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Year: 2015

[2014] 151 ITD 642 (Mum) ITO vs. Gope M. Rochlani AY 2008-09 Order dated – 24th May, 2013

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Explanation 5A to section 271(1)(c), read with
section 139. In absence of any limitation or restriction relating to
words ‘due date’ as given in clause (b) of Explanation 5A to section
271(1)(c), it cannot be read as ‘due date’ as provided in section 139(1)
alone, rather it can also mean date of filing of return of income u/s.
139(4). Therefore, where pursuant to search proceedings, assessee files
his return before expiry of due date u/s. 139(4) surrendering certain
additional income, he is entitled to claim benefit of clause (b) of
Explanation 5A to section 271(1)(c).

FACTS
The
assessee firm was carrying out business of housing development. A search
and seizure action u/s. 132(1) was carried out in case of assessee on
16th October 2008. In course of said proceedings, one of partners of
firm made statement u/s.132(4) declaring certain undisclosed income and
subsequently, the return was filed by the assessee declaring the amount
surrendered as income.

In the assessment order passed u/s.143(3)
read with section 153A, the assessment was completed on the same income
on which return of income was filed. The Assessing Officer also
initiated a penalty proceedings u/s. 271(1)(c).

The assessee,
before the Assessing Officer, submitted that this additional income was
offered voluntarily which was on estimate basis and the same has been
accepted in the assessment order as such, therefore, provisions of
section 271(1)(c) is not applicable. The Assessing Officer rejecting
assessee’s explanation levied penalty u/s. 271(1)(c).

In
appellate proceedings before Commissioner (Appeals), the assessee also
submitted that in view of clause (b) of Explanation 5A to section
271(1)(c) penalty could not be levied as the assessee filed return of
income on the due date which could also be inferred as return of income
filed u/s.139(4).

The Commissioner (Appeals) did not accept the
assessee’s explanation on Explanation 5A to section 271(1)(c), but
deleted the penalty on the ground that the income which was offered was
only on estimate basis, therefore, additional income offered by the
assessee could neither be held to be concealed income or furnishing of
inaccurate particulars of income.

On appeal by Revenue

HELD
There
is a saving clause in the Explanation 5A to section 271(1)(c) wherein
penalty cannot be held to be leviable u/s. 271(1)(c); according to which
if the assessee is found to be the owner of any asset/income and the
assessee claims that such assets/income represents his income for any
previous year which has ended before the date of search and the due date
for filing the return of income for such previous year has not expired
then the penalty u/s. 271(1)(c) shall not be levied.

The due
date for filing of the return of income u/s. 139(1) for assessment year
2008-09 was 30-9-2008, whereas the assessee has filed the return of
income on 31-10- 2008 i.e., after one month from the date of filing of
the return of income as provided in section 139(1). However the due date
for filing of the return of income u/s. 139(4) for the assessment year
2008-09 was 31-3-2010 and thus, the return of income filed by the
assessee in this case was u/s. 139(4).

The issue however is
whether the return of income filed u/s. 139(4) can be held to be the
‘due date’ for filing the return of income for such previous year as
mentioned in clause (b) of Explanation 5A to section 271(1)(c).

For
the purpose of the instant case, one has to see whether or not the
assessee has shown the income in the return of income filed on the ‘due
date’. Provisions of section 139(1) provides for various types of
assessees to file return of income before the due date and such due date
has been provided in the Explanation 2, which varies from year-to-year.
Whereas, provisions of section 139(4) provide for extension of period
of ‘due date’ in the circumstances mentioned therein and it enlarges the
time-limit provided in section 139(1). The operating line of
sub-section (4) of section 139 provides that ‘any person who has not
furnished the return within the time allowed’, here the time allowed
means u/s. 139(1), then in such a case, the time-limit has been
extended. Wherever the legislature has specified the ‘due date’ or has
specified the date for any compliance, the same has been categorically
specified in the Act.

In the aforesaid Explanation 5A, the
legislature has not specified the due date as provided in section 139(1)
but has merely envisaged the words ‘due date’. This ‘due date’ can be
very well-inferred as due date of the filing of return of income filed
u/s. 139, which includes section 139(4). Where the legislature has
provided the consequences of filing of the return of income u/s. 139(4),
then the same has also been specifically provided.

Once the
legislature has not specified the ‘due date’ as provided in section
139(1) in Explanation 5A, then by implication, it has to be taken as the
date extended u/s. 139(4). In view of the above, it is held that the
assessee gets the benefit /immunity under clause (b) of Explanation to
section 271(1)(c) because the assessee has filed its return of income
within the ‘due date’ and, therefore, the penalty levied by the
Assessing Officer cannot be sustained on this ground.

Thus, even
though the conclusion of the Commissioner (Appeals), is not affirmed,
yet penalty is deleted in view of the interpretation of Explanation 5A
to section 271(1)(c).

In the result, revenue’s appeal is treated as dismissed.

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Remuneration from foreign enterprise – Deduction u/s. 80-O – A. Y. 1994-95 – Assessee conducting services for benefit of foreign companies – Services rendered “from India” and “in India” – Distinction – Report of survey submitted by assessee not utilised in India though received by foreign agency in India – Mere submission of report within India does not take assessee out of purview of benefit –

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CIT vs. Peters and Prasad Association; 371 ITR 206 (T&AP):

The assessee was an agency undertaking the activity of conducting services for the benefit of foreign companies or agencies. After conducting a survey on the assigned subject, the reports were submitted to the foreign agencies. For the A. Y. 1994-95, the assessee claimed deduction u/s. 80-O in respect of the remuneration received from the foreign enterprise for such services. The Assessing Officer denied the deduction on the ground that the survey report was submitted in India and thereby section 80-O was not attracted. The Tribunal allowed the assessee’s claim..

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

“i) It was not the case of the Revenue that the report of survey submitted by the assessee was utilised within India, though it was received by the foreign agency within India. It is only when it was established that the survey report submitted to the foreign agency was, in fact, used or given effect to, in India, that the assessee becomes ineligible for deduction.

ii) The mere fact that the submission of the report was within India, did not take away the matter from the purview of section 80-O. If that was to be accepted, the very purpose of providing the Explanation becomes redundant.

iii) Thus, the assessee was entitled to deduction u/s. 80-O.”

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MAT on FPIs – Fickle Tax Laws hurt Foreign In – vestors

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It is absurd that foreign portfolio investors (FPIs) are facing fresh income-tax queries after the government granted them a retrospective exemption from the minimum alternate tax ( mat ), based on the recommendations of the justice A . P. Shah panel. however, FPIs will now reportedly have to convince tax authorities that they do not have a permanent establishment
 (PE) here to escape the tax.

Foreign institutional investors, now FPIs, have been in relentless fear that tax authorities could construe their domestic custodian as a PE in India, making them liable to pay tax. The government must come out with a clear communiqué on what constitutes a P E , and not leave it to interpretation. Waffling on the promise to scrap MAT on FPIs could create mayhem on the markets, needlessly. do servers, for example, create a permanent presence?
In the OECD’s view, a server i fixed, automated equipment that can perform important and essential business functions – may be sufficient to create a PE at the equipment location without the presence of human beings. Conflicting rulings by the authority of advance rulings have only added to uncertainty in this area of taxation. t he government should clear the air to mitigate investor concerns.

In this case, FPIs have approached the Dispute r esolution m echanism ( DR. P). t he need is to ensure its robust functioning – the DR. P has a pool of dedicated tax officers. India has slipped in the World Bank’s latest ease of doing business index in terms of paying taxes, and mounting disputes could be a major reason. t he country’s tax regime must be reformed to minimise disputes. o ur tax officers should be better trained to deal with complex transactions as India globalises. Predictability of tax conduct is on par with simplicity of the law.

Reducing vulnerabilities crucial for emerging economies: RBI Governor Rajan

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Emerging economies like India have to work towards reducing vulnerabilities in their economies, said Reserve Bank of India (RBI) Governor Raghuram Rajan.

Lower interest rates and tax incentives can boost investments, he said, but consumer demand holds the key for economic growth.

“Emerging economies have to work to reduce vulnerabilities in their economies, to get to the point where, like Australia or Canada, they can allow exchange rate flexibility to do much of the adjustment for them to capital inflows,” said Rajan in his speech to the Economic Club of New York.

However, it takes time to develop the required institutions. In the meantime, the difficulty for emerging markets in absorbing large amounts of capital quickly and in a stable way should be seen as a constraint, much like the zero lower bound, rather than something that can be altered quickly, said the RBI governor. Due to this, he said, even while resisting the temptation of absorbing flows, emerging markets will look for safety nets. In the past, India has been attracting large foreign flows in domestic markets.

“We also need better international safety nets. And each one of us has to work hard in our own countries to develop a consensus for free trade, open markets, and responsible global citizenry. If we can achieve all this even as the recent economic events make us more parochial and inward-looking, we will truly have set the stage for the strong sustainable growth we all desperately need,” Rajan said.

Rajan also nudged international organisations like the International Monetary Fund to re-examine the “rules of the game” for a responsible policy. “No matter what a central bank’s domestic mandate, international responsibilities should not be ignored. The IMF should analyse each new unconventional monetary policy (including sustained unidirectional exchange rate intervention), and based on their effects and the agreed rules of the game, declare them in- or out-of-bound,” he added.

According to Rajan, the current non-system in international monetary policy is a source of substantial risk, both to sustainable growth and to the financial sector. “It is not an industrial country problem, nor an emerging market problem, it is a problem of collective action. We are being pushed towards competitive monetary easing and musical crises.” There is a need for stronger well-capitalised multilateral institutions with widespread legitimacy, some of which can provide patient capital and others that can monitor new rules of the game, said Rajan. The governor said industrial countries should export to emerging markets as a way to bolster growth. This is because they have done so in the past, too.

(Source: Article by Mr. Raghuram Rajan, RBI Governor, in ‘Business Standard’ dated 19-05-2015.)

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Technological disruption – How to ride out the apocalypse – IT services firms are facing fatal disruption. They need to be utterly committed to the shift.

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Kodak. Digital Equipment. Sun Microsystems. Nokia. Blackberry. These are but a small sample of once-great companies devastated by technological disruption. Even mighty Microsoft and Intel are struggling to reinvent themselves and stay relevant in a phone-first world. There are vital lessons in these stories for India’s vaunted IT services companies.

It is easy — and wrong — to assume that the companies that get disrupted were poorly managed. Disruptive changes are like big storms. They build up slowly and then break with terrifying ferocity.

So it’s quite easy to spot the brewing disruption. Take Kodak. Kodak developed the world’s first digital camera in 1975. It held all the most important patents pertaining to digital imaging. It realised the potential impact digital photography would have on its enormously lucrative film franchise. In 2005, Kodak was the leader in digital cameras. But they failed to ride the tiger and eventually failed.

The story is similar with Nokia, which launched one of the world’s first smartphones, the N Series Communicator in 1995, but understood too late that with the iPhone, the game shifted from devices to competition between ecosystems. These companies had market leadership, enormous resources, most of the technology and many smart managers. They saw the approaching disruption, yet failed to cross the chasm.

One factor why companies find it hard to navigate industry disruptions is complacence, even arrogance. When a company is sitting on billions of dollars of cash, fat margins and a good market share, it’s hard to create a sense of urgency in the organisation and with its shareholders.

Another factor is the ‘gravitational pull’ of the current or legacy business. The need to deliver quarterly earnings, serve existing customers, maintain profit margins, manage the many daily operational challenges, all consume the majority of resources and senior management attention. Too little focus goes towards embracing the brewing disruption.

A third reason is the fear of cannibalisation. The new model is, at least initially, much less profitable than the current business and so there is a big fear of margin dilution.

Microsoft’s cloud services, for instance, have nowhere near the profitability of its old Windows and Office businesses. However, some margin is much better than zero margin.

The new business model usually requires a very different mindset and new capabilities. In the IT services business, for example, success requires the ability to hold a proactive conversation with CEOs and CXOs about the digital transformation of their business, rather than simply responding to project requests for proposals (RFPs) issued by the IT department. Building these capabilities is nontrivial and time-consuming. Finally, there is governance. Though the boards of good companies are populated by accomplished leaders, few boards have independent directors with a visceral grasp of the magnitude of impending changes. It is all too easy then to remain focused on revenue growth and earnings per share until it’s too late.

One obvious sign of this is to look at how the CEO is compensated. All too often, it is based on the financial performance of the legacy business rather than the momentum of the future business model.

Until, of course, it is too late. India’s extraordinary IT services companies face just such a transition today. What can be done? First and foremost, strategic transformation must be the top priority of the boards of companies facing disruption. Strategy cannot simply be left to the CEO and management.

It has to be a collaborative endeavour. Second, make it clear that the CEO’s top priority is the strategic transformation, not merely delivering the quarter and align compensation accordingly.

Third, realise that there are two kinds of risk: the risk of omission, or doing nothing versus the risk of commission, or trying something different. The risk of commission is better than doing nothing and the urgency and consequences of failure are such that there should be no half-measures.

A significant reason why Kodak and others failed is because their responses to disruption were halfhearted or anaemic. This won’t work. To succeed, companies have to be ‘all-in’ or utterly committed to the shift.

This may mean making significant acquisitions, or bringing in very different talent, even though these moves have major risk and can blow up too. In nature, it is not the strongest species that survive, nor the most intelligent, but the ones most adaptable to change.

(Source: Article by Mr Ravi Venkatesan in ‘The Economic Times’ dated 19-05-2015. The writer is a member of the board of Infosys and former chairman, Microsoft India)

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Business Expenditure – Disallowance u/s. 40A(3) of payments in cash in excess of specified limit in an assessment made for a block period – Provisions to be applied as applicable for the assessment years in question

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M. G. Pictures (Madras) Ltd. vs. ACIT (2015) 373 ITR 39 (SC)

The appellant/assessee was engaged in production and distribution of motion pictures mainly in Tamil language. There was a search u/s. 132 of the Income-tax Act, at the business premises of the assessee during which certain book of accounts were seized. Consequent to the search, proposal was made for assessment for the block period of ten years 1.4.1986 to 31.3.1996 and thereafter, up to 13.9.1996.

The Assessing Officer disallowed the expenditure where the payments were made in cash in excess of Rs.10,000/- relying on section 40A(3) of the Act as it stood prior to 1.4.1996.The appellant filed appeal before the Income Tax Appellate Tribunal, Madras Bench (‘the Tribunal’). The Tribunal vide order dated 28.6.2000 partly allowed the appeal and remitted the matter to the Assessing Officer for considering the claim whether the income/loss from the film Thirumurthy was to be computed for the assessment year 1996-97 in accordance with Rule 9A of the Income Tax Rules. It was also directed that in making the computation, the Assessing Officer will consider the expenditure and make the disallowance under the provisions of section 40A(3) of the Act, as was applicable for the assessment year in question.

Feeling aggrieved by the order of the Appellate Tribunal, the appellant filed appeal before the High Court. The High Court did not accept the contentions of the appellant which were based on the amended section 158B(b) in Chapter XIVB of Finance Act, 2002 and dismissed the appeal.
Questioning the validity of the aforesaid judgment of the High Court, the appellant preferred an appeal with the leave of the Supreme Court.

The Supreme Court noted that in the year 1996, the provisions of section 40A(3) of the Act did not allow any expenditure if it was more than Rs.20,000/- and paid in cash. The only exception that was carved out in such cases was where the assessee could satisfactorily demonstrate to the Assessing Officer that it was not possible to make payment in cheque. Even in those cases, the expenditure was allowable up to Rs.10,000/- and all cash payments made in excess of Rs.10,000/- were to be disallowed as the expenditure. Provisions of section 40A(3) were amended with effect from 1.4.1996. With this amendment, in cases where the cash payment is made in excess of Rs.20,000/-, disallowance was limited to 20% of the expenditure.

The Supreme Court observed that since the date of the amendment fell within the aforesaid block period, the assessee wanted the benefit of this amendment for the entire block period of ten years, i.e., 1.4.1986 to 31.3.1996. According to the Supreme Court, such a plea was unacceptable on the face of it inasmuch as the amendment was substantive in nature, which was made clear in the explanatory notes of amendments as well.

The Supreme Court held that once the amendment was held to be substantive in nature, it could not be applied retrospectively. The only ground on which the assessee wanted benefit of this amendment from 1.4.1986 was that the assessment was of the block period of ten years. The Supreme Court noted that, however, on its pertinent query, learned counsel for the appellant was fair in conceding that there was no judgment or any principle which would help the appellant in supporting the aforesaid contention. According to the Supreme Court, the order of the High Court was perfectly justified.

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Capital gain: Long-term or short-term – Sections 2(42A) and 45 – Written lease for three years – Assessee continuing to pay rent and occupying premises for 10 more years – Amount received on surrender of tenancy is long-term capital gain

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CIT vs. Frick India Ltd.; 369 ITR 328 (Del):

Under a written tenancy agreement for three years the assessee occupied premises on 15-03-1973. Thereafter the assessee continued to use and occupy the premises as a tenant. Rent was paid by assessee and was accepted by the landlord. On 18-02-1987 the tenancy rights were surrendered and consideration of Rs. 6.78 crore was received from a third party. The Assessing Officer held that the amount should be treated as short-term capital gains and not as long term capital gains. The logic behind the finding of the Assessing Officer was that the tenancy after the initial period of three years by way of a written instrument, was month to month. Thus the tenancy rights were extinguished on the last day of each month and a fresh or new tenancy was created. The Tribunal held that the amount was assessable as long-term capital gain.

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

“The tenancy rights had been held for nearly fourteen years and consideration received on surrender had been rightly treated as long-term capital gain.”

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[2015-TIOL-1085-CESTAT-MUM] Commissioner of Service Tax, Mumbai-ii vs. Syntel Sterling Bestshores Solutions Pvt. Ltd

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Input services without which the quality and efficiency of output services exported cannot be achieved are eligible for refund.

Facts:
The
Respondent is a BPO rendering services to the clients based abroad. A
refund claim was filed in respect of service tax paid on rent-a-cab
service, telephone service and rent. Adjudicating authority denied the
claim. On appeal, the first appellate authority allowed the refund
claim, aggrieved by which revenue is in appeal.

Held:
The
Tribunal relied upon the CBEC’s Circular No. 120/01/2010-ST dated
19/01/2010 which specifically provides that essential services used by
Call Centres for provision of their output service would qualify as
input services eligible for taking CENVAT credit as well as refund. It
further held that the expression ‘used in’ in the CENVAT Credit Rules
should be interpreted in a harmonious manner and accordingly as the
input services disallowed were essential to provide quality output
services, the refund should be granted.

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Refund – Self-assessment tax – Interest – Sections 140A, 244A(1)(a),(b) and 264 – A. Y. 1994-95 – Excess amount paid as tax on self-assessment – Interest payable from date of payment to date of refund of the amount

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Stock Holding Corporation of India Ltd vs. CIT; 373 ITR 282 (Bom):

For the A. Y. 1994-95, the Assessing Officer did not pay interest u/s. 244A in respect of the excess amount paid by the petitioner as self assessment tax. The petitioner’s application u/s. 264 of the Income-tax Act, 1961 was rejected by the Commissioner.

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

“i) The requirement to pay interest arises whenever an amount is refunded to the assessee as it is a kind of compensation for use and retention of money collected by the Revenue.

ii) Circular No. 549 dated 31/10/1989, makes it clear that if refund is out of any tax other than out of advance tax or tax deducted at source, interest shall be payable from the date of payment of tax till the date of grant of refund. The circular even remotely did not suggest that interest is not payable by the Department on self-assessment tax.

iii) The tax paid on self-assessment would fall u/s. 244A(1)(b). The provisions of section 244A(1)(b) very clearly mandate that the Revenue would pay interest on the amount refunded for the period commencing from the date payment of tax is made to the Revenue up to the date when refund is granted by the Revenue. Thus, the submission that the interest is payable not from the date of payment but from the date of demand notice u/s. 156 could not be accepted as otherwise the legislation would have so provided in section 244A(1)(b), rather than having provided from the date of payment of the tax. Therefore, the interest was payable u/s. 244A(1)(b) on the refund of excess amount paid as tax on self-assessment u/s. 140A.”

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Jupiter Construction Services Ltd. vs. DCIT ITAT Ahmedabad `A’ Bench Before Pramod Kumar (AM) and S. S. Godara (JM) ITA No. 2850 and 2144/Ahd/11 Assessment Year: 1995-96 and 1996-97. Decided on: 24th April, 2015. Counsel for assessee / revenue: Tushar P. Hemani / Subhash Bains

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Section 255(4) – At the time of giving effect to the majority view, it normally is not open to the Tribunal to go beyond the exercise of giving effect to the majority views, howsoever mechanical it may seem. Even if the Third Member’s verdict is shown to be “unsustainable in law and in complete disregard to binding judicial precedents”, Division Bench has no choice but to give effect to it.

Facts:
There was a different of opinion between the members of Division Bench while deciding the appeal of the assessee relating to levy of penalty. The difference was referred to the Third Member who agreed with the Accountant Member and confirmed the levy of penalty.

At the stage of Division Bench giving effect to the order of the Third Member, the assessee claimed that the order of the Third Member could not be given effect to as it was unsustainable and in complete disregard to binding judicial precedents. The assessee claimed that the matter of whether effect could be given to such an order was required to be referred to a Special Bench.

Held:
Post the decision of the jurisdictional High Court in the case of CIT vs. Vallabhdas Vithaldas 56 taxmann.com 300 (Guj) the legal position is that the decisions of the division benches bind the single member bench, even when such a single member bench is a third member bench.

A larger bench decision binds the bench of a lesser strength because of the plurality in the decision making process and because of the collective application of mind. What three minds do together, even when the result is not unanimous, is treated as intellectually superior to what two minds do together, and, by the same logic, what two minds do together is considered to be intellectually superior to what a single mind does alone. Let us not forget that the dissenting judicial views on the division benches as also the views of the third member are from the same level in the judicial hierarchy and, therefore, the views of the third member cannot have any edge over views of the other members. Of course, when division benches itself also have conflicting views on the issues on which members of the division benches differ or when majority view is not possible as a result of a single member bench, such as in a situation in which one of the dissenting members has not stated his views on an aspect which is crucial and on which the other member has expressed his views, it is possible to constitute third member benches of more than one members. That precisely could be the reason as to why even while nominating the Third Member u/s. 255(4), the Hon’ble President of this Tribunal has the power of referring the case “for hearing on such point or points (of difference) by one or more of the other members of the Appellate Tribunal”. Viewed from this perspective, and as held by Hon’ble Jurisdictional high Court, the Third Member is bound by the decisions rendered by the benches of greater strength. That is the legal position so far as at least the jurisdiction of the Gujarat High Court is concerned post Vallabhdas Vithaldas (supra) decision, but, even as we hold so, we are alive to the fact that the Hon’ble Delhi High Court had, in the case of P. C. Puri vs. CIT 151 ITR 584 (Del), expressed a contrary view on this issue which held the field till we had the benefit of guidance from the Hon’ble jurisidictional High Court. The approach adopted by the learned Third member was quite in consonance with the legal position so prevailing at that point of time.

At the time of giving effect to the majority view, it cannot normally be open ot the Tribunal to go beyond the exercise of giving effect to the majority views, howsoever mechanical it may seem. In the case of dissenting situations on the division bench, the process of judicial adjudication is complete when the third member, nominated by the Hon’ble President, resolves the impasse by expressing his views and thus enabling a majority view on the point or points of difference. What then remains for the division bench is simply identifying the majority view and dispose of the appeal on the basis of the majority views. In the course of this exercise, it is, in our humble understanding, not open to the division bench to revisit the adjudication process and start examining the legal issues.

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Heranba Industries Ltd. vs. DCIT ITAT Mumbai `H’ Bench Before R. C. Sharma (AM) and Sanjay Garg (JM) ITA No. 2292 /Mum/2013 Assessment Year: 2009-10. Decided on: 8th April, 2015. Counsel for assessee / revenue: Rashmikant C. Modi / Jeetendra Kumar

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Section 271(1)(c) – If surrender is on the condition of no penalty and assessment is based only on surrender and not on evidence, penalty cannot be levied. The fact that surrender of income was made after issuance of a questionnaire does not mean that it was not voluntary.

Facts:
The assessee company was engaged in manufacture of pesticides, herbicides and formulations. It filed its return of income for assessment year 2009-10 returning therein a total income of Rs.1.49 crore. In the course of assessment proceedings, the Assessing Officer (AO) noticed that during the previous year under consideration, the assessee had received share application money of Rs. 89.50 lakh. He asked the assessee to furnish details with supporting evidences. In response, the assessee expressed its inability to provide the necessary details and stated that in order to buy peace, it agreed to offer the share application money of Rs. 89.50 lakh as its income.

The AO added Rs. 89.50 lakh to the assessee’s income u/s. 69A and also levied penalty u/s. 271(1)(c).

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

Aggrieved, the assessee preferred an appeal to Tribunal.

Held:
The Tribunal noted that the assessee, at the very first instance, surrendered share application money with a request not to initiate any penalty proceedings. Except for the surrender, there was neither any detection nor any information in the possession of the department. There was no malafide intention on the part of the assessee and the AO had not brought any evidence on record to prove that there was concealment. No additional material was discovered to prove that there was concealment. The AO did not point out or refer to any evidence to show that the amount of share capital received by the assessee was bogus. It was not even the case of the revenue that material was found at the assessee’s premises to indicate that share application money received was an arranged affair to accommodate assessee’s unaccounted money.

The Tribunal noted that the Supreme Court in the case of CIT vs. Suresh Chandra Mittal 251 ITR 9 (SC) has observed that where assessee has surrendered the income after persistence queries by the AO and where revised return has been regularised by the Revenue, explanation of the assessee that he has declared additional income to buy peace of mind and to come out of vexed litigation could be treated as bonafide, accordingly levy of penalty u/s. 271(1)(c) was held to be not justified.

The Tribunal held that in the absence of any material on record to suggest that share application money was bogus or untrue, the fact that the surrender was after issue of notice u/s. 143(2) could not lead to the inference that it was not voluntary.

The amount was included in the total income only on the basis of the surrender by the assessee. It held that in these circumstances it cannot be held that there was any concealment. When no concealment was ever detected by the AO, no penalty was imposable. Furnishing of inaccurate particulars was simply a mistake and not a deliberate attempt to evade tax. The Tribunal did not find any merit in the levy of penalty u/s. 271(1)(c).

The appeal filed by the assessee was dismissed.

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DCIT vs. Aanjaneya Life Care Ltd. Income Tax Appellate Tribunal “A” Bench, Mumbai Before D. Manmohan (V. P.) and Sanjay Arora (A. M.) ITA Nos. 6440&6441/Mum/2013 Assessment Years: 2010-11 & 2011-12. Decided on 25.03.2015 Counsel for Revenue / Assessee: Asghar Zain / Harshavardhana Datar

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Section 221(1) – Penalty for delay in payment of self-assessment tax deleted on account of financial crunch faced by the assessee.

Facts:
Due to financial crunch the assessee was not able to pay the self-assessment tax within the stipulated period. However, according to the AO, the assessee could not prove its contention with cogent and relevant material. Further, he observed that substantial funds were diverted to related concerns. He therefore levied penalty u/s. 221(1) of the Act. On appeal, the CIT(A) allowed the appeal of the assessee and deleted the penalty imposed.

Held:
According to the Tribunal, the Revenue was unable to show that the assessee had sufficient cash/bank balance so as to meet the tax demand. Secondly, it also could not show if any funds were diverted for non-business purposes at the relevant point of time so as to say that an artificial financial scarcity was created by the assessee. In view of the same the tribunal accepted the contention of the assessee and upheld the order of the CIT(A).

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[2015] 152 ITD 533 (Jaipur) Asst. DIT (International taxation) vs. Sumit Gupta. A.Y. 2006-07 Order dated- 28th August 2014.

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Section 9, read with section 195 and Article 7 of DTAA between India and USA

Income cannot be said to have deemed to accrue or arise in India when the assessee pays commission to non-resident for the services rendered outside India and the non-resident does not have a permanent establishment in India. Consequently, section 195 is not attracted and so the assessee is not liable to deduct TDS from the said payment.

FACTS
The assessee exported granite to USA and paid commission on export sales made to a US company but it did not deduct tax u/s. 195.

The Assessing Officer held that the sales commission was the income of the payee which accrued or arose in India on the ground that such remittances were covered under the expression fee for technical services’ as defined u/s. 9(1)(vii)(b). He thus held that the assessee was liable deduct tax u/s. 195 and he was in default u/s. 201(1) for tax and interest.

On Appeal, CIT (Appeals) held that commission does not fall under managerial, technical or consultation services and therefore, no income could be deemed to have accrued or arisen to the non-resident so as to attract provisions of withholding tax u/s. 195.

On Appeal-

HELD THAT
The order of CIT(A) was to be upheld as the non-resident recipients of commission rendered services outside India and claimed it as business income and had no permanent establishment in India. Thus, provisions of section 9 and section 195 were not attracted.

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[2015] 55 Taxmann.com 111 (Mumbai – CESTAT) Deshmukh Services vs. CCE & ST.

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Multi-piece packing of soaps on job work basis amounts to deemed manufacture and hence cannot be taxed under Business Auxiliary Services – Matter remitted back to pass a reasoned order and also to consider the effect of Exemption Notification qua intermediate production processes.

Facts:
The appellant undertook job work activities in the nature of mixing of soap bits provided by the supplier company and returning the same in 50 kg. or bigger bags as per company’s instruction and multi-piece packing for which they received consideration. The department contended and confirmed the demand considering the activities as business auxiliary service.

Held:
The Tribunal observed that as per section 2(f)(iii) of the CE Act, 1944 ‘manufacture’ includes any process which in relation to the goods specified in the 3rd Schedule involves packing or re-packing of such goods in a unit container or labeling or re-labeling of containers including the declaration or alteration of retail sale price on it or adoption of any other treatment to the goods to render the products marketable to the consumer and soaps were covered under Serial No. 40 of the said 3rd Schedule. Therefore, multi-piece packaging would fall under the category of “packing or re-packing of goods” and would be an activity of ‘manufacture’. The department’s contention that soap is already in packed condition and hence manufacture is said to be completed was not accepted by the Tribunal on the ground that, multi-piece packaging is done on the soaps already packed and therefore, it would amount to repacking and accordingly the activity would be covered under the definition of ‘manufacture’ u/s. 2(f)(iii). It was further held that if the soap noodles are sold as such after mixing and packing/re-packing, then the activity undertaken by the appellant would amount to ‘manufacture’. On the other hand, if they are not sold as such, but are subject to further processes, since the goods are moved under Rule 4(5)(a) of the CENVAT Credit Rules, 2004 it will be an intermediary process in the course of manufacture of soaps and since such movements are permitted without payment of excise duty, the question of levy of service tax would not arise at all in terms of Notification No.8/2005-ST dated 01/03/2005. However, since there was no finding in the order except that the appellant did not contest the duty, the matter was remitted back to give specific finding as to why the activity of the appellant did not amount to manufacture and if it does not amount to manufacture, why benefit of Notification No. 8/2005-S.T. cannot be extended.

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Business expenditure – Disallowance u/s. 14A – A. Y. 2007-08 – Disallowance u/s. 14A is not automatic upon claim to exemption – AO’s satisfaction that voluntary disallowance made by assessee unreasonable and unsatisfactory is necessary – In the absence of such satisfaction the disallowance cannot be justified

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CIT vs. I. P. Support Services India (P) Ltd.; 378 ITR 240 (Del):

In the A. Y. 2009-10, the assessee had earned dividend income which was exempt. The Assessing Officer asked the assessee to furnish an explanation why the expenses relevant to the earning of dividend should not be disallowed u/s. 14A. The assessee submitted that as no expenses had been incurred for earning dividend income, this was not a case for making any disallowance. The assessing Officer held that the invocation of section 14A is automatic and comes into operation, without any exception. He disallowed an amount of Rs. 33,35,986/- u/s. 14A read with rule 8D and added the amount to the total income. The Commissioner (Appeals) found that no interest expenditure was incurred and that the investments were done by using administrative machinery of PMS, who did not charge any fees. He deleted the addition. The Tribunal affirmed the order of the Commissioner (Appeals).

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

“i) The Assessing Officer had indeed proceeded on the erroneous premise that the invocation of section 14A is automatic and comes into operation as soon as the dividend income is claimed as exempt. The recording of satisfaction as to why the voluntary disallowance made by the assessee was unreasonable or unsatisfactory, is a mandatory requirement of the law.

ii) N o substantial question of law arises. The appeal is dismissed.”

SEBI ORDERS ON TAX LAUN DERING – More orders and updates

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Background

In an article in this column earlier published in the February 2015 issue of this Journal, recent orders of SEBI debarring hundreds of persons from dealing in securities were discussed. It was alleged in these orders that trades were carried out for the purposes of making illegitimate long term capital gains (LTCG) using the stock market which would be exempt from tax. In other words, the allegation was that massive tax evasion has been carried out by indulging in price manipulation and related activities.

Soon thereafter, there have been two more Orders of SEBI (Mishka Finance, dated 17th April 2015 and Pine Animation, dated 8th May 2015) of similar nature. The earlier article referred to orders of SEBI in the case of First Financial Services Limited (“First Financial”), Radford Global Limited (both orders dated 19th December 2014) and Moryo Industries Limited (dated 4th December 2014).

The amounts continue to be large with alleged tax evasion as LTCG as high as Rs. 87 crore in case of a single individual. The price increase reflected in such profits is nearly 8300% over a period of less than two years.

There are related developments too, which will also be discussed. Apparently, on the basis of guidance by SEBI, the Bombay Stock Exchange suspended 22 companies from trading ostensibly on the ground that these companies too had certain similar suspicious features. One of the companies, however, appealed to the Securities Appellate Tribunal which reversed the SEBI’s order. It appears that now the matter is before the Supreme Court. Some parties raised a grievance that only because the second holder in their demat account was debarred, their demat account has also been frozen.

In light of these and a few other factors, an update is in order.

Review of the Orders
A quick review of what the earlier and latest orders involved is given hereafter, though for a detailed discussion the preceding article of February 2015 can be referred to. SEBI made observations as follows that were common in most companies. SEBI found that there were certain companies that had very low activities and revenues/ profits/losses. They made preferential allotment of shares that was many times its existing paid up capital to a large number of persons. The allotment price was not, according to SEBI, justified by the fundamental of such companies. There were off market transfer of existing shares held by the Promoters. The shares were subdivided and/ or bonus shares issued. The share capital thus underwent a massive expansion in terms of total paid up capital and number of shares.

Following this, the share price was allegedly increased by manipulation by entities related/connected to the Promoters. In a short period of time, the price increased many times. In case of Mishka, the increase in price was more than 60 times the cost of the shares/preferential issue price. In case of Pine, such increase was 85 times.

The persons who acquired shares off market and those who were allotted shares by way of preferential allotment sold the shares at such high price. The shares were allegedly purchased by persons connected with the Promoters. Thus, SEBI alleged that the shares went back to the same group from whom shares were acquired. Since there was a gap of more than one year between the date of purchase and sale (also because of lock in period in case of preferential allotment of shares), the gains were long term capital gains and thus exempt from tax. SEBI alleged that this whole exercise was undertaken to generate such bogus LTCG using the stock market.

SEBI referred the matter, inter alia, to income-tax authorities. It also debarred the Company, its Promoters, the persons who had acquired the shares and the persons who gave the exit route to such persons, from accessing the capital markets and also dealing in the stock markets. The demat accounts of such persons were also frozen.

22 companies have already been identified by the BSE and their trading suspended though in one case, SAT has reversed the order of suspension. However, the matter appears to be in appeal before the Supreme Court now.

Debarring other companies? – directions of BSE and decision of SAT

The issue already involves hundreds of persons facing such a bar and hundreds of crores of allegedly bogus LTCG. From press reports, the total amount of such allegedly bogus LTCG may be Rs. 20,000 crore taking into account further companies being investigated. Thus, it is likely that more such orders involving other companies may be released soon.

The Bombay Stock Exchange (BSE) suspended trading of twenty-two other companies with effect from 7th January 2015 by a notice dated 1st January 2015. One of the companies, viz., 52 Weeks Entertainment Ltd. (formerly known as Shantanu Sheorey Aquakult Ltd.), appealed to SAT against this suspension. It is interesting to study this decision though it relates to the facts of one of the twentytwo companies.

The original notice of BSE did not give any reason for the suspension, nor had it given any opportunity to the companies to be heard. SAT directed BSE to give hearing and record decision, which BSE did on 12th January 2015. The SAT Order contains certain details relating to this company which are given below and then proceeds to set aside the Order of BSE, alongwith certain directions.

The company was suspended from 2001 to 2012 on account of non-payment of listing fees, NSDL charges, etc. The company decided to revive its operations in 2012. The company made three preferential allotment of shares in 2013/2014 after taking due approval from BSE as required by law. The aggregate preferential allotment was of 3,07,55,000 shares, and it appears that this took the share capital from 41,25,000 to 3,48,80,000 shares (i.e., by about 8.50 times). The public holding post the preferential issue was about 91%.

The suspension was made, BSE stated, on account of directions given by SEBI in its meeting with stock exchanges. SEBI gave certain parameters to identify companies for this purpose. These were (a) non-existence of the company at the address mentioned (b) making of preferential allotment with or without stock split and following end of lock in period, rise in volumes in trading and exit of the preferential allottees (c) company having weak financials which did not warrant the rise in price. The company disputed the order giving several reasons. It stated that the company did exist at the address given. It pointed out the existence of a representative there who had offered the BSE representative who had visited there to talk to the concerned person on phone.

The company had many upcoming operations/projects. Though some of the preferential allottees were also such allottees in case of Radford/Moryo orders, this cannot be a ground for suspension of trading. After hearing representatives of SEBI and BSE, SAT , vide its order dated 13th March 2015, set aside the order (the two members gave their reasons separately, and in following paragraphs, reasons given by Presiding Officer, Justice J. P. Devadhar are given).
It was noted that in other cases, SEBI had found market manipulation, etc. and passed formal orders while it had passed no such orders in the present case. it also noted that even the existence of the three parameters specified by SEBI were not established. BSE suspended trading “… even though there is not an iota of evidence to show that the appellant-company or its promoters/ directors have directly or indirectly indulged in market manipulation.” (per justice devadhar). SAT also noted that the price had risen from Rs. 2.67 to Rs. 149 but still, assuming there was market manipulation, no action was taken against the manipulators but trading in the company suspended instead. Justice devadhar observed that “…it is not open to SEBI to direct the Stock exchanges to suspend the trading in the securities of the companies if they satisfy certain parameters fixed by SEBI which have no bearing whatsoever with the alleged market manipulation.”

Justice  devadhar  further  stated  that,  “..the  fact  that some of those preferential shareholders have allegedly indulged in market manipulation cannot be a ground to consider that all preferential shareholders are market manipulators.”

The SEBI order was set aside. However, directions were also given that the Promoters of the company shall not buy/sell/deal in the securities of the company till 30th june 2015. further, SEBI/BSE could suspend the trading in the securities of the company and restrain the promoters/directors/preferential allottees if prima facie evidence of manipulation by them is found.

It appears that an appeal has been filed against the order of  SAT before  the  Supreme  Court  for  this  matter  of  52 Weeks entertainment Limited.

Debarment of Joint Account Holders
There  was  another  interesting  decision  of  SEBI.  It  appears that SEBI has frozen the accounts of certain persons named in its orders. However, in some cases, those accounts where such persons were second holders were also frozen. the result of this was that even though the first holder may not be a person who has been debarred, simply having a debarred person as a second holder resulted in such account getting frozen. this happened in the case of ms. Sachi agrawal and Ms. Sneha Agrawal. Their parents were debarred from dealing in securities in the matter of moryo industries Limited. However, though each of them had a separate demat account, such account was also frozen because their mother, Ms. Neeli Agrawal, who was second holder, had been debarred by an order. They prayed to SEBI claiming that the securities in such account belonged to them exclusively. They also provided several documents including certificates of Chartered accountant in support of their contention. However, SEBI was not satisfied. It held that in view of section 2(1)(a) of the Depositories Act, joint holders were joint beneficial owners. Taking a view that “…it is likely that the aforesaid beneficiary demat accounts would be used by Ms. Neeli agarwal for sale or purchase of securities thereby defeating the purpose of the interim order and ongoing investigation”, it refused to unfreeze the account.

Conclusion
The facts in such cases are clearly prima facie of serious concern. however, it is also seen that orders have been passed by SeBi till now against 5 companies, their Promoters and hundreds of shareholders. They have been debarred indefinitely from accessing the capital markets and dealing in securities. The orders are ad-interim and eXparte. It appears, from the statements of  SEBI itself, that it could be a long period before which the final orders would be passed. Trading in 22 other companies has been suspended by BSE, of which in one matter, SAT has reversed the matter and now the matter is before the Supreme Court. It also is seen that SEBI has  not yet given opportunity to most of the persons involved to present their case. In some cases, prima facie, it is submitted that orders are arbitrary and may cause injustice to people who are not involved in the alleged manipulation, etc. also, a common order has been passed against all persons even though the orders themselves describe substantially different alleged roles played by different groups.

Interesting question arises: Can SEBI question the eventual motive of a person trading on stock exchange? Can SEBI, purely on suspicion that the transaction is with an intent to avoid/evade tax, of financing, etc., take action against such persons? Parties may have many reasons for dealing through the stock exchange, not all of which would involve violations of Securities Laws. it appears from past decisions that what was relevant was whether price manipulation was involved.

The next few months, and eventually perhaps at least a couple of years will be interesting to watch. Apart from SEBI passing orders in case of several other companies, it is also likely that there will be appeals to SAT and Supreme Court. There will also be objections raised by parties before SEBI itself who will be obliged to confirm or modify the directions in individual cases. More importantly, these cases may also help clarify the role of SEBI in matters where there may be avoidance or violation of other laws such as income-tax.

It will also be interesting to watch how the income-tax department, with whom the information about such transactions has been shared by SeBi, deals with such transactions. More particularly, whether it disallows outright the claims of the parties to exemption leaving them exposed to interest, penalties and even prosecution. Some cases relate to AY 2013-14/2014-15, the returns for which have already been filed while other cases related to AY 2015- 16 for which there is time to file returns.

From the legal and other perspectives, the coming years will result in interesting developments which will be worth closely watching.

Constitutional validity – Amendment made in section 80-IB(9) by adding an Explanation was not clarificatory, declaratory, curative or made “small repair” in the Act – On the contrary, it takes away the accrued and vested right of the Petitioner which had matured after the judgments of ITAT. Therefore, the Explanation added by the Finance (No.2) Act 2009 was a substantive law – Explanation added to section 80-IB(9) by the Finance (No.2) Act, of 2009 is clearly unconstitutional, violative of Arti<

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Niko Resources Ltd. vs. UOI: [2015] 55 taxmann.com 455 (Guj):

The
Petitioner is a foreign company based in Canada and has set up a
project office in India with the permission of Reserve Bank of India.
The Petitioner has been claiming benefit of deduction of 100% of the
profits and gains from the production of mineral oil and natural gas
u/s. 80-IB(9) of the Income Tax Act, 1961, as it stood prior to the
amendment by the Finance (No.2) Act 2009. In these proceedings, the
constitutional validity of the amendment to sub-section (9) of section
80-IB and Explanation added to it under the Act by the Finance (No.2)
Act, 2009, has been challenged.

The disputed question was as to
whether the benefits of tax holiday of seven years was available on each
undertaking which has now been taken away by the amendment made in
section 80-IB(9) by adding on Explanation that provides that all blocks
licensed under a single contract shall be treated as a single
undertaking.

The Gujarat High Court held as under:

“i)
Arbitrarily, the 100% tax deduction benefit could not be withdrawn by
the Finance Minister or the legislature by amending section 80-IB(9) of
the Act retrospectively from an anterior date.

ii) The amendment
in such cases where already tax benefit had accrued and vested in the
assessee could not be taken away by giving retrospective amendment to
section 80-IB(9) which is nothing but a substantive provision inserted
by amendment and it can only operate prospectively and not
retrospectively.

iii) Explanation added to section 80-IB(9) by
Finance (No.2) Act, of 2009 is clearly unconstitutional, violative of
Article 14 of the Constitution of India and is liable to be struck
down.”

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Hindu Law – Joint family property – Wife is entitled to share in property alongwith her husband – Wife cannot demand for partition, unlike daughter

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Thabagouda Satteppa Umarani vs. Satteppa AIR 2015 (NOC) 435 (Kar)(HC)

The Petitioner contended that as per the position of law the mother cannot demand a partition but, in the suit filed for partition among the co-parceners, she is entitled to a share, independent of her husband.

The court observed that the wife may be a member of a joint Hindu Family, but by virtue of being a member in the joint Hindu Family, she cannot get any share, right, title or interest in the joint Hindu Family property which that family owns. A wife cannot demand for partition, unlike a daughter. She would get a share only if partition is demanded by her husband or sons and the property is actually partitioned. The claim by a wife during lifetime of the husband in the share and interest which he has as a co-parcener in his Hindu Undivided Family is wholly premature and completely misconceived. This position of law is that though the wife is entitled to interest i.e. share, it is to be along with her husband. Any such decision being taken by the Courts, earmarking separate share for herself and one share in that of her husband’s cannot in any way be recognised.

To clarify this position, here it is to be noted that coparcener refers to a male issue i.e. may be a father or a son. The wives of co-owners do not get any interest by virtue of their marriage. It is only a Hindu widow who gets the interest of her husband in the co-parcenary or in the joint family property upon the death of her husband. That interest enables her to claim maintenance and residence. Only a widow can demand partition of the interest which her deceased husband would have been entitled to. Consequently, a wife has no share, right, title or interest in the Hindu Undivided Family in which her husband is a co-parcener with his brothers, father or sons and after the amendment of section 6 of the Hindu Succession Act, 2005, with his sisters and daughters also. The wife,may be a member of a joint Hindu Family, but by virtue of being a member in the joint Hindu Family, she cannot get any share, right, title or interest in the joint Hindu Family property which that family owns. A wife cannot demand for partition unlike a daughter. She would get a share only if partition is demanded by her husband or sons and the property is actually partitioned. The claim by a wife during lifetime of the husband in the share and interest which he has as a co-parcener in his Hindu Undivided Family is wholly premature and completely misconceived.

This position clarifies that though the wife is entitled to interest i.e., share, it is to be along with her husband.

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M/S. Harsh Jewelers vs. Commercial Tax Officer, [2013] 57 VST 538 ( AP)

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VAT- Input Tax Credit- Purchase From Registered Dealer-Selling Dealer Did Not Disclose Sales in His Return- Not a Ground For Denial Of Input Tax Credit, section 13(1) of The Andhra Pradesh Value Added Tax Act, 2005

Facts
The petitioner purchased goods from the registered dealer and claimed input tax credit. Subsequently the registration certificate of the selling dealer was cancelled after the date of sale by him to the purchasing dealer but he did not disclose the turnover in his returns. The vat department disallowed the input tax credit claimed by the petitioner on the impugned purchases on the ground that the turnover of sales is not declared by selling dealer in his returns and raised ademand . The petitioner filed a writ petition before the Andhra Pradesh High Court against the said assessment order.

Held
Section 13(1) of the Act entails input tax credit to the VAT dealer for the tax charged in respect of all purchases of taxable goods, made by that dealer during the tax period. It is not disputed that the registration of the selling dealer was cancelled after the transaction in question occurred. The failure on the part of the selling dealer to file returns or remit the tax component of the sale made to the petitioner dealer cannot per se be a ground for denial of input tax credit. Accordingly, the High Court quashed the order of assessment and it was made open to the vat department to pass revised order if there be material on the basis of which the input tax credit can be denied except on the ground that the selling dealer, despite being a registered dealer on the relevant date, did not remit the tax. The writ petition was allowed by the High Court.

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44. [2015-TIOL-1239-HC-P&H-ST] Ajay Kumar Gupta vs. CESTAT and Another.

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Service Tax deposited on a non-taxable service u/s. 73A(2) of the Finance Act with delay, penalty u/ss. 76 and 78 not leviable.

Facts:
The Appellant collected service tax on a non-taxable service and had deposited the tax with delay without the payment of interest. Show Cause Notice was issued proposing levy of interest and penalty u/ss. 76, 77 and 78 of the Finance Act, 1994. The First Appellate Authority held that since the amount collected was not chargeable, penalty u/s. 76 and 78 was set aside. Aggrieved thereby, Revenue appealed before the Tribunal. While allowing the Revenue’s appeal, the Tribunal noted that since the tax was collected and the same was deposited only on the insistence of Revenue, it was a case of willful suppression and interest and penalty u/ss. 75 and 78 was restored leading to the present appeal.

Held:
The Hon’ble High Court noted that service tax was not leviable u/s. 68 of the Finance Act and the liability was only to deposit tax u/s. 73A(2) of the Finance Act which was done after delay. Thus as service was not taxable, penalty u/s. 78 was not invocable.

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[2015] 56 taxmann.com 259 (Karnataka High Court) – Commissioner of Central Excise & Service Tax vs. Jacobs Engineering UK Ltd.

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A foreign company with no business establishment nor operations in India cannot be held liable to service tax on mere visit of its officers in India for providing service.

Facts:
Assessee company is situated in United Kingdom with no office or branch in India. They provided consulting engineering service to an Indian Fertiliser company for period March 1998 to April 2001. Revenue alleged that since officers of respondent company had visited premises of assessee they are liable to service tax. Both the appellate authorities decided against the Revenue, aggrieved by which appeal is filed before High Court.

Held:
The High Court observed that, the Tribunal dismissed the order relying upon Mumbai Bench judgment of Tribunal in case of Philcorp Pte. Ltd. vs. CCE on the ground that the respondent company did not have any office or operations within the Territory of India. The submission made by the revenue that respondent company’s officers had visited the client’s plant in India and thus liable to tax is not accepted by the Court , in view of the fact that, assessee don’t have branch or office within the taxable territory. Thus, the appeal was dismissed as service provider was located outside India with no business operations or office within territory of India.

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[2015] 63 taxmann.com 11 (Ahmedabad – Trib.) ADIT vs. Adani Enterprise Ltd A.Y.: 2010-11, Date of Order: 2-9-2015

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Sections 5, 9, the Act – since funds raised by issue of FCCBs were utilised for investment in foreign subsidiary carrying on business outside India, interest paid to bond holders was covered under exclusion in section 9(1) (v)(b) of the Act

Facts
The taxpayer had raised funds from certain nonresident investors by issuing FCCBs to them. The funds were invested in a company which was incorporated outside and which was carrying on business outside India. The taxpayer remitted interest to the bond holders without withholding tax on the ground that interest was neither received by non-resident bond holders in India nor had it accrued in India. Even if it was deemed to have accrued in India, the same was eligible for source rule exclusion as the borrowed funds were utilised for the purpose of earning income from source outside India.

According to the AO, the interest accrued or arose to non-resident bond holders in India. Consequently, the income was primarily subject to section 5(2). Accordingly, resorting to section 9 was not permissible. Therefore, the AO held that the income was chargeable to tax under section 5(2) and exclusion u/s. 9(l)(v)(b) was not relevant.

Held
Identical issue was considered in case of the taxpayer in earlier year. The Tribunal had observed that funds raised by issue of FCCBs were invested in foreign subsidiary which was involved in financing of businesses abroad.

The term “business” is wide enough to include investment in subsidiaries or joint ventures which are further involved in business or commerce. Therefore, the AO’s observation that the taxpayer was not earning out of business carried on outside India was not correct. Exclusion clause will not have any purpose unless the income is covered within the provision to which exclusion clause applies. Hence, the presence of exclusion in section 9(1)(v)(b) proves that the income is falling within the ambit of deeming provision. Thus, it cannot be accepted that the same income can also fall within the ambit of income which has accrued and arisen in India.

Since nothing contrary was brought on record in the relevant tax year, following the order of the Tribunal in case of the taxpayer, interest earned by non-resident bond holders was not chargeable to tax in India.

India’s Double taxation Avoidance Ag reements [DTAAs] & Ag reements for Exchange of information [AEIs] – Recent Developments

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In the last 3 years since our last Article on the subject published in
the December, 2012 issue of BCAJ, India has signed DTAAs with 8
countries and has entered into revised DTAAs with 4 countries. India has
also amended few DTAAs by signing Protocols amending the existing
DTAAs. In this Article, our intention is to highlight the salient
features of such DTAAs or Protocols amending the DTAAs. The purpose is
not to deal with such DTAAs or Protocols extensively or exhaustively. It
will be seen that the recent treaties/protocols follow more or less a
similar pattern.

Further, the DTAAs with certain countries have
been modified primarily to include ‘Limitation of Benefits (LOB)
Clause’. Further, Articles on ‘Exchange of Information’ and ‘Assistance
in Collection of Taxes’ have been included or the scope of such existing
Articles has been extended.

The reader is advised to refer the text of the relevant DTAA or the Protocol while dealing with facts of a particular case.

VAT – Works Contract – Goods Involved in Execution of Works Contract – Rate of Tax Applicable to The Goods Deemed to be Sold, section 4(1)(c)of The Karnataka Value Added Tax Act, 2003

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10. M/S Durga Projects Inc vs. State of Karnataka and Another, [2013] 62 VSTs 482 (Karn)

VAT – Works Contract – Goods Involved in Execution of Works Contract – Rate of Tax Applicable to The Goods Deemed to be Sold, section 4(1)(c)of The Karnataka Value Added Tax Act, 2003

Facts
The appellant, a partnership firm, engaged in the business of civil works contract, purchased necessary building materials, hardware, etc., the goods falling under Schedule III, certain items of ‘declared goods’ falling u/s. 15 of the CST Act and other non-scheduled goods from within and outside the State as well as from unregistered dealers. The appellant made an application u/s. 60 of the KVAT Act before the Authority for Clarifications and Advance Rulings (ACAR for short) seeking for clarification in respect of: a) A pplicability of the rate of tax on execution of civil works contract under the Act; and b) Whether input tax credit can be availed out of output tax paid by the contractor. The ACAR, after examining the matter in detail, by its order dated 2-8-2006 came to the conclusion that there is no specific entry providing rate of tax on works contract under the KVAT Act, up to 31-3-2006 and therefore, tax should be levied as per the rate applicable on the value of each class of goods involved in the execution of works contract i.e. if the goods involved are taxable at the rate of 4%, then works contract rate would be at 4% and if the rate is 12.5%, the works contract rate would also be at 12.5%. With regard to the clarification of input tax credit is concerned, no finding was given. The appellant subsequently sought for rectification of the order dated 2-8-2006 before the ACAR. The ACAR further clarified on 7-12-2006 stating that iron and steel is one of the commodities specified u/s. 14 of the CST Act 1956, as goods of special importance and therefore, the iron and steel are to be subjected to works contract tax at 4%, when it was used in the same form and if they are used in manufacture or fabrication of product, it would no longer qualify as iron and steel and would have to be subjected to works contract tax at 12.5%.The Commissioner for Commercial Taxes after noticing the clarification order passed by the ACAR found that the order passed by the ACAR is erroneous and prejudice to the interest of the revenue and issued notice u/s. 64(2) of the Act on 25- 8-2010. The Commissioner for Commercial Taxes, after considering the objections filed by the appellant, by its order dated 12-10-2010 set aside the order passed by the ACAR in exercise of its suo-motu revisionary power and held that the goods used in the works contract cannot be treated on par with the normal sale of goods for the purpose of arriving at the rate for the period prior to 1-4- 2006. Further, the iron and steel or any other declared goods used for executing the works contract would be liable to be taxed as per the State Law. The appellant, being aggrieved by the order dated 12-10-2010 passed by the Commissioner of Commercial Taxes, filed appeal before the Karnataka High Court.

Held

Section 4(1)(c) was inserted by Act No.4 of 2006 w.e.f. 1-4-2006 thereby levying tax on the works contract by specifying the rate of tax under the Sixth Schedule. Prior to the amendment, the tax was being collected on the rate applicable to sale of each class of goods under Section 3(1) of the Act. Section 3(1) of the Act provides for levy of tax on sale of goods. Section 4 prescribes the rate of tax. Neither section 3 nor section 4 of the Act seeks or intend to levy or prescribe different rate of tax for the goods involved in the normal sale and for the goods involved in the deemed sale. Both normal sale as well as the deemed sale should be treated as one and the same with respect to levy of tax on sale of goods. Admittedly, prior to 1-4- 2006 insertion of clause (c) to section 4, the rate of tax was not prescribed in respect of transfer of the property in goods, (whether as goods or in any other form) involved in the execution of works contract. Hence, the tax has to be levied as per section 3(1) of the Act. The sale under the works contract is a deemed sale of transfer of the goods alone and it is not different from the normal sale. Hence, the tax has to be levied on the price of the goods and material used in the works contract as if there was a sale of goods and materials. The property in the goods used in the work contract will be deemed to have been passed over to the buyer as soon as the goods or material used are incorporated to the moveable property by principle of accretion to the moveable property. For the period prior to 1-4-2006, tax has to be levied as per section 3(1) of the Act and for the period subsequent to 1-4-2006, tax has to be levied as per section 4(1)(c) of the Act. Accordingly, the High Court allowed the appeal filed by the firm. The order passed by the Commissioner was set aside and the order passed by the ACAR was restored.

[2015-TIOL-87-CESTAT-AHM] Commissioner of Central Excise and Service Tax, Bhavnagar vs. M/s. Madhvi Procon Pvt. Ltd.

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Service tax paid on advance received, ultimately no service was provided. If no service is provided the amount paid has to be considered as a deposit.

Facts:-
The Appellant received mobilisation advance, they paid service tax under works contract composition scheme. However, the contract was terminated and the advance received was recovered by the customer. The refund application filed was rejected on the ground that it had been filed beyond the limitation period u/s. 11B of the Central Excise Act. On appeal, the first appellate authority allowed the appeal, aggrieved by which the present appeal is filed.

Held:
Once service is not rendered then no service tax is payable, any duty paid by mistake cannot be termed as ‘duty’. The payment made has to be considered as a ‘deposit’ to which provisions of section 11B of the Central Excise Act, 1944 will not be applicable. Similar view was taken in the case of M/s. Barclays Technology Centre India P. Ltd vs. CCE [2015] – TIOL-82-CESTAT-MUM, where it was decided that refund cannot be denied for procedural infraction when service tax was not required to be paid. On slightly different facts, in the case of Jyotsana D Patel vs. CCE, Nagpur [2014] 52 taxmann.com 255 (Mumbai CESTAT), it was also held on similar lines that when the service tax is not required to be paid, the amount paid cannot constitute service tax and thus the provisions of section 11B are not applicable.

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Sanskrit, taught well, can be as rewarding as economics

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Discovering one’s past helps to nourish those roots, instilling a quiet self-confidence as one travels through life. Losing that memory risks losing a sense of the self.

With this conviction I decided to read Sanskrit a few years ago I wanted to read the Mahabharata. Mine was not a religious or political project but a literary one. I wanted to approach the text with full consciousness of the present, making it relevant to my life. I searched for a pundit or a shastri but none shared my desire to ‘interrogate’ the text so that it would speak to me. Thus, I ended up at the University of Chicago.

I had to go abroad to study Sanskrit because it is too often a soul-killing experience in India. Although we have dozens of Sanskrit university departments, our better students do not become Sanskrit teachers. Partly it is middle-class insecurities over jobs, but Sanskrit is not taught with an open, enquiring, analytical mind. According to the renowned Sanskritist, Sheldon Pollock, India had at Independence a wealth of world-class scholars such as Hiriyanna, Kane, Radhakrishnan, Sukthankar, and more. Today we have none.

The current controversy about teaching Sanskrit in our schools is not the debate we should be having. The primary purpose of education is not to teach a language or pump facts into us but to foster our ability to think — to question, interpret and develop our cognitive capabilities. A second reason is to inspire and instill passion. Only a passionate person achieves anything in life and realizes the full human potential. And this needs passionate teachers, which is at the heart of the problem.

Too many believe that education is only about ‘making a living’ when, in fact, it is also about ‘making a life.’ Yes, later education should prepare one for a career, but early education should instill the self-confidence to think for ourselves, to imagine and dream about something we absolutely must do in life. A proper teaching of Sanskrit can help in fostering a sense of self-assuredness and humanity, much in the way that reading Latin and Greek did for generations of Europeans when they searched for their roots in classical Rome and Greece.

This is the answer to the bright young person who asks, ‘Why should I invest in learning a difficult language like Sanskrit when I could enhance my life chances by studying economics or commerce?’ Sanskrit can, in fact, boost one’s life chances. A rigorous training in Panini’s grammar rules can reward us with the ability to formulate and express ideas that are uncommon in our languages of everyday life. Its literature opens up ‘another human consciousness and another way to be human’, according to Pollock.

Teaching Sanskrit under the ‘three-language formula’ has failed because of poor teachers and curriculum. But the debate is also about choice. Those who would make teaching Sanskrit compulsory in school are wrong. We should foster excellence in Sanskrit teaching rather than shove it down children’s throats.

The lack of civility in the present debate is only matched by ignorance and zealotry on both sides. The Hindu right makes grandiose claims about airplanes and stem cell research in ancient India and this undermines the real achievements of Sanskrit. The anti-brahmin, Marxist, post-colonial attack reduces the genuine achievements of Orientalist scholars to ‘false consciousness’. Those who defend Sanskrit lack the open-mindedness that led, ironically, to the great burst of creative works by their ancestors. In the end, the present controversy might be a good thing if it helps to foster excellence in teaching Sanskrit in India.

(Source: Extracts from an Article by Shri Gurucharan Das in Times of India, dated 14-12-2014)

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Sanskrit, taught well, can be as rewarding as economics

fiogf49gjkf0d
Discovering one’s past helps to nourish those roots, instilling a quiet self-confidence as one travels through life. Losing that memory risks losing a sense of the self.

With this conviction I decided to read Sanskrit a few years ago I wanted to read the Mahabharata. Mine was not a religious or political project but a literary one. I wanted to approach the text with full consciousness of the present, making it relevant to my life. I searched for a pundit or a shastri but none shared my desire to ‘interrogate’ the text so that it would speak to me. Thus, I ended up at the University of Chicago.

I had to go abroad to study Sanskrit because it is too often a soul-killing experience in India. Although we have dozens of Sanskrit university departments, our better students do not become Sanskrit teachers. Partly it is middle-class insecurities over jobs, but Sanskrit is not taught with an open, enquiring, analytical mind. According to the renowned Sanskritist, Sheldon Pollock, India had at Independence a wealth of world-class scholars such as Hiriyanna, Kane, Radhakrishnan, Sukthankar, and more. Today we have none.

The current controversy about teaching Sanskrit in our schools is not the debate we should be having. The primary purpose of education is not to teach a language or pump facts into us but to foster our ability to think — to question, interpret and develop our cognitive capabilities. A second reason is to inspire and instill passion. Only a passionate person achieves anything in life and realizes the full human potential. And this needs passionate teachers, which is at the heart of the problem.

Too many believe that education is only about ‘making a living’ when, in fact, it is also about ‘making a life.’ Yes, later education should prepare one for a career, but early education should instill the self-confidence to think for ourselves, to imagine and dream about something we absolutely must do in life. A proper teaching of Sanskrit can help in fostering a sense of self-assuredness and humanity, much in the way that reading Latin and Greek did for generations of Europeans when they searched for their roots in classical Rome and Greece.

This is the answer to the bright young person who asks, ‘Why should I invest in learning a difficult language like Sanskrit when I could enhance my life chances by studying economics or commerce?’ Sanskrit can, in fact, boost one’s life chances. A rigorous training in Panini’s grammar rules can reward us with the ability to formulate and express ideas that are uncommon in our languages of everyday life. Its literature opens up ‘another human consciousness and another way to be human’, according to Pollock.

Teaching Sanskrit under the ‘three-language formula’ has failed because of poor teachers and curriculum. But the debate is also about choice. Those who would make teaching Sanskrit compulsory in school are wrong. We should foster excellence in Sanskrit teaching rather than shove it down children’s throats.

The lack of civility in the present debate is only matched by ignorance and zealotry on both sides. The Hindu right makes grandiose claims about airplanes and stem cell research in ancient India and this undermines the real achievements of Sanskrit. The anti-brahmin, Marxist, post-colonial attack reduces the genuine achievements of Orientalist scholars to ‘false consciousness’. Those who defend Sanskrit lack the open-mindedness that led, ironically, to the great burst of creative works by their ancestors. In the end, the present controversy might be a good thing if it helps to foster excellence in teaching Sanskrit in India.

(Source: Extracts from an Article by Shri Gurucharan Das in Times of India, dated 14-12-2014)

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Throwaway culture

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Unlike earlier days when things were made to last, today everything is disposable

We’ve
had to get rid of our TV set, which was eight years old, and was acting
up. Can’t you repair it? i asked the technician. He looked at me as
though i’d morphed into a Martian. You don’t repair eight-year-old TVs;
you throw them away, he said.

So we got rid of it at a literally
throwaway price, a small fraction of what we’d paid for it. Now, as i
sit and look at the new TV we’ve bought to replace the old one, i can’t
help but think of its impending demise a few short years from now.

It’s
not just TV sets that belong to what could be called the throwaway
culture. Cars, computers, mobile phones, anything you care to name seems
to be made so as to ensure that it will self-destruct, or be rendered
useless, within a relatively short span of time. And that short span of
time seems to be getting shorter and shorter.

No sooner have you
got the very latest smartphone/ music system/ iPad/ electric nostril
hair clipper when a NEW! IMPROVED! UPDATED version of the darn thing is
launched and you find yourself saddled with the old model which your
raddiwala might have to be cajoled into carting away.

It’s
called ‘built-in obsolescence’, designing devices in such a way as to
make them disposable almost as soon as you’ve bought them. What are
known as ‘consumer durables’ should more appropriately be called
‘consumer disposables’ in today’s transient technology where yesterday’s
new is today’s old.

In earlier times, people didn’t merely buy
durable goods like cars, or refrigerators; they developed a relationship
with them. They weren’t just mechanical devices; they were part of the
family, and like other family members they often developed all manner of
idiosyncratic behaviour – rattles, wheezing, sudden stops and starts –
as they grew older, endearing traits that humanised them.

Instead
of being ashamed of their age, people were proud of how old their car
was, or their fridge, or their music system. It showed how well they’d
been looked after, like aging relatives whom one cherished.

Those
days are dim memories in today’s disposable culture of inbuilt
obsolescence. To which India boasts one notable exception: the
never-say-die neta who successfully defers all attempts to be put out to
pasture and comes with a genuinely lifetime guarantee.

(Source: Times of India, dated 03-12-2014)

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Throwaway culture

fiogf49gjkf0d
Unlike earlier days when things were made to last, today everything is disposable

We’ve
had to get rid of our TV set, which was eight years old, and was acting
up. Can’t you repair it? i asked the technician. He looked at me as
though i’d morphed into a Martian. You don’t repair eight-year-old TVs;
you throw them away, he said.

So we got rid of it at a literally
throwaway price, a small fraction of what we’d paid for it. Now, as i
sit and look at the new TV we’ve bought to replace the old one, i can’t
help but think of its impending demise a few short years from now.

It’s
not just TV sets that belong to what could be called the throwaway
culture. Cars, computers, mobile phones, anything you care to name seems
to be made so as to ensure that it will self-destruct, or be rendered
useless, within a relatively short span of time. And that short span of
time seems to be getting shorter and shorter.

No sooner have you
got the very latest smartphone/ music system/ iPad/ electric nostril
hair clipper when a NEW! IMPROVED! UPDATED version of the darn thing is
launched and you find yourself saddled with the old model which your
raddiwala might have to be cajoled into carting away.

It’s
called ‘built-in obsolescence’, designing devices in such a way as to
make them disposable almost as soon as you’ve bought them. What are
known as ‘consumer durables’ should more appropriately be called
‘consumer disposables’ in today’s transient technology where yesterday’s
new is today’s old.

In earlier times, people didn’t merely buy
durable goods like cars, or refrigerators; they developed a relationship
with them. They weren’t just mechanical devices; they were part of the
family, and like other family members they often developed all manner of
idiosyncratic behaviour – rattles, wheezing, sudden stops and starts –
as they grew older, endearing traits that humanised them.

Instead
of being ashamed of their age, people were proud of how old their car
was, or their fridge, or their music system. It showed how well they’d
been looked after, like aging relatives whom one cherished.

Those
days are dim memories in today’s disposable culture of inbuilt
obsolescence. To which India boasts one notable exception: the
never-say-die neta who successfully defers all attempts to be put out to
pasture and comes with a genuinely lifetime guarantee.

(Source: Times of India, dated 03-12-2014)

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Company – Book Profits – Computation – Assessee is entitled to reduce from its book profits, the profit derived from captive power plants in determining tax payable for the purposes of section 115JA

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CIT vs. DCM Sriram Consolidation Ltd. [2014] 368 ITR 720 (SC)

The assessee had four divisions, namely, Shriram Fertilizers and Chemicals, Shriram Cement Works, Shriram Alkalies and Chemicals and the textile division. In addition, the assessee also had four industrial undertakings which were engaged in captive power generation (hereinafter referred to as “CPP(s)”). Three out of the four CPPs were situated at Kota, which generated power equivalent 10 MW, 30 MW and 35 MW, respectively. The fourth CPP, at Bharuch, which was situated in the State of Gujarat, generated 18 MW power. For the purposes of setting up CPPs the assessee had taken requisite permission from the Rajasthan State Electricity Board (hereinafter referred as “ RSEB”), as well as the Gujarat State Electricity Board (hereinafter referred to as “GSEB”).

On 29th November, 1997, the assessee filed a return declaring a loss of Rs. 43,31,74,077. In a note attached to the return, the assessee had disclosed the profit and loss derived from each of the CPPs, and also indicated the formula adopted for computation of the profit derived from the respective CPPs. Briefly, the method for computation of profit and loss indicated in the note appended to the return was the rate per unit as charged by the respective State Electricity Board for transfer of power, reduced by 7% on account of absence of transmission and distribution losses (wheeling charges). From the figure obtained by applying the reconfigured rate per unit, deduction was made towards specific expenses, as well as common expenses attributable to each CPP so as to arrive at the figure of profit/loss of each CPP. In the note appended to the return of the assessee, the break up of total profit in the sum of Rs. 41,88,50,862 was detailed out in the following manner.

The assessee, however, for the purposes of the provisions of section 115JA of the Act based on its books of account, disclosed income of the sum of Rs.86,33,382. By an intimation dated 7th July, 1998, the Revenue processed the return filed by the assessee under the provisions of section 143(1)(a) of the Act. On 30th March, 1999, the assessee filed the revised return declaring a loss of Rs. 39,36,71,056. For the purposes of section 115JA of the Act, the assessee continued to show its income as Rs. 86,33,382. The case of the assessee was taken up by the Assessing Officer for scrutiny. A notice u/s. 143(2) of the Act was issued. During the course of scrutiny, the Assessing Officer raised a query with regard to the deduction of a sum of Rs. 41,88,50,862 from book profit by the assessee while computing tax u/s. 115JA of the Act. In response to the querry of the Assessing Officer, the assessee informed that the said amount has been reduced from the book profit as this amount was profit derived from CPPs set up by the assessee with the permission of the RSEB and the GSEB.

The Assessing Officer after a detailed discussion, vide order dated 24th March, 2000, rejected the claim of the assessee and added back the deduction claimed by the assessee from book profit, broadly on the following grounds:

(i) the memorandum and articles of association did not permit the assessee to engage in the business of generation of power;

(ii) the permission granted by the State Electricity Boards prohibited sale of energy so generated or supply of energy free of cost to others;

(iii) the sanction give by RSEB was only for setting up of turbo generator and not for parallel generation; and

(iv) the assessee was in the business of manufacturing fertiliser, for which purpose, it had received a subsidy as the urea manufactured was a controlled and consequently, a licensed item being subject to the retention price scheme of the Government of India which, mandated that since sale price and the distribution of urea was fully controlled, the manufacturer would be allowed a subsidy in a manner which permitted him to earn a return of 12 % on his net worth after taking into account the cost of raw material and capital employed, which included both the fixed and variable cost. From this, it was concluded that as the assessee had received a subsidy from the Government of India for manufacture of urea and as was apparent from the balance sheet and profit and loss account filed by the assessee, the CPPs were a part of the fertiliser, cement and caustic soda plants. The CPPs were included in the aforesaid plants and thus it could not be said that the income derived from the said plants, keeping in view the subsidy received by the assessee under the retention price scheme, was in any way, income derived from generation of power; and

(v) lastly, the assessee was not in the business of generation of power and that the assessee is not deriving any income from business of generation of power. A distinction was drawn between an industrial undertaking generating power and one which was in the business of generating power. The assessee’s case was likened to an undertaking which is generating power but is not in the business of generating power and, hence, not deriving income from generation of power.

The assessee being aggrieved, preferred an appeal to the Commissioner of Income-tax (Appeals). By an order dated 21st January, 2001, the Commissioner of Incometax (Appeals) allowed the appeal of the assessee with respect of the said issue.

Aggrieved by the order of the Commissioner of Incometax (Appeals), the Revenue preferred an appeal to the Tribunal. The Tribunal sustained the finding returned by the Commissioner of Income-tax (Appeals) in totality.

On further appeal by the Revenue, the High Court was of the view that the issue which required their determination was whether on a plain reading of the provisions of Explanation (iv) to section 115JA of the Act, the assessee would be entitled to reduce the book profits to the extent of profit derived fromits CPPs, while computing the MAT u/s. 115JA of the Act. According to the High Court, the entire objection of the Revenue to this claim on the assessee was pivoted on the submission that the assessee cannot derive profit from transfer of power from its CPPs to its other units for the following reasons:

(i) Firstly, there was no sale, inasmuch as, the transfer of power was not to a third party and consequently, no profits could have been earned by the assessee;

(ii) Secondly, in any event, the generation of power by CPPs would not constitute business within the meaning of Explanation (iv) to section 115JA of the Act as the main line of activity of the assessee was not the business of generation of power, an expression which finds mention in Explanation (iv) to section 115JA of the Act and;

(iii) Lastly, there was no mechanism for computing the sale price, and consequently, the profit which would be derived on transfer of energy from the assessee’s CPPs to its other units.

According to the High Court, the fallacy in the argument was self-evident, inasmuch as, counsel for the Revenue had proceeded on the basis that the words and expressions used in Explanation (iv) to section 115JA were to be confined to a situation which involved a commercial transaction with an outsider. According to the High Court , if the words and expression used in the said Explanation (iv) were to be given their plain meaning then the claim of the assessee had to be accepted.

The high Court thereafter went on to deal with each of the contentions of Revenue. To answer the first contention as to whether there could be sale of power and the resultant derivation of profits in a situation as the present one, the high Court held that one has to look no further than to the judgment of the Supreme Court in Tata Iron and Steel Co. Ltd. vs. State of Bihar [1963] 48 itr (SC) 123. Based on the ratio of the aforesaid Supreme Court decision, it was clear that in arriving at an amount that was to be deducted from book profits – which was really to the benefit of the assessee as it reduced the amount of tax which it was liable to pay under the provisions of section 115JA of the Act, the principle or apportionment of profits resting on disintegration of ultimate profits realised by the assessee by sale of the final product by the assessee had to be applied. In applying that principle it was not necessary  to depart from the principle that no  one  could  trade with himself.

When looked at from this angle, it was quite clear that the profit derived by the assessee on transfer of energy from its CPPs to its other units was “embedded” in the ultimate profit earned on sale of its final products. The assessee by taking resort to explanation (iv) to section 115JA had sought to apportion and, consequently, reduce that part of the profit which was derived from transfer of energy from its CPPs in arriving at book profits amenable to tax u/s. 115JA of the act.

As to the second contention as to whether the assessee was in the business of generation of power, based on the findings returned both by the Commissioner of Income- tax  (appeals)  as  well  as  the  tribunal,  the  high  Court held that it could not be said that the assessee is not engaged in the business. as rightly held by the tribunal, the assessee had been authorised by the State electricity Boards to generate electricity. The generation of electricity had been undertaken by the assessee by setting up a fully independent and identifiable industrial undertaking. these   undertakings   had   separate   and   independent infrastructures, which were managed independently and whose accounts were prepared and maintained separately and subjected to audit.   The term “business” which prefixes generation of power in clause (iv) of the explanation to section 115JA was not limited to one which is carried on only by engaging with an outside third party. The meaning of the word “business” as defined in section 2(13) of the act includes any trade commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. The definition of “business”, which is inclusive, clearly brings within its ambit the activity undertaken by the assessee, which was, captive  generation  of  power  for  its  own  purposes.  The high Court held that the approach of the Commissioner of income-tax (appeals) and, consequently, the tribunal, both in law and on facts could not be faulted with. The High Court was of the opinion that the Assessing Officer had clearly erred in holding that, since the main business of the assessee was of manufacture and sale of urea,    it could not be said to be in the business of generation  of power in terms of explanation (iv) to section 115JA of the act.

In view of the discussion above, the high Court held   that the assessee was entitled to reduce from its book profits, the profits derived from its CPPs, in determining tax payable for the purposes of section 115JA of the act. It also concurred with the line of reasoning  adopted  both by the Commissioner of income-tax (appeals) as well as the tribunal as regards the computation of sale price  and  consequent  profits  in  terms  of  Explanation
(iv)    of section 115JA of the act. the high Court further held that it was unfair to remand the matter for the purposes of computation of profits in terms of Explanation
(iv)    u/s. 115JA of the act since the Commissioner of income-tax (appeals) had categorically recorded the facts with regard to computation and, particularly of its judgement that despite being given an opportunity by the Commissioner of income-tax (appeals) nothing had been brought on record by the Assessing Officer, which could persuade them to disagree with the computation filed   by the assessee, which had been authenticated by the assessee’s auditors.

The Supreme Court dismissed the appeal filed by the revenue holding that the principle of law propounded in Tata Iron and Steel Co. Ltd. vs. State of Bihar (supra) had rightly been applied by the high Court in the facts and circumstances of the case.

A. P. (DIR Series) Circular No. 46 dated 8th December, 2014

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Notification No. FEMA. 312/2014-RB dated 2nd July, 2014 Foreign Direct Investment (FDI) in India – Review of FDI policy – Sector Specific conditions – Defence

This Notification & circular have made the following two changes in to Notification No. FEMA. 20/2000-RB dated 3rd May 2000 pertaining to FDI in Defence Sector so as to bring it line with the Press Notes issued by DIPP.

The amendments are as under: –
1. I n Regulation 14(3)(iv)(D) the words “Defence Sector” have been deleted.
2. Paragraph 6 of Annexure B pertaining to “Defence Sector” has been substituted as under: –



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IDBI Capital Market Services Ltd. vs. DCIT ITAT “I” Bench, Mumbai Before N.K. Billaiya, (A. M.) & Amit Shukla (J. M.) I.T.A. No. 618/Mum/2012 Assessment Year: 2008-09. Decided on 18.02.2015 Counsel for Assessee/Revenue: N.C. Jain/Kishan Vyas

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Section 37(1) – Loss arising from valuation of interest rate swap contracts as at the end of the year is allowable as deduction.

Facts:
The assessee is engaged in the business of investment, share broking and dealing in Government securities and it is a member of Bombay Stock Exchange as well as National Stock Exchange. While scrutinising the return of income the AO noticed that as on 31st March 2008 the assessee had valued the outstanding interest swap contracts and the loss of Rs.18.3 crore determined was debited to P&L Account. According to the AO, the assessee had recognised only the loss and not the profit. Further, he observed that the assessee was not consistent and definite in making entries in the account books in respect of losses and gains and accordingly denied the claim of deduction. On appeal, the CIT(A) relied upon the decision of the Bombay High Court in the case of Bharat Ruia in ITA No.1539 of 2010 and treated the loss as speculation loss and confirmed the disallowance.

Held:
The Tribunal noted that it was an undisputed fact that the assessee had made the valuation of interest rate swap contracts as at the end of the year and had incurred losses on such valuation. Further, it also noted that the assessee had made the entries following Accounting Standard AS- 11 of the ICAI. The Tribunal further found the observations of the AO that the assessee had never accounted for the gains on such transactions as totally misplaced and against the facts of the case. Relying on the decision of the Tribunal Special Bench Mumbai in the case of Bank of Bahrain & Kuwait, ITA No.4404 & 1883/Mum/2004 and of the Supreme Court in the case of Woodward Governor India Pvt. Ltd. [2009] 179 Taxman 326 (SC), the Tribunal set aside the order of the CIT(A) and directed the AO to delete the addition of Rs.18.3 crore.

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Sale of minors property by defecto guardian – Sale without legal necessity void or voidable. Hindu Minority and Guardianship Act, 1956, section 6, 11 & 12.

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Kanhei Charan Das vs. Ramakanta Das & Ors. AIR 2014 Orissa 193

The undisputed facts are that, the land appertaining to the plots was the ancestral land of one Krutibas Das and stood recorded in his name. After the death of Krutibas and his wife, the property devolved on his two sons, namely, Banamali and Ramakanta as joint owners thereof, both having 50% share each. Ramakanta being a minor was being looked after by his major brother Banamali, who was managing the joint family properties including the undivided interest of Ramakanta. By registered sale deed, Banamali sold the entire disputed land of 40 decimals on behalf of himself and also as brother guardian in favour of one Agani Dash. Agani in his turn sold the disputed land to one Sanatan and the present petitioner, Kanehei by registered sale deed.

During the consolidation operation, the disputed land was recorded in the name of Sanatan Dash and Petitioner Kanehei. Ramakanta, the present opposite party No.1, filed objection claiming to record his half share in the disputed land in his name on the ground that his brother Banamali had no right to alienate his share.

The Hon’ble Court observed that, where the de facto guardian of a minor is also the Karta or Manager or an adult member of the joint family including the minor himself, for sale by him of the joint family property including the undivided interest of the minor in such property, no permission of the court is necessary. Such sale shall be governed by the uncodified Mitakshara School of Hindu law, according to which sale by the Karta or Manager of the Hindu Joint Family Property without any legal necessity or benefit of estate shall be voidable at the option of the minor with regard to his undivided interest.

Thus, the sale of the minors’ property, in contravention of section 11 of the Hindu Minority and Guardianship Act, 1956 Act, is void and invalid must be applicable to all properties of the minor except where the sale is by a Karta or Manager of a joint Hindu Family of the undivided interest of the minor in the joint family property. The voidability of the sale transaction could only be decided by the Civil Court and not the consolidation Authorities.

The finding of the Consolidation Authorities in the impugned orders that the sale of Ramakanta’s undivided interest in the disputed joint family property by Banamali was void and invalid being in contravention of Section 11 of the Hindu Minority and Guardianship Act, 1956 cannot be sustained.

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Income Computation & Disclosure Standards – Some Issues

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The 10 Income Computation and Disclosure Standards (ICDS) which have been notified on 31st March 2015 u/s. 145(2) of the Income-tax Act, 1961 have significant implications on the computation of income for assessment years beginning from assessment year 2016-17.

Under the notification, these standards come into force from 1st April 2016, i.e. assessment year 2016-17, apply to all assessees following mercantile system of accounting, and are to be followed for the purposes of computation of income chargeable to income tax under the head “Profits and gains of business or profession” or “Income from other sources”. The notification also supercedes notification dated 25th January 1996 [which notified 2 Accounting Standards u/s 145(2) – Disclosure of Accounting Policies, and Disclosure of Prior Period and Extraordinary Items and Changes in Accounting Policies], except as regards such things done or omitted to be done before such supersession.

Background
Section 145, which deals with method of accounting, was substituted by the Finance Act, 1995, with effect from assessment year 1997-98. Sub-section (2) to this section, after this amendment, provided that the Central Government may notify in the Official Gazette from time to time accounting standards (“AS”) to be followed by any class of assessees or in respect of any class of income.

The provisions of sub-section (1) were made subject to the provisions of sub-section (2), whereby the income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” was to be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee, subject to the provisions of subsection (2).

Sub-section (3) provided that where the assessing officer was not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or AS notified under sub-section (2) had not been regularly followed by the assessee, the assessing officer could make an assessment in the manner provided in section 144 (i.e. a best judgement assessment).

In 1996, AS notified by ICAI were not mandatory for companies, but were mandatory for auditors auditing general purpose financial statements. On 29th January 1996, two AS (“IT-AS”) were notified by the CBDT, Disclosure of Accounting Policies, and Disclosure of Prior Period and Extraordinary Items and Changes in Accounting Policies.

In July 2002, the Government constituted a Committee for formulation of AS for notification u/s 145(2). In November 2003, this Committee recommended the notification of the AS issued by ICAI without any modification, since it would be impractical for a taxpayer to maintain two sets of books of account. It also recommended appropriate legislative amendments to the Act for preventing any revenue leakage due to the AS being notified by ICAI. These recommendations were not implemented.

With the imminent introduction of International Financial Reporting Standards (IFRS) in India in the form of Ind- AS, in December 2010, the Government constituted a Committee of Departmental Officers and professionals to suggest AS for notification u/s. 145(2). The terms of the Committee were as under:

i) to study the harmonisation of AS issued by the ICAI with the direct tax laws in India, and suggest AS which need to be adopted u/s. 145(2) of the Act along with the relevant modifications;

ii) to suggest method for determination of tax base (book profit) for the purpose of Minimum Alternate Tax (MAT) in case of companies migrating to IFRS (IND AS) in the initial year of adoption and thereafter; and

iii) to suggest appropriate amendments to the Act in view of transition to IFRS (IND AS) regime. This Committee submitted an interim report in August 2011. The recommendations of the Committee in such interim report were as under:

1. Separate AS should be notified u/s. 145(2), since the AS to be notified would have to be in harmony with the Act. The notified AS should provide specific rules, which would enable computation of income with certainty and clarity, and would also need elimination of alternatives, to the extent possible.

2. Since it would be burdensome for taxpayers to maintain 2 sets of books of account, the AS to be notified should apply only to computation of income, and books of account should not have to be maintained on the basis of such AS.

3. T o distinguish such AS from other AS, these AS should be called Tax Accounting Standards (“TAS ”).

4. S ince TAS were based on mercantile system of accounting, they should not apply to taxpayers following cash system of accounting.

5. S ince TAS are meant to be in harmony with the Act, in case of conflict, the provisions of the Act should prevail over TAS .

6. S ince the starting point for computation of taxable income was the profit as per the financial accounts, which are prepared on the basis of AS whose provisions may be different from TAS , a reconciliation between the income as per the financial statements and the income computed as per TAS should be presented.

In October 2011, drafts of 2 TAS – Construction Contracts and Government Grants – were released for public comment. In May 2012, drafts of another 6 TAS were released for public comment.

The Committee gave its final report in August 2012. It focused only on formulation of TAS harmonised with the provisions of the Act, since the position regarding the transition to Ind-AS was fluid and uncertain, and therefore even the impact of Ind-AS on book profits relevant for the purposes of MAT could not be ascertained.

It recommended that of the 31 AS issued by ICAI, 7 AS did not need to be examined, since they did not relate to computation of income. Of the remaining 24 AS, 10 related to disclosure requirements, were not yet mandatory or were not required for computation of income. The Committee therefore provided drafts of 14 TAS . The Committee also recommended that TAS in respect of certain other areas be considered for notification – Share based payment, Revenue recognition by real estate developers, Service concession arrangements (example, Build Operate Transfer agreements), and Exploration for and evaluation of mineral resources.

In January 2015, the CBDT released the draft of 12 TAS (renamed as ICDS) for public comment. These did not include 2 TAS recommended by the Committee – Contingencies and Events Occurring After the Balance Sheet Date and Net Profit or Loss for the Period, Prior Period Items and changes in Accounting Policies.

Section 145 was amended by the Finance (No. 2) Act, 2014 with effect from 1st April 2015 (assessment year 2015-16), by substituting the term “income computation and disclosure standards” for the term “accounting standards” in sub-section (2). Similarly, sub-section (3) was amended to substitute the “not regular following of accounting standards” with “non-computation of income in accordance with the notified ICDS”.

Finally, in March 2015, the CBDT notified 10 ICDS as under:

ICDS I – Accounting Policies
ICDS II – Valuation of Inventories
ICDS III – Construction Contracts
ICDS IV – Revenue Recognition
ICDS V – Tangible Fixed Assets
ICDS VI – Effects of Changes in Foreign Exchange Rates
ICDS VII – Government Grants
ICDS VIII – Securities
ICDS IX – Borrowing Costs
ICDS X – Provisions, Contingent Liabilities and Contingent Assets

The draft ICDS prepared by the Committee but not notified were those relating to Leases and Intangible Fixed Assets.

Applicability & Issues
The notified ICDS apply with effect from assessment year 2016-17, while section 145(2) was amended with effect from assessment year 2015-16. Therefore, for assessment year 2015-16, IT-AS would not apply, since the section provides for ICDS to be followed. Further, since ICDS were not notified till March 2015, ICDS were also not required to be followed for that year. Effectively, for assessment year 2015-16, neither IT-AS nor ICDS would apply. ICDS would apply only with effect from assessment year 2016-17.

ICDS would apply to all taxpayers following mercantile system of accounting, irrespective of the level of income. It would not apply to taxpayers following cash system of accounting. It would not apply only to taxpayers carrying on business, but even to other taxpayers, who may have income under the head “Income from Other Sources”. Effectively, since almost every taxpayer would have at least bank interest, which is taxable under the head “Income from Other Sources”, it would apply to most taxpayers. Further, most taxpayers choose to offer income for tax on an accrual basis, to facilitate matching of tax deducted at source (TDS) from their income with their claim for TDS credit as per their return of income.

Would it apply to taxpayers who do not maintain books of accounts? The provisions would certainly apply to all taxpayers who offer their income to tax under these 2 heads of income on a mercantile basis. Can a taxpayer choose to offer his income to tax on a cash basis, where books of account are not maintained, or is it to be presumed that his income has to be taxed on a mercantile or accrual basis in the absence of books of accounts?

In N. R. Sirker vs. CIT 111 ITR 281, the Gauhati High Court considered the issue and held as under:

“It can safely be assumed that ordinarily people keep accounts in cash system, that is to say, when certain sum is received, it is entered in his account and in the case of firms, etc., where regular method of accounting is adopted, sometimes accounts are kept in mercantile system. In the instant case it was not the case of the department that the assessee’s accounts were kept in mercantile system. On the other hand, the assessment orders showed that no proper accounts were kept. That being so it would not be justified to presume that the assessee kept his accounts in the mercantile system. Income-tax is normally paid on money actually received as income after deducting the allowable deductions. In the case of an assessee maintaining accounts in mercantile system, there was some variation, inasmuch as moneys receivable and payable were also shown as received and paid in the books. In order to apply this method, the proved or admitted position must be that the assessee keeps his accounts in mercantile system.”

Similarly, in Dr. N. K. Brahmachari vs. CIT 186 ITR 507, the Calcutta High Court held that unless and until it was found that the assessee maintained his accounts on accrual basis, income accrued but not received could not be taxed.

In CIT vs. Vimla D. Sonwane 212 ITR 489, the Bombay High Court considered a case where the assesse did not maintain regular books of accounts and did not follow mercantile system of accounting. The Bombay High Court held in that case:

“Option regarding adoption of system of accounting is with the assessee and not with the Income-tax Department. The assessee is indeed free even to follow different methods of accounting for income from different sources in an appropriate case. The department cannot compel the assessee to adopt the mercantile system of accounting. As a matter of fact, it was not adopted.”

In Whitworth Park Coal Co. Ltd. vs. IRC [1960] 40 ITR 517, the House of Lords laid down that where no method of accounting had been regularly employed, a non-trader cannot be assessed, (in the Indian context, u/s. 56 under the head ‘Income from other sources’) in respect of money which he has not received. The House of Lords observed:

“…The word ‘income’ appears to me to be the crucial word, and it is not easy to say what it means. The word is not defined in the Act and I do not think that it can be defined. There are two different currents of authority. It appears to me to be quite settled that in computing a trader’s income account must be taken of trading debts which have not yet been received by the trader. The price of goods sold or services rendered is included in the year’s profit and loss account although that price has not yet been paid. One reason may be that the price has already been earned and that it would give a false picture to put the cost of producing the goods or rendering the services into his accounts as an outgoing but to put nothing against that until the price has been paid. Good accounting practice may require some exceptions, I do not know, but the general principle has long been recognised. And if in the end the price is not paid it can be written off in a subsequent year as a bad debt.

But the position of an ordinary individual who has no trade or profession is quite different. He does not make up a profit and loss account. Sums paid to him are his income, perhaps subject to some deductions, and it would be a great hardship to require him to pay tax on sums owing to him but of which he cannot yet obtain payment. Moreover, for him there is nothing corresponding to a trader writing off bad debts in a subsequent year, except perhaps the right to get back tax which he has paid in error.” (p. 533)

“The case has often arisen of a trader being required to pay tax on something which he has not yet received and may never receive, but we were informed that there is no reported case where a non-trader has had to do this whereas there are at least three cases to the opposite effect—Lambe v. IRC [1934] 2 ITR 494, Dewar v. IRC 1935 5 Tax LR 536 and Grey v. Tiley [1932] 16 Tax Cas. 414, and I would also refer to what was said by Lord Wrenbury in St. Lucia Usines & Estates Co. Ltd. v. St. Lucia ( Colonial Treasurer) [1924] AC 508 (PC). I certainly think that it would be wrong to hold now for the first time that a non-trader to whom money is owing but who has not yet received it must bring it into his income-tax return and pay tax on it. And for this purpose I think that the company must be treated as a non-trader, because the Butterley’s case [1957] AC 32 makes it clear that these payments are not trading receipts.” (p. 533)

Therefore, for income falling under the head “Income from other sources”, it is clear that in the absence of books of accounts, and where the assessee has not exercised any option, the income would be taxable on a cash basis.

It is well settled that the method of accounting is vis-a-vis each source of income, since computation of income is first to be done for each source of income, and then aggregated under each head of income. An assessee can choose to follow one method of accounting for some sources of income, and another method of accounting for other sources of income. In J. K. Bankers vs. CIT 94 ITR

107    (All), the assessee was following mercantile system of accounting in respect of interest on loans in respect of its moneylending business, and offered lease rent earned by it to tax on a cash basis under the head “Income from Other Sources”. The Allahabad High Court held that an assessee could choose to follow a different method of accounting in respect of its moneylending business and in respect of lease rent. Similarly, in CIT vs. Smt. Vimla D. Sonwane 212 ITR 489, the Bombay High Court held that “The assessee is indeed free even to follow different methods of accounting for income from different sources in an appropriate case”.

Where an assessee follows cash method of accounting for certain sources of income and mercantile system of accounting for others, ICDS would apply only to those sources of income, where mercantile system of accounting is followed and would not apply to those sources of income, where cash method of accounting is followed. For instance, an assessee may have a manufacturing business, and a separate commission agency business. He may be following mercantile system of accounting for his manufacturing business, and a cash method of accounting for his commission agency business. ICDS would then apply only to the manufacturing business, and not to the commission agency business.

Can a taxpayer opt to change his method of accounting from mercantile to cash basis, in order to prevent the applicability of ICDS? Under paragraph 5 of ICDS I, an accounting policy shall not be changed without reasonable cause. Under AS 5, such a change was permissible only if the adoption of a different accounting policy was required by statute or for compliance with an accounting standard or if it was considered that the change would result in a more appropriate presentation of the financial statements of the enterprise. Would a change in law amount to reasonable cause? If such a change is made from assessment year 2016-17, the year from which ICDS comes into effect, an assessee would need to demonstrate that such change was actuated by other commercial considerations, and not merely to bypass the provisions of ICDS.

Do ICDS apply to a taxpayer who is offering his income to tax under a presumptive tax scheme, such as section 44AD? Under the presumptive tax scheme, books of account are not relevant, since the income is computed on the basis of the presumptive tax rate laid down under the Act. It therefore does not involve computation of income on the basis of the method of accounting, or on the basis of adjustments to the accounts. Therefore, though there is no specific exclusion under the notification for taxpayers following under presumptive tax schemes from the purview of ICDS, logically, ICDS should not apply to such taxpayers. However, where the presumptive tax scheme involves computation of tax on the basis of gross receipts, turnover, etc., it is possible that the tax authorities may take a view that the ICDS on revenue recognition would apply to compute the gross receipts or turnover in such cases.

Would ICDS apply to non-residents? The provisions of ICDS apply to all taxpayers, irrespective of the concept of residence. However, where a non-resident taxpayer falls under a presumptive tax scheme, such as section 115A, on the same logic as that of presumptive tax schemes applicable to residents, the provisions of ICDS should not apply. Further, where a non-resident claims the benefit of a double taxation avoidance agreement (DTAA), by virtue of section 90(2), the provisions of the DTAA would prevail over the provisions of the Income-tax Act, including section 145(2) and ICDS notified thereunder. In other cases of incomes of non-residents, which do not fall under presumptive tax schemes or DTAA, the provisions of ICDS would apply.

It has been stated in each ICDS that the ICDS would not apply for the purpose of maintenance of books of accounts. While theoretically this may be the position, the question arises as to whether it is practicable or even possible to compute the income under ICDS without maintaining a parallel set of books of account, given the substantial differences between AS being followed in the books of accounts and ICDS. Most taxpayers would end up at least preparing a parallel profit and loss account and balance sheet, to ensure that ICDS and its consequences have been properly taken care of while making the adjustments.

Further, the Committee had recommended that a tax auditor is required to certify that the computation of taxable income is made in accordance with the provisions of ICDS. Before certification, a tax auditor would invariably require such parallel profit and loss account and balance sheet to be prepared, to ensure that all adjustments required on account of ICDS have been considered. This will result in substantial work for most businesses, and may even result in the requirement of parallel MIS, one for the purposes of regular accounts, and the other for the purposes of ICDS. One wonders whether the Committee really wanted to avoid the requirement of maintenance of 2 sets of books of account, as stated by it, or has taken into account the practical difficulties, given the complex and myriad adjustments it has suggested through ICDS.

An interesting issue arises in this context. Can an assessee maintain 2 separate books of accounts – one under the Companies Act or other applicable law on a mercantile system, and a parallel set of books of accounts for income tax purposes on a cash basis? If one looks at the provisions of section 145(1), it provides that income chargeable under these 2 heads of income shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. What is the meaning of the term “regularly employed”? Normally, the system of accounting adopted by the assesse in his books for his dealings with the outside world would be adopted for the purposes of computing the profit or loss for tax purposes also. The accounts are those maintained in the regular course of business. It may therefore be difficult for an assessee to maintain separate books of account with different system of accounting only for income tax purposes.

It may be noted that even after the introduction of ICDS, the computation still has to be in accordance with the method of accounting regularly employed by the assessee. Compliance with ICDS is an additional requirement. Therefore, the computation in accordance with the method of accounting is merely modified by the requirements of ICDS, and not substituted entirely.

Since ICDS is not applicable for the purposes of maintenance of books of account, one wonders as to what is the purpose and ambit of ICDS I on Accounting Policies. Since the purpose of ICDS is not to lay down accounting policies which are to be followed in the maintenance of the books of account, ICDS I should be regarded as merely a disclosure standard and not a computation standard. There are however certain provisions in ICDS I which relate to computation.

For example, the provision that accounting policies adopted shall be such was to represent a true and fair view of the state of affairs and income of the business, profession or vocation, and that for this purpose, the treatment and presentation of transaction and events shall be governed by their substance and not merely by their legal form, and marked to market loss or an expected loss shall not be recognised, unless the recognition of such loss is in accordance with the provisions of any other ICDS, really relates to what accounting policies an assessee should follow in its books of account. This is inconsistent with the preamble to this ICDS, that it is not applicable for the purpose of maintenance of books of account. This is also ultra vires the powers available under the provisions of section 145(2), which provide for computation in accordance with notified ICDS, and no longer contain the power to notify accounting standards.

This anomaly possibly arose on account of the fact that the provisions of section 145(2) were modified only after the Committee provided the draft of the relevant ICDS. Possibly, such provisions of ICDS I may not be valid.

Each ICDS states that in the case of conflicts between the provisions of the Income-tax Act and the ICDS, the provisions of the Act would prevail to that extent. Such a provision is ostensibly to harmonise the provisions of the ICDS with the provisions of the Act. One wonders as to why the Committee did not take into account the various provisions of the Act while framing ICDS. While such a provision is helpful, it would lead to substantial litigation in cases where there is no express provision in the Act, but where courts have interpreted the provisions of the Act in a manner which is inconsistent with the provisions of the ICDS.

There have been 3 specific amendments made to the Income-tax Act by the Finance Act 2015, to ensure that the provisions of the Act are in line with the provisions of ICDS. These 3 provisions are as under:

1.    The definition of “income” u/s. 2(24) has been amended by insertion of clause (xviii) to include assistance in the form of a subsidy or grant or cash incentive or duty drawback or favour or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee, other than the subsidy or grant or reimbursement, which is taken into account for determination of the actual cost of the asset in accordance with the provisions of explanation 10 to clause (1) of section 43. This is to align it with the provisions of ICDS VII on Government Grants.

2.    The provisions of the proviso to section 36(1)(iii) have been modified to delete the words “for extension of existing business or profession”, after the words “in respect of capital borrowed for acquisition of an asset”, to bring the section in line with ICDS IX on Borrowing Costs, whereby interest in respect of borrowings for all assets acquired, from the date of borrowing till the date of first put to use of the asset, is to be capitalised.

3.    A second proviso has been inserted to section 36(1) (vii), to provide that where a debt has been taken into account in computing the income of an assessee for any year on the basis of ICDS without recording such debt in the books of accounts, then such debt would be deemed to have been written off in the year in which it becomes irrecoverable. This is to facilitate the claim for deduction of bad debts, where the debt has been recognised as income in accordance with ICDS, but has not been recognised in the books of accounts in accordance with AS.

Obviously, with the amendment of the Income-tax Act as well, the provisions of the ICDS in this regard read along with the amended Act, which may be contrary to earlier judicial rulings, would now apply.

There could be earlier judicial rulings which are based on the relevant provisions of the accounting standards, and where the court therefore interpreted the law on the basis of such accounting standards. These judicial rulings would now have to be considered as being subject to the requirements of ICDS, as the method of accounting is now subject to modification by the provisions of ICDS.

The third and last category of judicial rulings would be those where the courts have laid down certain basic principles while interpreting the tax law, in particular, the relevant provisions of the tax law. In such cases, such judicial rulings would override the provisions of ICDS, since such rulings have interpreted the provisions of the Act, which would prevail over ICDS.

For instance, various judicial rulings have propounded the real income theory. The Delhi High Court, in the case of CIT vs. Vashisht Chay Vyapar 330 ITR 440 has held, based on the real income theory, that interest accrued on non-performing assets of non-banking financial companies cannot be taxed until such time as such interest is actually received. Would the contrary provisions of ICDS IV on revenue recognition change the position? It would appear that the ruling will still continue to hold good even after the introduction of ICDS.

In case any of the provisions of ICDS is contrary to the Income Tax Rules, which one would prevail? The provisions of ICDS are silent in this regard. Given the fact that rules are a form of delegated legislation, while ICDS is in the form of a notification, which then becomes a part of the legislation, it would appear that the provisions of ICDS should prevail in such cases.

Since ICDS is not applicable for the purpose of maintenance of books of account, it is clear that the provisions of ICDS would not apply to the computation of “book profits” for the purposes of minimum alternate tax under section 115JB.

In fact, most of the ICDS provisions would increase the gap between the taxable income and the book profits, instead of narrowing down the gap. In this context, one wonders whether a recent Telangana & Andhra Pradesh High Court decision would be of assistance. In the case of Nagarjuna Fertilizers & Chemicals Limited 373 ITR 252, the High Court held that where an item of income was taxed in an earlier year but was recorded in the books of account of the current year, on the principle that the same income could not be taxed twice, such income had to be excluded from the book profits of the current year.

Can one use the provisions of AS for interpreting ICDS, where the provisions of both are identical? If one compares the ICDS with the corresponding AS, one notices that the bold portion of the AS has been picked up and modified, and issued as ICDS. Where the provisions of the AS and ICDS are identical, one should therefore be able to take resort to the explanatory paragraphs forming part of the AS, though they do not form part of the ICDS, in order to interpret the ICDS.

Impact & Conclusion

One thing is certain – the provisions of ICDS will create far greater litigation, then what one is now witnessing. That would defeat the very purpose of ICDS of bringing in tax certainty and reduction of litigation. Does reduction of litigation mean introduction of complicated provisions which are unfair to taxpayers? Is there at least one provision in the ICDS which decides a disputed issue in favour of taxpayers?

Does the CBDT believe that what is accepted worldwide as income (profit determined in accordance with IFRS), is not the real income when it comes to taxation? Are the Indian tax authorities an exception to the rest of the world? ICDS does not increase taxes – it merely results in advancement of taxability of income to an earlier year, and postponement of allowability of expenditure to a later year. Is the need for advancement of tax revenues so pressing, that taxpayer convenience and compliance costs are brushed aside?

Looking at the requirements of ICDS, one cannot but help wonder as to whether ICDS has been merely brought in to overcome the impact of adverse judicial rulings, and not really with a view to facilitate transition to IndAS. What ought to have been done by amendments to the law is being sought to be implemented through ICDS.

Assessees would now have to cope with not only frequent changes to the law, but also with frequent changes to ICDS, given the unfinished agenda of 4 draft ICDS yet to be notified, and the further 4 recommended for notification by the Committee. One understands that the Committee is in the process of drafting further ICDS for notification.

One also understands that the CBDT is likely to issue FAQs to clarify various aspects of ICDS. One only hopes that such FAQs will not create further confusion, but would help clear the confusion created by the ICDS.

One wonders as to how such ICDS fits in with the Prime Minister’s promise to improve the ease of doing business. The additional compliance costs in order to comply with ICDS would far outweigh the advantages gained by the tax department by recovering taxes at an earlier stage. Would business be keen to expand or would persons be willing to set up new businesses, given the significant compliance costs? The country would certainly take a significant hit in the “Ease of Doing Business Survey” once ICDS is implemented.

Tax auditors will now be in an extremely difficult situation, if the recommendation relating to requirement of certification of computation of income in accordance with ICDS is implemented. So far, they merely had to certify the true and fair view of the accounts, and the correctness of the information provided in Form 3CD. They did not have to certify the correctness of the claims for various deductions. If an auditor would now have to certify the correctness of the computation of income, this would give rise to various issues as to how such certification could be carried out, particularly in cases where the issue was debatable.

Instead of taxpayers, tax auditors may bear the brunt of the income tax department’s actions in respect of claims for deduction or exemption made which, in the view of the income tax department, is not allowable. Would assessees be willing to remunerate tax auditors for such additional high risks which they would bear in certifying the computation of income? If such a requirement of certification of the computation of income were introduced, it is possible that many chartered accountants may no longer be willing to carry out tax audits.

The biggest beneficiaries of ICDS may be tax lawyers and chartered accountants, who will have to handle the resultant additional litigation. The biggest losers will be the taxpayers, due to additional compliance and litigation costs, and the country, due to loss of productive manhours, and the loss of potential growth in business.

SA 330 – The Auditor’s Responses to Assessed Risks

While planning an audit of financial statements, the auditor identifies risks of material misstatement both at the financial statement level and at the assertion level. The objective of the auditor is to obtain sufficient and appropriate audit evidence to address this risk and he does so by designing and implementing appropriate responses to such risks. How the auditor designs these responses will be influenced by the auditor’s assessment of the risk of material misstatement at the assertion level for each class of transactions, account balances and disclosures including:

  • the likelihood of material misstatement due to the particular characteristics of the relevant class of transactions, account balances, or disclosures (i.e., inherent risk); and

  • the existence and operation of relevant controls (i.e., control risk), thereby requiring the auditor to obtain audit evidence to determine whether the controls are operating effectively and whether reliance can be placed on their operating effectiveness in determining the nature, timing and extent of substantive procedures.

Let us break the auditor’s responses to assessed risks into two parts and look at each one of them independently and in conjunction, bearing in mind the auditor’s objectives while performing an audit of financial statements:

1)    Overall response to the risks identified at financial statement level
2)    Audit procedures which are responsive to assessed risks of material misstatements at the assertion level.

Overall response to the risks identified at financial statement level

Guilelessly put, risk of material misstatements at the financial statement level is the risk that the financial statements as a whole may not reflect a true and fair view. Risk of material misstatement as we know is a function of inherent risk and control risk. To address this risk, the auditor may include the following responses while planning the audit of financial statement:

  • Incorporating additional elements of unpredictability in the selection of further audit procedures to be performed (like varying the timing of audit procedures, selecting items for testing that have lower amounts or are otherwise outside customary selection parameters, etc.)

  • Making generic changes to the nature, timing or extent of audit procedures, for example: performing substantive procedures at the period end instead of at an interim date; or modifying the nature of audit procedures to obtain more persuasive audit evidence.

  • Emphasising to the audit team the need to maintain professional skepticism.

  • Assigning more experienced staff or those with special skill sets or using experts and providing increased levels of supervision

The auditor’s assessment of the financial statement level risks, and thereby his overall responses, are affected by his understanding of the control environment. An effective control environment may allow him to have more confidence in internal controls and the reliability of audit evidence generated internally within the entity. The overall response by an auditor to the financial statement risks generally has a noteworthy bearing on the auditor’s general approach towards an audit. Hence it is important that these responses are evaluated and implemented by the auditor in the planning stage of an audit.

Audit procedures which are responsive to assessed risks of material misstatements at the assertion level

The nature, timing and extent of audit procedures are based on the assessment of risk of material misstatement at the assertion level of financial statement captions by the auditor and the auditors’ approach to address a specific risk may vary. For example:

  • He may choose to perform only test of operating effectiveness of controls if he feels that he may achieve an effective response to the risk of material misstatement for a particular assertion.

  • He may choose to perform only substantive procedures if he concludes that there are no effective controls relevant to that particular assertion.

  • He may choose to have a combined approach using both test of controls and substantive procedures.

The design of further audit procedures to be performed by the auditor is generally based on:

1)    The auditor’s assessment of inherent risk and control risk assigned to an assertion, and
2)    Persuasiveness of audit evidence required to address the degree of risk identified.

Let us consider a case study to understand the above concepts.

Case study

Addressing risks at the financial statement level

Background

KKM and Company (‘KKM’) is a financial institution operating in a highly regulated environment. Based on the following scenarios, let us examine the approach that the auditors of KKM, M/s. ALB and Associates would need to adopt to address the risk of material misstatement at financial statement level.

1.    Based on the experience obtained during the past audits, management inquiries conducted and the results obtained while evaluating the design and implementation of higher level controls, the auditors have assessed the control environment to be effective.

2.    The engagement team is comparatively new and is undertaking the audit of this company for the very first time.

3.    The management of the company is well aware of the audit procedures performed by the audit team on a year on year basis. They are ready with all the information required by the audit team at the commencement of the audit. All the information required to be given to the auditors is entirely reviewed by the management to identify any errors and changes and any identified changes are duly incorporated in the information sent to auditors for audit.

4.    As per the policy in place at ALB and Associates, based on the risk grading assigned to KKM while performing the engagement acceptance formalities, the audit team is required to have at least two managers reviewing the work done by the engagement team. However, the engagement partner is of the belief that one manager is sufficient to review the audit.

Evaluation

As per SA 330, the auditor is required to address the risk of material misstatement at financial statement level. He may do so by changing the nature, timing and extent of his audit procedures.

1.    In this scenario, the auditor has concluded that the control environment of the entity is effective. Based on the efficacy of the control environment and existence and operation of internal controls, the reliability of the audit evidence generated internally by the entity increases. This may help the auditor to reduce the nature, timing and extent of audit procedures to be performed by him. Such a reliance on internal controls may help him to place less emphasis on substantive procedures and elect to have a controls based approach towards audit. Such an approach would also help the auditor save time and resources.

2.    In such a scenario where the engagement team is relatively new to the client, the engagement manager/ partner need to ensure that the team is appropriately trained and guided to apply professional skepticism during the course of the audit. The audit team may also find it useful to engage the work of experts wherever required. The audit team should also be made to attend trainings on audit methodology and procedures so as to equip them with the requisite knowledge about the client and the industry. The audit team should familiarise themselves with the client and the industry in which it operates by perusing the previous year’s work papers to obtain an understanding of the issues which were identified in the prior year audit as well as to address any carried forward issues from the previous year’s audit.

3.    In the current scenario, the audit team has been performing identical audit procedures over a period of time due to which the client is well aware of these procedures. In such a scenario, the audit team should include surprise procedures so as to eliminate the consistency of audit procedures so as to incorporate an element of unpredictability in the procedures applied. This surprise element will also help the audit team to address the fraud risk, if any, for certain classes of transactions. For example the audit team may perform a surprise visit for one of the branches of the company for verification of cash balances, select certain low value debtors or debtors with credit balances for balance circularisation etc.

4.    The engagement partner is deviating from the policy followed by the firm while performing the audit of this entity. In the given scenario, based on the risk grade assigned to the entity, at least two managers are to be assigned to this engagement. Hence the engagement partner should increase the number of managers on the job to two. This would increase the supervision on engagement, thus also helping the auditors to address the risk of material misstatement at the financial statement level.

Closing Remarks

Assessing risk lies at the core of the audit process and this article has introduced and explained some of the terminology used by SA 330, giving guidance to auditors on how to respond to assessed risks. In general, tests of control are short, quick audit tests, whereas substantive procedures will require more detailed audit work. SA 330 requires that, irrespective of the assessed risks of material misstatement, the auditor would need to design and perform substantive procedures for each class of transactions, account balance and disclosures. We will discuss the concept of assessing risks at the assertion level in our next article.

25. [2015-TIOL-2086-CESTAT-DEL] Commissioner of Service Tax, Delhi vs. M/s Bagai Construction.

25. [2015-TIOL-2086-CESTAT-DEL] Commissioner of Service Tax, Delhi vs. M/s Bagai Construction.

The taxable event for the levy of service tax is the date of rendition of service. Thus the rate prevalent at the time of provision of service would be the applicable rate irrespective of the rate prevalent at the time of receipt of payment.

Facts:

Assessee paid service tax under works contract service at the rate of 2.06% which was the rate prevalent prior to 01/03/2008 for the payments received after the said date. Although the rate applicable at the time of receipt of payment was 4.12% it was contended that the payments received related to the services rendered prior to 01/03/2008 therefore the old rate should apply.

Held:

Relying on the decision of the Delhi High Court in the case of Vistar Construction P. Ltd vs. Union of India & Ors [2013-TIOL-73-HC-DEL-ST] wherein the Court held that the rate of tax applicable on the date on which the services were rendered would be the one that would be relevant and not the rate of tax on the date on which payments were received. The Tribunal decided the matter in favour of the Assessee.

[Note: Readers may note that the issue pertains to the period prior to the introduction of the Point of Taxation Rules, 2011. However, section 67A of the Finance Act, 1994 provides that the rate of service tax, value of taxable service and rate of exchange will be as applicable at the time when the taxable service has been provided or agreed to be provided. Therefore the taxable event being the provision of the service provided or agreed to be provided, the ratio of the aforesaid judgment may be applied.

20. 2015 (39) STR 972 (Ker.) Dileep Kumar V. S. vs. Union of India

20. 2015 (39) STR 972 (Ker.) Dileep Kumar V. S. vs. Union of India

If the assessee has alternate remedy to file appeal before the Tribunal, writ is maintainable even if there is a provision of mandatory pre-deposit before filing appeal.

Facts:

The petitioner’s demand was confirmed by adjudicating authority and first appellate authority without expressly considering the issue of jurisdiction as directed by the Hon’ble High Court. Further, the appellate authority did not consider the plea of limitation. Accordingly, the petitioner filed the writ.

Held:

The petitioner had an effective alternate remedy to file appeal before appellate tribunal after payment of mandatory pre-deposit. The condition of mandatory pre-deposit for filing appeal was not so onerous to deprive the petitioner of an effective right of appeal. Comparing the present and erstwhile provisions of pre-deposit, only 10% of confirmed tax demand needed to be deposited which is fairly reasonable and imposes a lighter burden on the assessees. The writ therefore was dismissed.

Substantive Analytical Procedures: Relevance and Efficacy in an Audit

During the course of an audit of financial statements, an auditor is required to obtain sufficient and appropriate audit evidence to ensure that the financial statements are not materially misstated. The procedures adopted for this purpose are enquiry, observation, testing and re-performance. The procedures around testing involve testing of controls as well as test of details. The test of details may comprise of substantive testing or use of substantive analytical procedures (SAPs) or a combination of both.

SAP procedures consist of evaluating financial information through analysis of plausible relationships among both financial and non-financial data. It also consists of investigation of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount. The basic presumption behind the use of SAP by an auditor is that correlation between data can be expected to exist in the absence of any condition either financial or non-financial disturbing such relationship. However it is to be noted that while performing any form of SAP, prior knowledge of the industry in which the entity operates is very crucial along with the understanding the efficiencies and limitations that are harbored in adapting such procedures. SAP are subject to auditor judgment including evaluation of the data to be used and understanding the conclusions reached.

SAP may be performed using various methods like statistical techniques and Computer Assisted Audit Techniques (“CAAT’s”). They can be performed at financial caption level or at a disaggregated detailed level of information. The auditor may choose to apply SAP on financial statements as a whole or on any specific component of the financial statements. The decision about which audit procedures to perform, including whether to use SAP, is based on the auditor’s experience about the expected effectiveness and efficiency of the available audit procedures to reduce audit risk at the assertion level to an acceptably lower level.

SAP are generally used by the auditor at the following stages of audit:

  •     Risk assessment procedures (termed as planning SAP) which assist the auditor in identifying and assessing the risks of material misstatement thus allowing them to provide a basis for designing and implementing the audit procedures. For instance – revenue trend analysis, gross margin analysis, effective tax rate reconciliation, etc.

  •     Substantive procedures (termed as SAP) to obtain corroborative audit evidence about relevant assertions and the risks attached to such assertions. For instance, payroll logic test, interest costs as a percentage of borrowings, etc.

  •     Final analytical procedures – to perform an overall review of the financial statements (termed as final SAP) to aid the auditor while forming an overall conclusion as to whether the financial statements are consistent with the auditor’s understanding of the entity and its business.

Suitability of a particular analytical procedure for a given assertion:

SAP are generally more applicable to large volumes of transactions that tend to be predictable over time. However, the suitability of a particular analytical procedure will depend upon the auditor’s assessment of how effective it will be in detecting a misstatement that, individually or when aggregated with other misstatements, may cause the financial statements to be materially misstated. Different types of SAP provide different levels of assurance.

For example building up an expectation of payroll cost (as demonstrated in the case study discussed later) can provide persuasive evidence and may eliminate the need for further verification by means of tests of details, provided the information used and the elements of the payroll cost is appropriately tested.

On the other hand, calculation and comparison of effective tax rate to profit before tax can be deemed as a means of confirming the completeness of tax provision, however this will provide less persuasive evidence, but may be reduce the detail of work that needs to be performed for other audit steps performed on the caption.

It is imperative that the auditor has adequate assurance over the efficacy of the internal controls around over financial reporting of an enterprise before he concludes to place reliance solely on analytical procedures to get comfort over any financial statement caption.

    Reliability of data

Before placing reliance on the assurance obtained from SAP the auditor needs to evaluate and confirm the data used to perform SAP. The reliability of data is influenced by its source and nature and is dependent on the circumstances under which it is obtained. Some of the parameters that may be considered by an auditor to evaluate the reliability of the data are:

    i. Source of the information available, for instance, information may be more reliable when it is obtained from independent sources outside the entity.

    ii. Comparability of the information available, for instance, information from the same industry may be more reliable than information of the entities operating in the cluster of industries.

    iii. Nature and relevance of the information available. For example, whether budgets have been established as results to be expected rather than as goals to be achieved; and

    iv. Controls over the preparation of the information that are designed to ensure its completeness, accuracy and validity. For example, controls over the preparation, review and maintenance of accounting information. The auditor may choose to test the operative effectiveness of controls over preparation of data giving him further assurance on the reliability of the data used to perform SAP.

While devising substantive analytical procedures, an auditor considers comparison of the entity’s financial information with:

  •     Comparable information of the prior period for the caption on which assurance is planned to be achieved through SAP.

  •     Anticipated results of the entity including budgets and forecasts made by the management.

  •     Expectations made by the auditor, for example – comparing actual with estimated lease rent or an estimation of depreciation.

  •     Information of the industry in which the entity operates – for instance, the comparison of the debtors’ turnover ratio of the enterprise with that of the industry to identify nuances in the entity’s operating cycle, industry growth with sales growth of the enterprise.

The auditor also considers relationships amongst the various elements of financial information to obtain assurance on the trend/variation in financial statement captions. An illustrative inventory of such relationships is as given below:

  • relationship between variation in turnover and debtors
  • variation in material cost consumption with variation in input prices, manufacturing yield, capitalization of new machinery, variation in cost of repairs of plant and machinery
  • correlation of variation in payroll costs with employee count, labor turnover

correlation between labor efficiency rates and production costs

  • variation in power and fuel consumption costs with variation in manufacturing output/power tariffs.

Let us understand SAP with the help of a practical example:

Background:

ABC India Private Limited (‘ABC’) is a service provider whose primary business is to act as customer care center for its clients. The business model involves setting up of a call center with relevant IT, telecommunication and other infrastructure facilities and hiring and training graduates with good communication skills who are required to attend to customer calls. As far as execution of services is concerned, the employee pyramid comprises of a large number of graduates, related proportion of supervisors/ team leaders and delivery heads. ABC also has a robust sales and marketing team. The company has signed agreements with various customers where its revenue is
based on an agreed charge-out rate and the number of executives requested for by the customer. the executives may be assigned on a 24×7 basis or otherwise depending on     the    customer     requirements.    The    major    expenses     for ABC comprise of payroll cost.  

Application of SAP on Payroll Cost


the auditor may use SaP to obtain evidence surrounding ‘C’ of salary costs. to start with the auditor would need to build up an expectation for the payroll cost. he may do so by using the average salary earned per employee and the average number of employees which were employed by the company during the year. he also needs to determine the amount of variance from the expectation so worked out with the actual cost which can be accepted without further investigation.     This     amount     is influenced by the materiality, the assurance that is desired by the auditor while performing this analytical procedure and the assessed     risk     for     the    financial    caption    assertion.    Let us assume that the auditor has set the amount of allowable difference as rs. 2 crore. he may arrive at his expectation of the salary cost as follows

Scenario 1:
The    salary    cost    of    the    company    as    per    the    draft    financials    
is rs. 32.10 crore which is different than the salary cost as arrived by the auditor in his expectation. however the difference between the expectation i.e. rs. 31.26 crore and the actual cost (rs. 32.10 crore) is rs. 84 lakh which is within the limit of allowable difference set by the auditor. In such a situation the audit may choose not to perform any further scrutiny on the difference and conclude to have obtained the desired level of assurance from this procedure that he initially set out to obtain.

Scenario 2:
The    salary    cost    of    the    company    as    per    the    draft    financials     is rs. 34.57 crore which is different than the salary cost as arrived by the auditor in his expectation. however the difference between the expectation  i.e.rs. 31.26 crore and the actual cost (rs. 34.57 crore) is rs. 3.31 crore which is greater than the allowable difference set by the auditor during the commencement of this exercise.

In such a case the auditor would investigate into the reasons for the variance arrived at by him so as to bring the variance to an acceptable level. he may also chose to do further audit procedures on this caption to get the required level of assurance.

Some reasons for variance may be:

  • Joining of senior personnel in a band with salary far higher than average

  • Large number of joiners at month end or vice versa

  • Increment during the period for certain bands of employees, including mid-term increment

  • Exceptional/discretionary bonus or other payouts, etc.

  • Revision is statutory obligations such as percentage of provident fund/superannuation contribution, minimum wages payable under labor laws, changes in retiral benefits    such    as    gratuity,    basis    of    leave    encashment

  • Revision in assumptions made for payroll liabilities which are actuarially valued such as pension, compensated benefits, gratuity, post medical retirement benefits etc.

After investigating the difference, the auditor may rebuild his expectation so as to take effect of the newly identified factors and modify his evaluation of the difference identified based on those factors.

In this case, the auditor may also be able to build up an expectation on the revenue for a reporting period for ABC as the revenue model is entirely based on the category of employees who have been assigned to customers. one could apply the agreed charge out rates on the average number of employees employed during a period and arrive at the expectation. a similar exercise of comparing and challenging the actual results against the actual results could provide insights on what further audit procedures need to be undertaken to obtain assurance on the revenue recognised during a given period.

Conclusion

Use of SAP during the planning, execution and completion stages of an audit enables an auditor to obtain sufficient and appropriate audit evidence to address the risk of material misstatement as also brings efficiencies in the audit process by way of reduced effort on substantive testing. Substantive analytical procedures provide the auditor with an overall perspective of the financial impact of significant events that have taken place in an enterprise during the reporting period. It could be said that SAP aids the auditor in setting the level of professional skepticism in terms of identifying areas where additional or detailed substantive testing may be required to be performed.

53. [2014] 48 taxmann.com 6 (New Delhi – CESTAT) Amit Khanna vs. Commissioner of Central Excise, Bhopal.

53. [2014] 48 taxmann.com 6 (New Delhi – CESTAT) Amit  Khanna  vs.  Commissioner  of  Central Excise, Bhopal.

Stay – Whether CENVAT Credit is allowed if benefit of small scale exemption under Notification 6/2005-ST is denied to assessee? Held, Yes.

Appellant provided taxable services of cable network. It took over another cable operator who was availing threshold limit exemption under Notification No. 6/2005-S.T. The department observed that the other cable operator was not eligible for exemption under Notification No. 6/2005 and therefore demanded service tax and consequential interest and penalties. At the time of application for waiver of pre-deposit and stay, appellant argued that even if it was liable for service tax for the period prior to take-over, it would be eligible to take credit of input service received from other multi-system operators in that period. Therefore, net service tax would be much lower. Accepting the submission, the Tribunal expressed a prima facie view that CENVAT Credit of input service can be taken in respect of years for which exemption under Notification No. 6/2005-S.T. was denied and service tax was demanded. Pre-deposit was accordingly ordered of reduced amount.

40. [2014] 36 STR 543 (Kar) CST, Bangalore vs. Team Lease Services Pvt. Ltd.

40. [2014] 36 STR 543 (Kar) CST, Bangalore vs. Team Lease Services Pvt. Ltd.

CENVAT credit on group mediclaim services is an input service under Rule 2(l) of CENVAT Credit Rules, 2004.

Facts:

The appellant claimed CENVAT Credit on input service on group mediclaim services for the period April 2007 to September 2010 and the said credit was allowed by the Tribunal. The revenue aggrieved by the Tribunal’s order filed the instant appeal.

Held:

The appeal was dismissed as reliance was placed on the cases of (i) Commissioner vs. Micro Labs Ltd. – 2011(24)STR 272 (Kar) and (ii) Commissioner vs. Stanzen Toyotetsu India Pvt. Ltd. – 2011 (23) STR 44 of the same Court wherein the said CENVAT Credit was allowed.