thereof. The write-ups were extremely relevant and well put together, especially the last one of June, 2014. In regard to the ‘President’s Page,’ many readers have sent in words of appreciation. It is not possible to publish all of them. As a farewell to him, we are publishing a few responses.

We, at the editorial board, have always welcomed feedback whatever its nature. We welcome the bouquets but are prepared to receive the brickbats as well.

We hope this will encourage readers to respond to the journal.

Anil Sathe                                                                                                Narayan Varma Editor                                                                                                               Publisher

September 2013
You have echoed our thoughts and what generally a common literate Indian feels these days. We don’t feel any special on 15th August every year. But as you rightly said, we are no less patriotic even. However, the general political scenario has brought this apathy towards the nation and its governing people. And there seem to be no ray of hope in the near future for a desired change. But there is another side! There are our youth, our young generation, our young intelligent Indian minds residing abroad and in India who certainly have a different view of the things, of the national problems. The need of the hour is somebody to lead this revolution. The intelligent, good, conscientious people are doing wonders where they are standing. The ‘do good’ effect has to be consolidated and brought forward/in front, so that the others could be inspired. Let us do our bit and hope to build a nation. Thanks for reminding.

— Shubha Gupta


OCTOBER 2013
That was a lovely message. I would like to add that these days, sorry is less accepted. It is better to be safe than sorry, since in certain circumstances, sorry may or may not fetch forgiveness. Also, where deadlines are to be met, it is ‘do or die’ or ‘perform to meet deadline or pay interest and penalty and sometimes may attract even prosecution.” We need to look into such drastic laws and give better justice by giving the defendant a chance to get waiver of penalty and prosecution. We are heading for non compassionate and inhuman treatment. Can the BCAS do something to reverse the harsh impact of changes in laws?

— Gracy Mendes

NOVEMBER 2013
All together a new way of looking into age old issues – very interesting. The thought process was developing in a very intriguing but positive manner. But the end was sort of very pessimistic, doomed. You suggested a solution which you yourself have ruled out. Can we not find a shrewed way out using some ‘chanayak niti’? Being a leader, there should be a more concrete end to the discussion. The questions should not be left hanging I suppose… may be encouraged for further debate! That’s my view

— Shubha Gupta

JANUARY 2014, February 2014
Liked your message as President of BCAS. Your thoughts penned are aligned well with your love for Hindi movies. I do agree that it has been a utter chaos in last three years as far as policymaking is concerned. However, an appeal to our countrymen and especially the young voting class that you mentioned, to keep virtues and values of Indian Culture in mind disguise of rational thinking. I may not be as good as you, but the best way to express myself in form of a hindi movie sher from a ghazal from the movie Umrao Jaan:

“Maana ke doston ko nahin dosti ka paas
Lekin yeh kya keg air ka ehsaan lijiye
Wishing you all the success.”
— Prakash Udeshi

MARCH 2014
A positive note. I am sure, over time, new dishes will surface from A. P. and Telangana to add to your list of favourites. And before the bifurcation takes effect sometime in June, let BCAS host a programme which will include a united A. P. meal. If required, my daughter who is possibly a foodie like you, will assist you in organising such a dinner .

— Puloma/Dushyant Dalal

APRIL 2014
You have given a beautiful and inspiring article to students appearing for the exams. My son is appearing for the CA Final and there is lot of stress and anxiety. This article comes at a right time and will provide a tonic for him. We all have gone through the same phase and now know the value of it. Thanks again.

— Sudhir Avhad

MAY 2014
Naushad, in the current dispensation, I am with the SC. When the Parliament does not function (since the Bofors days), executive has no regard for law and the PM is dysfunctional for a decade, SC’s activism is justified. People are happy with Sahara developments. Our top judicial brains are defending him without answering from where he got the money to repay and how can one repay 20K without recording in the books?

All the cream of our society has made India a ‘Banana republic.’ They now fear only the SC; they don’t fear God!

— Tarunkumar Singhal


JUNE 2014
An excellent piece to be read by every citizen of this country. Beautiful parting speech. Words fail to compliment you. Wish you good luck

— K. Sankaranarayanan

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TAXATION PRINCIPLES AND APPLICATIONS

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TAXATION
PRINCIPLES AND APPLICATIONS
A Compendium
Author: Dr. Parthsarathi Shome
Publisher: LexisNexis
Price Rs. 1,495.00

All of us as Chartered Accountants are busy with the interpretation and application of Revenue Legislations. We do not normally make a contribution in the Legislative Tax Policy and Planning, except at the time of presenting the pre-budget or post-budget memorandum. Dr. Parthsarathi Shome’s latest book, however, takes us even a step prior to Revenue Legislation and the thought process behind Taxation Policy and Planning.

Dr. Shome has rich experience as an internationally acclaimed Research Scholar in the Fiscal Policy and planning and during his illustrious career spanning four decades, has made several research studies and given presentations at various international forums. The present book is a selective compendium of his work in the field. As a result, what we come across in the book is a progressively changing thought on Fiscal Legislation.

Divided into seven main chapters, the book starts with an overview of Taxation system from earliest days of Ramayana and Mahabharata, and later on, Kautilya. The early economic principles from Mahabharata and Ramayana depict the social responsibility of the King. One finds that even after many centuries, these principles are even valid today. Dr. Shome in his research has touched upon these principles, of course with changing trends.

In the later chapters, he has analysed in depth the incidence and distribution effects of Taxation, efficiency effects of Taxation, an overview of VAT , GST and customs duty. In the entire analysis, GST appears to be the darling of the policy makers and scholars and Dr. Shome is no exception. In the process, he has also touched upon some innovative schemes of taxation such as Financial Transaction Taxes, Global Carbon Tax, cash flow tax, asset base of tax popularly known at many places as MAT , the much criticised and later on jettisoned from our country, the Fringe Benefit Tax etc. He has examined these innovative measures both from the point of view of policy framing and administration. Before the general elections in our country early this year, there was a talk of abolishing all taxes and in its place imposition of only one Banking Transaction Tax. A theoretical analysis of the said measure of taxation also finds a place in his book. He has of course not forgotten the problems of small and medium size taxpayers from both the sides.

The book also contains the country’s and regional experiences in the process and his analysis mainly concentrates on Latin America and Asia, because of the traditional tag of developing and underdeveloping economies in these regions.

The last chapter of his book is devoted to the exclusive study of Tax Administration, concentrating on the process of a discussion on countering tax evasion, including the famous, tedious TDS. The use of information technology in tax management and administration also finds a place towards the end, but it is touched on the surface. Perhaps, in his next compendium, Dr. Shome may be making a reference to Tax Administrative Reform Commission, which he is chairing at the moment. As we all know, the Government of India had set up the TAR C in August, 2013. In its first report, TARC has suggested radical changes in tax administration. The key suggestion, if implemented in its true spirit, the taxpayer may be treated as a valued customer. Such a radical change will require a drastic change in attitude. The ingrained attitude of arrogance on the part of revenue officials needs to be deeply buried.

Dr. Shome has made a very valid and valuable reference to Spengler’s Contemporary hypothesis, which is reproduced below because of its importance, “ Increasing political stimulation of man’s wants beyond his capacity to supply them has generated forms of disorders. Wants generated by political means are bound to outstrip a community’s economic capacity to satisfy such wants and hence must give rise to increasing frustration of man’s expectations. This ascendance of political over economic want-generation, together with the disorder, which comes in its wake, may be numbered among the progeny of the two Pelopennesian wars which sundered the world of European civilisation and polity between 1914 and 1945.” (p 7).

In today’s world, the people’s Kings have taken the places of hereditary Kings. A continuous aspiration to become the people’s King is reflected by a group known as the political party. Politics, therefore, demands a continuous show of moon to the public at large, thereby increasing the actual and perceived wants in geometrical proportion. This necessitates a need for continuous higher tax collection since it is a main source of revenue for governance. This relationship of economics of tax policy and planning and political necessity for faster and increased collection through such a policy has given rise to political dominance over economic principles. This has given rise to complex economic policies for generating tax revenue.

Although the book avoids reference to political overtones, it describes in detail various complex and multiple models of Source vs. Residence, DTAA issues, Transfer pricing, base for taxation whether expenditure or income, final destination points of taxation. The policy and planning is therefore truly complex. Dr. Shome has through his writing skills tried hard to soften the complexity. Since it is a compendium, there is repetition at some points because the thoughts have been expressed at various times and various places, but in the context of the book it appears to be unavoidable.

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The Menace of Corruption

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“I got used to it by not getting used to it.” said Thomas Mann. This in a nutshell sums up our approach to corruption.

India suffered losses of Rs. 36,400 crores due to corruption in the 12 months preceding September, 2013, says a survey by EY (Ernst and Young) and FICCI, excluding large corruption scandals – 2G, CWG etc.

Chetan Bhagat mentions five areas towards which the new Government’s effort should be focused. One of them is Corruption. He says, “Go after corruption. It bothers Indians and needs to be fixed. However at present it also churns the wheels of our economic system. Draconian measures or finger pointing will solve nothing. It might bring the country to a halt. You don’t solve a blood contamination disease by cutting of the arteries of the heart. You make the blood pure again, one small transfusion at a time.”

To combat the cancer, we require chemotherapy which is given in small doses and is calibrated. To overcome the menace of this national termite which has rendered us hollow; we need to have clear thinking and appropriate strategy.

Corruption is of two types: meat eating and grass eating. The meat-eating corruption is almost always collusive and one transaction is enough to last a couple of generations. It is silent, stealthy and insidious!

Unaccountable wealth or better known as black money, (attained by illegal means and/or remaining outside the purview of the tax laws), remains within the calculated comfort of its owner. This includes money generated through arms deals, gun running, smuggling, drugs and narcotics, illicit trade, real estate transactions et al; and is major contributors to the tax havens abroad

Grass-eating corruption extorts millions of our countrymen in their day to day activities. Obtaining a post-mortem report, death certificate, donation in cash for admissions to school, caste verification certificate, lodging of FIRs, pre-condition for recruitment in govt. jobs at subordinate cutting edge levels levels etc. etc. This is extortionist in nature and is demanded when one is under already duress. This form of corruption is petty in scale and alienates the belief of lay public in the government . Anna Hazare lead the movement “India Against Corruption” that later significantly contributed to the electoral decimation of the Congress led UPA government.

The NDA government shall have to tackle the grass-eating variety through massive education of public opinion to say NO to corruption of this form. Every school, college and other training/professional institutions should be giving lessons inculcating values. Though a long exercise, but can give credible and sustainable results in couple of years. Incidentally the Honk Kong government faced the same menace and they started working through schools and in couple of years, the change became manifest to the relief of suffering populace. It had a tremendous impact on the states effort to combat the menace.

Manoje Nath – a former Director–General of Police, Bihar, brilliantly sums up people’s response to the menace by saying that the response of people at large is even more ambiguous because it is rooted in the fact that they are themselves “half victims, half accomplice, like everyone.” People’s lack of combativeness, venom and extraordinary passivity stems from the fact that they tend to be comfortable with the idea that corruption is an inescapable fact of governance and political morality. Nath explains;

“The ambiguity in the public attitude towards ill-gotten money is the result of our peculiar situation. Our economy is half white and half black, half over-ground and half underground. We condemn black money but deal in it, nevertheless. Under our very eyes, criminals and gangsters acquire wealth, then political power, then more wealth and with it acceptability and social esteem. Political banditry as a mode of creation of surplus value has long been accepted as a legitimate vocation. To displace the awareness of these contradictions, we have devised various overt and covert strategies to acknowledge and accommodate the criminality within our midst. Lawyers, chartered accountants, investment advisors, honestly work for the legitimization of dishonest earnings by politicians, government officials, corporate CEOs, etc. Dirty money courses through our formal and informal financial system in different ways, with different consequences. We do not seek to know hard enough about the offshore funds being routed in our economy for fear of discovering their actual provenance. We are so enamoured, even over awed with power and manipulation that we tend to ignore what David Bell calls “the economic fulcrum underneath.”

The decision to constitute a Special Investigation Team, under the chairmanship of Justice M. B. Shah, to investigate the cases of black money stashed away in foreign banks, will prove to be an acid test for the new government. It calls for a equally strong political will to fight this ever growing threat to national economy.

To combat crime, we need to have two pronged strategy: prevention and detection. Many a crime are prevented when the preponderance of probability lies in that these would become manifest at any given moment. A reasonable certainty of apprehension and conviction deters criminals. Crime swells when there is an assurance that it would not be easily detected and that in the unlikely event of getting so detected, the law as it exists, could be subverted first at the level of cognizance and subsequently during investigation, prosecution and/or adjudication. Organized crime syndicates prosper on this philosophy.

“Ideas spur crimes. A psychological, people-oriented counter strategy and approach while it is certainly not a panacea, empowers the individual citizen who ceases to ask what is there in the state system for him and instead begins to introspect on what he can do for the society/ state system given his new found status as a stakeholder,” says Prateep Phillip.

The power syndrome is that when we do not share power, the power have-nots hate us with a passion, when we share power through such a power sharing mechanism we are loved with an equal passion.

Corruption permeates at the top and it becomes a corporate activity. We shall have to put upright and competent officers at the top – selected on merit – and mind you we have plenty of them. All such officials have now been marginalised and wasted in non-sensitive departments/ assignments.

Clearly laid out policies with irreducible minimum discretion, with the help of technology to take speedy decisions, will go a long way to cut on avoidable delays, famous breeding grounds of corruption.

Creation and existence of a credible mechanism where information can be received and is welcomed, with privacy of the informer kept in absolute secrecy, will make the masses feel participants in unearthing diverse forms of unaccounted/illicit wealth. All such information leading to successful prosecution may be rewarded with tempting percentage of such money unearthed. The RT I Act has significantly contributed to lifting of veil of confidentiality from public records maintained by the government. It’s time we take a call whether we should continue to maintain confidentiality of income and assets of all those who seem to be living in a life style disproportionate to their know sources irrespective whether they are public servants or not.

Hoederer’s admonition to Hugo (who refuses to “dirty” his hands) in Jean Paul Sartre’s play Dirty Hands would induce a curious sense of déjà vu in those of us who have tried to take a stand against the contemporary wisdom:

“You cling so tightly to your purity, my lad! How terrified you are of sullying your hands.
Well, go ahead then, stay pure! What good will it do, and why even bother coming here among us? Purity
is a concept of fakirs and
friars. But you, the intellectuals, the bourgeois anarchists, you invoke
purity as your rationalisation for doing nothing. Do nothing, don’t move, and wrap your arms tight around
your body, put on your gloves. As
for myself, my hands are dirty. I have plunged my arms up to the elbows in
excrement and blood. And what else should one do? Do you suppose that it is
possible to govern innocently?”

Towards a healthy India

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“Ache din aane waale hai”

Well,
that’s what I believe anyway. India used to be known as the ‘sone ki
chidiya’ – the Golden Bird, but that sadly is a thing of the past.
Corrupt officials, ineffective governance, ridiculous policies (both
foreign and national) and high level yes-men, have rendered this once
great nation, a laughing stock not only to the world, but also to its
very own residents. Having such a massive population, second only to
China, should have helped propel us forward, but it has been more of a
burden, dragging us behind. Restlessness and discontent was strife
against the current regime. A huge shake-up of the government, from top
to bottom, was massively required. And that is exactly what has
happened. A wave of change has swept over our country bringing with it
billions of hopes and expectations. And it is we, the youth, who stand
at the centre of this change.

Ten years from now, I see India as a
global superpower. I see us as a country at the pinnacle of
development, be it the economy, education, infrastructure or even the
health care sector. Yes, the health care sector! And this is where, as a
medical intern at Sion Hospital, I would like to give my not-so-expert
opinion.

According to me, the health care sector is one of the
most neglected fields in our country. And that, for a country with a
population exceeding a billion, is simply unacceptable. There is a lack
of availability of even the most basic of medical supplies, at the
primary health care level. For example, when I was doing my rural
rotation, the health centre I was posted at did not even have stock of
isosorbide dinitrate (simply called nitrate), a basic drug which is
critically important in the emergency management of myocardial
infarction, commonly known as a heart attack. Lack of such basic
supplies will hinder even the best doctor’s attempts at treating his
patients. The WHO guidelines dictate that there should be at least one
doctor for a population of 1,000 people. But the sad reality is that
this ratio currently stands at around 1:2,000 in our country. This
prevents people from availing even the most basic facilities, especially
at the primary level.

However, these problems are not just
limited to the rural level. They are also prevalent in the urban areas,
specifically the government-run hospitals. Most of these hospitals are
severely understaffed. Doctors are unable to give their complete
attention to every single patient, which results in them not getting the
appropriate medical treatment. Most of these hospitals are grossly
mismanaged, which results in the patient not getting timely, and in
certain cases, lifesaving medical care.

But it is not only the
patients who suffer. Doctors are in fact, the major victims of this poor
management of the health care sector. The ‘resident’ doctors, i.e., the
postgraduate student, are probably the ones who are the most affected.
These doctors are the ones who practically run the whole hospital. Along
with that, they have to battle a host of other problems such as
inhumane working hours (most of them don’t sleep more then 30-35 hours a
week), poor and unhygienic living conditions which predispose them to
various illnesses such as tuberculosis, abysmally low salaries, and
handling aggressive patients and their relatives, each of whom demand
the best treatment for themselves. Even after treating the patient to
the best of their abilities, there is always that nagging fear of
getting beaten up even if one miniscule thing goes wrong. In the private
set-up, although there are no problems of staffing or overcrowding as
such, it is the huge cost of treatment which acts as a deterrent, which
pushes people towards the public hospitals.

All these issues are
correctable, if the government shows the required desire, understanding
and dedication. The most obvious solution would be to increase the
number of doctors at all public hospitals. This increase should not only
be at the senior level, but should start from the grass roots, at the
undergraduate level. The number of seats at both UG (Undergraduate) and
PG (Postgraduate) level should be increased, which would results in an
increase in doctors at all levels. As of now, there are approximately
20,000 PG seats in government-run medical colleges throughout India.
This is totally inexcusable for a country with such a massive
population. Establishing new medical colleges and hospitals would go a
long way in providing better health services. It would reduce the
workload on already overburdened doctors. The aim of the government
should be to have at least a 100 new, tertiary hospitals in India in the
next 10 years. This would make a massive difference in ensuring quality
health care.The government must take steps to ensure better, sanitary
living conditions for resident doctors. Offering attractive
remunerations and financial packages would draw more doctors to take up
jobs at government hospitals. Another crucial decision should be to
increase the strength of the para-medical staff at all hospitals. These
include the nurses, ward boys, technicians etc. These people play a
critical role in the day to day efficient running of a hospital, without
whom, things would just come to a grinding halt. There should also be
an increased focus on infrastructure and basic facilities. For tertiary
health centres such as the big hospitals, providing them with the latest
technology, modern equipments and the best lab facilities, would go a
long way in enabling them to provide the best medical care that they
possibly can. For example, there are currently many hospital across
india which do not even have a CT scan! Primary health care as a whole
has been grossly neglected and steps must be taken to ensure that such
centers have access to basic, life-saving medications as well as simple
investigative equipment like x-ray machines. Our aim should not be to
provide medical care on par with the Western countries, but to provide
better care than them, simply because we have the resources to do so.

I
have a very limited knowledge of the budget and the constraints faced,
but I do know that expenses on health care were cut down by 10% for the
2014-15 budget. The most obvious solution would be increase the
allocation, and the subsequent expenditure, on health care. However, if
that is not possible, judicious and carefully planned use of the
resources should be made. There should be increased focus on certain
areas which require them the most, such as the primary health care
sector. Conducting increased number of health camps, with the assistance
of NGOs, would go a long way in tackling health problems in rural
areas. Special departments should be set up within the health ministry,
each given their exclusive objectives and asked specifically to focus on
them.

Ten years down the line, I would like to see every person, whether rich or poor, have the opportunity to access the best medical care and facilities. I would like to see India at the forefront of health care services. An India, where peo- ple from abroad come to access OUR health services, not the other way around. An India where our doctors get the respect and facilities they deserve, and are not vulnerable to the very diseases they are supposed to treat. An India where basic medicines are available throughout, such that not one single person should die from simple, preventable diseases like tuberculosis or malaria. All in all, I would like to see India achieve its tremendous potential, become the country that we know we can, and command awe and respect from the rest of the world. Bold claims maybe, but I firmly believe, with the current government in place, all of this is eminently achievable with the required will and hard work.

In the words of Martin Luther King Jr.,”I have a  dream…”

“My INDIA”…. A Decade From Now….

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“Saare Jahan Se Acha Hindustan Hamara…………..”

These words unite millions of proud Indians. India, a nation of many religions, languages, customs and beliefs, may have its perils, but in them also lie its myriad opportunities. As we tap the means of realising any such opportunity, we have to realise that the land on which we tread is sacred. Criticism is no way to revere it.

Back from the time of the Indus Valley civilization, till the end of the British Era, Indians as one people have not shared the same destiny, although we may have come close to it during the times of the great emperors Ashoka and Akbar. Sharing destiny entails sharing responsibility. The ‘Indian Dream’ is a million acts of private daring put together and in many of us the dreams of 1947 passed down the generations are still alive. Somewhere deep down in the heart of every Indian is the hope of one day seeing India restored to its former glory.

The areas in which India lags behind today in core competence are agriculture and food processing , education, healthcare, information and communication technology, providing quality infrastructure, creating a culture of self reliance for critical technologies, minimising the rural – urban divide, improving our attitude and approach towards women and emphasis on national security.1 There is little dispute as to what needs to be done; the debate remains over the means to achieve and sustain such core competence.

‘Development’ in India is a term that is loosely used and followed and includes anything that constitutes a new stage in a changing situation. There is always a tendency to view development as an accumulation of capital instead of including factors like the emulation and assimilation of knowledge2. Whereas in practice, it is actually a multi-dimensional term, that is a composite of the degree of economic and social growth. One of the major challenges that India faces today is to ensure that the governance is matching pace with and is responsive to the needs of the people. In this regard, the records of the many governments, both in the state and at the centre, have been murky at best. In order to succeed, one of the essential features that any government today will need to imbibe is transparency in governance. Embracing a policy of transparency would go a long way in restoring the faith of the people which has been steadily diminishing down the years. Well formulated and sound policies which are not bogged down with provisions having retrospective applicability, which are not regressive policies, and not based on knee-jerk reactions and which are efficiently implemented, would surely go a long mile in boosting the development of India.

We take pride today in saying that we are one of the world’s fastest growing economies and one of the largest economies. Even post the financial crisis of 2009 the Indian economy has maintained a positive outlook. The large population base provides enough market demand to sustain industry and make the country attractive from an investment perspective.

“Innovation is the specific instrument of entrepreneurship. The act that endows resources with a new capacity to create wealth.”- Peter Drucker.

Indians are shining across fields all around the globe and yet our present international rank is low with respect to the ease of doing business and innovation. The government needs to invoke the entrepreneurial spirit of Indians by placing emphasis on new knowledge and innovation and framing a national policy for entrepreneurs.

India has a high ratio of shadow economy entrepreneurs to legitimate business.3 At present, they are beyond the purview of the government and hence belligerently flout labour laws as also various other laws and do not pay taxes. Should the government adopt policies that would encourage formalising such businesses, their transactions would result in a substantial amount accruing to the exchequer and improve social security for the entire nation. Further, the formalisation of these entrepreneurs is incumbent to ensure that they innovate, accumulate capital and invest in the economy for promoting economic growth.

What has troubled industry and investors alike has been the lack of consistency in the role and policy making, the exercise of discretion by the government and the lack of clarity regarding the rationale behind the rules apart from of course, their enforcement.

Despite the limitations imposed, we do possess an impressive array of basic laws that are equipped to tackle most situations. In many instances we have not updated or upgraded them to match the progress of time.5 However, there are also certain laws that are completely archaic and have not been amended to cover present business realities, or even practicality, thereby creating an environment of uncertainty and confusion.

For example land acquisition has been a very touchy subject in India. The availability of land for implementing various projects is a key aspect of development and is considered a stable means of investment. The land acquisitions in India were governed by the archaic Land Acquisition Act of 1894 which was expropriatory and conferred the state with wide powers that affected a person’s right over his property.6 There have been many well documented instances where the acquisition of land under the Act was not consistent with the concept of the Indian welfare state.

Sharing destinies is different from sharing backgrounds. What works for one state may not work for the other, and this may be true from region to region. Innovation and adapting of policies to suit the needs of each region would need a healthy stand adopted by the state governments in the case of land acquisition. For example in Gujarat, a state that has large tracts of non agricultural land8; has instituted an industry friendly process of land acquisition which is governed by the GIDC, a statutory corporation responsible for the acquisition of industrial estates.9 Any industry that was interested in setting up shop in Gujarat could approach the corporation for an allotment of land.10 The corporation has instituted a fair and transparent mechanism for the compensation of farmers and has given the state a competitive edge over the others with respect to attracting investments. A similar role has been played by the nodal agency in Karnataka through the creation of land banks through acquisition in anticipation of industrial demand.

“See no advantage of new clocks. They run no faster than the ones made 100 years ago.” Henry Ford.

Apart from laws affecting business, there have also been instances where social laws are drafted without giving much (or in some cases, any) thought to its consequenc- es. An apt example would be the Bombay Prevention of Begging Act, 1959 which was extended also to the Union Territory of Delhi. Under this act, a person found begging upon being found ‘guilty could be detained in a certified institution for a period of one year.11  When challenged   in the Hon’ble High Court of Delhi, it was held that such statute completely failed to take into account the various aspects of begging.12 The court observed that a person could have taken up begging due to any of the following factors (i) The person may be lazy and would not want  to work, (ii) the person could be an alcoholic or a drug- addict, whose only thought was financing the next drink or dose,(iii) the person could also be exploited by gangs that thrived on the earnings of beggars, or (iv) he could be a destitute, starving and helpless person. Professional beg- gars as mentioned in the first category would certainly be the persons the act was trying to target. Whereas persons mentioned in second category would actually require help in a deaddiction centre. A person who is at the mercy  of a gang would need to be extricated from the clutches of such people. The last category of persons mentioned were persons who were genuinely helpless, who only begged to survive; to remain alive. Fairness and justice is the core of any law and policy introduced. No rule can apply to an entire population uniformly. Formation of sound law in keeping with this basic principle is the key to good governance.

“Any man who reads too much and uses his own brains too little, falls into the lazy habit of thinking”
– Albert Einstein.

Apart from a sound domestic legal framework, promulgation of laws and enforcement of policies formulated with regard to international business also play   a pivotal role in our country’s progress. Policies framed on ‘elite’ economics but disregarding practicality are dangerous to say the least. What is even more dangerous is that the people who frame them believe it is for the good. Whatever harm evil may do, the harm done by ‘good’ is most harmful.

“In International Commerce , India is an ancient country”
– Virchand Gandhi

Foreign Direct Investment in India has always been a contentious issue. The governments post 1991 have been following a policy of allowing FDI, yet restricting the quantum of investment allowed in each sector. In the ‘50s, India had an open door FDI policy, since Pandit Nehru was of the opinion that foreign capital was necessary to facilitate progress. The rules were so progressive that investors outside India were given the freedom to repatriate all profits. The discontinuation of this policy occurred in the late 60’s due to the increase of state control in the manufacturing and services sectors.13 Post this era it was all downhill for foreign investors, with the enactment of FERA14 .

In June 1991, the Government of India had to face the ignominy of pawning 67 tons of gold to foreign banks to shore up its meagre foreign exchange reserves. This exercise was necessitated by the demand for the dollar emanating from within the country. Fast forward two decades we can see that the reserves have reached over USD 300 billion and we have instances of the country buying over 200 tonnes of gold from the IMF (International Monetary Fund) to boost its reserves.15 This turnaround can be attributed to the Government’s decision circa 1991 to pursue an active policy of attracting foreign investment by creating a liberalised policy framework. Having said that, one has to balance social responsibility with economics. Economists framing policies may have education from a MIT, Havard or Stanford, however, they may lack real time assessment, which would likely result in a theoretically sound legal framework which completely fails to address the ground realities and the practical issues faced.

To illustrate further, let’s recollect the policy for FDI in retail, which has been debated endlessly. In India retailers are largely the entrepreneurs who set up small shops, convenience stores in an unorganised manner. Instead of supporting human spirit and will, the influx of foreign multi brand retail chains is likely to wipe out the young businessman. The promise of lower rates of inflation and food prices, improvements in warehousing and distribution, which appear to be the factors that influenced the allowance of FDI in retail, may not necessarily prove accurate or worthwhile. The advent of foreign retail chains in Thailand and Malaysia should serve as a cautionary tale, regarding the plight of local retailers.

Globalisation is another phenomenon that India has had to face over the past few decades. This is the process  of international integration in the fields of economics, fi- nance, trade, and communications. The policy makers in our country have to realise that blindly minimising trade restrictions and opening up the country to foreign investments may not be very opportune for developing country like ours.

Right to aspire for dignity and distinction is the prerogative of every citizen in a democracy.

On the social front, the labour laws in India have been categorised by many quarters as being pro- workmen. The need for far reaching reforms in such sector has been evidenced long back, as they16 create inflexibility in the labour market, which has been linked to a reduction in the growth potential of the economy. Such laws are nu- merous and ambiguous, that it is debateable whether they promote litigation or resolve disputes We as a nation could loose a lot in terms of its comparative advantage of labour abundance where such laws are inflexible to such a large extent. Certain reforms suggested are usage of contract labour in non core activities and enactment of a single legislation that combines the present legislations to form a comprehensive code governing and regulating the labour sector. Such need is even more apparent as witnessed recently during the construction projects undertaken for the Commonwealth Games, where there were denials of minimum wages, overtime and weekly holidays by contractors.17

Education is not preparation for life; education is life itself
– John Dewey.

The most important social obligation of education is still, very sadly a basic necessity denied to millions. One of the flagship programmes of the previous government was the provision for free and compulsory education for children between the age of six and fourteen18 and also envisaged the setting up of schools in every neighbourhood for the completion of elementary education. In a large country like India, even a small measure can have enormous impact if implemented across the country. Accordingly, a positive obligation was created on the State and a negative obligation on private educational institutions with respect to providing education. A bright feature of this programme was social inclusiveness, i.e., including minority institutions, so as to achieve the object of creating heterogeneous schools and classrooms. The inclusion of disadvantaged groups would mean that classrooms would not be the sole province of the privileged. Education for an effective policy has to focus on empowering the students by imparting knowledge and not merely teaching curriculum. It of course would not help if the students were not being imparted the skills necessary for their livelihood and survival. Nothing short of a cultural revolution is needed to empower our teachers and change the education system..

With the core issue of education, lies the deep connection to how one should treat our female citizens. The significance of Parvati, Sita & Shakti would have not been required to be separately imparted if only one learnt from childhood to respect women as an integral part of life.

‘Wherever laws end, tyranny begins’19 .

The judiciary is a body which ideally should be steeped in values and ethics. Its functions inter alia are to administer justice, to ensure that the rule of law is in place and to promote the observance and attainment of human rights.20 The common law based judicial system has failed to certain extent to keep pace with the tide of litigations that have been thrust upon it. In many cases, the judiciary had to act as a crusader of societal change. The courts today, despite the criticism, have been identified as the guardians of the constitutional promise of social and economic growth and have to conduct reforms to keep up with the march of time. The strength of various courts should be increased while maintaining quality of justice. The tenures/ retirement ages for judges should be increased to allow judges to cope with the humungous workload. With respect to the procedural laws, changes have to be made to the cumbersome and onerous aspects. Justice is not meant to be denied by delay. Of course people do take advantage of the system, but a gradual change in attitudes and procedures will surely go a long way in achieving a judicial dependency that is today lacking among the common man.

India, to realise its true potential and achieve what it can, has a long way to go. The journey has, I believe already begun a while ago, but is not at the pace it is capable    of treading. My India has to be just like yours, where we wake up to a land which provides for all and not just cater to the interests of a selective few. So let us not only as a theory but in practice too try and put our individual needs after that of our country and imbibe a spirit of togetherness. A spirit which unites us, takes us at a swift pace   to where we deserve and more importantly shapes our destinies, together as a nation.

Arbitration Law In India-The Way Forward

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Introduction
Indian commerce has been bubbling with hope and anticipation that the newly elected government will usher in a new era of regulatory reforms and improve the stagnating business environment in the country. True enough, the new ministers have been making all the right noises about creating a lean and efficient administration that will focus on governance rather than government. But it is not difficult to realize that a no-nonsense workaholic PM and well-intentioned ministers are not enough. Several other cogs need to move smoothly to create a healthy business and commerce ecosystem in a democracy. One such critical component of a vigorous economy is an efficient and smooth-functioning judicial system. This is needed so that disputes, particularly commercial disputes, are resolved quickly and in a cost-effective manner instead of disappearing into the black-hole of judicial backlog that the Indian Court system is infamous for.

In an attempt to revolutionarise dispute resolution in India that was stalled by the burgeoning traditional Indian Court system and to give contracting parties greater flexibility in choosing their dispute resolution mechanism, India updated its arbitration law in 1996. This was done by replacing the Indian Arbitration Act, 1940 (“1940 Act”) with the Arbitration and Conciliation Act, 1996 (“1996 Act”), which largely adopted the UNCITRAL Model Law on International Commercial Arbitration. The 1996 Act made significant improvements to the existing arbitration regime and has been responsible for the growing popularity of arbitration as the default dispute resolution mechanism in most commercial contracts. While the 1996 Act has been a reasonable effort by the legislature, the judicial interpretation of some of its provisions have made this “alternate” dispute resolution mechanism subject to constant (and often time-consuming) interference by the Courts. This has dulled, to some extent, the sheen and attractiveness of arbitration in India.

The two hallmarks of arbitration, at least, from an aspirational point of view, are: (i) the ability of parties to contractually substitute the regular civil courts with a private tribunal comprising of the parties’ chosen adjudicators whose decision has the force of law; (ii) avoidance of the pitfalls and inconvenience of court litigation including cost, delays, lack of subject matter expertise, inflexible venue, etc.

This Article seeks to identify some of the key drawbacks of the arbitration regime in India and the aspirations this author has from the judiciary, suggests solutions to overcome the same, which could possibly help restore the efficacy of arbitration in India over the coming years. By way of disclaimer, I must also acknowledge that this Article does not propose to be an exhaustive critique of arbitration in India but merely seeks to introduce the mostly common issues that are plaguing the Indian arbitration regime.

1. Refusal to uphold the binding nature arbitration agreements

Arbitration, simply put, is the voluntary submission of a present or future dispute by parties to a private tribunal (as opposed to a civil court) consisting of persons chosen either by the parties themselves, or through a procedure agreed upon by the parties, for final and binding adjudication. Once parties have agreed to arbitration as the dispute resolution mechanism for their disputes, they are expected to be bound by such agreement and cannot resort to civil courts for adjudication of such disputes.

This defining character of arbitration, i.e., exclusion of courts by agreement of parties, finds resonance in numerous provisions of the Arbitration Act. For example, section 5 of the 1996 Act declares that once parties have entered into an arbitration agreement for arbitration in India, “no judicial authority shall intervene except where so provided…”

Section 8 goes one step further. It directs every judicial authority before which an action is brought in a matter that is the subject matter of an arbitration agreement to compulsorily refer the parties to arbitration upon the application any of the parties to the arbitration agreement. The Supreme Court too has viewed Section 8 as a legislative mandate on the Courts that leaves Courts with no discretion or choice in matters where parties have already entered into arbitration agreements. In P. Anand Gajapathi Raju & Ors. vs. P. V. G. Raju (Dead) & Ors1. , the Supreme Court has observed that section 8 is “peremptory” in nature and proceeded to hold as follows:

“It is, therefore, obligatory for the Court to refer the parties to arbitration in terms of their arbitration agreement. Nothing remains to be decided in the original action or the appeal arising therefrom.”

Section 8 further clarifies that “notwithstanding that an application has been made u/s/s. (1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued and an arbitral award made”. This further reaffirms the emphasis on the primacy given to arbitration. So even if one party initiates proceedings in Court despite entering into an arbitration agreement, the other party would remain entitled to commence arbitration and the arbitral tribunal can proceed to hear the matter even before the Court decides an application for reference to arbitration.

It is also worth noting that section 8 does not apply only to Courts. It applies to all “judicial authorities” before whom a dispute covered by an arbitration agreement is brought. Accordingly, all other authorities performing judicial functions, including tribunals such as the Company Law Board, are intended to be bound by the mandatory language of section 8.

The Scheme of the 1996 Act, and sections 5 and 8 in particular, make it clear that once parties have entered into an arbitration agreement, they will be held to their bargain and the courts will do permit either side to circumvent the arbitration agreement by commencing judicial proceedings instead of arbitration. But this legislative scheme has been somewhat diluted by three sets of decisions of Indian courts that have allowed Courts to retain control over certain kinds of the disputes even in the face of an arbitration agreement.

1.1. Multiple parties and multiple causes of action
In Sukanya Holdings (P) Ltd. vs. Jayesh H Pandya and Anr.2 , the Supreme Court held that:

…there is no provision in the Act that when the subject matter of the suit includes subject matter of the arbitration agreement as well as other disputes, the matter is required to be referred to arbitration. There is also no provision for splitting the cause or parties and referring the subject matter of the suit to the arbitrators…

…In our view, it would be difficult to give an interpretation to section 8 under which bifurcation of the cause of action that is to say the subject matter of the suit or in some cases bifurcation of the suit between parties who are parties to the arbitration agreement and others is possible. This would be laying down a totally new procedure not contemplated under the Act.

By the above ruling, the Supreme Court has created two exceptions to the mandate of section 8. According to the Apex Court, a judicial authority was not required to refer parties to arbitration u/s. 8 when: (i) the claim involves multiple parties, some of whom are not party to the arbitration agreement, or (ii) if only some, but not all of the disputes among the parties are covered by the arbitration agreement.

It is submitted that this case creates an unnecessary exception to the mandate of compulsory arbitration u/s. 8. First, the decision proceeds on the basis that when multiple claims are involved among the same parties, they must necessarily be pursued by way of a single composite legal proceeding. This, however, is not mandated by the either the 1996 Act or the Code of Civil Procedure (CPC). In fact, Order I, Rule 3 of the CPC only permits (but does not require) a plaintiff to join several disputes or causes of action or sue several defendants in the same Suit. Moreover, Order I, Rule 6 of the CPC actually permits the Court to split up a composite suit if the joinder of the multiple causes of action would “embarrass or delay the trial” or “is otherwise inconvenient”.

Secondly, the decision is prone to misuse by parties  that wish to back out of an arbitration agreement. For instance, two contracting parties having several transactions with each other may very often have several disputes and claims against each other, only some of which are covered by an arbitration agreement. A party who is keen on escaping the rigors of arbitration can do so quite easily by merely raising claims that are not covered by the arbitration agreement. Since the Court will not examine the merits of the substantive dispute at the initial stage of determining whether or not the matter should be referred to arbitration, a party can escape arbitration by raising even a frivolous claim that falls outside the scope of the arbitration agreement. Similarly, a person can also avoid an arbitration agreement by cheekily raising claims against other persons who are not party to the arbitration agreement. In fact, a person need not even raise an actual claim against such third parties. He can implead them in the Suit as “proper” parties so long as they have some reasonable connection with the subject matter of the Suit.

1.2.    Matters covered by special laws
It is reasonably well settled across most jurisdictions that a dispute affecting rights in rem (i.e., matters affecting the world at large) cannot be the subject matter of arbitration. So matters involving criminal offences, winding-up of companies or suits for foreclosure of a mortgage are generally considered as matters in which the public at large has an interest and are therefore non-arbitrable. The Supreme Court, however, has extended this logic to certain cases that involve nothing more than the personal rights of the disputing parties and has allowed Courts to interfere even when parties have consensually submitted certain disputes to arbitration.

In Natraj Studios (P) Ltd. vs. Navrang Studios3 and Mansukhlal Dhanraj Jain vs. Eknath Vithal Ogale4, the Supreme Court held that all matters falling within the ju- risdiction of the Small Causes Courts, including disputes between a landlord and tenant and matters between a licensor and licensee relating to recovery of possession, could not be the subject matter of arbitration. The Su- preme Court reasoned that in so far as landlord-tenant and licensor-licensee disputes are concerned, the Small Causes Court was vested with the exclusive jurisdiction to try such cases under the Presidency Small Cause Courts Act, 1882.

Although the above two cases were decided before the 1996 Act came into force, their dicta continues to be followed by the Bombay High Court5. As a result, even when a landlord-tenant or a licensor-licensee enter into  a written agreement to refer all disputes between themselves, including disputes relating to recovery of possession, to arbitration, either party can avoid the arbitration agreement by claiming that the Small Causes Court has exclusive jurisdiction to try such matters.

Presumably, this reasoning can be extended to all matters where designated courts and tribunals have been vested with jurisdiction try certain specific type of cases. In fact, in several cases, the Company Law Board has also taken a similar view and assumed jurisdiction over shareholder disputes even when there was an arbitration clause between the shareholders. For instance, in the case of Rajendra Kumar Tekriwal vs. Unique Construction Pvt. Ltd.6, the Company Law Board held as follows:

“…the test to determine as to whether the matter in a petition u/s. 397 & 398 is to be relegated to arbitration or not, one has to examine whether the allegations  of oppression/mismanagement contained therein can be adjudicated without reference to the terms of the arbitration agreement. In the present case, this Board can examine the allegations purely on the basis of the Articles. If it can be, then the question of referring the matter to arbitration does not arise even if assuming that there is an arbitration agreement and the agreement covers the same matter. In the present case though there is arbitration agreement, the matter relates to oppression and mismanagement directly relating to the rights of or benefit to shareholders in their capacity as members of the company arising out of the provisions of the Act, Articles or on equitable grounds. Assuming that the matters are covered under the arbitration agreement yet, since the same is covered under the Articles also, this Board can determine the allegations only with reference to the Articles and without recourse to the arbitration agreement.”

This line of reasoning, it submitted, not only dilutes one of the objectives of the 1996 Act, viz. to reduce the burden on the judicial system, but also flies in the face of the plain language of section 8. There is nothing in the 1996 Act which suggests that merely because a dispute falls within the exclusive jurisdiction of a special Court or Tribunal, such dispute is incapable of being determined by arbitration. On the contrary, section 8 deliberately uses the words “judicial authority” instead of “civil court”. A reasonable interpretation of section 8, especially in light of the object of the 1996 Act, would suggest that the legislature deliberately used the wider term “judicial authority” to ensure that the section 8 covers all judicial bodies, including special Courts and Tribunals such as Small Causes Court and Company Law Board.

1.3.    Fraud and other complicated matters
The third set of cases, which has further diluted the sanctity of a binding arbitration agreement between the parties, are the decisions where the Court has held that an arbitral tribunal is not equipped to deal with matters involving complicated questions of fact or law or disputes where an allegation of fraud is has been made.

Under the old arbitration law7, the Court was not bound to refer parties to arbitration even when parties had entered into an arbitration agreement. The Court could, for “sufficient reason”, refuse to relegate parties to arbitration and instead decide the dispute itself. But the language of section 8 of the 1996 Act, as explained above, is mandatory and leaves the Court with no discretion.

Despite the clear difference between the provisions of the two legislations, the Madras High Court, in the case of Oomor Sait HG vs. Asiam Sait8, has taken the view that even under the 1996 Act, the Court continues to retain the “time-tested” power of deciding whether or not to refer the dispute before the Arbitrator.

The Supreme Court, in the case of N. Radhakrishnan vs. Maestro Engineers & Ors.9 has upheld this view and held that when there are serious allegations of fraud or malpractices or manipulation of finances such matters cannot be properly dealt with by an Arbitrator. Such issues should, “for the furtherance of justice”, be tried in a court of law which would be “more competent and have the means to decide such a complicated matter…”. This reasoning has been followed in several subsequent cases.

It is submitted that this is an artificial exception that has been carved out despite there being no legislative backing for it under the 1996 Act. In fact, it appears to be a hangover from the early days of judicial mistrust of arbitration when the Courts felt that arbitration, as a means of adjudication, was rife with short-comings10. But this exception creates to the rule that an arbitration agreement is binding on the parties and the Court, creates a virtual black-hole. A party who does not wish to submit to arbitration can  do so by merely raising an allegation of fraud and claiming that such an issue cannot be adjudicated upon by an arbitrator. Unless the Supreme Court changes its view, it would be difficult for any civil Court or High Court take a different view and they would find themselves compelled to ignore the arbitration agreement in every matter where there is an allegation, howsoever far-fetched of fraud.

2.    Pre-arbitration litigation
The other problem plaguing the arbitration regime in India is the lengthy and expensive pre-arbitration litigation that is required when one party (usually the party disputing the claim) refuses to participate in the arbitration process. U/s. 11 of the 1996 Act, if parties to an arbitration are unable to agree on the arbitrators or if one party refuses to participate in the appointment of an arbitrator, then the Chief Justice of the relevant High Court (or his designate) is empowered to appoint the arbitrator.

A plain reading of the section suggests an innocuous procedure whereby designated Judge will perform a routine task of merely naming an arbitrator and relegate the parties to the arbitration by such a court appointed arbitrator. The Supreme Court, however, in the landmark case of SBP has held that the Chief Justice’s power u/s. 11 is not an administrative task that can be carried out summarily but is matter far more exhaustive. The Court has defined the role of the Chief Justice u/s. 11 as follows:

“Obviously, he has to decide his own jurisdiction in the sense, whether the party making the motion has approached the right High Court. He has to decide whether there is an arbitration agreement, as defined in the Act and whether the person who has made the request before him, is a party to such an agreement. It is necessary to indicate that he can also decide the question whether the claim was a dead one; or a long barred claim that was sought to be resurrected and whether the parties have concluded the transaction by recording satisfaction of their mutual rights and obligations or by receiving the final payment without objection. It may not be possible at that stage, to decide whether a live claim made, is one which comes within the purview of the arbitration clause. It will be appro- priate to leave that question to be decided by the arbitral tribunal on taking evidence, along with the mer- its of the claims involved in the arbitration. The Chief Justice has to decide whether the applicant has satisfied the conditions for appointing an arbitrator under Section 11(6) of the Act. For the purpose of taking a decision on these aspects, the Chief Justice can either proceed on the basis of affidavits and the documents produced or take such evidence or get such evidence recorded, as may be necessary.”

As a result of the above interpretation given by the Supreme Court, appointment of an arbitrator is by no means a straightforward process. A person who seeks appointment of an arbitrator, is first required to prove through affidavits and detailed arguments the following: (i) existence of a validly executed arbitration agreement; (ii) that the claim is a long dead one; (iii) that there has been no accord or satisfaction. This entails filing of detailed pleadings and exhaustive oral arguments and it could be several months before the High Court makes a decision and appoints an arbitrator. Even if the High Court chooses to exercise its power in favour of arbitration and appoints an arbitrator, this appointment can be challenged by way of a Special Leave Petition before the Supreme Court under Article 136 of the Constitution.

CONCLUSION
The 1996 Act, as it stands today, is a reasonable effort at promoting arbitration. But the manner in which several of its provisions, especially section 8 and section 11, have come to be interpreted by the Courts, somewhat takes away from this effort. It is submitted that as a result of the colour given to these provisions if the 1996 Act by the various rulings of the Supreme Court, the hallmarks of arbitration, viz. mutual agreement to avoid courts, and expeditious decision making, continue to remain aspirational and serious re-thinking is required, preferably judicially, to correct this dichotomy.

The Supreme Court has in the past two years started taking a more liberal view of arbitration and has been less eager to assume control of matters when parties have agreed to exclude the jurisdiction of Indian courts. In the case of BALCO vs. Kaiser Aluminium12 the Supreme Court boldly overruled its long criticised decision in Bhatia International13 and held that Indian Courts have no role to play when the seat of arbitration is outside of India, even if parties or the property in dispute is in India. Furthermore, in World Sport Group vs. MSM Satellite (Singapore) Pte. Ltd.14, the Supreme Court has rejected the contention that an arbitral tribunal is incompetent to deal with allegations of fraud. But since this was a matter relating to an arbitration taking place outside of India, it does not apply to arbitrations held in India, which continue to be governed by the law laid down by the Supreme Court in N. Radhakrishnan’s15 case.

Both these decisions suggest that the Supreme Court has recognised that a strong push is required from the judiciary to correct the gap that exists between the legislative intent and judicial interpretation of Indian arbitration law. It is hoped that the Court continues this trend over the next few years and smoothens out the remaining creases, including the ones highlighted in this Article, by relooking at the law laid down in some of its previous decisions. !

Reinventing India A Youth Perspective

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Abstract
Mumbai, 8th June 2014: “Mumbai Metro: East meets West in 21 minutes flat!”

No, you read it right. It was 8th June 2014 and not 8th June 2004. Why people are so excited over something that they should have had at least 10 years ago, befuddles me! Mumbai generates 5% of India’s GDP, but our infrastructure system is in shambles! Roads are potholed, traffic situation is pathetic, trains, buses are unimaginably overcrowded and people spit, shit and litter anywhere, without a care! We have to bribe through our noses to get our work done and we are still struggling to get decent internet connectivity. Above all, every once in five years we are prepared to get attacked by terrorists. We may be an alpha world city, but it is shameful that we are lagging far, far behind our western counterparts. And what’s true for Mumbai, is truer for India.

At 24, me and my generation have become responsible for the future of our country. We have our sights on the global leadership throne, but we have inherited an onerous, corrupt kingdom. Well, since we are intent on becoming world pioneers, we have set out to reform our own nation first; we are going to cleanse it, bring it up-to-date and then lead it.

We have already taken our first steps towards this goal by bringing to power a government that takes our lofty aspirations seriously and is committed to help us achieve it. Together we shall take India to the heights billions before us have dreamt of! And now to war! A war for upliftment of the poor and the illiterate! A war for saving the dignity of our nation! A war against the mediocrities that have far too long plagued our country!

We shall evolve, leaders.

“Achche Din Aane Wale Hain.”
The entire country is gushing over this one statement of divine prophecy. Mere five words have made the stock markets go tipsy. Some are saying that this is the start of a new era for India! This is all very endearing except for the one single problem that I have: Why aren’t the achche din here already?

Our country makes me mad. The oldest civilization in the world and we are still a developing nation! 5,000 years of history that we are proud of, but a shameful present and a stumbling future! 30 crore Indians are illiterate. That is the entire population of the United States of America! 15 crore are poor. That is more than Japan’s entire population. And by the way, the international poverty line is Rs. 90 per day. Which means that when I sponsor dinner to my friends, I spend more in one hour than what my poor brother earns in a month! It is 2014, and India has not been able feed, clothe and house all her citizens. In a completely unrelated story, India has the 6th highest number of billionaires!

While we are talking about citizens, let us take a few questions from the people of my generation.

“Why do I feel scared of getting out of my house alone at 10 in the night even if I stay in the capital of the largest democracy in the world?” asks a 22 year old Delhi resident, Aditi.

“What is electricity? Is it a toy? I have never seen it!” says 8 year old Shivappa who resides in a small village called Makki in Karnataka.

“Why do I have to pay chai-pani everytime I have to get my file removed in the Income Tax Office?” asks 20 year old Rajesh, a budding CA hailing from Patna.

All these questions, my predecessors have left unanswered! And now it is upto me to answer them.

At 24, I have come to a stark realisation that the future of our country has fallen squarely on my and my generation’s shoulders. And we have inherited an outdated, bureaucratic and debauched state from our predecessors. The present government, like each of its forerunners, has promised the sky; but then again, has there ever been a dearth of promises in our land? Where the previous one’s have consistently and cumulatively floundered is backing up those promises with tangible efforts.

The onus therefore to make amends rests completely and unequivocally with my generation. It is now our responsibility to ameliorate the past, augment the present and accelerate the future. And thankfully, all is not lost. Our country still retains the proverbial silver lining in the form of educated and motivated young population, large domestic demand base and high savings rate. Fortunately, these are the exact things we could not have worked without.

Global leaders at everything. That’s what we aim to become. Be it trade or sports or education or technology. We want to edify the next Einstein, build the next Burj Khalifa and grubstake the next Google. We want to outdo China at the Olympics and end tiger poaching. We want to be the next startup hub, the next global tourism hub and the next healthcare hub. We want LTE connectivity in each village and a dream job for each citizen. We want be at the top, of the top.

Naysayers shall complain that we are being immature, materialistic and we don’t know what the realities and the difficulties are. No offence sir, but we don’t care. Yes, it is a steep, treacherous road. It is going to be a dogfight and we know it. But we don’t just dare to dream, we dare to live our dreams. Frankly, it is not just our dream. Billions before us had the same vision. But we shall be the torchbearers to an advanced Indian state!

Chris Gardener, the motivational American entrepreneur wrote that “if you don’t take the necessary steps to make them happen, dreams are just mirages that mess with your head!”. We have already taken the first steps towards achieving our dream! Over 2 crore first timers, 18 and 19 year olds, a record participation, voted for the rehabilitation and reform of the Indian economy. We voted for CHANGE. We voted for a government with a track record of fulfilling promises. And believe you me, we require this government to make good on some pretty big promises.

Our first mandate to this government is that they need to very clearly understand that they are a government to my generation. We are an impatient bunch of people. We have an attention span of 140 characters or lesser, so we’d be grateful if you make your point quickly. We are practical and result oriented. We value guidance, but we value quantifiable efforts more; what we don’t value is futile vote bank politics and bureaucratic processes. We are motivated to achieve our goal and we require you to be equitable enablers so that we can partner in making India the global superpower it should be!

To play out your role of being facilitators of growth, progress and development, we have a four point agenda where the government needs to immediately ring in definitive reforms. Special focus needs to be given to rural areas – where most our country’s resources reside.

Infrastructure
While we may live in a modern day society, our infrastructure is severely medieval. How else would it be possible that almost 25% of our population lives without electricty! Why is agriculture still dependent on natural rainfall and animal resources? The infrastructure sector is the backbone of all investments into our country, therefore it is critical that this sector gets the much needed shot in the arm.

Transportation, energy, telecommunication, education and healthcare are amongst the most vital sectors requiring impetus. All the villages have to be connected by a network of roadways, railways and basic amenities like electricity and water. Innovative automation, especially in the agriculture industry, e.g. computer controlled ploughing or schemes like ‘e-Choupal’ which empower the farmers needs to be introduced. The new government has to reduce bureaucracy and usher adequacy, accessability and reliability to strengthen investor confidence.

Education
Education system today, is down in the dumps. It is unequipped, outdated and ridiculously inadequate. Just to give a perspective, children born today shall retire in the year 2080! Is it even distantly possible for us to provide them with the skills to survive and thrive that long? Al- ready today, there is a sharp disconnect between the educated skills and employable skills.
The need of the hour is to reengineer our education curriculum so as to embed employability into courses and forge stronger links between business and academia. Teacher education system has to be rebuilt, grounds up. Partnering with foreign institutions offering specialisation programmes shall upgrade the Indian education system to global standards. It is imperative for the new govern- ment to increase spending on education to 5% of GDP.

CORRUPTION
With the parallel economy running at $ 700 billion per year or 40% of our GDP, corruption is the biggest reason for inequitable wealth distribution in our country. It is literally killing our nation. Unfortunately, the canker doesn’t stop at illicit monetary transactions. Our biggest cause of worry is the corruption of moral and ethical values.

The new government has to put an end to corruption. Immediately. Permanently. Stringent anti-corruption framework and comprehensive education to impart discipline consistent with a national code of conduct for good citizenship shall act as strong deterrents to corruption. Policy makers may implement the Nordic model of governance which practically eradicated corruption in some developed Scandinavian countries. But most of all, Indian citizens need to realise that corruption can only be completely evicted from within, not without.

ECONOMY AND GOVERNANCE
Our economy is dithering due to high levels of inflation, instable currency and the alarming levels of fiscal deficit. The zooming stock markets are nothing but a heightned sense of exuberance, the fundamentals beneath the dizzy heights are yet to improve. Also, with only 3% of the entire population paying taxes, the government has to take some hard calls to increase public revenues, improve economic factors and bring sanity back to the land.

Softer issues like casteism, communal disharmony, gender inequality and rampant crime are still affecting our society Despite living in the 21st century it is deplorable that a woman is raped every 20 minutes in India. We, as a society, are self-conceited megalomaniacs. Freedom of expression is trampled on regularly and intolerance is  an instinct embedded deep within the Indian psyche. It has become necessary now to attack this malaise from  a national platform. Women empowerment has to be a agenda item. Implementation of radical and stringent penal practices has become a necessity. Governance has to be redefined to mean Minimum government, Maximum governance!

HOW CAN CHARTERED ACCOUNTANTS HELP?
While as a member of Young India I am responsible to contribute towards India’s growth and progress, being a qualified chartered accountant makes me doubly account- able to achieve my generation’s goal for India. Our qualification gives us the skills and the access to almost any industry we choose. It charges us with the responsibility of being ombudsmen to our society to ensure enhanced transparency and accountability. But how do we dispose these responsibilities? What measures do we take to en- sure that CAs are at the forefront of all professionals?

Contributing towards rural and semi urban development Growing investment in agriculture, relocation of manufac- turing base to tier II and tier III cities and acceptance of the concept of inclusive growth shall generate consider- able requirement of financial administration, risk manage- ment, tax planning, accountancy, legal advice and better governance in rural and semi urban areas. The time is ripe for CAs to increasingly set up proprietorships and partnership firms here. We can assist the local panchay- ats in areas of governance, taxation and finance planning. One more area of contribution may be compliance to the latest Corporate Social Responsibility provisions, where- by companies shall be able to uplift rural and backtroden areas.

CONTRIBUTING TOWARDS GLOBALISATION
According to a United Nations Conference on Trade and Development (UNCTAD) survey in 2012, India is the second most important foreign direct investment (FDI) destination for transnational corporations after China. Further, the new government’s focus on improving strategic ties with key foreign powers and its determination to simplify the investment process shall propel FDIs in our country.

There is therefore, a burgeoning requirement of CAs in the areas of double taxation avoidance, transfer pricing and corporate laws. IFRS, sustainability reporting, UK Bribery Act and SOX are also becoming a compliance necessity for Indian multinational conglomerates. Specialising in these areas shall help us better align with these requirements and supplement the global India case.

CONTRIBUTING TOWARDS AUTOMATION
Technology is slowly permeating and disrupting every sphere of business. The risk landscape of various sectors like banking, insurance, capital markets, telecommunication, etc. has undergone a paradigm shift with increased dependence on internet and technology. Also, with the proliferation of Enterprise Resource Planning (ERP) solutions, organisations today have lesser control over data integrity, privacy and reliability. There is an urgent need for CAs to enhance their risk management expertise by equipping themselves with skills necessary for identification, assessment and mitigation of IT risks.

CONTRIBUTING TOWARDS CEASING CORRUPTION IN INDIA
Being CAs we are always precariously treading the thin line between tax evasion and tax planning. Similarly, cor- porations today are always trying new ways to ‘improve’ their financial statements. It is imperative therefore, that we ensure real compliance with various provisions of the taxation laws and reporting standards, that we steadfastly uphold our ethical values and moral standards and ensure that we neither allow nor abet any act of malfeasance.

Public and government sector have recently been riddled with scams like 2G and Commonwealth. CAs have to ensure transparency, by making the government accountable towards the country and its citizens for the utilisationof citizens funds through exhaustive public audits.

CONTRIBUTING TO ENTREPRENEURSHIP

Our nation is becoming increasingly entrepreneurial. There has been a huge spurt in the number of startups in the recent years and the trend is going to be an up- swing. With a huge demand for support areas like market research, venture funding, financial modeling or business value chain implementation, CAs have to hone the skills they already have to be at the forefront of this bull wave!

THE NEED TO REINVENT OURSELVES

It is evident that there is a lot of opportunity for us, CAs,to make our mark in India’s next decade of advancement. However, it is now inevitable that we reinvent who we are! Whether in practice or industry, we can no longer solely remain financial stakeholders of companies. We have to become business stakeholders!

It’s going to be an uphill task, history and tradition are against us, but it can be achieved. What we need is a catharsis! A step back to realign our interests with those of our nation. We need to innovate some of the core elements of our present day qualification so as to make it more attuned to the present day scenario. For instance,
•    The current curriculum and the examination pattern needs to be revisited. Inputs should be drawn from industry, practices and international institutes so that the curriculum ensures employability and equips our students to have an equal standing with their global counterparts. Special attention should be awarded to cross functional training since today, MBAs, cost accountants, financial analysts, etc. have started replacing CAs, even in core areas like finance and taxation.

•    Is an audit firm oriented articleship the only option for practical training? Why can’t students gain industrial training for the entirety of their tenure from some of the top companies of India? We need to realize that the students have two diets of careers to choose from, practice firms and industry. It is imperative that a solution is derived for the blinkered audit based training approach.

•    Partnering with foreign institutions has become the need of the hour. With CA students opting for multiple degrees, the institute should ensure that the skills developed by the CA institute are not put to waste. Collaboration, not competition is the way forward. Also, with multiple professional degrees, what matters is that CAs continually update themselves in their area of work and remain relevant. However, it is doubtful whether the present CPE norms ensure continuous education. A bitter pill that needs to be swallowed and worked upon.

•    Most importantly, the ICAI needs to ensure that it remains strongly in control of the central elements of our profession – accountancy, taxation and audit. It needs to retain relevance by producing quality CAs, and work against becoming an exam conducting body generating dignified accountants!

It is imperative therefore, that CAs allineate themselves to the big picture. This nation is now in the hands of a new generation, our generation. Fearless and unafraid, we are the custodians of India’s advanced future. The revolution has already begun. And we will emerge victorious. We shall evolve, leaders!

Achche din are here!

Gazing through the crystal ball

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My Country
Every third person in an Indian city today is a youth. In about seven years, the median individual in India will be 29 years, very likely a city-dweller, making it the youngest country in the world. India is set to experience a dynamic transformation as the population burden of the past turns into a demographic dividend, but the benefits will be tempered with social and spatial inequalities.

The requirements of a younger nation differ radically from aging countries like Japan or even China, for that matter. By 2020, India is set to become the world’s youngest country with 64% of its population in the working age group. A UN HABITAT report states that while income levels in cities may appear to be higher, the cost of living is also constantly increasing, resulting in shrinking savings, inadequate access to health care and lack of quality education.

And so, I believe that our young, growing country demands a progressive, result-oriented transformation-and a nation that can cater to theaspiration and temperament of the young population. India 10 years from now will be more intelligent, more informed, less tolerant of incompetence and regressive practices. I believe that we are growing more aware as a nation.

I believe that a decade from now, we will be a more transparent, and accountable nation-where change and progress will get more apparent. I don’t believe that a radical transformation would be required-but stable, steady and sustainable growth is more desirable and will perhaps, be delivered.

Dr. APJ Abdul Kalam’s book, 2020 – A Vision for the New Millennium, examines in depth the weakness and the strength of India, as a nation, and offers a vision of how India can emerge to be among the world’s first four economic powers by 2020. This is a goal post that we can all agree, is desirable and on everyone’s agenda.

However, I believe that there is another critical component to development in the country. Inclusive growth and a green economy are the government’s guiding principles for its development agenda. Sustainability-economic, environmental and social can provide a balanced approach to the development of the nation.

The UN Environment Programme’s Green Economy Report demonstrates that green economies are a new engine of growth, generate decent jobs and are vital to eliminating persistent poverty.

And so, while I hope for a stable and progressive country in the decade to come, I also hope that our economic social and environmental goals will align with sustainable ideals.

My Profession
As a Sustainability and Green Building Consultant, I am currently part of some of the most topical conversations with regard to environment, renewable energy, energy efficiency, technology etc. Sustainable solutions mean meeting our lifestyle and existential requirements in a manner which is harmonious with the environment and does not jeopardise the future of our existence on this planet.

Sustainability is no longer a buzzword but reflects an indispensability as our survival depends on it. India, aspiring to be an opinion leader and increasingly emerging as one, especially in the aftermath of the recession, needs to be at the vanguard of this movement and lead from the front.
Indians have realised the importance of making their residences compatible with environment, and regulators have also become active. If environmental activists continue to be as vociferous as they are now, I would like to believe that Consulting on Green building will probably have ended-I am going to have to find something else to do! It will be passé, as projects will be designed to be more efficient through inherent design, effective resource consumption and innovative technologies.

I would like to believe that the profession of a sustainability consultants will disintegrate into creating impactful policy level decisions to ensure sustainable growth in the country-regardless of the sector-agriculture, healthcare, real estate etc. I would also like to believe that sustainability consultants can use their experience to think as innovators to solve solutions of environmental degradation- in all fields.

Expectations
Transparency. Responsibility. Accountability. These are the expectations from our government.

We as citizens, understand that we are stakeholders in the issues pertaining to the country’s development and growth. We would like to understand our responsibility and the manner in which progressive policy formulation is done. There needs to be transperancy in this regard.

For this to happen, I believe that governments need to respect and understand the role of sustainability, for growth and superior long term returns. As US President, John F. Kennedy once said, “There are risks and costs to a program of action. But they are far less than the long-range risks of comfortable inaction.”

Organised action toward sustainable growth with measurable outcomes is expected. For example: strategies to manage resources like water, and energy must be measured and regulated in a responsible manner. Corruption with regard to regulation of other natural resources must be stopped. Education at large, and an emphasis on sustainability will allow ups to be equipped for future needs and requirements. Progressive policies on agriculture and even urban farming to mitigate long-term environmental risks and hazards is key. Furthermore, policies that require us to measure, monitor and regulate carbon emissions at large, across all industries and domestic sectors is critical.

The Indian private sector, known for its resilience and entrepreneurship, is ideally placed to lead this movement and the government’s policies in this regard, although not adequate as of now, are at least encouraging and reflect the right intentions. A combination of entrepreneurship and adequate policies has the potential of making India a role model for many to follow and emerge as a true super power, as only a high GDP growth rate is not the sole criterion in today’s scenario to be considered a superpower.

Most importantly, I believe that sustainability needs to be a way of life for it to become a reality. Our present state of excesses and skewed development is against the very grain of sustainable development. It needs to be community driven to not only provide everyone an incentive to be a part of the movement but also ensure equitable distribution of resources. The focus on rural areas is inevitable as two-thirds of the country lives in villages and small towns. They need to be made a part of the movement and made to see the benefits of the same before they are bitten by the ‘so-called development’ bug. The lifestyle and culture of an average person in such areas is conducive to this movement and all these attributes can be dove-tailed to fulfill the needs of Indians in a sustainable manner.

After all, as explained in a quote from Lakota, “We do not inherit the Earth from our ancestors; We borrow it from our children.”

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Imagining India From The Eyes Of Young Professionals

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On 16th May 2014, the Bharatiya Janata Party (BJP)
emerged victorious under the leadership of its prime ministerial
candidate, Mr. Narendra Modi. The BJP won an astounding 282 seats. Not
since 1984, had a single party single-handedly crossed the 272 mark
required to form a central government in Delhi. Moreover, the BJP and
its alliance partners that form the National Democratic Alliance (NDA)
won a grand total of 336 of the 543 seats. This general election to the
Lok Sabha was rightly billed as the biggest election in the history of
the world’s largest democracy and was keenly followed by the entire
world.

On 26th May 2014, Mr. Modi was sworn in as the 15th Prime
Minister of India. The first steps of the new government have been
positive thus far and irrespective of one’s views on Mr. Modi, there is
an undeniable feeling of optimism about the country and excitement for
the good times to come or as goes the BJP’s election campaign song,
“acchhe din aane wale hain”. One of the key reasons for the victory was
the effective use of social media and the strong focus on development
and good governance in its campaign which allowed the party to reach the
youth in a way never done before. The “Abki baar Modi sarkar” as well
as similar messages flooding the social media space in the months
leading to the election were specifically designed to attract the youth.
Not surprising given that almost 65% of the Indian population is below
the age of 35 today, with India having the largest youth population.
This youth-centric campaign that made development a key agenda also
played a crucial role in India registering its highest ever voter
turnout of 66.4%. The mandate was clear: Focus on the youth to shape
India’s future.

Acknowledging the fact that the future of India
is inextricably linked to the future development of India’s youth, the
Bombay Chartered Accountants’ Society has, in the special issue to its
prestigious Bombay Chartered Accountant Journal, chosen the
theme“Imagining India from the eyes of young professionals”.

A
common question in job interviews is: “Where do you see yourself in the
next 10 years?” While most of us have chartered a path of where we want
our careers to be after 10 years, not many of us have thought, “Where do
I see my country in the next 10 years?” Admittedly, I too was one of
them and therefore, thank the Society for giving me this opportunity to
stop thinking from a micro level perspective and start thinking on a
macro level. Coming to the question at hand, I for one, like millions of
my fellow young professionals, am very optimistic.

I am sure
that a decade from now, India will be a super power, economically as
well as intellectually. It is no secret that this country is brimming
with talent. Millions of hard working and supremely talented people
proudly call this country their home. Yes, it has been hit hard by scams
in the recent past and many foreign investors have lost their
confidence in the economy. However, as the perennial optimist Harvey
Dent says in the movie, The Dark Knight, “The night is the darkest just
before dawn!” One can only hope that India has turned the page on one of
the darkest periods in its post-independence period and the dawn is
just around the corner.

It is only a matter of time before the
investor confidence is reposed in the Indian economy with the new
government hinting at steps to do the same by having a clearer tax
system and negating the element of uncertainty in the taxes that the
foreign investors are wary of today. Numerous foreigners awaited with
bated breath, the results of the recently concluded Indian elections as
though their future plans as well as their existing plans to invest in
the country depended upon it. Agreed, that it is not much to go on.
However, this has provided the new government a platform to give a
confidence boost to these potential investors and welcome them with open
arms.

A decade from now, we will see the economy being opened up
and moving towards becoming a free-market economy with minimum
regulation required. With trade flowing across the country, flowing
freely from all over the world, one would also see the strengthening of
economic ties with economies, such as China and Japan, allowing India to
position itself at the top for free trade with some of the largest
global players.

Such free trade would also result in an increase
in employment. The Prime Minister has already stated that inclusive
growth is the goal of the new government. Further, the Food Security
Bill and the Mahatma Gandhi National Rural Employment Guarantee Scheme,
if properly implemented, could drive the way towards eradication of
poverty. Creating employment would result in more disposable income in
the hands of more Indians, leading to an increase in demand for consumer
products. Further, the increase in disposable income in the hands of
the middle class Education reforms especially in rural India can spur
the improvement of the quality of education. It is only with quality
education that one hope to make India an economic power house. The first
67 years of the country’s independence have witnessed a high occurrence
of brain drain, especially in the information technology sector with
the Satya Nadellas and Rajeev Suris heading top corporations of the
world. However, the next decade consisting of free-market and a booming
economy would witness a reversal of the brain drain, where Indians
working abroad would return to India for better professional
opportunities and to serve their country. This phenomena has already
started with various foreign companies setting up businesses in India
and asking Indian employees already working abroad to return and work
from these Indian subsidiaries and branches in the initial stage.
Subsequently, one would witness many start ups beginning their journey
in the country and soon we would have our very own Silicon Valley. This
would be supported by the advancement of infrastructure and technology
in the country.

A recent tweet from the Prime Minister has
suggested that infrastructure does not only mean highways but also optic
fiber networks or ‘information highways’. A recent study shows that
India is currently 3rd in the world in terms of number of users of
internet! It is only a matter of time that it would have the highest
number of users in the world.

In terms of infrastructure, one
would also witness the improvement in the infrastructure in the country
in the coming decade with the Golden Quadrilateral (highway network of
roads) and the railways connecting every corner of the country.

In
respect of the chartered accountancy profession, I am of the firm
belief that we are in for exciting times ahead during the next decade.
With the three main laws, relating to the Companies Act, the Income Tax
Act and the Goods and Service Tax, undergoing an overhaul, it is back to
the drawing board for most of us in the profession.

Firstly, the
next decade would see chartered accountants moving away from the
traditional areas of practice such as audit and tax and towards
unexplored territory such as investment advisory, valuations, mergers
and acquisition advisory, transfer pricing, corporate law advisory,
securities law advisory, foreign exchange law advisory, management
consultancy etc. This in turn would lead to more opportunities being
available especially in unchartered areas. Further, with laws undergoing
major changes, clients would look up to the chartered accountants to
guide them for compliance with these new laws. One would therefore, see a
shift of focus from the attestation function to an advisory function.

Further, the Companies Act requires appointment of independent directors in case of certain companies. Who better than chartered accountants to be appointed as independent directors. It is common knowledge that a chartered accountant knows the business of his client, right from the efficiency in operations, accounting, finance and taxation aspects.

The free-market approach of the government leading to the increase in inbound investments would lead to an in- crease in the demand for chartered accountants as the foreign investors would not have knowledge of the laws applicable in India.

Secondly, the next decade would also see the rise in super-specialisation in the case of chartered accountants. The free-flowing trade and investment in India resulting in increase in the demand for chartered accountants would lead to higher occurrences of complex transactions and would require an expert in the field to understand such transactions. This would lead to chartered accountants specialising in certain fields thereby creating a niche. A ‘jack of all trades but king of none’ chartered accountant may not be able to survive in a highly competitive environment and therefore, eventually everyone will move towards super-specialisation. Super-specialisation would also lead to a higher bargaining power for the purposes of fees.

At the same time, many clients would prefer going to a one-stop shop i.e., a CA firm which would provide all the services that would be required by the client. This would lead to multiple chartered accountants or firms providing services in different niche areas merging or combining into one and working together and therefore providing various super-specialised services under one umbrella.

Thirdly, another major area where the chartered accountants will flourish in the next decade would be in assistance in policy making. This election has made one realise that there are many chartered accountants who have an interest in playing an active role in society. Chartered accountants would play an active role in the policy making of the government and would be instrumental in guiding the government on various economic as well as social aspects of governance.

The government is expected to give weightage to the suggestions and recommendations of the chartered accountant community as more often than not, a chartered accountant knows the ground reality about the implementation of the law , and therefore the best judge in formation of various economic policies.

Fourthly, another change in the profession in the next decade would be the realisation of the importance of communication and presentation skills. This would help the members of the profession to position themselves better in the market.

Finally, with the advancement of technology, borders between countries are slowly fading and the world is becoming one large global village. This has also resulted in the work moving towards a virtual world with diminishing requirement for a personal interaction. A chartered accountant of the future would have a far greater reach in terms of providing services due to this advancement of technology and would enable growth.

Only time will tell whether the India that I have imagined and the state of the profession that I have dreamt about will become a reality. However, one does feel extremely optimistic about these exciting and game-changing days ahead and a chartered accountant of the future would most certainly have a big role to play in society.

About our young authors of the special issue

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Sameer Pandit
Advocate
A law graduate from the National Law School of India University Bangalore, he completed his Masters at Harvard in 2011. He worked with an international law firm, Clifford Chance, at their London and Singapore offices and he is currently serving as a Senior associate with Wadia & Ghandy Solicitors. His area of specialisation is dispute resolution.

CA. Mahesh Nayak
Qualified as a Chartered accountant in 2011 and is currently with Contractor Nayak & Kishnadwala. He specialises in advisory services in the areas of FEMAand international tax.

CA. Pranav Vaidya
A chartered accountant with an advanced diploma in management accountancy as an additional qualification. He is currently with the Essar group as manager group assurance and cost control. Reviewed large capital investments made by the Essar Group into diversified sectors like Steel, Power, Oil, Shipping, Projects. His main areas of focus are project conceptualisation, planning execution, project management and post completion project appraisal.

Ms. Nazneen Ichhaporia
Advocate
A partner in ANB Legal, a prominent law firm, Nazneen is a corporate commercial lawyer with a focus on private equity and venture capital investments, acquisitions, joint ventures and business restructuring. She has expertise in matters relating to cross border investments, infrastructure, project finance, external commercial borrowings, franchising and intellectual property rights.

Ms. Priya Vakil
Architect
She is the managing and founding partner Ed en. She has done a specialisation in sustainable environmental design from the Architectural Association in London, UK. She has worked on creating innovative services related to green building certification, energy audits and design services related to the environment – like façade and landscape design. She is the winner of the exemplary performance award from Griha at the National Conference on Green Design.

Dr. Parth Mehta
A student with a bright academic career, he passed matriculation with flying colours. Extremely passionate about his career in the medical field. He qualified as a doctor in 2014. During this period, he was the recipient of the JRD Tata foundation scholarship. Currently, he is undergoing internship at Sion Hospital.

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A. P. (DIR Series) Circular No. 145 dated 18th June, 2014

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Notification No. FEMA.307/2014-RB dated 26th May, 2014
Annual Return on Foreign Liabilities and Assets Reporting by Indian Companies – Revised format

This circular states that RBI has amended the FLA Return. The new return and FAQ for filling up the same have been uploaded on the RBI website – www.rbi.org.in.

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A. P. (DIR Series) Circular No. 144 dated 16th June, 2014

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Know Your Customer (KYC) norms/Anti-Money Laundering (AML) standards/Combating the Financing of Terrorism (CFT)/Obligation of Authorised Persons under Prevention of Money Laundering Act (PMLA), 2002 – Amendment to section 13(2) – Cross Border Inward Remittance under Money Transfer Service Scheme

This circular requires Authorised Persons, who are Indian Agents under MTSS, to nominate a Director on their Board as “designated Director” to ensure compliance with the obligations under the Prevention of Money Laundering (Amendment) Act, 2012.

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A. P. (DIR Series) Circular No. 142 dated June 12, 2014

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Notification No.FEMA.295/2014-RB dated 24th February, 2014

Transfer of assets of Liaison Office (LO)/Branch Office (BO)/Project Office (PO) of a foreign entity either to its Wholly Owned Subsidiary (WOS)/Joint Venture (JV)/Others in India–Delegation of powers to AD Banks

Presently, banks can, subject to submission of prescribed closure documents, allow closure of the accounts of LO/ BO and repatriate the surplus balances.

This circular now permits banks to allow transfer of assets of LO/BO/PO, subject to compliance with the following stipulations by the concerned LO/BO/PO: –

1. T he LO/BO must have complied with the operational guidelines such as (i) submission of AAC (up to the current financial year) at regular annual intervals with copies endorsed to DGIT (International Taxation), (ii) obtained PAN from IT Authorities and (iii) got registered with ROC under Companies Act 1956. The PO must have complied with the guidelines regarding initial reporting requirements and submission of CA certified annual report indicating project status.

2. They must submit a certificate from their Statutory Auditors furnishing details of assets to be transferred indicating their date of acquisition, original price, depreciation till date, present book value or WDV value and sale consideration to be obtained. The Statutory Auditor must also confirm that the assets were not re-valued after their initial acquisition. The sale consideration must not be more than the book value in each case.

3. T he assets must have been acquired by the LO/BO/ PO from inward remittances and no intangible assets such as goodwill, pre-operative expenses must be included. Also, no revenue expenses must be capitalized and transferred to JV/WOS.

4. A ll applicable taxes must have been paid before the transfer of assets.

5. T ransfer of assets is permitted only when the foreign entity intends to close their LO/BO/PO operations in India.

6. A mounts received as a result of such transfer of assets can be credited to the bank account of the LO/ BO/PO as a permissible credit.

Banks have to submit the documents for scrutiny by their own auditors and RBI auditors. A. P. (DIR Series) Circular No. 143 dated 16th June, 2014Know Your Customer (KYC) norms/Anti-Money Laundering (AML) standards/Combating the Financing of Terrorism (CFT)/Obligation of Authorised Persons under Prevention of Money Laundering Act (PMLA), 2002 – Amendment to section 13(2) – Money Changing Activities

This circular requires Authorised Persons to nominate a Director on their Board as “designated Director” to ensure compliance with the obligations under the Prevention of Money Laundering (Amendment) Act, 2012.

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A. P. (DIR Series) Circular No. 141 dated 6th June, 2014

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Notification No. FEMA. 305/2014-RB dated 22nd May, 2014 Pledge of shares for business purposes in favour of NBFCs

Presently, a non-resident can pledge shares held by him in and Indian Company in favour of a bank in India to secure the credit facilities being extended to the Indian Company for bonafide business purposes.

This circular permits banks to allow pledge of equity shares of an Indian Company held by non-resident investor/s in favour of a NBFC – whether listed or not, to secure the credit facilities extended to the Indian Company for bonafide business purposes/operations, subject to compliance with the conditions indicated below: –

(a) Only the equity shares listed on a recognized stock exchange/s in India can be pledged in favour of the NBFC.
(b) In case of invocation of pledge, transfer of shares must be in accordance with the credit concentration norm.
(c) (i) Bank can obtain a board resolution ‘ex ante’, passed by the Board of Directors of the Indian Company, that the loan proceeds received consequent to pledge of shares will be utilised by it for the declared purpose. (ii) Bank can also obtain a certificate ‘ex post’, from the statutory auditor of Indian Company, that the loan proceeds received consequent to pledge of shares, have been utilised by the investee company for the declared purpose.
(d) Indian company has to follow the relevant SEBI disclosure norms, as applicable.
(e) Credit concentration norms cannot be breached by the NBFC under any circumstances. If there is a breach on invocation of pledge, the shares must be sold and the breach must be rectified within a period of 30 days from the date of invocation of pledge.

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A. P. (DIR Series) Circular No. 140 dated 6th June, 2014

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Notification No. FEMA. 304/2014-RB dated 22nd May, 2014

Foreign investment in India – participation by registered FPIs, SEBI registered long term investors and NRIs in non-convertible/redeemable preference shares or debentures of Indian companies

Presently, FII/FPI, QFI and long term investors registered with SEBI can invest in corporate debt up to $ 51 billion. Also, an Indian company can issue non-convertible/redeemable preference shares or debentures to non-resident shareholders, including the depositories that act as trustees for the ADR/GDR holders by way of distribution as bonus from its general reserves under a Scheme of Arrangement approved by a Court in India.

This circular permits: –

– FII, QFI, FPI and long term investors registered with SEBI – Sovereign Wealth Funds (SWFs), Multilateral Agencies, Pension/Insurance/Endowment Funds, foreign Central Banks to invest on repatriation basis; and

– NR I to invest both on repatriation and non-repatriation basis in non-convertible/redeemable preference shares or debentures issued by an Indian company in terms of A.P. (DIR Series) Circular No. 84 dated 6th January, 2014 and listed on recognised stock exchanges in India, within the overall limit of $ 51 billion earmarked for corporate debt.

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A. P. (DIR Series) Circular No. 139 dated 5th June, 2014 Press Note No.2 (2014 Series) issued by the DIPP dated 4th February, 2014

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Notification No. FEMA. 301/2014-RB dated 4th April, 2014

Foreign investment in the Insurance Sector – Amendment to the Foreign Direct Investment Scheme This circular states that in terms of and subject to the conditions mentioned in Press Note 2 (2014 Series) FII / FPI and NRI can invest within the overall limit of 26% permitted for FDI in Insurance sector under the Automatic Route.

The amended paragraph 6.2.17.7 of FDI policy is as under: – Paragraph 6.2.17.7 of the ‘Consolidated FD1 Policy, effective from 5th April, 2013’, is replaced by the following:

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Assessment: Company: Amalgamation w.e.f. 01/04/2009: A. Y. 2010-11: Notice dated 20/06/2012 u/s. 142 to amalgamating (transferor) for assessment of the company for A. Y. 2010-11 is not valid:

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Khurana Engineering Ltd. vs. Dy. CIT; 364 ITR 600 (Guj):

Under
a scheme of amalgamation, the transferor company was amalgamated with
the assessee company w.e.f. 01-04-2009. On 20-06-2012, the Assessing
Officer issued notice u/s. 142 of the Income-tax Act, 1961 to the
amalgamating (transferor) company for assessment of the company for the
A. Y. 2010-11.

The Gujarat High Court allowed the writ petition
filed by the assessee-amalgamated company challenging the said notice
and held as under:

“i) A s per the order of the High Court
allowing the scheme of amalgamation, the appointed date for amalgamation
is 01-04-2009. The transferor company would no longer be amenable to
assessment proceedings for the A. Y. 2010-11.

ii) T he notice for producing documents for such assessment would, therefore, be invalid. Impugned notice is quashed.”

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2014-TIOL-630-ITAT-DEL Jcdecaux Advertising India Pvt. Ltd. vs. DCIT A. Y. : 2007-08. Date of Order: 08-09-2014

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Ss. 3, 4 – The business of selling ad space on bus queue shelters is set up on entering into a contract with a municipal body. Once the business is set up revenue expenditure incurred becomes eligible for deduction.

Facts:
The assessee company was incorporated to carry on the business of advertising on bus shelters, public utilities, parking lots, bill boards, etc. The assessee was awarded its first contract by New Delhi Municipal Corporation (NDMC) in March 2006 for construction of 197 Bus Queue Shelters (BQS) on Build-Operate-Transfer (BOT) basis. Under this contract, the assessee was required to undertake preliminary investigations, study, design, finance, construct, operate and maintain BQS’s at its own cost. In consideration, the assessee was allowed to commercially exploit the space allotted in these BQS’s by means of display of advertisement for a period of 15 years. During the said period of 15 years the title and other rights in BQSs were to vest in NDMC.

During the previous year the assessee claimed a deduction of Rs. 18,36,62,145 incurred in discharge of its obligations under NDMC contract. The assessee also claimed deduction of Rs. 3,17,91,180. The AO disallowed Rs. 18,36,62,145 on the ground that it is capital expenditure and sum of Rs. 3,17,91,180 was admitted by the AO to be revenue in nature but was not allowed since according to the AO the business would commence only when the BQSs would be ready to provide space for advertisement to the assessee.

Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld the action of the AO by observing that the business was not set up and therefore the revenue expenditure is also not deductible.

Aggrieved, the assessee preferred an appeal to the Tribunal where it did not press its ground for allowability of capital expenditure.

Held
The Tribunal noted that during the previous year the assessee formally signed a contract with NDMC on 08-03- 2006. On 30-03-2006, the assessee entered into manufacturing agreement with a supplier for manufacture and installation of BQSs and also made advance payment. It also arranged for credit facility and obtained overdraft limit as well as term loan. A security deposit was also placed with NDMC under the contract.

The Tribunal noted that the case made out by the lower authorities was that the business would commence only when the BQSs are ready for providing the space to the assessee for advertisement, being the source of its income. This, according to the Tribunal, was fallacious understanding of the concept of setting up of business. It held that the business of a building contractor is set up on his having all the necessary tools and equipments ready to take up the construction activity. Only when he gets construction contract and takes the first step in the direction of doing the construction activity, he commences his business. It cannot be said that the business of the contractor has not been set up till the construction work, undertaken pursuant to the contractor, goes on.

The assessee’s business was set up when it was prepared for undertaking the activity of building BQSs on receipt of contract from NDMC. It cannot be related to the completion of construction of BQSs. As the setting up of the business was over in the previous year, at the maximum, on entering into manufacturing agreement for manufacture and on installation of BQSs on 30-03-2006 not only the business was set up but had also commenced. Section 3 read with section 4 refers to the starting of the previous year from the date of setting up of a new business.

The expenditure of Rs. 3.17 crore had been disallowed since it was held to be incurred before commencement of the business and hence was in the nature of pre-operative expenses. Upon setting up of the business, all revenue expenses become eligible for deduction. The Tribunal held that the sum of Rs. 3.17 crore was allowable as deduction.

This ground of appeal of the assessee was allowed.

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2014-TIOL-656-ITAT-MUM ACIT vs. Gagandeep Infrastructure Pvt. Ltd. A. Y. : 2008-09. Date of Order: 23-04-2014

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Section 68 – Share premium is a capital receipt and
not income in ordinary sense. Even if it is held that excess premium is
charged, it does not become income as it is a capital receipt. In case
of share capital, if identity is proved, no addition can be made u/s.
68.

Facts:
During the previous year, the assessee
company issued equity shares of face value of Rs. 10 each at a premium
of Rs. 190 per share. The face value of shares issued was Rs. 81,25,000
and the amount received as share premium was Rs. 6,69,75,000. The book
value of the shares at the time of issue of fresh capital was Rs. 10.
The AO asked the assessee to furnish the supporting details of
subscribers and to justify the share premium charged.

The
assessee stated that the premium was charged based on future prospects
of the assessee company. From the submissions made, the AO noticed that
the applicants were all group companies operating from the same address
where the assessee was operating its business. The share application
forms were all signed by the same person. The persons from whom premium
were charged were newly established companies and their source of funds
was from share capital. The funds raised by the assessee company were
invested in shares of M/s .Omni Infrastructure Pvt. Ltd., which was also
a group company. These shares were subscribed at a premium of Rs.
12,490 per share. The AO made an addition of Rs. 7,53,00,000 u/s. 68 of
the Act.

Aggrieved, the assessee preferred an appeal to the
CIT(A) who observed that the AO has not given any reason as to why the
investment with a premium is not genuine when the assessee has produced
all the details of investors in the form of share application form, bank
account details, copies of return of income and balance sheet. He
allowed this ground of appeal.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:
The
Tribunal noted that the assessee had filed all the requisite
details/documents which are required to explain credits in the books of
accounts by the provisions of section 68 of the Act. It stated that the
assessee has successfully established the identity of the company which
has purchased the shares at a premium. The assessee has also filed bank
account details to explain the source of the shareholders and the
genuineness of the transaction was also established by filing copies of
share application forms and Form No.2 filed with the Registrar of
Companies.

No doubt a non-est company or a zero balance sheet
company asking for a premium of Rs. 190 per share defies all commercial
prudence but at the same time it cannot be ignored that it is a fact
that it is a prerogative of the Board of Directors of the company to
decide the premium amount and it is the wisdom of the share holders
whether they want to subscribe to such heavy premium. The Revenue
authorities cannot question the charging of such huge premium without
any bar from any legislated law of the land.

The Tribunal
observed that the amendment to section 56(2) by insertion of clause
(viib) is applicable w.e.f. A.Y. 2013-14. In the year under
consideration, the transaction has to be considered in the light of
provisions of section 68 of the Act. It held that the assesse has
discharged the initial burden of proof. Even if it is held that excess
premium has been charged, it does not become income as it is a capital
receipt. The receipt is not in the revenue field. What is to be probed
by the AO is whether the identity of the assessee is proved or not. In
the case of share capital, if the identity is proved, no addition can be
made u/s. 68 of the Act. The tribunal dismissed this ground of appeal
filed by the revenue.

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[2014] 148 ITD 619 (Delhi) Vineet Sharma vs. CIT (Central)-II, New Delhi. A.Y. 2005-06 and 2006-07 Order dated- 8th November 2013

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S. 264- CIT cannot pass order prejudicial to the assessee u/s. 264, CIT cannot pass order u/s. 263 prejudicial to the assessee, otherwise it would make the prohibition u/s. 264 that the CIT cannot pass the order prejudicial to the assessee nullity.

Facts:
A search u/s. 132 was conducted at the business/residential premises of the assessee and in response to notice u/s. 153A, the assessee filed the return of income disclosing certain taxable income.

The Assessing Officer, having completed his assessment passed a penalty order u/s. 271(1)(c) in respect of substantial part of additional income disclosed by the assessee in the return filed in response to notice u/s. 153A, but not on the entire additional income disclosed by the assessee.

The assessee filed a revision petition u/s. 264 before CIT for quashing the penalty order.

The CIT held the penalty order u/s. 271(1)(c) to be erroneous on the ground that the Assessing Officer had not levied the penalty in respect of the entire additional income offered in the return filed in response to notice u/s. 153A.

Hence, during the pendency of the revision petition u/s. 264 with CIT, the CIT passed an order u/s. 263 setting aside the penalty order and also treated the assessee’s petition u/s. 264 infructuous on the ground that the penalty order had already been set aside during the proceedings u/s. 263.

In the fresh penalty order passed in pursuance of order u/s. 263, the Assessing Officer levied the penalty on the entire additional income disclosed by the assessee in the return filed in response to notice u/s.153A.

Aggrieved, the assessee preferred an appeal before the Tribunal.

Held:
It is evident that u/s. 264, the Commissioner can revise any order passed by any authority subordinate to him on his own motion or on the application made by the assessee and can pass the order as he thinks fit but cannot pass an order prejudicial to the assessee.

The CIT cannot pass an order prejudicial to the assessee u/s. 264, and hence it was held that once the assessee approaches CIT for getting relief u/s. 264, CIT cannot pass order u/s. 263 prejudicial to the assessee, otherwise it would make the prohibition u/s. 264 that the CIT cannot pass the order prejudicial to the assessee nullity.

Even on facts, it was held that the order u/s. 263 cannot be sustained because it is a settled position that penalty u/s. 271(1)(c) is not to be levied on every income. The penalty is to be levied only when the conditions prescribed u/s. 271(1)(c) are satisfied.

When one looks at the language of section 271(1)(c), even in regard to concealed income, the levy of penalty is not automatic because discretion has been given to the Assessing Officer to levy or not to levy the penalty which would be clear from the use of the words ‘may’ in section 271(1)(c).

Moreover, Assessing Officer has also been given discretion to levy the penalty at the rate ranging between 100 % to 300 % of the tax sought to be evaded.

Therefore, if the Assessing Officer levies the penalty u/s. 271(1)(c) on the part of the additional income, it cannot be said that the order of the Assessing Officer is erroneous as well as prejudicial to the interests of the revenue within the meaning of section 263.

In the instant case, the penalty had already been levied on the substantial portion of the additional income. Also in the penalty order, the Assessing Officer had discussed each and every fact as well as legal position in detail and, at the end, he had also mentioned the amount of concealment worked out by him and then calculated penalty thereon.

In such a case, merely because in the opinion of the Commissioner the penalty should have been levied on the entire returned/assessed income, it would not vest the Commissioner with the power of suo motu revision u/s. 263.

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Search and seizure: Block assessment: Block period: S/s. 132A and 158B(a): Period up to which “requisition was made”: Meaning of: Date on which the authorisation u/s. 132A was issued is to be taken and not the dated of execution of the authorisation: Warrant of authorisation u/s. 132A issued on 18-09-2001: Warrant executed and books of account and other documents received on 21-03-2003: The block period will be from 01-04-1995 to 18-09-2001 and not from 01- 04-1996 to 21/03/2003 as taken by the<

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Sanjay Gupta vs. CIT; 366 ITR 18 (Delhi):

The assessee derived income from purchase and sale of properties and from trading of transistor parts. He also worked as an informer for the Directorate of Revenue Intelligence. On 15-06-2001, the CBI conducted a search at the premises of the assessee and seized cash amounting to Rs. 1,12,50,000/-. The Director of Incometax (Investigation) issued a warrant of authorisation u/s. 132A of the Income-tax Act, 1961 on 18-09-2001. The Income Tax Authorities executed the warrant and received the books of account and other documents on 21-03- 2003. The Assessing Officer passed block assessment order u/s. 158BC for the block period from 01-04-1996 to 21-03-2003.

When the dispute reached the High Court in appeal the Delhi High Court held as under:

“i) “Block period” has been defined to mean the period comprising previous years relevant to the six assessment years preceeding the previous year in which search u/s. 132 of the Income-tax Act, 1961, is conducted or requisition u/s. 132A is made. It also includes the part of the previous year till the date when the search u/s. 132 is conducted or such requisition u/s. 132A is made.

ii) Making a requisition would not be the same as receiving the articles that are requisitioned. The expression “a requisition was made” cannot be equated to receiving the articles that were requisitioned. There was no reason to read the expression “requisition was made” not to mean the date on which the authorised officer made the requisition, but to mean the date when he received the records and assets pursuant thereto.

iii) The block period adopted by the Assessing Officer was not in accordance with the provisions of the Act, the assessment made by the Assessing Officer would also be required to be reviewed. Thus, the matter was remanded to the Assessing Officer to assess the income for the block period 01-04-1995 to 18-09-2001.”

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Revision: S/s. 143 and 263: A. Y. 2006-07: ITO had jurisdiction at the time issuing notice u/s. 143(2): Assessment order u/s. 143(3) passed by ITO when jurisdiction was with Dy. Commissioner/ Assistant Commissioner as per Departmental Circular: Assessment order not invalid: Commissioner does not have power to revise such order u/s. 263:

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CIT vs. Kailash Chand Methi: 366 ITR 333 (Raj):

For the A. Y. 2006-07, the assessee had filed the return of income declaring income of Rs. 2,32,969/-. The ITO completed the assessment u/s. 143(3) of the Incometax Act, 1961 making an addition of Rs. 4,50,000/-. The Commissioner initiated proceedings u/s. 263 of the Act, but being satisfied with the submissions of the assessee dropped the proceedings. Subsequently, another Commissioner set aside the order of the ITO holding that the ITO had no jurisdiction to complete the assessment as the income of the subsequent A. Y. 2007-08 was over Rs. 5 lakh and the jurisdiction lay with the Dy. Commissioner/ Asst. Commissioner and not with the ITO . The Tribunal set aside the order of revision.

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

“i) T he Commissioner does not have unfettered or unchequered discretion to revise the order u/s. 263 of the Income-tax Act, 1961. He can do so within the bounds of the law and has to satisfy the need of fairness in action. The Commissioner cannot invoke the powers to correct each and every mistake or error committed by the Assessing Officer. Every loss to the Revenue cannot be treated as prejudicial to the interest of the Revenue.

ii) T he notice u/s. 143(2) was issued on 11-01-2007 by the ITO and at that particular time, the income for the subsequent A. Y. 2007-08 was not submitted, rather the financial year had not ended by then and the ITO assumed valid jurisdiction. The return for the A. Y. 2007-08 was submitted on 31-08-2007, and merely because the assessment order was passed after 31- 08-2007, the assessment order u/s. 143(3) passed by the ITO on 30-09-2008, could not be said to be without jurisdiction. The assessment order passed on 30-09- 2008 was within jurisdiction and validly passed.

iii) M oreover, one Commissioner had issued notice u/s. 263 for the same assessment year and he having been satisfied dropped the proceedings and it was only thereafter that another Commissioner came to the conclusion about the jurisdiction while the earlier Commissioner was also aware of this fact. The order of the Commissioner was at best a result of change of opinion and tantamount to abuse of powers granted to the Commissioner. The practice adopted by the Commissioner is de hors and it amounts to unnecessary harassment to the assessee for no fault of his. Therefore, the order of revision was not valid.

iv) We do not find any infirmity or perversity in the order of the Tribunal. The appeal, being devoid of any merits, is hereby dismissed.”

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Income: Unexplained investment: Section 69: A. Y. 2005-06: Search and seizure: Jewellery found during search: Instruction No. 1916 dated 11-05- 1994: Jewellery within prescribed limits: Addition of value of part of jewellery as undisclosed income: Not justified:

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CIT vs. Satya Narayan Patni; 366 ITR 325 (Raj):

There
was a search action in the case of the Appellant on 30-06-2004,
wherein, besides other items, gold jewellery weighing 2202.464 gms,
valued at Rs. 10,53,520/- was found. Looking to the status of the
assessee and the statement given during the course of search operation
by various family members and considering the fact that there were four
married ladies in the house including the wife of the assessee, no
jewellery was seized. However, jewellery to the extent of 1600 grams,
was treated as reasonable by the Assessing Officer which had been
received by them at the time of their marriage. The balance jewellery
weighing 602.464 gms, was treated as unexplained in the absence of any
satisfactory explanation from the assessee and the value thereof of Rs.
2,88,176/- was added to the income of the assessee as unexplained
investment u/s. 69 of the Income-tax Act, 1961. The CIT(A) and the
Tribunal deleted the addition.

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

“i)
O n a perusal of Instruction No. 1916 dated 11/05/1994 issued by the
CBDT, it is clear that in the case of a wealth-tax assessee, whatever
gold, jewellery and ornaments have been found and declared in the
wealth-tax return, need not be seized. However, subclause (ii)
prescribes that in the case of a person not assessed to wealth-tax, gold
jewellery and ornaments to the extent of 500 gms. per married lady, 250
gms. per unmarried lady and 100 gms per male member of the family need
not be seized. Sub-clause (iii) also prescribes that the authorised
officer may, having regard to the status of the family, and the customs
and practices of the community to which the family belongs and other
circumstances of the case, decide to exclude larger quantity of
jewellery and ornaments from seizure.

ii) A dmittedly looking to
the status of the family and the jewellery found in the possession of
the four ladies, it was held to be reasonable and therefore, the
authorised officer, in the first instance, did not seize the jewellery
as being within the limit or limits prescribed by the Board and the
subsequent addition was not justifiable on the part of the Assessing
Officer and rightly deleted by both the two appellate authorities.

iii)
T he Tribunal has correctly analysed the circular of the Board and we
do not find any infirmity or perversity in the order of the Tribunal.
The appeal, being devoid of any merits, is hereby dismissed.”

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House property income: Annual letting value: Section 23(a): A. Y. 2005-06: For determining annual value of property municipal rateable value may not be binding on Assessing Officer only in cases where he is convinced that interest free security deposit and monthly compensation do not reflect prevailing rate: In such a case, Assessing Officer can himself resort to enquire about prevailing rate in locality: Where a premises is covered by Rent Control Act, Assessing Officer must undertake exercise<

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CIT vs. Tip Top Typography: [2014] 48 taxmann.com 191 (Bom):

In the A. Y. 2005-06, the assessee had let out commercial premises. The assessee had received Rs. 3,60,000/- as rent and Rs. 5,25,00,000/- as interest free security deposits from the tenants. The Assessing Officer noticed that the rent received by the assessee was nominal and the circumstantial evidence indicated that the fair market value was higher. Therefore, he obtained instances of the rental amount prevailing in the market and particularly in the area and confirmed that the property was not covered by the Rent Control Act. On the basis of such comparable instance, the annual letting value u/s. 23(1)(a) was determined at Rs. 85,72,608/- as against Rs. 3,60,000/- shown by the assessee. The Tribunal remitted the matter back to the Assessing Officer and directed him to verify the rateable value fixed by the Municipal authorities and if the same is less than Rs. 3,60,000/-, then the actual rent received should be taxed. In appeal filed by the Revenue, the following questions of law were raised:

“i) Whether on the facts and circumstances of the case and in law, Tribunal was right in holding that the fair rental value specified in section 23(1)(a) is the municipal value or actual rent received whichever is higher and not the annual letting value on the basis of comparable instances as adopted by the Assessing Officer, though the property under consideration was not covered by the Rent Control Act?

ii) Whether on the facts and circumstances of the case and in law, Tribunal was right in remitting the matter back to the file of the Assessing Officer with direction to verify the rateable value fixed by the Municipal Authorities and if the same is less than the actual rent received, then the actual rent received should be taxed?”

The Bombay High Court dismissed the appeal filed by the Revenue and held as under:

“i) T he rateable value, if correctly determined, under the municipal laws can be taken as Annual Letting Value u/s. 23(1)(a) of the Act. To that extent we agree with the contention of the learned Counsel of the assessee. However, we make it clear that rateable value is not binding on the assessing officer. If the assessing officer can show that rateable value under municipal laws does not represent the correct fair rent, then he may determine the same on the basis of material/ evidence placed on record.

ii) We are of the view that where Rent Control Legislation is applicable and as is now urged the trend in the real estate market so also in the commercial field is that considering the difficulties faced in either retrieving back immovable properties in metro cities and towns, so also the time spent in litigation, it is expedient to execute a leave and license agreements. These are usually for fixed periods and renewable. In such cases as well, the conceded position is that the Annual Letting Value will have to be determined on the same basis as noted above.

iii) I n the event and as urged before us, the security deposit collected and refundable interest free and the monthly compensation shows a total mismatch or does not reflect the prevailing rate or the attempt is to deflate or inflate the rent by such methods, then, as held by the Delhi High Court, the Assessing Officer is not prevented from carrying out the necessary investigation and enquiry. He must have cogent and satisfactory material in his possession and which will indicate that the parties have concealed the real position.

iv) H owever, we emphasise that before the Assessing Officer determines the rate by the above exercise or similar permissible process he is bound to disclose the material in his possession to the parties. He must not proceed to rely upon the material in his possession and disbelieve the parties. The satisfaction of the Assessing Officer that the bargain reveals an inflated or deflated rate based on fraud, emergency, relationship and other considerations makes it unreasonable must precede the undertaking of the above exercise. After the above ascertainment is done by the Officer he must, then, comply with the principles of fairness and justice and make the disclosure to the Assessee so as to obtain his view.

v) The following conclusions are drawn:-

a) AL V would be the sum at which the property may be reasonably let out by a willing lessor to a willing lessee uninfluenced by any extraneous circumstances.

b) An inflated or deflated rent based on extraneous consideration may take it out of the bounds of reasonableness.

c) A ctual rent received, in normal circumstances, would be a reliable evidence unless the rent is inflated/ deflated by reason of extraneous consideration.

d) Such ALV, however, cannot exceed the standard rent as per the Rent Control Legislation applicable to the property.

e) If standard rent has not been fixed by the Rent Controller, then it is the duty of the assessing officer to determine the standard rent as per the provisions of rent control enactment.

f) T he standard rent is the upper limit, if the fair rent is less than the standard rent, then it is the fair rent which shall be taken as ALV and not the standard rent.

vi) We do not see as to how we can uphold the submissions of Mr. Chhotaray that the notional rent on the security deposit can be taken into account and consideration for the determination. If the transaction itself does not reflect any of the afore-stated aspects, then, merely because a security deposit which is refundable and interest free has been obtained, the Assessing Officer should not presume that this sum or the interest derived therefrom at Bank rate is the income of the assessee till the determination or conclusion of the transaction.

vii) The Assessing Officer cannot brush aside the rent control legislation, in the event, it is applicable to the premises in question. Then, the Assessing Officer has to undertake the exercise contemplated by the rent control legislation for fixation of standard rent. The attempt by the Assessing Officer to override the rent control legislation and when it balances the rights between the parties has rightly been interfered with in the given case by the Appellate authority. The Assessing Officer either must undertake the exercise to fix the standard rent himself and in terms of the Maharashtra Rent Control Act, 1999 if the same is applicable or leave the parties to have it determined by the Court or Tribunal under that Act. Until, then, he may not be justified in applying any other formula or method and determine the “fair rent” by abiding with the same. If he desires to undertake the determination himself, he will have to go by the Maharashtra Rent Control Act, 1999. Merely because the rent has not been fixed under that Act does not mean that any other determination and contrary thereto can be made by the Assessing Officer.

viii)We are of the opinion that wherever the Assessing Officer has not adhered to the above principles, and his finding and conclusion has been interfered with, by the higher Appellate Authorities, the revenue cannot bring the matter to this Court as no substantial question of law can be arising for determination and consideration of this Court. Then, the findings by the last fact finding Authority, namely the Tribunal and against the revenue shall have to be upheld as they are consistent with the facts and circumstances brought before it. If they are not vitiated by any perversity or error of law apparent on the face of the record, the appeals of the revenue cannot be entertained. They would have to be accordingly dismissed.”

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TS-594-ITAT-2014(Mum) The Bank of Tokyo Mitsubishi UFJ Ltd vs. ADIT A.Y: 2007-09, Dated: 19.09.2014

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• Interest paid by Indian branch (BO) to its foreign head office (HO) is to be allowed as deduction in terms of Article 7(2) and 7(3) of Double Taxation Avoidance Agreement (DTAA ) between India and Japan and such Interest received cannot be taxed in the hands of HO on the principle of mutuality.
• Interest received by BO for deposits placed with HO/other branches is taxable in India.

Facts:
Taxpayer (HO) is a banking company incorporated in Japan. HO was engaged in carrying on banking operations in India under license from Reserve Bank of India, through a branch in India (BO), which constituted Permanent establishment (PE) for HO in India.

During the relevant financial year
• HO received interest from its BO in India
• BO received interest from HO and other overseas branches of HO for the funds of BO lying with HO and other foreign branches.

In computation of income of BO, being the PE,
• Deduction was claimed for interest payments made by BO to HO.
• Interest received by BO was not offered to tax on the basis of principle of mutuality.

Tax Authority disallowed interest payments made by BO on the grounds that the BO failed to withhold taxes on interest payments made to HO and also taxed the interest income of HO in India. Additionally, interest received by BO was also taxed on the basis that the same was attributable to the PE in India.

Held:
On interest paid to HO by BO:
As per Article 7(2) and 7(3) of DTAA between India and Japan, the interest paid by BO (being the PE) to HO is to be allowed as deduction in computation of profits of the BO as BO and HO are to be treated as a distinct and separate enterprise. However, interest received by HO from the branch cannot be taxed in the hands of HO on the ground of mutuality as held by Special Bench in the case of Sumitomo Corporation (147 TTJ 649)(Mum).

On interest received by BO from HO:
Under the Act, specific deeming provision u/s. 9(1)(v) will override the concept of mutuality and hence interest income of BO would be taxable in India. As a result interest earned by Indian branch is taxable in India.

Under the DTAA, no exemption has been provided for taxation of interest income of BO. Once the interest received by BO is deemed to be income of BO and there is no bar in the DTAA on its taxability then it cannot be excluded from computation of income earned by virtue of Article 7. Thus interest accrued or received by BO on funds lying with HO and other foreign branches should be taxable in India.

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51 taxmann.com 1 (Mumbai) Johnson & Johnson Ltd. vs. Addl. CIT SA No. 288 /Mum/2014 Assessment Year: 2009-10. Date of Order: 31.10.2014

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If the Tribunal has granted stay, even if there is consent of the assessee, the Officer should not collect the amount stayed.

Facts:
By
this stay application the assessee sought stay of collection of
outstanding demand of Rs. 43,24,08,871. The AO after reference to
determine transfer pricing adjustments u/s. 92C of the Act passed an
order determining the income of the assessee at Rs. 353.30 crore and
raised an additional demand of Rs. 116.27 crore. The Tribunal while
dealing with stay application dated 19.2.2014 noticed that most of the
issues stated before the Tribunal have been decided in favor of the
assessee in the orders passed by the Tribunal in assessee’s own cases
for earlier years and therefore it granted stay and directed the AO not
to make any adjustment except for the amount of Rs. 7.50 crore.

The
AO, despite the specific direction by the Bench, obtained consent
letter from the assessee and collected Rs. 16.64 crore during the
subsistence of the stay order. The amount outstanding had been reduced
to Rs. 43.24 crore.

Since the DR sought adjournment from time to time, the assessee filed a fresh stay application for extension of stay.

Held:
In
the proceedings for hearing the second stay application the Tribunal
noticed that the AO followed an innovative method of collection of taxes
despite specific directions of the Bench. The Tribunal clarified that
neither the assessee nor the Revenue has the right to flout the decision
of the Tribunal and being an officer functioning under the Government
of India it is his obligation to follow the directions of the superior
authority and even if there is consent he should not have collected the
amount.

The Tribunal having noticed that in few other cases also
similar consent letters were obtained and tax collected despite the
stay order being passed by the Tribunal, the Bench deplored this
practice and directed the Chief Commissioner of Income-tax to issue a
letter to all concerned officers not to adopt this kind of approach of
obtaining consent letters and to respect the order passed by the
Tribunal as otherwise the Tribunal would be constrained to view the
conduct of the Department adversely.

The Tribunal extended the
stay for a further period of six months and also directed the AO to
refund the amount collected, contrary to the order passed by ITAT in
S.A. No. 50/Mum/2014, along with interest within 15 days and to furnish
the proof of having refunded the amount before the Bench.

The stay application filed by the assessee was allowed.

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49 taxmann.com 578 (Cochin) Three Star Granites (P.) Ltd. vs. ACIT ITA No. 11/Cochin/2011 Assessment Years: 2007-08. Date of Order: 25.4.2014

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Section 40(a)(ia) – No disallowance can be made u/s 40(a)(ia) in cases of short deduction of tax at source.

Facts :
In respect of certain payments made by the assessee to resident contractors the Tribunal vide its order dated 29th March, 2012 decided that the assessee was liable to deduct tax at source u/s. 194I and not u/s. 194C as was the contention of the assessee. Aggrieved by this order of the Tribunal, the assessee carried the matter, by way of an appeal u/s. 260A, to the High Court. The High Court vide its order dated 26th November, 2013 held that the assessee was liable to deduct tax at source u/s. 194I and not u/s. 194C. For the limited purposes of applicability of section 40(a)(ia) of the Act in respect of short deduction of tax, i.e., deduction of tax at 2.06 % instead of 10 % u/s. 194-I of the Act, the High Court restored the matter to the file of the Tribunal.

Held:
The Tribunal noted that the issue of disallowance in respect of short deduction of of tax at source has been considered by the co-ordinate Bench in the case of Apollo Tyres Ltd. vs. Dy. CIT [2013] 60 SOT 1 (Cochin). Having considered the provisions of section 40(a)(ia) and also the provisions of section 201(1A), the Tribunal held that section 40(a)(ia) does not envisage a situation where there was short deduction/lesser deduction as in case of section 201(1A) of the Act. There is an obvious omission to include short deduction/lesser deduction in section 40(a) (ia) of the Act. Therefore, the entire expenditure whose genuineness was not doubted by the Assessing Officer, cannot be disallowed. The Tribunal set aside the orders of lower authorities and deleted the entire disallowance.

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A. P. (DIR Series) Circular No. 138 dated 3rd June, 2014

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Liberalised Remittance Scheme (LR S) for resident individuals-Increase in the limit from $ 75,000 to $ 125,000

Presently, under the LRS an individual resident in India can remit up to $ 75,000 or its equivalent per financial year for any permitted current or capital account transaction or a combination of both.

This circular has increased the said limit from $ 75,000 per financial year to $ 125,000 per financial year. As a result, an individual resident in India can remit up to $ 125,000 or its equivalent per financial year for any permitted current or capital account transaction or a combination of both. However, remittance under the scheme cannot be made for any prohibited or illegal activities such as margin trading, lottery, etc.

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A. P. (DIR Series) Circular No. 136 dated 28th May, 2014

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Notification No. FEMA 10A/2014-RB dated 21st March, 2014

Crystallisation of Inoperative Foreign Currency Deposits

Notification No. 10A and this circular require banks to crystallize and convert credit balances in any inoperative foreign currency denominated deposit into Indian Rupee as under: –

1. In case a foreign currency denominated deposit with a fixed maturity date remains inoperative for a period of three years from the date of its maturity, than at the end of the 3rd year, the bank has to convert the balances lying in the foreign currency denominated deposit into Indian Rupee at the exchange rate prevailing as on that date. Thereafter, the depositor will be entitled to claim either the said Indian Rupee proceeds and interest thereon, if any, or the foreign currency equivalent (calculated at the rate prevalent as on the date of payment) of the Indian Rupee proceeds of the original deposit and interest, if any, on such Indian Rupee proceeds.

2. In case of foreign currency denominated deposit with no fixed maturity period, if the deposit remains inoperative for a period of three years (debit of bank charges not to be reckoned as operation), the bank must, after giving three months’ notice to the depositor at his last known address as available with the bank, convert the deposit from the foreign currency in which it is denominated to Indian Rupee at the end of the notice period at the prevailing exchange rate. Thereafter, the depositor will be entitled to claim either the said Indian Rupee proceeds and interest thereon, if any, or the foreign currency equivalent (calculated at the rate prevalent as on the date of payment) of the Indian Rupee proceeds of the original deposit and interest, if any, on such Indian Rupee proceeds.

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A. P. (DIR Series) Circular No. 135 dated 21st May, 2014

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Risk Management and Inter Bank Dealings

Presently, resident importers can book contracts to hedge the currency risk of their probable exposures, based on past performance, for an amount which is higher of the following: –
a) U p to 25% of the average of the previous three financial years’ import turnover; or
b) Previous year’s actual import turnover.

This circular has increase the limit of 25% to 50%. As a result, resident importers can book contracts to hedge the currency risk of their probable exposures, based on past performance, for an amount which is higher of the following: –
a) U p to 50% of the average of the previous three financial years’ import turnover; or
b) Previous year’s actual import turnover.

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A. P. (DIR Series) Circular No. 133 dated 21st May1, 2014

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Import of Gold by Nominated Banks/Agencies/ Entities

This circular permits with immediate effect: –
A. Star Trading Houses/Premier Trading Houses (STH/ PTH) that are registered as nominated agencies by the Director General of Foreign Trade (DGFT) to import gold under 20:80 scheme. The conditions are: –
i) STH/PTH must have imported gold prior to the introduction of the 20:80 scheme. STH/PTH have to get this import verified by the Department of Customs at any port where they have imported gold consignment in the past.
ii) The first lot of gold under this scheme will be based on the highest monthly import during any of the last 24 months prior to the RBI’s notification dated 14th August, 2013, subject to a maximum of 2,000 kgs.
iii) STH/PTH can import the eligible quantity from any port.
iv) ATH /PTH must submit the import plan, port-wise and quantity-wise, to the concerned Customs office, where the verification of the figures of past performance was done.
v) STH/PTH importers will have to comply with the overall discipline of exporting 20% of each imported consignment before the next consignment is imported.

B. N ominated banks to give Gold Metal Loans (GML) to domestic jewellery manufacturers from the eligible domestic import quota of 80% to the extent of GML outstanding in their books as on 31st March, 2013.

Annexed to this circular is the revised working example of the operations of 20:80 scheme based on the changes announced in this circular.

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A. P. (DIR Series) Circular No. 132 dated 21st May, 2014 Export of Goods – Long Term Export Advances

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Presently, an exporter has to obtain prior permission of RBI for receipt of advance where the export agreement provides for shipment of goods extending beyond the period of one year from the date of receipt of advance payment. Also, banks have been authorised to permit exporters to receive advance payment for export of goods which can take more than one year to manufacture and ship if the ‘export agreement’ provides for the same.

This circular authorises banks to permit exporters who have a minimum of 3 years satisfactory track record to receive long term export advance up to a maximum tenor of 10 years. This advance has to be utilised for execution of long term supply contracts for export of goods and is subject to the following conditions: –

a) Firm irrevocable supply orders should be in place. The contract with the overseas party / buyer must be vetted and it must clearly specify the nature, amount and delivery timelines of products over the years and penalty in case of nonperformance or contract cancellation. Also, product pricing must be in consonance with prevailing international prices.
b) The company should have the capacity, systems and processes in place to ensure that the orders over the duration of the said tenure can actually be executed.
c) The company must not have come under the adverse notice of Enforcement Directorate or any such regulatory agency or must not be caution listed.
d) Such advances must be adjusted through future exports.
e) The rate of interest payable on such advance, if any, must not exceed LlBOR plus 200 basis points.
f) Documents must be routed through one bank only.
g) Bank have to ensure compliance with AML/KYC guidelines and also undertake due diligence of the overseas buyer to ensure that it has good stand-in/soundtrack record.
h) Such export advances must not be used to liquidate Rupee loans, which are classified as NPA as per the RBI asset classification norms.
i) Double financing for working capital for execution of export orders must be avoided.
j) Receipt of advance of $ 100 million or more must be immediately reported to the Trade Division, Foreign Exchange Department, RBI, Central Office, 5th Floor, Amar Building, Mumbai under copy to the concerned Regional Office of RBI as per the format given in Annex – I to this circular.

Banks, if required, can issue bank guarantee (BG)/Stand by Letter of Credit (SBLC) for export performance, subject to the following guidelines:
a) Issuance of BG/SBLC, being a non-funded exposure, must be rigorously evaluated as any other credit proposal and such facility must be extended only for guaranteeing export performance.
b) BG/SBLC must be issued for a term not exceeding two years at a time and further rollover of not more than two years at a time is permitted, and is subject to satisfaction of relative export performance as per the contract.
c) BG/SBLC must cover only the advance on reducing balance basis.
d) BG/SBLC issued from India in favour of overseas buyer cannot be discounted by the overseas branch / subsidiary of bank in India.
e) Banks must duly evaluate and monitor the progress made by the exporter on utilisation of the advance and submit an Annual Progress Report to the Trade Division, Foreign Exchange Department, RBI, Central Office, 5th Floor, Amar Building, Mumbai under copy to the concerned Regional Office of RBI in format given in Annex – II to this circular within a month from the close of each financial year.

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A. P. (DIR Series) Circular No. 131 dated 19th May, 2014Notification No. FEMA.299/2014-RB dated 24th March, 2014

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Overseas Direct Investments – Limited Liability Partnership (LL P) as Indian Party

This circular states that a Limited Liability Partnership (LLP), registered under the Limited Liability Partnership Act, 2008 (6 of 2009), has been notified as an “Indian Party” under Clause (k) of Regulation 2 of Notification No. FEMA.120/RB-2004 dated 7th July, 2004. As a result, with effect from 7th May, 2014, an LLP is permitted to undertake financial commitment to / on behalf of a JV / WOS abroad.

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Postal ballot, e-voting and meetings – Bombay High Court rules on the 2013 Act

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Background and scope of the decision
Barely
have some provisions of the Companies Act, 2013, (“the 2013 Act”) come
into force that one provision has already come under scrutiny of a High
Court (In Re Godrej Industries Limited, dated 8th May, 2014). The
context, and quite possibly the scope and binding nature of the
decision, is in regard to schemes of amalgamation. However, even if one
takes the statements of the Court as observations, they do need
consideration in a wider context.

Some related issues have also
been discussed by the Court. Some aspects have been ruled on, some
issues have been flagged for further information or debate and some
issues would be considered later for ruling.

The issues raised
relate to certain important measures under the law that help wider
shareholder participation in decision making, viz., postal ballot and
e-voting. Postal ballot has been in place for several years now and the
2013 Act has extended its reach and nature. Further, yet another similar
measure suited to the digital age, e-voting, has been mandated with
even wider scope. Indeed, e-voting is now required with immediate effect
and applies to all matters except a specified few. Before we go
further, let us recapitulate what these two concepts are.

Postal Ballot and e-voting
Postal
ballot was introduced by the Companies (Amendment) Act, 2000 through a
new section 192A. The section, along with Rules made pursuant thereto,
provided for voting by post in respect of specified matters. The Company
would send voting papers to shareholders by post. The ballots received
from shareholders would be reviewed by a scrutineer who would report on
the votes. The law mandated that certain specified matters should be
decided only by postal ballot. Further, the Company could also use, at
its option, the postal ballot method for any other matters except
certain specified matters (e.g., approval of accounts, etc.) that could
be approved only at a shareholders’ meeting. For matters approved by
postal ballot, a further shareholders meeting was not required.

The
2013 Act extended this concept further to e-voting. E-voting is
mandatory for listed companies and other companies having at least one
thousand shareholders. In e-voting, the shareholders can exercise their
votes electronically through internet in the prescribed manner. The
advantage was that, like postal ballot, the shareholder need not attend a
shareholders meeting but instead vote through the internet. However, in case of e-voting, unlike postal ballot, the meeting would still have to take place.
Thus, those who have not voted through e-voting could participate and
cast their votes at the meeting. As the law stands, those who have
already cast their votes through e-voting would not in the normal course
participate again at the meeting. Further, since the law provides that
the e-voting ends 3 days prior to the meeting, e-voting at the meeting
was not possible.

The law requires that all matters, except a
specified few, should require facility of e-voting. Since this provision
has come into force immediately, all forthcoming annual general
meetings in 2014 would have to provide for e-voting. Considering that
the court decision being discussed herein mandates certain changes to
the e-voting procedure, it has important and immediate relevance.

Court decision – context and issues
The
matter before the Court was a scheme of amalgamation. Such schemes
require meetings of shareholders/creditors in a manner as directed by
the Court. The counsel for the amalgamating companies prayed to the
court that the resolutions be allowed to be passed by postal ballot
instead of meetings being called for that purpose. Here, it may be added
that while this article focuses on the provisions of the 2013 Act, the
amended Clause 49 of the Listing Agreement providing for corporate
governance requirements also mandates for e-voting. Thus, this decision
will apply to such requirement too.

The Court examined the
concept of postal ballot, e-voting and related issues. In particular,
the Court examined the very concept and purpose of meetings and whether
postal ballot/e-voting that essentially eliminate or substantially
reduce the requirement of holding meetings went against the spirit of
shareholder democracy and participation. These and related issues were
discussed by the Court.

Whether new rules have come into force?
A
transitional issue raised by the Court was whether the new Rules
relating to e-voting etc. have come into force. The Court noted that
while the Rules were signed by the concerned authority and also posted
on the website, the prescribed and time tested procedure of publishing
them in the official gazette was not, as per the information available
to the Court, carried out. Hence, the question was whether the rules
were indeed in force. Since numerous rules were prescribed at the same
time, this concern applies to all.

However, it appears that the
department has duly released the gazetted notifications. Hence, this
issue raised by the Court ought not to remain a cause of concern for
current validity of the provisions.

Whether postal ballot/e-voting has benefits
The
Court explained the nature and purpose of such methods of voting. It
noted that considering the fact that many meetings were held at far off
places and for other reasons, shareholders could not attend, participate
and vote at such meetings. Thus, postal ballot and e-voting would help
shareholders at least participate in the voting. Hence, these methods
were laudable.

Whether postal ballot/e-voting can substitute shareholders’ meetings?
This
is the fundamental issue that the Court raised. It noted that voting by
such methods eliminated substantially the need of shareholders meetings
and interaction essential for shareholder democracy. Postal ballot
totally eliminated even the requirement of such meetings. E-voting would
result in lower shareholder participation since shareholders who have
already voted would not attend. The Court therefore expressed a view
that, firstly, that holding of shareholders’ meetings was a must. In the
matter before it, it had discretion whether or not to allow voting by
postal ballot that would eliminate the need of a meeting. The Court thus
rejected such request.

The Court observed, :-
“We must remember that at the heart of corporate governance lies transparency and a well-established principle of indoor democracy that gives shareholders qualified, yet definite and vital rights in matters relating to the functioning of the company in which they hold equity. Principal among these, to my mind, is not merely a right to vote on any particular item of business, so much as the right to use the vote as an expression of an informed decision. That necessarily means that the shareholder has an inalienable right to ask questions, seek clarifications and receive responses before he decides which way he will vote. It may often happen that a shareholder is undecided on any particular item of business. At a meeting of shareholders, he may, on hearing a fellow shareholder who raises a question, or on hearing an explanation from a director, finally make up his mind. In other cases, he may hold strong views and may desire to convince others of his convictions. This may be in relation to matters that are not immediately obvious to the shareholder merely on receipt of written information or a notice. The right to persuade and the right to be persuaded are, as I see it, of vital importance. In an effort for greater inclusiveness, these rights cannot be altogether defenestrated. To say, therefore, that no meeting is required and that the shareholder must cast his vote only on the basis of the information that has been send to him by post or email seems to me to be completely contrary to the legislative intent and spirit to the express terms of the SEBI circular and amended Listing Agreement’s Clauses 35B and 49.” (emphasis here, and elsewhere in this article, is supplied)

The Court also noted that apart from merely deciding on whether to vote for and against, a meeting could even modify the agenda, if the discussion led to a conclusion that such changes are necessary.

WHETHER e-VOTING SHOULD BE ALLOWED AT THE MEETING ALSO ?
The Court then considered how to combine the advantage of remote voting such as through postal ballot/e-voting and the benefits of discussions at a meeting. The Court stated that e-voting was a good concept. However, it explained the nature and need of shareholder participation and stated that even those who had already cast their votes through e-voting should be allowed to participate in the meeting since they would be able to explain their views on the matters. Considering that they had already voted, the question of their voting again would not arise. The rest of the shareholders who are present at the meeting should be allowed to vote by e-voting. In view of this, the e-voting would have to be extended till the date of the meeting. Thus, the requirement under law to conclude the e-voting three days prior to the meeting would not hold good.It observed:

“Electronic voting is a method by which the votes  cast by a large number of shareholders could be more accurately ascertained. That does not mean that electronic voting cannot be permitted at the meeting itself. A shareholder at a remote location and a shareholder at a meeting will both be required to use the same portal to cast their votes. This necessitates a single integrated electronic system for voting. This is technologically feasible and, indeed, essential. It cannot be that at the meeting that there be no voting or poll, and that electronic votes or postal ballots cast earlier would be determinative. Those who vote by postal ballot or by electronic voting cannot, of course, be permitted to vote again at a meeting. But they also cannot be restrained from attending that meeting. A shareholder may hold strong views. He may vote by postal ballot or electronic means and then attend the meeting to persuade others. Other shareholders may be undecided and may prefer to attend the meeting. Greater inclusiveness demands the provision of greater facilities, not less; and certainly not the apparent giving of one ‘facility’ while taking away a right. There is no reason why members attending a meeting should not be allowed to use a bank of computers to digitally cast their votes just as they might do if they were voting from a remote location.

20.    There is also a question about the determination of electronic votes cast. The rules seem to indicate that electronic voting must stop three days before the meeting. The Chairman of the meeting  is to be given a tally of the electronic votes cast and the decision on any item of business is supposed to have been passed or not passed only on the basis of these electronic votes. Ex-facie, this is an untenable mechanism. If, as I have said, electronic voting is not limited to voting from a remote location but must also include electronic voting at the meeting in addition to postal ballots received, then it is a sum total of all these votes that must be taken into account.

21.    This means that while a meeting must be held, provision must also be made for electronic voting at the meeting by those shareholders who desire it. Every shareholder being given that option of exercising their votes by postal ballot or by electronic voting, the latter being either from a remote location or at the meeting itself.”

Thus, the Court held that in case of e-voting/postal ballot, a meeting must be held and at such meeting, the shareholders who have not voted should be given an opportunity to vote. Further, those who have voted could also be present and participate and persuade others.

WHETHER POSTAL BALLOT WITHOUT MEETINGS SHOULD BE ALLOWED?

The Court questioned the law which said that if a matter is decided by postal ballot, a meeting for considering such matter is not required. The Court felt that this interfered with a fundamental concept of having a meeting of the shareholders to discuss on an issue. It noted that apart from the matters mandatorily required to be decided by postal ballot, except a specified few, all the rest could also be at the option of the company be decided by postal ballot. It stated that this matter required further consideration before an appropriate bench of the Court and concerned parties may be given a hearing to express their views. It observed:

“On  a  prima  facie  view  that  the  elimination   of all shareholder participation at an actual meeting is anathema to some of the most vital of shareholders’ rights, it is strongly recommended that till this issue is fully heard and decided, no authority or any company should insist upon such a postal-ballot-only meeting to the exclusion of an actual meeting. Since this is evidently a matter of some importance, the Company Registrar is directed to make a submission and obtain necessary directions on the administrative side to have the matter placed before an appropriate Bench.”

CONCLUSION
It may be emphasised that the decision arose out of a petition for approval of a Scheme of amalgamation and hence the observations arguably have a limited scope and  context.  In  any  case,  except  for  limited matters, the Court has not given final  decision.  Nevertheless, the decision would need consideration for forthcoming shareholders meetings and e-voting. Further, one would have to note what are the further developments when this matter is finally heard and the larger issue of postal ballot and e-voting is decided.

Part D: Ethics & Governance

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M.J. Akbar Writes:
For BJP, the central message of 2014 has two principle elements: a credible promise to lift India’s economy out of the doldrums of paralysis; and the assurance that t will be an inclusive force that reaches out to all segments of the nation. This is the necessary evolution from popularity to governance. Popularity is possible from negative factors, like rage against an existing establishment; but governance is fashioned by a positive agenda. You are elected by most of the people; you rule for all the people.

Governance now comes with an adjective: stable. Non- BJP fronts have collapsed before construction. And when stand-alone Arvind Kejriwal threatens to send journalists to jail, and denies his remarks despite video evidence, then he has lost composure because he is losing support.

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Part A Orders of the Supreme & CIC

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Sections 2 (f) and 6 of the RTI Act:

Petitioner
filed an application u/s. 6 of the RTI Act before the Administrative
Officer-cum-Assistant State Public Information Officer (respondent no.1)
seeking information to the queries mentioned therein. The said
application was rejected by the PIO. An appeal against the said order
was dismissed by the First Appellate Authority. Second Appeal against
the said order was also dismissed by the Andhra Pradesh State
Information Commission vide order dated 20-11-2007. The petitioner
challenged the said order before the High Court. The Writ Petition had
been dismissed by the High Court on the grounds that the information
sought by the petitioner cannot be asked for under the RT I Act. Thus,
the application was not maintainable. More so, the judicial officers are
protected by the Judicial Officers’ Protection Act, 1850 (hereinafter
called the “Act 1850”). Hence, this petition.

Mr. V. Kanagaraj
learned Senior Counsel appearing for the petitioner has submitted that
right to information is a fundamental right of every citizen. The RT I
Act does not provide for any special protection to udges. The petitioner
has the right to know the reasons as to how Respondent no. 4 (the
Appellate Court) has decided his appeal in a particular manner.
Therefore, the application filed by the petitioner was maintainable.
Rejection of the application by Respondent no. 1 and Appellate
Authorities rendered the petitioner remediless. Petitioner vide
application dated 15-11-2006 had asked as under what circumstances
Respondent no. 4 ignored the written arguments and additional written
arguments, as the ignorance of the same was tantamount to judicial
dishonesty.

It was noted that the petitioner has not challenged
the order passed by Respondent no. 4. Instead, he had filed the
application u/s. 6 of RT I Act to know why and for what reasons
Respondent no. 4 had come to a particular conclusion which was against
the petitioner. The nature of the questions posed in the application
were to the effect why and for what reason Respondent no. 4 omitted to
examine certain documents and why he came to such a conclusion.

The
definition of ‘information’ u/s. 2(f) of the RTI Act shows that an
applicant u/s. 6 of the RT I Act can get any information which is
already in existence and accessible to the public authority under law.
Of course, under the RT I Act an applicant is entitled to get a copy of
the opinions, advices, circulars, orders etc., but he cannot ask for any
information as to why such opinions, advices, circulars, orders etc.
have been passed especially in matters pertaining to judicial decisions.
A judge speaks through his judgments or orders passed by him. If any
party feels aggrieved by the order/judgment passed by a judge, the
remedy available to such a party is either to challenge the same by way
of appeal or by revision or any other legally permissible mode. No
litigant can be allowed to seek information as to why and for what
reasons the judge had come to a particular decision or conclusion. A
judge is not bound to explain later on for what reasons he had come to
such a conclusion.

Moreover, in the instant case, the petitioner
submitted his application u/s. 6 of the RT I Act before the
Administrative Officer-cum-Assistant State Public Information Officer
seeking information in respect of the questions raised in his
application. However, the Public Information officer is not suppose to
have any material which is not before him; or any information he could
have obtained under the law. Under section 6 of RT I Act, an applicant
is entitled to get only such information which can be accessed by the
“public authority” under any other law for the time being in force. The
answers sought by the petitioner in the application could not have been
with the public authority nor could he have had access to this
information and Respondent no. 4 was not obliged to give any reasons as
to why he had taken such a decision in the matter which was before him. A
judge cannot be expected to give reasons other than those that have
been enumerated in the judgment or order. The application filed by the
petitioner before public authority is per se illegal and unwarranted. A
judicial officer is entitled to get protection and the object of the
same is not to protect malicious or corrupt judges, but to protect the
public from the dangers to which the administration of justice would be
exposed if the concerned judicial officers were subject to inquiry as to
malice, or to litigation with those whom their decisions might offend.
If anything is done contrary to this, it would certainly affect the
independence of the judiciary. A judge should be free to make
independent decisions.

The Supreme Court held that as the
petitioner has misused the provisions of the RT I Act, the High Court
had rightly dismissed the writ petition.

[Khanapuram Gandaiah vs. Administrative Officer & Ors: SLP (civil) No. 34868 of 2009.]

Section 8 (1) (j)
Vide RT I dated 17-05-2012 the appellant had sought information on 7 points.

PIO vide letter dated 12-06-2012 denied information stating that the same is exempt u/s. 8 (1) (e) (g) and (j) of the RT I Act.

First
Appellate Authority (FAA) vide order dated 06- 08-2012 provided Place
of birth as per service records sought at query no. 4 and other details
as sought at query no 5 and 6.

Remaining information was denied stating that the same is personal information and exempted u/s. 8 (1) (j) of the RT I Act.

Aggrieved
with the decision of FAA, the appellant filed second appeal to Central
Information Commission on 21-08-2012 citing that Shri Ajit Kumar has
submitted fake caste certificate for seeking appointment.

CIC
vide order dated 27-12-2012 dismissed the appeal stating that personal
Information can be disclosed only in the larger public interest and
appellant has not established any such interest.

The appellant
filed Writ Petition No. W P 080 of 2013 in the High Court of Calcutta
(Circuit Bench at Port Blair). The Honorable High Court remitted the
matter to CIC with directions to decide the appeal afresh.

To
decide the matter under the application, the Chief Information
Commissioner constituted a 3 member bench of following Commissioners A)
Shri Rajiv Mathur B) Shri Basant Seth C ) Smt Manjula Prasher.

The
appellant submitted that Shri Ajit Kumar (third party) has obtained
appointment under reserve category by submitting false caste
certificate. On being asked by the Commission as to the evidence he has
to prove the same, he replied that he has information from official
sources.

Shri Ajit Kumar, the third party, submitted that he is
recruited under general category and had not submitted any caste
certificate to his employer. He also submitted that the appellant had
been harassing him and none of his personal information should not be
provided to him.

The CPIO submitted that Shri Ajit Kumar is
appointed under general category and no caste certificate has been
submitted by him. A notice was sent to Shri R. Ajit Kumar under
provisions of section 11(1) of RT I Act. In his response he objected to
furnishing any personal information related to him and also stated that
there is threat to him. PIO also stated that the appellant is habitual
information seeker and filed RTIs against many employees and
blackmailing them.

Ms. Tamali Biswas, advocate on behalf of
public authority, stated that the fact of employment of Shri R. Ajit
Kumar under unreserved category and non-availability of caste
certificate was brought to the notice of Hon’ble High Court also.

The appellant has submitted that decision may be taken on the basis of documents/records and justice be delivered in true spirit as per orders of the Hon’ble High Court of Calcutta (Circuit Bench At Port Blair).

Shri R. Ajit Kumar submitted that his appointment was under Unreserved Category and the appellant is seeking information to harass him .The appellant has a criminal background and is involved in a forgery case and the issue is sub judice. He has requested that his personal information should not be provided to the appellant.

The public authority has submitted that the appellant is  a retired employee of their yard and was involved in two criminal cases for forgery. He is misusing the RTI Act against NSRY and its employees. Shri Ajit Kumar was appointed under Unreserved Category and copy of recruitment letter is enclosed with the submissions. A notice was sent to third party by them who responded stating that it is an unwarranted invasion of privacy and perpetuation of biased campaign of maligning his professional image as well as disturbing the personal peace and also seems to be an act of personal vendetta.

DECISION
•    “The Commission observes that Shri R. Ajit Kumar has been appointed under unreserved category, hence the plea of getting employment by submitting forged caste certificate does not have any merit and the contention that disclosure sought is in public interest fails”.

•    “In Stroud’s Judicial Dictionary, Volume 4 (IV Edition),‘Public Interest’ is defined as: “ a matter of public or general interest does not mean that which is interesting as gratifying curiosity or love of information or amusement but that in which a class of community have a pecuniary interest, or some interest by which their legal rights or liabilities are affected.”

•    “The appellant has made mere conjectures and surmises and not able to give any cogent and sound evidence to prove the element of ‘Public Interest.’

•    Commission quoted the Hon’ble Supreme Court in its decision dated 13-12-2012 in the case of Bihar Public Service Commission vs. Saiyed Hussain Abbas Rizwi & Anr:

23.    The expression ‘public interest’ has to be understood in its true connotation so as to give complete meaning to the relevant provisions of the Act.

The expression ‘public interest’ must be viewed in its strict sense with all its exceptions so as to justify denial of a statutory exemption in terms of the Act. In its common parlance, the expression ‘public interest’, like ‘public purpose’, is not capable of any precise definition. It does not have a rigid meaning, is elastic and takes its colour from the statute in which it occurs, the concept varying with time and state of society and its needs. [State of Bihar vs. Kameshwar Singh (AIR 1952 SC 252)]. It also means the general welfare of the public that warrants recommendation and protection; something in which the public as a whole has a stake [Black’s Law Dictionary (Eighth Edition)].

24.    The satisfaction has to be arrived at by the authorities objectively and the consequences of such disclosure have to be weighed with regard to circumstances of a given case. The decision has to be based on objective satisfaction recorded for ensuring that larger public interest outweighs unwarranted invasion of privacy or other factors stated in the provision.

Certain matters, particularly in relation to appointment, are required to be dealt with great confidentiality. The information may come to knowledge of the authority as a result of disclosure by others who give that information in confidence and with complete faith, integrity and fidelity. Secrecy of such information shall be maintained, thus, bringing it within the ambit of fiduciary capacity. Similarly, there may be cases where the disclosure has no relation- ship to any public activity or interest or it may even cause unwarranted invasion of privacy of the individual. All these protections have to be given their due implementation as they spring from statutory exemptions. It is not a decision simpliciter between private interest and public interest. It is a matter where a constitutional protection is available to a person with regard to the right to privacy. Thus, the public interest has to be construed while keeping in mind the balance factor between right to privacy and right to information with the purpose sought to be achieved and the purpose that would be served in the larger public interest, particularly when both these rights emerge from the constitutional values under the Constitution of India.”

•    The Hon’ble High Court of Delhi in its judgement dated 05-02-2014 (Shail Sahni vs. Sanjeev Kumar & Others ) have observed:

“… This Court is also of the view that misuse of the RTI Act has to be appropriately dealt with, otherwise the public would lose faith and confidence in this “Sunshine Act”. A beneficial Statute, when made a tool for mischief and abuse must be checked in accordance with law…”

•    Keeping in view above, the Commission held that the information sought by the appellant is personal information of Shri R Ajit Kumar and protected from disclosure U/S 8 (1) (j) of RTI Act as no larger public interest is established.

[Ch. Rama Krishna Rao vs. Naval Ship Yard, Port Blair, (Third Party: Shri R. Ajit Kumar) Decided by the full bench on 05-05-2014. File No. CIC/LS/A/2012/002430/RM.]

Sale of Goods Act, 1930

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Synopsis
This Article examines certain important element of the Sale of Goods Act, 1930, an old Act which is very relevant even today for matters connected with trade and commerce. The Act also has use while interpreting certain other statutes.

Introduction
Trade is often said to be one of key drivers of an economy. The importance of trade can be gauged from the fact that the western world was constantly asking India to open its doors to foreign investment in retail trading. When trade is such a vital constituent of a country’s economy it is essential that we understand the laws governing trade. The sale of goods in India is governed by the Sale of Goods Act, 1930 (“the Act”). While the Transfer of Property Act, 1882 applies to the transfer of immovable property, the Sale of Goods Act applies to the sale of certain movable property, being goods. This Act was earlier a part of the Indian Contract Act, 1872. However, in 1930 it was felt that there is a need for a separate dedicated legislation and hence, a separate Act was carved out. Let us examine some of the key facets of this Act.

Goods
The pivot of the Act is the definition of the term “goods”. If a particular property cannot be termed as goods then the Act does not apply to the same. This definition is also relevant since certain other Acts also refer to this definition, since what constitutes goods is often relevant for several issues.

Goods are defined under the Act to mean every kind of movable property. It includes stock and shares, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale. However, actionable claims and money are not goods. Thus, the definition is very wide to include all types of movable property other than what is expressly excluded. According to the General Clauses Act, 1897, things attached to or forming part of the land are treated as immovable property. However, the Sale of Goods Act states if they have been agreed to be severed before or under the Contract of sale, then they become goods. Since the definition revolves around movable property it also becomes essential to understand what constitutes movable and what is immovable property. Sale of immovable property is governed by the Transfer of Property Act, 1882 and this Act applies to the sale of movable property.

The following three landmark decisions of the Supreme Court dealing with what is immovable property are very relevant:

(A) T he Supreme Court in Sirpur Paper Mills (1998) 1 SCC 400 while examining whether or not a paper plant was an immovable property, held that the whole purpose behind attaching the machine to a concrete base was to prevent wobbling of the machine and to secure maximum operational efficiency and also for safety. It further held that paper-making machine was saleable as such by simply removing the machinery from its base. Hence, the machinery assembled and erected at its factory site was not an immovable property because it was not something attached to the earth like a building or a tree. The test laid down was, whether the machine can be sold in the market. Just because the plant and machinery is fixed in the earth for better functioning, it would not automatically become an immovable property.

(B) Further, the decision of the Supreme Court in the case of Duncan’s Industries Limited vs. State Of U. P. (2000) 1 SCC 633, dealing with a fertiliser plant, is also relevant in determining what is movable and what is immovable. In this case, the Supreme Court distinguished the Sirpur’s case and held that whether a machinery which is embedded in the earth is a movable property or an immovable property, depends upon the facts and circumstances of each case. Primarily, the court will have to take into consideration the intention of the party when it decided to embed the machinery: the key question is, whether such embedment was intended to be temporary or permanent ? If the machineries which have been embedded in the earth permanently with a view to utilising the same as a plant, e.g., to operate a fertilizer plant, and the same was not embedded to be dismantled and removed for the purpose of sale as a machinery at any point of time, then it should be treated as an immovable property. It was held that it could be said that the plant and machinery could have been transferred by delivery of possession on any date prior to the date of conveyance of the title to the land.

(C) In the case of Triveni Engineering & Indus. Ltd., 2000 (120) ELT 273 (SC), the Court held that a mono vertical crystalliser, which had to be assembled, erected and attached to the earth by a foundation at the site of the sugar factory was not capable of being sold as it is, without anything more. Hence, the plant was not a movable property.

The Central Board of Excise and Customs has, under the Central Excise Act 1944, after considering several Supreme Court decisions (including those mentioned above), clarified that:

(A) if items assembled or erected at site and attached by foundation to the earth cannot be dismantled without substantial damages to components and thus cannot be reassembled, then the items would not be considered as movables.

(B) If any goods installed at site (e.g., paper-making machine) are capable of being sold or shifted as such after removal from the base and without dismantling into its components/parts, the goods would be considered to be movable. If the goods, though capable of being sold or shifted without dismantling, are actually dismantled into their components/parts for ease of transportation etc., they will not cease to be movable merely because they are transported in dismantled condition.

In the context of sales tax, the Supreme Court in the case of Tata Consultancy Services Ltd vs. State of AP (2005) 1 SCC 308, has held that software, even though intangible, is goods.

Shares and stock are expressly included in the definition of goods. The Companies Act also states that shares in a company shall be movable property. However, a debenture does not constitute movable property as held by the Supreme Court in the case of RD Goyal vs. Reliance Industries Ltd, (2003) 1 SCC 81.

Actionable claims are governed by section 130 of the Transfer of Property Act and are hence, outside the purview of this Act.

The goods may be existing or future goods which would come into the seller’s possession. If however, the goods are specific, i.e., are identified when the agreement is made and they perish thereafter, the agreement becomes void. However, they must perish due to no fault of the seller or buyer.

Sale
The next vital cog in the wheel is the definition of “sale”. Section 4 of the Act defines a contract of sale of goods as:

(a) A contract. Thus, all the elements of a valid contract as laid down in the Indian Contract Act, 1872 must be fulfilled.
(b) In which there is a seller, i.e., a person who sells or agrees to sell goods;
(b) H e transfers or agrees to transfer property in goods;
(c) The transfer is to a buyer, i.e., a person who sells or agrees to buy goods; and
(d) The transfer is for a price.

Thus, the pre-requisite of a sale is the transfer of movable property being goods. This view has also been expressed in State of Madras vs. Gannon Dunkerley & Co., (1959) SCR 379 – “sale of goods …. is a nomen juris, its essential ingredients being an agreement to sell movables for a price and property passing therein pursuant to that agreement.” Halsbury defines a sale as “the transfer by mutual consent of the ownership of a thing from one person to another for a money price.”

The contract may be absolute or conditional. If property in goods is transferred from seller to buyer,  then such    a contract becomes a sale. However, if property is transferred in future or is conditional, then such a contract is termed as an agreement to sell. Eventually, when the conditions are fulfilled or the time period elapses, an agreement to sell becomes a sale. The principles of a sale have been succinctly summed up by the Apex Court in the case of State of Tamil Nadu vs. Sri Srinivasa Sales Circulation, (1996) 10 SCC 648 as follows:

“…in order to constitute a sale under the Sale of Goods Act, it is essential to establish that there is an agreement between the parties for transfer of title    to the goods and that such agreement should be supported by money consideration and as a result of the transactions the goods. article or the property must actually pass to the purchaser. It is settled law that the expression “sale” under the Sales Tax Act has to be understood with reference to the definition of “sale of goods” under the Sale of Goods Act. But if the title of the goods passes without any contract between the parties, express or implied, there is no sale. Similarly if the consideration of the transfer is not money, but some other valuable consideration, it may amount to exchange or barter but not a sale in the strict sense of the law..”

The most vital part of the definition is that the title of goods must pass from the seller to the buyer.

PRICE
A sale of goods under the Act is always for a price, i.e., for a money consideration. A price is an essential element of a contract of sale of goods. If there is no price there   is no contract. This is also an essential ingredient under the Contract Law. Hence, a sale of goods as understood under the Act cannot be for a barter or for any non- monetary consideration. Such a transaction  would  be an exchange and not a sale. This is a very important fundamental distinction which is relevant even for several fiscal statutes. The Transfer of Property Act defines an exchange on the other hand, to mean a mutual transfer of the ownership of one thing for the ownership of another thing and neither thing nor both thing being money only. As opposed to a sale transaction, the fundamental difference is the absence of money as consideration. The distinction between a sale and an exchange transaction has been very succinctly brought out by three Supreme Court decisions under the Income-tax Act, CIT vs. Ramakrishna Pillai (R.R.), 66 ITR 725 (SC); CIT vs. Motors and General Stores (P.) Ltd., 66 ITR 692 (SC); CIT vs. B. M. Kharwar 72 ITR 603 (SC). Recently, the Bombay High Court in Bharat Bijlee Ltd. [TS-270-HC-2014(BOM)], distinguished a slump exchange from a slump sale and held that a slump exchange does not entail capital gains tax.

The price may be either fixed by the contract or left to the negotiation of the parties or may be fixed as agreed upon. However, in the absence of the above, the buyer must pay a reasonable price. What is a reasonable price depends upon the facts of each case. In some cases, the price determination is to be decided by the valuation of  a third party. If such third party cannot fix the value, then agreement is avoided.

TRANSFER OF PROPERTY IN GOODS
When the property in the goods is transferred from the seller to the buyer is the most important effect of a contract for sale of goods.

Unascertained Goods: If the goods are unascertained, then property passes only when they are ascertained. E.g., the seller agrees to sell 50 kgs. of rice but at that time he has 250 kgs. in his warehouse. No property passes to buyer until the seller identifies and appropriates 50 kgs. of rice towards this agreement. Thus, there must be a clear-cut identification as to which goods out of the generic mass are towards satisfaction of the contract.

Where there is a contract for the sale of unascertained / future goods by description and goods of that description and in a deliverable state are unconditionally appropriated to the contract the property in the goods passes to the buyer. Such assent may be expressed or implied, and may be given either before or after the appropriation      is made. Thus, an appropriation must be made by the seller or the buyer and only then would the property in such unascertained goods pass to the buyer. Further, the appropriation of unascertained goods must be unconditional. Till property passes there is no sale.

E.g., in Emperor vs. Kuverji Kavasji, 1941 43 BLR 95, a merchant agreed to sell 20 litres of liquor out of a cask containing 100 litres. It was held that until the 20 litres are separated or bottled, the property does not pass to the buyer.

The Supreme Court in the cases of New India Sugar Mills Ltd vs. CST, 1963 AIR 1207, CST vs. Husenali Adamji & Co., 1959 AIR 887, M/s. Carona Sahu Ltd vs. State, 1966 AIR SC 1153 has held that in case of sale of unascertained goods, no property is transferred to the buyer unless and until the goods are ascertained and there is unconditional appropriation of the goods in a deliverable state.

Ascertained Goods: However, if they are ascertained / specific, then property passes in accordance with the contract, i.e., when the parties want it to pass. In this respect, section 2(2) of the Act is also relevant. It defines the term delivery to mean a “voluntary transfer of possession from one person to another”. Thus, delivery of goods is one of the ways in which possession can be transferred.

Section 30 of the Act provides that a seller need not have actual physical possession of the goods sold. It is enough that he has control over the goods by making over a document of title to the goods. Possession of documents of title enable the holder of document to transfer the goods. Section 30 does not require the seller to be in actual physical possession of goods – Pramatha Nath Talukdar vs. Maharaja P M Tagore, AIR 1966 Cal 405. This view has also been laid down in Halsbury’s Laws of England, 3rd Edition Vol. 34 @ p.84 and in the English case of Nicholson vs. Harper, (1895) 2 Ch. D. 415. Unless a different intention arises from the contract, the following three rules have been laid down under the Act to determine the intention of the parties as to when the property passes to the buyer:

(a)    When contract is for sale of specific goods in a deliverable state, property passes to buyer when contract is made, irrespective of whether time of payment or delivery is postponed.
(b)    However, when under a contract for specific goods and the seller has to do something to the goods for putting them in a deliverable state, then property passes only when such thing is done and the buyer is given notice of the same. E.g., a 2nd hand car dealer agrees to sell a car but it needs certain repairs before it can run properly. Property passes only once the repairs are done and the buyer is intimated about the same.
(c)    When contract is for sale of specific goods in a deliverable state but seller has to weigh, measure, test or do some act for ascertaining the price, the property passes to buyer when such act is done and buyer is given notice of the same. E.g., a seller sells cotton at a price per ton. To ascertain the price, he needs to weigh the cotton. Till such act is done, property does not pass.

It is essential to determine when property passes because if there is any damage or loss to the goods then the same would be borne by the seller in cases where property has not yet passed to the buyer. The Act provides that unless the contract provides otherwise, the goods remain at the seller’s risk till property passes to the buyer. However, where the property has passed risk passes to the buyer even if the delivery has not yet been made. E.g., a seller sells a certain vase to a buyer but both payment and delivery are postponed till the next day. Before delivery can be effected, the vase breaks due to mishandling. The loss is to the buyer’s account since property of specific goods in a deliverable state under an unconditional contract passes immediately even if delivery is postponed. But when delivery is delayed due to the fault of any one party, the risk of loss is to his account.

NEMO DAT QUAD NON HABET
‘No one can give a better title than what he himself has’ is the meaning of the above Latin maxim. Thus, a sale by a person who is not the legal owner of the goods does not give any title to the buyer. The actual owner can recover possession of the goods from the buyer without compensating him. However, if the seller has authority  of the owner; he is an authorised mercantile agent (e.g., broker, factor); he is a joint owner, etc., then he can give a good title to the buyer.  Whether the buyer can raise   a plea of being a bona fide purchaser without notice is   a matter which depends upon the facts of each case – Sumitra Debi Jalan vs. Satya Narayan Prahladka, AIR 1965 Cal 355.

CONDITIONS AND WARRANTIES
A contract of sale may come with conditions and warranties as to the quality, fitness, title, etc. of the goods. A condition is a stipulation essential to the main purpose of the contract. If breached, the contract may be repudiated. A warranty on the other hand is collateral to the main purpose and a breach of the same gives rise to a claim for damages but not a right to repudiate the contract. Thus, sale of soft drinks with pesticides is a breach of a condition, i.e., it is fit for human consumption. However, sale of soft drinks in glass bottles instead of plastic bottles, as contracted, is a breach of a warranty. The former entitles the buyer to cancel the contract while under the latter the buyer can sue for damages.    It may not be always a cut and dried situation as to whether a stipulation is a condition or a warranty and the determination of the same depends upon the contract  as a whole. Even a Share Purchase Agreement (SPA) carries conditions and warranties from the seller as to the shares. Breach of material conditions can lead to cancellation of the SPA.

CAVEAT EMPTOR; QUI IGNORARE NON DEBUIT QUOD JUS ALIENUM EMIT
Let a purchaser beware; who ought not to be ignorant that he is purchasing the rights of another – buyer beware of what you buy for the seller has no obligation to caution you is the meaning of this maxim. Section16 of the Act lays down that subject to this Act and any other law in force, there is no implied condition or warranty as to the fitness or quality of the goods sold by a seller. This is a statutory recognition of the above maxim. The Supreme Court in Commissioner of Customs (Preventive) vs. M/s. Aafloat Textiles (I) P. Ltd. has explained the maxim as follows:

“….Caveat emptor means “Let the purchaser beware.” It is one of the settled maxims, applying to a purchaser who is bound by actual as well as constructive knowledge of any defect in the thing purchased, which is obvious, or which might have been known by proper diligence.

21.    “Caveat emptor does not mean either in law or in Latin that the buyer must take chances. It means that the buyer must take care.” (See Wallis vs. Russell (1902) 21 R 585, 615).

22.    “Caveat emptor is the ordinary rule in contract. A vendor is under no duty to communicate the existence even of latent defects in his wares unless by act or implication  he represents such defects not to exist.” (See William R. Anson, Principles of the Law of Contract 245 (Arthur L. Corbin Ed.3d. Am. ed.1919) Applying the maxim, it was held that it is the bounden duty of the purchaser to make all such necessary enquiries and to ascertain all the facts relating to the property to be purchased prior to committing in any manner.

23.    Caveat emptor, qui ignorare non debuit quod jus alienum emit. A maxim meaning “Let a purchaser beware; who ought not to be  ignorant  that  he  is  purchasing  the rights of another. Hob. 99; Broom; Co., Litl. 102 a: 3 Taunt. 439.

24.    As the maxim applies, with certain specific restrictions, not only to the quality of, but also to the title to, land which is sold, the purchaser is generally bound to view the land and to enquire after and inspect the title- deeds; at his peril if he does not.

25.    Upon a sale of goods the general rule with regard   to their nature or quality is caveat emptor, so that in the absence of fraud, the buyer has no remedy against the seller for any defect in the goods not covered by some condition or warranty, expressed or implied. It is beyond all doubt that, by the general rules of law there is no warranty of quality arising from the bare contract of sale of goods, and that where there has been no fraud, a buyer who has not obtained an express warranty, takes all risk of defect in the goods, unless there are circumstances beyond the mere fact of sale from which a warranty may be implied. (Bottomley vs. Bannister, [1932] 1 KB 458 : Ward v. Hobbs, 4 App Cas 13}. (Latin for Lawyers) 14

26.    No one ought in ignorance to buy that which is the right of another. The buyer according to the maxim has  to be cautious, as the risk is his and not that of the seller.

27.    Whether the buyer had made any enquiry as to the genuineness of the license within his special knowledge. He has to establish that he made enquiry and took requisite precautions to find out about the genuineness of the SIL* which he was purchasing. If he has not done that consequences have to follow.”

* SIL = Special Import Licence

However, the Law also provides for the following statutory exceptions to this Rule:

(a)    Where the buyer makes known to the seller that he requires goods for a particular purpose, then goods must meet such purpose.  In  Eternit  Everest  Ltd.  vs. Abraham, AIR 2003 Ker 273, it was held that corrugated asbestos sheets are mainly used for roofing of buildings for protecting the building from sun and rain and it is not being used for a variety of purposes. The leakproof of the asbestos sheet is the essential quality of the sheets and only if it is leakproof, it can be said to be fit for the purpose for which it is purchased.

(b)    Where goods are bought by description from a seller who deals in goods of that description, then there is an implied condition as to the merchantable quality  of the goods. In Agha Mirza Nasarali Khoyee & Co. vs. Gordon Woodroffe & Co., AIR 1937 Mad 40 it was held that goods are treated as being of merchantable quality if they are of such quality that any defects which a buyer of ordinary diligence and experience would have detected by due diligence in the use of  all ordinary and usual means (what is due diligence, depending upon the circumstances).

(c)    An implied warranty or condition as to quality or fitness for a purpose may be annexed by the usage of trade.

CONCLUSION
This is a very important mercantile Law which is relevant for commercial matters. It is essential for businesses to keep in mind the provisions of this Act while entering into contracts for sale and purchase of goods.

Will – Succession – Clause offending rule against perpetuity is invalid – Indian Succession Act, 1925, section 114.

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Asis Mitra vs. Sibani Dutta & Ors AIR 2014 Calcutta 126

In 1900, Baikuntha Nath Dutta had founded a “thakurbari.” He installed this deity and started worship. By his will dated 30-07-1916 various properties of the testator were dedicated to the above deity. Shebaits were appointed. Clause 5 of the Will dealt with the devolution of Shebaitship.

Many years had passed since the making of this dedication. The main question that was posed before the court was whether the stipulation in the Will and in the Codicil that Shebaitship would vest only in sons of the Shebaits was valid or not.

The issue in this case was in regard to the rule against perpetuity. The rule applied equally to transfer of property inter vivos as it did to transmission of property by succession. In this case those rules regarding transmission of property by succession were relevant. The owner of a property, while bequeathing it, could not postpone the vesting of the absolute legal and beneficial ownership thereof indefinitely. He could not fetter the powers of alienation, indefinitely.
Hence, if A is disposing of his property by Will or by creation of a trust, he cannot hold up its absolute vesting in some other person, for an uncertain period. Neither can he tie this person’s hands regarding alienation for an uncertain time.

If there was any further postponing of absolute legal and beneficial ownership of the property, the bequest or settlement was void as it violated the rule against perpetuity. The law against perpetuity did not favour, as observed earlier, tying up of property without its vesting, for an indefinite period of time.

The Indian Succession Act, 1925, section 114 enacts as follows:

“114. Rule against perpetuity. – No bequest is valid whereby the vesting of the thing bequeathed may be delayed beyond the life-time of one or more persons living at the testator’s death and the minority of some person who shall be in existence at the expiration of that period, and to whom, if he attains full age, the thing bequeathed is to belong.”

Hence, the Clause in the will devolving Shebaitship only on grandson and on death of grand sons to their sons violates the rule against perpetuity.

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Precedent – Doctrine of per incuriam and sub silentio – Constitution of India – Article 141

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Triveni Engineering & Industries Ltd vs. The State of Karnataka & Ors AIR 2014 Karnataka 75

The doctrines of per incuriam and sub silentio operate as exceptions to the rule of precedent. Incuriam literally means carelessness. In practice, per incuriam means per ignorantium. Doctrines of per incuriam and sub silentio have been taken recourse to by the courts for relieving from injustice perpetrated by unjust precedents. A decision which is not express and is not founded on reasons or consideration of the issue, could not be deemed to be a law declared having binding effect as is contemplated under Article 141 of the Constitution.

The doctrine of per incuriam has no application in a case to ignore the principle laid down after analysing the relevant provisions of law by a co-ordinate bench. The doctrine of per incuriam is resorted to when decisions are rendered without reference to statutory prescriptions or other binding authorities.

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Month – Month does not mean 30 days – Computation of six months period, Negotiable Instruments Act, 1881, section 138.

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Rameshchandra Ambalal Joshi vs. State of Gujarat & Anr. AIR 2014 SCC 1554

While hearing on SLP against an order passed by the High Court in context of a complaint filed u/s. 138 of the Negotiable Instrument Act, 1881 the court was required to consider the meaning of term ‘months’.

Proviso (a) to section 138 provides that the cheque should be presented within six months from the date on which it is drawn. Word month has been defined u/s. 3(35) of General Clauses Act to mean a month reckoned as per British calendar. Period of six months cannot therefore be calculated on 30 days basis.

As regards computation of six months period section 9 of General Clauses Act has to be pressed in service proviso (a) to section 138 of the Act uses the expression “Six months from the date on which it is drawn.” Once the word “from” is used for the purpose of commencement of time, in view of section 9 of the General Clauses Act, the day on which the cheque is drawn has to be excluded and the last day within which such act needs to be done is to be included. In other words, six months period stipulated in section 138 would expire on day prior to the date in the corresponding month and in case no such day falls, the last day of the immediate previous month. For calculating period of six months for cheque drawn on 31-12-2005 the first day, i.e., 31-12-2005 has to be excluded and the period of six months will be reckoned from the next day i.e. from 01-01-2006; meaning thereby that according to the British calendar, the period of six months will expire at the end of the 30th day of June, 2006.

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Hindu Law – Devolution of property of male dying intestate: Hindu Succession Act, 1956, sections 8 and 10:

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Narinder Singh Rao vs. Air Vice Marshal Mahinder Singh Rao & Ors. (2013) 9 SCC 425

Rao
Gajraj Singh and his wife Sumitra Devi were occupiers of the suit
property. The property had been constructed somewhere in 1935 and as per
the municipal record, it belonged to Rao Gajraj Singh. A document was
executed by Rao Gajraj Singh to the effect that upon death of himself or
his wife, the suit property would be inherited by the survivor. The
said writing was attested by Rao Devender Singh, the son of Rao Gajraj
Singh’s real sister.

Rao Gajraj Singh expired on 29th March, 1981
and thereafter Sumitra Devi, who had eight children, started residing
at Ranchi with the Appellant. Somewhere in 1980s, Sumitra Devi had
constructed some shops in the suit premises and the said shops were
given on rent.

On 1st June, 1989, Sumitra Devi executed a Will
whereby she bequeathed the suit property to one of her sons, namely,
Narinder Singh Rao (the present Appellant and original Defendant No. 1)
and she expired on 6th June, 1989.

After the death of Sumitra
Devi, her four children, one of them being the present Respondent No. 1,
filed a suit for declaration claiming their right in the suit property.
Subsequently, the plaint was amended so as to make it a suit for
partition. According to the case of the said children, the Will was not
genuine and therefore, the said Will could not have been acted upon and
as Sumitra Devi was survived by eight children, the suit property would
be inherited by all the children. Thus, each child had a 1/8th share in
the suit property.

Even after the death of Rao Gajraj Singh, the
suit property continued to remain in his name because nobody had got the
property mutated in the names of his heirs/legal representatives after
his death. Upon the death of Rao Gajraj Singh, no mutation entry was
made in the Municipal Corporation records to show as to who had
inherited the property in question and the said property continued to
remain in the name of late Rao Gajraj Singh.

By virtue of the
Will executed by Sumitra Devi, whereby the property had been bequeathed
to the present Appellant, the Appellant claims complete ownership over
the suit property.

The Hon’ble Court observed that so far as
inheritance of the suit property by the present Appellant in pursuance
of the Will dated 1st June, 1989 executed by Sumitra Devi is concerned,
the Will was validly executed by Sumitra Devi, which had been attested
by two witnesses, one being an advocate and another being a medical
practitioner.

The next question which was to be considered by the
High Court was with regard to the ownership right of the suit property.
The property was in the name of Rao Gajraj Singh and no evidence of
whatsoever type was adduced to the effect that the property originally
belonged to Sumitra Devi. Thus, the findings that the suit property
belonged to Rao Gajraj Singh cannot be disturbed. As Rao Gajraj Singh
died intestate and was the owner of the property at the time of his
death, the suit property should have been inherited by his widow, namely
Sumitra Devi and his eight children in equal share, as per the
provisions of the Hindu Succession Act, 1956. In that view of the
matter, the High Court arrived at the conclusion that the suit property
would be inherited by all the nine heirs, i.e., Sumitra Devi and her
eight children and therefore, Sumitra Devi had inherited only 1/9th of
the right and interest in the suit property whereas 1/9th of the right
and interest in the suit property belonged to each child of Rao Gajraj
Singh.

Though the Will executed by Sumitra Devi has been treated
as a validly executed Will, Sumitra Devi, who had only 1/9th of the
right and interest in the suit property, could not have bequeathed more
than her interest in the suit property. If Sumitra Devi was not a
full-fledged owner of the suit property, she could not have bequeathed
the entire suit property to the present Appellant, Narinder Singh Rao,
who has claimed the entire property by virtue of the Will executed by
Sumitra Devi. At the most Sumitra Devi could have bequeathed her
interest in the property which was to the extent of 1/9th share in the
said property. So the High Court rightly came to the conclusion that the
1/9th share in the suit property belonging to Sumitra Devi would be
inherited by the present Appellant – Narinder Singh Rao by virtue of the
Will executed by her. In addition to his own right and interest in the
suit property to the extent of 1/9th share, which the present Appellant
had inherited from his father. Thus the present Appellant would get
1/9th share in the suit property as he also inherited the share of his
mother Sumitra Devi whereas all other children of Rao Gajraj Singh would
get 1/9th share each in the suit property. Thus, the present Appellant
would be having 2/9th share in the suit property

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Minor – Sale of Minors property – By father (Natural Guardian) – Without prior permission of Court – Voidable at instance of minor. Hindu Minority and Guardianship Act 1956, section. 8 (2):

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Rameshwar Lal & Ors vs. Jai Prakash & Ors AIR 2014 Rajasthan 72.

The present Respondent Nos. 1 and 2 – (original plaintiffs) had filed a suit for cancellation of sale deed and for possession of the suit property against the appellants and respondent No. 4 Bhagwan Lal (their father) with the averments that the plaintiffs had purchased the suit property by a registered sale deed dated 01-02-1974 from Suresh Chandra for a sum of Rs. 26,000. The defendant Nos.1 to 3 were tenants in the said house and a sum of Rs.1,000/- were deposited with Suresh Chandra as earnest money.

The rent deed has been executed by the eldest brother in favour of Suresh Chandra, which has been handed over to the plaintiffs by Suresh Chandra on the date of sale. By notice dated 06-02-1974, Suresh Chandra had informed defendant No.1 (i.e., tenants) by a registered notice that he has sold the house to the plaintiffs and therefore, the rent be paid to them and the deposit of Rs.1,000/- had also been transferred to them. The defendants admit them to be owners of the house and one months rent was sent by money order and therefore, based on attornment, the defendant Nos. 1 to 3 have become plaintiffs tenants. On 23-06-1974, the plaintiff No.1 became major and plaintiff No. 2 was still a minor. The suit property was required by the plaintiffs reasonably and bonafidely. However, the respondent No. 4, their father sold the suit house to the defendant Nos. 1 to 3 for a sum of Rs. 28,000/- on 15-06-1974 and has executed a sale deed and therefore, the defendants do not treat them as landlord which is incorrect. The defendant No. 4 had not obtained permission u/s. 8 of the Hindu Minority and Guardianship Act,1956 (the Act) from the competent court and therefore, the sale deed was illegal and void and the plaintiffs are entitled for getting the same cancelled. The plaintiff was becoming a major eight days after the date of sale and therefore, the defendant No. 4 had no reason to sale the same to the defendant Nos. 1 to 3; the defendant No. 4 had no requirement as guardian of the money; as the defendants are plaintiffs tenants, they are entitled for possession and therefore, the suit be decreed and the sale deed dated 15-06-1974 be cancelled and possession of the suit house alongwith the due rent be decreed.

Once the property is owned by a minor, the provisions of section 8 of the Act are attracted. While s/s. (1) confers power on a natural guardian of a Hindu minor to do all acts which are necessary or reasonable and proper for the benefit of the minor or for the realisation, protection or benefit of the minors estate. The guardian can in no case bind the minor by a personal covenant, however, the said power is subject to the other provisions of section 8.

S/s. (2) provides for such conditions/restrictions, which inter alia mandates that a natural guardian shall not, without the previous permission of the court mortgage, charge, transfer by sale, gift, exchange or otherwise any part of the immovable property of the minor and s/s. (3) provides that any disposal of immovable property by a natural guardian in contravention of s/s. (1) and (2) is voidable at the instance of minor or any person claiming under him. Even the grant of permission by the court is circumscribed by s/s. (4), wherein except in case of necessity or for an evident advantage to the minor such permission cannot be granted.

Though, s/s. (1) permits a natural guardian to do all acts necessary for the benefit of minor and for benefit of minors estate, but the same is subject to other provisions of section and s/s. (2) clearly provides that without previous permission of the court transfer by sale of immovable property shall not be made by the guardian and any sale in contravention of s/s. (2) is voidable at the instance of the minor. The said s/s. (2) does not admit of any exception, whereby for any condition the minors estate could be transferred by the natural guardian without previous permission of the court.

It is for the minor, on attaining majority, not to question the transfer which is in contravention of s/s. (2) of section 8, but if he decides to question the same, the same is voidable at his instance. In the present case, the Plaintiff No.1 has on attaining majority chosen to question the transfer made by the defendant No.4 Bhagwan Lal, his father in favour of the defendant Nos. 1 to 3 (tenants) without seeking previous permission from the Court and therefore, the same was rightly declared void by the trial court.

levitra

Auditing outsourced services – Auditors’ predicament

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Cost optimisation – the genesis of outsourcing
Many enterprises operate more efficiently and profitably by outsourcing certain functions to other organisations that have the personnel, expertise or infrastructure to accomplish these tasks. The past several years have seen rapid growth in outsourcing of various business functions to service organisations. This growth has been fueled by a number of factors, including economic recession, pressure to improve operational costs, an increasingly virtual workforce and lack of internal resources to support a process or function. Traditionally the term ‘outsourcing services’ would elicit reference to services such as book keeping, payroll processing, clearing house services, mortgage services and medical claims processing amongst others. However, with advancement of information technology, the outsourcing space has witnessed emergence of a plethora services such as Software as a Service (SaaS), Application Service Providers (ASP), Cloud Computing, Credit Card Processing platforms, Internet Service Providers (ISP), Data Centers, Tax processing etc.

How is an outsourced function relevant to audit?
In some cases the outsourced work generates information that is included in the outsourcer’s financial statements. Consider the example of a claims processor (third party administrator (TPA)) who processes claims for an insurance company. When the claims processing function is outsourced to a TPA, health plan customers are instructed to submit their claims directly to the TPA, which processes the claims based on rules established by the insurance company, such as rules related to eligibility and the amount to be paid against each claim. The claims processor provides the insurers with data, such as the cost of claims processed during a period, and this information flows through to the insurance company’s financial statements i.e., the expense claims and the related liability. Even though this information is generated by the claims processor, the insurance company is responsible for the accuracy of that information because the same is included in its financial statements.

For the auditors of the insurance company, the responsibility for auditing the information generated by the claims processor is the same as it would have been for auditing other financial statement information generated by the insurance company itself. The auditors must find a way to obtain evidence that supports the assertions in the insurers’ financial statements that include or are affected by the information generated by the claims processor. Under auditing parlance, the claim processor is termed as a ‘service organisation’, the insurance company would be a ‘user organisation’ whereas the auditor of the user organisation would be called as ‘user auditor’.

Auditors’ Responsibilities under SA 402
SA 402 – ‘Audit Considerations Relating to an Entity Using a Service Organisation’ expands on the factors that an auditor needs to bear in mind while auditing the financial statements of an entity that outsources functions that affect its financial statements. Services provided by a service organisation are relevant to the audit of a user entity’s financial statements when those services, and the controls over them, are part of the user entity’s information system, including related business processes, relevant to financial reporting.

In some cases, management of a user entity is able to monitor the quality of the data it receives from a service organisation by establishing controls to prevent, or detect and correct, misstatements in its financial statements resulting from errors in the data received from a service organisation. This would be the case if the user entity initiates and records the transactions it submits to the service organisation for processing. A good example of such services are payroll processing services.

In other cases, the user entity relies on the service organisation to initiate, execute and record the transactions. Consider for example where a user entity that grants an investment manager the authority to purchase and sell investments on its behalf based on written guidelines provided by the user entity.

Even though such controls are located and operating at the service organisation, they are relevant to the user entity’s internal control over financial reporting because they are designed to prevent, or detect and correct, errors in the information provided to user entities. The question is whether the auditor of a user organisation is required to test these controls and if yes, what approach would enable the user auditor to obtain sufficient information that such controls are designed and are operating effectively. Testing of controls at a service organisation.

SA 402 requires that where a user entity establishes controls over the services provided by a service organisation, the user auditor should test those controls which impact financial reporting to evaluate whether the same are operating effectively. Where the user auditor is satisfied that such controls at the user entity are operating effectively, he is not required to test controls established by the service organisation in relation to the services outsourced by the user entity. This may usually be the case where the process is less complex and the transaction volume is not substantial, for e.g., payroll processing for a small/medium sized enterprise.

Where the services provided by a service organisation involve highly automated processing, a user entity may not be able to implement effective controls over the transactions processed by the service organisation and may need to rely on the controls at the service organisation. From the user auditor’s perspective, he may be unable to obtain sufficient evidence by performing substantive procedures alone at the user entity. In such cases, the user auditor shall obtain an understanding through one or more of the following procedures:

a) O btaining a Type 1 or Type 2 report, if available

b) Contacting the service organisation, through the user entity, to obtain specific information

c) Visiting the service organisation and performing procedures that will provide the necessary information about the relevant controls at the service organisation; or

d) U sing another auditor to perform procedures that will provide the necessary information about the relevant controls at the service organisation.

A Type I report is a report by the service auditor on the design of the controls whereas a Type II report is a report on the design and operating effectiveness of controls at the service organisation.

The following case study highlights the procedures that a user auditor would perform to obtain sufficient evidence for risk assessment in relation to the services performed by a service organisation.

Case Study

World Wanderers Private Limited (WWPL) a wholly owned Indian subsidiary of World Wanderers Inc. USA (WWI) is an online travel company offering outbound and inbound travel services. WWI commenced operations in India in June 20X0. In order to rationalise the operating costs, the parent company, WWI outsourced the accounting for accounts payable function for all its subsidiaries including WWPL to Rapidex Accounting Services (RAS), an outsourcing firm based out of Philippines. The processing of accounts payable for WWPL happened at RAS whereas the general ledger was maintained by WWPL in India. WWI and all its subsidiaries used a globally renowned ERP system called ‘Apex’. Access to the Apex accounts payable module was provided by WWI to RAS. RAS used Apex for its other clients as well.

Under the accounts payable process, raising of purchase orders in Apex and approval of receipt of goods and services against these purchase orders was performed by authorised staff of WWPL. RAS accounts payable team was responsible for invoice and payment processing, reconciliations, journal posting in Apex and vendor helpdesk services. WWPL maintained a documentation imaging database called OMNI to which the designated accounts personnel from RAS accounts were given access. Scanned images of the invoices duly authorized by WWPL would be uploaded on OMNI. WWPL would provide a list of scanned images of specimen signatures of WWPL staff who were authorised to approve invoices. A designated team leader (TL) authorised by RAS would need to match the signatures on the invoices with the specimen provided and where these matched, the invoices were to be processed in Apex. A quality check was performed by RAS QC team on a test check basis.

Apex generated details of payments to be released to vendors based on due date which were compared    by RAS accounts payable team with the payment authorisation received from personnel of WWPL. The request was then uploaded on the bank’s website by RAS Team Leader and payments released after sign off by WWPL. The contractual terms agreed by WWI with RAS included the requirement of RAS furnishing a Type 2 report on a calendar year basis for all the subsidiaries by an independent firm of IT auditors.

RAS engaged a service auditor ABC & Co. (‘ABC’) a firm based in Philippines to provide his opinion on the design and effectiveness of controls over the accounts payable function. The period of coverage was from 1st January 20X0 to 31st December 20X0. The significant controls tested by ABC inter alia included the following critical controls:

a.    Controls provide reasonable assurance that invoices posted by RAS are authorised and accurate.

b.    Controls provide reasonable assurance that only authorised payments are processed accurately by RAS.

c.    Controls provide reasonable assurance that RAS IT resources used to provide services to WWPL are restricted to authorised personnel only.

ABC provided a Type 2 report stating that all controls related to accounts payable process were designed and operated effectively, other than the following controls:

•    For 3 out of 25 samples, the verification of the payments uploaded on bank website by RAS was done using the ID of a resigned Team Leader of RAS.

•    For 1 out of 25 samples, the verification of payment uploaded on the bank website was done using an ID which could not be associated with any of the Team Leaders of RAS assigned to WWPL.

•    For 2 out of 25 samples, the evidence for verification by the TL on the bank website was not available.

ABC & Co. qualified their opinion on the above count.

WWPL had also outsourced its tax planning and processing function to XYZ & Co. (‘XYZ’),  an  Indian firm of chartered accountants. XYZ was responsible for filing of all statutory returns such as Service tax returns, withholding tax returns, and income-tax returns as well as providing assistance in tax assessments.

The accounting period for WWPL ended on 31st March 20X1. M/s.PQR & Associates (‘PQR’) were appointed as auditors of WWPL.

Let us now examine what procedures would  PQR  would need to perform to ensure compliance with the requirements of SA 402:

1.    PQR may need to enquire whether WWPL has maintained independent detailed records or documentation of invoices processed and payments made by RAS on its behalf. It could be possible that no independent records could be maintained by WWPL on account of costs and operational efficiency.

2.    Auditors generally have broad rights of access established by legislation. PQR would need to obtain an understanding of the legislation applicable in Philippines to determine whether appropriate access rights can be obtained to RAS systems. PQR could consider requesting WWPL to incorporate rights of access in the contractual arrangements between  the WWPL and RAS. PQR may need to consider Inspecting records and documents held by RAS.

3.    PQR may need to obtain evidence as to the adequacy of controls operated by RAS over the completeness and integrity of WWPL’s accounts payable data for which RAS is responsible.

4.    If independent records of accounts payable are being maintained by WWPL, PQR could consider obtaining confirmations of balances and transactions from RAS for corroborating WWPL’s records. This may constitute reliable evidence confirming existence of transactions and balances.

5.    Given the significant volume of payments, performing substantive procedures or testing of operating effectiveness of controls at WWPL by PQR would not be sufficient. It would be imperative that the design and operative effectiveness of controls over processing of invoices as well as payments which occurred at RAS were tested by PQR.

6.    As ABC is a firm based out of Philippines and assuming that ABC is not registered with ICAI, PQR would need to evaluate the professional competence of ABC, its independence from WWPL and the adequacy of the standards under which ABC has issued the Type 2 Report. PQR may need to make enquiries about ABC to ABC’s professional organization and enquire whether ABC is subject to regulatory oversight.

7.    (a) If PQR is satisfied as to the professional competence of ABC, PQR could use ABC to perform procedures on the WWPL on its behalf such as testing of controls at RAS (other than those covered by the Type 2 Report) or substantive testing on WWPL financial statement transactions and balances maintained by RAS.

(b)    Alternatively, PQR could use another auditor to perform test of controls or substantive procedures at RAS on its behalf. The results of such procedures performed could be used by PQR to support its audit opinion. In such a case, it would be essential for ABC and PQR to agree to the form of and access to audit documentation.

(c)    PQR may visit RAS to perform tests of relevant controls if RAS agrees to it.

8.    As far as reliance on Type 2 Report is concerned, the controls tested by ABC and the results thereof would need to be evaluated by PQR to determine whether these support PQR’s risk assessment. In the present case it is pertinent to note that:

(a)    The period covered by the Type 2 report is until 31st December 20X0 whereas the period under audit ended on 31st March 20X1. PQR would need to discuss with WWPL or where permissible with RAS whether there were any significant changes to the relevant controls at WWPL outside of the period covered by ABC’s Type 2 report. PQR could consider extending tests of controls over the remaining period or testing  WWPL’s  monitoring of controls. PQR may also review current documentation of such controls as provided by RAS

(b)    PQR would need to evaluate the scope of work performed by ABC, i.e., the controls tested, the appropriateness of the sample sizes and whether there were significant changes to the relevant controls beyond the period covered by the Type 2 Report.

(c)    The service was designed with the assumption that WWPL user will have controls in place for authorizing invoices before they are sent to RAS for processing. Other control to consider would be whether an updated list of signatories authorized to approve invoices was sent by WWPL to RAS. PQR would need to consider whether such complementary controls at WWPL were relevant to the service provided to WWPL.

(d)    Merely because ABC had issued a qualified opinion does not imply that  ABC’s  report  will  not be useful for the audit of WWPL’s financial statements in assessing the risks of material misstatement. Subject to considerations explained in paragraph 7(a) above, the exceptions giving rise to the qualified opinion in ABC’s report should be considered in PQR’s assessment of the testing of controls performed by ABC.

(e)    The exceptions pertained  to  inconsistency  in  the login IDs used by RAS team to process transactions on Apex. PQR would need to evaluate how these exceptions impacted the overall control environment around accounts payable processing, any remedial was taken post  31  December  20X0 and whether alternative checks were available to prevent or detect and correct errors in misstatement.

(f)    The involvement of ABC or another auditor does not alter PQR’s responsibility to obtain sufficient appropriate audit evidence as a basis for forming his opinion. PQR would not be in a position to make a reference to ABC’s report as a basis for PQR’s opinion on WWPL’s financial statements. However, if PQR were to modify its opinion based on ABC’s opinion, then PQR could refer to the ABC’s report in its own audit opinion with prior consent of ABC.

9.    As regards tax processing services performed by XYZ, a report on controls at XYZ may not be available and visiting XYZ may be the most effective procedure for PQR to gain an understanding of controls XYZ   as there is likely to be direct interaction of WWPL’s management with XYZ.

The above is an illustrative inventory of procedures that SA 402 mandates auditors to perform. The procedures may be customised to meet the requirements of an actual scenario.

CONCLUDING REMARKS
Increasingly, enterprises are outsourcing their business functions to achieve cost  efficiencies.  The  rise  of cloud computing has played a key role in the number    of businesses that outsource functions to service organisations. Cloud computing providers offer user entities access to applications, data storage, and numerous other computing functions on a pay-as-you- go basis. Controls at a service organisation that are related not only to user entities’ internal control over financial reporting but also to other critical aspects such as data privacy of customers and other stakeholders have gained prominence. User entity would continue to remain responsible for such data though the same resides with the service organisation.

SA 402 provides useful guidance to auditors to understand the nature and significance of services provided by service organisations and to  design  and  perform  procedures to respond to risk of material misstatements related thereto.

Gaps in GAAP— Component accounting under Schedule II

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Schedule II to the Companies Act, 2013 is
applicable from 1 April 2014. Notes to Schedule II, among other matters,
state as below:

“Useful life specified in Part C of the
Schedule is for whole of the asset. Where cost of a part of the asset is
significant to total cost of the asset and useful life of that part is
different from the useful life of the remaining asset, useful life of
that significant part shall be determined separately.”

An illustrative example is given below.

Some key issues are discussed in this article.

How does a company go about conducting this exercise?
Schedule
II requires separate depreciation only for parts of an item of tangible
fixed asset having (i) significant cost, and (ii) different useful
lives from remaining parts of the asset. In many cases, such
determination may be straight forward. For example, an IT company, which
has only computers as fixed assets, may be able to determine with
little analysis that there are no significant components requiring
separate depreciation. Similarly, for an airline company, it may be
clear that engine has different useful life vis-à-vis remainder of the
aircraft. In many other cases, identification of components requiring
separate depreciation may involve complex analysis.

The company
first splits the fixed asset into various identifiable parts to the
extent possible. The identified parts are then grouped together if they
have the same or similar useful life. There is no need to identify and
depreciate insignificant parts as separate components; rather, they can
be combined together in the remainder of the asset or with the principal
asset.

Identification of significant parts is a matter of
judgment and decided on case-to-case basis. Identification of separate
parts of an asset and determination of their useful life is not merely
an accounting exercise; rather, it involves technical expertise. Hence,
it may be necessary to involve technical experts to determine the parts
of an asset.

How does one judge materiality in the context of identification of components?
A
company needs to identify only material/significant components
separately for depreciation. Materiality is a matter of management/audit
judgment and needs to be decided on the facts of each case. Normally, a
component having original cost equal to or less than 5% of the original
cost of complete asset may not be material. However, a component having
original cost equal to 25% of the original cost of complete asset may
be material. In addition, a company also needs to consider impact on
retained earnings, current year profit or loss and future profit or loss
(say, when part will be replaced) to decide materiality. If a component
may have material impact from either perspective, the said component
will be material and require separate identification.

In many
cases, identification of material components may involve complex
judgment, particularly, for assessing impact on future P&L. Also
what may not be material in a particular period could become material in
later years, and vice versa.

Auditors will have to modify
their audit opinion for a company that does not follow component
accounting, the impact of which is likely to be material in the context
of the overall results or financial position of that company.
In the case of a company that has a manufacturing facility and is asset
intensive, component accounting is likely to be material, not only
because of depreciation impact, but also the way replacement costs are
accounted for.

How is depreciation computed for components vis-avis the requirements of Schedule II?

Each
significant component of the asset having useful life, which is
different from the useful life of the remaining asset, is depreciated
separately. Though component accounting is mandatory, its application should be restricted only to material items.
If the useful life of the component is lower than the useful life of
the principal asset as per Schedule II, such lower useful should be
used. On the other hand, if the useful life of the component is higher
than the useful life of the principal asset as per Schedule II, the
company has a choice of using either the higher or lower useful life.
However, higher useful life for a component can be used only when
management intends to use the component even after expiry of useful life
for the principal asset.

To illustrate, assume that the useful
life of an asset as envisaged under the Schedule II is 10 years. The
management has also estimated that the useful life of the principal
asset is 10 years. If a component of the asset has useful life of 8
years, AS 6 requires the company to depreciate the component using eight
year life only. However, if the component has 12 year life, the company
has an option to either depreciate the component using either 10 year
life as prescribed in the Schedule II or over its estimated useful life
of 12 years, with appropriate justification. However, in this case 12
years life for the component can be used only when management intends to
use the component even after expiry of useful life for the principal
asset.

How are replacement costs accounted for?
The
application of component accounting will cause significant change in
measurement of depreciation and accounting for replacement costs.
Currently, companies need to expense replacement costs in the year of
incurrence. Under component accounting, companies will capitalize these
costs as a separate component of the asset, with consequent expensing of
net carrying value of the replaced component. If it is not practicable
for a company to determine carrying amount of the replaced component, it
may use the cost of the replacement as an indication of what the cost
of the replaced part was at the time it was acquired or constructed.

Even
under the component accounting, a company does not recognise in the
carrying amount of an item of fixed asset the costs of the day-to-day
servicing of the item. These costs are expensed in the statement of
profit and loss as incurred.

How are major inspection/overhaul expenses accounted for when component accounting is applied?

Under
Indian GAAP, no specific guidance is available on component accounting,
particularly, major inspection/ overhaul accounting. In the absence of
guidance, the following two options are likely. A company can select
either of two options for accounting of major inspection/ overhaul. The
option selected should be applied consistently.

Option 1
Though
AS 10 Accounting for Fixed Assets or any other pronouncement under
Indian GAAP does not comprehensively deal with component accounting,
Ind-AS 16 Property, Plant and Equipment contains comprehensive guidance
on the matter. Under component accounting as envisaged in Ind-AS 16,
major inspection/overhaul is treated as a separate part of the asset,
regardless of whether any physical parts of the asset are replaced.
Hence, one option is to apply Ind-AS 16 guidance by analogy. The
application of this approach is explained below.

When a company
purchases a new asset, it is received after major inspected/ overhaul by
the manufacturer. Hence, major inspection/ overhaul is identified
separately even at the time of purchase of new asset. The cost of such
major inspection/ overhaul is depreciated separately over the period
till next major inspection/overhaul.

Upon next major inspection/overhaul, the costs of new major inspection/ overhaul are added to the asset’s cost and any amount remaining from the previous inspection/ overhaul is derecognized. There is no issue in application of this principle, if the company has identified major inspection/ overhaul at the time of original purchase. However, sometimes, it may so happen that the cost of the previous inspection/overhaul was not identified (and considered a separate part) when the asset was originally acquired or constructed (this may not necessarily be an error but a change in an estimate). This process of recognition and derecognition should take place even in such cases.

If   the   element   relating   to   the   inspection/overhaul had  previously  been  identified,  it  would  have  been depreciated between that time and the current overhaul. However, if it had not previously been identified, the recognition and derecognition principles still apply. In such a case, the company uses estimated cost of a future similar inspection/overhaul to be used as an indication of the cost of the existing inspection/overhaul component to be derecognized after considering the depreciation impact.

OPTION 2
It may be argued that under AS 10 approach, all repair expenditure (including major inspection/overhaul) need to be charged to P&L as incurred. Though schedule II mandates component accounting, it does not state that application of component accounting is based on Ind-AS 16 principles. Hence, AS 10 applies for repair expenditure (including major inspection/overhaul).

Under this option, the application of component accounting is restricted only to physical parts. Neither on initial recognition nor subsequently, the compa- ny identifies major inspection/overhaul as separate component. Rather, any expense on major inspection/ overhaul is charged to P&L as incurred.

What are the presentation/disclosure requirements when component accounting is followed?
Component accounting is relevant for purposes such as depreciation and accounting for replacement cost. Companies are not required to disclose components separate- ly in the financial statements or notes thereto. Rather, the company discloses the asset with all its components as one line item.

With regard to disclosure of useful life/depreciation rates, Schedule II has prescribed depreciation rates only for principal asset and no separate rates are prescribed for its components. Also, schedule II requires disclosure of justification if a company uses higher/lower life than what is prescribed in Schedule II. To comply with these require- ments, the following principles are used:

(i)    A company discloses useful life/depreciation rate used for the principal asset separately. If this life/rate is higher/ lower than life prescribed in schedule II, justification for the difference is disclosed in the financial statements.
(ii)    There is no need to disclose useful lives or depreciation rates used for each component (other than principal asset) separately. It will be sufficient compliance, if disclosure is given as a range by presenting the highest and lowest amount. It may not be sufficient to present the average of the useful lives or depreciation rates used in that class of components.

What are the transitional provisions with respect to componentisation?

Component accounting is applicable from 1st April, 2014. It is required to be applied to the entire block of assets existing as at that date. It cannot be restricted to only new assets acquired after 1st April, 2014. Since companies may not have previously identified components separately, they may use estimated cost of a future similar replacements/ inspection/ overhaul as an indication of to determine their current carrying amount.

AS 10 gives companies an option to follow component accounting; it does not mandate the same. In contrast, component accounting is mandatory under the Schedule
II.    Considering this, transitional provisions of Schedule II can be used to adjust the impact of component accounting. If a component has zero remaining useful life on   the date of Schedule II becoming effective, i.e., 1st April 2014, its carrying amount, after retaining any residual value, will be charged to the opening balance of retained earnings. The consequent impact with respect to deferred taxes should also be adjusted to retained earnings. The carrying amount of other components, i.e., components whose remaining useful life is not nil on 1st April 2014, is depreciated over their remaining useful life.

In the case of listed companies do companies have to comply with component accounting in the quarterly results provided under Clause 41?

Listed companies having 31st March year-end need to apply component accounting for quarter ended 30th June, 2014. It may be possible that certain companies have not completed the process of identifying components by due date for publishing its results for quarter ended 30th June, 2014. In such a case, the auditors should make materiality assessment particularly considering that there is no need to publish balance sheet on a quarterly basis. In many cases, it may be clear that application of component ac- counting may not have impacted results for the quarter materially. If so, the auditor should document its basis for materiality assessment in the work papers. As already indicated elsewhere in this article, for most asset intensive companies, the impact on current or future results or financial position will most likely be material because of depreciation and accounting for replacement costs.

Gift – Validity – Delivery of possession is not an essential prerequisite for making of valid gift in case of immovable property: Transfer of property Act. Section 123.

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Renikuntha Rajamma (D) by LRS vs. AIR 2014 SC 2906

A reference was made to a larger bench for an authoritative pronouncement as to the true and correct interpretation of sections 122 and 123 of The Transfer of Property Act, 1882. The Plaintiff-Respondent in this appeal filed for a declaration to the effect that revocation deed dated 5th March, 1986 executed by the Defendant-Appellant purporting to revoke a gift deed earlier executed by her was null and void.

The Plaintiff’s case as set out in the plaint was that the gift deed executed by the Defendant- Appellant was valid in the eyes of law and had been accepted by the Plaintiff when the donee-Defendant had reserved to herself during for life, the right to enjoy the benefits arising from the suit property. The purported revocation of the gift in favour of the Plaintiff-Respondent in terms of the revocation deed was, on that basis, assailed and a declaration about its being invalid and void ab initio prayed for.

The suit was contested by the Defendant-Appellant herein on several grounds including the ground that the gift deed executed in favour of the Plaintiff was vitiated by fraud, misrepresentation and undue influence. The parties led evidence and went through the trial with the Trial Court eventually holding that the deed purporting to revoke the gift in favour of the Plaintiff was null and void. The Trial Court found that the Defendant had failed to prove that the gift deed set up by the Plaintiff was vitiated by fraud or undue influence or that it was a sham or nominal document. The gift, according to Trial Court, had been validly made and accepted by the Plaintiff, hence, irrevocable in nature. It was also held that since the donor had taken no steps to assail the gift made by her for more than 12 years, the same was voluntary in nature and free from any undue influence, misrepresentation or suspicion. The fact that the donor had reserved the right to enjoy the property during her life time did not affect the validity of the deed, opined the Trial Court.

The First Appellate Court also held that the gift deed was not a sham document, as alleged by the Defendant and that its purported cancellation/revocation was totally ineffective.

The first Appellate Court also affirmed the finding of the Trial Court that the donee had accepted the gift made in his favour. The appeal filed by the Defendant (Appellant herein) was dismissed.

The High Court declined to interfere with the judgments and orders impugned before it and dismissed the second appeal of the Appellant, holding that the case set up by the Defendant that the gift was vitiated by undue influence or fraud had been thoroughly disproved at the trial.

The Court observed that Chapter VII of the Transfer of Property Act, 1882 deals with gifts generally and, inter alia, provides for the mode of making gifts. Section 122 of the Act defines ‘gift’ as a transfer of certain existing movable or immovable property made voluntarily and without consideration by one person called the donor to another called the donee and accepted by or on behalf of the donee. In order to constitute a valid gift, acceptance must, according to this provision, be made during the life time of the donor and while he is still capable of giving the gift. It stipulates that a gift is void if the donee dies before acceptance.

Section 123 regulates mode of making a gift and, inter alia, provides that a gift of immovable property must be effected by a registered instrument signed by or on behalf of the donor and attested by at least two witnesses. In the case of movable property, transfer either by a registered instrument signed as aforesaid or by delivery is valid u/s. 123.

When read with section 122 of the Act, a gift made by a registered instrument duly signed by or on behalf of the donor and attested by at least two witnesses is valid, if the same is accepted by or on behalf of the donee. That such acceptance must be given during the life time of the donor and while he is still capable of giving is evident from a plain reading of section 122 of the Act. A conjoint reading of sections 122 and 123 of the Act makes it abundantly clear that “transfer of possession” of the property covered by the registered instrument of the gift duly signed by the donor and attested as required is not a sine qua non for the making of a valid gift under the provisions of Transfer of Property Act, 1882. Judicial pronouncements as to the true and correct interpretation of section 123 of the T.P. Act have for a fairly long period held that section 123 of the Act supersedes the rule of Hindu Law if it contained any stipulation in making delivery of possession an essential condition for the completion of a valid gift.

Section 123 of the T.P. Act is in two parts. The first part deals with gifts of immovable property while the second part deals with gifts of movable property. Insofar as the gifts of immovable property are concerned, section 123 makes transfer by a registered instrument mandatory. This is evident from the words “transfer must be effected” used by the Parliament insofar as immovable property is concerned. In contradistinction to that requirement the second part of section 123 dealing with gifts of movable property, simply requires that gift of movable property may be effected either by a registered instrument signed as aforesaid or “by delivery.” The difference in the two provisions lies in the fact that insofar as the transfer of movable property by way of gift is concerned, the same can be effected by a registered instrument or by delivery. In the case of immovable property no doubt requires a registered instrument, but the provision does not make delivery of possession of the immovable property gifted as an additional requirement for the gift to be valid and effective.

There is indeed no provision in law that ownership in property cannot be gifted without transfer of possession of such property. As noticed earlier, section 123 does not make the delivery of possession of the gifted property essential for validity of a gift.

The recitals in the gift deed also prove transfer of absolute title in the gifted property from the donor to the donee. What is retained is only the right to use the property during the lifetime of the donor which does not in any way affect the transfer of ownership in favour of the donee by the donor.

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Labour Reforms – Hold the Celebrations

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There has been some minor celebration over the fact that the president has given assent to changes in three central laws relating to industrial labour, proposed by the Rajasthan government and, therefore, applicable to that state. It would seem that we are prepared to celebrate even the smallest change in labour legislation in one corner of the country, when what the country needs is wholesale change across all states. The most significant of the changes in Rajasthan is one that does away with the need for government permission to retrench staff or shut down a unit, so long as the unit employs fewer than 300 workers (against 100 earlier). This is to be welcomed, but do remember that a more ambitious change along the same lines was proposed on a national scale by Yashwant Sinha, in a Budget speech, more than a decade ago. So this is reform by inches over decades. In any case, the real changes needed in labour laws are not those that facilitate units shutting down, rather those that help units to function more easily – though it is also true that you are more likely to hire workers if you know that you can retrench them should they become surplus.

What one would like to hear more of are the changes to labour laws on an all-India scale that the Cabinet was widely reported to have cleared more than three months ago. These were more wide-ranging, though perhaps not comprehensive, and with all-India application. As reported at the time, the changes related to limits on hours of overtime (important for seasonal businesses that have peaking cycles at specific times of the year), women working night shifts (many industries have traditionally had more women employees), reducing the scope for harassing factory owners because of minor infractions, and simplifying form-filling for the owners of small factories. Some of these changes were clearly designed to reduce the scope for blackmail by labour inspectors – harking back once again to Yashwant Sinha’s unfulfilled promise to get rid of the “inspector raj”.

The accompanying message to the country has to be that the government wants to create real jobs that create real value, and pay much better wages than the rural employment guarantee programme does. China, which has been factory to the world, is now less than competitive in quite a few labour-intensive industries because of its much higher level of per capita income and a stronger currency. So far the slack has been taken up by countries like Bangladesh, Vietnam and the Philippines. There is no reason why some of those industries should not find a welcoming home in India. If the government can bring about a more congenial environment for employers, the jobs should materialise – and that would be more important than all the other Modi initiatives so far.

(Source: Article in Weekend Ruminations by T. N. Ninan in Business Standard dated 15.11.2014)

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Gold imports: Reform Taxes, don’t create new smugglers

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Gold imports have skyrocketed despite the global price of the yellow metal weakening. That signals that gold has not lost its sheen as an investment choice. The government is worried that the surge in gold imports could undermine the country’s balance of payments position. The worry is not misplaced. India’s current account deficit is within limits of prudence, due to the sharp drop in global crude prices, but splurging foreign exchange on imported gold will negate these gains. Anecdotal evidence suggests that people are using their unaccounted money to buy jewellery and bullion, shunning financial instruments that create audit trails. So, the need is to establish audit trails of these transactions. One way would be for the Centre to impose a nominal 1% excise duty on jewellery, to create audit trails and curb the use of black money to fund gold purchases.

Jewellery purchases in cash of over Rs. 5 lakh is captured under the annual information returns (AIR) that identify potential taxpayers by examining their expenditure patterns. AIR creates an audit trail too, but there are no trails for cash purchases below Rs. 5 lakh. The import surge is being attributed to a relaxation of the 80:20 scheme — at least onefifth of every lot of imported gold is exclusively made available for exports, and the balance for domestic use — for star and premier trading houses. However, the government should desist from any attempt to restrict the demand for gold through quantitative restrictions or impose higher import duties, as it would only encourage smuggling.

(Source: The Economic Times dated 17-11-2014)

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Voluntary Disclosure Scheme for politicians

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I am a senior citizen. My greatest regret is that I was totally inactive beyond my personal and professional life. I was happy with my family, books, T.V., residence, court-work and holidays here and abroad. Doing something concrete for the nation was no part of my life or living. Not surprising, of late, I have been experiencing substantial remorse on this count. By such indifference I, like many others, permitted some unscrupulous and corrupt politicians to loot the people of this country. It is because of this loot that crores of people of this country are below the poverty line and many children are dying at infancy or in the womb, all because of the absence of proper nourishment. I blame particularly the educated, me included, for being self-centered and being totally indifferent to this on-going loot; a loot of far greater magnitude than what our foreign rules are accepted of.

I have come across, of course, a few politicians, who are sorry for their sins and would like to wash off those sins, given an opportunity. There are others, who also must be given a similar opportunity so that they are not blamed for what follows in case the opportunity is not availed of. These people have enjoyed the monies, which really belong to the nation and which would have alleviated the poverty of teeming millions of this country; these politicians have enjoyed the ill-gotten monies for a fairly long time. The earlier they pay back the same to the nation, the better. In this direction, let me share a few ideas.

By way of a first opportunity, there must be Voluntary Disclosure and Repayment Scheme (‘Scheme’ hereafter) promulgated by the Government, giving an opportunity to such profligate politicians to voluntarily declare the amount of ill-gotten monies that they have got by corruption or by any other illegal means and to payback the same to the Government forthwith or by installments, as may be laid down in the scheme. The Scheme will apply even to a member of Village Panchayat. In future, a similar Scheme can be promulgated for Government servants.

The politicians making such a declaration would have immunity from prosecution and penalty under all laws of the land in respect of the ill-gotten monies declared under the Scheme.

If after the expiry of the scheme, any politician, who has not availed of the scheme, is found to have the monies received in corruption, his entire wealth will immediately vest in the Government and the custody thereof will also be immediately taken by the Government. A special committee headed by the retired Supreme Court judge will decide whether the politician has been having the ill-gotten monies with him and yet has not availed of the Scheme.

The concerned laws must be amended to provide that in cases of corruption beyond a particular figure the incumbent must be punished with life imprisonment and others with rigorous imprisonment of minimum 14 years; the corruption cases of these VIPs must be taken up on a priority basis by the Courts; if necessary Special Courts must be established so that the litigation, which is bound to ensue at the instance of these VIPs and VVIPs comes to an end immediately and the message goes to all concerned that now the corruption is not profitable, or for that matter dangerous and risky. The attempt in this article is to give an idea to get back the people’s money from the corrupt. To those who will feel like criticising the idea, my earnest request is to come out with a better and more effective idea; I will be very happy.

It is a sad commentary on the CBI, that inspite of long-standing corruption, its record on this count, to say the least, is not very impressive. Is it that they did not know what every man in the street knew? The rampant corruption requires a CBI with bigger manpower and greater competence. Today, CBI does not seem to be fully equipped to take on the powerful and influential head on.

More criminal lawyers and chartered accountants trained in investigation of corruption cases must be put at the disposal of the CBI at the stage of investigation; in fact, the CBI must have some of them in house, so that they are at their beck and call any time it wants them.

Looking at the fact that the corrupt are also very powerful and influential persons, it is very necessary that the C.B.I. must be made an independent body, like the Election Commission. It will be unfair to expect much on this count from the present CBI. We must acknowledge that with all its handicaps, the performance of the CBI of late is becoming better. The present C.B.I. can go up as much as its Chief is keen to take it. Recall what Seshan did to the Election Commission. An independent C.B.I. will be a great check on the corrupt and will have huge credibility amongst the people of this country and even abroad.

I will exhort to those amongst us to whom the nation is dear, particularly the youngsters, to see that these corrupt politicians cannot enjoy status and power resulting from their ill-gotten riches. I will suggest that Gandhian methods must be adopted when the corrupt are out to show, rather exhibit, their ill-gotten wealth on various social or other occasions. A great mass of Gandhians, scattered all across the country in a disjointed manner, can be of great help in this direction. In this direction if they unite for this work, miracles can happen. Recall the Anna Hazare movement.

Let me illustrate as to where we were when we got independence and where we are now. When Jawaharlal Nehru was the Prime Minister, he was invited to a wedding function, by one of his ministers. Instead of straightaway attending the marriage function, he sent his personal secretary to check whether the function was on a modest scale or was it on an ostentatious and gaudy scale. After the personal secretary reported that it was on a modest scale, he attended.

I think it is high time that the Prime Minister and the State’s Chief Ministers must ask their Cabinet Colleagues to live within their legitimate means; or for that matter set all examples in simple living. The citizens of this country will highly appreciate it.

The citizens, particularly the industrialists and the big traders, must at least decide that they will not be seeking favours from the Ministers and the Government servants by bribe, and the FICCI can declare a particular year say 2015 as the ‘No bribe year’. Those people who help the CBI to catch the corrupt red-handed must be rewarded by the Government in appreciation of their service to the nation. The T.V. channels can do a great job by publishing and glorifying such events. Let me state one heartening incident, which I read sometime back. A particular unit of WIPRO required a dedicated electric sub-station and for installation thereof some permission was required. That unit made an application. The Manager of that unit, who was newly appointed, was approached by the public utility employee informing him that in ordinary course, the permission would take about a year but if his demands are met he can get the permission within a week’s time. The newly appointed Manager thought that this is a great opportunity to impress the boss about his competence and went to Mr. Azim Premji. Mr. Premji heard him patiently and then told him, “You are new to this company. Let me tell you that bribing is not our culture. Therefore, hereafter do not think of doing any such thing as long as you are in this organisation.” We require many more Premjis. I am sure there are a few others like Mr. Premji; but for sure, we require many many more like him. In the challenging task of making India corruption free India, the industry and trade leaders can contribute a lot.

Let me tell the people that as against the corrupt ones there are honest politicians also. It is because of such people that the country has not collapsed.

I request the Government and our Economists to tell the nation as to what is the corruption-cost component in the cost of living index.

Lastly, the Election must be funded by the State. The earlier this is done, the better, because anybody can have an alibi when caught red-handed that he was accepting monies for the party. The ensuing election in the States is a great opportunity to the voters. Consider only that candidate to be eligible for vote who declares on oath his (and his family members’) wealth as on last 31st March at least one month before election and undertakes to declare it as on 31st March of every year thereafter till the next election.

I am absolutely shocked by the ‘I don’t care’ attitude of the Central and State Governments to the progressively aggravating problem of overpopulation and the absence of any discussion of the problem as if it does not exist at all! In my humble opinion, all the talk of progress will be a hogwash if the overpopulation problem is not urgently attended to. It looks like that after the back lash in late Sanjay Gandhi’s times, the politicians of all hue decided to turn a Nelson’s eye to the problem.

In the end, it is impossible to conclude this article without mentioning that our judiciary, particularly the higher echelons thereof like the Supreme Court and High Court have done remarkable work and has made us all very proud. I wonder if the framers of the Constitution would have imagined that the judicial wing in future will be a life belt to a sinking nation caught in the malicious whirlpool of rampant, nepotism, dishonesty and corruption. Permit me to say that much more is expected from the judiciary.

One man from Gujarat was instrumental in getting us independence. I hope and trust that another man from Gujarat also fulfils the hopes and inspiration of the nation, which has entrusted its destiny into his hands.

Let me conclude with Pearl Buck; “Oh India, dare to be worthy of your Gandhi.” Jai Hind.

Press Note No. 9 – DIPP File No. 9(8)/2014-IL(IP) dated 20th October, 2014

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Press Note No. 9 – DIPP File No. 9(8)/2014-IL(IP) dated 20th October, 2014

Streamlining the procedures for grant of Industrial Licences

This Press Note contains 3 clauses which modify the existing preocedures as under: –

1. Increasing the validity of the Industrial Licence
This Press Note, in supersession of Press Note No. 5 (2014 Series) dated 2nd July, 2014, provides for 2 extensions of 2 years each in the initial validity of 3 years of the Industrial Licence.

2. Removal of stipulation of annual capacity in the Industrial Licence
Annual capacity for defense items for Industrial Licence has been de-regulated. The Licencee now has to submit half-yearly production returns to the DIPP & Department of Defence Production, Ministry of Defence in the proscribed format.

3. Sale of Defence items to Government entities without approval of Ministry of Defence
Licensee’s are allowed to sell Defence items to Government entities under the control of Ministry of Home Affairs, State Governments, Public Sector Undertakings and other valid Defence Licenced Companies without prior approval of the Department of Defence Production. Sales to others will require prior approval of the Department of Defence Production.

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Are sebi’s answers to Faqs binding on sebi and/or third parties?

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Synopsis
This article touches upon the issue of legal sanctity, enforceability & binding nature of the answers to ‘frequently asked questions’ (FAQs), that are provided by the SEBI. It raises some fundamental questions – whether SEBI has the authority to issue such FAQs, whether these FAQs are binding on SEBI and/or third parties, and can these FAQs override regulations issued by the SEBI?

These challenging questions have been debated in the light of a recent SEBI order where the SEBI-issued FAQS were relied upon & also considered valid in deciding the questions of law. The article, after comprehensive analysis, demonstrates a view that is inconsistent with the view held in the recent SEBI order.

Basic issue
How far are answers by SEBI to Frequently Asked Questions (‘FAQs’) on SEBI Regulations, etc. binding? Can they even be relied on by SEBI? More so, when substantive legal issues are to be decided which may result in grant/rejection of relief to parties or even levy of penalty for violation of Regulations. SEBI has recently passed an Order (dated 30th October, 2014 in matter of Mr. A. B. Gupta) where it relies on the FAQs. Further, SEBI asserts that FAQs are valid and can be relied on by SEBI for answering questions of law.

What are FAQ s?
As is known, SEBI (like many other regulators) issues Frequently Asked Questions (‘FAQs’) from time-to-time (the correct term should be AFAQ – Answers to Frequently Asked Questions, but that is perhaps a semantic issue).

Thus, they are generally answers to specific questions that SEBI anticipates or has received from timeto- time. The answers are usually not reasoned in detail though in some cases, where the Regulation itself answers the question, due reference is given. Often they are answers about how the Regulations would be viewed in practice and also about matters of procedure. Such details may not always be possible to be inserted in Regulations.

However, several questions arise. If the Regulations say one thing and the FAQs something different, or even the opposite, will the FAQs override the Regulations? If the Regulations do not cover certain matters, can the FAQs fill in the gaps and provide for such matters, even if by this it would mean extending or amending the Regulations? In particular, can the FAQs be binding in regard to the Regulations, when these FAQs give clarifications on substantial matters and/or matters which can result in penalty/prosecution or other adverse directions? Indeed, in the other extreme, can SEBI even rely on such FAQs in any manner? ?

How are FAQ s issued?
There does not seem to be any prescribed procedure by which the FAQs are issued. Indeed, as we will see later, there is no legal power or basis to issue FAQs either which gives them any legal sanctity. Generally, they seem to be issued by way of display on its website. It is not clear under whose authority, if any, these are issued – i.e., whether it is issued by the authority of the Board with contents duly confirmed by it, or by the Chairman of SEBI or by a senior official. Further, the FAQs can keep changing from time-to-time and while it appears that at least in a couple of cases, they have highlighted the change and when it was made, it is possible that the FAQs could be changed without any notification. The FAQs can be added to, deleted from, and amended generally from time to time without any notice or even a mention.

SEBI’s order
In this background, let us consider what the recent SEBI Order said.

SEBI, as stated earlier, recently passed an order in which it relied on its own FAQs for arriving at answers to substantive issues of law under the Regulations. While doing so, it made some observations. The case concerns an allegedly hostile takeover and is on some objections made by certain persons against open offer made. The core issues in that case are interesting. However, this post focuses only on one matter and that is on the manner in which SEBI has relied on FAQs (Frequently Asked Questions) on the SEBI (Substantial Acquisition of Shares and Takeovers), Regulations 2011 (the Regulations), released by it.

SEBI relied on the FAQs to arrive at the conclusion on two issues raised. The issues were significant. Depending on which way SEBI had decided it, certain parties could have gained or lost substantial rights. Hence, the Order interpreted the Regulations. Whether the interpretation was correct or not could be a matter of debate. What is worth reviewing here are observations SEBI made while relying on the FAQs.

At first, SEBI relied on the FAQs while answering the issues raised. The complainant objected to SEBI’s reliance on FAQs saying they do not have the force of Regulations. SEBI rejected this argument and said:-

“9. The complainant’s Advocates acknowledged the existence of SEBI’s FAQs as reproduced on pages 15-16 of this Order but argued that FAQs does not have the force of regulations and therefore should not be considered at all. The question before me is whether SEBI can interpret its own regulations, which it has done in the form of FAQs. I am of the opinion that it can and it should, otherwise doubts raised about the effect of regulations would bring the entire business to a halt. I am of the opinion that such interpretations are valid so long as these are transparent and applied consistently without discrimination. No case has been made out that SEBI interpreted regulations 3(1), 3(2) and 4 otherwise in any other matter, or that SEBI’s interpretation was not known publicly.”

Several questions arise.
– Do FAQs have the force of Regulations?
– Is SEBI’s interpretation expressed through FAQs binding on third parties?
– Does SEBI’s interpretation bind SEBI itself?

Assuming such interpretations are valid, what are pre-requisites for reliance on such FAQs – whether it is enough that they are (i) transparent/published and known publicly (ii) applied consistently without discrimination?

SEBI seems to have taken a view that the FAQs are binding if they are transparent and applied consistently. On one of the issues raised, it even gave a few examples of similar practices adopted in the past where it had applied in practice the same interpretation that it was applying in the present case. However, does practice make or amend law in such circumstances?

Nature of FAQ s as per the FAQ s
Firstly, let us examine the FAQs themselves. This is what the introductory paragraphs to the FAQs to the SEBI (SAST) Regulations 2011, which are the subject matter of this decision, say:-

“These FAQs offer only a simplistic explanation/ clarification of terms/concepts related to the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 [“SAST Regulations, 2011”]. Any such explanation/clarification that is provided herein should not be regarded as an interpretation of law nor be treated as a binding opinion/ guidance from the Securities and Exchange Board of India [“SEBI”]. For full particulars of laws governing the substantial acquisition of shares and takeovers, please refer to actual text of the Acts/ Regulations/Circulars appearing under the Legal Framework Section on the SEBI website.” (emphasis supplied).

Thus, the FAQs themselves clearly say that are not to be regarded as interpretation of law. Further, they are not binding on SEBI or third parties nor do they have the status of any guidance from SEBI. For knowing the law, it is the actual text of the Regulations, etc. that has to be read.

Nature of Regulations and manner of their issue

The SEBI Act, 1992 empowers SEBI to issue Regulations for certain specified purposes. The Regulations are required to be made – and amended – in the prescribed manner u/s. 31 of the SEBI Act, 1992. They have to be released and notified as prescribed under the Act. They have to be then laid before the House of Parliament for prescribed period. Any changes agreed by the Houses have to be duly incorporated.

Further, violations of the Regulations have significant consequences under the Act and the Regulations them- selves. These include penalties, prosecution, directions, etc. Thus, there is a clear basis of Regulations as a law, clear prescribed procedure of how they are to be made and notified. Finally, it is this clear basis which gives them a force of law such that violations of Regulations have adverse consequences in law.

Whether There is any Power To issue FAQs?
SEBI does not have power under the Act to issue such “clarifications” to the Regulations where such clarifications would have binding force of Regulations, particularly when they contradict the Regulations or result in extended application of the Regulations. Indeed, there is no concept of FAQs under the Act.

There have been several decisions of the Courts and even the Securities Appellate Tribunal that uphold Regulations over circulars. And that in case of any contradictions between the Regulations and circulars, it will be the Regulations that would apply.

Undoubtedly, the FAQs would help a party, particularly a lay person, in throwing some light at what the Regulations are trying to say. They may even be a sort of guidance of how SEBI views certain issues, though it seems from the introduction to the FAQs themselves that they may not be binding even on SEBI.

In case the Regulations are clear, therefore, it is submitted then FAQs have no relevance. Indeed, it cannot be even said that in case of ambiguity, the FAQs could be looked into and the views in the FAQs could apply.

It appears that SEBI has erred in stating that the FAQs have any binding legal status. SEBI, it is submitted, cannot take any adverse action in terms of penalties/prosecution/directions by relying on FAQs that contradict the Regulations. The Regulations are self-contained in this sense; the FAQs cannot add or modify the Regulations.

In conclusion, it is reiterated that the issue here is not whether the interpretation given in the FAQs is correct or not, it is on how much, if at all, can they be considered binding on SEBI and/or parties. The better view seems to be that FAQs cannot be relied on at all while deciding on substantive legal issues. They are neither binding on SEBI nor they are binding on any third party.

Boskalis International Dredging International CV vs. DDIT [2014] 47 taxmann.com 150 (Mumbai – Trib.) A.Y: 2002-03, Dated: 18-07-2014

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S. 92C, the Act; Rule 10A(d), the Rules – when the transactions are influenced by each other, particularly in determining price/ profit in the transactions, they are ‘closely linked transactions’; however, where taxpayer undertook transactions with different AEs, only transactions with each separate AE could not be clubbed.

Facts:
The taxpayer was a limited partnership established in Netherland to undertake international dredging contracts. It entered into a contract with Indian Oil Corporation for dredging and reclamation for a refinery project in India. For this purpose, it hired dredgers/vessels/equipment on lease from certain Associated Enterprises (“AEs”).

The taxpayer followed CUP method for benchmarking the international transactions of leasing of dredger/equipment using valuation certificates of an international firm that are normally used in the dredging industry for negotiating lease rentals. The said valuation certificates were accepted by TPO as suitable benchmark for computing the ALP. The taxpayer then clubbed all lease transactions with all AEs together and benchmarked the same on an aggregate basis by adopting average of all.

Referring to section 92C of the Act read with Rule 10A(d) of the rules, the taxpayer contended that all the transactions of lease of dredger and equipment being similar, were the same class of transactions. Further, dredgers and equipment were used for carrying out single project and they could not be used independently since their working was dependent on each other. The taxpayer also contended that the TPO should consider the average of all the payments (whether above the benchmark valuation certificates or below the benchmark valuation certificates) and since such average was lower than the benchmark, question of any adjustment will not arise.

The tax authority contended that the benchmark valuation certificates of the international firm constituted a scientific benchmark. Once a scientific benchmark is used as a basis, and as each vessel is a class by itself, no clubbing of transactions should be done.

The issue before Tribunal was whether for determining ALP, lease rentals paid to AEs should be considered by adopting ‘vessel-by-vessel’ approach or ‘class of transactions’ approach (i.e. clubbing) in respect of ‘closely linked transactions’.

Held:
The Tribunal held as follows.

If transactions are closely linked or continuous in nature, they can be considered as ‘closely linked transactions’ in terms of Rule 10A(d). When number of transactions are entered into between two parties, then portfolio approach (and not individual transaction approach) should be followed.

To examine whether the number of transactions are closely linked or continuous, it should be considered whether a transaction is, follow on of, and wholly or substantially dependent on, the earlier transaction. If the transactions are influenced by each other, particularly in determining the price/profit, they can be regarded ‘closely linked transactions’.

The taxpayer had taken dredger/equipment on hire from several AEs. The objective of transfer pricing provisions is to avoid base erosion and profit shifting from one tax jurisdiction to another tax jurisdiction. Therefore, for determining ALP, the clubbing of transactions can be only to the extent of the transactions with each AE. Transactions with different AEs cannot be clubbed as ‘closely linked transactions’ so as to influence the aggregate price or profit arising from the transactions because they cannot be termed as closely linked or continuous so as to influence the price in aggregate or the profit of the parties arising from these transactions.

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DCIT vs. Kothari Food and Fragrances (ITA No 92/LKW/2012) (Unreported) A.Ys: 2008-09, Dated: 05-09-2014

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Ss 40(a)(i), 195(1) – discount allowed by exporter to foreign buyer for pre-payment constitutes ‘credit’ in terms of section 195(1) and since tax was not withheld, the discount was disallowable u/s 40(a)(i).

Facts:
The taxpayer was an exporter of certain products. The products were exported to an overseas buyer on credit. The taxpayer offered discount to the buyer for making payment before the due date. The buyer was required to provide through its bank a guarantee or stand by letter of credit to the bank of the taxpayer for an amount equal to the provisional price and the interest. The contract did not mention pre-payment discount. However, in the invoice, the taxpayer allowed pre-payment discount and asked the buyer to pay the net amount after adjusting the advance payment from the invoice amount. Since the prepayment discount was adjusted in the invoice earlier from the contract price, effectively, the buyer paid the amount after deduction of pre-payment discount.

The AO held that credit of discount in the account of the foreign buyer of the taxpayer in its book of account was a ‘credit’, though not ‘payment’. Therefore, provisions of section 195(1) were attracted. Since the taxpayer had not withheld tax from such ‘credit’, the discount was disallowable in terms of section 40(a)(i) of the Act.

Held:
The Tribunal held as follows.

Whether payment of discount is made to the buyer or lesser amount is collected from the buyer (after adjusting the discount), the buyer receives the benefit. In Havells India Ltd. (ITA No 55/2012 and 57/2012), the Delhi High Court held that income in form of discount or interest is taxable in India and hence, ratio of decision of Supreme Court in GE India Technology Centre Pvt. Ltd. [2010] 327 ITR 456 (SC) was not applicable.

The pre-payment discount given by the taxpayer cannot be equated to quantity discount since quantity discount is reduction in sale price. The pre-payment discount was effectively in the nature of interest because it was in consideration of the taxpayer receiving advance payment and to compensate the buyer for making the payment in advance before the sale of goods. Mere nomenclature will not change its character.

Section 195 of the Act required the taxpayer to deduct tax from any sum paid to a non-resident which was chargeable under the Act.

The pre-payment discount allowed by the taxpayer was a ‘credit of income’ to the account of the buyer. As the taxpayer had not withheld the tax on the credit of such discount, the discount amount was disallowable u/s. 40(a) (i) of the Act.

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ITO vs. Antrax Technologies (P.) Ltd. [2014] 49 taxmann.com 275 (Bangalore – Trib.) A.Ys.: 2007-08 Dated: 10-07-2013

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Ss 9(1)(vi), 9(1)(vii) and 40(a)(i), the Act – payments for import of operations and service manuals relating to equipment being for purchase of copyrighted products, were neither FTS nor royalty and hence withholding of tax was not required.

Facts:
The taxpayer was an Indian Company. The taxpayer was engaged in the business of import and sale of certain visual equipment, such as, projectors, projector lamps, etc. During the relevant previous year, the taxpayer imported manuals and software containing operating and servicing instructions for use of the equipment and separately made payments to the supplier for the same.

Before the AO, the taxpayer contented that manuals and software were copyrighted products and the payments was made for use and sale of copyrighted products and not for acquiring copyrights. Therefore, payments for the services manuals were neither in the nature of FTS nor in the nature of royalty which were subject to withholding of tax. However, the AO concluded that in light of the decisions of Karnataka High Court in Samsung Electronics Company Ltd (ITA No 2988 of 2005) and Sonata Information Technology Ltd (ITA No 3076 of 2005), payment for purchase of software were to be treated as royalty and were subject to withholding of tax. As the taxpayer had not withheld tax from the payments, the AO applied the provisions of section 40 (a)(i)1 of the Act and disallowed the payments.

Held:
The Tribunal held as follows. Service manuals were books containing guidance and instructions for operation, use and after-sale service of equipment and thus were part of the equipment imported by the taxpayer.

While software requires user license, the manuals were copyrighted products that could be used by any person purchasing the equipment. There is a clear distinction between the copyrighted article and equipment which comes with a copyright or license to use the copyright.

In case of Samsung Electronics Company Ltd and Sonata Information Technology Ltd, Karnataka High Court dealt with import of software which required license to use copyright and hence, the Court held the payment was in the nature of royalty. However, the service manuals are not products but they merely provide guidance in using the product. Also, the equipment imported by the taxpayer is not protected by license or copyright and can be used by anyone who purchases them without any restriction on either its transfer or its usage. Therefore, the payment was not subject to withholding of tax.

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REITs: Providing Liquidity to Illiquid Assets!

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Synopsis
When a cheque issued to a creditor is dishonoured, where does the creditor file a suit against the debtor – in the Court which has jurisdiction over the creditor or in a Court which has jurisdiction over the debtor? This one issue has been oscillating back and forth with several Supreme Court decisions giving their view one way or the other. There now seems to be some finality on the matter …. … … … or is it?

Introduction
According to a 2008 Report of the Law Commission of India, over 38 lakh cheque bouncing cases were pending at the Magistrate Level as of October 2008. Over six years have passed since that Report and this figure is expected to have leapfrogged! The Magistrate is the first Court in the hierarchy of criminal justice in India and if this entry level forum itself is clogged, one can very well understand why justice in India often takes so long.

Section138 of the Negotiable Instruments Act, 1881 (“the Act”) is one of the few provisions which is equally well known both by lawmen and laymen. The section imposes a criminal liability in case of a dishonoured or bounced cheque. One of the most litigious issues in relation to a bounced cheque has been which Court has jurisdiction over a case? Say a debtor which has its registered office in Ranchi, Jharkhand issued a cheque drawn on a Ranchi bank to a creditor based in Mumbai and the cheque bounces, should the suit be filed in Mumbai or in Ranchi? This answer could make a big difference since the ease of filing a case in one’s own city or State is manifold as compared to a remote location. This issue has recently seen several Supreme Court and High Court decisions leading to a see-saw, one way and the other. A slew of decisions have come out strongly in favour of the accused unlike the earlier decisions which were procomplainant. Let us look at the history and the current position on this very important aspect which has made several creditors and banks jittery.

The Law: Section 138 of the Negotiable Instruments Act
Before we plunge into the issue on hand, let us pause for a moment and examine the impugned section. Section138 of the Act provides that if any cheque is drawn by a person to another person, and if the cheque is dishonoured because of insufficient funds in the drawer’s bank accounts, then such person shall be deemed to have committed an offence. The penalty for this offence is imprisonment for a term which may be extended to two years and/or with a fine which may extend to twice the amount of the cheque. In order to invoke the provisions of section138, the following three steps are necessary:

(a) the cheque must be presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier;

(b) once the payee is informed by the bank about the dishonour of the cheque, then he must, within 30 days of such information, make a demand for the payment of the said account of money by giving a notice in writing, to the drawer of the cheque; and

(c) the drawer of such cheque fails to make the payment of the said amount of money to the payee of the cheque, within 15 days of the receipt of the said notice.

A fourth step is specified u/s.142 of the Act which provides that a complaint must be made to the Court within 30 days from the date from which the cause of action arises (i.e., the notice period).

Where to file the case – Bhaskaran sets the stage!
A two-member bench of the Supreme Court in K. Bhaskaran vs. Sankaran Vaidhyan Balan (1999) 7 SCC 510 laid down five important components for filing a compliant u/s. 138 of the Act:

(1) D rawing of the cheque,
(2) Presentation of the cheque to the bank,
(3) Returning the cheque unpaid by the drawee bank,
(4) Giving notice in writing to the drawer of the cheque demanding payment of the cheque amount, and
(5) Failure of the drawer to make payment within 15 days of the receipt of the notice.

The Apex Court finally concluded that since an offence could pertain to any of the above five acts there could be five offences which could be committed at five different locations and hence, the suit could be filed in any Court having jurisdiction over these locations. Thus, the complainant can select any of the five Courts for filing his complaint within whose jurisdiction the five acts were done.

To continue our example above, the creditor could file his case against the Ranchi Company before the Magistrate Court in Mumbai (or Ranchi) and save himself a lot of trouble and effort, not to mention money! Suppose further, that the creditor has operations in all major cities and also bank accounts in all these cities. He deposits the cheque in his Ahmedabad branch which bounces. He issues the Notice from his Hyderabad office. As per Bhaskaran’s decision, not only can he file the suit in Mumbai or Ranchi but even from Ahmedabad and Hyderabad. Thus, the payee has full freedom to decide where to sue the drawer from. At times, this can also be used as a tool for harassment and as a pressure tactic.

Subsequent Cases Queer the Pitch
There have been several subsequent decisions but two noteworthy cases stand out. In Harman Electronics P. Ltd. vs. National Panasonic India (2009) 1 SCC 720, another two-member Bench held that the correct Court would be the one where the Notice for the bounced cheque was received and not where the Notice was sent. It also observed that section138 is being rampantly misused for territorial jurisdiction.

A subsequent three-member Bench in Shri Ishar Alloy Steels vs. Jayaswals Neco Ltd. (2001) 3 SCC 609 clarified that to be able to file a case u/s. 138 the cheque must be presented within six months on the bank of the drawer and not to the bank of the payer. The place where the complainant presented the cheque would not be relevant. Thus, the decisions of Harman and Ishar Alloy suggest that the Court of the accused should be the place where the suit should be filed. To continue our example above, the creditor could file his case against the Ranchi Company before the Jharkhand Courts.

Interestingly in Nishant Aggarwal vs. Kailash Kumar Sharma (2013) 10 SCC 72 the Supreme Court held that the ratio laid down by these two decisions in the case of Harman and Ishar Alloy did not dilute the principle stated in Bhaskaran’s case. This view was followed by the Supreme

Court in FIL Industries Ltd. vs. Imtiyaz Ahmad Bhat (2014) 2 SCC 266 and in Escorts Ltd. vs. Rama Mukherjee (2014) 2 SCC 255 all of which followed Bhaskaran.

Dashrath Rathod’s case – Cat amongst the Pigeons?
A recent decision of the three-member Supreme Court decision in the case of Dashrath Rupsingh Rathod vs. State of Maharashtra, Cr. A. No. 2287 /2009 Order dated 1st August, 2014 has led to debtors across the Country celebrating and creditors panicking. The decision of the Apex Court was as follows:

(a) T he offence contemplated u/s. 138 stands committed on the dishonour of the cheque, and accordingly the Magistrate at the place where this occurs is ordinarily where the Complaint must be filed, entertained and tried. The place, situs or venue of judicial inquiry and trial of the offence must logically be restricted to where the drawee bank, is located. The law should not be warped for commercial exigencies.

(b) T he place of the issuance or delivery of the statutory notice or where the Complainant chooses to present the cheque for encashment by his bank are not relevant for purposes of territorial jurisdiction of the complaints.

(c)    It is also now manifest that traders and businessmen have become reckless and incautious in extending credit where they would heretofore have been ex- tremely hesitant, solely because of the availability of redress by way of criminal proceedings.

(d)    Every magistrate is inundated with prosecutions u/s. 138 NI act, so much so that the burden is becoming unbearable and detrimental to the disposal of other equally pressing litigation.

(e)    Courts are not required to twist the law to give relief to incautious or impetuous persons and hence, the territorial jurisdiction is restricted to the Court within whose local jurisdiction the offence was committed, which in the present context is where the cheque is dishonoured by the bank on which it is drawn.

(f)    Bhaskaran’s case permitting prosecution at any one of the five places has resulted in hardship and inconvenience to the accused. Thus, it overruled Bhaskaran’s case and all subsequent decisions which followed it. Consequently, it endorsed the views expressed in the cases of harman and Ishar alloy.

(g)    Courts must avoid an interpretation which can be used as an instrument of oppression by the complainant.

The Supreme Court also observed as follows in respect to the problem this order would create for Creditors:

(a)    It is always open to the creditor to insist that the cheques in question be made payable at a place of the creditor’s convenience.

(b)    the relief introduced by section 138 of the act is in ad- dition to the contemplations in the Indian Penal Code. It is still open to such a payee recipient of a dishon- oured cheque to lodge a First Information report (FLR) with the Police or file a Complaint directly before the concerned magistrate. If the payee succeeds in establishing that the inducement for accepting a cheque which subsequently bounced had occurred where he resides or ordinarily transacts business, he will not have to suffer the travails of journeying to the place where the cheque has been dishonoured.

Coming back to our example, the case must now deffnitely be filed before the Courts in Ranchi. Thus, it is the creditor who now would have to travel to ranchi every time  there  is  a  hearing  and  appoint  local  lawyers. this substantially pushes up the cost of litigation.

Decision Retrospective or Prospective?
Is  this  decision  retrospective  or  prospective?  the  Supreme Court in Dashrath’s case held that this decision applied retrospectively and not just to complaints filed after the date of the Order!

The Court however held that this decision would not apply in those pending cases where the accused has been summoned to give evidence u/s. 145(2) of the act. Section 145(2) requires that the complainant has given evidence under an Affidavit and he has been summoned and examined.

All other cases where evidence recording has not commenced would be bound by this order and shall be returned to the proper jurisdictional Court in accordance with the Order laid down by the Court. If they are refiled within 30 days of their return then they shall be deemed to have been filed in time else they would be treated as being filed late. This decision would cause a series of transfer of cases in Courts across India.

Section 145(2) – a gaTeway? Considering the gateway given u/s.145(2), a series of cases have come up before the Courts as to whether they are exempt from the decision of Dashrath’s case. Some of the important principles laid down by the Bombay high Court in this respect are as follows:

(a)    Peter David Pinto vs. Dinesh Ranawat, Cr. WP No. 4421 /2013 dated 9th September 2014 – Mere filing of an affidavit cannot take the case out of the princi- ples laid down by the Supreme Court. Section 145(2) would apply only when the complainant has been ex- amined/cross-examined.

(b)    Suresh K. K. vs. Mansingaram, Cr. WP No. 923/2013 dated 9th September, 2014 and Sanjay Ramchandra Shrikande, Cr. WP No. 3619/2013 dated 19th Septem- ber, 2014 – even in a case which has travelled beyond section 145(2), the gateway provided by Dashrath’s case would not be available where the challenge of territorial jurisdiction has been given before the Supreme Court Order. Thus, the Supreme Court’s gateway is only applicable to cases where an objection to jurisdiction has been raised on the basis of the judgment. the Bombay high Court held that the Supreme Court order was retrospective in nature. Thus, Courts are loath to allow the gateway very easily.

Back to square one?
Can the decision in Dashrath’s case be distinguished in those cases where the cheque has been issued at par? thus, can it be said that for all cheques which are pay- able at par, the place where the cheques are deposited would  have  jurisdiction?  this  was  the  issue  before  the Bombay high Court in the case of Ramanbhai Mathurbhai Patel vs. State of Maharashtra, Cr. WP No. 2362/2014 dated 25th August, 2014. the Bombay high Court was faced with a case where “at par cheques” drawn on an ahmedabad      Branch      were      dishonoured.      They were    deposited    at    a    branch    in    mumbai.       The Court  held   that   by   issuing   cheques   payable   at all  branches,  the  drawer  of  the   cheques   had   given an option to the banker of payee to get the cheques cleared from the nearest available branch of bank of the drawer. It, therefore, held that the cheques were dishonoured within the territorial jurisdiction of the Court were they  bounced.  the  Bombay  high  Court  took  this  view based on its interpretation of Dashrath’s case.

It may be noted that the delhi high Court in similar facts in GVPR Engineers Ltd. vs. A. K. Tiwari, Cr. MC 3689/2009 dated 31st January, 2011 has held that the mere fact that a cheque is payable does not confer territorial jurisdiction on the place where the cheque is dishonoured. this decision was not considered by the Bombay high Court.

Stay
The Supreme Court vide its order dated 16th September, 2014 in SLP (Crl.) No. 7251/2014 has granted an interim stay to the Bombay High Court’s Order in Raman-bhai Mathurbhai Patel vs. State of Maharashtra. A final decision of the Supreme Court on this issue of cheques payable at par is expected soon.

Conclusion
One hopes that a judicial see-saw of this type where the complainants are in the dark over where to file suits is resolved soon. A reading of Dashrath’s decision shows that the question of cheques “payable at par” was not an issue before the apex Court. Since a majority of cheques are payable at par, based on this Bombay high Court decision, the suit could be filed at the place where they were deposited. the view endorsed by the Bombay high Court merits consideration considering centralised processing and clearing systems/electronic fund transfers. In today’s day and age the cheque does not physically travel to the drawer’s branch. In fact, even within a bank after centralised processing, it is the centralised unit which clears all cheques without physically receiving a cheque. One would have to wait and watch how the Supreme Court deals with these interesting arguments while finally deciding the issue!

Family Settlement – Registration – Document not compulsorily registrable –Registration Act, section 17:

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Vikaram Singh & Anr. vs. Ajit Indersingh; AIR 2014 Del 173

The learned Single Judge held that Memorandum of Family Settlement not being a registered document was inadmissible in evidence and also held that family arrangements are governed by special equities and principles applicable to dealings between strangers do not apply to dealings within the family.

On appeal, the division Bench held that the tenth recital records that a family settlement was being reduced into writing because it had already been acted upon by the parties. Thus, it is clear that the Deed of Family Settlement is a Memorandum i.e., a written record of what the parties had orally agreed upon at an earlier point of time and had acted thereupon. The second thing which emerges is that parties have acknowledged antecedent title. Thus, the court agreed with the view taken by the learned Single Judge in view of the law declared in the decisions. AIR 1958 SC 706 Nanibai & Ors. vs. Geeta Bai Kom Rama Gunge, AIR 1976 SC 807 Kale & Ors. vs. Deputy Director of Consolidation & Ors., and AIR 2007 SC 18 Hansa Industries vs. Kidar Sons Industries Ltd. The Deed of Family Settlement does not require any registration u/s. 17 and is a document admissible in evidence.

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Coparcenary property – Right of daughters – Section 6 as amended by Amendment Act (2005) is available to all daughters living on date of coming into force of 2005 Amendment Act : Hindu Succession Act, 1956:

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Badrinarayan Shankar Bhandari & Ors vs. Omprakash Shankar Bhandari AIR 2014 Bombay 151 (FB).

The Full Bench of the Bombay High Court held that the provisions of amended section 6 are retroactive in operation, and daughters living on 9th September, 2005 get rights in coparcenary property with effect from 9th September, 2005.

The Amendment Act applies to daughters born any time provided the daughters born prior to 9th September, 2005 are alive on the date of the coming into force of the Amendment Act i.e., on 9th September,2005. There is no dispute between the parties that the Amendment Act applies to daughters born on or after 9th September, 2005.

A bare perusal of sub-section (1) of section 6 would, thus, clearly show that the legislative intent in enacting clause (a) is prospective i.e. daughter born on or after 9th September, 2005 will become a coparcenary by birth, but the legislative intent in enacting clauses (b) and (c) is retroactive, because rights in the coparcenary property are conferred by clause (b) on the daughter who was already born before the amendment, and who is alive on the date of Amendment coming into force. Hence, if a daughter of a coparcener had died before 9th September, 2005, since she would not have acquired any rights in the coparcenary property, her heirs would have no right in the coparcenary property. Since section 6(1) expressly confers right on daughter only on and with effect from the date of coming into force of the Amendment Act, it is not possible to take that view of the heirs of a deceased daughter would get such a right.

On examination of amendment section 6 of the principal act and bearing in mind the words ‘on and from commencement of the Hindu Succession Act, 2005 found in section 6’, it must follow that the rights under the amended section 6 can be exercised by a daughter of a coparcener only after the commencement of the Amendment Act, 2005. Therefore, it is imperative that the daughter who seeks to exercise such a right must herself be alive at the time when the Amendment Act, 2005 was brought into force. It would not matter whether the daughter concerned is born before 1956 or after 1956. This is for the simple reason that the Hindu Succession Act, 1956, when it came into force applied to all Hindus in the country irrespective of their date of birth. The date of birth was not a criterion for application of the Principal Act. The only requirement is that when the Act is being sought to be applied, the person concerned must be a existence/ living. The Parliament has specifically used the word “on and from the commencement of Hindu Succession(Amendment) Act, 2005″ so as to ensure that rights which are already settled are not disturbed by virtue of a person claiming as heir to a daughter who had passed away before the Amendment Act came into force.

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Citizenship by Registration – Eligibility Criteria not fulfilled:Citizenship Act, 1955 section 5(1)(a):

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Shah Mohammed Anwar Ali & Ors vs. The State of Assam & Ors. AIR 2014 Gauhati 156

The appellant Nos. 1 and 2 filed a writ petition, praying for a direction to the respondents to consider their applications filed u/s. 5(1)(a) of the Citizenship Act, 1955 and to pass appropriate orders thereon, in accordance with law, contending inter alia that both the petitioners were born in Gauhati and the petitioner no. 1’s father was also initially a citizen of India born in undivided India. It has further been contended that after partition, the father of the petitioner no. 1 permanently settled in Shylet district of the then East Pakistan (now Bangladesh) and due to his old age ailments, the petitioners along with their first child Shah Mohammad Aminul Islam, who is the appellant no. 3 went to Bangladesh in the month of September, 1991 and stayed in Bangladesh up to the month of March, 1992, during which period the second child, namely, Jakia (appellant no. 4) was born in Bangladesh on 30-12-1991. The further contention of the writ petitioners was that they again went to Bangladesh in the month of November, 1996 to attend to the ailing father of the appellant no. 1 with the intention to return to India as early as possible, but unfortunately as the father of the petitioner no. 1 fell seriously ill, for which they had to stay back in Bangladesh.Thereafter though they wanted to return to India, they could not do so and under compelling circumstances they had to obtain the passports from the Government of Bangladesh and entered India on 10-05-1997 as Bangladeshi nationals. It has also been pleaded that after the expiry of the initial period of visa, they filed an application for extension from time to time and accordingly the visa was extended and though their application for further extension of visa dated 21-03-1998 was under active consideration of the Government, they were arrested along with their minor children on the ground that they overstayed in India beyond the period for which visa was granted.

The court observed that sub-section (2) of section 9 of 1955 Act, empowers the Central Govt. to determine the question as to whether, when or how any citizen of India has acquired the citizenship of another country, if such question arises for consideration. It is, therefore, the Central Government and no other authority, who can determine such question. The writ court would also, ordinarily, not enter into such determination unless of course the determination made by the Central Government is put to challenge by the aggrieved party.

In the instant case, the applicants never at any point of time, prior to filing of the writ petition, claimed that they had under compulsion and not voluntarily acquired the citizenship of Bangladesh. On the other hand, they had filed the application u/s. 5(1)(a) of 1955 Act seeking registration of their names as Indian citizen, upon accepting that they had voluntarily acquired the citizenship of Bangladesh.

Since the question as to whether, when or how the applicants acquired citizenship of Bangladesh, did not arise at all, there was no question of determination of such question by the Central Government, before passing an order of deportation.

The appellants having approached the writ Court for a direction to the respondent authorities to consider their applications filed u/s. 5(1)(a) of the 1955 Act, they must demonstrate that they have fulfilled the requirement of the said provisions of law for getting their names registered, which they had failed to do. The writ Court rightly refused to issue directions, which if issued, would be a futile writ, when the appellants on their own admission have accepted that they have not fulfilled the requirement of section 5(1)(a) of the said Act.

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Bombay Stamp Act, 1958 – Delay in filing application before Chief Controlling Revenue Authority – Specific exclusion of Limitation Act – Executive cannot condone delay taking recourse of limitation Act: Limitation Act section 5, 29:

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Jayminbhai Navinbhai Doshi & Ors vs. State of Gujarat & Ors AIR 2014 Gujarat 220

The petitioners challenged the orders passed by the authority u/s. 53 of the Bombay Stamp Act, 1958, by which, the said authority, viz., the Chief Controlling Revenue Authority refused to condone the delay in filing the proceedings on the ground that those were not filed within 90 days from the date of order passed by the competent authority because of lack of power with such authority to condone the delay.

The Bombay Stamp Act is a self contained code dealing with all relevant matters exhaustively therein and its provisions show an intention to depart from the common rule, qui facit per lalium facit per se. In the Bombay Stamp Act, 1958, there is no provision incorporated by which the provision of the Limitation Act is extended to the proceedings under the said statute. The provision of the Limitation Act applies only to courts and courts alone, and it does not even apply to any Tribunal or any other authority unless by virtue of the statute creating such Tribunal or the Authority, the provisions of the Limitation Act have been specifically made applicable.

Thus, in the instant case, the authority u/s. 53 of the Act not being a Court could not take the assistance of the provisions contained in section 29(2) of the Limitation Act. Section 54 of the Bombay Stamp Act however, unlike section 53, specifically gives power to the Chief controlling Revenue Authority to condone delay in preferring an application beyond the period of limitation fixed therein, namely, 60 days, but that power of condonation by the Chief Controlling Revenue Authority is also limited to only to a further period not exceeding 30 days.

Thus, if the Chief Controlling Authority has no power of condonation, it necessarily follows that the High Court in exercise of power under Article 226 of the Constitution against the order of the Chief Controlling Revenue Authority cannot condone the delay.

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