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By this Notification, the following services are exempted from whole of the service tax :
1) Services of life insurance business provided under Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY);
2) Services of life insurance business provided under Pradhan Mantri Jan Dhan Yojana (PMJDY);
3) Services of general insurance business provided under Pradhan Mantri Suraksha Bima Yojana (PMSBY);
4) Services by way of collection of contribution under Atal Pension Yojana (APY).
The Central Govt. had withdrawn abatement in relation to Chit Fund vide Notification No. 8/2015 dated 1st March, 2015 & thereby made consideration received by Chit Fund fully taxable w.e.f. 01 04 2015. Now by this Notification, the Central Govt. has completely removed the definition given in the Principal Abatement Notification No. 26/2012 dated 20th June, 2012.
Finance Minister while presenting the Budget, 2015 had increased the rate of service tax from 12.36 % to flat 14%. However, the date from which the new rate would be applicable was not announced. On 19th May, vide this Notification, Finance Ministry has announced that the new service tax rate of 14% will be applicable from 1st June, 2015.
Facts:
The assessee was a non-resident domiciled in France. The estate of the assessee’s late father consisted of shares of certain companies which were held in joint name of the assessee’s late father either with the assessee or with the brother of the assessee. In order to transfer such shares in the name of the assessee and to manage the affairs in India the assessee had executed a general power of attorney in favour of her friend ‘R’.
During the previous year relevant to A.Y. 2003-04, ‘R’ sold the shares for Rs. 93,70,135/- and deposited sum of Rs. 60,32,000/- in the bank account of the assessee. These facts were not in the knowledge of the assessee at all.
After realising the foul play and cheating on the part of ‘R’, the assessee sent a legal notice to R and filed criminal complaint against R before the Additional Chief Metropolitan Magistrate. As a result of such complaint, the police conducted enquiry and investigation into whole matter and gave prima facie findings that ‘R’ fraudulently sold these shares and have cheated the assessee. On filing of the findings of the police with the Magistrate, ‘R’ sought to settle the dispute and come forward with settlement agreement dated 31st March 2004, wherein she offered to pay Rs.1,20,00,000/- on the terms that the assessee would withdraw all the complaints filed against ‘R’.
As per the terms of the settlement agreement out of the total compensation, Rs. 33,38,135/- was towards the balance consideration of shares, and the balance lump sum amount of Rs. 86,61,865/- was for other disputes and differences. The above balance consideration was inclusive of the compensation of Rs.15,00,000/- which was on account of fraudulent sale of land situated in Alibaug.
While filing the return, the assessee allocated a substantial portion of compensation received, i.e. Rs. 1,01,97,000/- as compensation attributable to dispute relating to shares being a principal dispute (excluding compensation relating to land and other miscellaneous disputes). The assessee claimed that since she gave up her claim regarding to shares in the previous year relevant to the A.Y. 2005-06, i.e. the year in which settlement took place, the entire capital gain arising on account of initial sum of Rs. 60,32,000/- deposited in her account and allocated compensation of Rs.1,01,97,000/- was taxable in A.Y. 2005-06 but was claimed to be exempt as per Article 14(6) of the Indo-France DTAA .
The AO held that amount of Rs. 60,32,000/- received by the assessee in lieu of transfer of shares is taxable as capital gain in the A.Y. 2003-04 as it was accepted by ‘R’ that shares were actually sold in the A.Y. 2003-04. The compensation of Rs.1,20,00,000/- was taxed under the head ‘Income from Other Sources’ as in the settlement agreement there was no mention regarding agreeing on the compensation for high rise in the market price of the shares and the same cannot be attributed to transfer of shares. The AO held that if at all any capital gain is to be taxed, then same is to be taxed in the A.Y. 2003-04 and compensation received by the assessee will be taxable in the A.Y. 2005-06.
The CIT(A) held that the matter was settled in the year 2004-05 and therefore for the purpose of section 45 the shares transferred in the A.Y. 2005-06 and not in A.Y. 2003- 04. The stand taken by the assessee was accepted by the CIT(A) and a sum of Rs.1,01,97,000/- was considered to be consideration for misappropriation of shares by fraud and unfair means.
Held:
From the records and the impugned order, it is an admitted fact that in this case, no dispute other than the dispute relating to shares and land was involved. Thus, for the purpose of taxability/assessability of sum of Rs. 1.20 crore, the amount of Rs. 33,38,135, and Rs. 15 lakh has to be segregated, because, the sum of Rs. 33,38,135, pertains to transaction of shares which is to be assessed and taxed under the head capital gains, which in the present case is admittedly not taxable by virtue of Article-14(6).
Regarding balance amount of Rs. 71,61,865/-, the said amount cannot be taxed under the head capital gain as it was clearly specified that only Rs. 33,38,135/- was towards sale of shares and there cannot be any inference that the balance amount was also in lieu of shares, for the reason that at the time of settlement of agreement, the market value of these shares was very high. Further, nothing was brought on record to establish that balance amount was towards compensation for change in market value from date of sale and upto the date of settlement.
The balance compensation of Rs. 71,61,865/- was on account of personal damage done by ‘R’. The settlement has been agreed only to withdraw the police complaint and criminal case filed in the Court of Chief Metropolitan Magistrate. Under the given circumstances and facts the compensation is capital receipt and hence it cannot be taxed as it is beyond the purview of charging section.
Further, such compensation cannot be taxed under the head Income From Other Sources as nowhere it was mentioned that it was towards interest on delayed payment of shares sold in the year 2002. It has been received only towards damage for breach of trust or fraud and which has no co-relation with sale of shares and therefore compensation received cannot be taxed under any heads of income.
Thus, the sum of Rs. 71,61,865, cannot be taxed under the charging provision, as the same is compensation in the form of capital receipt.
ii. Section 54EC – Where sale consideration of property belonging to assessee-firm was credited directly in hands of partners of firm and specified bonds were also purchased in names of those partners, still assesseefirm would be entitled to claim benefit of deduction u/s. 54EC.
Facts:
i. The assessee-firm was having three partners. The land and hospital building was owned by the two partners individually before the formation of the assessee-firm in year 1992. The partners of firm introduced the said hospital building and land as their capital contribution.
The assessee-firm carried out its operation from the hospital premises after its formation. Subsequently, assessee-firm sold said land and building and earned short-term capital gain of Rs. 1,64,76,685/-.
The assessee firm contended that there was no transfer of the ownership to the assessee firm by the partners even though the land and hospital building was introduced as a capital contribution. Further, even if the immovable property is introduced by the partners towards their capital contribution but same must be by way of proper conveyance deed registered under the Indian Registration Act.
The Assessing Officer having rejected assessee’s explanation, brought to tax the short-term capital gain in the hands of the assessee-firm. The Commissioner (Appeals) confirmed the order of the Assessing Officer. Aggreived, the assessee appealed before the Tribunal.
ii. Against the capital gains which was offered to tax by the partners in their individual capacity, the exemption was claimed u/s. 54EC with respect to the investments in Rural Electrification Bonds by them. Upon shifting of taxability from partners to the partnership firm by the AO, the assessee-firm alternatively claimed that exemption u/s. 54EC be allowed to the assessee-firm.
The sale consideration received on sale of above land and building was directly credited to the Bank accounts of the two partners out of which both the partners invested the in notified bonds in terms of section 54EC. The firm, subsequent to sale of above land and building, was dissolved. Therefore, it was contended that whatever is invested by the partners on their individual names is in fact from the funds of the assets of the assessee firm which was sold out.
Held:
i. The Tribunal placed reliance on the case of K. D. Pandey vs. CWT 108 ITR 214 (All) wherein on identical issue it was observed that under the provisions of section 239 of the Indian Contract Act and section 14 of the Indian Partnership Act for the purpose of bringing the separate properties of a partner into the stock of the firm it is not necessary to have recourse to any written document at all, that as soon as a partner intends that his separate properties should become partnership properties and they are treated as such, then by virtue of the provisions of the Contract Act and the Partnership Act, the properties become the properties of the firm and that this result is not prohibited by any provision in the Transfer of Property Act or the Indian Registration Act.
Therefore the Tribunal held that Capital gains arising on sale of land and building which were introduced by the partners as their capital contribution to the assessee-firm is taxable in the hands of the firm and not in the hands of the said partners irrespective of the fact that the transfer of the said property by the partners to the assessee-firm was not made by way of registered conveyance deed.
ii. There is no dispute on the legal position that the investment made by two partners on their individual names in the notified bonds is otherwise eligible investment for getting the exemption from the taxable capital gain u/s. 54EC.
As per the well-settled law, partnership is not a legal entity in strict sense and in all the movable and immovable assets which are held by the partnership, there is an interest of every partner though not specifically defined in terms of their shares.
On perusal of the language used in section 54EC, it is provided that the assessee has to make the investment within a period of six months in the notified securities after the date of transfer of capital asset. The words used in section 54EC are – ‘the assessee has invested the whole or any part of capital gains in the long-term specified asset’. As already held that the property which was sold out, it was property of the assesseefirm and hence, the capital gain is taxable in the hands of the assessee-firm.
At the same time even though the bonds are purchased on the names of the two partners, it can be said that irrespective of the way, how the sale consideration was credited to the bank accounts of two partners, but the benefit of section 54EC cannot be deprived to the assessee-firm. As admittedly, even on the dissolution of the firm the assessee as a partner has a right to get back their capital as per the final valuation done on the date of dissolution or otherwise. Accordingly, the exemption u/s. 54EC was allowed to the assessee-firm in respect of notified bonds purchased by its partners.
Facts:
In the instant case, appeals in respect of the order passed u/s. 263 as well as the order u/s.143(3) pursuant to said order u/s. 263 are pending for disposal before the Tribunal. Besides this, appeal is also pending before the Tribunal against the levy of penalty u/s. 271(1)(c).
In the meantime, Assessing Officer has issued showcause notice to the assessee for initiating prosecution proceedings u/s. 276C(1) in respect of the additions made in the assessment.
The assessee filed the application for stay of launching of prosecution proceedings before the Tribunal.
Held:
From reading of proviso to section 254(2A) it is apparent that “the Tribunal can pass an order of stay in any proceedings relating to an appeal filed u/s. 253(1)”. This phrase mandates that this power is not confined to a case where the appeal is pending before the Tribunal but also extends to any proceedings relating to an appeal pending before it.
The appeals pending relate to the validity of the order passed by the CIT u/s. 263 in consequence of which the additions have been made by the AO in the assessment order passed subsequent to that. It is also not denied that the appeal is also pending in respect of the penalty imposed u/s. 271(1)(c).
Until and unless the additions as well as the penalty are sustained, it cannot be said whether there was an attempt to evade tax or not or whether this attempt was wilful or not. Steps taken by the AO for launching of the prosecution proceedings u/s. 276C(1) depend on the outcome of the appeals pending before this Tribunal.
The Tribunal noted that there is no limitation prescribed for launching the prosecution proceedings u/s. 276C(1). Therefore, when the order of the Tribunal will have a bearing on the prosecution proceedings, the Tribunal opined that there will not be any loss if the prosecution proceedings are not launched immediately but kept pending till the outcome of the order of the Tribunal. The Tribunal further opined that it is not a case where the prosecution proceedings have already been launched before the criminal Court. Had the prosecution proceedings already been launched before the criminal Court, the Tribunal would not have any jurisdiction to entertain such petition filed by the assessee. Since in this case the Revenue has not launched so far the prosecution against the assessee in any criminal Court, the Tribunal granted stay against the launching of prosecution proceedings.
Facts:
The assessee sold a plot of land vide agreement to sell, dated 27th May 2004, for consideration of Rs. 2,62,08,000/-. The agreement to sell was duly registered on the same date. On the said date, the circle rate was Rs.13,000/- per sq mt. However, on the date of execution of sale-deed, i.e. 16th September 2004, the circle-rate enhanced to Rs. 20,000/- per sq mt resulting into stamp duty value of Rs. 4,03,20,000/-.
The assessee computed the capital gains on the basis of the circle rate on the date of agreement to sell and not the circle rate on the date of execution of sale deed.
However, the A.O. did not accept the above computation and he computed capital gains on the basis of circle rate prevailing on the date of execution of sales deed, i.e Rs. 20,000/- and enhanced the capital gains by the difference of Rs.1,41,12,000/-.
On further appeal, the CIT(A) upheld the A.O.’s view on the ground that the “agreement to sell” may bind the parties inter-se but does not override the statutory provision of section 50C as are applicable on the “date of transfer”; which in the instant case had been 16th September 2004.
Held:
It was held that the enhancement in the circle rate from Rs.13,000/- to Rs.20,000/- per sq mt was beyond the control of the assessee (seller). It is also not the case of the revenue, that the buyer has given more than the consideration that has been accepted by the parties when they executed the agreement to sale.
Further, reliance was placed on the Supreme Court’s decision in Sanjeev Lal Etc. vs. CIT (2014) 269 CTR 1 wherein it was held that the question whether the entire property can be said to have been sold at the time when an agreement to sell is entered into has to be answered in the negative in normal circumstances. However, looking at the provisions of section 2(47) which defines the word ‘transfer’ in relation to a capital asset, one can say that if a right in the property is extinguished by execution of an agreement to sell, the capital asset can be deemed to have been transferred.
Having regard to the above factual and judicial position, the additions made by A.O. were deleted.
The assessee, an Indian company, was one of the leading manufacturers of rider apparel. It had incorporated a subsidiary company in United States for undertaking distribution and marketing activities for the products manufactured by it and advanced loan to its subsidiary and received interest at the rate of 4%. It applied CUP method and claimed rate of 4% to be comparable with the export packing credit rate obtained from independent banks in India. The TPO opined that what was to be considered was the prevalent interest that could have been earned by advancing a loan to an unrelated party in India with the same financial health as that of the tax payer’s subsidiary. The TPO further noted that while deciding the interest rate that may be charged on receivables from AE’s, Libor rate for calculating interest was not proper and instead of US rate, Indian rate was to be adopted. Finally, the TPO held that interest rate at 14% would be fair and reasonable. DRP granted partial relief in the form of reduction in rate of interest to 12.20%, recording that the loan was given on fixed rate of interest out of shareholder funds and the Prime Lending Rate (PLR, for short) fixed by the Reserve Bank of India, ranged from 10.25% to 10.75% in April, 2006 to 12.25% to 12.50% in March, 2007. The Tribunal agreed with assessee in view of earlier year’s decision of Tribunal.
On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:
“Arm’s length interest rate for loan advanced to foreign subsidiary by Indian company should be computed based on market determined interest rate applicable to currency in which loan has to be repaid. Interest rates should not be computed on basis of interest payable on currency or legal tender of place or country of residence of either party. There is no justification or a cogent reason for applying PLR for outbound loan transactions where Indian parent has advanced loan to an AE abroad. Parameters cannot be different for outbound and inbound loans and a similar reasoning applies to both inbound and outbound loans.”
In this case the Bombay High Court had to consider as to whether scope of assessment u/s. 153A of the Incometax Act, 1961 in respect of completed assessments is limited to only undisclosed income and undisclosed assets detected during search.
The High Court held as under:
“(i) On a plain reading of section 153A of the Incometax Act, it becomes clear that on initiation of the proceedings u/s. 153A, it is only the assessment/ reassessment proceedings that are pending on the date of conducting search u/s. 132 or making requisition u/s. 132A of the Act stand abated and not the assessments/reassessments already finalised for those assessment years covered u/s. 153A of the Act. By a circular No. 8 of 2003 dated 18-9-2003 (263 ITR (St) 61 at 107) the CBDT has clarified that on initiation of proceedings u/s. 153A, the proceedings pending in appeal, revision or rectification proceedings against finalised assessment/ reassessment shall not abate. It is only because, the finalised assessments/reassessments do not abate, the appeal revision or rectification pending against finalised assessment/reassessments would not abate. Therefore, the argument of the revenue, that on initiation of proceedings u/s. 153A, the assessments/ reassessments finalised for the assessment years covered u/s. 153A of the Income-tax Act stand abated cannot be accepted. Similarly on annulment of assessment made u/s. 153A (1) what stands revived is the pending assessment / reassessment proceedings which stood abated as per section 153A(1).
ii) Once it is held that the assessment has attained finality, then the AO while passing the independent assessment order u/s. 153A read with section 143 (3) of the I.T. Act could not have disturbed the assessment / reassessment order which has attained finality, unless the materials gathered in the course of the proceedings u/s. 153A of the Income-tax Act establish that the reliefs granted under the finalised assessment/ reassessment were contrary to the facts unearthed during the course of section 153A proceedings. If there is nothing on record to suggest that any material was unearthed during the search or during the 153A proceedings, the AO while passing order u/s. 153A read with section 143(3) cannot disturb the assessment order.”
For the A. Y. 2010-11, the return of income was accepted u/s. 143(1) of the Income-tax Act, 1961. Subsequently, a notice u/s. 148 was issued on the ground that a specific aspect requires verification. The assessee filed a writ petition and challenged the notice.
The Bombay High Court allowed the writ petition and held as under:
“(i) The assessee filed a return of income which could have been subjected to verification and scrutiny and in terms of the applicable law and sections in the Income-tax Act, 1961 itself. However, if this notice has been issued in the present case and on the footing that the income chargeable to tax has escaped assessment during the course of the assessment proceedings, then, we would not go by the stand taken by the Revenue and on affidavit. It is too late now to urge that there was no assessment and therefore no question arises of reopening thereof. In the light of the language of the notice itself, it would not be proper for us and to permit the Revenue to raise such a plea.
(ii) In the present case, the AO does not state that any income chargeable to tax has escaped assessment. All that the Revenue desires is verification of certain details and pertaining to the gift. That is not founded on the belief that any income which is chargeable to tax has escaped assessment and hence, such verification is necessary. That belief is not recorded and which alone would enable the Assessing Officer to proceed. Thus, the reasons must be founded on the satisfaction of the AO that income chargeable to tax has escaped assessment. Once that is not to be found, then, we are not in a position to sustain the impugned notice (Smt. Maniben Valji Shah (2006) 283 ITR 453 and Prashant S. Joshi and Anr. vIncome Tax Officer (2010) 324 ITR 154 referred)”
The third proviso to section 254(2A) was amended by the Finance Act, 2008, with effect from 01/10/2008 to provide that the Tribunal shall not have the power to grant stay of demand for a period exceeding 365 days “even if the delay in disposing of the appeal is not attributable to the assessee”. The said amendment was inserted to overcome the judgement of the Bombay High Court in Narang Overseas Private Limited vs. ITAT 295 ITR 22(Bom). The Petitioners filed a Writ Petition to challenge the said amended third proviso to section 254(2A) on the ground that it is arbitrary and contrary to the provisions of the Article 14 of the Constitution of India.
The Delhi High Court allowed the writ petition and held as under:
“i) U /s. 254, there are several conditions which have been stipulated with respect to the power of the Tribunal to grant stay of demand. First of all, as per the first proviso to Section 254(2A), a stay order could be passed for a period not exceeding 180 days and the Tribunal should dispose of the appeal within that period. The second proviso stipulates that in case the appeal is not disposed of within the period of 180 days, if the delay in disposing of the appeal is not attributable to the assessee, the Tribunal has the power to extend the stay for a period not exceeding 365 days in aggregate. Once again, the Tribunal is directed to dispose of the appeal within the said period of stay. The third proviso, as it stands today, stipulates that if the appeal is not disposed of within the period of 365 days, then the order of stay shall stand vacated, even if the delay in disposing of the appeal is not attributable to the assessee.
ii) While it could be argued that the condition that the stay order could be extended beyond a period of 180 days only if the delay in disposing of the appeal was not attributable to the assessee was a reasonable condition on the power of the Tribunal to grant an order of stay, it can, by no stretch of imagination, be argued that where the assessee is not responsible for the delay in the disposal of the appeal, yet the Tribunal has no power to extend the stay beyond the period of 365 days. The intention of the legislature, which has been made explicit by insertion of the words – ‘even if the delay in disposing of the appeal is not attributable to the assessee’– renders the right of appeal granted to the assessee by the statute to be illusory for no fault on the part of the assessee. The stay, which was available to him prior to the 365 days having passed, is snatched away simply because the Tribunal has, for whatever reason, not attributable to the assessee, been unable to dispose of the appeal. Take the case of delay being caused in the disposal of the appeal on the part of the revenue. Even in that case, the stay would stand vacated on the expiry of 365 days. This is despite the fact that the stay was granted by the Tribunal, in the first instance, upon considering the prima facie merits of the case through a reasoned order;
iii) The petitioners are correct in their submission that unequals have been treated equally. Assessees who, after having obtained stay orders and by their conduct delay the appeal proceedings, have been treated in the same manner in which assessees, who have not, in any way, delayed the proceedings in the appeal. The two classes of assessees are distinct and cannot be clubbed together. This clubbing together has led to hostile discrimination against the assessees to whom the delay is not attributable. It is for this reason that we find that the insertion of the expression – ‘even if the delay in disposing of the appeal is not attributable to the assessee’– by virtue of the Finance Act, 2008, violates the non-discrimination clause of Article 14 of the Constitution of India. The object that appeals should be heard expeditiously and that assesses should not misuse the stay orders granted in their favour by adopting delaying tactics is not at all achieved by the provision as it stands. On the contrary, the clubbing together of ‘well behaved’ assesses and those who cause delay in the appeal proceedings is itself violative of Article 14 of the Constitution and has no nexus or connection with the object sought to be achieved. The said expression introduced by the Finance Act, 2008 is, therefore, struck down as being violative of Article 14 of the Constitution of India.
iv) This would revert us to the position of law as interpreted by the Bombay High Court in Narang Overseas (supra), with which we are in full agreement. Consequently, we hold that, where the delay in disposing of the appeal is not attributable to the assessee, the Tribunal has the power to grant extension of stay beyond 365 days in deserving cases.”
Presently, Exim Bank in participation with commercial banks in India can extend Buyer’s credit up to US $ 20 million to foreign buyers in connection with export of goods on deferred payment terms and turn key projects from India.
This circular has done away with the said limit of US $ 20 million. Hence, Exim Bank in participation with commercial banks in India can now extend Buyer’s credit without any limit to foreign buyers in connection with export of goods on deferred payment terms and turn key projects from India.
This circular states that a financial institution or a branch of a financial institution set up in an IFSC permitted/ recognised as such by the Government or a Regulatory Authority will be treated as person resident outside India and their transaction(s) with any person resident in India will be treated as a transaction between a resident and non-resident and will be subject to the provisions of Foreign Exchange Management Act, 1999 and the Rules /Regulations/Directions issued thereunder.
Further, subject to the provisions of section 1 (3) of Foreign Exchange Management Act, 1999, nothing contained in any other Regulations will apply to a financial institution or a branch of a financial institution set up in an IFSC unless there is some express and specific provision to that effect in the Foreign Exchange Management (International Financial Services Centre) Regulations 2015 or any other Regulation.
This circular has made the following changes in the guidelines relating to ETCD, as contained in Notification No. FEMA. 25/RB-2000 dated May 3, 2000 (Foreign Exchange Derivative Contracts) and A.P. (DIR Series) Circular No. 147 dated June 20, 2014, as under: –
This circular states that from March 2015 banks dealing in foreign exchange need not send Stat 5 and Stat 8 Returns (both hard and soft copies) to the Department of Statistics and Information Management, RBI.
a) In an earlier article in this column, certain recent amendments to the SEBI Act were pointed out. One amendment that was noteworthy was of the powers given to SEBI to arrest any person for having defaulted in paying certain dues to SEBI. The dues to SEBI could be of several types – on account of penalty, on account of amounts ordered to be disgorged or even on account of fees, etc. SEBI could arrest and send to prison such a defaulter. Such arrest did not even require a court order. A relatively junior official of SEBI could arrest and send such person to prison for such a period. However, this is subject to conditions on the lines of and indeed borrowed from the Incometax Act, 1961.
b) Recently, however, on 18th December 2014, SEBI exercised this power for the first time and arrested a defaulter and sentenced him to prison for six months. The arrested person had to file a writ petition and the Bombay High Court set aside this order and released him. He was in prison for more than two and a half months. As will be seen later, the power to arrest was exercised by misconstruing and misapplying the provisions, in an arbitrary manner and, as the Court held, quite illegally too. The only silver lining to this episode was that the pre-conditions for such arrest were duly highlighted by the Court and thus, in future cases, hopefully, these pre-conditions will be observed.
c) Let us discuss the law first, as amended, and thereafter the SEBI Order and then the decision of the Bombay High Court that set it aside.
2) The Law
a) SEBI collects dues from various persons on several accounts. It collects fees for registration, fees for carrying out activities under securities laws such as public issues, open offers, buybacks, etc. It also levies penalties. It disgorges ill-gotten gains. And so on. Some of such amounts are remitted to the Consolidated Fund of India i.e., to the central government. Most of the others are used by SEBI. A person from whom amounts are due on such specified accounts may default for various reasons. He may not have the money or he may have the money but avoids paying it. He may even transfer his assets to his relatives/benami persons or others to avoid recovery. SEBI has several powers to deal with such defaulters. It can attach assets of the defaulter and recover the dues. It can even prosecute such defaulters (which is totally different from the new power discussed here) in court which may sentence such person to jail. However, vide the Securities Laws (Amendment) Act, 2014, a fresh power was given to deal with such defaulters. Vide the newly inserted section 28A, a defaulter can be, inter alia, arrested and detained in jail. The relevant provisions of this section have been reproduced below (certain words are highlighted which need review since the Court relied on these words to release the arrested in the case under discussion):-
Recovery of amounts
28A. (1) If a person fails to pay the penalty imposed by the adjudicating officer or fails to comply with any direction of the Board for refund of monies or fails to comply with a direction of disgorgement order issued under section 11B or fails to pay any fees due to the Board, the Recovery Officer may draw up under his signature a statement in the specified form specifying the amount due from the person (such statement being hereafter in this Chapter referred to as certificate) and shall proceed to recover from such person the amount specified in the certificate by one or more of the following modes, namely:—
(a) attachment and sale of the person’s movable property;
(b) attachment of the person’s bank accounts;
(c) attachment and sale of the person’s immovable property;
(d) arrest of the person and his detention in prison;
(e) appointing a receiver for the management of the person’s movable and immovable properties, and for this purpose, the provisions of sections 220 to 227, 228A, 229, 232, the Second and Third Schedules to the Income-tax Act, 1961 and the Income-tax (Certificate Proceedings) Rules, 1962, as in force from time to time, in so far as may be, apply with necessary modifications as if the said provisions and the rules made thereunder were the provisions of this Act and referred to the amount due under this Act instead of to income-tax under the Income-tax Act, 1961.
…
(4) For the purposes of sub-sections (1), (2) and (3), the expression ‘‘Recovery Officer’’ means any officer of the Board who may be authorised, by general or special order in writing, to exercise the powers of a Recovery Officer.
b) As can be seen, the Recovery Officer exercises the powers under this Section. The Recovery Officer is any officer of SEBI who is authorised to act as such. In the present case, he was an Assistant General Manager.
3) SEBI order
a) The facts as stated in the SEBI Order are as follows. Certain penalties were levied against a person (“the Defaulter”) in respect of two companies where he was a non-executive Chairman. The cumulative amount was about Rs. 1.65 crore. The Defaulter failed to pay despite reminders. His bank accounts, etc. were attached but the amounts available were grossly insufficient. SEBI asked such Defaulter to submit a plan to pay such dues but he could not submit. He was finally asked to appear before the Recovery Officer to submit such a plan or be arrested. He appeared and could not either pay the dues nor submit a satisfactory plan. He was arrested u/s. 28A and sent to prison by the Recovery Officer for six months or till he paid the dues.
b) Interestingly, the provisions of Section 28A can be exercised irrespective of the nature of the dues. That is to say, the dues can be for having committed some malpractices or could even be dues on account of unpaid fees to SEBI.
c) The Defaulter filed a writ petition before the Bombay High Court.
4) Bombay High Court Order
a) In the Writ Petition before the Bombay High Court, an initial point was made that the Writ Petition was not maintainable since the Defaulter had a right of appeal to the Securities Appellate Tribunal. However, considering the facts of the case and precedents on this point, this point was rejected and the WP allowed.
b) The Court analysed the prerequisites for making an arrest u/s. 28A as clearly laid down in the section. It pointed out that the specified provisions of the Income-tax Act, 1961 (and specified Schedules/ Rules made thereunder) would apply. A review of such Schedule/Rules showed that it is a pre-requisite for arrest that at least one of two conditions should be satisfied. The Defaulter should have sought to obstruct the recovery by dishonestly transferring, concealing or removing his property. Alternatively, he should have refused or neglected to pay the whole or part of the dues despite having property to meet the dues. Apart from establishing such facts, the Recovery Officer should also record the reasons, etc. for the proposed arrest. The Court observed several things. Firstly, it was not shown at all that either of the two pre-conditions. Secondly, no inquiry was made giving a fair opportunity to the Defaulter to establish this. Finally, the reasons for arrest giving existence of these pre-conditions were not recorded. The reasons were sought to be put forth in the reply which obviously the Court found it to be too little and too late. The Court analysed Rule 73 to 77 of Second Schedule to the Income-tax Act, 1961 and made the following observations for setting aside the SEBI Order:-
23. A perusal of aforesaid relevant provision indicates that Part V of Second Schedule provides a detail procedure which is required to be complied with when the Tax Recovery Officer resorts to the mode of arrest and detention. Needless to state that the mode of arrest and detention though not a punitive action, is a drastic step which infringes upon the liberty of a person. Hence, recourse to such mode has to be necessarily in strict compliance with the provisions stipulated in Part V of second Schedule.
28. A bare reading of the notice and the impugned orders makes it abundantly clear that the power of arrest has not been exercised in the manner and for the circumstances provided for in Rule 73(1). It is to be noted that Rule 73(1) confers power of arrest and detention only in two situations i.e. when the Tax Recovery Officer is satisfied that
(i) the defaulter, with the object or effect of any obstructing the execution of the certificate, has dishonestly transferred, property or (ii) despite having means the defaulter, refuses or neglects to pay the dues. Rule 73(1) further mandates the Tax Recovery Officer to record in writing the reasons of his satisfaction.
29. In the instant case, the Tax Recovery Officer had not recorded his satisfaction with reasons in writing, as regards the existence of two situations, which are specified in Clause (a) of Rule 73(1). The Tax Recovery Officer has not detained and arrested the petitioner on the ground that he had transferred, concealed or removed any part of his property. The respondent had stated in the affidavit that upon issuance of the attachment orders, none of the banks have reported any accounts in the name of the petitioner, except Punjab National Bank at Mira Road (E) branch and only an amount of Rs.5160.82 was recovered by the respondent Board. By these averments, the respondent has sought to justify the arrest. Needless to state that having failed to record the reasons as regards existence of the situation in clause (a), the respondent cannot rectify the lacuna by stating the reasons in the reply.
30. It is also not the case of the Respondent Authority that the petitioner had failed to pay to dues despite having means to pay the arrears or some substantial part thereof. On the contrary, a bare perusal of the impugned order reveals that the petitioner was detained and arrested for non¬payment of dues and further for not giving a proposal of payment
32. In the light of the aforesaid principles, the Tax Recovery could not have ordered detention of the petitioner solely on the ground that he had failed to pay an amount or give the proposal.
33. The authority of the respondent had therefore not arrived at a satisfaction that the conditions specified in clause (a) and (b) of Rule 73(1) were satisfied and had further not complied with the mandate of Rule 73(1) of recording the reasons of satisfaction in writing. The absence of satisfaction as well as recording of reasons vitiates the exercise of power of arrest. We are, therefore, of the considered view that the detention and arrest is patently illegal and arbitrary.
c) Thus, the defaulter was forthwith released from prison. however, he was ordered not to leave the country during pendency of the proceedings and his passport was retained with the EOW. The recovery Officer could pass a fresh order after due compliance of the procedures and establishment of the conditions as stated in the law.
5) Concluding Comments
a) The Court thus has confirmed the essential pre- requisites for making such an arrest u/s. 28a. Arrest of a defaulter merely for not having paid dues would thus not be possible even if such dues were on account penalty for misdeeds.
b) Having said that, some other provisions of the act need to be noted since they too may result in imprisonment. Firstly, attention is invited to section 24(1) of the SeBi act which states that violation of any of the provisions of the act, regulations, etc. may result in a fine or imprisonment upto 10 years. However, this would obviously require due prosecution proceedings before the Court, demonstrating to the Court that such violations deserve imprisonment, etc. there is also section 24(2) which states that if a person on whom a penalty has been levied fails to pay the same, he can be sentenced to imprisonment from one month to 10 years. Here too, this can only be after due prosecution proceedings before the jurisdictional Court.
c) However, it is sad and curious that, with due respect, though the Court emphatically held that the arrest was arbitrary and illegal, the defaulter had to suffer more than two months in jail. But he was not awarded any compensation or even the costs of the legal proceedings.
A Will is the last wish of a deceased individual and it determines how his estate and assets are to be distributed. However, in several cases, the deceased has not only made a Will, but he has also made a nomination in respect of several of his assets.
Nomination is something which is extremely popular nowadays and is increasingly being used in co-operative housing societies, depository/demat accounts, mutual funds, Government bonds/securities, shares, bank accounts, etc. Nomination is something which is advisable in all cases even when the asset is held in joint names. Simply put, a nomination means that the owner of the asset has designated another person in his place after his death. A question which often arises is which is superior – the will or the nomination made by the deceased member. While the position was quite clear that a nominee was not superior to the legal heir, a judgment rendered in the context of shares in a company had taken a contrary view. A recent decision of the Bombay High Court suggests that the tide has turned, or has it?
Effect of Nomination
The legal position in this respect is crystal clear. Once a person dies, his interest stands transferred to the person nominated by him. Thus, a nomination is a facility to provide the society, company, depository, etc., with a face which whom it can deal with on the death of a person. On the death of the person and up to the execution of the estate, a legal vacuum is created. Nomination aims to plug this legal vacuum. A nomination is only a legal relationship created between the society, company, depository, bank, etc., and the nominee.
The nomination seeks to avoid any confusion in cases where the will has not been executed or where there are disputes between the heirs. It is only an interregnum between the death and the full administration of the estate of the deceased.
Which is Superior?
A nomination continues only up to and until such time as the will is executed. No sooner the will is executed, it takes precedence over the nomination. Nomination does not confer any permanent right upon the nominee nor does it create any beneficial right in his favour. Nomination transfers no beneficial interest to the nominee. A nominee is, for all purposes, a trustee of the property. He cannot claim precedence over the legatees mentioned in the will and take the bequests which the legatees are entitled to under the will.
The Supreme Court in the case of Sarbati Devi vs. Usha Devi, 55 Comp. Cases 214 (SC), had an occasion to examine this issue in the context of a nomination under a life insurance policy. The Court held, in the context of the Insurance Act, 1938, that a mere nomination made does not have the effect of conferring on the nominee any beneficial interest in the amount payable under the life insurance policy on the death of the assured. The nomination only indicates the hand which is authorised to receive the amount, on the payment of which the insurer gets a valid discharge of its liability under the policy. The amount, however, can be claimed by the heirs of the assured in accordance with the law of succession governing them.
The Supreme Court, once again in the case of Vishin Khanchandani vs. Vidya Khanchandani, 246 ITR 306 (SC), examined the effect of a nomination in respect of a National Savings Certificates. The issue here was whether the nominee of a National Savings Certificate can claim that he is entitled to the payment in exclusion to the other heirs. The Court examined the National Savings Certificate Act and various other provisions and held that, the nominee is only an administrative holder. Any amount paid to a nominee is part of the estate of the deceased which devolves upon all persons as per the succession law and the nominee must return the payment to those in whose favour the law creates a beneficial interest.
Again, in Shipra Sengupta vs. Mridul Sengupta, (2009) 10 SCC 680, the Supreme Court upheld the superiority of a legal heir as opposed to a nominee in the context of a nomination made under a Public Provident Fund.
The Supreme Court again reinforced its view on a nominee being a mere agent to receive proceeds under a life insurance policy in Challamma vs. Tilaga (2009) 9 SCC 299.
In Ramesh Chander Talwar vs. Devender Kumar Talwar, (2010) 10 SCC 671, the Supreme Court upheld the right of the legal heirs to receive the amount lying in the deceased’s bank deposit to the exclusion of the nominee.
In Gopal Vishnu Ghatnekar vs. Madhukar Vishnu Ghatnekar, (1982) 84 Bom LR 41, the Bombay High Court, observed, in the context of a nomination made in respect of a flat in a co-operative housing society, that the purpose of the nomination was to make certain the person with whom the Society has to deal and not to create interest in the nominee to the exclusion of those who in law will be entitled to the estate. The persons entitled to the estate of the deceased do not lose their right to the same. Society has no power, except provisionally and for a limited purpose to determine the disputes about who is the heir or legal representative, it, therefore, follows that the provision for transferring a share and interest to a nominee or to the heir or legal representative as will be decided by the Society was only meant to provide for interregnum between the death and the full administration of the estate and not for the purpose of conferring any permanent right on such a person to a property forming part of the estate of the deceased. The idea was to provide for a proper discharge to the Society without involving the Society into unnecessary litigation which may take place as a result of dispute between the heirs’ uncertainty as to who are the heirs or legal representatives. Even when a person was nominated or even when a person was recognised as an heir or a legal representative of the deceased member, the rights of the persons who were entitled to the estate or the interest of the deceased member by virtue of law governing succession were not lost and the nominee or the heir or legal representatives recognised by the Society held the share and interest of the deceased for disposal of the same in accordance with law. It was only as between the Society and the nominee or heir or legal representative that the relationship of the Society and its member were created and this relationship continued and subsisted only till the estate was administered either by the person entitled to administer the same or by the Court or the rights of the heirs or persons entitled to the estate were decided in the Court of law. Thereafter, the Society was bound to follow such decision.
The Bombay High Court reiterated its stand on a nominee being subordinate to a legal heir in its judgments in the cases of Nozer Gustad Commissariat vs. Central Bank of India, 1993 Mh LJ 228 and Antonio Joao Fernandes vs. Assistance Provident Fund Commissioner, 2010 (4) Bom. CR 208, both rendered in the context of provident fund dues. Decisions of the other High Courts which have taken similar views include, Leelawati Singh vs. State of Delhi, 1998 (75) DLT 694; Hardial Devi Ditta vs. Janki Das, AIR 1928 Lah 773; D Mohanavelu Mudaliar vs. Indian Insurance & Banking Corporation, AIR 1957 Mad 115; Shashikiran Ashok Parekh vs. Rajesh Agarwal, 2012 (4) MhLJ 370.
Thus, the legal position in this respect is very clear. Nomination is only a legal relationship and not a permanent transfer of interest in favour of the nominee. If the nominee claims ownership of an asset, the beneficiary under the will can bring a suit against him and reclaim his rightful ownership.
Companies act – Nominee is superior
Section 109a of the Companies act, 1956, was added by the amendment act of 1999. Section 109a provided that any nomination made in respect of shares or debentures of a company, if made in the prescribed manner, shall, on the death of the shareholder/debenture holder, prevail over any law or any testamentary disposition, i.e., a will. thus, in case of shares or debentures in a company, the nominee on the death of the shareholder/debenture holder, became entitled to all the rights to the exclusion of all other persons, unless the nomination is varied or cancelled in the prescribed manner. In case the nominee is a minor, then the shareholder/debenture holder can appoint some other person who would be entitled to receive the shares/debentures, if the nominee dies during his minority. This position continues under the Companies act, 2013 in the form of section 72 of this act read with rule 19 of the Companies (Share Capital and debentures) rules, 2014. a similar position is contained in Bye Law
9.11 Made under the depositories act, 1996 which deals with nomination for securities held in a dematerialised format.
A Single judge of the Bombay high Court explained this proposition in the case of Harsha Nitin Kokate vs. The Saraswat Co-op. Bank Ltd, 112 (5) Bom. L.R. 2014. interpreting section 109a of the Companies act, 1956 and the depositories act, the Court ruled that the rights of a nominee to shares of a company would override the rights of heirs to whom property may be bequeathed. In other words, what one writes in one’s will would have no meaning if one has made a nomination on the shares in favour of someone other than the heir mentioned in the will. The high Court ruled that securities automatically get transferred in the name of the nominee upon the death of the holder of shares. the nominee is required to follow the prescribed procedure in the Business rules. Upon the death of the holder of shares the nominee would be entitled to elect to be registered as a beneficiary owner by notifying the Bank along with a certified copy of the death certificate. The bank would be required to scrutinize the election and nomination of the nominee registered with it. Such nomination carries effect notwithstanding anything contained in a testamentary disposition (i.e. Wills) or nominations made under any other law dealing with Securities. the last of the many nominations would be valid.
The Court referred to and noted the provisions of section 39 of insurance act and section 30 of the maharashtra Cooperative act also. it held that these are totally different from the Companies act. the key is the use of the word “vest” in the provisions of section 109a of the Companies act, 1956, which the court interpreted as giving ownership rights and not just custody rights as is the case for an insurance policy or shares of a housing society. the Bombay high Court distinguished the Supreme Court’s judgment in the case of Sarbati Devi vs. Usha Devi, 55 Comp. Cases 214 (SC) citing a difference in the language of the applicable law. Section 109a of the Companies act, 1956 provided that upon the death of a shareholder, the shares would “vest” in the nominee. A nominee became entitled to all the rights attached to the shares to the exclusion of all others regardless of anything stated in any other disposition, testamentary or otherwise. The Court concluded that the Legislature’s intent u/s.109a of the Companies act, 1956 and Bye Law 9.11 made under the depositories act, 1996 was very clear, i.e., to vest the property in the shares in the nominee alone.
A similar view was also endorsed by a Single judge of the delhi high Court in the case of Dayagen P. Ltd. vs. Rajendra Dorian Punj, 151 Comp. Cases 92 (Del).
This decision has caused a lot of heartburn since the entire succession law in the case of shares has been thrown for a toss. It may be noted that while the Companies act deals with nomination in the case of physical shares the depositories act deals with nomination in the case of demat accounts/shares held in dematerialised format. it is submitted that a Bye Law under the depositories act does not carry the same force as a section of the Companies act. hence, it may be a moot point whether this distinction could in any manner salvage the situation?
A Twist in The Tale?
another Single judge of the Bombay high Court, very recently, had an occasion to consider the above provisions of the Companies act and the earlier decision of the Bombay high Court in jayanand Jayant Salgaonkar vs. Jayashree Jayant Salgaonkar and others, Notice of Motion No. 822/2014 in Suit No. 503/2014 decided on 31st March, 2015. The Bombay high Court after an exhaustive study of all the Supreme Court and Bombay high Court decisions on the subject of superiority of will / legal heirs over nomination, concluded as follows:
a) The earlier decision of Harsha Nitin Kokate vs. The Saraswat Co-op. Bank Ltd was rendered per incuriam, i.e., without reference to several binding Supreme Court and Bombay high Court decisions.
b) It wrongly distinguished the Supreme Court’s decision in the case of Sarbati Devi vs. Usha Devi whereas the reality was that the ratio of that decision was applicable even under the Companies act, 1956.
c) Neither the Companies act, 1956 nor the depositories act provide for the law of succession or transfer of property. They must be viewed as being sub-silentio (i.e., as being silent on) of the testamentary and other dispositive laws.
d) If a nomination is held as supreme then it cannot be displaced even by a Will made subsequent to the nomination. this obviously cannot be the case.
e) The nomination would even oust personal law, such as, mohammedan Law and become all-pervasive.
f) The nomination under the Companies act is not subject to the rigour of the indian Succession act in as much as it does not require witnesses as mandated under this act. It cannot be assailed on grounds of importunity, fraud, coercion or undue influence. there cannot be a codicil to a nomination. In short, a nomination, if held supreme, wholly defenestrates the indian Succession act. According to the judgment in harsha nitin Kokate, a nomination becomes a “Super-Will” one that has none of the defining traits of a proper Will.
g) Thus, a nomination, even under the Companies act only provides the company or the depository a quittance. A nominee only continues to hold the securities in trust and as a fiduciary for the legal heirs under Succession Law.
Legal Issues
The recent Bombay high Court judgment may come as great solace for those who were severely impacted by the judgment in the case of Harsha Nitin Kokate. However, it is humbly submitted that it also raises a few interesting legal issues?
Could a Single judge hold the judgment of another Single judge of the same high Court to be per incuriam or would it have been more appropriate if this question had been referred to and decided by a larger Bench?
Kanga & Palkhivala, in their commentary, the Law and Practice of income tax, 10th edition, Lexisnexis, state that a single judge of a high Court cannot give a decision contrary to an earlier judgment of a single judge of the same high Court.
In CIT vs. BR Constructions, 202 ITR 222 (AP FB) it was held that a single judge cannot differ from the earlier judgments of co-ordinate jurisdiction merely because he holds a different view on the question of law for the reason that certainty and uniformity in the administration of justice is of paramount importance. But if the earlier judgment is erroneous or adherence to the rule of precedents results in manifest injustice, differing from an earlier judgment will be permissible. Further, a precedent ceases to be binding when it is inconsistent with the earlier decisions of the same rank or when it is sub silentio or when it is rendered per incuriam. The Court even held that though a judgment rendered per incuriam can be ignored yet when a Single judge doubts the correctness of an otherwise binding precedent, the appropriate course would be to refer the case to a division Bench for an authoritative pronouncement. It also referred to Salmond on jurisprudence which held that the mere fact that the earlier decision misconstrued a Statute is no ground for per incuriam.
A similar view has been taken by the division Bench of the Bombay high Court in CIT vs. Thana Electricity Supply Ltd, 202 ITR 727 (Bom) wherein the Court held that a single judge of a high Court is bound by the decision of another single judge of the same high Court. It would be judicial impropriety to ignore that decision. judicial comity demands that a binding decision to which his attention had been drawn should neither be ignored nor overlooked. If he does not find himself in agreement with the same, the proper procedure is to refer the binding decision and direct the papers to be placed before the Chief justice to enable him to constitute a larger Bench to examine the question. the Bombay high Court took this its view based on a Supreme Court decision in the case of Food Corporation of India vs. Yadav Engineer and Contractor AIR 1982 SC 1302.
Conclusion
While one would like to believe that the position as explained by the recent Bombay high Court decision is the correct legal position in law, it would be interesting to see whether this decision is challenged before a larger forum? one feels that we may not have heard the last on the issue of nomination versus legal heirs in the context of shares in a company!
The plaintiff filed a suit against the defendant and the plaintiff in such suit prayed that a decree be passed under Specific Relief Act directing the defendant to execute the sale deed in respect of the suit property in terms of the agreement for sale dated 26-04-2006 entered in between the plaintiff and the defendant. The plaintiff also prayed for a decree directing the defendant not to disturb the possession of the plaintiff from the suit property. The trial court, after hearing the parties and considering the evidence on record, dismissed the said suit and directed the defendant to refund the earnest money. The trial court dismissed the said suit mainly on the ground that the agreement for sale is not a registered instrument and therefore the plaintiff is debarred from getting any relief in the said suit. The plaintiff filed another Appeal. The learned District Judge affirmed the view of the learned Trial Court that since the said agreement for sale is not a registered instrument, the plaintiff is not entitled to get any relief by virtue of the agreement for sale dated 26-04- 2006. The learned First Appellate Court was of the view that since the said agreement for sale is not a registered document as per the provisions of section 17(1A) of the Registration Act, 1908, the plaintiff is not entitled to get any decree.
The Hon’ble High Court observed that a document which happens to be an agreement for sale does not by itself confer any right, title and/or interest in favour of the proposed transferee and it is only a document by which the parties entered into an agreement to create a further document which is called a deed of conveyance. There cannot be any dispute that such deed of conveyance is required to be compulsorily registered if the value of the immovable property is more than Rs. 100/- but since the agreement for sale does not create any such right, title and/or interest, there is no such provision in law which mandates that the said agreement for sale will also have to be registered excepting in cases where section 17(1A) of the Registration Act, 1908 applies. The provisions of the Registration Act, would also clearly indicate that an agreement for sale is not required to be compulsorily registered.
The Court further observed that, section 53A of the Transfer of Property Act stipulates that when a transferee has, in part performance of contract, taken possession of the property or any part thereof or the transferee, being already in possession, continues in possession in part performance of the contract and has done some act in furtherance of contract and the transferee has performed or is willing to perform his part of the contract then in that event the transferor is debarred from enforcing against the transferee any right in respect of such property.
The plaintiff accordingly, gets a decree of specific performance of contract against the defendant/respondent in respect of the suit property in terms of the agreement for sale dated 26-04-2006 and the defendant was directed to execute an appropriate sale deed in favour of the plaintiff/ appellant in respect of the suit property and in terms of the said agreement for sale dated 26-04-2006.
The case of the plaintiff is that the first defendant is the partnership firm comprising of four partners i.e. the plaintiff and defendant nos 2 to 4 by virtue of partnership deed dated 03-04-1992. The partnership firm was engaged in advertising business and allied matters. Each of the partner has contributed a sum of Rs. 10,000/- towards share capital and the partnership was one at will. While so, the plaintiff expressed her willingness to retire from the partnership firm and sent letter on 17-01-1994. The said letter was acknowledged by the defendants 2 to 4 by letter dated 24-01-1994, confirming that the plaintiff was deemed to have retired from the partnership firm with effect from 18-01-1994. Though the plaintiff retired from the partnership firm, the existing partners reconstituted the deed of partnership and carried on their business. It was contended by the plaintiff that the partnership firm did not settle her accounts on retirement despite several demands and that she demanded to settle all her share in respect of transactions from 03-04-1992 to 18-01-1994, till the date of settlement of her dues. The plaintiff also had given break-up of the amounts that she is entitled to from the partnership firm
The suit was contested by the defendants who are the other partners on the ground that the plaintiff was acting detrimental to the interest of the partnership firm. It was further contended that the suit was not maintainable as the plaintiff only retired voluntarily from the partnership firm and the partnership firm was not dissolved as alleged by her.
The Hon’ble Court observed that u/s. 37 of the Partnership Act, the court can grant relief to outgoing partner who has not been made a final settlement and the partnership is carrying out of the business with the surviving partners and the court has jurisdiction to grant such relief based on the findings of the fact. In the instant case plaintiff partner has categorically stated that she voluntarily resigned from the firm. Therefore, she cannot be expected to claim profits of the partnership firm subsequent to her exit as there was no contribution from her side. Share of the partner would be his/her proportion of the partnership assets after they have been all realised and converted into money, all the partnership debts and liabilities have been paid and discharged. Liability to pay arises when the partnership firm is dissolved and the legal existence is taken away. After voluntary resignation of partner from firm even presuming that immovable assets purchased from the plaintiffs participation in the firms as a partner and admittedly the partnership firm was continuing the business even after the exit of the plaintiff, the retired partner can only demand her share, be it an asset or liability based on the value on the date of her exit and she cannot claim profits of the firm.
If interest is leviable u/s. 234A, 234B or 234C, such levy of interest is mandatory and compensatory in nature but in order to levy interest under these sections, the Assessing Officer is specifically required to mention the specific section of charging interest, failing which, no interest could be levied under those sections.
The assessee was a trust established with the purpose of administering and maintaining technical training institutions at various places in India for pre-sea and post-sea training of ships and maritime industry as a public charitable institution for education, that is to provide on board and offshore training and continuing technical education for officers, both on the deck and engine side. The Assessing Officer held that the assessee was not entitled to exemption u/s. 11. The CIT(A) and the Tribunal allowed the assessee’s claim.
On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:
“i) We are of the opinion that the Tribunal has applied the correct test in concluding that the exemption u/s. 11 of the Act can be availed of by the respondent assessee. The Tribunal in paragraph 9.6 of the impugned order concludes that the assessee is giving training in the above area to seamen. All the courses may not be approved by the Director General of Shipping but that by itself is no ground to hold that the purpose is not charitable.
ii) The exemption u/s. 11 can be claimed and bearing in mind the object of the trust. We are of the opinion that the Tribunal and the CIT(A) have approached the issue correctly and in the light of the definition so also the tests laid down came to a factual conclusion that the respondent is entitled to exemption u/s. 11.
iii) This is not a case where the purpose can be said to run a coaching class or a centre. This is an institution which imparts education in the area of pre-sea and post-sea training to seamen so as to prepare them for all the duties. In such circumstances, we do not find that the concurrent findings of fact are vitiated by error of law apparent on the face of the record or perversity enabling us to entertain this appeal. The appeal is, therefore, dismissed.”
Under an agreement between a Danish company and an Indian company, the Danish company supplied equipment and information regarding installation of such equipment. For the A. Y. 1991-92, the Danish company claimed that its income consequent on the agreement was not taxable in India. The Assessing Officer rejected the claim. The Tribunal accepted the claim and held that the payments were not covered within the expression “royalty” provided u/s. 9(1)(vi) of the Income-tax Act, 1961, which was much wider than the one provided in the DTAA between India and Denmark.
On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:
“i) The equipment was supplied to the Indian party for which the Indian party made payment. The contract included stipulations for giving all information so as to guide the Indian party to install the equipment at site and thereafter to use it.
ii) In these circumstances, this was a mixed question and finding of fact had been rendered considering the peculiar facts and circumstances. The finding of fact was a possible one. There was no perversity or error of law apparent on the face of the record. The payments were not assessable in India.”
CIT Vs. Sulzer India Ltd.; 369 ITR 717 (Bom):
In the A. Y. 2003-04, the assessee had opted for deferral scheme for payment of sales tax of Rs. 7,52,01,378/- under the deferral 1993 scheme of the Government of Maharashtra. The amount was allowed as deduction treating the option as deemed payment for the purpose of section 43B of the Income-tax Act, 1961 as per the circulars. The assessee also opted for the 2002 scheme for premature payment of net present value and paid an amount of Rs. 3,37,13,393/-. The Assessing Officer added the difference amount of Rs. 4,14,87,985/- as deemed income u/s. 41(1) of the Act. The Tribunal deleted the addition and held that the amount was not taxable u/s. 41(1) of the Act.
On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:
“i) The first requirement of section 41(1) is that the allowance or deduction is made in respect of the loss, expenditure or a trading liability incurred by the assessee and the other requirement is that the assessee has subsequently obtained a benefit in respect of such trading liability by way of a remission or cessation thereof. The sales tax collected by the assessee during the relevant year amounting to Rs. 7,52,01,378/- was treated by the State Government as a loan liability payable after 12 years in six annual/equal installments.
ii) Subsequently, pursuant to the amendment made to the fourth proviso to section 38 of the 1959 Act, the assesee accepted the offer of the SICOM paid an amount of Rs. 3,37,13,393/- to the SICOM, which represented the net present value of the future sum as determined and prescribed by the SICOM. The State may have received a higher sum after a period of 12 years and in installments. However, the statutory arrangement and by section 38, fourth proviso did not amount to remission or cessation of the assessee’s liability assuming the liability to be a trading one. Rather that obtains a payment to the State prematurely and in terms of the correct value of the debt due to it. There was no evidence to show that there had been any remission or cessation of the liability by the State Government.
iii) A proper understanding of all this by the Tribunal cannot be termed as perverse. The view taken by it is imminently possible. Appeals are dismissed.”
In the A. Y. 2003-04, the assessee had opted for deferral scheme for payment of sales tax of Rs. 13,78,41,600/- under the deferral 1993 scheme of the Government of Maharashtra. The amount was allowed as deduction in the A. Y. 2003-04 treating the option as deemed payment for the purpose of section 43B of the Income-tax Act, 1961 according to the circulars. In the subsequent year, the assessee opted for the 2002 scheme for premature payment of net present value and paid an amount of Rs. 4,25,79,684/-. In the A. Y. 2004-05, the Assessing Officer added the difference amount of Rs. 9,52,61,916/- as deemed income u/s. 41(1) of the Act. The Tribunal deleted the addition and held that the amount was not taxable u/s. 41(1) of the Act.
On appeal by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held as under:
“i) As per the scheme the assessee was allowed to retain the sales tax as determined by the competent authority and pay the tax 15 years thereafter. The tax collected was deemed to have been paid and, therefore, the tax so collected could not be construed as income in the hands of the assessee.
ii) The tax so retained by the assessee was in the nature of a loan given by the Government as an incentive for setting up the industrial unit in a rural area. The loan had to be repaid after 15 years. Again, it is an incentive.
iii) However, by a subsequent scheme, a provision was made for premature payment. When the assessee had the benefit of making the payment after 15 years, if he is making a premature payment, the amount equal to the net present value of the deferred tax was determined at Rs. 4,25,79,684/- and on such payment the entire liability to pay tax/loan stood discharged. Again, it is not a benefit conferred on the assessee. Therefore, section 41(1) of the Act was not attracted.”
CIT vs. Sambhaji Nagar Coop. Hsg. Society Ltd (Bom); ITA No. 1356 of 2012 dated 11/12/2014: www.itatonline.org:
In this case, the Tribunal held that the gains on sale of TDR received as additional FSI as per D. C. Regulations has no cost of acquisition and accordingly is not chargeable to capital gains tax.
On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:
i) Only an asset which is capable of acquisition at a cost would be included within the provisions pertaining to the head “Capital gains” as opposed to assets in the acquisition of which no cost at all can be conceived. In the present case as well, the situation was that the FSI/ TDR was generated by the plot itself. There was no cost of acquisition, which has been determined and on the basis of which the Assessing Officer could have proceeded to levy and assess the gains derived as capital gains.
ii) It may be that subsection (2) of s. 55 clause (a) having been amended, there is a stipulation with regard to the tenancy rights. In the present case, additional FSI/TDR is generated by change in the D. C. Rules. A specific insertion would therefore be necessary so as to ascertain its cost for computing the capital gains.
iii) Therefore, the Tribunal was in no error in concluding that the TDR which was generated by the plot/property/ land and came to be transferred under a document in favour of the purchaser would not result in the gains being assessed to capital gains.”
In the A. Y. 2009-10, the assessee had sold a immovable property for a consideration of Rs. 25,60,000/- as distress sale. For computing the capital gain the Assessing Officer applied section 50C and treated the guideline value of Rs. 39,63,900/- as the full value of consideration. In the objection letter, the assessee specifically pointed out that the sale was more in the nature of a distress sale and requested to take the actual sale consideration for working out capital gain. The Assessing Officer rejected the claim u/s. 50C of the Act. The Tribunal confirmed the order of the Assessing Officer holding that there was nothing on record to show that the assessee had disputed the sale consideration of Rs. 39,63,900/- adopted for the purpose of stamp duty taken as basis under the Act and that the Assessing Officer had not rightly invoked section 50C.
On appeal by the assessee the Madras High Court reversed the decision of the Tribunal and held as under:
“i) The Assessing Officer’s order showed that having found such an objection, he committed a serious error in not invoking section 50C(2), that the error continued through out before every appellate forum and that there was no justification in the order of the Tribunal for taking the view that there was nothing on record to show that the assessee had disputed the sale consideration of Rs. 39,63,900/- adopted for the purpose of stamp duty for the purpose of working out capital gains.
ii) Hence the matter was restored to the files of the Assessing Officer to work out long-term capital gains by invoking section 50C(2).”
Note: Also see Appadurai Vijayaraghavan vs. JCIT; 369 ITR 486 (Mad)
For the A. Ys. 2005-06 to 2009-10, the assessee had claimed that the rent received from letting out buildings along with other amenities in a software technology park as income from business. The Assessing Officer assessed it as income from house property. The Tribunal held that it constituted business income and accepted the assessee’s claim.
On appeal by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held as under:
“The assessee was engaged in the business of developing, operation and maintaining an industrial park and providing infrastructure facilities to different companies as its business. In view of that the lease rent was assessable as business income.”
The
Tribunal had to consider whether in view of the Special Bench verdict
in Merilyn Shipping & Transport 146 TTJ 1 (Vizag), a disallowance
u/s 40(a)(ia) could be made in respect of the amounts that have already
been paid during the year and are not “payable” as of 31st March. The
Tribunal held that as the department’s appeal against the said verdict
was pending in the High Court and as the High Court had granted an
interim suspension, the AO should decide the issue after the disposal of
the appeal in the case of Merilyn Shipping by the High Court.
On appeal by the Revenue, the Telangana and Andhra Pradesh High Court held as under:
“We
are of the view that until and unless the decision of the Special Bench
is upset by this Court, it binds smaller Bench and coordinate Bench of
the Tribunal. Under the circumstances, it is not open to the Tribunal to
remand on the ground of pendency on the same issue before this Court,
overlooking and overruling, by necessary implication, the decision of
the Special Bench. We simply say that it is not permissible under quasi
judicial discipline. Under the circumstances, we set aside the impugned
judgment and order, and restore the matter to the file of the Tribunal
which will decide the issue in accordance with law and it would be open
to the Tribunal either to follow the Special Bench decision or not to
follow. If the Special Bench decision is not followed, obviously remedy
lies elsewhere.”
For the A. Y. 2009-10, the Assessing Officer charged interest u/s. 234C for late payment of advance tax on the basis of date of clearing of the cheque. The CIT(A) and the Tribunal held that the interest has to be charged on the basis of the date of presentation of the cheque and not date of clearing.
On appeal by the Revenue, the Madras High Court upheld the decision of the Tribunal and held as under:
“i) The core issue to be considered in this case is whether interest u/s. 234C is to be calculated based on date of clearing of the cheque or date of presentation of the cheque.
ii) The issue raised in this appeal is no longer res integra in view of the decision of the Supreme Court in CIT vs. Ogale Glass Works Ltd. [1954] 25 ITR 529, where it is held that the position is that in one view of the matter an implied agreement under which the cheques were accepted unconditionally as payment and on another view, even if the cheques were taken conditionally, the cheques not having been dishonoured but having been cashed, the payment related back to the dates of the receipt of the cheques and in law that dates of payments were the dates of the delivery of the cheques.
iii) It is not the case of the department that the cheque issued by the assessee was dishonoured. Once the cheque issued by the assessee is encahsed, in the light of the decisions referred (supra), the payment relates back to the date of receipt of the cheque.”
The ex-Ruler of Gondal Shri Vikramsinhji executed three deeds of settlements (trust deeds) in the United States of America on 19th December, 1963 and two deeds in the United Kingdom on 1st January, 1964.
Perusal of the deeds of settlements executed in the U.K. showed that one Mr. Robert Hampton Robertson McGill was designated as the trustee, referred to in the deeds as ‘the Original Trustee’. These trusts were created for the benefit of (a) the Settlor, (b) the children and remoter issue for the time being in existence of the Settlor and (c) any person for the time being in existence who is the wife or widow of the Settlor or the wife or widow or husband or widower of any of them, the children and remoter issue of the Settlor. The trust deeds defined the expression “the Trustees” to mean and include the Original Trustee or the other trustees for the time being appointed in terms of the deeds of settlement.
During his life time, the settlor, Shri Vikramsinhji, was including the whole of the income arising from these trusts in his returns of income. The said income was also included in the two returns filed by his son Jyotendrasinhiji for the assessment year 1970-71. Thereafter, it appears that the assessee – Jyotendrasinhiji took the stand that the income from these trusts is not includible in his income. Jyotendrasinhiji also took the stand that inclusion of the said income in the returns submitted by his father for the assessment years 1964-65 to 1969-70 and by himself for the assessment year 1970-71 was under a mistake.
Jyotendrasinhiji approached the Settlement Commission with an application for settlement relating to income from the U.K. and U.S. trusts. As regards to the U.K. trusts, the Settlement Commission observed as follows:-
“So far as the U.K. trusts are concerned, clause (3) did never come into operation inasmuch as no additional trustees were appointed as contemplated by it. If so, clause (4) sprang into operation whereunder the entire income under the settlements flowed to the settlor during his lifetime and on his death, to his elder son, the appellant herein. In other words, these settlements are in the nature of specific trusts. In any event, the entire income from these trusts was received by the settlor during his lifetime and after the settlor’s death, by the appellant. Therefore, the said income was rightly included in the total income of the settler and the assessee during the respective assessment years.”
The Settlement Commission, accordingly, computed the taxable income of the Settlor under both the sets of trusts – U.S. and U.K. – for the assessment years 1964-65 to 1970-71 (up to the date of the death of the Settlor) as also the income of Jyotendrasinhiji for the assessment years 1970-71 to 1982-83.
The above order of the Settlement Commission reached the Supreme Court in a group of appeals. The Supreme Court, by its judgment dated 2nd April, 1993, Jyotendrasinhji vs. S.I. Tripathi & Others, (1933) Supp. (3) SCC 389, with regard to U.K. trusts did not consider the arguments advanced on behalf of the assessee on merits. The Supreme Court, however, observed that the question urged on behalf of the assessee was academic in the facts and circumstances of the case.
Before the Supreme Court, a group of 17 Appeals came up for hearing, 8 arising from the Income-tax Act, 1961 and 9 arising from the Wealth Tax Act, 1957. Of the 9 Wealth Tax appeals, one appeal related to ‘protective assessment’ for 18 assessment years, i.e, 1970-71 to 1976-77, 1978-79 to1979-80, 1981-82 to 1989-90. The remaining 8 Wealth Tax appeals related to assessment years 1970-71, 1971-72, 1972-73, 1973-74, 1974-75, 1975-76, 1976-77 and 1978-79. In so far as 8 appeals arising from the assessment orders passed under the Income-tax Act, 1961 were concerned, they related to assessment years 1984-85, 1985-86, 1986-87, 1987-88, 1988-89, 1989-90, 1990-91and 1991-92.
From the copies of the returns and balance sheets relating to assessment years 1984-85 to 1991-92, the Supreme Court noted there from that there was an endorsement at the bottom of the statement of funds ending on 31st March of each previous year, ‘Net Income for the year retained.’
The Supreme Court observed that Clause 3 of the deeds of settlement executed in the U.K. left at the discretion of the trustees to disburse benefits to the beneficiaries. The endorsement made in the returns, as noted above, showed that income was retained by the trustees and not disbursed.
The Supreme Court noted that the Income-tax Appellate Tribunal, while considering Clause 3(2) and Clause 4 of the U.K. Trust Deeds referred to the findings of the Settlement Commission and observed that if the trusts were really intended to be discretionary, the trustees had a duty cast on them to ascertain the relative needs and personal circumstances of all the beneficiaries and to allocate the income of the trusts, among them from time to time, according to the objects of the trusts, however, the tell tale facts bring out the intention of the settlor to treat the trust property as his own. The settlor and after his death his son have been showing the income of foreign trusts in the returns of income filed from time to time. Had the trust deeds been really understood by the trustees and the beneficiaries as discretionary by virtue of the operation of Clause 3, one would have expected the state of affairs to have been different. Consequently, the Tribunal held that due to failure on the part of the Maharaja to appoint discretion exercisers as per clause 3(2), Clause 4 has become operative and the U.K. trusts have to be held to be specific trusts.
The Supreme Court further noted that the High court, however, did not agree with the Tribunal’s view on consideration of the relevant clauses of the U.K. Trust Deeds and various judgments of the Supreme Court as well as some High Courts and held that there were distinguishing features for assessment years under appeal and the previous order of the Settlement Commission and the earlier judgment of this Court. The High Court noted the following distinguishing features, viz., (i) the assessee has not admitted having received the income, (ii) the assessee has not received the said income and (iii) the assessee has not shown as taxable income in the returns of all the years under appeal. Having observed the above distinguishing features, the High Court was also of the view that on interpretation of the relevant clauses of the deeds of settlement executed in the U.K., character of the trusts appears to be discretionary and not specific.
The Supreme Court held that a discretionary trust is one which gives a beneficiary no right to any part of the income of the trust property, but vests in the trustees a discretionary power to pay him, or apply for his benefit, such part of the income as they think fit. The trustees must exercise their discretion as and when the income becomes available, but if they fail to distribute in due time, the power is not extinguished so that they can distribute later. They have no power to bind themselves for the future. The beneficiary thus has no more than a hope that the discretion will be exercised in his favour.
The Supreme Court having regard to the above legal position about the discretionary trust and the fact that the income has been retained and not disbursed to the beneficiaries, held that the view taken by the High Court could not be said to be legally flawed. Merely because the Settlor and after his death, his son did not exercise their power to appoint the discretion exercisers, the character of the subject trusts did not get altered.
In the opinion of Supreme Court the two U.K. trusts continued to be ‘discretionary trust’ for the subject assessment years.
The Supreme Court further held that the above position with regard to the discretionary trust was equally applicable to the controversy in appeals under the Wealth Tax Act. The High Court had taken a correct view that the value of the assets could not be assessed on the estate of the deceased Settlor.
The Supreme Court dismissed the appeals with no order as to costs.
By these notifications, effective date of applicability of amendments in the Mega Exemption Notification relating to services by way of job work on alcoholic liquors for human consumption; and Services by way of right to admission to exhibition of film, circus, dance or theatrical performances, sporting event, is notified as 1st June, 2015.
Further effective date of applicability of changes in abatement rates of Service Tax for Air Travel Agent, Life Insurance Business, Foreign Exchange Brokers and Distributor & Selling Agent of Lottery is also notified as 1st June, 2015.
Facts:
Petitioner provided its commercial premises on leave and license. The occupants challenged the levy of service tax on renting of immovable property service. On account of the ongoing litigation, the computation of liability was not in terms of the statutory provisions. Service tax liability of Rs 31,51,010/- was declared in the ST-3 returns filed and VCES declaration was filed for Rs 31,54,010/-. The declaration was rejected under the first proviso to section 106(1) of the Finance Act, 2013.
Held:
The Hon’ble High Court noted that as per section 106 of the Finance Act, 2013, any person can declare his tax dues in respect of which no notice or order of determination u/s. 72 or 73 or 73(a) has been issued before 01-03-2013. Provided if a return is furnished u/s. 70 disclosing true liability but the payment is not made in full or in part then such person would not be eligible for making a declaration. There is no provision which allows the authority to bifurcate or compute the liability by showing some differences between the ST-3 returns and the declaration filed and thus rejection of the scheme outright by the exercise undertaken was not permissible. The Writ Petition succeeded and the declaration was directed to be scrutinised in terms of the scheme and the rules made in this regard.
The assessee is a promoter, claimed deduction u/s. 80- IB(10) of the Income-tax Act, 1961 on the housing project for the A. Y. 2004-05. The Assessing Officer denied the claim on two counts, viz., (i) that the assessee had not developed the flats, and (ii) that out of 66 flats constructed, the built up area of 25 flats exceeded the prescribed maximum limit of 1,500 sq. ft. if the car park area of 220 sq. ft. was included. The Commissioner (Appeals) allowed the deduction u/s. 80-IB(10) holding that the provisions of section 80-IB(10) did not warrant ownership of land. As regards car park area, he held that there was no definition for the term ‘common area” in the Act. He held that the car park area has to be treated as common area. Accordingly, he held that the assessee had not come under any of the disqualifications prescribed u/s. 80-IB(10). The Tribunal confirmed the order of the Commissioner (Appeals).
On appeal by the Revenue, the Madras High Court upheld the decision of the Tribunal and held as under:
“i) The assessee was entitled to the benefit of the claim u/s. 80-IB(10) even though the assessee was not a developer but only a builder.
ii) In the absence of any specific definition of the term “built-up area” during the relevant period, the reasoning of the Commissioner (Appeals), which was confirmed by the Tribunal was justified. Nevertheless, section 80-IB(10) speaks about the residential unit having a maximum built up area of 1,500 sq. ft. to claim deduction. Even u/s. 80-IB(14)(a), which comes into effect from April 1, 2005, “built-up area is defined as inner measurements of the residential unit at the floor level, including the projections and balconies, as increased by the thickness of the walls, meaning thereby, the actual residential portion of the property. It clearly states that it will not include common areas shared with other residential units. Thus, there was no justification in including the car park in the definition of the built-up area of the residential unit for the purpose of determining the maximum built-up area.”
The assessee is a Mauritius based company. The Revenue proceeded against it on the footing that it is engaged in the business of telecasting of TV channels such as B4U Music, MCM, etc. It is the case of the Revenue that the income of the assessee from India consisted of collections from time slots given to advertisers from India through its agents. The assessee claimed that it did not have any permanent establishment in India and has no tax liability in India. The Assessing Officer did not accept this contention of the assessee and held that affiliated entities of the assessee are basically an extension in India and constitute a permanent establishment of the assessee within the meaning of Article 5 of the DTAA . The Commissioner of Income Tax (Appeals) Mumbai, partly allowed the appeal in some cases and held that the entity in India cannot be treated as an independent agent of the assessee. Alternatively, and assuming that it could be treated as such if a dependent agent is paid remuneration at arm’s length, further proceedings cannot be taxed in India. The Tribunal upheld the decision of the Commissioner (Appeals).
On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:
“Assessee carried out entire activities from Mauritius and all contracts were concluded in Mauritius. It was also undisputed that only activity which was carried out in India was incidental or auxiliary/preparatory in nature which was carried out in a routine manner as per direction of assessee without application of mind. In aforesaid circumstances, assessee’s agent did not have any PE in India and, consequently, amount in question could not be brought to tax in India.”
The assessee had two divisions: a transformer division manufacturing power transformers, and a tap changer division. It entered into an agreement with a German Company to sell plant and machinery of its tap changer division. Under the agreement, it undertook not to engage either directly or indirectly in the manufacture of the existing range of products. For the A. Y. 1996- 97, the assessee received a sum of Rs. 6.89 crore as a consideration for cessation of manufacturing activity. The Assessing Officer held that the receipt should be attributed to transfer of goodwill and restrictive covenants. Accordingly, he brought to tax the capital gains on the transfer of goodwill to the extent of Rs. 403.89 lakh adopting the cost of acquisition at Nil. The Commissioner (Appeals) deleted the addition holding that there was no element of goodwill in the agreement entered into by the assessee with the German company and the entire receipt should be attributed to restrictive covenants/noncompete fee. The Tribunal confirmed the decision of the Commissioner (Appeals).
On appeal by the Revenue, the Madras High Court upheld the decision of the Tribunal and held as under:
“i) The assessee transferred the technical know-how and other advantages to the joint venture company consisting of the assessee and the German company and the assessee continued its business using its own logo, trade name, licenses, permits and approval under an agreement with another company. The Tribunal held that there was no intention to acquire the goodwill of the assessee and, therefore, the non-compete fee received by the assessee could not be treated as payment for goodwill taxable as income. Section 55(2) (a) of the Income-tax Act, 1961, came into effect in the year 1998-99, whereas the assessment year in question was 1996-97. Therefore, there was no basis to fall back on section 55(2). The non-compete fee received by the assessee was capital in nature.”
The assessee was engaged in the business of warehousing, handling and transport business. For the A.Ys. 2004-05, 2005-06, 2007-08 and 2009-10, the assessee showed the income from letting out of buildings and godowns as income from business. The Assessing Officer treated the income as income from house property. The assessee contended that its activity was not merely letting out of the warehouses but storage of goods with provision of several auxiliary services such as pest control, rodent control and preventive measures against decay of goods stored due to vagaries of moisture and temperature, fungus formation, etc., besides security and protection of the goods stored. The Commissioner (Appeals) allowed the assessee’s claim and held that the assessee carried out the activity in an organised business manner. These activities were more than mere letting out of the godowns for tenancy. The Department itself had accepted in the past that the income from warehousing was assessable as income from business. The Tribunal upheld the decision of the Commissioner (Appeals).
On appeal by the Revenue, the Madras High Court upheld the decision of the Tribunal and held as under:
“i) T he Commissioner (Appeals) as well as the Tribunal had not only gone into the objects clauses of the memorandum of association of the assessee but also into individual aspects of the business to come to the conclusion that it was a case of warehousing business and, therefore, the income would fall under the head “Business income”.
ii) T hus, the income of the asessee from letting out its warehouses was chargeable under the head “Income from business” and not under the head “Income from house property”.
The assessee, in its annual return for the assessment years 1989-90 and 1991-92, showed a loss of Rs.1,94,13,40 and Rs. 1,80,22,480 respectively. By an assessment order dated 14th December, 1992, the Assessing Officer levied an additional tax u/s. 143(1A) of Rs. 5,62,490 and Rs. 8,09,290, respectively, for the two assessment years in question calculated in the manner provided in the section.
Being aggrieved by the order dated 14th December, 1992, the respondent filed two separate writ petitions to declare the provisions of section 143(1A) as ultra vires and, consequently, prayed for the quashing of the order dated 14th December, 1992. The learned single judge who heard the two petitions upheld section 143(1A) as amended in 1993 prospectively but held that in so far as it operated with effect from 1989 on losses made by companies, the section is arbitrary and unreasonable and would, therefore, have to be struck down. The Division Bench agreed with single judge and dismissed the two writ appeals before it.
The Supreme Court held that on a cursory reading of the provision, it was clear that the object of section 143(1A) was the prevention of evasion of tax. By the introduction of this provision, persons who has filed returns in which they have sought to evade the tax properly payable by them is meant to have a deterrent effect and a hefty amount of 20% as additional income-tax is payable on the difference between what is declared in the return and what is assessed to tax.
The Supreme Court observed that a plain reading of the provision as it originally stood referred to the total income. Further, it was settled law that the word “income” would include within it both profits as well as losses. The Supreme Court further held that even on a reading of section 143(1)(a) which is referred to in section 143(1A), a loss is envisaged as being declared in a return made u/s. 139. It was clear, therefore, that the retrospective amendment made in 1993 would only be clarificatory of the position that existed in 1989 itself.
According to the Supreme Court, all assessees were put on notice in 1989 itself that the expression “income” contained in section 143(1A) would be wide enough to include losses also. That being the case, on facts there was in fact no retrospective imposition of additional tax–such tax was imposable on losses as well from 1989 itself.
In the present case, the question that therefore arose before the Supreme Court also as to whether bona fide assesses are caught within the net of section 143(1A).
The Supreme Court after referring to its decisions in CIT vs. Hindustan Electric Graphites Ltd. (2000) 243 ITR 48(SC), Asst. CIT vs. J.K. Synthetics Ltd (2001) 251 ITR 200 (SC) and K. P. Varghese vs. ITO 131 ITR 579 (SC); held that section 143(1A) could only be invoked where it was found on facts that the lesser amount stated in the return filed by the assessee was a result of an attempt to evade tax lawfully payable by the assessee. The burden of proving that the assessee had so attempted to evade tax was on the Revenue which could be discharged by the Revenue by establishing facts and circumstances from which a reasonable inference can be drawn that the assessee had, in fact, attempted to evade tax lawfully payable by it. Subject to the aforesaid construction of section 143(1A), the Supreme Court upheld the retrospective clarificatory amendment of the said section and allowed the appeals.
1.1 Sizeable debt funds are being raised by the corporates through the issue of debentures. To make the issue of debentures attractive, such debentures are issued with different terms. Sometimes debentures are issued at a discount with nominal or lower rate of interest. At times, the debentures are issued at par for a fixed period with specified interest rate, but the option is also given to the debenture holders for upfront payment of present value of interest on debentures in the very first year for the entire period of debentures. In such cases, the accounting treatment of such interest is guided by the accounting principles, and generally the expenditure on interest is spread over the life of the debentures on an appropriate basis.
1.2 The expenditure of revenue nature incurred on issue of such debentures generally qualifies for deduction u/s. 37(1) of the Income-tax Act, 1961 (the Act). Section 36(1)(iii) of the Act grants deduction of interest on capital borrowed for business purpose. Accordingly, interest on such debentures should generally qualify for deduction u/s. 36(1)(iii) of the Act, subject to certain exceptions with which we are not concerned in this write-up.
1.3 In the past,for the assessees following mercantile system of accounting, the issue was under debate with regard to the year of deductibility of interest under the Act, in cases where the upfront payment of present value of interest on debenture is made in the very first year for the entire period of debentures and for accounting purpose, such interest is amortised over the redemption period of debentures in the books of account.
1.4 Earlier, the issue with regard to deductibility of discount on issue of debentures under the Act came up for consideration before the courts. Finally, the Apex Court in the case of Madras Industrial Investment Corporation Ltd [225 ITR 802 – Madras Industrial Investment’s case] settled the controversy with regard to deductibility of such discount and the year of its deductibility. In this case, the Apex Court, on the facts of that case, held that the discount on issue of debentures constitutes revenue expenditure. The Court further held that, although a liability of such expenditure has been incurred in the year of issue of debenture, this is a continuing liability which stretches over the period for which the debentures were issued and therefore, the liability spreads over such period. Accordingly, the deduction of such expenditure will also be spread over on a proportionate basis during the tenure of the debentures. The Court also noted that this view is in conformity with the accounting practice in which such discount is amortised over the redemption period of debentures. It may be noted that in this case, initially, the assessee itself had claimed deduction on proportionate basis and subsequently, changed it’s position in this respect. We had analysed this judgment in this column in the July, 1998 issue of the journal.
1.5 Recently, the issue with regard to the year of deductibility of upfront payment of interest in the first year of the tenure of debentures referred to in para 1.3 above came up for consideration before the Apex Court in the case of Taparia Tools Ltd. and the Court has decided this issue. Considering the importance and usefulness of this judgment, it is thought fit to consider the same in this column.
Taparia Tools Ltd. vs. JCIT – 260 ITR 102 [Bom.]
2.1 The issue referred to in para 1.3 above came up before the Bombay High Court in the above case. In this case, the brief facts were: the assessee was following mercantile system of accounting and it had issued non-convertible debentures of the face value of Rs. 100 each aggregating Rs. 600 lakh on a private placement basis. Under the terms of issue,effectively, as noted by the Court,the debenture holders were entitled to receive interest periodically on half yearly basis @ 18% p.a. for five years. Alternatively, the debenture holders had the option to receive one year upfront payment of Rs. 55 per debenture immediately on allotment. The debentures were redeemable at a premium of Rs. 10 per debenture in one installment any time after the end of fifth year from the date of allotment but, not later than the seventh year from that date.
2.1.1 The company made allotment of debentures to six parties on two different dates. On 29th March, 1996, the allotment was made to one party for which the company had received Rs. 495 lakh and on 19th June, 1996, the company had made an allotment to five parties for which the company had received Rs. 100 lakh from one party and Rs. 1.25 lakh each from the other four parties. Out of six parties, two lenders exercised the option to receive upfront payment. Accordingly, upfront payment of Rs. 2,72,25,000 became payable to one party (who was allotted debentures of the face value of Rs. 495 lakh) on 29th March, 1996 and Rs. 55 lakh became payable to another party (who was allotted debentures of the face value of Rs. 100 lakh)on 19th June, 1996. The other four debenture holders holding debentures of the aggregate face value of Rs. 5 lakh opted for payment of interest periodically as per the terms of issue of debentures. In the books of account, the assessee had shown the upfront payment of interest of both the years as ‘deferred revenue expenditure’ to be written off over a period of five years. Similarly, the premium of Rs. 60 lakh payable on redemption of debentures was also proportionately debited to each year’s profit and loss account and credited as reserve on the liability side of the balance sheet. Even for tax purpose, the claim by deduction of this premium payable on redemption was spread over the life of the debentures.
2.1.2 For the purpose of furnishing return of income for the assessment year 1996-97, the assessee claimed entire upfront payment of interest of Rs. 2,72,25,000 as deduction and similarly, in the Return of income from the assessment year 1997- 98, the full deduction of Rs. 55 lakh paid upfront was claimed as deduction. For both the years, the deduction was disallowed by the Assessing Officer (AO) on the ground that liability for the full amount regarding discounted interest paid upfront has not been incurred in the respective accounting years and the approximate income which the assessee would have earned by utilisation of Rs. 595 lakh (Rs. 495 lakh and Rs. 100 lakh) borrowed was not offered for taxation. Relying on the judgment of the Apex Court in Madras Industrial Investment’s case, the AO spread over the deduction of interest expenditure over a period of five years and worked out the amount of deduction of interest by applying appropriate discount rate for the assessment year 1996-97 [Rs. 74,250 – for three days (annual amount being Rs. 89,10,000) as against the claim of Rs. 2,72,25,000]. For the assessment year 1997-98 also, similar approach was adopted. It seems that in subsequent years, deduction was allowed on this basis. On first appeal, for the Assessment Year 1996-97, the Commissioner of Income-tax (Appeals) [CIT (A)] took the view that the entire scheme was made to avoid tax and the upfront payment was repayment of capital out of the total borrowing and accordingly, the actual borrowing for the assessment year 1996-97 was only Rs. 2,22,75,000 (and not Rs. 495 lakh). For this, the CIT(A) also relied on the judgment of the Apex Court in the case of McDowell & Company Ltd. [154 ITR 148 – McDowell’s case]. Based on this, the CIT(A) allowed deduction on this reduced amount of borrowing for three days. The Tribunal set aside the order of CIT(A) and restored the order of the AO.
2.2 It seems that similar views were taken for the assessment years 1997-98 and subsequent years. It also seems that appeals for three assessment years (1996-97 to 1998-99) were filed by the assessee as well as the revenue before the Bombay high Court. details of the other years are not available. Appeals of the Revenue were filed on the ground that the upfront payment represented repayment of borrowed capital and therefore, the assessee was entitled to deduction u/s. 36(1)(iii) only on the net amount of rs. 2,22,75,000.
2.3 On the above facts, the matters came-up before the Bombay high Court, and the high Court, it seems, dealt with the appeals by first taking the appeal for the assessment year 1996-97 as the base. It seems that in the assessee’s appeals, large number of questions were raised before the Court. however, the high Court framed the following substantial question of law for its decision [Page 107]:
“Whether, on the facts and circumstances of the case and in law, the tribunal was right in holding that, even though the liability of payment of interest stood liquidated in the first year itself, such liability had to be allowed on a spread over basis over the life of the debentures?”
2.4 On behalf of the assessee, it was, inter alia, contended that the upfront payment of Rs. 55 per debenture on 29th march, 1996 was on account of interest and the CIT(a) wrongly treated the payment of Rs. 55 per debenture on capital account. the terms of issue of debentures in this respect are very clear. for accounting purpose, the assessee has debited 1/5th of Rs. 55 for five years in profit and loss account but, for the purpose of determining deductibility of the amount under the act one has to go by the year in which the liability arises under the terms of issue of debentures, and for that purpose, the treatment in the books of account is irrelevant. The assessee is following mercantile system of accounting and under the terms of issue, the liability arose in the first year itself and therefore, deductibility thereof cannot be spread over the five years as erroneously done by the ao. It was further contended that it was not open to the revenue to tamper with the terms of issue and therefore, the ao was wrong in spreading the deduction over the five years. Such spreadover in five years amounts to altering the terms and conditions of the issue of debentures which was not permissible. It was also pointed out that, had the assessee not claimed the deduction in the very first year, the Revenue could have denied deduction in the second and subsequent years on the ground that no liability accrued in those years and no amount was also paid during those years. The method of determining the quantum for allowing the deduction on a spreadover basis adopted by the revenue was also questioned.
2.4.1 It was further contended that the judgment of the apex Court in the case of madras industrial investment’s case did not apply to the facts of the case of the assessee. this was distinguished on various grounds which, inter alia, include: in that case, the Court was concerned with the concept of premium payable at the time of redemption and in this case, although the assesse is liable to pay 10% premium at the time of redemption, that has been claimed on the basis of tests laid down in that case and,therefore, in this case, we are not concerned with the deductibility of such premium. Present case is concerned with the deductibility of upfront payment of interest which became payable in the very first year ending on 31st march, 1996. it was further pointed out that in madras industrial investment’s case, the premium amount was payable after five years and therefore, the apex Court has allowed amortisation whereas in this case, the liability to pay interest arose in the very first year and that is also discharged in the first year itself. Furthermore, in that case the liability was a continuing liability which is not the case in this case. From the judgment of the apex Court in that case, it would appear that the option was with the assessee to claim deduction in the very first year when it discharged the accrued liability or to spread it over for five years. As such, according to the learned counsel appearing on behalf of the assessee, the judgment of the Apex Court in the madras industrial investment’s case had no application to the facts of the present case. A reliance was also placed on the judgment of the Bombay high Court in the case of Buckau Wolf new india engineering Works Ltd. [157 ITR 751] in which case, the amount was payable in installments and yet, the high Court took the view that the deduction for the entire amount should be given in the first year because the liability was accrued in the first year.
2.4.2 It was also pointed out that @ 55 per debenture, the assessee was required to pay Rs. 4,45,50,000 interest in five years but by paying upfront amount of Rs. 2,72,25,000 it has been able to save a payment of interest to the extent of Rs. 1,73,25,000. While spreading over the deduction,even the revenue is ultimately allowing deduction of Rs. 4,45,50,000 as against the claim of deduction of Rs.2,72,25,000 made by the assessee. It was also contended that the Revenue has wrongly invoked the judgment of the apex Court in mcdowell’s case.
2.4.3 The learned counsel for the assessee further contended that under the terms of issue, the lenders were free to opt for interest on half yearly basis @ 18% per annum for five years (i.e. in aggregate Rs. 90 per debenture) or to receive upfront payment of Rs. 55 per debenture in the year of allotment itself. Therefore, the lenders had a right to receive discounted amount of interest in the first year under the second option. In other words, by making upfront payment of Rs. 55 per debenture, the assessee has brought the present value of rs. 90 to Rs. 55 which is nothing but discounted value of the interest otherwise payable in five years. Under the first option, the assessee would have paid Rs. 89,10,000 every year for a period of five years on this amount of borrowing. however, by making upfront payment of discounted value of interest amounting to Rs. 2,72,25,000,the assessee got rid of the annual liability of Rs. 89,10,000 for five years. It was also contended that the revenue has accepted that upfront payment of Rs. 55 per debenture was revenue expenditure and by spreading over the amount of deduction, the revenue allows deduction of rs. 89,10,000 per year for a period of five years aggregating the amount to Rs. 4,45,50,000 as against the assessee’s claim of deduction of Rs. 2,72,25,000 in the first year. Therefore, there is no loss to the revenue. As such, the only question which the ao was required to decide was whether the liability to pay interest was incurred in the first year itself or not, and if so, the assessee was entitled to obtain full deduction in the first year.
2.4.4 It was also pointed out that the tribunal has proceeded on the footing that the entire measure was adopted because the assessee had surplus income whereas the concerned lender had brought forward losses. In this respect, it was contended that the court should not take into account extraneous factors while deciding the claim of the assessee.
2.4.5 Referring to the judgment of the Apex Court in the case of tuticorin alkali Chemicals and fertilizers Ltd. [227 itr 172 – tuticorin’s case], it was further contended that the deduction of expenditure under the act does not depend on what the assessee debits in its accounts but, it depends on the provisions of the law. Therefore, in this case, the fact that the assessee has not debited the full amount to profit and loss account in the first year itself cannot be the ground for its disallowance in that year. The tax cannot be levied on the basis of entries made by an assessee in its books of account.
2.4.6 It was also contended that the tribunal has erred in introducing matching concept to the effect that the expenditure must relate to the income in the assessment year and the benefit was spread over for a period of five years and therefore, the expenditure must also be spread over. According to the learned counsel, since the liability in this case is incurred in the first year itself, the assesseee was entitled to full deduction in that year and, therefore, the question of co-relating the expenditure to income/ benefit for five years does not arise. For this, the reliance was placed on the judgment of the Apex Court in the case of Mysore Spinning and mfg. Co. Ltd. [61 itr 572].
2.5 On behalf of the revenue, it was, inter alia, contended that the option given to the lenders refers to upfront one-time payment and it does not speak of interest. the upfront payment of Rs. 55 per debenture, as against the amount of Rs. 90, was made to get the benefit of differential amount of Rs. 45 for a period of five years and therefore, the ao was right in spreading the expenses over that period. If the argument of the assessee for deduction of the full amount in the first year is accepted, then the computation of income will stand distorted, because the assesse got the benefit of Rs. 45 for five years. Upfront payment of Rs. 55 was on account of advance payment of interest in the first year for five years. As such, the principle laid down by the apex Court in the madras industrial investment’s case was squarely applicable to the facts of the case of the assessee. It was also contended that under both the options, the interest was payable every six months and therefore, the amortisation principle was applicable to both the options. Therefore, even Rs. 55 per debenture was payable by way of interest for five years which was paid by the assessee in the first year and therefore, the ao was right in applying the principle of amortisation in this case.
2.5.1 Supporting the appeals filed by the Revenue, the learned counsel appearing on behalf of the revenue, further contended that, as against the amount of Rs. 4,95,00,000 borrowed on 29th march, 1996, on the same day, an amount of Rs. 2,72,25,000 was repaid in the name of upfront payment of interest and therefore, the actual borrowed capital left with the assesse was only Rs. 2,22,75,000 which was used for the purpose of business. Since part of the borrowed capital was refunded to the subscribers on the same date, the actual borrowed capital remaining was the net amount and the tribunal has failed to appreciate this factual positon. as such, the assessee was entitled to claim deduction u/s. 36(1)(iii) for interest only on Rs. 2,22,75,000.
2.5.2.1 It was also contended that the entire scheme of issue of non-convertible debenture was devised to defeat the collection of tax revenue. In the present case, the assessee has not paid the discounted value of interest, but has repaid part of the face value of the debenture itself under the garb of upfront payment of interest at present value. therefore, the tribunal has erred in giving spread over and granting deduction of Rs. 4,45,50,000 @ 18% per annum for five years on the gross amount (i.e. Rs.4,95,00,000) of debentures.
2.6 After considering the contentions raised on behalf of both the sides, the Court proceeded to decide the question referred to in para 2.3. For this purpose, at the outset, the Court noted the following relevant terms of the issue of debentures [Page115]:
“3(a) Each debenture shall carry interest at the rate of 2%. Per annum above the prime lending rate and the interest shall be payable half-yearly.
(b) Each debenture shall carry interest at the rate of Rs. 55 per debenture, payable up-front within thirty days of the exercise of option or from the date of allotment, whichever is earlier”.
These terms were not accepted by the lenders.
The final terms of the issue were as follows:
“2. Terms of the issue:
(a) Up-front fee – the debenture shall carry up- front fee at the rate of Rs. 55 per debenture payable up-front immediately on allotment.
(b) Redemption period – the debenture shall be redeemed at a premium of 10 per cent, i.e., Rs.10 per debenture, in one instalment any time after the end of the fifth year from the date of allotment, but not later than the seventh year from the date of allotment.”
2.6.1 The Court then briefly referred to the facts of the present case and stated that the question which arises for determination in this case is whether Rs. 55 per debenture (total – Rs. 2,72,25,000) deductible in the first year of allotment or that expenditure was to be apportioned over the period of five years, which is the life of the debenture. The Court also noted that the assesse is following the mercantile system of accounting on the basis of which the assessee has made a claim for the full amount in the first year itself whereas the Revenue has treated this as deferred revenue expenditure (DRE) and apportioned the expenditure for five years. The Court then stated that for the purpose of deciding this issue, two concepts are required to be borne in mind, viz., matching and discount rate.
2.6.2 The Court then proceeded to consider the ‘matching concept’ referred to in above para. for this purpose, the Court noted that the mercantile system of accounting is based on accrual. under this system, book profits are liable to be taxed. The profits earned and credited in the books of account constitute the basis of computation of income. the system postulates the taxation of monies that are due and payable by the parties to whom they are debited. explaining the effect of the ‘matching concept’ in the mercantile system of accounting, the Court observed as under [Page no. 116]:
“…….therefore, under the mercantile system of accounting, in order to determine the net income of an accounting year, the revenue and other incomes are matched with the cost of resources consumed (expenses). under the mercantile system of accounting, this matching is required to be done on accrual basis. under this matching concept, revenue and income earned during an accounting period, irrespective of actual cash in- flow, is required to be compared with expenses incurred during the same period, irrespective of actual out-flow of cash. In this case, the assesse is following the mercantile system of accounting. this matching concept is very relevant to compute taxable income particularly in cases involving dre. it has been recognised by numerous judgments… ”
2.6.2.1 The Court then referred to the judgment of the apex Court in the case of Calcutta Co. Ltd. [37 ITR 1] and stated that, in that case, the Court had held that the expression ‘profits or gains’ used in section 10(1) of the income-tax act, 1922 [similar to section 28(i) of the act] should be understood in its commercial sense and there can be no computation of such profits and gains until the expenditure, which is necessary for the purpose of earning receipts is deducted therefrom. the Court then noted that in that case the apex Court had applied the ‘matching concept’ and allowed the deduction of an expenditure required to be incurred in subsequent period on an estimated basis which related to the income that was already accounted on the ground that otherwise it was not possible to compute profits and gains. The Court then stated that this concept is also applied by the apex Court in the case of madras industrial investment’s case and for that purpose the Court noted the following observations from the head notes of that case [Page 117]:
“Ordinarily, revenue expenditure which is incurred wholly and exclusively for thepurpose of business must be allowed in its entirety in the year in which, it is incurred. it cannot be spread over a number of years even if the assessee has written it off in his books, over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. in fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Issuing debentures is an instance where, although the assesse has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. the liability should, therefore, be spread over the period of the debentures”.
2.6.2.2 The Court then stated that the ‘matching concept’ is also covered by section 36(1)(iii) read with section 43(2), which defines the word ‘paid’ to include incurred according to the method of accounting. Both these sections are part of the provisions relating to computation of business income. Interest on monies borrowed for business purposes is an expenditure in the business, which is deductible under section 36(1)(iii). the Court then pointed out that for claiming deduction u/s. 36(1)(iii), the necessary conditions are: the capital must have been borrowed; it must have been borrowed for business purpose and the interest must have been paid i.e., actually paid or incurred in accordance with the method of accounting followed by the assessee.
2.6.2.3 Referring to the facts of the case of the assessee, the Court noted that the assessee got the benefit of the borrowed money for a period of five years and if the ‘matching concept’ is not applied, the profits get distorted. In this context the Court then observed as under [Page 118]:
“……for the year ending march 31, 1996, the assessee has submitted that it has incurred an expenditure amounting to rs. 2,72,25,000 as and by way of interest deductible under section 36(1)(iii) of the income-tax act. however, in the annual accounts, the said amount is not debited to the profit and loss account. It is interesting to note from the profit and loss account for the year ending March 31, 1996, that profit after tax was rs.1,86,34,016. now if the expenditure incurred was Rs. 2,72,25,000 as submitted by the assessee then the assessee could never have earned the said profit of Rs. 1,86,34,016. This is how the profit got distorted. In the annual report, the assessee has conceded that Rs. 2,72,25,000 was deferred revenue expenditure to be written off over five years. In his order, the Assessing Officer has recorded a finding of fact which categorically brings out the ‘matching concept’. he has stated that for the accounting year March 31, 1996, profit after tax increased to Rs. 1,86,34,016 from rs. 50 lakhs in the last year ending march 31, 1995. Therefore, the Assessing Officer was right in apportioning the expenditure at 18 per cent. per annum on Rs. 495 lakhs amounting to Rs.74,259 for three days because only then the estimated expenditure could match with income of Rs. 1,86,34,016… ”
2.6.2.4 Considering the above referred accounting treatment and the accounting profit for the year ending 31st march, 1996, the Court stated that the assessee has shown Rs. 2,72,25,000 as deferred revenue expenditure and according to the Court, this expenditure, though paid, was not incurred in the year ending 31st march, 1996 and the expenditure incurred in that year was Rs. 74,250. in this context, the Court further observed as under [Page 118]:
“… What we would like to emphasise is that, therefore, ordinarily revenue expenditure incurred only and exclusively for business purposes must be allowed in its entirety in the year in which it is incurred. However, in a given case, like the present one, the facts may justify the Assessing Officer to spread the expenditure over the life of the debentures because allowing the entire expenditure in one year might give a distorted picture of the profit of a particular year… ”
2.6.2.5 Considering the overall facts of the assessee, the Court took the view that the assessee has received the borrowed funds for a period of five years and it is a continuing benefit to the business of the assessee over the entire period of debentures and therefore, the liability was required to be spread over the period of debentures. the Court also noted that the assessee itself has applied a ‘matching concept’ qua the claim of premium payable on redemption of debentures. As such, in this very case, the assessee has invoked the ‘matching concept’ qua premium but not for interest.
2.7 The Court then proceeded to consider the second concept, viz., discount rate. in this context, the Court noted that the ao had taken a view that the upfront payment made by the assessee had to be discounted as these payments represent present value of the interest liability and were deferred revenue expenditure. For this purpose, the ao applied 18% as the discount rate which was effectively based on one of the options available for payment of interest over a period of five years. On this basis, the ao determined the annual liability of interest at Rs. 89,10,000 in respect of borrowing of Rs. 495 lakh and Rs. 18 lakh in respect of borrowing of Rs. 100 lakh. on this basis, the ao allowed deduction of Rs. 74,250 for three days for the assessment year 1996-97 and Rs. 1,03,20,410 for the assessment year 1997-98 (i.e. Rs. 89,10,000 for the first set of debenture and Rs. 14,10,410 for the second set of debenture on a proportionate basis for part of the financial year 1996-97). in the subsequent years,it seems, the ao had allowed deduction on this basis for the full year. The assessee had questioned the discount rate applied by the ao for determining the amount of deduction. After considering the factual position, the Court did not find any defect in the method of determining the amount of deduction adopted by the ao.
2.8 After considering both the above concepts, viz., ‘matching concept’ and discount rate, the Court stated that if they are kept in mind, the matter stands resolved in law. For this purpose, the Court then analysed the annual accounts of three years under appeal and noted that in each of the years, the assessee has treated the upfront payments made in the first year as deferred expenditure and written off the same on that basis during the life of the debentures. After analysing these annual accounts for three years, the Court also noticed that even this method continued in the subsequent accounting years upto 31st march, 2001 and finally, the debentures were repaid during the accounting year 2001-02.
2.8.1 Based on the analysis of the above referred annual accounts, the Court noted that this analysis indicates two things. Firstly, in the accounts, the upfront payment has been written off over the period of debentures by creating an asset in respect thereof on the basis that interest for five years is paid in advance in the first year. Secondly, the accounts show that the premium payable by the assessee on redemption was Rs. 60 lakh and in each year, 20% thereof has been charged to the profit and loss account. On this basis, the Court felt that the acceptance of claim of deduction of the full amount in the first year would result into distortion.
2.9 The Court then noted the contention of the assessee that good accounting is not necessarily correct law. For this, on behalf of the assessee, apart from the other authorities, heavy reliance was placed on the judgment of the Apex Court in tuticorin’s case to contend that the deduction of expenses in computation of income under the act does not depend on its accounting treatment but depends on the provisions of the law. For this, the Court considered the relevant provisions contained in section 36(1)(iii) read with section 43(2) and stated that, from this, it would be clear that question of allowance permitted to be deducted under the head profits and gains would differ according to the system of accounting adopted by the assessee. For this purpose, one has to estimate the expenditure by applying the ‘matching concept’ and a proper discount rate. Referring to the judgment of the Apex Court in the case of A. Krishnaswamy Mudaliar [53 ITR 122], the Court stated that profits of the business should be determined according to the ordinary principles of commercial accounting so far as they are applicable. The Court then stated that there is no merit in the argument advanced on behalf of the assessee that good accounting is not necessarily good law.
2.10 Finally, explaining the effect of judgment in tuticorin’s case,the Court held as under [Page 125]:
“………one of the points which arose for determination was whether interest received by the assessee on short-term deposits during pre-commencement of business could be capitalised as accretion to capital and, therefore, nontaxable. Therefore, in the case, the issue was on the nature of the receipt. Hence, that case has no application. On the contrary, it has been held that the accounting principles are relevant for ascertainment of profits made by a company or for ascertainment of value of assets of the company but, not for determining the nature of receipt. Therefore, the said judgment supports the view which we have taken as in this case, we are concerned with computation of income.
It is important to note that the deferred revenue expenditure is of revenue nature but, because of its special features, it is spread over a number of years during which the benefit of expenditure is expected to arise to the business. on the facts, we hold that the liability was a continuing liability to pay interest spread over for a period of five years… ”
2.11 In view of the above, the Court took the view that the ao was right in spreading the deduction over the period of five years which was the life of the debentures. Accordingly, the Court decided the question referred to in para 2.2. above in favour of the revenue and against the assessee.
2.12 On the above basis, appeals of the assessee for all the three years were dismissed. the Court also noted that the three appeals preferred by the revenue, relate to the ground that upfront payments represented repayment of borrowed capital and therefore, the assessee was not entitled to deduction u/s. 36(1)(iii) in respect thereof. In this respect, the Court clarified that the AO has recorded the finding of fact that the upfront payments were on revenue account and that has been confirmed by the Tribunal and therefore, the Court has decided these matters on the basis of that finding of fact. Accordingly, on this basis, the Court preferred not to answer the questions raised in the three appeals filed by the Revenue.
The expenditure, though incurred for the purposes of business, shall be deemed to have not been incurred for the purposes of business, where the expenditure is incurred for a purpose which is an offence or which is prohibited by law. No deduction or allowance, therefore can be made in respect of such an expenditure by virtue of Explanation 1 to section 37(1) of the Act.
It is not uncommon for a businessman to make certain payments in the course of his business, the payment of which might be an offence or prohibited by law. Several cases of payments of fines and penalties for violation of law are the examples that immediately come to mind. Such payments largely would be the cases of expenditure that would be hit by the Explanation 1 to section 37(1) and would stand to be disallowed in computing the Total Income.
Cases often arise wherein a businessman, for the purposes of his safety or for safeguarding his business, is required to make certain payments to either the police or security guards or to the gangsters or even to the kidnappers. Such payments, when made to the police or security guards are known as “Security Charges”, when made to gangsters are known as “Protection Money” and as “Ransom” when paid to kidnappers.
Issue arises in the context of Allowance or Deduction when such payment, i.e., security charges or protection money or ransom is made. Whether such payments, though made for business purposes, would be liable for disallowance on the ground of it being construed as an expenditure incurred for a purpose which is an offence or is prohibited by law. Conflicting views of the High Courts highlight the controversial nature of the issue under consideration.
M. S. Swam inathan’s case
Before the Karnataka High Court in the case of CIT vs. M. S. Swaminathan, 236 CTR 559, the Revenue had raised the following question for consideration of the high court in an appeal filed by it – “ whether the payment made to local police and local rowdies can be an allowable expenditure as a business expenditure ?
“In the said case, a sum of Rs. 86,000 was claimed as expenditure for money paid to local police and local goons towards the maintenance of the two theatres run by the assessee, viz., Vinayaka Touring Talkies and Sri Krishna Theatre. The expenditure of Rs. 86,000 claimed was disallowed by the AO. The CIT(A), in an appeal filed by the assessee, concurred with the view expressed by the AO and dismissed his appeal. Aggrieved by the same, the assessee filed the second appeal before the tribunal, which allowed the appeal in part, by allowing deduction of Rs. 50,000 as against Rs. 86,000 claimed. Being aggrieved by the same, the appeal was filed by the Revenue before the High Court.
On hearing the rival contentions, the Karnataka High Court allowed the appeal of the Revenue for disallowing the claim of the expenditure by holding as under;
“If any payment is made towards the security, towards the business of the assessee, such amount is an allowable deduction, as the amount spent for the maintenance of peace and law and order in the business premises of the assessee as he was running two cinema theatres. But the amount spent in the instant case claimed by the assessee is towards payment made to the police and rowdies. If any payment is made to the police illegally, it amounts to bribe and such illegal gratification cannot be considered as an allowable deduction and similarly, if any amount is paid to a rowdy as a precautionary measure to see that he shall not cause any disturbance in the theatre run by the assessee, the same is also an amount paid illegally for which no deduction can be allowed by the Department. If the assessee had spent the money for the purpose of security, we would have to concur with the view of the Tribunal. However, in the instant case, the payment has been made to the police and rowdies to keep them away from the business premises which payment be held as illegal and such illegal payment cannot be an allowable deduction.”
Khemchand Motilal Jain, Tobacco Products (P.) Ltd.’s case
The issue arose in the case of CIT vs. Khemchand Motilal Jain, Tobacco Products (P.) Ltd. 340 ITR 99 (MP) before the Madhya Pradesh High Court. In that case, the assessee company was engaged in manufacturing and sale of bidis. One Mr. Sukhnandan Jain was a whole-time director of the assessee-company and was looking after the purchase, sales and manufacturing of bidis. During his business tour in August 1987 to Sagar for purchase of tendu leaves, he was kidnapped for ransom by a dacoit gang headed by Raju Bhatnagar. Immediately, a complaint and FIR were lodged with Sagar Police. The assessee company awaited the action of the police but the police was unsuccessful in getting Mr. Sukhnandan Jain released from the clutches of the dacoit. Ultimately after 20 days, a sum of Rs. 5,50,000 was paid by way of ransom for the release of Mr. Sukhnandan Jain. On the same day of payment of the ransom, Mr. Sukhnandan Jain was released by the dacoits.
The company claimed a deduction of the ransom amount as business expenditure. The AO disallowed the claim of the assessee company on the ground that the ransom money paid to the kidnappers was not an expenditure incidental to business. On appeal, the CIT (Appeals) allowed the claim of the assessee. The Tribunal confirmed the finding of the CIT (Appeals). On appeal, the Revenue contended that the amount of ransom could not have been claimed by way of expenditure as the Explanation to sub-section (1) of section 37 prohibits such expenditure. The Tribunal referred the following question to the Court :“Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the amount of Rs. 5,50,000 paid as ransom money to the kidnappers of one of the Directors was an allowable deduction under section 37(1) of the Income-tax Act,1961?”
Before the High Court, the Revenue submitted that the amount of ransom could not have been claimed by way of expenditure as the Explanation of sub-section (1) of section 37 of the Income-tax Act, 1961 prohibited allowance of such an expenditure. It was submitted that the payment of any amount which was prohibited by law was not a business expenditure and it could not be allowed as an expenditure.
The amicus curiae, and the assessee company supported the orders passed by the appellate authorities and submitted that the payment of ransom was an allowable expenditure. It was pleaded that the amount was paid to the dacoits to get Mr. Sukhnandan Jain, who was on business tour and who was working as the director of the company, released from the dacoit. It was contended that the aforesaid amount was rightly claimed as an expenditure of business. It was insisted that at the relevant time, Mr. Sukhnandan Jain was on a business tour and was staying at a Government Rest House at Sagar, from where he was kidnapped.
The assessee company, in support of its claim, relied upon the judgments in cases of Sassoon J. David & Co. (P.) Ltd. vs. CIT, Bombay 118 ITR 261 and CIT West Bengal, Calcutta vs. Karam Chand Thapar and Brothers (P.) Ltd, 157 ITR 212(Cal.) and Addl. CIT vs. Kuber Singh Bhagwandas, 118 ITR 379(MP).
The madhya Pradesh high Court extensively quoted with approval the findings of the appellate authorities in respect of the contribution of Mr. Sukhnandan Jain to the business of the company, his need to travel for the purposes of business, the business exigency for payment of ransom money and the compulsion thereof. The court noted that from the perusal of the facts, it was apparent that Sukhnandan jain was conducting business tour for the company and was staying at a government rest house and the visit was to meet one Bihari Lal for the procurement of quality tendu leaves and it was during the business tour, that he was kidnapped. The court further noted that for a period of near about 20 days after lodging a report to the police, when all the efforts of the police were unsuccessful, the company made payment of ransom amount of Rs. 5,50,000 to the kidnappers and ultimately on the same day, Sukhnandan jain was released from the clutches of the dacoits and that both the appellate authorities had found that it was a business expenditure while allowing the claim.
The court referred to the provisions of explanation of sub-section (1) of section 37, for determining whether the expenditure could have been disallowed under that provision of the act. It also examined the provisions of section 364a of the indian Penal Code which provided that kidnapping a person for a ransom was a criminal offence. It noted that the aforesaid section 364A provided that kidnapping a person for ransom was an offence and any person doing so or compelling to pay, was liable for punishment as provided in the section, but nowhere it was provided that to save a life of the person if a ransom was paid, it would amount to an offence. No provision was brought to the notice of the court that the payment of ransom was prohibited by any law and in absence of it, the Explanation of sub-section (1) of section 37 was not applicable in the case of the assessee company.
The madhya Pradesh high Court, after analysing the decisions cited by the assessee company, observed that in the case before the court, Mr. Sukhnandan Jain was on business tour and was staying at a government rest house from where he was kidnapped and to get him released, the amount was paid to the dacoits as ransom money. It thereafter held as under; “If the respondents to save his life paid the aforesaid amount, then the aforesaid amount cannot be treated as an action which was prohibited under the law. No provision could be brought to our notice that payment of ransom is an offence. In absence of which, the contention of the petitioner that it is prohibited under Explanation of section 37(1) of the Income-tax Act has no substance. The entire tour of Sukhnandan Jain was for purchase of tendu leaves of quality and for this purpose he was on business tour and during his business tour, he was kidnapped and for his release the aforesaid amount was paid.”
The high Court accordingly held that the ransom amount was an allowable business expenditure.
Observations
The bitter reality of the day is that people do have to regularly cough up money, against their will, for securing the safety of their business or lives or both. in some cases. the payments are made to ensure continuity of the business. In many cases, the payments are not only involuntary but may not be authorised by the law, as well. Such payments are forced by the goons or the guardians of the law and at times by the framers of the law. Barring a very limited section of the society, no one cherishes such payments but are seen, nonetheless to be acquiescing to such extortions in the interest of survival. Cases are available wherein a citizen has to resort to imaginary ways to meet such demands by generating cash from one’s accounted funds. In most of the cases, even approaching the authorities, entrusted with the task of protecting and ensuring the safety of the citizens, involves an extra and additional cost. Therefore, it brings additional pains where such expenditure incurred against one’s will is not allowed as a deduction in computing the total income. On disallowance of the claim, it becomes a case of a double whammy for the businessman.
The Government, instead of ensuring that its citizens are not extorted to pay money against their will by securing their safety, by booking the extortionists, has, to add insult to the injury, legislated the said Explanation to section 37(1) for providing that such an expenditure is disallowable.
Section 37 of the income-tax act provides for allowance of an expenditure that has been wholly and exclusively incurred for the purposes of the business of the assessee. It is a settled position in law that the expression “wholly and exclusively” does not mean “necessarily”. An expenditure maybe incurred by than assessee without there being a dire necessity for incurring such an expenditure and such an expenditure will not be disallowed once it is shown that the same has been incurred for the purposes of business of the assessee. It is for the assessee to decide whether any expenditure should be incurred in the course of his business or not. Such an expenditure may be incurred voluntarily and without any necessity. Once an expenditure is incurred for promoting the business and to earn profits, the assessee can claim deduction even though there is no compelling necessity to incur such expenditure.
In order to decide whether a payment of money or incurring of expenditure is for the purpose of the business and is an allowable expenditure or not, the test to be applied is that of ‘commercial expediency’. If the payment or expenditure is incurred to facilitate the carrying on of the business of the assessee and is supported by commercial expediency, it does not matter that the payment is voluntary or that it also enures to the benefit of a third party.
An expenditure otherwise allowable u/s. 37, in terms of the tests discussed above, would still be disallowed if the same is incurred for a purpose which is an offence or is prohibited by law, in which event the expenditure so incurred shall be deemed to be not for the purposes of business or profession. The purpose behind an expenditure assumes a great importance; where the purpose is an offence, the disallowance would take place.
An offence, as per the dictionary, in the context, is an illegal act; a transgression or misdemeanour. accordingly, an expenditure incurred for the purpose which is illegal cannot be allowed under the act. Similarly, an expenditure incurred for achieving a purpose that is prohibited by law would not be allowed a deduction. It appears that there is very little difference between a purpose which is an offence and a purpose which is prohibited by law. In the context of explanation to section37 (1), one is therefore required to examine whether the payment is being made for a purpose which is prohibited by law.
Ensuring security of the business or of the business personnel, is an essential function of any business and therefore, payment of security charges would neither be an offence nor prohibited by law. We are afraid that the objective of the payee or his purpose behind demanding, collecting or receiving the payment is an irrelevant factor while applying the test of explanation 1 to section 37(1), the application of which is qua the payer and is limited to his purpose, as long as the purpose behind his expenditure is not an offence or prohibited by law.
Taking this understanding to the second level of payment of protection money, to a gangster, such a payment should not be disallowed as long as paying such an amount is not an offence under the indian Penal Code or any other law. It is true that for a gangster, demanding protection money or extorting money for not causing any damage, is an offence that is punishable under the indian Penal Code. His offence, however, need not necessarily be the offence of the payer assessee. The objectives and the purposes are different and cannot be equated.
Likewise, payment of ransom for securing the release to a kidnapper is not an offence or is not prohibited under any law. So, however, demanding a ransom is a serious crime that is punishable in law. Accordingly, the payment of ransom shall not be liable for any disallowance, simply on application of explanation 1 to section 37(1).
At the same time, it is significant to note that a payment to a police officer is an offence and is also prohibited by law if the same amounts to bribing him. however, an official payment to the Police Department, for security, is not an offence and is not liable for disallowance. In Swaminathan’s case (supra), it is not clear that what was the nature of payment to the police. Was it a bribe? if yes, it was liable for disallowance.
Many years back, the mumbai tribunal in the case of Pranav Construction Company, 61 T1TJ 45, held that payments made by a builder of “protection money” to tapories and hawkers was allowable as deduction on being satisfied about the genuineness of the expenditure. The tribunal held that the builders engaged in construction activities were vulnerable to danger such as extortion, haftas, etc. and unless, they obliged, it would be impossible for them to conduct business.
The view of the madhya Pradesh high Court, in the case of Khemchand Motilal Jain’s case (supra), that payment of ransom for securing the release of the director was not an expenditure for a purpose that was an offence or was prohibited by law and was therefore not hit by the explanation 1 to section 37(1) is the correct view in law.
1.1 The Finance Minister, Shri Arun Jaitley, presented his second budget in the Lok Sabha on 28th February, 2015. After some discussions, both the houses of Parliament have passed the Finance bill with some amendments in the Finance Bill, 2015, and the same has received presidential assent on 14th May, 2015. There are 80 sections in the Finance Act dealing with amendments in direct tax provisions.
1.2 In Paras 96 to 98 of his budget speech he has referred to certain steps which the Government proposes to take in the field of Indirect Taxes and Corporate Taxation, in the coming years. These are
(a) Expediting the process to legislate Goods and Services Tax (GST)
(b) Reduce the corporate tax to 25% over the next four years and phase out exemptions and incentives.
1.3 I n Para 99 of his budget speech he has enumerated the themes adopted by him for his tax proposals as under;
“99. While finalizing my tax proposals, I have adopted certain broad themes, which include;
A Measures to curb black money;
B Job creation through revival of growth and investment and promotion of domestic manufacturing and ‘Make in India’.
C Minimum government and maximum governance to improve the ease of doing business;
D Benefits to middle class taxpayers;
E Improving the quality of life and public health through Swachch Bharat initiatives; and
F Stand alone proposals to maximize benefits to the economy”
1.4 It may be noted that another major step in this year’s budget is about abolition of wealth tax from A.Y. 2016-17. The justification for this is given in Para 113 of the budget speech as under;
“113. My next proposal is regarding minimum government and maximum governance with focus on ease of doing business and simplification of Tax Procedures without compromising on tax revenues. The total wealth tax collection in the country was Rs. 1,008 Crore in 2013-14. Should a tax which leads to high cost of collection and a low yield be continued or should it be replaced with a low cost and higher yield tax? The rich and wealthy must pay more tax than the less affluent ones. I have therefore decided to abolish the wealth tax and replace it with an additional surcharge of 2% on the super-rich with a taxable income of over Rs. 1 Crore. This will lead to tax simplification and enable the Department to focus more on ensuring tax compliance and widening the tax base. As against a tax sacrifice of Rs. 1,008 Crore, through these measures the Department would be collecting about Rs. 9,000 Crore from the 2% additional surcharge. Further, to track the wealth held by individuals and entities, the information regarding the assets which are currently required to be furnished in wealth-tax return will be captured in the income tax returns. This will ensure that the abolition of wealth tax does not lead to escape of any income from the tax net”.
1.5 While concluding his budget speech, he has stated that the Direct Tax proposals will result in revenue loss of Rs. 8,315 Crore. As compared to this, his Indirect Tax proposals will yield estimated revenue of Rs. 23,383 Crore. Thus the net revenue gain will be about Rs. 15,068 Crore.
1.6 I n this article some of the important amendments made to the Income-tax Act by the Finance Act, 2015, have been discussed. It may be noted that the amendments, as in last year’s Finance Act, have only prospective effect i.e., will operate for assessment year 2016-17, unless specifically provided
2. Rates of Taxes
2.1 I n view of the changes in threshold limits made by the Finance (No.2) Act, 2014, the exemption limit for Individuals, HUF, AOP as well as the rates of tax remain unchanged.The rates of income tax in the case of corporate and non-corporate assessees in A.Y. 2015-16 and A.Y.: 2016-17 will be the same.
2.2 T herefore, in the case of an Individual, HUF, AOP, BOI etc., the rates of Income-tax for A.Y. 2015-16 and A.Y. 2016-17 will be as under:
Note: Rebate of Tax – A Resident Individual having total income not exceeding Rs. 5 lakh, will get Rebate upto Rs. 2,000/- or tax payable, whichever is less u/s. 87A.
2.3 A s stated earlier, due to abolition of wealth tax from A.Y. 2016-17, the rate of Surcharge on tax has been increased from 10% to 12% for Super Rich assessees. This increased surcharge will be charged as under from A.Y. 2016-17.
(i) I n the case of an Individual, HUF, AOP etc. the rate of surcharge on tax will be 12% if the total income of the assessee exceeds Rs.1 crore.
(ii) In the case of a firm, LLP, Co-operative Society and a Local Authority the rate of Surcharge on tax will be 12% if the total income exceeds Rs.1 crore.
(iii)In the case of a domestic company the rate of surcharge on tax will be as under:
(a) I f the total income exceeds Rs.1 crore but does not exceed Rs.10 crore the rate of surcharge will be 7%.
(b) I f the total income exceeds Rs.10 crore, the rate of surcharge will be 12%.
(iv) I n the case of a foreign company there is no increase in the rate of surcharge on tax. Hence, the existing rate which is 2% in respect of total income between Rs.1 crore and 10 crore and 5% in respect of total income exceeding Rs.10 crore will continue.
(v) T he rate of surcharge on Dividend Distribution Tax u/s. 115-0, Tax on Buy Back of shares u/s. 115 QA, Income Distribution Tax payable by Mutual Funds u/s. 115R, and Income Distribution Tax payable by Securitisation Trusts u/s. 115 TA will be 12%.
2.4 T he existing rate of 3% for Education Cess (including Secondary and Higher Secondary Education Cess) on Income tax and surcharge will continue in A.Y. 2016-17.
2.5 T he effective maximum marginal rate of tax (including Surcharge and Education Cess ) will be as under for A.Y. 2016 – 17.
3. Tax Deduction at Source:
3.1 Section 192: At present, the person responsible for paying salary has to depend upon the evidence and particulars furnished by the employee in respect of deduction, exemptions and set-off of loss claimed by the employee while deducting tax at source. There is no guidance available about the evidence or particulars to be collected. Therefore, s/s. (2D) is inserted from 1.6.2015 to provide that the person responsible for deduction of tax will have to get particulars, evidence etc. about the deduction claimed from the salary in the Form which will be prescribed in the Rules.
3.2 Section 192A: This is a new section inserted from 1.6.2015. In the case of an employee participating in a Recognised Provident Fund (RPF), the accumulated balance to his credit in his PF account is excluded from his total income if Rule 8 of Part A of Schedule IV is applicable. If this Rule does not apply, the trustees of RPF are required to deduct tax at source. The Trustees of P.F. sometimes find it difficult to determine the rate of tax for TDS. To resolve this issue, section 192A provides that, at the time of payment of the accumulated balance due to the employee, trustees shall deduct income-tax at the rate of ten per cent. If the employee fails to furnish his PAN to the trustees, tax shall be deducted at the maximum marginal rate. Tax is not deductible under this section where the aggregate amount of withdrawal is less than Rs. 30,000/- or where the employee furnishes a selfdeclaration in the prescribed Form 15G/15H that tax on his estimated total income would be nil.
3.3 Section 194A: This section has been amended from 1.6.2015. The effect of this amendment is as under:
(i) A co-operative Bank will have to deduct tax at source from interest paid or payable on time deposit made by its member. This deduction is to be made if the amount of the interest exceeds Rs.10,000/-. however, no such deduction will be required to be made on interest paid or payable on time deposit by a co-operative society. Similarly, a primary agricultural society, a primary credit society, a Co-operative land mortgage bank, or a Co-operative land development bank will not be required to deduct tax at source from interest payment. the amendment to section 194a(3)(v) sets at rest the controversy created by a recent decision of the Bombay high Court.
(ii) Hitherto, there was no tdS from interest paid by a Bank on recurring deposits. now, tax will be required to be deducted by the bank in respect of interest on recurring deposit also.( amendment to explantion 1 of section 194 a).
(iii) At present, the threshold limit of exemption from tdS provisions apply to interest credited or paid by a branch on an individual basis in the case of a bank, Co- operative bank or a public company engaged in long- term housing finance. It is now provided that the TDS provisions u/s. 194a with reference to interest credited or paid by such entities as a whole will apply if the entity has adopted core banking solutions. in other words, in such cases, total interest paid or payable by all branches will have to be considered for determining the threshold limit of exemption.
(iv) Interest paid on compensation amount awarded by the motor accident Claim tribunal (MACT) shall now be liable to TDS u/s. 194a only at the time of payment of interest, if the aggregate amount of such payment during the financial year exceeds Rs. 50,000/-. Hence, as per the amended provision, there will be no withholding of tax at the time when such interest is credited.
3.4 Section 194C: This section is amended from 1.6.2015. at present, payment to a transporter carrying on the business of plying, hiring, or leasing of goods carriages is not subject to TDS u/s. 194C if the transporter furnishes his Pan to the payer. Now, this exemption will be available only to such transporterwho owns ten or less goods carriages at any time during the previous year and also furnishes a declaration to that effect to the payer along with his Pan.
3.5 Section 194-I: This section is amended from 1.6.2015. It is now provided that tax will not be deducted u/s. 194-I from rent paid or payable to a Business trust (real estate investment trust) in respect of any real estate asset as referred to in section 10(23fCa) owned directly by such business trust.
3.6 Section 194 LBA: This section is amended from 1.6.2015. Section 194LBA was inserted by the finance (no.2) act, 2014, w.e.f. 1.10.2014 to provide for deduction of tax @10% from income referred to in section 115ua (i.e. interest income received by a Business trust from SPV) distributed to a resident unit holder. in the case of non-resident unit holder the rate of TDS was 5% plus applicable Surcharge and education Cess. By an amendment of this section, the scope of this TDS provision is extended to income of Business trust from renting, leasing or letting out any real estate asset owned by it distributed to its unit holder. it is now provided that, in the case of a resident unit holder the rate of TDS will be 10% and in the case of a non-resident unit holder, tax will be deductible at the applicable rate if the distribution of income is from income referred to in section 10 (23FCA) i.e., rental from the real estate asset.
3.7 Section 194 LBB: This is a new section inserted from1.6.2015. this section provides for deduction of tax @10% from income distributed to persons holding units issued by “investment fund” (refer section 115 uB) out of income other than that referred to in section 10(23fBB) (i.e. income of investment fund other than income from business or profession).
3.8 Section 194 LD: This section was inserted by the finance act, 2013, w.e.f. 1.6.2013. under this section, tax is required to be deducted at concessional rate of 5% from interest payable to foreign institutional investors or Qualified Foreign Investors on Government Securities or rupees denominated Bonds of any indian Company. This concessional rate was applicable on interest payable during the period 1.6.2013 to 1.6.2015. this will now continue in respect of interest payable till 1.7.2017.
3.9 Section 195: This section is amended from 1.6.2015. Section 195(1) requires any person responsible for paying to a non-resident any interest or other sum chargeable under the provisions of this act to deduct tax from such payment. At present, such person has to furnish the information relating to payment of any sum in form 15Ca. now, section 195(6) is amended to provide for furnishing of information, whether or not such remittances are chargeable to tax, in such form as may be prescribed. this will cast an onerous obligation on payers. Section 271-I has been introduced to provide for a penalty of Rs.1,00,000/-, if the person required to furnish information under this section fails to furnish such information or furnishes inaccurate particulars. this is a new provision for levy of penalty.
3.10 Section 197A: This section is amended from1.6.2015 to provide as under:
(i) Section 194da provides for deduction of tax at source at the rate of 2% from payments made under life insurance policy, which is chargeable to tax if the amount is rs. 1,00,000/- or more. it is now provided that tax shall not be deducted, if the recipient of the payment on which tax is deductible furnishes to the payer a self-declaration in the prescribed form no.15G/15h declaring that the tax on his estimated total income for the relevant previous year would be nil.
(ii) Similarly, as stated in Para 3.2 above, it is now provided that tax shall not be deducted u/s. 192a if a salaried employee withdrawing the accumulated balance from P.f. a/c gives a self-declaration in form no.15G/15h.
3.11 Section 203A: This section is amended from1.6.2015 to provide that the requirement of obtaining and quoting of TAN shall not apply to the persons as notified by the Central Government. This is in order to reduce the compliance burden for those individuals or huf who are not liable for audit u/s. 44aB or for one time transaction such as single transaction of acquisition of immovable property by an individual or huf, on which tax is deductible.
4. Exemptions and Deductions:
In order to give certain benefits to middle class taxpayers and with a view to encourage savings and to promote health care among individual taxpayers, the following amendments are made in various sections of the income -tax act.
4.1 Section 80C: at present, section 80C (2) (vill) of the income-tax act provides that any subscription to a scheme notified by the Central Government will be eligible for deduction in the case of an individual or huf. By Notification No.9/2015 dated 21-1-2015, a scheme for the welfare of the girl child under the SukanyaSarmiddhi Account Rules, 2014, has been notified. In view of this, amendment is made in section 80Cfrom1-4-2015. under this amendment any deposit by any individual, in the name of girl child of that individual or by legal guardian of the girl child as specified in the scheme will be eligible for deduction u/s. 80C within the overall limit of Rs.1.50 lakh as provided in that section. an amendment is also made to provide u/s. 10(11A) to grant exemption to the individual in respect of interest on the deposit under the above scheme or for the amount withdrawn from such deposit. Since this amendment comes into effect from
a.y. 2015 – 16 any such deposit made on or before 31-3- 2015 will be eligible for this deduction.
4.2 Section 80CCC: This section provides for deduction in the case of an individual in respect of contribution to any annuity Plan of LiC or any other insurer for receiving pension from the fund set up under a pension scheme upto Rs.1 lakh. this limit is now raised to Rs. 1.50 lakh froma.y. 2016-17. it may be noted that u/s. 80CCe an overall cap of Rs. 1.50 lakh for such deduction is provided for contribution u/s. 80C, 80CCC and 80CCd(1). There is no amendment to raise this limit.
4.3 Section 80CCD: this section provides that an individual contributing to national Pension Scheme (NPS) can claim deduction upto 10% of salary, in the case of an employee or 10% of the gross total income in other cases subject to a cap of Rs.1 lakh u/s. 80CCD(1A). However, this deduction is subject to overall ceiling limit of Rs.1.50 lakh u/s. 80CCe. it is now provided from A.Y. 2016-17 that the cap of Rs.1 lakh u/s. 80CCD(1A) be removed.
With a view to encourage individuals to contribute towards NPS, it is now provided, by insertion of section 80CCD(1B), that an additional deduction upto Rs.50,000/- will be allowed if the individual contributes to NPS. this deduction will be allowed even if it exceeds 10% limit in respect of salary income (for employees) or gross total income (for others). Further, this deduction will be over and above the ceiling limit of Rs.1.50 lakh provided u/s. 80CCe relating to deduction u/s. 80C, 80CCC and 80CCD(1). therefore, with proper planning of investments in PF, PPF, LIP, savings certificates etc. (section 80C), annuity Plan of LIC or other insurers (section 80CCC) and contribution to NPS (section 80CCD) an assessee can claim deduction upto Rs.2 lakh under these sections.
4.4 Section 80D: this section provides for deduction for premium paid for mediclaim policies for self, family members and Parents of the individual. Similarly, similar deduction for premium paid by huf for mediclaim polices of members of huf is allowed. the present limits for such deduction is Rs.15,000/- and for Senior Citizens it is Rs. 20,000/-. these limits are now raised from A.Y. 2016- 17and a further provision is made for deduction of actual medical expenses under certain circumstances. the new provisions are as under.
(i) In view of continuous rise in the cost of medical expenditure, the limit of deduction is raised from Rs.15,000/- to Rs. 25,000/- in case of premium for mediclaim policy for individual and his family members. Similarly, in the case of huf such deduction for premium on mediclaim policies for members of huf is also raised from Rs.15,000/- to Rs. 25,000/-. In the case of a Senior Citizen the deduction for premium on mediclaim policies is raised from Rs.20,000/- to Rs. 30,000/-.
(ii) In the case of very Senior Citizens (i.e 80 years and above), it may not be possible to get a mediclaim policy and they cannot get benefit of the above deduction. therefore, as a welfare measure, it is now provided that deduction upto Rs.30,000/- will be allowed for medical expenditure in respect of very senior citizens if no mediclaim policy is taken out. The aggregate expenditure available for deduction in the case of an individual/huf for premium on mediclaim policy and expenditure on medical expenditure for parent or family member who is a very senior citizen shall not exceed Rs. 30,000/-.
4.5 Section 80 DDB:This section provides for deduction for expenditure incurred by a resident individual or huf for medical treatment of certain chronic and protracted diseases. It is provided that the expenditure in the case of individual should be in respect of medical treatment of himself or his dependant relative and in the case of huf it should for any member of HUF. The medical treatment should be for a disease specified in Rule 11DD and should be supported by a certificate from an authorised Doctor in a Govt. Hospital. at present, the deduction allowable is upto Rs. 60,000 if the medical treatment is of a Senior Citizen and in other cases deduction is allowed upto Rs. 40,000/-. In view of the difficulties experienced in obtaining certificate from a specialised doctor in a Govt. Hospital, the section is now amended to provide that the assessee should obtain prescription from a specialized doctor as may be prescribed. further, in the case of medical treatment of a very senior citizen the ceiling for deduction of expenditure is now raised from Rs. 60,000/- to Rs. 80,000/- from A.Y. 2016-17.
4.6 Section 80DD: This section provides that a resident individual or huf can claim deduction for (i) expenditure for medical treatment (including nursing), training and rehabilitation of a dependant relative suffering from specified disability or (ii) any amount paid to LIC or other insurer in respect of a scheme for the maintenance of a disabled dependant relative. At present, this deduction can be claimed upto Rs.50,000/- in the case of medical treatment for specified disability and upto rs.1 lakh in the case of medical treatment for severe disability as defined in the section. In view of rising costs of medical treatment, these limits have been raised, by amendment of this section, from A.Y. 2016-17 from Rs.50,000/- to Rs.75,000/- (for disability) and from Rs.1 lakh to Rs.1,25,000/- (for Severe disability).
4.7 Section 80U: this section provides for deduction of Rs.50,000/- in the case of a resident individual suffering from a specified Disability. If such individual is suffering from specified Severe Disability deduction of Rs.1 lakh is allowed. in view of rising costs of special needs of disabled persons, these limits are now raised from A.Y. 2016-17 from Rs. 50,000/- to Rs.75,000/- (for disability) and from Rs.1 lakh to Rs.1,25,000/- (for Severe disability).
4.8 Section 80G: this section provides for deduction of amounts contributed by way of donations to various institutions set up for charitable purposes. this section has been amended as under:-
(i) Two funds, namely, “Swachh Bharat Kosh” and “Clean Ganga fund” have been established by the Central Government. With a view to encourage people to participate in this national effort, section 80G is amended from A.Y. 2015-16 to provide that deduction of 100% of the donation to any of these funds will be allowed. Since this amendment has been made from A.Y. 2015-16, such donation made upto 31-3-2015 will be eligible for deduction under the amended section. it may be noted that such donation made by a company in pursuance of Corporate Social responsibility (CSR) expenditure u/s. 135(5) of the Companies act, 2013, will not qualify for this deduction. it may be noted that section 10(23C) has been amended from A.Y. 2015-16 to provide that income of “Swachh Bharat Kosh” and “Clean Ganga fund” will be exempt from income tax.
(ii) By another amendment to section 80G from a.y. 2016- 17 donation made to “the national fund for control of drug abuse” will now be eligible to 100% deduction.
4.9 Section 80 JJAA: This section is amended from A.Y. 2016-17. this section allows deduction to an indian Company deriving profit from manufacturing of goods in a factory. This benefit is now extended to non-corporate assessees also. The quantum of deduction allowed is equal to 30% of additional wages paid to new regular workmen employed by the assessee in such factory in the previous year. this deduction can be claimed for 3 assessment years. At present, additional wages for this purpose has been defined to mean wages paid to new regular workmen in excess of 100 workmen. This limit is now reduced to 50. It is also clarified that the above benefit will not be granted where factory is acquired by way of transfer from any other person or as a result of any business reorganisation.
5. Investment Fund:
a new Chapter XII – FB has been added in the income tax act from A.Y. 2016-17. Special provisions relating to tax on income of “investment funds” and income received from such funds are made in sections 115 UB, 10 (23 FBA) and 10 (23FFB) of the act. In brief, these provisions are as under:
5.1 “Investment fund” means any fund established or incorporated in india in the form of a trust, Company, LLP or a body corporate which has been granted certificate of registration as a Category I or a Category II alternate investment fund (AIF) and is regulated under SEBI (AIF) regulations, 2012.
5.2 In order to rationalise the taxation of Category –i and Category-ii AIFS (i.e. investment funds) section 115uB provides for a special tax regime. The taxation of income of such investment funds and their investors shall be in accordance with the provisions applicable to such funds irrespective of whether they are set up as a trust, company, or LLP etc. the salient features of these provisions are as under:
(i) Income of a person, being a unit holder of an investment fund, out of investments made by the investment fund shall be chargeable to income-tax in the same manner as if it was the income accruing or arising to, or received by, such unit holder.
(ii) Income in the hands of investment fund, other than income from profits and gains of business, shall be exempt from tax. The income in the nature of profits and gains of business or profession shall be taxable in the case of investment fund.
(iii) Income in the hands of investor which is of the same nature as income by way of profits and gain of business at investment fund level shall be exempt.
(iv) Where any income, other than income which is taxable at investment fund level, is payable to a unit holder by an investment fund, the fund shall deduct income-tax at the rate of 10%.
(v) The income paid or credited by the investment fund shall be deemed to be of the same nature and in the same proportion in the hands of the unit holder as if it had been received by, or had accrued or arisen to, the investment fund.
(vi) If in any year there is a loss at the fund level either current loss or the loss which remained to be set off, the loss shall not be allowed to be passed through to the investors but would be carried over at fund level to be set off against income of the next year in accordance with the provisions of Chapter Vi of the income-tax act.
(vii) The provisions of Chapter Xii-d (dividend distribution tax) or Chapter Xii-e (tax on distributed income) shall not apply to the income paid by an investment fund to its unit holders.
(viii) The income received by the investment fund would be exempt from TDS requirement. this would be provided by issue of appropriate notification u/s. 197A(1F) of the act subsequently.
(ix) It shall be mandatory for the investment fund to file its return of income. The investment fund shall also provide to the prescribed income-tax authority and the investors, the details of various components of income, etc. for the purposes of the scheme.
6. Business Trusts:
6.1 This was a new concept introduced by the finance (no.2) act, 2014 w.e.f. A.Y. 2015-16. new chapter XII FA (Section 115 UA) was inserted in the income-tax Act, w.e.f. 1.10.2014. The definition of the term “Business trust” is now amended in section 2(13a) from a.y. 2016-17 to mean a trust registered as an “infrastructure investment trust” (inVitS) or a real estate investment trust” (reit), under the relevant SeBi regulations, the units of which are required to be listed on a recognised Stock exchange, in accordance with the SeBi regulations. in brief, at present the following is the taxation position of the trust.
Out any real estate asset owned directly by the reit, by granting exemption to the reit u/s. 10(23fCa) and taxing such income in the hands of the unit holder, by amending section 115ua(3) to provide that the distributed income, of the nature referred to in section 10(23fCa), received by a unit holder during the previous year shall be deemed to be the income of the unit holder and shall be charged to tax as his income of the previous year. Consequential amendments have been made in relation to tdS provisions in sections 1941 and 194LBa, which are effective from 1st june, 2015.
6.5 In view of the above amendments from A.Y. 2016- 17, the taxation structure of reit and its unit holders shall be as under:
(i) Any income of reit by way of renting or leasing or letting out any real estate asset owned directly by such business trust shall be exempt;
(ii) The distributed income or any part thereof, received by a unit holder from the reit, which is in the nature of income by way of renting or leasing or letting out any real estate asset owned directly by such reit, shall be deemed to be income of such unit holder and shall be charged to tax.
6.2 Section 47(xvii) Currently provides that the
(iii) The reit shall effect tdS on rental income allowed to be passed through. in case of resident unit holder, tax shall be deducted @ 10%, and in case of distribution
Transfer of shares of a Special Purpose Vehicle (SPV) to a Business trust by a share holder (Sponsor) in exchange of units allotted by the trust to the share holder is not considered as a transfer for the purpose of capital gains in the hands of the share holder. Section 10(38) has now been amended to provide that the long term capital gain from transfer or such units will be exempt. Section 111a has also been amended to provide that short term capital gains arising on transfer of such units of a Business trust shall be charged to tax at the rate of fifteen per cent.
6.3 Therefore, units received by a ‘Sponsor’ in exchange of shares of a SPV, are now at par with other units of a Business trust. further, Stt is now chargeable on sale of unlisted units of a Business trust under an offer for Sale. therefore, Sale of such unit in an offer for sale will qualify for exemption u/s. 10(38) and the concessional rate of tax in respect of short term capital gains u/s. 111A.
6.4 reit has been granted pass through status also in respect of income by way of renting or leasing or letting
to non-resident unit holder, the tax shall be deducted at applicable rate.
(iv) No deduction of tax at source shall be made u/s. 194- 1 of the act, where the income by way of rent is credited or paid to such business trust, in respect of any real estate asset held directly by such reit (Business trust)
7. Charitable Trusts:
7.1 Section 2(15): The Definition of “charitable purpose” in the section has been amended from A/Y:2016- 17 as under:-
(i) “yoga” is now recognised as a charitable purpose. hence any charitable trust for promotion of “yoga” can now claim exemption u/s. 11 to 13 of the income tax act.
(ii) Under the existing provisions of section 2(15) if a charitable trust having “any other object of general public utility”, carries on any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to the above for a consideration, will lose the exemption u/s. 11 if the total receipts from such activities is more than Rs. 25 lakh. By amendment of this section, it is now provided that such a trust will not lose its exemption if:
(a) Such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and
(b) The aggregate receipts from such activities, during the previous year, do not exceed 20% of the total receipts of the trust.
(c) This amendment will create a fresh round of litigation for charitable trusts. the limit of 20% will affect small charitable instituitions adversely.
7.2 Section 11 provides that a charitable trust should apply at least 85% of its income for charitable or religious purposes. if it is not possible to do so, it can apply the balance of unspent amount in the next year. for this purpose, the trust can write a simple letter to a.o. before the due date for filing the return u/s. 139(1). It is now provided from a/y: 2016-17 that the trust can exercise such option only by filing the prescribed from before the due date for filing the return of income.
7.3 Section 11 also provides that if a trust is not able to apply 85% of the income or any part of the same it can apply for accumulation of such unspent amount for 5 years. For this purpose the trustees have to file an accumulation application in Form No.10. No specific time limit is fixed in the Act. The Supreme Court in CIT vs. Nagpur Hotel Owners Association (247ITR201) held that Form 10 can be filed at any time before completion of the assessment. now, by amendment of section 11 from A.Y. :2016-17, it is provided that form no.10 should be filed before due date for filing Return u/s. 139(1). By amendment of section 13 it is also provided that if the return of income as well application in form 10 is not filed before the due date provided in section 139(1), the benefit of accumulation will not be available.
7.4 A university or educational institution, hospital or other Institution which is wholly or substantially financed by the Government and which is exempt u/s. 10(23C) (iiiab) or (iiiac) is not required to mandatorily file its return of income. By amendment of section 139(4C), it is now provided that these entities will have to mandatorily file return of income from A.Y. 2016-17.
7.5 Section 10(23C)(vi) and (via) provides that educational institutions or hospital specified in section 10(23C)(iiiab) to (iiiae) have to obtain approval from the prescribed authority. If this approval is denied there is at present no specific remedy. Section 253(1) is now amended from 1.6.2015 to provided that appeal to ITA Tribunal can be filed against any order for denying such approval.
8. Income from business or profession:
8.1 Income: The definition of “Income” in section 2(24) has now been widened by insertion of clause (xviii) in section 2(24) from A.Y 2016-17. Under this definition, any receipt from the central or state Government or any authority, body or agency in the form of any assistance in the form of subsidy, grant, cash incentive, duty drawback, waiver, concession or reimbursement in cash or kind will be considered as income. however, if any subsidy, grant etc is required to be deducted from the cost of any asset under explanation (10) to section 43(1), the same will not be considered as income.
From the wording of the above definition it will be seen that no distinction has been made between Government Grants which are of a capital nature and which are in the nature of revenue grant. The Supreme Court and the various high Courts have held that subsidy received from Government as an incentive to set up an industry is a capital subsidy not liable to tax. In the case of Sahney Steel & Press Works Ltd vs. CIT (2281TR 253), the Supreme Court has held that subsidy given to set up the business or to complete a project will be considered as a Capital receipt not liable to tax. In view of the above amendment assessees will have to enter into fresh litigation about taxability of subsidy received from the Government.
8.2 Additional Depreciation : at present, additional depreciation of 20% is allowed in respect of new plant and machinery (other than ships and aircraft) installed by an assessee engaged in the business of manufacture or production or in the business of generation as well as generation and distribution of power u/s. 32(1) (iia). There was no clarity about deduction in the event of Plant & machinery installed and put to use for less than 180 days. By amendment of section 32(1) from A.Y. 2016-17 it is now provided that in such a case 10% of additional depreciation will be allowed in the year if the new plant & machinery is used for less than 180 days and the balance of 10% will be allowed in the subsequent year.
8.3 Backward Area Incentive: a special incentive is given by way of additional depreciation at the rate of 35% (instead of 20%) in respect of new plant & machinery (other than ships and aircraft) acquired and installed during the period 1.4.2015 to 31.3.2020. this incentive will be available to new plant & machinery installed in the notified backward area of Andhra Pradesh, Bihar, telangana and West Bengal. in this case also, if the new plant and machinery is used for less than 180 days, 17.5% additional depreciation will be allowed in the first year and balance 17.5% additional depreciation will be allowed in the next year.
8.4 Investment Allowance: A new section 32 ad has been inserted from a.y. 2016 – 17 providing for deduction of one time investment allowance in respect of newly established undertaking for manufacture or production in the notified backward areas of Andhra Pradesh, Bihar, telangana and West Bengal. This deduction will be at 15% of the actual cost of the new asset (other than office equipments, vehicles etc.) acquired and installed in the new undertaking during the period 1.4.2015 to 31.3.2020. this deduction is allowable in the year of installation of new plant and machinery and isin addition to depreciation (including additional depreciation) allowable u/s. 32 and investment allowance allowable u/s. 32AC. It is also provided that if the above plant and machinery is sold or transferred within 5 years from the date of installation, otherwise than in connection with amalgamation, demerger or business re-organisation (section 47 (xiii), (xiii b), or (xiv), the amount of deduction allowed u/s. 32ad shall be taxable as income of the year of sale or transfer.
8.5 Section 35(2AB): under this section a company can claim deduction of 200% of the expenditure on scientific research by way of in house research and development facility. For this purpose, the company has to comply with certain formalities. One of the requirements is to get the accounts maintained for this research facility audited. This requirement is now modified from A.Y. 2016-17 and its is provided that the company should fulfill such conditions with regard to maintenance of accounts and audit and furnishing the reports as may be prescribed by the rule.
8.6 Section 36: this section is amended from A.Y. 2016-17 as under
(i) Section 36(1) (iii) provides for deduction of interest paid on funds borrowed for the purposes of business.
It is provided in this section that interest paid in respect of amount borrowed for acquisition of asset for extension of existing business shall not be allowed. By amendment of this section the words “for extension of existing business or profession” have now been deleted. the effect of this amendment is that interest paid for acquisition of any asset for the business or profession from the date of purchase to the date it is put to use, will not be allowed. it appears that this amendment is made to bring this provision in line with income Computation and disclosure Standard (ICDS IX) relating to “Borrowing Costs”.
(ii) Section 36(1) (vii) dealing with allowance of Bad debits is also amended to provide that an amount of any debt or part thereof is considered as income under any ICDS issued u/s. 145(2) without recording in the books of accounts, it will be possible to claim deduction for such amount in the year in which such debt becomes irrecoverable. thus, if the a.o. makes any addition in the computation of income from business under ICDS IV dealing with “revenue recognition” and no entry is made in the books of accounts, deduction u/s. 36(1) (vii) can be claimed in any subsequent year when the debt representing such amount becomes irrecoverable.
(iii) Section 36(1)(xvii): this provision added in section 36(1) provides for deduction of expenditure incurred by a co-operative society engaged in the business of manufacturing of sugar for purchase of sugarcane at a price which is equal to or less than the price approved by the Government.
9. Income computation and disclosure standards (ICDS):
9.1 Section 145 of the income-tax act (act) dealing with “method of accounting” was amended by the finance act, 1995, effective from a.y. 1997- 98. the concept of Tax Accounting Standards was introduced for the first time by this amendment. this section has been amended by the finance (no.2) act, 2014, effective from 1.4.2015. By this amendment, the concept of computation of income from “Business or Profession” and “income from other Sources” are required to be computed in accordance with “income Computation and disclosure Standards” (ICDS) notified by the Central Government. In brief, section 145 is divided into three parts as under.
(i) Income under the heads “income from Business or Profession” and “income from other sources” shall be
computed in accordance with either (a) cash or (b) mercantile system of accounting regularly adopted by the assessee.
(ii) The Central Government shall notify ICDS to be followed by the assessee for computation of income from the above two sources.
(iii) The assessing officer (A.O) can make a best judgment assessment u/s. 144 of the act by estimating the income if the provisions of section 145 are not complied with by the assessee.
9.2 On 25.1.1996, the Central Government notified two accounting Standards viz. (i) disclosure of accounting Polices and (ii) disclosure of Prior period and extra ordinary items and Changes in accounting Policies”. these standards were required to be followed by the assessee while maintaining its books of account. These two standards were more or less on the same lines as AS-1 and AS-5 issued by the institute of Chartered accountants of india (ICAI). Thereafter, for about two decades, no information and make the adjustments while computing the taxable income from these two sources. If the required information is not furnished by the assessee, the A.O. can make the best judgment assessment u/s. 144 of the Act.
Accounting Standards were notified u/s. 145(2) of the Act.
9.3 CBDT has now notified 10 Accounting Standards u/s. 145(2) on 31/3/2015. this Standards are called “income Computation and disclosure Standards” (iCdS). The notification u/s. 145(2) states that ICDS will have to be followed by the assessee following mercantile system of accounting for the purpose of computing income chargeable to tax under the head “Profits and Gains of Business or Profession” and “income from other sources”. This Notification comes into force with effect from 1/4/2015 i.e. a/y:2016-17 (f.y:2015-16).
9.4 The Ten ICDS notified u/s. 145(2) of the Act and the corresponding aS issued by iCai and ind – aS as notified under the companies Act, 2013, are as under:
9.5 It may be noted that ICDS issued u/s 145(2) of the act only provide that income from Business/Profession or income from other sources should be computed in accordance with the standards ICDS. Therefore, the assessee will have to maintain its accounts in accordance with applicable AS issued by ICAI or IND – AS notified under the Companies act. if there is any difference between the accounting results and the requirements of applicable ICDS, the assessee will have to make adjustments while computing its taxable income from the above two sources while filing its Return of Income. If this is not done, the a.o. can call upon the assessee to furnish the required information and make the adjustments while computing the taxable income from these two sources. if the required information is not furnished by the assessee, the a.o. can make the best judgment assessment u/s. 144 of the Act.
9.7 In the preamble of all the ten ICDS it is stated that in case of conflict between the provisions of the income tax act and ICDS, the provisions of the act shall prevail to that extent. To take an example, if a provision for any tax, duty, cess or fee etc. is made and the same is in accordance with any ICDS, deduction will not be allowable unless actual payment is made as provided in section 43B of the act. Similar will be the position where provisions of section 40(a)(i) or 40 (a)(ia) are applicable.
10. Minimum Alternate Tax (MAT)
During the last over a year there has been an extensive debate aboutcertain provisions of section 115JB which levies tax on Book Profits. By amendment of this Section from A.Y. 2016-17, the Government has tried to deal with some of the issues in brief, these amendments are as under.
(i) Income accruing or arising to a foreign Company from (i) Capital Gains arising on transactions in securities or (ii) interest. royalty or fees for technical Services chargeable at the concessional rates specified in Chapter Xii, after deduction of expenses relatable to such income (i.e. net income), shall not form part of Book Profits u/s. 115 jB. this provision will apply if the tax payable on such net income is less than the tax payable at the rate specified u/s. 115JB
(ii) Share of a company in the income of aoP or Boi on which tax is payable u/s. 86, after deduction of expenditure relatable to such income, shall not be included in the computation of Book Profit u/s. 115JB. This will benefit companies which have entered into joint venture and income of the j.V. is taxed as AOP.
(iii) Notional Gain or notional loss on transfer of capital asset, being shares in SPV to a Business trust, in exchange of units allotted by such trust, as referred to in section 47 (xvii), shall not be considered in the computation of Book Profits u/s. 115JB. Similarly, notional gain or loss resulting from any change in carrying amount of the said units or gain or loss on transfer of units referred to in section 47(xvii) will be excluded from the computation of Book Profits u/s. 115JB. It may be noted that certain adjustments, as provided in the amended section for computation of cost of shares or units, have to be made in computing the notional gain or loss on such transfer of shares or units.
11. Capital Gains:
11.1 Sections 2(42a), 47 and 49 have been amended from a.y. 2016–17. The amendments in the sections provide that consolidation of two or more similar schemes of mutual funds under the process of consolidation of schemes of mutual funds in accordance with SEBI (mutual funds) regulations, 1996 will not be treated as a transfer. the consolidation should be of similar schemes i.e. two or more schemes of an equity oriented fund or two or more schemes of a non-equity oriented fund. Consequently, section 2 (42A) and section 49 relating to the period of holding and cost of acquisition, respectively, have been amended to provide that the cost of acquisition of the units of the consolidated scheme shall be the cost of the units in the consolidating scheme and the period of holding of the units of the consolidated scheme shall include the period for which the units in the consolidating scheme were held by the assessee.
11.2 The provisions of section 49 have been amended from A.Y. 2016-17 to provide that the cost of acquisition of a capital asset acquired by a resulting company in a scheme of demerger shall be the cost for which the demerged company acquired the asset as increased by the cost of improvement incurred by the demerged company. Consequently, the period of holding of the capital asset by the demerged company will be considered in the hands of the resulting company u/s. 2 (42a).
11.3 Section 49 has been amended from A.Y. 2016-
17 to provide that cost of acquisition of shares of a company acquired by a non-resident on redemption of Global depository receipts (GDR) referred to in section 115AC (1)(b) shall be the price of the shares quoted on the recognised Stock exchange on the date on which request for such redemption is made. A consequential amendment is made in section 2(42A) to provide that the period of holding of such shares shall be reckoned from the date on which such request for redemption of Gdr is made.
12. Domestic Transfer Pricing:
At present, section 92BA can be invoked only if the aggregate of transactions, to which the provision applies exceeds Rs.5 Crore. this limit is now increased to Rs. 20 Crore from a.y. 2016-17.
13. Deferment of applicability of general anti-avoidance rule (GAAR):
Sections 95 to 102 (chapter X-a) dealing with provisions of Gaar were to come into force from a.y. 2016-17 (i.e. accounting year 1-4-2015 to 31-3-2016 and onwards). in order to accelerate the momentum in investment (Para 109 of the speech of the finance minister) the applicability of Gaar has been postponed to a.y. 2018 – 19 (i.e from accounting year 1.4.2017 to 31.3.2018 and onwards).
14. Measures to curb black money:
14.1 One of the broad themes adopted by the finance minister in the finance Bill was to curb black money. Provisions of the income-tax act 1961, were felt to be inadequate as regards to achieve this objective. In the opinion of the finance minister it required stringent measures, which he summarised in in Paras 103 to 105 of his budget speech.
14.2 To achieve the above objective, the Parliament has passed the Black money“ undisclosed foreign income and assets (imposition of tax) act, 2015”. this act has come into force from 1.4.2015 (A.Y. 2016-17). Suitable amendments are also made in Prevention of money- laundering act, 2002, foreign exchange management act, 1999 and other relevant acts. Since the said act is an independent legislation, the same is being mentioned in this article and not analysed.
15. Furnishing of returns, assessment and reassessment:
15.1 Section 139 has been amended from a.y. 2016- 17 to provide that a resident (other than notordinarily resident in india) who is not required to furnish his return as his income is below taxable limit or for any other reasons will now be required to file his return of income mandatorily before the due date. this amended provision will apply if the assessee –
(i) Holds, as beneficial owner or otherwise, any asset (including any financial interest in any entity) located outside india or has signing authority in any account loaded outside india, or,
(ii) Is a beneficiary of any asset (including any financial interest in any entity) located outside india.
It is also provided that if the assessee is a beneficiary of any asset located out of India, will not be required to file return under the above provision if income from such asset is includible in the income of the person referred to in (i) above under the provisions of the act.
15.2 In section 139, it is now provided that every “Investment Fund” shall file its return of income from A.Y. 2016-17.
15.3 In the form of return of income, from a.y. 2016- 17, the assessee will be required to give details of assets
of prescribed nature and value held by him as a beneficial owner or otherwise or as a beneficiary. This will mean that details of assets of a trust in which the assessee is a beneficiary will have to be disclosed.
15.4 Section 151 is amended to provide that notice u/s. 148 can be issued by an Assessing Officer, after the expiry of a period of four years from the end of the relevant assessment year, only after the sanction of Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner. In any other case, where Assessing Officer is below the rank of the Joint Commissioner, sanction of joint Commissioner is required.
16. Appeals and Revision:
16.1 A new procedure for non-filling an appeal by the Commissioner before the income tax appellate tribunal (itat)tribunal against the order of the CIT (a) for avoiding multiple litigation has been introduced from 1.6.2015 in section 158 aa.
This Procedure is as under:
(i) If a question of law decided by the CIT (a) is in favour of the assessee and the identical question of law is pending before the Supreme Court either by way of an appeal or by way of a Special Leave Petition in case of the same assessee for any other year and the Commissioner receives an acceptance from the assessee that the question of law is identical to the one which is pending before the Apex Court, he need not file before ITAT.
(ii) On receipt of the acceptance from the assessee, the Assessing Officer will apply to the ITAT stating that an appeal against the order of CIT (a) on a question of law may be filed within 60 days of receipt of the order of the Supreme Court.
(iii) If no acceptance is received from the assessee, the Commissioner will proceed to file an appeal before the ITAT.
(iv) If the order of the CIT(a) is not in conformity with Supreme Court order, the Commissioner will file an appeal against the CIT(a)’s order, within 60 days of receipt of Supreme Court order.
It may be noted that similar facility is already given to the assessee in section 158A.
16.2 As stated earlier any order rejecting the application for approval of an educational institution or hospital u/s. 10(23C) can be challenged in appeal before ita tribunal from 1/6/2015.
16.3 A single member bench of the itat can now dispose of any case where the income assessed by the Assessing Officer does not exceed Rs.15 lakh. Earlier this limit was Rs. 5 lakh. this amendment in section 255 from 1/6/2015.
16.4 At present, the CIT is empowered to revise u/s. 263 the order passed by the Assessing Officer, if it is erroneous and prejudicial to the interest of the revenue. The section does not provide for the meaning of the words ‘erroneous and prejudicial to the interest of the revenue’. Explanation 2 is added in section 263(1) from 1.6.2015 to provide that an order passed by the Assessing Officer shall be deemed to be erroneous and prejudicial to the interest of revenue, if in the opinion of the CIT:-
(i) The order is passed without making inquiries or verification which should have been made;
(ii) The order is passed allowing any relief without inquiring into the claim;
(iii) The order has not been made in accordance with any order, direction or instruction issued by the Board u/s. 119; or
(iv) The order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.
From the above explanation, it will be noticed that very wide powers are given to CIT to revise the order passed by A.O. the extent of enquiry or verification is a very subjective matter. thus, any assessment order passed by the A.O. will not become final for 2 years during which it can be revised by CIT on any of the above grounds. CIT may try to revise the order of A.O if A.O is not able to reopen the assessment u/s. 147 on some technical or other ground.
17. Settlement Commission:
Chapter XIX-A deals with settlement of cases. Several amendments have been made in some of the sections in this Chapter from 1.6.2015. Consequential changes have also been made in a few other sections. The important amendments are as under:
(i) For an assessee to approach the Settlement Commission u/s. 245a, it was necessary that a notice u/s. 148 was received for every assessment year for which the application was to be made. this provision is amended to provide that where a notice u/s. 148 is issued for any assessment year, the assessee can approach the Settlement Commission for other assessment years even if notice u/s. 148 for such other assessment years has not been issued if return of income for such other assessment years has been furnished u/s. 139 of the act or in response to notice u/s. 142 of the act.
(ii) In Section 245A(b), the explanation is amended to provide that a proceeding for assessment or reassessment referred to in clause (i) or clause (iii) or clause (iiia) for any assessment year shall be deemed to have commenced from the date on which a return of income is furnished u/s. 139 or in response to notice u/s. 142 and concluded on the date on which the assessment is made or on the expiry of two years from the end of relevant assessment year, in a case where no assessment is made.
(iii) The provision for time limit for rectification of an order assed by the Settlement Commission has been revised.
(iv) Section 245h is amended to provide that while granting immunity to the applicant from prosecution, the Settlement Commission must record its reasons in writing.
(v) 245K is amended to ensure that in respect of an individual who has made an application to the Settlement Commission u/s. 245C, any entity controlled by such person is also barred from making an application to the Settlement Commission. Hitherto, only the concerned person was prevented from making another application to the Settlement Commission. Now, entities controlled by such a person will also be prevented. The situations when an entity will be considered to be controlled by the applicant are provided in the explanation inserted after section 245K(2).
(vi) Section 132B is amended to allow the assets seized from an assessee u/s. 132 or requisitioned u/s. 132a to be adjusted against the liability arising on an application made to the Settlement Commission u/s. 245C.
Sub-section (2A) is inserted in section 234B to levy interest on the shortfall, if any, that may arise in the advance tax on account of an application made u/s. 245C. The interest would be calculated from the 1st april of the assessment year and ending on the date of making the application. Similarly, interest would also be payable on the additional shortfall, if any, arising on the basis of an order passed u/s. 245d for the period from 1st day of april of the assessment year and ending on the date of the order.
18. Taxation of non-residents:
18.1 Section 6 of the income-tax act has been amended from A.Y. 2015–16 to provide that in the case of an individual who is a citizen of india and a member of a crew of a foreign bound ship leaving india, the period of stay in india shall be determined as prescribed in the rules. The earlier explanation (now renumbered as explanation 1 applied only to indian Ship.
18.2 Section 6 has been further amended from a.y. 2016-17. Under the existing provisions, a company is said to be resident in india in any previous year, if:
a) It is an indian company; or
b) During that year, the control and management of its affairs is situated wholly in india.
Therefore, currently, a foreign company which is partially or wholly controlled abroad is to be regarded as non- resident in india. now section 6, has introduced the concept of ‘Place of effective management’ (Poem), in substitution of the existing provisions of requiring the control and management of affairs to be situated wholly india. In view of the above, provisions of this section has been amended to provide that a company shall be said to be resident in india in any previous year, if;
a) It is an indian company; or
b) Its place of effective management, in that year, is in india. (it may be noted that in the finance Bill, 2015, the proposal was to provide that the company will be resident in india if Poem is “at any time” in that year is in india. the words “at any time” in india have been dropped while passing the finance act.)
Further, POEM has been defined to mean a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance, made. this is a far reaching amendment as a number of indian Companies have foreign subsidiaries and what would be considered as POEM in such cases will be a subject matter of litigation. if any foreign company becomes resident in india, it will have to comply with the various provisions of the income-tax Act such as filing return of income, getting accounts audited u/s. 44aB, complying with tdS provisions etc.
18.3 Explanation 5 to section 9(1) provides that an asset being any share or interest in a foreign company or entity shall be deemed to have been situated in india if it derives, directly or indirectly, its value substantially from assets located in india. The word “substantially” in the explanation was not defined. In order to clarify the position, new explanation (6) is added from A.Y. 2016-17 to provide as under
(i) If the value of assets (tangible on intangible) situated in india exceeds Rs.10 crore and represents at least 50% of the value of total assets of the foreign company as on valuation date (without deduction of any liabilities) it will be deemed that the interest in the foreign company is substantially from assets in india.
(ii) the valuation date shall be the last day of the accounting period preceding the date of transfer or the date of transfer in case the book value of assets on the date of transfer exceeds book value as on the last day of the accounting period by 15%.
(iii) The taxation of gains arising on transfer of share or interest deriving directly or indirectly its value substantially from assets located in india will be on proportional basis and the method for determination of such proportion shall be provided in the rules. To avoid hardship in genuine cases, exemption is available in certain transfers subject to fulfillment of prescribed conditions.
Moreover, to keep a track of such offshore transactions, an obligation has been cast on the indian concern to furnish information in respect of off-shore transactions resulting into modification of its control or ownership structure. any non-compliance in this regards by the india concern would attract penalty of Rs.5 lakhs or 2% of transaction value, as the case may be.
18.4 At present, income arising to foreign Portfolio investors (‘FPIS’) from transactions in securities is treated as capital gains. however, the provisions of the act did notadequately address the apprehension of fund managers, resulting in a large number of offshore funds choosing to locate their investment managers outside india. therefore, new section 9a is inserted in the income tax act from A.Y.2016-17 for providing clarity on issues relating to business connection/permanent establishment and residential status of offshore funds. in order to facilitate location of fund managers of off-shore funds in India, this section now provides that, subject to fulfillment of certain conditions by the fund and the fund manager:
(i) The tax liability in respect of income arising to the fund from investment in india would be neutral to the fact as to whether the investment is made directly by the fund or through engagement of fund manager located in india;
(ii) Income of the fund from the investments outside india would not be taxable in india solely on the basis that the fund management activity in respect of such investments have been undertaken through a fund manager located in india;
(iii) In the case of an eligible investment fund, the fund management activity carried out through an eligible fund manager acting on behalf of such fund shall not constitute business connection in india of the said fund;
(iv) An eligible investment fund shall not be said to be resident in india merely because the eligible fund manager undertaking fund management activities on its behalf is located in India, subject to certain conditions.
(v) The term “Eligible Investment Fund” is defined in section 9a(3) and the term “eligible fund manager” is defined in section 9A(4).
Further, every eligible investment fund shall, in respect of its activities in financial year, furnish within ninety days from the end of the financial year, a statement in the prescribed form to the prescribed income-tax authority containing information relating to the fulfillment of the conditions or any information or document which may be prescribed. In case of non-furnishing of the prescribed information or document or statement, penalty of Rs.5 lakh shall be leviable on the fund.
18.5 Under the provisions of Securities Contracts (regulation) (Stock exchanges and Clearing Corporations) Regulations, 2012 (SECC) notified by SEBI, the Clearing Corporations are mandated to establish a fund, called Core Settlement Guarantee fund (Core SGF) for each segment of each recognised stock exchange to guarantee the settlement of trades executed in respective segments of the exchange. under the existing provisions, income by way of contributions to the investor Protection fund set up by recognised stock exchanges in india, or by commodity exchanges in india or by a depository is exempt from taxation. on similar lines, the income of the Core SGF arising from contribution received and investment made by the fund and from the penalties imposed by the Clearing Corporation subject to similar conditions as provided in case of investor Protection fund set up by a recognised stock exchange or a commodity exchange or a depository will now be exempt u/s. 10(23ee) from A.Y. 2016-17.
However, where any amount standing to the credit of the fund and not charged to income-tax during any previous year is shared, either wholly or in part with the specified persons, the whole of the amount so shared shall be deemed to be the income of the previous year in which such amount is shared.
The specified person for this purpose is defined to mean any recognised clearing corporation which establishes and maintains the Core Settlement Guarantee fund and the recognised stock exchange being the shareholder of such clearing corporation.
18.6 The CBDT, in its Circular no.740 dated 17/4/1996 had clarified that branch of a foreign company in India is a separate entity for the purpose of taxation under the act and accordingly tdS provisions would apply along with separate taxation of interest paid to head office or other branches of the non-resident, which would be chargeable to tax in india.
Considering that there are several disputes on the issue which are pending and likely to arise in future, section 9 is amended form a.y. 2016-17 to provide that, in the case of a non-resident, being a person engaged in the business of banking, any interest payable by the permanent establishment in india of such non-resident to the head office or any permanent establishment or any other part of such non-resident outside india shall be deemed to accrue or arise in india and shall be chargeable to tax in addition to any income attributable to the permanent establishment in india and the permanent establishment in india shall be deemed to be a person separate and independent of the non-resident person of which it is a permanent establishment and the provisions of the act relating to computation of total income, determination of tax and collection and recovery would apply. Accordingly, the PE in india shall be obligated to deduct tax at source on any interest payable to either the head office or any other branch or PE, etc. of the non-resident outside india. Further, non-deduction would result in disallowance of interest claimed as expenditure by the PE and may also attract levy of interest and penalty in accordance with relevant provisions of the act.
18.7 Section 115a (1)(b) has been amended from a.y. 2016-17 to provide that the rate of tax on royalty or fees for technical Services received by a non-resident or a foreign Company shall now be 10% instead of 25%.
19. Restrictions about Appointment Tax Auditors:
19.1 Assessees are, under various provisions of the act, required to obtain and/or furnish the reports and certificates from an ‘accountant’. At present, the term “accountant” is defined in theExplanation below section 288(2) to mean a chartered accountant within the meaning of the Chartered accountants act, 1949. From 1.6.2015 this definition has been amended. The amended definition defines the term ‘accountant’ to mean a chartered accountant as defined in section 2(1)(b) of the Chartered accountants act, 1949 who holds a valid certificate of practice u/s. 6(1) of that Act. The definition specifically excludes the following chartered Accountants for purposes of Tax Audit and certification.
(1) Where the assessee is a company – any person who is not eligible for appointment as an auditor of the said company in accordance with the provisions of section 141(3) of the Companies act, 2013;
(2) Where the assessee is a person other than a company –
(i) Where the assessee is an individual, firm or association of persons or hindu undivided family – the assessee himself or any partner of the firm, or member of the association or the family;
(ii) Where the assessee is a trust or institution, any person referred to in clauses (a), (b), (c) and (cc) of section 13(3) of the act;
(iii) Where the assessee is any person other than those referred to in (i) and (ii) above any person who is competent to verify the return u/s. 139 in accordance with the provisions of section 140;
(iv) Any relative of any of the persons referred to in (i), (ii) and (iii) above;
(v) An officer or employee of the assessee;
(vi) An individual who is a partner, or who is in employment of an officer or employee of the assessee;
(vii) An individual who himself or his relative or his partner
(a) Is holding any security of or interest in, the assessee;
however, the relative may hold security or interest in the assessee of the face value up to Rs. 1,00,000/-.
(b) Is indebted to the assessee;
however, the relative may be indebted to the assessee for an amount upto Rs.1,00,000/-.
(c) Has given a guarantee or provided any security in connection with the indebtedness of any third party to the assessee;
However, the relative may give guarantee or provide any security in connection with the indebtedness of any third person to the assessee for an amount up to Rs.1,00,000/.
(viii) Any person who, whether directly or indirectly, has business relationship with the assessee of such nature as may be prescribed;
(ix) A person who has been convicted by a court of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction.
19.2 For this purpose, the term ‘relative’ in relation to an individual is defined to mean (a) spouse of the individual;
(b) Brother or sister of the individual; (c) brother or sister of the spouse of the individual; (d) any lineal ascendant or descendant of the individual; (e) any lineal ascendant or descendant of the spouse of the individual; (f) spouse of the person referred to in clause (b), (c), (d) or (e) above; or
(g) Any lineal ascendant or descendant of a brother or sister of either the individual or of the spouse of the individual.
19.3 The above disqualification will apply only to professional assignment as tax auditor or assignment for Certification of financial statements for tax purposes. It may be noted that disqualification noted in Para 19.1 (2) above is on similar lines as provided in Section 141(3) of the Companies act, 2013. As the amended provisions come into force from 1.6.2015, many non-corporate assessees will have to change their tax auditors for auditing the accounts for the accounting year 2014-15 if the existing tax auditor is to be considered as disqualified under amended explanation as stated in Para 19.1 (2) above. It may be noted that the above disqualification does not apply to representation by a Chartered accountant before tax authorities.
19.4 Sub-section (4) of section 288 has been amended to provide that a person who has become insolvent or has been convicted by a court for an offence involving fraud, shall be disqualified to represent an assessee for a period of ten years from the date of conviction.
20. Penalties :
20.1 Section 271: (i) under the existing provisions of this section penalty for concealment of income or furnishing inaccurate particulars of income is levied on the “amount of tax sought to be evaded”, which has been defined, inter alia, as the difference between the tax due on the income assessed and the tax which would have been chargeable had such total income been reduced by the amount of concealed income.
(ii) There was no clarity on the computation of amount of tax sought to be evaded, where the concealment of income or furnishing inaccurate particulars of income occurred in the computation of income under the other provisions whereas the book profits u/s. 115JB remained unchanged. further, in the case of CIT vs. Nalwa Sons Investments Ltd. [327 ITR 543 (Del)], it was held that penalty u/s. 271(1)(c) cannot be levied in cases where the concealment of income occurred under the income computed under general provisions but the tax was paid under the provisions of sections 115JB, where there was no addition to the Book Profit. The SLP against the judgment of the Delhi High Court was dismissed by the Supreme Court.
(iii) In order to deal with such cases, it is now provided from A.Y. 2016-17 that the amount of tax sought to be evaded shall be the summation of tax sought to be evaded under the general provisions and the tax sought to be evaded under the provisions of section 115JB. However, if an addition on any issue is considered both under the general provisions and also u/s. 115JB, then such amount shall not be considered in computing tax sought to be evaded under provisions of section 115JB or 115JC. Further, in a case where the provisions of section 115 JB are not applicable, the computation of tax sought to be evaded under the provisions of section 115JB shall be ignored.
20.2 Sections 269SS/269T and 271D / 271E:
(i) Sections 269SS and 269t, at present, prohibit acceptance of loan or deposit in excess of Rs.20,000/- by any person or repayment of loan or deposit in excess of Rs.20,000/- by any person in cash. The scope of both these sections has been enlarged by amendments in these sections from 1.6.2015. This amendment in section 269SS extends its scope to specified items. In brief, this section will also apply to any sum of money received or receivable as advance or otherwise in relation to an immovable property, whether or not the transfer takes place. Similar amendment in section 269T prohibits repayment of advance in relation to transfer of an immovable property, whether or not the transfer takes place. With these amendments, any advance given or repaid in cash, where such advance exceeds Rs. 20,000/- in immovable property transactions will contravene the provisions of Section 269SS or 269T.
(ii) Section 271D and 271E levying penalty of a sum equivalent to the amount received or paid in cash in contravention of 269SS and 269T has now been extended to the above transactions relating to immovable properties from 1.6.2015.
20.3 Section 271 FAB: under new section 9A(5), an eligible investment fund is required to furnish a statement, information or document within the prescribed time. if this is not furnished, this new section inserted from A.Y. 2016- 17 provides for levy ofpenalty of Rs.5,00,000/-
20.4 Section 271 GA: new Section 285A provides for furnishing information/document by an indian Concern. if this is not done in accordance with the prescribed rules, penalty @ 2% of the value of the transaction as specified in the section can be levied under this new section from A.Y. 2016-17. in any other case of default u/s. 285 A, penalty of Rs.5,00,000/- can be levied.
20.5 Section 271 – I : This is a new section inserted from 1.6.2015. It provides for levy of penalty of Rs.1,00,000/- if the information required u/s. 195 (6) is not furnished or inaccurate information is furnished.
20.6 Section 272A: this section is amended from 1.6.2015. under the existing provisions, Government deductors/collectors are allowed to pay TDS / TCS through book entry. rules 30 and rule 37CA of the income- tax Rules required the Paying Officer to furnish Form 24G detailing the deduction / collection and adjustment. There are no penal consequences for non-furnishing of the said information.
With a view to enforce compliance for reporting of payment through book entry of TDS/TCS, sections 200 (2a) and section 206(3a) are inserted requiring furnishing of the prescribed information for TDS / TCS by the Government dedicators / collectors concerned. Section 272a has been suitably amended to extend levy of penalty of Rs. 100/- for every day of delay in filing the requisite statement under section 200(2a) and 206(3a) in respect of tdS / tCS which shall not exceed the amount of tax.
21. Other Provisions
21.1 Interest payable u/s. 234B: in case of increase in the assessed income on reassessment u/s. 147 or 153A, currently interest u/s. 234B is chargeable from the date of the regular assessment up to the date of reassessment. Section 234B has now been amended from 1/6/2015to provide that such interest would be chargeable from 1st april of the relevant assessment year up to the date of reassessment on the additional tax liability.
21.2 Section 285A: this is a new section inserted from a.y. 2016-17. It is provided in this section that where any share of or interest in a foreign company or entity, derives directly or indirectly, its value substantially from assets located in india (refer section 9(1)(i) explanation 5, the indian concern owning such assets shall furnish such information as may be prescribed within the prescribed time limit.
21.3 Wealth Tax Act: Section 3 of the wealth – tax has been amended. it is provided there in that net Wealth shall not be changed to wealth-tax with effect from a.y. 2016-17. Thus, assessees will have to file return of wealth tax in respect of net Wealth as at 31.3.2015 and no such return will be required to be filed from next year.
22. To sum up:
22.1 From the above discussion it is evident that the finance minister has lived upto his promise made last year that all major amendments in the Income tax Act will be only prospective. This year one major step taken for tax reforms relates to Goods and Service tax (GST). The necessary legislation, as a first step, is passed in the Lok Sabha. It is expected to be cleared in the Rajya Sabha during the year. Let us hope that GSt is implemented from 1/4/2016 as promised by the Government.
22.2 In the last year’s Budget Speech an assurance was given that direct tax Code Bill, 2010, which lapsed, will be revived after consultation with the stakeholders. It is surprising that in this year’s budget speech the finance minister has stated in Para 129 of his Speech that now there is no need for revival of dtC.
In view of this, we will have to live with the present income-tax act with so many sections, sub-sections, clauses, provisos, explanations etc. and many different interpretations leading to unending litigation.
22.3 Another important step taken by the finance minister is to address the burning issue about Black money. he has listed steps taken and proposed to be taken in Para 103 of his Budget Speech. in order to tackle the issue relating to Black money stacked in foreign Countries Black money “undisclosed foreign income and assets (imposition of tax) act, 2015”, has been passed. Harsh penalty and prosecution provisions are made in this legislation. if this act was made applicable to persons holding foreign assets exceeding rs.1 crore small assesses would not have been put to any hardship.
22.4 The finance minister has tried to show some sympathy so far as personal taxation is concerned. he has also given some benefit to the salaried employees by increasing the exemption limit for the transport allowance from Rs.800/- per month to Rs.1,600/- per month. However, if we consider the other procedural provisions of the income-tax act, very wide powers are given to assessing officers and commissioners. This will be evident from the amendments relating to taxation of charitable trusts where compliance cost to trusts will increase and the responsibility of trustees, who generally render honorary service, will increase. further, amendments in section 263 will give wide powers to Commissioners to revise the orders of the assessing officers. Thus, cases in which the assessments cannot be reopened by the assessing officers will be reopened through this route. again, the finance minister, while abolishing the Wealth tax act, has stated that to track the wealth held by individuals and entities, information regarding the assets which are currently required to be furnished in wealth tax return will be captured in the income tax return. This will show that compliance cost of getting valuation of assets, which were subject to wealth tax, will not reduce. Further, this information will have to be given by firms, AOP, etc. who were outside the wealth tax provision. Let us hope that this requirement of disclosing assets in the income tax return is introduced only in cases where the value of such assets exceed the specified limit and is restricted to only those who were otherwise liable to the wealth tax. If this is not done, all taxpayers, whether small or big, will have to get valuation of assets done for disclosing in the income tax return.
22.5 The concept of minimum alternative tax (mat) was introduced for the first time by the Finance Act, 1987 effective from A/Y:1988-89. The finance minister at that time explained that many Companies were not paying any tax or paying nominal tax but were showing large profits in the published accounts and paying dividend to shareholders. This was because they were availing of tax incentives and reducing taxable profits as compared to book profits. For this reason, tax on Book Profits (MAT) was introduced. It was always understood that these provisions (sections 115J, 115JA or 115JB) applied to domestic Companies. In last couple of years, the tax department has started applying mat provisions to foreign Companies (in particular FIIS) although they are not required to prepare accounts under the Companies act, 1956. in view of the loud protest by foreign Companies, the finance act has made only halfhearted attempt to amend section 115JB from A/Y :2016-17. Earlier year’s issues, involving huge tax demands which are under litigation, are now being considered by an expert Committee. The ideal way of handling the issue was to declare that section 115JB does not apply to foreign Companies which have no P.E. in india.
22.6 One disturbing feature relates to notification issued u/s. 145(2) requiring assesses carrying on business or profession or having income from other sources to comply with “income Computation and disclosure Standards” (iCdS) from A/Y:2016-17. Since accounts are required to be prepared according to Accounting Standards notified by the Government under the Companies and ICDS notified u/s. 145(2) are different in some important areas there will be lot of confusion while computing taxable income. This will lead to unending litigation.
22.7 Another area of concern is about the provisions relating to disclosure of foreign income and foreign assets in the return of income. These provisions also apply to residents who have no taxable income. This new provision read with the new legislation Black money “undisclosed foreign income and assets (imposition of tax) act, 2015” which has come into force from A/Y:2016-17 will create lot of confusion and hardships. Some asessees who are not aware of these provisions will suffer harsh penalty and prosecution proceedings.
22.8 The finance minister has assured that the amendments made in the act will not put small assesses to any hardship. While concluding his speech he has stated as under:-
“To conclude, it is no secret that expectations of this Budget have been high. . In this speech, I think I have clearly outlined not only what we are going to do immediately, but also a roadmap for the future.
I think I can genuinely stake, for our Government, a claim of intellectual honesty. We have been consistent in what we have said, and what we are doing. We are committed, to achieving what we have been voted to power for: Change, growth, jobs and genuine, effective upliftment of the poor and the under-privileged. This will be in the spirit of the Upanishad-inspired mantra:
(OM! May All Be Happy, May All Be Free From Illness, May All See What is Beneficial, May No One Suffer)”
Let us hope, the present Government is able to achieve its goal and make our life happier.
Thus, the objective of these standards was to modify the book profit in the process of computation of income. It was universally accepted that it was impractical for any business entity to maintain two sets of accounts – one for reporting to stakeholders and the other for paying tax. The tax accounting standards were expected to bridge that gap. However, somewhere along the way, that objective seems to have been totally lost sight of.
The committee that was formed for this purpose made its recommendations by way of a report and tax accounting standards were placed for comment is in the public domain. To what extent the responses from the public were considered is a matter of debate. Finally, ten “Income Computation and Disclosure standards” ICDS were notified by the government and they came into effect from accounting year commencing from 1st April 2015, relevant to assessment year 2016-17. As notified today, the standards will create a host of complications.
Firstly, these standards require “disclosure” of policies followed. They apply to all assessees following the mercantile method of accounting and having income under the head “profits and gains of business” or “income from other sources “. These are not accounting standards but computation standards. Therefore, the place of disclosure is a matter of debate. It must be remembered that the amended section 145 gives a power to the assessing authority to make a best judgment assessment in case of non-compliance. It was thus essential that these standards were precise and comprehensive to the extent possible which they do not appear to be.
Secondly, these standards completely exclude those following cash method of accounting. While this will certainly give relief to those assessees who follow only the cash method, it could cause complications when under the same head, two different methods are followed for two different sources. The standards should have addressed situations arising in this scenario.
Thirdly, it is provided that wherever the computation standards are in conflict with the provisions of the Income -tax Act (the Act), the provisions of the Act would prevail. While this sounds to be perfectly acceptable, it could create significant controversy. It is a well-established proposition that the Supreme Court interprets the law, as it always stood. Given the Indian judicial system, it could be close to two decades for a particular provision to be finally interpreted by the apex court. In a situation like this, if income is computed on the basis of ICDS and the same is in harmony with the law as it stood at the time, but subsequently the law is interpreted differently by the apex court, then it would create great difficulty. One would possibly say that this is the position even today. But now there would be two prescriptions to be interpreted under the same statute. The Act and ICDS themselves.
Finally, one needs to consider the effect of the transitional provisions. In a couple of standards namely construction contracts and revenue recognition, the transition provisions are extremely harsh. They would apply to unfinished contracts entered into before 31st March 2015, where the assessee was following completed contract method, but now is forced to follow percentage completion. This would create a substantial liability in the year of transition i.e., assessment year 2016-17.
In fact, a preliminary study of ICDS seems to suggest that the cost of compliance will increase significantly. Though the standards do not require maintenance of separate sets of books as the computation is of taxable income and not book profit, the prescriptions are such that a virtually parallel separate record will have to be maintained by each entity of some size. With the current attitude of revenue officials being what it is, one is really concerned about the litigation that will ensue.
The way the standards have been drafted, the objective seems to be to garner maximum revenue at the earliest. It may have been easier to recommend some adjustments to book profit to take care of some of the issues thrown up. If that could be achieved, Income Computation and Disclosure standards were possibly unnecessary. If this was not feasible then the issues arising out of Ind AS, in regard to computation of income ought to have been addressed, comprehensively. The ICDS as notified will only increase litigation.
The last but not the least, power to formulate standards affecting taxable income is virtually power to amend the law without going to the Parliament. One wonders how desirable this is.
If the government is serious about promoting their pet theme of ease of doing business, like GAAR, ICDS in their present form certainly need a rethink.
This story is attributed to Alexander the Great. Like all highly ambitious persons, Alexander, the emperor, was seeking Eternal Life. He was directed to a reknowned Indian Sage. The sage told him about a magical tree which grew on the shores of a lake, far away, hidden deep inside the forests, which could be reached only after crossing several mountain ranges. Eating the fruit of that tree gave eternal life. Alexander set off, taking the directions from the sage. After travelling for seven days and seven nights, he reached that lake and found the magical tree with the fruits. As he was about to eat one, a voice called him and cautioned him “Do not eat the fruit”. Alexander was amazed to find that it was a crocodile and that the lake was teeming with crocodiles. “We have eaten the fruit and are miserable. How much so ever we may wish, we cannot die. We have become old, disabled, have nothing to live for and yet we cannot die. Do not make the same mistake we had made. Otherwise you will have an eternally miserable life, cursing this day when you ate this fruit”. Alexander realized the wisdom of the words of the crocodile. He no longer wanted eternal life. His quest was over. He returned back without eating the fruit.
The question we have to ask ourselves is ‘Do we want eternal life?’ or we would be happier with a few good years?
Let us imagine the life of a caged bird, alone in the cage. The cage may be made of gold and he would be getting the best of food and care from the lady who lovingly kept him as a pet. He would not be wanting anything; anything except freedom to fly in the open sky and meet and mingle with the other birds of his tribe. Would the bird prefer a hundred years of such caged life, or would he rather be satisfied with just a few years of life in the open, flying soaring high up above in the sky. No question. The bird would surely love to be out of the cage, and flying high. No matter the life in the open world would carry with it its own perils. He would have to face hunger, illness, brave all kinds of weather and even run the risk of falling prey to predator birds. But it would be better than a purposeless eternal life.
All this leads us to the conclusion that endless life is not a boon, but a curse; a life which is totally protected, cut off from all risks and also human contacts is worthless. Further, to lead a good life, one requires challenges to meet and goals to achieve. One requires someone to share both, happiness and sorrow. As they say “a ship is safe in the harbour, but that is not what it is meant for”. The captain of a ship would be far happier sailing the seven seas, fighting wild winds, weathering thunderous storms and facing turbulent waves than merely sitting in the harbour. So it is with our lives. What one really seeks is not just a long life, but a good and a meaningful life, even if it be short. I am reminded of the words of Philip James Bailey:
We then have to decide, that whatever may be our remaining life span, we will live a purposeful, meaningful life, we shall strive to achieve great goals and make the best use of our lives. We will leave our footprints on the sands of time. Maybe then, even when we die a physical death, we shall continue to live in the hearts of our fellow human beings and have a truly eternal life. We can then attain the state described in the bhajan of Jain Muni Shri Anandghanji:
Designed with the intent to share knowledge in an unconventional manner using a youth-friendly approach, the YRRC was a mix of interactive workshops, group discussions, presentations, networking and entertainment spread over a wide range of topics of professional interest. While the days were filled with technical sessions, evenings provided opportunities to unwind by the beach with music, networking, singing and dancing.
Most of all, the YRRC provided a platform to its participants to learn from an elite group of speakers in a rather closed and personal setting and to interact and network with them at an informal level.
Summarised below is a snapshot of the technical sessions.
DAY 1 Thursday, 19th February 2015
Inauguration Session by Chairman of the MPR Committee – Mr. Naushad Panjwani
Chairman, Mr. Naushad Panjwani, inaugurated the YRRC by extending a warm welcome to all the participants and set the tone and momentum for the 4 days of the event.
SESSION 1
INTERACTIVE WORKSHOP – CLIENT PITCHING
Speaker: Mr. Vaibhav Manek
Mr. Manek, author of the book ‘CA Firm of the Future’, explained in detail concepts such as mission, vision and values of a CA firm, clients development process, marketing strategies, balanced scorecard, marketing funnel, etc. He carried out exercises with the participants to demonstrate how to have effective marketing strategies and how to prepare for client presentations.
SESSION 2 PRESENTATION – MAKE YOUR MONEY WORK FOR YOU
Speaker: Mr. Sunil Jhaveri 
Mr. Jhaveri, an expert at financial planning, explained the various investment avenues which young professionals could avail of to get into the habit of investing early and investing smart. He shared the mantras to make goal-oriented investments.
DAY 2 Friday, 20th February 2015
Session 1 – group discussion – rea l estate , reits and aifs – issues in accountin g, taxation & fema
Speaker: Mr. Anup Shah 
During the group discussion led by Ms. Kinjal Bhuta, the participants discussed the posers raised by the Paper Writer, Mr. Anup Shah. The discussion revolved around the relatively newer concepts of REITs and AIFs and the various taxation and accounting issues in the subject. The speaker delved deep into the concepts of REITs and AIFs. He highlighted the controversies in accounting and taxation of these instruments and spoke about his expectations from the Budget on the subject. All the participants’ queries were satisfactorily answered.
SESSION 2 – PRESENTATION – OPPORTUNITIES IN MULTI-CHANNEL RETAIL
Speaker: Mr. Kumar Rajagopalan
Mr. Rajagopalan, CEO of the Retailers Association of India, spoke on career opportunities for CAs in the multichannel retail segment. His detailed analysis of the retail segment in India provided great insights to participants to the retail business world. He highlighted the various stages in the retail industry which a CA can service. He also brought to light some of the niche areas where a CA’s professional expertise could be put to use. Newer exciting career avenues for practicing as well as industry-based CAs were brought to the fore.
SESSION 3 – INTERATIVE WORKSHOP – BUSINESS ETIQUETTES
Speaker: Ms. Shital Kakkar
Ms. Kakkar, one of India’s best known corporate etiquettes trainer, spoke to the participants about the musthave etiquettes in a business environment. In a world which is getting increasingly polished by the day, proper professional behavior and courtesies go a long way in making good first impression and retaining it for the longer term. Through activities and exercises, she brought out the tricks to making good impressions and to avoid a business faux pas.
DAY 3 Saturday, 21st February 2015
SESSION 1 – BASE EROSION AND PROFIT SHIFTING
Speaker: Mr. Tilokchand P. Ostwal
Well renowned in the world of international taxation and transfer pricing, Mr. Ostwal explained to the participants about the upcoming Base Erosion and Profit Shifting project of the OECD and its impact on India. He shared some of the more commonly arising issues for India, his views of the same and the Governments’ actions/inactions to resolve. This was a great opportunity for the young CAs to get introduced to a project which the world has its spotlight on.
Sight-seeing, dinner & entertainment
Post the afternoon siesta, participants embarked on the Goa sight-seeing trip organised by BCAS to explore the bounties Goa had to offer.
DAY 4 Sunday, 22nd February 2015
SESSION 1 – PRACTICAL ASPECTS OF DUE DILIGENCE
Speaker: Mr. Akshay Kapur 
Mr. Kapur discussed different types of due diligence that exist in a business scenario. Mr. Kapur took the participants through the process flow in the life cycle of a deal and stage at which due diligence has a role to play. He explained with examples how a due diligence finding could make or break a deal. He discussed case studies based on issues he had come across during the course of his career in the field.
SESSION 2 – BUSINESS OF MOVIES & OPPORTUNITIES FOR CAs
Speaker: Mr. Komal Nahta
Mr. Nahta, editor and publisher of “Film Information” and a television show host, joined the participants for the last session of the YRRC to share insights into the glitzy and glamour world of the movie business. He explained how the movie industry trades and the revenue models peculiar to the industry. Mr. Nahta shared some ideas as to how a young CA could make headway in seeking clients from the movie industry.
The YRRC ended on a happy note with vote of thanks to the organisers and the participants.
Two issues are at stake. One, how companies source capital. Hesitant foreign capital could be persuaded to enter the country by offering it guaranteed exit options that minimise or quantify the possible loss it could make. Should India say no to such capital? Should all equity investments that come with put/call options automatically be deemed suspect? The answer is a resounding ‘No!’ The second issue is how to prevent a liberal view on put/ call options at the time of entry of foreign capital being misused by Indian companies to siphon capital out.
The way out is to check if the bathwater contains a baby or not, before throwing it out. This calls for use of judgement and intelligence. Scam-scarred policymakers in India are too scared to allow themselves to use discretion, and want to go by the rule book, regardless of whether it meets the larger goal, to subserve which the rules were framed. The signal a stalled Tata-NTT Docomo deal would send out to the world is that India continues in the grip of political timidity, leaving passing the buck the only game in town, even in these, post-UPA, post-policy-paralysis, so-called good times.
(Source: Editorial in The Economic Times dated 26-03- 2015.)
Globally, private equity and hedge funds have assets under management of over $3.5 trillion and $2.5 trillion respectively. In India, the domestically domiciled Alternate Investment Funds (AIF) have total commitments of less than Rs 25,000 crore (roughly $4 billion), with the actual inflows just a fraction of the commitments. By any measure, the AIF industry in India is sub-scale and not commensurate with the size of a $2-trillion economy.
Foreign institutional investors (FIIs) and foreign portfolio investors (FPIs) route their investments via Mauritius and other tax havens with double taxation-avoidance agreements and pay zero tax on their business income and capital gains and a maximum 10% withholding tax on their interest income in India. Also, all securities held by FIIs/FPIs including derivatives were reclassified as capital assets in last year’s Budget.
With pass-throughs denied for AIF Category 3 funds, the investors in these funds see even their equity returns classified as business income, if there is any interest income or other income from derivatives, and all income taxed at maximum marginal rates. AIF Category 2 fund investors, even with the benefit of pass-throughs, still have their derivative income classified as business income.
The result of the perverse tax rules is that while even equity returns of investors in AIF Category 3 funds get re-characterised as business income resulting in higher tax liability, for foreign investors, what was previously business income now gets re-characterised as capital gains, enabling them to enjoy lower or nil taxes.
A large global top-tier hedge fund like AQR, DE Shaw or Renaissance Technologies that deploys quantitative strategies and invests in Indian equities and derivatives via the Mauritius route pays zero tax, while a domestic AIF Category 3 fund deploying similar investment pays peak marginal rates. The very business case for incorporating an AIF Category 3 fund in India becomes questionable.
Domestic funds are further handicapped by Sebi regulations that restrict leverage and prohibit them from investing in commodities and forex markets. This handicap reduces the amount of capital that can be deployed and returns earned. It creates a unique situation where both an individual investor with limited capital and a corporate house from a non-financial services industry with large treasury operations enjoy far more leverage and risk-taking ability than a professionally-managed fund deploying sophisticated risk capital.
The underdeveloped nature of the debt markets in India also means that domestic funds are restricted to equity markets alone. Foreign funds, on the other hand, can invest in multiple asset categories globally and have lower leverage restrictions. This enables foreign funds to outperform domestic funds while taking lesser overall risks.
It is more attractive to incorporate outside India and invest in India via the FII/FPI route, or in rupee-denominated assets in foreign markets, rather than get an AIF licence and invest in local markets. This results in export of capital and underdeveloped capital markets in India. A significant chunk of the rupee-denominated securities and currency markets has already moved out to Singapore and Dubai and investment capital continues to move out of India to foreign fund managers.
To mitigate the handicaps the fledgling local industry faces, these steps should be immediately taken:
1. Remove the leverage restrictions on AIF Category 3 funds and subject them to the same exchange-based risk management and margin rules that all categories of investors are subject to.
2. Allow domestic funds to invest in commodities and foreign exchange markets starting with non-agricultural commodities.
3. Include investments made by the local AIFs in Section 2(14) of the Income-Tax Act, thereby giving capital asset classification to those investments as was done for FIIs/FPIs.
4. Grant pass-throughs to AIF Category 3 funds as was done for AIF Category 1 and 2 fund assets immediately as an interim measure.
5. Over the longer term, a mutual fund-like regulatory regime for AIFs where the funds are not taxed but the unit holders pay capital gains tax on their units, would be a solution to the current discriminatory regime.
In every country, domestic and foreign capital are treated at par, while in India, foreign capital continues to get far better terms and tax treatment and domestic capital is discriminated against. The time has come for the ‘Make in India’ concept to be also applied to the domestic AIF industry to create a vibrant ecosystem, enabling India to achieve the objective of having a global financial centre located here.
(Source: Extracts from an Article by Mr T V Mohandas Pai, ex-CFO, Infosys and Mr V Balkrishnan, Chairman, Exfinity Venture Partners.)
Considering the scope of section 43B the Karnataka High cOurt held as under:
“The employees’ contribution made to the provident fund and employees’ State insurance by the assessee on or before the due date for filing the return u/s. 139(1) of the Income-tax Act, 1961, would be eligible for the benefit conferred u/s. 43B(b).”
The appellant, a company, was incorporated under the Companies Act, 1956 for the purpose of setting up a 235 MW Gas based power project at Jegurupadu, Rajahmundry, Andhra Pradesh at an estimated cost of Rs. 839 crore. The main object of the appellant company is to generate and sell electricity.
With the intention to utilie the expert services of qualified and experienced professionals who could prepare a scheme for raising the required finance and tie up the required loan, it sought the services of a consultant and eventually entered into an agreement with ABB – Projects & Trade Finance International Ltd., Zurich, Switzerland, (hereinafter referred to as “Non-Resident Company/NRC”).
The NRC, having regard to the requirements of the appellant-company offered its services as financial advisor to its project from 8th July, 1993. Those services included, inter alia, financial structure and security package to be offered to the lender, making an assessment of export credit agencies world-wide and obtaining commercial bank support on the most competitive terms, assisting the appellant in loan negotiations and documentation with lenders and structuring, negotiating and closing the financing for the project in a coordinated and expeditious manner. For its services the NRC was to be paid, what is termed as, “success fee” at the rate of 0.75% of the total debt financing. The said proposal was placed before the Board meeting of the company on 21st August, 1993 and the Board of Directors approved the appointment of the NRC and advised that it be involved in the proposed public issue of share by the company. The NRC rendered professional services from Zurich by correspondence as to how to execute the documents for sanction of loan by the financial institutions within and outside the country. With advice of NRC the appellant-company approached the Indian Financial Institutions with the Industrial Development Bank of India (IDBI) acting as the Lead Financier for its Rupee loan requirement and for a part of its foreign currency loan requirement it approached International Finance Corporation (IFC), Washington DC, USA. After successful rendering of services the NRC sent invoice to the appellant-company for payment of success fee amount i.e., $.17,15,476.16 (Rs. 5.4 Crore).
After the receipt of the said invoice the appellant-company approached the concerned income tax officer, the first respondent herein, for issuing a ‘No Objection Certificate’ to remit the said sum duly pointing out that the NRC had no place of business in India; that all the services rendered by it were from outside India; and that no part of success fee could be said to arise or accrue or deemed to arise or accrue in India attracting the liability under the Income-tax Act, 1961 (for brevity, ‘the Act’) by the NRC. It was also stated as the NRC had no business connection section 9(1)(i) is not attracted and further as NRC had rendered no technical services section 9(1)(vii) is also no attracted. The first respondent scanning the application filed by the company refused to issue ‘No Objection Certificate’ by his order dated 27th September, 1994.
Being dissatisfied with the said order passed by the first respondent the appellant-company preferred a revision petition before the Commissioner of Income-tax, Hyderabad, u/s. 264 of the Act. On 21st March, 1995 the Commissioner permitted the appellant-company to remit the said sum to the NRC by furnishing a bank guarantee for the amount of tax. The company took steps to comply with the said order but afterwards on 25th October,1995 the revisional authority revoked the earlier order and directed the company to deduct tax and pay the same to the credit of the Central Government as a condition precedent for issuance of the ‘No Objection Certificate’. Thus, the order passed by the first respondent was affirmed and resultantly the revision petition was dismissed.
The non-success in revision compelled the company to approach the High Court for issue of writ of certiorari for quashing of the orders passed by the Income-tax officer and that of by the revisional authority.
The High Court framed the following two issues for consideration:
“(1) Whether ‘success fee’ payable by the petitionercompany to the NRC or any portion thereof is chargeable under the provisions the Act; and
(2) Whether the petitioner-company is entitled to ‘No Objection Certificate’.”
The High Court referring to the contents of the correspondence, the nature and extent of services which the NRC had undertaken under the agreement, the resolution passed by the Board of Directors which had perused the letter dated 8th July, 1993 addressed by the NRC stipulating the scope of services to be undertaken by NRC; the decisions of the Board to pay a fee to NRC and came to hold thus:
“On a careful reading of the letter of proposal of the NRC and the extract of resolution of the Board of Directors of the petitioner-company, it is clear to us that it was no part of the services to be provided by the NRC to manage public issue in India to correspond with various agencies to secure loan for the petitionercompany, to negotiate the terms on which loan should be obtained or to draft document for it. The NRC has only to develop a comprehensive financial model, tie up the rupee/foreign currency loan requirements of the project, assess export credit agencies worldwide and obtain commercial bank support, assist the petitionercompany in loan negotiations and documentation with the lender. It appears to us that the service to be rendered by the NRC is analogous to draw up a plan for the petitioner-company to reach the required destination indicating roads and highways, the curves and the turns; it does not contemplate taking the petitioner-company to the destination by the NRC. Once the NRC has prepared the scheme and given necessary advice and assistance to the petitionercompany for obtaining loan, the responsibility of the NRC is over. It is for the petitioner-company to proceed on the suggested lines and obtain loan from Indian or foreign agencies. On the petitionercompany obtaining loan, the NRC becomes entitled to ‘success fees’.”
The High Court scanned the letters with due consideration and opined that the business connection between the petitioner company and the NRC had not been established. Thereafter, the writ court adverted to the proposition whether success fee could fall within clause (vii) (b) of section 9(1) of the Act. Interpreting the said provision, the High Court opined that:
“Thus from a combined reading of clause (vii) (b) Explanation (2) it becomes clear that any consideration, whether lump sum or otherwise, paid by a person who is a resident in India to a non-resident for running any managerial or technical or consultancy service, would be the income by way of fees for technical service and would, therefore, be within the ambit of “income deemed to accrue or arise in India”. If this be the net of taxation under Section 9 (1) (vii) (b), then ‘success fee’, which is payable by the petitioner company to the NRC as fee for technical service would be chargeable to income tax thereunder. The Income-tax officer, in the impugned order, held that the services offered by the NRC fell within the ambit of both managerial and consultancy services. That order of Income-tax officer found favour by the Commissioner in revision. In the view we have expressed above, we are inclined to confirm the impugned order.”
A contention was advanced before the high Court by the assessee that the nrC did not render any technical or consultancy service to the company but only rendered advise in connection with payment of loan by it and hence, it would not amount to technical or consultancy service within the meaning of section 9(1)(vii)(b) of the act. While not accepting the said submission, the high Court observed that for the purposes of attracting the said provision, the business of the company cannot be divided into water-tight compartments like fire, generation of power, plant and machinery, management, etc. and to hold that managerial and technical and consultancy service relate to management, generation of power and plant and machinery, but not to finance. Elaborating further, the high Court observed that advice given to procure loan to strengthen finances may come within the compartment of technical or consultancy service and “success fee” would thereby come within the scope of technical service within the ambit of section 9(1)(vii)(b) of the act. Being of this view, the high Court opined the assessee was not entitled to the “No Objection Certificate”.
Being aggrieved, the appellant approached the Supreme Court. according to the Supreme Court, the crux of the matter was whether, in the obtaining factual matrix, the High Court was justified in concurring with the view expressed by the revisional authority that the assessee- company was not entitled to “No Objection Certificate” under the act as it was under the obligation to deduct the tax at source pertaining to payment to the nrC as the character of success fee was substantiated by the revenue to put in the ambit and sweep of section 9(1)(vii)
(b)of the act.
The Supreme Court observed that NRC was a non- resident Company and it did not have a place of business in india. The revenue has not advanced a case that the income had actually arisen or received by the NRC in india. The high Court has recorded the payment or receipt paid by the appellant to the NRC as success fee would not be taxable u/s. 9(1)(i) of the act as the transaction/ activity did not have any business connection. that being the position, the singular question that remained to be answered was whether the payment or receipt paid by the appellant to NRC as success fee would be deemed to be taxable in india u/s. 9(1)(vii) of the act. As the factual matrix would show, the appellant had not invoked double taxation avoidance agreement between india and Switzerland. that being not there, the Supreme Court was only concerned with as to whether the “success fee” as termed by the appellant was “fee for technical service” as enjoined u/s. 9(1)(vii) of the act.
According to the Supreme Court, the principal provision is Clause (b) of section 9(1)(vii) of the act. the said provision carves out an exception. the exception carved out in the latter part of clause (b) applies to a situation when fee is payable in respect of services utilised for business or profession carried out by an indian payer outside india or for the purpose of making or earning of income by the indian assessee i.e. the payer, for the purpose of making or earning any income from a source outside india.
The Supreme Court held that on a studied scrutiny of the said Clause, it becomes clear that it lays down the principle what is basically known as the “source rule”, that is, income of the recipient to be charged or chargeable in the country where the source of payment is located, to clarify, where the payer is located. the Clause further mandates and requires that the services should be utilised in india.
The two principles, namely, “Situs of residence” and “Situs of source of income” have witnessed divergence and difference in the field of international taxation. The principle “residence State taxation” gives primacy to the country of the residency of the assessee. This principle postulates taxation of world-wide income and world-wide capital in the country of residence of the natural or juridical person. The “Source State taxation” rule confers primacy to right to tax to a particular income or transaction to the State/nation where the source of the said income is located. The second rule, as is understood, is transaction specific. To elaborate, the source State seeks to tax the transaction or capital within its territory even when the income benefits belongs to a non residence person, that is, a person resident in another country. The aforesaid principle sometimes is given a different name, that is, the territorial principle. It is apt to state here that the residence based taxation is perceived as benefiting the developed or capital exporting countries whereas the source based taxation protects and is regarded as more beneficial to capital importing countries, that is, developing nations. Here comes the principle of nexus, for the nexus of the right to tax is in the source rule. It is founded on the right of a country to tax the income earned from a source located in the said State, irrespective of the country of the residence of the recipient. It is well settled that the source based taxation is accepted and applied in international taxation law.
The two principles that have been mentioned hereinabove, are also applied in domestic law in various countries. the source rule is in consonance with the nexus theory and does not fall foul of the said doctrine on the ground of extra-territorial operation. The doctrine of source rule has been explained as a country where the income or wealth is physically or economically produced.
Appreciating the aforesaid principle, it would apply where business activity is wholly or partly performed in a source State, as a logical corollary, the State concept would also justifiably include the country where the commercial need for the product originated, that is, for example, where the consultancy is utilised. From the aforesaid, it is quite vivid that the concept of income source is multifaceted and has the potentiality to take different forms. The said rule has been justified on the ground that profits of business enterprise are mainly the yield of an activity, for capital is profitable to the extent that it is actively utilised in a profitable manner. To this extent, neither the activity of business enterprise nor the capital made, depends on residence.
The purpose of adverting to these aspects is only to highlight that the source rule has been accepted in the un Commentaries and the organisation of economic Corporation and development (OECD) Commentaries. It is well known that what is prohibited by international taxation law is imposition of sovereign act of a State on a sovereign territory. This principle of formal territoriality applies in particular, to acts intended to enforce internal legal provisions abroad. Therefore, deduction of tax at source when made applicable, it has to be ensured that this principle is not violated.
The Supreme Court adverting to the instant case, held that, it was evident that fee which had been named as “success fee” by the appellant had been paid to the NRC. It had to be seen whether the payment made to the non- resident would be covered under the expression “fee for technical service” as contained in explanation (2) to section 9(1)(vii) of the act. The said expression means any consideration, whether lumpsum or periodical in rendering managerial, technical or consultancy services. It excludes consideration paid for any construction, assembling, mining or like projects undertaken by the non-resident that is the recipient or consideration which would be taxable in the hands of the non- recipient or non-resident under the head “salaries”. In the case at hand, the said exceptions were not attracted. What was required to be scrutinised was that the appellant had intended and desired to utilise expert services of qualified and experience professional who could prepare a scheme for raising requisite finances and tie-up loans for the power projects. As the company did not find any professional in India, it had approached the consultant NRC located in Switzerland, who offered their services. Their services rendered included, inter alia, financial structure and security package to be offered to the lender, study of various lending alternatives for the local and foreign borrowings, making assessment of expert credit agencies world-wide and obtaining commercial bank support on the most competitive terms, assisting the appellant company in loan negotiations and documentations with the lenders, structuring, negotiating and closing financing for the project in a coordinated and expeditious manner.
The Supreme Court held that from the letter dated 8.7.1993 addressed by the NRC and resolution passed by the Board on 21st august, 1993, it was clear as crystal that the obligation of the NRC was to:
“(i) Develop comprehensive financial model to tie-up the rupee and foreign currency loan requirements of the project.
(ii) assist expert credit agencies world-wide and obtain commercial bank support on the most competitive terms.
(iii) assist the appellant company in loan negotiations and documentation with the lenders.”
Pursuant to the aforesaid exercises carried out by the NRC, the company was successful in availing loan/financial assistance in India from the Industrial development Bank of india (IDBI) which acted as a lead financier for the rupee loan requirement. For foreign currency loan requirement, the appellant approached international finance Corporation, Washington D.C., USA and was successful. in this backdrop, “success fee” of Rs. 5.4 crore was paid to the NRC.
According to the Supreme Court, it was in this factual score, that the expression, managerial, technical or consultancy service, were to be appreciated. The said expressions have not been defined in the Act, and, therefore, it was obligatory on the part of the Supreme Court to examine how the said expressions are used and understood by the persons engaged in business. The general and common usage of the said words has to be understood at common parlance.
The Supreme Court held that in the case at hand, it was concerned with the expression “consultancy services” and in this regard, a reference to the decision by the authority for advance ruling In Re.P.No. 28 of 1999 (1999) 242 itr 280, would be applicable. The observations therein read as follows:
“By technical services, we mean in this context services requiring expertise in technology. By consultancy services, we mean in this context advisory services. The category of technical and consultancy services are to some extent overlapping because a consultancy service could also be technical service. However, the category of consultancy services also includes an advisory service, whether or not expertise in technology is required to perform it.”
In this context, according to the Supreme Court, a reference to the decision in C.I.T. vs. Bharti Cellular Limited and others (2009) 319 ITR 139, was also apposite. In the said case, while dealing with the concept of “consultancy services”, the high Court of delhi has observed thus:
“Similarly, the word “consultancy” has been defined in the said Dictionary as “the work or position of a consultant; a department of consultants.” “Consultant” itself has been defined, inter alia, as “a person who gives professional advice or services in a specialized field.” It is obvious that the word “consultant” is a derivative of the word “consult” which entails deliberations, consideration, conferring with someone, conferring about or upon a matter. Consult has also been defined in the said Dictionary as “ask advice for, seek counsel or a professional opinion from; refer to (a source of information); seek permission or approval from for a proposed action”. It is obvious that the service of consultancy also necessarily entails human intervention. The consultant, who provides the consultancy service, has to be a human being. A machine cannot be regarded as a consultant.”
The Supreme Court, in this context, referred to the dictionary meaning of ‘consultation’ in Black’s law dictionary, eighth edition. The word ‘consultation’ has been defined as an act of asking the advice or opinion of someone (such as a lawyer). It means a meeting in which a party consults or confers and eventually it results in human interaction that leads to rendering of advice.
The Supreme Court held that as the factual matrix in the case at hand, would exposit the nrC had acted as a consultant. It had the skill, acumen and knowledge in the specialised field i.e. preparation of a scheme for required finances and to tie-up required loans. The nature of service referred by the nrC, can be said with certainty would come within the ambit and sweep of the term ‘consultancy service’ and, therefore, it had been rightly held that the tax at source should have been deducted as the amount paid as fee could be taxable as ‘fees for technical service’. once the tax is payable the grant of ‘no Objection Certificate’ was not legally permissible. Ergo, the judgment and order passed by the high Court was absolutely impregnable.
The Supreme Court dismissed the appeal, being devoid of merit.
A question that often arises in such circumstances is about the taxability of notional income under the head ‘Income from House Property’ in respect of the flats held as stock-intrade of business from which no rental income is received during the year. Whether the notional income in such cases is taxable at all and if yes, under the head “Income from business or profession” or “Income from house property”. Could it be said that even otherwise the notional income was not taxable on the ground that the unsold flats are occupied for the purposes of business. Further issue is whether rental income from such flats is taxable under the head ‘Income from House Property’ or ‘Profits and Gains of Business or Profession’. While the Delhi High Court has taken the view that notional income is to be taxed under the head “Income from House Property”, the Gujarat high court has held that the rental income in respect of the flats held as stock-in-trade should be taxed under the head ‘Profits and Gains of Business and Profession’ .
Ansal Housing Finance and Leasing Co’s case
The issue came up before the Delhi High Court in the case of CIT vs. Ansal Housing Finance and Leasing Co Ltd., 354 ITR 180. In this case, the assessee was engaged in the business of development of mini townships, construction of house property, commercial and shopping complexes, etc. It had certain unsold flats, out of the flats that it had constructed.
During the course of assessment proceedings, the assessing officer proposed to assess the annual letting value of flats which the assessee had constructed, but which were lying unsold, on notional basis u/s. 22, under the head “Income from House Property”. The assessee contended that the flats were its stock in trade, were lying vacant, and therefore the annual letting value of the flats could not be brought to tax under the head “Income from House Property”. The assessing officer did not accept the assessee’s stand, and added the notional letting value of the unsold flats to the total income of the assessee.
The Commissioner(Appeals) set aside the addition made by the assessing officer. The appeal to the Tribunal by the revenue was also dismissed.
Before the High Court, it was argued on behalf of the revenue that regardless of whether income was on from the vacant flats, the assessee in its capacity as owner, had to pay tax on the annual letting value. It was argued that tax incidence did not depend on whether the assessee actually rented out the premises or not, but on the mere fact of ownership. Reliance was placed on behalf of the revenue on the Calcutta High Court decision in the case of Azimganj Estate (P) Ltd 206 Taxman 308, where , the builder had flats which were let out, the Court held that the rental income was assessable not under the head of profits or income from business, but under the head income from house property. It was argued before the Delhi high court that so long as the assessee continued to be the owner of the vacant flats, it had to be assessed under the head of income from house property. Since there was no letting out, the basis of assessment had to be annual letting value, which was rational and scientific.
On behalf of the assessee, it was argued that unlike in the case before the Calcutta High Court, in the present case, the assessee did not actually let out the vacant flats. It was not even in the business of renting out its flats. Letting out vacant or other properties was not part of the business objectives of the assessee, and since it did not derive any income as a result of letting out, that judgment did not apply. It was argued that income tax was a levy on income received, and not only on an amount derived on notional calculations. In the alternative, it was argued that the flats could not be taxed on the basis of their notional annual letting value, because the owner was an occupant, and such occupation was in the course of and for the purpose of business as a builder. It was explained to the court that section 22 saved the case of flat occupied, for the purposes of business, from taxation.
The Delhi High Court held that the levy of income tax in the case of a person holding house property was premised not on whether the assessee carried on business as landlord, but on the ownership. The incidence of charge was because of the fact of ownership.
The High Court further observed that in every case, the Court had to discern the intention of the assessee, and that in the case before it, the intention of the assessee was to hold the properties till they were sold. According to the Court, the capacity of being an owner was not diminished one whit because the assessee carried on the business of developing, building and selling flats in housing estates. It negated the assessee’s argument that since income tax was levied not on the actual receipt but on a notional basis, i.e. Annual Letting Value, it was therefore not sanctioned by law. According to the Court, Annual Letting Value was a method to arrive at a figure on the basis of which the impost was to be effectuated. The existence of an artificial method itself would not mean that levy was impermissible. Parliament had resorted to several other presumptive methods, for the purpose of calculation of income and collection of tax. Application of Annual Letting Value to determine the tax was regardless of whether actual income was received; it was premised on what constituted a reasonable letting value, if the property were to be leased out in the marketplace.
Addressing the alternative argument that the assessee itself was the occupier, because it held the property till it was sold, the Court held that there was no merit in that submission. According to the Court, while there could be no quarrel with the proposition that ‘occupation’ could be synonymous with physical possession, in law, when Parliament intended a property occupied by one who was carrying on business, to be exempted from the levy of income tax was that such property should be used for the purpose of business. The intention of the lawmakers, in other words, was that occupation of one’s own property, in the course of business, and for the purpose of business, i.e., an active use of the property, (instead of mere passive possession) qualified as ‘own’ occupation for business purpose.
The Delhi High Court therefore held that the annual letting value of the unsold flats was taxable, as the income was taxable under the head “Income from House Property”.
Neha Builders’ case
The issue about the head of income came up for consideration before the Gujarat High Court in the case of CIT vs. Neha Builders (P) Ltd. 207 CTR 231.
The assessing officer was of the view that since the expenses on maintenance of the property were debited to the profit and loss account, and the building was also shown as stock in trade, the property would partake the character of stock. According to the assessing officer, any income derived from stock could not be taken to be income from property. the Commissioner(appeals) upheld the view of the assessing officer. The Tribunal allowed the assessee’s appeal, observing that any dividend received on shares held as stock-in-trade was taxable under the head ‘income from other sources’ by virtue of statutory provision, and therefore, any income derived as rent would be taxable under the head ‘income from house property’.
Before the Gujarat high Court, on behalf of the revenue, it was argued that if the property was used as a property, then any income therefrom would be an income from house property, but if the property was used as stock, than any income from such stock would not be an income from house property.
The Gujarat high Court noted that the case of the assessee was that the company was incorporated with the main objects of purchasing, taking on lease, acquiring by sale or letting out the buildings constructed by the company. development of land or property was also one of the businesses for which the company was incorporated.
The high Court noted that income derived from property would always be termed as income from the property, but if the property was used as stock in trade, then the property would partake the character of the stock, and any income derived from the stock would be income from the business, and not income from the property. The court observed that if the business of the assessee was to construct the property and sell it or to construct and let out the same, then that would be business, and the business stocks, which would include movable and immovable properties, would be taken to be stock in trade, and any income derived from such stocks could not be termed as income from property.
The high Court further held that , there was a distinction between “income from business” and “income from property” on one side, and “income from other sources” on the other. in the opinion of the Court, the tribunal was not justified in comparing rental income with dividend income on shares or interest income on deposits. The court observed that this comparison was not raised before the subordinate authorities, and the tribunal on its own supplied the said analogy.
The high Court noted that from the statement of the assessee, it was clear that it was treating the property as stock in trade. From the records, it was also clear that except for the ground floor, which had been let out by the assessee, all other portions of the property constructed had been sold out. That being the case, right from the beginning, the property was held as stock-in-trade.
The Gujarat high Court therefore held that the income from property held as stock-in-trade was to be assessed as business income.
Observations
There are three issues involved here; the taxation of notional income of unsold flats held as stock-in-trade, claim that such flats so held are occupied for the purposes of business and the head of income especially in cases where real income is received on letting of such flats. The related questions could be the allowability of the claims for vacancy allowance and that of the taxes and interest in full. A reasonable certainty that prevailed in relation to taxation of income under the head ‘income from house property,’ where the rental income is received on letting of such flats, is disturbed by the above referred decision of the Gujarat high court in the case of neha Builders. The court in this case held that the rental income of such flats, in the hands of a builder, can be taxed under the head ‘Profits and Gains of Business’, dismissing the claim of the assessee that the same should be taxed as ‘income from house property’. In that case, it was the income tax department that claimed that the income in question should be taxed as the business income. The reasoning of the court that income from flats held as stock-in-trade of a business, should be taxed as the business income, is appealing and is not to be dismissed summarily for the added reason that the court distinguished the decisions delivered in the context of dividend and interest income relating to the business under the head ‘Profits and Gains of Business’, to consciously hold that there was a difference between the two heads of income. With this, there at least arises the need for refreshing the debate on the issue.
The case of the unsold flats not let out and remaining vacant is otherwise also on a better pedestal. it is a case where no income whatsoever is received. there is no real income is received here, actual or otherwise. in the circumstances, no question should arise about deciding the head of income. The Gujarat high court decision can be applied here with the greater force to contend that the question of deciding the head, as is in the case of the business related dividend income, does not arise at all where there is no income. Independently, the rule that the income from ownership of the property shall always be taxed under the head ‘income from house property’ is not something that is written in stone; an exception is made by section 56(2)(iii) that provides for taxation of such income which is inseparable from letting of other assets. The case for not taxing the flats held as stock-in-trade is also supported by the fact that such flats are exempted from levy of the wealth tax under the Wealth tax act which in turn indicates the intention of the legislature to keep away such flats from the impost of taxation.
There is also a good case to hold that even the notional income is saved from taxation by the express provision of section 22 which excludes the income from the property occupied for the purposes of business. It is true that the delhi high court in the ansal housing finance’s case explained where a person could be said to be occupying the property for business purposes.With respect, it seems that a contrary view is not ruled out. A businessman holding an unsold flat for the purposes of sale can surely be said to have occupied such a flat for the purposes of his business which business is to keep such flat ready for sale and exhibit it to persons desirous of purchasing it . All this is a part of the business and is possible only where it is occupied by him.
There is also a good case for him in such a case to claim vacancy allowance u/s 23(1)(c) of the act. the deeming fiction of section 22 is to be applied by determination of annual Value as per section 23 of the act which provision requires due consideration of the fact that the property in question had remained vacant during the year.
It appears that the CBDT also has two conflicting views on the subject which has been evident by the fact that in the case before the Gujarat high court, it sought to contend that the income in question should be taxed under the head “Profits and Gains of Business”.
The history of the income tax act is replete with stories of cases revolving simply around the heads of taxation. the enormous litigation arises simply on account of the schedular system of taxation which requires the income to be pegged under a specific pigeon hole. This is most evident in the cases involving transactions in securities that has flooded the courts. It is high time that the parliament takes note of unwarranted litigation and does away with the system of head wise taxation, once for all.
Position under Transfer of Property Act, 1882:
Before
discussing the position under the Income-tax Act, it would be
imperative to understand the implications under the General Law i.e.
Transfer of Property Act. Section 54 of Transfer of Property Act
provides that ‘A contract for the salel of immovable property is a
contract that a sale of such property shall take place on terms settled
between the parties. It does not, of itself, create any interest in or
charge on such property.’ As the section expressly provides, an
agreement to sell is merely a contract for sale on agreed terms and the
agreement itself does not create any right or interest in the property.
It is therefore considered as a contract between the parties with
ensuing respective contractual obligations. In so far as the property is
concerned, no right in the property is affected. The parties to the
contract however get a right of specific performance of contract under
Specific Relief Act. This right of specific performance is a right
independent of the right in the property. This right is also construed
as right to obtain conveyance.
Further, section 40 of Transfer
of Property Act provides that where a third person is entitled to the
benefit of an obligation arising out of contract, and annexed to the
ownership of immovable property, but not amounting to an interest
therein or easement thereon, such right or obligation may be enforced
against a transferee with notice thereof or a gratuitous transferee of
the property affected thereby, but not against a transferee for
consideration and without notice of the right or obligation, nor against
such property. E.g., A sells Sultanpur to C. C has notice of the fact
that there is a contract of sale between A and B. B may enforce the
contract against C who is a third person and stranger to contract just
as he could enforce it against A. This provision is based on equity.
Accordingly, although a contract for sale does not create any interest
in land or charge upon it yet, it does create an obligation annexed to
ownership of property. However, it is to be seen that this obligation is
not enforceable against a transferee for consideration who had no
notice of the earlier contract.
Part Performance:
It
would also be necessary to appreciate the provisions of Part Performance
u/s. 53A of the Transfer of Property Act. As the provisions of section
53A where any person contracts to transfer for consideration any
immovable property by writing signed by him or on his behalf from which
the terms necessary to constitute the transfer can be ascertained with
reasonable certainty, and the transferee has, in part performance of the
contract taken possession of the property or part thereof, or the
transferee, being already in possession, continues in possession in part
performance of the contract and has done some act in furtherance of the
contract and the transferee has performed or willing to perform his
part of the contract, then notwithstanding that the contract, though
required to be registered, has not been registered, or, where there is
an instrument of transfer, that the transfer has not been completed in
the manner prescribed therefore by the law for the time being in force,
the transferor or any person claiming under him shall be debarred from
enforcing against the transferee and persons claiming under him any
right in respect of the property of which the transferee has taken or
continued in possession, other than a right expressly provided by the
terms of the contract:
Provided that nothing in this section
shall affect the rights of a transferee for consideration who has no
notice of the contract or the part performance thereof.
This
doctrine is a step subsequent to the execution of agreement to sell. It
applies where the transferee is in possession of the property in
pursuance of agreement for transfer of the property and he is willing to
perform his obligation under the agreement, then transferor is debarred
from claiming any right against the transferee. This doctrine gives a
right to the transferee to protect his possession and does not create a
title in the property. This right can be used as a shield but not as a
sword. This is based on the principle of equity However, the proviso to
section 53A further makes it clear that the right under this section
does not affect the right of a transferee who is different than the one
with whom the agreement to sell is made.
Thus it can be seen
that under both the situations above, there is no transfer of any right
in the property to the transferee but they give some other rights in
different forms. In case of Agreement to sell, the purchaser gets right
of specific performance of the agreement and in case of part
performance, the purchaser is entitled to protect his possession. The
transferor can transfer the property to third person and the new
transferee for a consideration who has no notice of such earlier
agreement gets proper title.
Position under Income-tax Act:
The right arising fromthe agreement to sell has been explained in various decisions. Since, the agreement to sell does not create rights in the assets, there have been instances where the assessee claimed specific performance of the contract and in that process, the amount received by assigning the right of specific performance was claimed to be capital receipt. While dealing with such question, the hon. Bombay high Court in case of CIT vs. Tata Services 122 ITR 594 held a contract of salel of land is capable of specific performance. It is also assignable. therefore, such right to obtain conveyance was ‘property’.
As contemplated by section 2(14). in that case, the assessee entered into an agreement with Seth Anandji Haridas for purchase of 5,000 sq. yards of land situated at Bombay, @ Rs. 175 per sq. yard and paid earnest money of Rs. 90,000. the vendor was to obtain requisite permission from municipal and other authorities at his cost. the agreement of purchase was to be completed within 6 months of its execution. if the permission was not obtained on any account whatsoever, the vendor was entitled to cancel the agreement and the earnest money was to be refunded. the vendor could not obtain requisite permission and wanted to cancel the agreement. this was not accepted by the assessee. finally, a tripartite agreement was entered into among Seth anandji haridas, the assessee and m/s advani & Batra. in consideration, the assessee received a sum of Rs. 5,90,000 from m/s. advani & Batra, consisting of rs. 5 lakh as consideration for transfer and assigning its rights, etc., and Rs. 90,000, being the earnest money paid to Seth anandji haridas. the tribunal held that it was a case of transfer of a capital asset. the case of the assessee was that the agreement for sell did not create any interest or right in land in favour of the assessee as per section 54 of the transfer of property act. the amount of Rs. 5,90,000 was merely compensation and not consideration of transfer of any right, etc. in the land as the assessee did not own any asset as contemplated by section 2(14) of the act. the hon’ble Court pointed out that as per section 54 of the transfer of property act, a contract for sell of immovable property does not by itself create any interest in such property. However, it was difficult to see how the aforesaid provisions were applicable to the facts of the case. It was nobody’s case that the aforesaid agreement gave rise to a right in the land which was agreed to be sold by Seth anandji haridas and purchased by the assessee. the case of the revenue was that under the agreement to sell, the assessee had a right to obtain a conveyance of the immovable property. This right of conveyance either get extinguished or was assigned in favour of m/s. advani & Batra for a consideration, of rs. 5,90,000. the hon’ble Court referred to the definition of ‘capital asset’ given in section 2(14) of the act and pointed out that it has a wide ambit. The hon’ble Court also referred to the provisions of section 2(47) of the Act, which defines the term ‘transfer’ to include the sell, exchange, relinquishment of asset or extinguishments of any right therein, etc. It was also pointed out that a contract of sell of land is capable of specific performance. It is also assignable. Therefore, such right to obtain conveyance was ‘property’ as contemplated by section 2(14). This right was assigned in favour of m/s. advani & Batra and, therefore, it amounted to transfer of right by way of extinguishment of any right therein. a similar view has been taken in the following cases–
CIT vs. Vijay Flexible containers 186 ITR 693 Bom,
K. R. Shrinath vs. ACIT 268 ITR 436 Mad CIT vs. H. Anil Kumar 237 CTR 537 Kar
The above decisions imply that the right acquired under agreement to Sell is a right which is a capital asset since the definition of Capital asset u/s. 2(14) provides property of any kind. it further implies that this right is different than the property itself. The agreement to Sell gives rise to a right which is separate and independent right than the right in the property itself. Applying this principle of law, in cases where the assessee enters into agreement to sell with the intention to purchase a flat to be constructed in a scheme by a builder, and if the rights are sold before possession and conveyance, the capital gains are chargeable on account of transfer of rights arising out of the agreement to sell.
Right to sue:
The right to obtain specific performance or right to obtain conveyance is further distinguished from right to sue. in a given case, if after agreement to sell, one of the party refuses to perform his part of the contract but also disposes of the subject-matter, the injured party has nothing left in the contract except the right to sue for damages. there is no other right flowing from the contract except the right to complain about breach and sue for damages or specific performance of the contract with or without injunction as well as restitution of the benefit which the defaulting party has received from the injured party. Once there is a breach of contract by one party and the other party does not keep it alive but acquiesces in the breach and decides to receive compensation therefor, the injured party cannot have any right in the capital asset which could be transferred by extinguishment to the defaulter for valuable consideration. That is because a right to sue for damages not being an actionable claim, a capital asset, there could be no question of transfer by extinguishment of the assessee’s rights therein since such a transfer would be hit by section 6(e) of the transfer of property act. Section 6(e) provides for exceptions to property that can be transferred. it provides in clause (e) that a mere right to sue cannot be transferred. in such situation, the amount received an account of damages would not be chargeable under the head capital gains. Gujrat high Court in case of Baroda Cement & Chemical Ltd vs. CIT 158 ITR 636 has adopted this line of proposition. In order to find out the exact nature of amount received by the assessee as to whether it is from assignment of right attracting capital gains or purely damages for breach of contract to be treated as capital receipt, it would be essential to refer to the agreement minutely and determine the exact transaction.
Period of holding:
The next question is as to the period of holding. for the purpose of determining the nature of capital gains as to long term or short term, the period of holding is relevant. the question arises as to which date, the capital asset was acquired, the date of agreement to sell or the date of possession or actual conveyance. Section 2(42a) defines short term capital asset as a capital asset held by an assessee for not more than 36 months immediately preceding the date of its transfer. as per this section, the period for which the asset was held by the assessee is to be seen. the interpretation of the word ‘held’ requires attention. the term can be understood to mean held as a legal owner in which case the date of acquiring the legal title would be relevant or the term ‘held’ can be interpreted to include beneficial ownership as well without the legal title. the Bombay high Court in case of CIT vs. R. R. Sood 161 ITR 92 held that it is well-settled in law that a mere agreement to purchase a land does not convey any title to the said land or create any interest in the said land. all that the intended purchaser acquires under such an agreement is an equity to obtain specific performance. the fact that she was put in possession of the said plot does not in any way confer on the assessee a title to the land in question. at best, such possession might give the assessee a right to claim the benefit of part performance, but it is clear that the fact of being put in possession in part performance of the agreement cannot confer any title on the assessee to the land in question. It was only on the execution of the conveyance that the assessee acquired title to the said plot and it was only from the date of conveyance that it can be said that the assessee held the said plot as the owner thereof. However, the punjab & haryana high Court in case of CIT vs. Ved Parkash & Sons (HUF) 207 ITR 148 has taken a different view on the question. in the case before the punjab & haryana high Court, the assessee entered into an agreement for sell and was put into possession on the same day. the consideration was to be paid in installments. When the last installment was paid, the same day the property was sold. the capital gains was assessed as short term by ao. the high Court held that from the bare reading of section 2(42A) of the act, word `owner’ has designedly not been used by the legislature. The word `held’ as per dictionary meaning means to possess, be the owner, holder or tenant of (property, stock, land. ). Thus, person can be said to be holding the property as an owner, as a lessee, as a mortgagee or on account of part performance of agreement, etc. Conversely, all such other persons who may be termed as lessees, mortgagees with possession or persons in possession as part performance of the contract would not, in strict parlance, come within the purview of an `owner’. As per Shorter oxford dictionary, edition 1985, `owner’ means one who owns or holds something; one who has the right to claim or title to a thing. the assessee in terms of agreement to sell having been put in possession, remained in its occupation as of right and thus for all intents and purposes was its beneficial owner from the start. the capital gain was a long-term capital gain. the meaning of beneficial ownership was also adopted in case of decision of itat in A. Suresh Rao vs. ITO 144 ITD 677 (Bang). The decision of the Bombay high Court in case of r. r. Sood was before the amendment to Section 2(47) by which the concept of part performance u/s. 53a of transfer of property act was recognised for the purpose of transfer. The meaning of beneficial ownership may be possible and if the assessee is in possession of the property as a beneficial owner and is beneficially enjoying it, such date can be suitably adopted for computing the period of holding. Other relevant and supporting factors for claiming beneficial ownership could be the municipal bill, the electricity connection or income from the property if assessed in his hands. On the other hand, if the rights to obtain conveyance are transferred, the date of agreement would be the date relevant for computing period of holding as held in Gulshan Malik vs. CIT 102 DTR 354 (Del) in which case the booking rights were transferred.
Nature of Transaction of sale: The transaction of sale of property may involve two stages. first, the stage of agreement to sell. if the agreement is entered into and thereafter it becomes matured for conveyance by fulfillment of the respective obligations from both sides, it would be a transaction of sell of property i.e land or building. the agreement to sell gives rise to right of specific performance but if the conditions are fulfilled, the right thereafter gets merged or converted into ownership after the purchase of the property. if however, the terms are not fulfilled; either party has option to use their right of specific performance under Specific Relief Act. The suit for specific performance may have various outcomes. The Court may direct for specific performance in a given case or the parties may arrive at the settlement involving assignment of this right to someone else or the party may accept pure damages. in such cases where the right is assigned, it would be a transfer of right to obtain specific performance liable for capital gains u/s.
45. It is essential to carefully identify in a given situation as to whether is it transaction of sale of property itself or transfer of right of obtaining conveyance in pursuance of agreement to sell.
Transfer u/s. 2(47):
In both the situations, the point at which the transfer u/s. 2(47) needs to be determined. In the case where the right is surrendered, the transfer u/s. 2(47) would arise at a time when the agreement for surrender of such right is entered into. in other case where the agreement to sell is to be acted upon by fulfilling the obligations, section 53A would be applicable. Section 2(47) was amended in 1987 which enlarged the scope of transfer to transaction contemplated u/s. 53A of transfer of property act. the CBDT’s Circular no. 495, dt. 22nd Sept., 1987 [(1988) 67 CTR (St) 1] provides an insight into the background and objective of the said clauses :
“11.1 The existing definition of the word ‘transfer’ in section 2(47) does not include transfer of certain rights accruing to a purchaser, by way of becoming a member of or acquiring shares in a co-operative society, company, or aop or by way of any agreement or any arrangement whereby such person acquires any right in any building which is either being constructed or which is to be constructed. transactions, of the nature referred to above are not required to be registered under the registration act, 1908. Such arrangements confer the privileges of ownership without transfer of title in the building and are a common mode of acquiring flats particularly in multi- storeyed constructions in big cities. The definition also does not cover cases where possession is allowed to be taken or retained in part performance of a contract, of the nature referred to in sectiosssssn 53A of the transfer of property act, 1882. now sub-cls. (v) and (vi) have been inserted in section 2(47) to prevent avoidance of capital gains liability by recourse to transfer of rights in the manner referred to above.”
The above amendment makes it clear that earlier, there was no transfer unless conveyance deed was executed. To prevent avoidance of capital gains liability to indefinite period, the scope of transfer was widened and the event of transfer was preponed to the stage of contemplated under part performance u/s. 53a of transfer of property act. This goes to show that the mere execution of agreement to sell did not trigger transfer u/s. 2(47) of the property. Specifically in the context of purchase of property, the transfer has to be seen with reference to clause (v) of section 2(47) dealing with part performance. The necessary event would therefore be the obtaining of possession by the transferee in pursuance of agreement to sell.
Decision of The supreme court in The case of Sanjeev Lal:
in the case before the Supreme Court, the agreement to sell was made in 2002. the assessee received Rs. 15 lakh out of total consideration of rs 1.32 crore. the assessee purchased new house on 30-4-2003. thereafter, there were suits filed challenging the will document by which the assessee had acquired the property. Because of the interim order of the court of civil suit restraining the parties to deal with the property, the sell deed could not be executed. the dispute was resolved and then the sell deed was executed on 24-9-2004. The assessee claimed the capital gains to be exempt since the gain was invested in new house. the claim was rejected on the ground that the transfer took place in 2004. Since the new house was purchased before one year prior to the date of transfer, the exemption was held to be not allowable by the learned ao. the matter reached upto the Supreme Court. in dealing with the question of transfer the Supreme Court held that-
1. An agreement to sell gives rise to a right in personam in favour of transferee. It gives right of specific performance if vendor is not executing sell deed.
2. Some right in respect of capital asset had been transferred in favour of vendee which got extinguished because after agreement to sell as it was not open to the appellants to sell the property to some one else in accordance with law. There was a transfer u/s. 2(47) on agreement to sell.
3. Purposive interpretation should be given while considering a claim of exemption. Since the amount was invested in new house, the assessee was entitled to exemption u/s. 54.
The immediate question that is raised in one’s mind is that does it lay down the law that transfer of property u/s. 2(47) gets triggered on agreement to sell. As discussed earlier considering the provisions of section 2(47), the amendment in 1987 so as to insert clause (v) thereby encompassing the situation of part performance within the meaning of transfer, the reading of the decision to that effect may not be appear to be in consonance with the existing or prevailing provisions of the act. The provisions of transfer of property also do not provide for any express bar for the transferor to sell the property to third person. the agreement to sell gives rise to independent right of Specific Performance without affecting the title of the owner or transferor. Even the obligation attached to the property in view of section 40 of the transfer of property act does not bind the third person is he has no knowledge of the contract.
In view of this inconsistency between the above interpretation of the decision and the prevailing law, the decision could not be understood to be laying down the law on transfer u/s. 2(47) for agreement to sell in general. the Supreme Court’s verdict was on the whole question as to the transfer of property u/s. 2(47) as also the exemption u/s. 54. Since the assessee had invested the capital gain in new asset, the Supreme Court proceeds to adopt purposive interpretation and did not hesitate to hold that the transfer was effected u/s. 2(47) on agreement to sell appreciating that ultimately the legislature did not want to burden the tax payer if he invested in prescribed asset. If one looks at the decision as a whole question, it can be said that the decision is in the specific context of facts and law before them. The obvious reason for such view is that the Supreme Court decides not to go into the law on transfer in general but restricts itself to question of exemption rws transfer u/s. 2(47). In the context of general law, the Supreme Court makes a categoric observation in para 20 of the decision that the question as to whether the entire property can be said to have been sold at the time when agreement to sell is entered into, in normal circumstances has to be answered in the negative. The entire discussion of the Supreme Court in connection with transfer u/s. 2(47) is in the background of exemption u/s. 54 which appears expressly in the judgement.
In the context of general law, section 52 of transfer of property act is based on a doctrine called “Lis Pendens” meaning during the pendency of any suit regarding title of a property, any new interest in respect of that property should not be created. in essence, the provision prohibits transfer of property pending litigation. This aspect though crucial in general law could not prevail the mind of the Supreme Court as it did not find relevant for deciding the question before them.
Similar situation arose before Supreme Court in case of CIT vs. Sun Engineering Works P. Ltd. 198 ITR 297 in which the Supreme Court had to interpret the judgement of Supreme Court in case of V. Jaganmohan Rao vs. CIT reported in 75 ITR 373. it was urged before the Supreme Court that in case of jaganmohan rao, the Supreme Court has taken a view that in reassessment proceedings, the entire assessment is reopened and the original assessment is wiped off. The Supreme Court in case of Sun engineering held that to read the judgment in V. jaganmohan rao’s case (supra), as laying down that reassessment wipes out the original assessment and the reassessment is not only confined to “escaped assessment” or “underassessment” but to the entire assessment for the year and starts the assessment proceedings de novo giving the right to an assessee to re-agitate matters which he had lost during the original assessment proceedings, which had acquired finality, is not only erroneous but also against the phraseology of section 147 of the act and the object of reassessment proceedings. Such an interpretation would be reading that judgment totally out of context in which the questions arose for decision in that case. it is neither desirable nor permissible to pick out a word or a sentence from the judgment of this Court, divorced from the context of the question under consideration and treat it to be the complete “law” declared by this Court. the judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this Court. A decision of this Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the Courts must carefully try to ascertain the true principle laid down by the decision of this Court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this Court, to support their reasoning. in Madhav Rao Jivaji Rao Scindia Bahadur vs. Union of India (1971) 3 SCR 9 : AIR 1971 SC 530, this Court cautioned :”it is not proper to regard a word, clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as containing a full exposition of the law on a question when the question did not even fall to be answered in that judgment.” The above observations thus help us in interpretation of the decision in Sanjeev lal’s case.
Conclusion:
Agreement to sell in the literal as also in legal sense means, a contract or agreement to transfer property on agreed terms. It needs to be perceived as a contractual arrangement to be fulfilled in future. The taxability on transfer of property may not be guided by the agreement to sell. The verdict of Supreme Court needs to be interpreted being restricted to the question before it in light of the discussion above. However, the agreement to sell is an essential document to find out and determine the exact nature of property that is transferred and its chargeablity to capital gains.
The Finance Minister deserves to be congratulated on the introduction of the Bill. The siphoning off of funds and wealth created by evading taxes has been a disease our country suffered from even prior to the independence. In the postindependence era, the menace increased exponentially in a regime where tax rates were astronomically high, there was distrust between the taxpayer and the tax collector, and being wealthy was virtually a sin. By the time tax rates were rationalised, the disease had reached epidemic proportions, so that normal palliative medicine was of no use and a drastic surgery was necessary. The Bill which some view as harsh and irrational must be looked at in this background.
The estimates of illegal or “black” money which was kept in undisclosed accounts with foreign banks varied significantly. The CBI director stated in 2012 that the estimate was US dollars 500 billion. Finally, the judiciary stepped in and ordered the formation of a Special Investigation Team (SIT). It would be appropriate to note the anguish of the judges of the Supreme Court Justice B. Sudershan Reddy and Justice S.S. Nijjar who, while ordering the constitution of the SIT, remarked ”The issue of unaccounted money held by nationals and other legal entities in foreign banks is of primordial importance to the welfare of the citizens. The quantum of such monies may be rough indicators of the weakness of the state, in terms of both crime prevention and also of tax collection”. Finally, the government prodded by the Supreme Court has acted and the Bill has been introduced.
One may wonder as to why, if the source of ill-gotten wealth is in our country, the government should go after only that wealth that is lying in foreign countries. While undoubtedly the war against black money should continue in earnest on the domestic front, if one were to prioritise the efforts of the government in checking or mitigating this problem, beginning the battle against tax evasion with an attack on undisclosed foreign assets is probably justified. The first reason for this is purely economic. If income or assets on which tax has been evaded lie within the country, normally they circulate through distribution channels albeit unofficial. Therefore, if wealth resides in the country, it is more often than not distributed among different people though the distribution may be grossly unequal. Consequently, to an extent, such moneys gives a fillip to economic activity. On the other hand, once money is secreted abroad, it remains in a foreign economy with virtually no benefit to our country.
Secondly, if unaccounted wealth is within India the possibility or probability of it getting converted into disclosed wealth either voluntarily, or through detection is much stronger. Once black money is transported out of the country, the trail goes weak and then turns cold. In an attempt to detect such money, one may face a maze of legal issues and the success rate of such efforts is not encouraging.
Thirdly, such money often enters India, through a facade and is often hot money, leaving Indian shores at the slightest hint of economic turbulence. This affects a developing economy like ours. Finally, such wealth is often used by the underworld or terrorist organisations to wage an undeclared war on India. For all these reasons I believe that the Finance Minister has got his priorities right.
At first blush, the Bill seems to be fairly harsh. Perhaps, that is the intent. It seeks to tax the foreign undisclosed asset at the value in the year in which it comes to the notice of the assessing officer. If one aggregates the tax payable along with the penalty, an assessee would have to shell out 120%. While no one can defend a flagrant violation of the law, taxation on the basis of the value of the asset may result in a number of problems.
Further, there is no provision for stay of recovery of the tax and penalty, even though one may have filed an appeal against a manifestly erroneous demand. There are other glitches as well, which may possibly be ironed out in the course of the passage of the Bill becoming an Act. More importantly what needs to be addressed is the wantonly aggressive stand of the tax authorities in the recent times. While a person who evades taxes must undoubtedly be punished and should suffer, it is essential that an environment is created where compliance is rewarded, honesty is recognised and the treatment of a taxpayer is human. Those of my colleagues that were practising in the field are fully conscious of the tax terrorism that prevails. It is not sufficient only to say that the government wants a fair tax administration, action in that regard is necessary on the ground.
All in all, in its battle against black money, the government has taken the first step. Let us hope that this Bill is followed up with provisions to deter creation of ill-gotten wealth within the country. For the time being we can only say ” well begun is half done!”
The answer to the question as to which is the surest way to unhappiness is given in the following Sutra, which reads as under:
It means – “Ignoring what you have and longing for what you do not have is the surest way to unhappiness.”
How true! So lucidly explained! Simple as these words may sound, they hold the key to human happiness. The root cause of all our unhappiness is that we are never appreciative of what we have, never satisfied with what we have and are therefore never happy. As they say “the grass is always greener on the other side.” We are not thankful to the Almighty for all that He has given us. We have no sense of gratitude. We are always seeking more. Our desires are endless. Our ‘trishna’, our thirst is never ending.
When one’s cup is half full, one only looks at the empty upper half and cribs. “My cup is already half-empty”. Only rarely, a few are happy and rejoice saying “My cup is still half full”. One has to remember that one’s cup is ever full. It is upto us whether to cry about the cup which is half empty or feel happy that our cup is half full.
The desires around us are so strong that once they catch hold of us, it is difficult to escape from their clutches. There is a story of two shepherds. They were grazing their sheep on a bank of a raging river. Suddenly, one of them saw a black shining woolen object floating down the river. Thinking that it was woolen blanket, as it very much looked like one, one of them jumped in the river and swam upto it. When he reached it, to his horror, he discovered that it was not a blanket but a bear which was very much alive. Before he could swim away from it, the bear grabbed him. Both were being pulled by the strong currents. The Shepherd on the shore shouted “Leave the blanket, leave the blanket”. Our friend, whom the bear would not let go, shouted back, “What do I do?” I have left the blanket. But the blanket is not leaving me!” This friend’s plight is the one in which all of us are. When our desires take hold of us even if we want to leave them, they would not let us go. Ultimately, we drown under the burden of our desires.
Our attitude of comparing is one of the reasons for this situation. If I do not get something, it is alright so long as my neighbor does not get it. But if my neighbor gets the latest refrigerator, I must have it too. I would be unhappy till I have one. The media plays havoc with our desires. 24×7 we are bombarded with views of “beautiful things,” without which, we are told, life and living are incomplete. We succumb to this pressure, and go on acquiring objects which may not be of real use to us and forgetting in the process that we acquire an attitude which guarantees lifelong unhappiness.
We have no time to thank God Almighty for all that He has given to us. We have lost the art of ‘counting our blessings’.
Unknowingly, all of us have been treading on this path of unhappiness. What we must now do is clear. Tell ourselves that ‘things’ may bring comfort but not lasting happiness. We must stop in our tracks. Fortunately, a U-Turn on this road to unhappiness is permitted. We must turn around, retrace our steps and be on the right road to happiness. God is always more than willing to help us. I would like to end with the lines of a song of the bye-gone era which conveys the right message.
1. The obligation to export under the 20:80 scheme will continue to apply in respect of unutilised gold imported before November 28, 2014, i.e., the date of abolition of the 20:80 scheme.
2. Nominated banks are now permitted to import gold on consignment basis. All sale of gold domestically will, however, be against upfront payments. Banks are free to grant gold metal loans.
3. Star and Premier Trading Houses (STH / PTH) can import gold on DP basis as per entitlement without any end use restrictions.
4. While the import of gold coins and medallions will no longer be prohibited, pending further review, the restrictions on banks in selling gold coins and medallions are not being removed.
Presently, eligible residents who have entered into FCY-INR swaps to hedge their exchange rate and / or interest rate risk exposure arising out of long-term foreign currency borrowing or to transform long-term INR borrowing into foreign currency liability are not permitted to rebook or reenter into the swap once it is cancelled.
This circular permits residents borrowing in foreign currency to re-enter into a fresh FCY-INR swap to hedge the underlying after the expiry of the tenor of the original swap contract that had been cancelled, in cases where the underlying is still surviving.
This circular states that on and from February 19, 2015 recipients of FDI can now file the following returns using the e-Biz portal with RBI: –
1. Advance Remittance Form (ARF) – used by the companies to report the foreign direct investment (FDI) inflow to RBI.
2. FCGPR Form – which a company submits to RBI for reporting the issue of eligible instruments to the overseas investor against the above mentioned FDI inflow.
This online reporting on the e-Biz platform is an additional facility provided to Indian companies to undertake their ARF and FCGPR reporting and the manual system of reporting will also continue till further notice.
This circular states that importers are henceforth not required to submit Form A-1 to their banks at the time of making payments to their overseas suppliers for imports into India. However, banks need to obtain all the requisite details from the importers so as to satisfy themselves about the bonafides of the transactions before effecting the remittance.
This circular requires banks to: –
1. Follow up with their exporter customers to ensure that export performance (shipments in case of export of goods), in cases where advances have been received for exports from overseas buyers, are completed within the stipulated time period.
2. Undertake proper due diligence so as to ensure compliance with KYC and AML guidelines so that only bonafide export advances flow into India. Doubtful cases and instances of chronic defaulters must be referred to Directorate of Enforcement (DoE) for further investigation.
3. Submit a quarterly statement indicating details of doubtful cases and chronic defaulters (as per Annex) to the concerned Regional Offices of RBI within 21 days from the end of each quarter.
Foreign investment in India by Foreign Portfolio Investors This circular clarifies the queries received by RBI with respect to investment by Foreign Portfolio Investors (FPI). The queries and the respective clarifications are as under: –
a. Query: The applicability of the directions to investment by FPIs in commercial papers (CPs). Clarification: In terms of the aforesaid directions, any fresh investments shall be permitted in any type of debt instrument in India with a minimum residual maturity of three years. Accordingly, FPIs shall not be allowed to make any further investment in CPs.
b. Query: The applicability of these guidelines on debt instruments having maturity of three years and over but with optionality clause of less than three years. Clarification: FPIs shall not be allowed to make any further investments in debt instruments having minimum initial / residual maturity of three years with optionality clause exercisable within three years.
c. Query: The applicability of these guidelines on amortised debt instruments having average maturity of three years and above. Clarification: FPIs shall be permitted to invest in amortised debt instruments provided the duration of the instrument is three years and above.
This circular permits, with immediate effect, Foreign Portfolio Investors (FPI) to invest in government securities the coupons received by them on their existing investments in government securities. These investments will be outside the current limit of US $ 30 billion available for investments by FPI in government securities.
This circular clarifies that, with immediate effect, in case of investment by Foreign Portfolio Investors (FPI): –
1. All future investments within the limit for investment in corporate bonds will have to be in corporate bonds with a minimum residual maturity of three years.
2. All future investments against the limits vacated when the current investment runs off either through sale or redemption, will have to be in corporate bonds with a minimum residual maturity of three years.
3. No further investment can be made in liquid and money market mutual fund schemes.
4. There will be no lock-in period and FPI can sell the securities (including those that are presently held with less than three years residual maturity) to domestic investors.
Facts:
The Respondent, a manufacturer availed CENVAT Credit on various inputs. CENVAT Credit was denied on the ground that the dealers did not supply any scrap but only issued invoices.
Held:
The Tribunal noted that the Respondent made full payment of duty indicated in the invoice by cheque, the transaction and the payments are properly recorded in the books of Account and therefore the onus under Rules 9(2), 9(3), 9(4) and 9(7) of the CENVAT Credit Rules, 2004 which requires to ensure that appropriate duty of excise on inputs paid was discharged. Further the suppliers were registered with the department and thus their identity and address were never in doubt and thus the benefit of CENVAT credit being a substantial benefit granted by law cannot be denied on flimsy grounds.
Facts:
Appellants were executing the contract of Commercial or Industrial Construction Service. Due to dispute, the contract was terminated and thereafter fresh bids were evaluated and the contract was again awarded to the Appellants and a new contract was executed with effect from 05/06/2007. Various documents viz. tender documents; affidavits regarding the entire sequence of events were placed on record to establish that the work was executed under the new contract.
Held:
On verification of the documents, the Tribunal held that it is apparent that two contracts are different in factual details and thus it was concluded that a fresh contract was executed with effect from 05/06/2007 and thus there is no objection to classify the service rendered in this contract as Works Contract Service. It was also held that the Appellants are eligible for the composition scheme as paying service tax at the composition rate in the returns filed is enough indication and sufficient compliance with Rule 3(3) of the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007.
Facts:
Assessee, a manufacturer of motor cycles, took CENVAT Credit of mirror assembly, sari guard and tool kit treating them as ‘inputs’. The Commissioner allowed the CENVAT Credit. The revenue filed the appeal on the ground that the said items are not used in or in relation to the manufacture of the motor cycle and therefore are not eligible to be called inputs as per the law prevailing prior to 01/03/2011.
Held:
Tribunal observed that, it is not disputed that all three impugned items are cleared along with the motor cycle and the value thereof is included in the assessable value of the motor cycle. The Tribunal relied upon the decision in the case of CCE vs. Honda Motorcycle & Scooter India (P.) Ltd. 2014 (303) ELT 193 (P&H) wherein it was held that the final product cannot be given restricted meaning so as to mean as the engine of the vehicle or the chassis but all things which are necessary to make the final product marketable. Thus, for motor vehicle, the tool kit and the first aid kit has to be part of the vehicle before the same can be put to use. Applying the said ratio in respect of sari guard and rear view mirror assembly, the Tribunal dismissed Revenue’s appeal.
Facts:
The appellant entered into a contract with an agreement with KPH Dream Cricket Pvt. Ltd. for sponsoring cricket team Kings XI Punjab. On the said contractual consideration, service tax was collected by M/s. KPH from the appellant and deposited with the Central Government under Business Auxiliary Service. However, revenue contended that the agreement between the parties falls under the category of sponsorship service and as such, the tax liability falls on the appellant under reverse charge basis.
Held:
The Tribunal observed that, in Hero Motocorp Ltd. vs. CST [2013] 38 taxmann.com 182, cricket has been held to be not covered by the sponsorship service. Further, the service tax on the same transaction already stands deposited by service provider under the category of Business Auxiliary Services. Demand of service tax in respect of the same transaction under a different category cannot be held justifiable.
Held:
The Tribunal held that the reasoning given by the lower authorities in taxing the transaction is fundamentally flawed. On a true and fair construction of provisions of the exclusionary clause under Explanation 1 to section 65(105)(zzzz); and in particular sub-clause (d) thereof, renting of buildings used for the purpose of accommodation including hotels, meaning thereby renting of a building for a hotel, is covered by the exclusionary clause and does not amount to an “immovable property”, falling within the ambit of the taxable service in issue.
Note: The above judgment is in respect of the period prior to 01/06/2010, i.e., before insertion of clause (v) in inclusion part of explanation 1 to section 65(105)(zzzz)
Facts:
The petitioner had filed refund claim of service tax paid on exempted services by mistake. The appropriate authority issued a SCN directing the petitioner to show cause as to why the claim should not be declined and if found to be eligible, why the same should not be appropriated against the arrears of service tax. It was argued that the SCN was issued in a pre-conceived manner and no purpose would be served in relegating the petitioner to go before the authority since the grounds given in SCN indicated the minds of the authority.
Held:
Article 226 of Constitution of India cannot be invoked unless the High Court is satisfied that the SCN was totally non est in the eyes of law for absolute want of jurisdiction to investigate into the facts, writ petitions should not be entertained.
SCN do not impose any penalty but discloses the prima facie findings so as to afford an opportunity to the petitioner to put forth their contentions.
The petitioner has invoked the power of refund under a specific statutory provision. Therefore, theHigh Court refrained from interfering with the proceedings.
Facts:
The appellants engaged in providing taxable services of “manpower recruitment and supply of agency services” was reimbursed provident fund in respect of manpower supplied and no service tax was discharged on this amount. It was contended that gross amount charged included provident fund component which was a statutory liability of service provider. Service tax with interest was paid before issuance of adjudication order. There was mass unawareness on the subject matter in view of various such notices floated by department. Whether the penalty u/s. 77 and 78 of the Finance Act, 1994 should be levied when they were under a bonafide belief regarding nonapplicability of service tax on reimbursement of provident fund amount, there was no case of fraud, collusion, wilful mis-statement or suppression of facts. Accordingly, the penalties should be dropped.
Held:
Having regard to the circumstances of the case and relying on the Hon’ble Supreme Court’s decisions in case of Anand Nishikawa Co. Ltd. 2005 (188) ELT 149 (SC) and Padmini Products 1989 (43) ELT 195 (SC), it was observed that there was no intention to evade tax, in view of payment of service tax with interest before issuance of adjudication order. Further, since the amount involved was trivial, the matter was not remanded back and was answered in favour of the appellants.
Facts:
The appellant, an association of non-banking financial companies have filed writ petition challenging the constitutional validity of section 137 of the Finance Act, 2001 by which Service Tax was introduced on “banking and other financial services” which includes ‘equipment leasing and hire-purchase’. It was contended that the Parliament has no authority to legislate on hire- purchase and leasing transactions since the State has such powers in this regard under Entry 54 of List II of seventh Schedule to the Constitution of India. After the 46th Constitutional Amendment and as per Article 366 29A (c) & (d), States were authorised to levy sales tax on hire-purchase and leasing transactions.
The transaction of leasing goods between the financier and the Hirer is almost similar to the hire purchase agreement. In case of leasing of goods, machinery/ other articles required by the lessee are identified and the purchase terms with the manufacturers/dealers are finalised. Thereafter, lessee approaches financier who advances the loan under the lease agreement executed. After finance is arranged, supplier raises invoice on the Financier and delivers the goods. While the financer continues to be the owner of the goods, lessee enjoys the right to use the goods and as and when installments of loan and other charges are paid, lessee either becomes owner or has option to purchase the goods by paying balance price.
Appellants have not denied that they were not collecting anything other than installments of loan and interest thereon and they were not collecting any charges for services rendered in the leasing arrangement. It was argued that the decision of the Supreme Court in BSNL’s case would be applicable in as much as levy of sales tax is possible on sale of goods involved in the transaction while service tax can be levied on the service charges received in the transaction.
Held:
The High Court after observing that a Hire purchase was for the vehicles and vehicles for this purpose were purchased from manufacturers/dealers after agreement between the Financers and price in part or full was advanced by the financier as a loan under agreement. Further, the vehicle was purchased in the name of the hirer and in the certificate of registration under the Motor Vehicles Act, hire purchase/hypothecation in favour of the financier was endorsed. Besides Appellants collected charges under various heads including interest etc. under hire purchase agreement.
Appellants could not deny or dispute that hire purchase agreement involves only sale of goods and no service was rendered by them. Admittedly they rendered services and service charges were also collected along with interest on loan advanced. In fact, hire purchase agreement between the financier and the hirer of the vehicle did not affect sales tax liability, whether it was payable at the point of sale of vehicle from the manufacturer or dealer to the financier or to the hirer or whether it was payable on delivery by the financier to the hirer under the Hire purchase agreement etc.
It was further observed that even if financier retained ownership under the hire purchase agreement, still sales tax was payable on delivery of vehicle. Therefore it was held that there was no conflict between the levy of sales tax on the sale/deemed sale of vehicle and the service tax payable on services rendered by the financier under the hire purchase agreement. Since interest was excluded through Notification, the incidence of service tax does not fall on interest on loan advanced.
Accordingly, the incidence of service tax was held to be not on sale/deemed sale of goods pertaining to leasing and hire purchase transactions covered by the said Article 366(29A) (c) and (d), the levy was upheld.
Facts:
Appellant, an advocate claimed to be affected by the service tax levy on advocates u/s. 65(105)(zzzzm) of the Finance Act, 1994. It was argued that they are engaged not only for aid and advice but also for appearance and representation of a case in the Court. Administration of justice, a sovereign and legal function of the State and Advocates were part of the same, could not be said to be rendering any services under the Act. Legal profession had not been understood as a profit making activity or venture. It was not a business or trade. It was a solemn duty which was performed for the litigants including the State who were major stakeholders in the judicial system. The levy of service tax imposed a heavy additional burden on litigants and also disabled them from approaching the Court. The amendment violated Article 14 of the Constitution as it discriminates between representation made on behalf of an individual and a business entity. The purpose to exempt representation and arbitration on behalf of individual seems to be to cater to the need of Article 39A of the Constitution. Equal treatment be given if the services are provided to Corporations/ Partnership firms.
Held:
The High Court after observing the amendment to the definition u/s. 65(105)(zzzzm) held that service tax was levied on Advocates providing service to business entity. However, service provided to individual by individual advocate continues to be exempted as legal advice, aid and assistance should be available to poor and needy section at lower cost In making this distinction, legislature was reasonable and did not overlook constitutional guarantee as envisaged in preamble and Article 14, 21 and 39A of Constitution of India. It was not a case where un-equals were treated equally. Such classification cannot be termed as arbitrary, discriminatory, unfair, unreasonable and unjust. As burden of service tax was on receiver of service and not on advocates, there was no violation of Article 19(1)(g) ibid. Also, Notification No. 25/2012 ST exempted services provided by individuals as advocate or a partnership firm of advocates by way of legal services to any person other than business entity or business entity with turnover up to Rs.10 lakh in preceding financial year. Hence small businessmen, petty traders and persons carrying on business in individual capacity would be able to afford services of individual of individual advocates or partnership firm of advocates.
Service tax on Advocates providing service to business entity does not mean that legal profession has been treated on par with commercial or trading activities or dealings in goods and services. Like any other service provider advocates are pushing themselves by rigorous marketing and advertisement, branding themselves as specialists in Corporate Law, Intellectual, Matrimonial and Family Laws, etc.
Notification No. 30/2012-ST shifting burden of paying service tax to litigants cannot be given retrospective effect because Legislature has decided to grant exemption and shift burden on to recipient from particular date, viz. prospectively and not retrospectively which does not mean that doctrine of equality has been violated. In matter of taxation-legislature has wide choice in taxation whereby it can include/exclude from tax bracket persons or classes of persons, decide cutoff date, and legislate retrospectively.
Accordingly, High Court dismissed the appeal and upheld the constitutional validity of service tax on legal service.
Facts:
The
Petitioners had tea plantation estates in the State of Assam located in
a disturbed and highly volatile area at which there was a constant
threat of damage to the estate. The consortium of owners of tea gardens
approached the Government of Assam for protection. A force-ASIF was
created by the Assam Government comprising of policemen as well as home
guards. The administrative control rested with the Director General of
Police and Commandant General of Home Guards, Assam. As per the MOU
signed with the Government, the force was deployed in the area to
protect planters and their property. The members of the force are
servants of the State of Assam. Their appointment, management,
discipline and pay are controlled by that State. It does not have power
to carry out any investigation. In case they detect the commission of
any cognisable offence they have to report it to the nearest police
station. For providing the service, the Assam Government charged a fee.
In other words, they ask the tea plantation owners to reimburse them of
the salary they have to disburse to the force. The Superintendent of
Service Tax wrote that the above service provided by the Assam
Government to the writ petitioner would be considered as a security
service and to be more specific a support service exigible to service
tax “in the hands of service receiver” and issued notice of demand.
Aggrieved by the same, Petitioners filed writ
Held
The
department contended that these personnel private security guards
provided by the State to the tea plantation owners for protection of
their persons and property and their functions were limited and
personalised. They had no police power or power of investigation. Hence,
it was “support services” provided by Government to business entity
liable under reverse charge in hands of the assessee. According to
petitioners, the service rendered are a part of the sovereign functions
of the State covered under list II entry1 of the 7th schedule to the
Constitution of India as the State has obligations to maintain law and
order, peace, prevention of crime in the tea growing and manufacturing
area of the State. Thus, discharging sovereign functions by the State
cannot be equated with providing support services by it. The High Court
observed that the basic foundation of the case that the force employed
by the State in the tea plantations discharges the sovereign function of
the State of maintaining peace and security in the region has not been
specifically denied in the affidavit-in-opposition filed by the
department and therefore the Court did not take into account any
statement made from the bar. On that basis, the Court held that, the
statement of the writ petitioner that the appointments to this force,
its management, control, finance, discipline etc., are regulated by the
Government is uncontroverted. That the nature of its function is to
protect the plantations and the personnel working therein against
unlawful acts is also uncontroverted. Therefore, prima facie there is
every indication that the service rendered by this force is sovereign
and hence not a “support service”.
The Court held that the value
of sovereign functions of a State is not taxable in the hands of the
citizens. Support services rendered by the Government are taxable.
Whether the service in question is taxable or not is a question of fact.
Leaving the matter to the judgment of the department to determine
whether the petitioner received support services or otherwise, the
notice was quashed and set aside. However, it was left open to the
department to adjudicate following an appropriate procedure as to the
matter being exigible to tax.
Facts:
The assessee was engaged in marketing and promoting various kinds of Indian Made Foreign Liquor (IMFL). It received consideration from the beer manufacturer under various heads like Primary Claim/Retail Scheme, commission, merchandise expenses, fixed office expenses, other expenses. Department was of the view that service tax be levied on the entire consideration received by the assessee under “Commission Agent” (Business Auxiliary Services). The Commissioner (Appeals) held that service tax would be levied only on commission. In department’s appeal before the Tribunal, it was held that assessee is also liable to pay service tax on merchandise expenses, fixed office expenses and certain part of the other expenses excluding expenses of registration and transportation. Department further preferred appeal before the High Court contending that amount received under the head Primary claim/Retailer scheme is also liable to service tax
Held:
The High Court held that the head of primary claim/retailer scheme is the amount which the service provider gave to retailers on behalf of manufacturer for achieving certain quota of sales. It was then reimbursed to it. Rule 5(2) qualifies the conditions under which fixed expenses or costs incurred by the service provided is to be excluded. It was observed that Commissioner (Appeals) after discussing the material on record recorded a finding that this was the expense that was done by the assessee as a pure agent and this finding has also been upheld by the Tribunal. Therefore, Revenue’s appeal was dismissed.
Facts:
Assessee, a manufacturer took credit of inputs namely, cement, explosive, lubricant oil and grease used in mining area treating them as inputs. Department argued that cement was used by assessee for purpose of filling gaps in form of cut and fill for excavation of ores; and obviously, cement had been used as a construction material so as to provide safety to roof of mining area and was, therefore, ineligible for credit
Held:
The High Court observed that the matter is squarely covered in favour of the revenue in the case of Union of India vs. Hindustan Zinc Ltd. 2008 (225) ELT 183 (Raj) where it was held that cement, being a building material used for the purpose of building construction, cannot be said to be an input used for manufacturing of final product and hence, no CENVAT Credit is available so far the cement is concerned. Further, that the foundation made of cement does not fall under the category of “capital goods” in terms of Rule 2(b) of the Rules of 2002; and therefore cement cannot be said to be ‘inputs’ in terms of Explanation-II to Rule 2(g) of the Rules of 2002. Relying upon the same, department’s appeal was allowed.
Note: Readers may also read decision in the case of Lloyds Metal & Engineering Ltd. vs. CCE 2008(226) ELT 599 (Mum- Tri) in which the above judgment of Hindustan Zinc 2008 225 ELT 183 is distinguished interalia on the ground that the issue of eligibility to CENVAT Credit on steel and cement themselves as capital goods being component or accessories or spare parts of specified capital goods was not under the consideration of the High Court. Also Refer CCE vs. APP Mills Ltd. 2013 (291) ELT 585 (Tri- Bang.) distinguishing Vandana Global Ltd vs. Commissioner 2010 (253) ELT 440 (Tri- LB)
Held:
The Hon’ble High Court held that Government departments are working with depleted staff strength and vacancy in the post of Finance and Accounts Manager being a vital factor, delay in filing appeals condoned upon imposition of cost.
Important judgment on interpretation on nature of lease transaction
Though there are several judgments, reference can be made to the followings:
Bharat Sanchar Nigam Ltd .(145 STC 91)(SC)
The
issue in this case was about levy of lease tax on services provided by
Telephone Companies. The Supreme Court held that no sales tax is
applicable as the transaction pertains to service. While holding so, one
of the learned judges on the Bench, observed as under in para 98 about
taxable lease transactions:
“98. To constitute a transaction for
the transfer of the right to use the goods the transaction must have
the following attributes:
a. There must be goods available for delivery;
b. There must be a consensus ad idem as to the identity of the goods;
c.
The transferee should have a legal right to use the goods –
consequently all legal consequences of such use including any
permissions or licenses required therefore should be available to the
transferee;
d. For the period during which the transferee has such
legal right, it has to be the exclusion to the transferor – this is the
necessary concomitant of the plain language of the statute – viz. a
“transfer of the right to use” and not merely a licence to use the
goods;
e. Having transferred the right to use the goods during the
period for which it is to be transferred, the owner cannot again
transfer the same rights to others.”
Based on above parameters,
there are further judgments at various forums where the nature of lease
transaction is decided. Reference can be made to following judgments:-
Smokin’ Joe’s Pizza Pvt. Ltd . (A 25 of 2004 dt.25.11.08)(MSTT)
The
facts in this case were that the dealer was holding the registered
Trade mark “Smokin’Joe’s” and allowed its use to its franchisees. The
franchise agreement provided for non exclusive right to use the
registered Trade mark. The agreement also provided for providing various
services to Franchisee. The lower authorities held the transaction as
taxable lease transaction. The Tribunal held that it is not a lease
transaction as it is not exclusive. This judgment is now before the
Bombay High Court by way of Reference.
Malabar Gold Pvt. Ltd . vs. Commercial Tax Officer, Kozhikode (58 VST191)(Ker)
This
judgment is of the Kerala High Court. In this case also, the
transaction was about granting of franchise right on non-exclusive
basis. The Hon. High Court has held that when the grant of franchise is
non exclusive it is not lease transaction and not liable to VAT.
On the other hand, there are a few contrary judgments as discussed below:
Nutrine
Confectionery Co. Pvt. Ltd. vs. State of Andhra Pradesh (40 VST
327)(A.P). In this case, the transaction was for allowing use of the
trade mark. The said use was also on non-exclusive basis. Still, the
Hon. A.P. High Court has held that the transaction is a lease
transaction. The Hon. High Court felt that the judgment of BSNL about
exclusive use cannot apply in relation to intangible goods like trade
mark.
Latest Judgment of THE Hon. Bombay High Court
Latest
in the series, there is a judgment from the Bombay High Court in case
of Tata Sons Ltd. vs. State of Maharashtra (W.P.No.2818 of 2012 with
Notice of Motion (L) No.214 of 2013 dt.20.01.2015).
In this
case, the use of brand name was allowed on nonexclusive basis. Before
the Hon. Tribunal, judgments including in case of Smokin’ Joe’s was
relied upon for nonliability. However, the Tribunal has confirmed the
liability. Therefore, this matter came up, before the Hon. Bombay High
Court, on behalf of the assessee. After referring the facts and various
judgments including in case of BSNL, the Hon. Bombay High Court has held
that even if use of right is given on non-exclusive basis, still it
will be a lease transaction. The observations of the Hon. Bombay High
Court are as under:
“50. Para 98 is relied upon by Mr. Chinoy.
However, that cannot be read in isolation and out of context. It must be
read in the backdrop of the underlying controversy, namely,
relationship between a telephone connection service provider and its
customer. Such a transaction is essentially of service.
51. It
is in relation to such a controversy that the observations, findings and
conclusions must be confined. We do not see as to how they can be
extended and in the facts and circumstances of the present case to the
enactment that we are dealing with. Going by the plain and unambiguous
language of the Act of 1985, we cannot read into it the element of
exclusivity and a transfer contemplated therein to be unconditional.
Therefore, the tests in para (d) and (e) cannot be read in the Act of
1985. 58. We are of the opinion that the Tribunal did not act perversely
or committed an error apparent on the face of record in rejecting the
petitioner’s appeals. May be the Tribunal could have rendered a detailed
finding and conclusion. However, upon perusal of the order passed by
the Tribunal we find that it referred to the facts. It has also adverted
to the contentions of the parties. It also referred to its own
conclusions rendered in the case of M/s. Smokin’ Joe’s etc. However, it
concludes that the facts and circumstances in the present case are not
identical to the cases dealt with by it and of the above franchisees. We
do not express any opinion as to whether the Tribunal’s conclusions in
the case of M/s. Smokin’ Joe’s (supra) and M/s. Diageo India (supra) are
accurate or correct. We are informed that separate proceedings in that
regard are pending in this Court. However, the Tribunal did not err in
holding that the cases which have been dealt with by it including the
Supreme Court judgment in the case of BSNL (supra) are on distinct
facts.”
Conclusion
Thus, the controversy is
increasing day by day. There is uncertainty in the mind of assessees as
to which is the correct tax applicable, whether service tax or VAT. In
fact, this has led to double taxation ultimately resulting in enhanced
cost to the assessees and correspondingly to the consumers. It is
expected that finality be brought to the above burning issue either by
legislative interference or by judgment of the Hon. Supreme Court.
Facts:
The
assessee, an investment management consultant, filed its return of
income for assessment year 2009-10 returning a total income of Rs. Nil.
In the course of assessment proceedings, the Assessing Officer (AO)
noticed that the assessee has claimed a loss of Rs. 93,63,235 on account
of foreign currency futures. The AO disallowed the loss of Rs.
93,63,235 by considering it to be a speculative transaction in view of
the provisions of section 43(5) r.w.s. 2(ac) of the Securities Contracts
(Regulation) Act, 1956.
Aggrieved, the assessee preferred an
appeal to the CIT(A) who observed that the assessee is not in the
manufacturing and merchanting business, and is also not a dealer or
investor in stocks and shares and therefore the loss on foreign currency
futures is not in the nature of hedging loss and that such loss was not
incurred in the course of guarding against loss through future price
fluctuation in respect of contract for actual delivery of goods
manufactured or in respect of stock of shares entered into by a dealer.
He held that the provisions of clause (d) of the proviso to section
43(5) were not applicable. He, accordingly, confirmed the order passed
by the AO.
Aggrieved, the assessee preferred an appeal to the Tribunal.
Held:
The
Tribunal considered the provisions of section 43(5) of the Act and
observed that clause (d) of the proviso to section 43(5) excludes the
transaction of trading in derivatives referred to in section 2(ac) of
the Securities Contracts (Regulation) Act, 1956 carried out on a
recognised stock exchange from the purview of the definition of the term
`speculative transaction’. Considering the definition of the term
`derivative’ in section 2(ac) of the Securities Contracts (Regulation)
Act, 1956, it observed that derivatives also includes securities. It
noted that the Madras High Court has in the case of Rajashree Sugar
& Chemicals Ltd. vs. Axis Bank Ltd. AIR (2011), Mad 144 has defined
the term derivative to include foreign currency as underlying security
of the derivative. It also noted the meaning of the term `derivative’ as
explained in the section `Frequently Asked Questions’ on the website of
SEBI. On going through the copies of the contract notes, it found that
the assessee had entered into either a call option or a put option and
on the settlement day, the transaction has been settled by delivery.
Either the assessee has paid US Dollar on the settlement day or has
taken delivery of the US Dollar.
The Tribunal held that there
remains no doubt that the transaction of the assessee cannot be treated
as a speculative transaction. Derivatives include foreign currency and
call/put option are transactions of derivative markets and cannot be
termed as speculative in nature. The Tribunal held that the transactions
entered into by the assessee were not speculative transaction and
therefore, the loss incurred had to be allowed.
The Tribunal allowed the appeal filed by the assessee.
FACTS
The assessee, a registered society, applied for registration u/s. 12AA.
The DIT (Exemption) mentioned that the provisions of section 12AA stipulates the following conditions for registration u/s. 12A of the Income-tax Act, 1961 :
(i) The objects of the society should be of charitable in nature;
(ii) The activities of the society should be genuine. The DIT (Exemption) noticed that life members and general members had not paid admission fee to assessee till date, the assessee had not been able to raise funds from public nor from amongst themselves and that no activities had been started yet by assessee.
The DIT (Exemption) thus observed that applicant had not done any charitable activity, and the genuineness of the activities could not be established. Therefore, one of the conditions for granting registration u/s. 12AA is also not satisfied.
Accordingly, the application filed by the applicant for grant of registration u/s. 12AA was rejected.
On appeal:
HELD
From the DIT (Exemptions)’s order, it emerges that no dispute has been raised about the charitable nature of the objectives of the trust as per the memorandum. The adverse inference has been drawn on possible intention, activities, i.e., the issues, which are not germane at the time of grant of registration of trust u/s. 12A , more so when the assessee’s objects are not held to be non-charitable.
Apropos the income and expenditure, it has been accepted by the assessee that it had created a website for the trust which also is one of the activities to promote the objects of the trust, the fact which is not denied by the DIT (Exemptions) or the Departmental representative. Therefore, the adverse inference has nothing to reflect on this aspect. Apropos time to raise the funds and donations it is the discretion of the society that can be undertaken in due course, may be the issue of section 80G registration which is consequent to section 12A registration may be important.
Thus mere non-carrying on of the vigorous activities of trust at the time of registration per se cannot be detrimental for registration of the trust u/s. 12A when the objects are charitable and there is no adverse comment about them.
Thus, the order of the DIT (Exemptions) is reversed and the assessee is held to be eligible for registration u/s. 12A.
Pursuance to above announcement, the
Ministry of Corporate Affairs announced a revised roadmap for
implementation of the new set of Indian Accounting Standards (Ind – AS)
converged with IFRS on 16th February 2015. The revised roadmap does not
cover banking and insurance companies and NBFC’s. The important
provisions of the the Companies (Indian Accounting Standards) Rules,
2015 are discussed below and these Rules are effective from 1st April
2015
– Voluntary Compliance of these Rules by companies– F.Y.2015-2016
Any company can voluntarily comply with IND AS for its financial statements for the mentioned f inancial year
– First Phase – Mandatory from F. Y. 2016/17
a.
Companies whose equity or debt securities are listed or are in the
process of being listed on any recognized stock exchange in India or
outside India and with a net worth of Rs. 500 crores or more and;
b. Companies other than those covered above having a net worth of Rs.500 crores or more;
c. the holding, subsidiary, joint venture or associate companies of the aforementioned companies; –
Second Phase: – Mandatory from F. Y. 2017/18 a.
a.
Companies whose equity or debt securities are listed on a recognized
stock exchange in India or outside India and whose net-worth is less
than Rs.500 crores;
b. Unlisted companies whose net worth is more than Rs.250 crores but less than Rs.500 crores;
c. the holding, subsidiary, joint venture or associate companies of the aforementioned companies;
Exemption:
However,
companies that are listed or in the process of being listed on SME
Exchange are exempt referred to in Chapter XB or on the Institutional
Trading Platform without initial public offering in accordance with the
provisions of Chapter XC of the Securities and Exchange Board of India
(Issue of Capital and Disclosure Requirements) Regulations, 2009.
On
February 16, 2015 the following Companies (Indian Accounting Standards)
Rules, 2015 have been notified by the Ministry of Corporate Affairs
Overview of the impact of the Indian Accounting Standard
–
Objective of the Standards: The objective of IFRS is move from a rule
based method of accounting to principle based method of accounting.
Hence during the initial period there is bound to be significant
volatility in the financial statements.
– Benefits: The Key benefits for Indian Companies with the applicability of Ind – AS include:
i) Improved access to Global Markets:
Majority
of the Stock Exchange globally require financial information as per
IFRS. The need to prepare multiple financial statements for different
requirements is eliminated.
ii) Lower cost of capital:
Convergence
with IFRS means the Indian companies need not prepare two sets of
Financial Statements comply with the requirements abroad and this would
lead to lower cost of administration and minimise the risk premium. Thus
pricing could be comparable and companies can approach any market for
capital.
iii) Benchmarking with Global Peers:
Preparing
accounts as per IFRS will give better understanding of performance in
relation to the Global benchmarks. Targets and milestones will be set
based on the global business environment.
iv) True Value of
acquisition: I n Indian GAAP except for few exceptions net assets
acquired are recorded at its carrying value instead of fair value. Hence
its true value is not reflected. IFRS overcomes this flaw as it
mandates accounting of business combinations at fair value.
The internal audit function is most likely to be relevant for the external auditor if the responsibility assigned to the internal auditor is related to the entity’s financial reporting and other internal control related processes on which the external audit will rely while conducting his audit. Certain internal audit activities may not be relevant to an audit of the entity’s financial statements, for example, the internal auditors’ procedures to evaluate the efficiency of certain management decision-making processes are ordinarily not relevant to a financial statement audit.
While determining whether the work of the internal auditor is relevant and adequate for the purpose of the audit, the external auditor has to evaluate parameters set out in the table below:
The external auditor would need to consider the materiality of the account balances or classes of transactions which were covered by internal audit, the risk of material misstatement of the assertions related thereto and the degree of subjectivity involved in the evaluation of the audit evidence gathered in support of the assertions. As the materiality of the financial statement amounts increases and either the risk of material misstatement or the degree of subjectivity increases, the need for the auditor to perform his or her own tests of the assertions increases. Where an auditor elects to use the work of internal audit, audit documentation prepared by him should include the auditor’s evaluation of internal audit, the nature and extent of the work used and the basis for that decision, the audit procedures performed by the auditor to evaluate the adequacy of the work used, and an overall evaluation of the evidence obtained. The nature and extent of the procedures the auditor would perform when making this evaluation is a matter of judgment. Ordinarily, an external auditor should not use the work of internal audit when performing procedures related to controls that have a higher risk of failure (e.g., internal controls intended to address assertions where a significant judgment or a risk of fraud has been identified).
Unlike in situations of branch audits or audits of subsidiaries for the purpose of consolidation where an external auditor has the latitude of using and relying on the work of other independent auditors, he does not have the same autonomy as far as using the work of internal auditors is concerned. The external auditor remains solely responsible for the audit opinion issued on the financial statements audited by him. At the same time, it is not obligatory for the auditor to rely on the work performed by internal audit.
We will consider two case studies to understand the above concepts:
Case Study 1 – Relevance of Internal Audit function to the External Auditor
Background
LMN Private limited is a company which is engaged in the business of travel and tourism. The management has constituted an in-house internal audit function. The scope of internal audit as decided by the management includes the following:
1) Monitoring the controls over bookings from customers and recording of revenue in the ERP system.
2) Review of the monthly, quarterly and yearly financial statements prepared by the company and. verifying that these comply with the financial reporting framework
3) Verifying the process of pre-departure formalities necessary to be completed like insurance and visa application to ensure compliance with the processes set out in the procedure manual of the company.
4) R eview of contracts entered into with the vendors who provide services to the company including hotels and coordinators for transfers. Ensure that the standard operating procedures for vendor selection as set by the management have been followed.
5) Verifying the process of background verification of the employees joining the company.
PMR and Associates (PMR) have been appointed as the statutory auditors of the company. Which of the above would be relevant and adequate to the work conducted by PMR?
Analysis
As per SA 610 ‘Using the work of the internal auditors’, the external auditor may use the work performed by the internal auditor if he considers it relevant to his audit. Some procedures performed by the internal auditor may impact the nature or timing or extent of the work performed curtailing his planned work for a particular area during the course of audit. In the given scenarios, factors that could be considered in evaluating the relevance of the scope of internal audit function have been explained below.
1) T he work performed by the internal audit function could be used by the external auditor to understand the process over tour bookings and revenue recognition. If there are significant internal control issues identified by the internal auditor, these could be factored in by the external auditor to modify the procedures that he would perform to test revenue. The external auditor may examine some of the controls or transactions that the internal auditors examined or examine similar controls or transactions not actually examined by the internal auditors. In reaching conclusions about the internal auditors’ work, the auditor should compare the results of his tests with the results of the internal auditors’ work.
2) Though the review of the monthly, quarterly and yearly financial statements by the internal audit team is directly related to the financial reporting process, the external auditor cannot merely rely on the work performed by the internal auditor. His review of the financial statements and assurance of compliance with financial reporting framework remains independent of the review performed by the internal auditor. However, the external auditor should be wary of control lapses in the accounts closing process, if any, which have been identified by the internal auditor and ensure that the risk of possible misstatements emanating therefrom is adequately addressed, for e.g., if the internal auditor has commented about the lack of robustness in the he process for provision for expenses for pending bills, the external auditor would need to more skeptical in verifying the completeness of provisions for expenses. He would need to enlarge the sample size, perform a more robust testing of expense booking/payments in the subsequent period, trend analysis etc.
3) One of the objectives of the internal audit function is to test the orderly conduct of business operations consistent with the processes set by the management. Verifying whether the process of completion of predeparture formalities would ensure compliance to the service standards of the company however this is not likely to have any direct impact on financial reporting, as such, may not be relevant from a financial statement audit perspective.
4) The external auditor can use the observations made in the internal audit reports on vendor contracts entered during the period under audit and evaluate whether these have any impact on reporting on internal controls or financial reporting – for e.g., any onerous terms entailing provision/disclosures etc. the internal audit reports could also possibly highlight non-compliance with standard operating procedures in selection and awarding of vendor contracts. The external auditor would be in a position to evaluate whether such non- compliance is indicative of fraud. Internal audit function can act as a good checkpoint for fraud prevention and reporting.
5) Background verification of employees would prevent the company from hiring fraudulent employees or employees with malicious intent. Though there is no direct implication of this on the financial reporting of the company, the procedures performed by the internal auditor may help the external auditor address the risk of fraud over employee hiring. The auditor based on his assessment of internal audit could use their work in this area to re-engineer the substantive work necessary to be performed by him audit for addressing fraud risk.
Case study 2- Adequacy and use of work performrd by the Internal Auditor
background
ABC limited has appointed M/s. XYZ and Co. (XYZ) as their internal auditors. The statutory auditors of the company – M/s.PQR & associates (PQR) need to evaluate the adequacy of the work performed by XYZ. Consider the following scenarios:
1) XYZ is a reputed firm of chartered accountants with a sizeable client portfolio. the recruitment policy of the firm specifies that only qualified Chartered accountants or students pursuing Chartered accountancy course can be recruited in the internal audit department. The firm follows a policy of training new joiners in accordance with XYZ’s audit manual which helps new joiners understand the audit methodology to be followed while conducting internal audits. XYZ also ensures that the team composition on any client comprises of at least one experienced member with relevant industry knowledge. The work performed by the internal audit team goes through various levels of reviews by partners and managers before the final reports are issued to the clients. As far as relationship with ABC limited is concerned, XYZ occupies an independent status and reports directly to the board of directors of ABC Limited. XYZ presents its observations in the monthly operations meeting of the company and the line managers of the company are responsible to take corrective action within an agreed timeline. XYZ organises meetings with the external auditors – PQR on a monthly basis to discuss their findings and also to assess the requirements of the external auditors if any, when planning their scope for the year. Determine whether the work performed by the internal auditor can be considered as adequate for the purpose of the audit by the external auditor
2) Assume that for the year ended 31st march 20X0, XYZ has performed a comprehensive review of revenue cycle of ABC Limited. There were no adverse findings. in view of the background information given in (1) above, mr. Khanna, audit manager – PQR decided not to perform any work on revenue as this area was extensively covered by XYZ. Mr. Khanna elected to rely on the work already performed by XYZ and was contemplating requesting XYZ to provide them with a copy of their report as well as work papers for his audit file documentation.
Analysis
1) In the given scenario, the internal audit function comprises of a highly prestigious firm with set procedures and hierarchy of reviews. The internal audit division has qualified accountants and trainees. New recruits are provided adequate training. It is also ensured that at all times there is at least once experienced member in the engagement team due to which the entire team gets the requisite guidance. The internal auditor enjoys an independent position with ABC Limited. Internal audit reports directly to the board which is indicative of minimal interference by operating management. Management takes cognizance of internal audit findings and has in place a mechanism to address these in a time bound manner. Internal auditors communicate the observations emanating from their audits with the external auditors. Internal auditors take cognizance of the requirements and expectations of the external auditors from the internal auditors. These are indicators of effective implementation of internal audit function within the organisation. In such an environment, the external auditors – PQR may be able to conclude that the internal audit function is effective and may undertake to modify the extent of testing for that they would undertake on those account captions which have been subjected to internal audit.
2) (a) It would not be appropriate for mr. Khanna to conclude that no work should be performed on the revenue cycle. Given that revenue is presumed to have fraud risk, the auditor should not entirely rely on the work of internal audit when performing procedures related to controls that are intended to address assertions which are susceptible to fraud risk. Mr. Khanna would need to devise his own testing plan, he may consider modifying the testing approach in terms of controls testing and substantive procedures. Given the existence of a robust internal audit system, he may elect to test fewer key controls, rationalize the sample size, undertake substantive procedures which are less time consuming etc.
(b) In the indian context, the Code of ethics provides that a chartered accountant in practice would be deemed to be guilty of professional misconduct if he discloses information acquired in the course of his professional engagement to any person other than his client. As such, XYZ would not be in a position to share their work papers with PQR without prior consent from the Company.
(c) Even considering a scenario where PQR provides access to XYZ access to its work papers (after prior approval from the company), it would be incumbent upon PQR to test or re-perform the work performed by XYZ by obtaining evidence directly from the management of the Company supporting the samples verified by XYZ as opposed to reviewing the documentation provided by XYZ. PQR may exercise its judgment as to whether all samples tested by XYZ should be tested again by PQR or whether PQR should select an entirely new sample. Mere reliance on the documentation provided is not sufficient.
Closing Remarks
Using the work of an internal auditor could assist the external auditor in performing a more efficient and effective audit. However, the external auditor would continue to be solely responsible for the audit opinion.
The Companies act, 2013 has re-emphasied the importance of a robust internal financial control environment by casting specific responsibility on the Board of directors of a company to establish internal financial controls and ensuring that these are adequate and they operate effectively. internal audit will play a very significant role in providing a comfort to the Board in this regard. Statutory auditors are also required to comment in their report, whether the company has an adequate internal financial controls system in place and the operating effectiveness of such controls. The statutory auditors too would need to take cognisance of the work performed by internal auditors on testing of controls. This will entail increased cohesiveness between internal and external auditors however, the external auditor would continue to be responsible for his opinion on the design and operative effectiveness of internal controls.
Question
How does a seller of a business account for the contingent consideration?
Analysis
There is no direct guidance on accounting for contingent consideration under Indian GAAP from a seller’s perspective. Guidance is available under AS 14 Accounting for Amalgamations with respect to contingent consideration for the purposes of acquisition accounting. The provision relating to AS 14 Accounting for Amalgamations is set out below.
AS 14 Accounting for Amalgamations
15. Many amalgamations recognise that adjustments may have to be made to the consideration in the light of one or more future events. When the additional payment is probable and can reasonably be estimated at the date of amalgamation, it is included in the calculation of the consideration. In all other cases, the adjustment is recognised as soon as the amount is determinable.
It may also be worthwhile to consider guidance in AS 9 Revenue Recognition though AS 9 applies to goods and services and not to sale of a business.
AS 9 Revenue Recognition
9.1 Recognition of revenue requires that revenue is measurable and that at the time of sale or the rendering of the service it would not be unreasonable to expect ultimate collection.
9.4 An essential criterion for the recognition of revenue is that the consideration receivable for the sale of goods, the rendering of services or from the use by others of enterprise resources is reasonably determinable. When such consideration is not determinable within reasonable limits, the recognition of revenue is postponed.
11. In a transaction involving the sale of goods, performance should be regarded as being achieved when the following conditions have been fulfilled:
(i) the seller of goods has transferred to the buyer the property in the goods for a price or all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually associated with ownership; and
(ii) no significant uncertainty exists regarding the amount of the consideration that will be derived from the sale of the goods.
The guidance in AS 29 Provisions, Contingent Liabilities and Contingent Assets can also be applied by analogy.
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Definition of a contingent asset: A contingent asset is a possible asset that arises from past events the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise.
32. Contingent assets are not recognised in financial statements since this may result in the recognition of income that may never be realised. However, when the realisation of income is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate.
Author’s point of view
All the three standards viz., AS-9, AS-14 and AS-29 seem to uphold the concept of probability in recognition of revenue or gain. A careful analysis of AS-29 definition of contingent asset also indicates that if recovery is probable then it is an asset and not a contingent asset. Contingent asset is a possible asset and not a probable asset. Therefore recognition of contingent asset requires the use of virtual certainty principles.
Whether a seller of a business should recognise gain from contingent consideration will depend upon the nature of the contingent consideration itself. Where contingent consideration is based on normal revenue targets which are easily achievable, it may be highly probable that it would be received. In such circumstances contingent consideration should be recognised by the seller. If it appears that the set targets are unachievable, then it may not be appropriate to recognise contingent consideration. Rather they should be treated as contingent asset.
At other times, it may so happen that the contingent consideration is determined at each level of performance. As a result it is highly probable that a minimum amount of consideration is always received. Any excess of expected consideration over the minimum amount recognised is only possible and hence a contingent asset not to be recognised in the financial statements. For example, a seller will receive a contingent consideration of Rs. 1 million, if the following year performance is equal to previous year, and another half a million if the performance improves by 40%. In this case, the seller recognises one million consideration if it is probable that performance will be atleast as good as the previous year. However, the extra half a million will not be recognized if it is not probable (though possible) that it will be received. The said amount is a contingent asset and hence not to be recognised under AS 29. The standard also prohibits the disclosure of contingent assets.
Facts:
The Taxpayer, a Swiss company engaged in the reinsurance business, earned income from various cedents in India. Further, an Indian Company (I Co), wholly owned subsidiary of Taxpayer, entered into a service agreement with the Singapore branch of the Taxpayer, for obtaining risk assessment services, marketing of insurance and administrative support in India and was remunerated at cost plus basis.
The Taxpayer contended that in the absence of a PE, income from re-insurance business is not taxable in India. However, the Tax Authority contended that taxpayer had a business connection in India owing to its regular and continuous stream of income in India. Further since I Co renders core and technical reinsurance services to the Taxpayer, it would constitute a Dependent Agent PE (DAPE) for the Taxpayer in India. Alternatively as the Taxpayer remunerated ICo on cost plus basis, I Co’s employees were de-facto employees of the Taxpayer.
The tax authority’s contentions were upheld by the Dispute resolution Panel (DRP). Aggrieved, the Taxpayer appealed before the Tribunal.
Held:
Under the Act
A business connection is defined to include any business activity carried on by a NR through a person who habitually concludes contracts in India on behalf of the NR, maintains stock in India and regularly delivers goods on behalf of the NR or secures orders in India for the NR.
On the facts of the case, I Co does not carry on any such activity on behalf of the Taxpayer in India. Thus there is no business connection in India.
Under the DTAA
Establishing a subsidiary in the other treaty country would not, in itself, result in creating and establishing a PE of a foreign holding company in the said country. Reliance in this regard was placed on the Delhi High Court ruling in E-Funds IT Services (266 CTR 1)
Further, to create a Service PE in India, the Taxpayer has to furnish services through employees or other personnel in India. Additionally, such services must be furnished to third parties on behalf of the Taxpayer and not to the Taxpayer itself to create a Service PE. The employees of ICo are not rendering services as if they were employees of the Taxpayer and hence the above condition is also not satisfied.
Moreover, reinsurance is specifically excluded from the ambit of the PE definition under DTAA. Accordingly, the income from re-insurance service is not taxable in India.
Facts:
Taxpayer, an Indian Head office, rendered software development and consultancy services to its branch situated in Canada. The taxpayer contended that the transactions with branch office were not in the nature of transactions with associated enterprises (AEs) as branch cannot be treated as a separate entity and hence should not be treated as international transaction under the Act.
However the Tax authority treated this transaction as international transaction and proceeded to calculate the arm’s length price. Aggrieved the taxpayer appealed before the Tribunal.
Held:
Section 92B(1) of the Act provides that an International transaction means a transaction between two or more AEs. Thus for treating any transaction as an international transaction, it is sine qua non that there should be two or more separate AEs.
From a bare reading of section 92B(1) and section 92A of the Act which provides the meaning of AEs it clearly transpires that in order to describe a transaction as an ‘international transaction’, there must be two or more separate entities.
The Taxpayer has consolidated the financial results of the head office as well as the Canada branch and offered the aggregated income to tax. The fact that the office in Canada is Taxpayers branch office and not a distinct entity was specifically argued before the Tax Authority which was not negated by the Tax Authority. Thus it is clear that the branch office is not a separate entity.
As per the principle of mutuality, no person can transact with himself in common parlance. As such, one cannot earn any profit or suffer loss from oneself. Even if Tax authority’s contention that the Taxpayer has earned an income from his branch is accepted then such profit earned would constitute additional cost to the Branch. On the aggregation of the annual accounts of the HO and branch, such income of the head office would be set off with the equal amount of expense of the Branch, leaving thereby no separately identifiable income.
Inter se dealings between HO and branch cease to be commercial transactions in the primary sense. In such a case it cannot be contended that such transaction should be treated as an international transaction.
In the course of assessment, the Assessing Officer made addition to assessee’s income in respect of amount received on redemption of Stock Appreciation Rights received under ESOP as a perquisite u/s. 17(2)(iii). The Tribunal held that stock options were capital assets and gain therefrom was liable to capital gain tax.
On appeal by the Revenue the Gujarat High Court held as under:
“i) In the case of CIT vs. Infosys Technologies Ltd. [2008] 297 ITR 167/166 Taxman 204, it is held by the Supreme Court that the revenue had erred in treating amount being difference in market value of shares on the date of exercise of option and total amount ‘paid’ by employees consequent upon exercise of the said options as perquisite value as during the lock-in period there was no cash inflow to employees to foresee future market value of shares and the benefit if any which arose on date when option stood exercised was only a notional benefit whose value was unascertainable.
ii) In view of the above, the Tribunal was correct in treating the amount received on redemption of Stock Appreciation Rights as capital gain as against treated as perquisite u/s. 17(2)(iii) and in treating the amount received on exercising the option of Employee’s Stock Option Plan (EOSP) as long term capital gains instead of treating the same as short term capital gains.
iii) However, the Tribunal was not justified in holding that capital gain arose to the assessee on redemption of Stock Appreciation Rights which were having no cost of acquisition. Tax Appeals stand disposed of accordingly”
This circular states that in terms of Press Note No.2 (2015 Series) dated January 6, 2015 a special carve out has been made for medical devices. As a result: –
a. 100% FDI is permitted in the manufacture of medical devices.
b. Conditions applicable to both green field as well as brown field projects in the Pharmaceuticals Sector will not be applicable to FDI in manufacture of medical devices.
Facts:
Taxpayer, a resident but not ordinarily resident (RNOR) in India,, was currently employed by an Indian Co (ICo). Taxpayer had received certain stock awards for services rendered by him to his past employer, an USA company (FCo). The Taxpayer had rendered services to FCo both in USA as well as in India. During the relevant financial year, Taxpayer received transfer proceeds of Stock Options which were granted to him by FCo.
Taxpayer contended that out of the total stock awards vested in him, certain portion was attributable to services rendered in USA and certain portion was attributable to services rendered in India. Accordingly, he offered to tax only that portion of stock awarsds which related to services rendered in India.
Further, Taxpayer had sold the stocks to broker appointed by US Co in the year of grant and he received only the final instalment of stock award sale in the year under consideration. However, Tax Authority contended that the entire income from stock awards is taxable in India as the same was received in India.
On appeal the First Appellate Authority upheld the Tax Authority’s contentions. Aggrieved the Taxpayer appealed before the Tribunal.
Held:
It is not in dispute that u/s. 6(6) of the Act, Taxpayer qualifies as a person who is not ordinarily resident of India. Thus as per section 5(1) of the Act, income which accrues or arises outside India to a person who is not ordinarily resident in India shall not form part of his total income taxable in India, unless it is derived from a business controlled in or profession set up in India. Further, section 9(1)(ii) specifically provides that salaries shall be deemed to accrue or arise in India if it is earned in India towards services rendered in India. Article 16(1) of India-USA DTAA also provides that salary derived by a resident of USA in respect of an employment exercised in USA shall be taxable in USA.
Thus stock awards can be apportioned towards services rendered in India depending on number of days of stay in India and only that portion of stock award can form part of total income of the Taxpayer.
Merely because stock awards were treated as part of salary by I Co, it cannot be concluded that entire stock award is taxable in India.
I Co has clarified that the stock award which was received by Taxpayer in India was allotted to him when he was under employment by FCo and was sold by the Taxpayer in USA. What was received in India was only the last instalment of such sale. Therefore, without ascertaining the portion of stock awards which is attributable to services in India, the entire amount cannot be made taxable only because the money was received in India.
Thus the taxpayer being RNOR, only that portion of stock awards which is attributable to services in India can form part of total income.
As the above facts were not considered by the Tax Authority or by the First Appellate Authority, the matter was remitted to decide the taxability of stock awards in light of the above observations.
Facts:
Taxpayer,
a company incorporated, controlled and managed from Bermuda, was set up
to build a high capacity undersea cable for providing telecommunication
link between the UK and Japan. For this purpose, it had entered into an
memorandum of understanding (MOU) with 13 parties world over, including
an Indian Company (I Co), for planning and implementation of the said
telecommunication link cable system linking western Europe (starting
from the UK), Middle East, South Asia, South East Asia and Far East
(ending in Japan).
ICo accordingly entered into a Cable Sales
Agreement (CSA) and thereafter into a Construction and Maintenance
Agreement (C&MA) with the Taxpayer. Pursuant to these agreements,
ICo purchased certain capacity in the said cable system for a lump sum
consideration. The C&MA was for a period of 25 years, which
coincided with the life of the cable system.
Further, as per the
terms of C&MA, the Taxpayer had agreed to arrange for maintenance
to keep the cable system in proper working condition at all times. One
of the maintenance activity involved providing of standby cover, i.e.,
having the cable ships on standby to repair any breaks or damages in the
submarine cable.
The Taxpayer argued that the payment for
standby maintenance was not in the nature of FTS. The Taxpayer further
claimed that its receipt from ICo for cable capacity purchase is a sale
transaction that was executed outside India on a principal to principal
basis and, hence, was not taxable in India in absence of business
connection in India. The Tax Authority argued that the payment by ICo is
for “right to use” in the cable, hence, taxable as “Royalty” in India.
The
First Appellate Authority agreed with the Taxpayer that the payment for
cable capacity was a sale transaction. However, the payment for standby
maintenance was held to be FTS. Aggrieved, both the Taxpayer as well as
the Tax Authority appealed before the Tribunal.
Held:
Whether payment for telecom capacity is a transaction of ‘sale’ or ‘royalty’? Held that the transaction is a sale.
Transaction
of sale is a fact based exercise which can be only ascertained from the
intention of the parties concerned as evidenced by written agreements
between them in light of the facts and circumstances. For determining
whether the telecom capacity agreement is for provision of “right to
use” or “sale” of a capacity in the cable network, one needs to examine
whether the owner had retained ownership control and possession of the
property.
From the terms of the clauses given in CSA and
C&MA, it is clear that ICo has got all the ownership rights and
obligations in respect of the capacity purchased in the cable system.
Further, it was provided that the management committee which also
included ICo would make all decision on behalf of the signatories to
implement the purpose of the agreement. ICo, therefore, had unrestricted
right to transfer its assigned capacity, though such a transfer had to
be with the consent of each signatory/telecommunication entity to whom
such capacity was assigned.
It was also clear that the benefit
and burden of ownership had shifted from the seller (i.e. the Taxpayer)
to the buyer. ICo had all the risks and rewards attached to ownership;
ICo not only had the exclusive domain on the rights to use but also
right to resale or transfer its interest in the capacity in the cable
system. Thus under the C&MA, ICo satisfied the characteristic of an
“owner” and “ownership” in respect of the capacity in the cable system.
Further, ICO has treated the capacity as “Fixed Asset” in its books and
had claimed depreciation, indicating that it had treated the capacity
purchased as an asset owned by it. All these points lead to the
conclusion that the intention of the parties to the agreement was sale
and purchase of capacity. Accordingly, the payment is in the nature of
sale.
In case of a “royalty” agreement, the complete ownership
is never transferred to the other party. What is envisaged is that there
should be transfer of rights, or imparting of any information in
respect of various kinds of property, or use of rights to any equipment
etc. If the consideration has been received for transferring ownership
with all rights and obligations then such payment cannot be treated as a
“royalty” payment. In the present case, capacity has been transferred
to ICo along with complete ownership. Accordingly the payment is not in
the nature of royalty.
Is there a business connection? Held No.
The
term business connection connotes some type of establishment, agency or
subsidiary or dependent agent or the like. The connection in India must
be in the form of any concern in the nature of trade, commerce or
manufacture by which the NR earns income.
In the facts of the
present case, there is no asset of the Taxpayer that is situated in
India. The assets in India (landing station) belong to ICo. Further,
once the Taxpayer sells the capacity in the cable system, it also
belonged to ICo. The capacity thus sold, is no longer an asset that
belongs to the Taxpayer. Hence, there is no income accruing or arising
though or from asset of the Taxpayer in India.
The sale of
capacity in the cable system does not arise through or from business
connection in India, because sale has been made to ICo which is an
independent entity and on a principal to principal basis. Thus, there is
neither a business connection of the Taxpayer in India, nor is there
any asset or source of income of the Taxpayer in India. Therefore, the
Taxpayer is not taxable in India on the sale transaction.
Whether nature of payment for standby maintenance is FTS? Held No.
For
a payment to be classified as FTS there needs to be “rendition” of
services in the nature of “managerial”, “technical” or “consultancy”
Rendering services means actual performance of service. The standby
charges paid are not for performance of service. In case the Taxpayer is
providing some kind of repair services, it can be termed as “technical”
in nature and hence falling within the purview of FTS. However, if
there is no actual rendering of services, but mere collection of an
annual charge to recover the cost of standby facility, then it cannot be
said that the payment is for providing technical services. Therefore,
the payment for standby maintenance charges does not qualify as FTS and
hence is not taxable in India.
Facts:
Taxpayer, an Indian company, was engaged in providing international long distance services to its subscribers. For such services Taxpayer availed the assistance of non-resident (NR) telecom operators (NTO ) located in different jurisdictions and payments were made to NTOs without withholding taxes on the same.
The Tax Authority contended that the payments made to NTO ’s are in the nature of royalty/Fee for Technical services (FTS) under the provisions of the Act as also the relevant Double Taxation Avoidance Agreement (DTAA ) and hence held the Taxpayer to be an assessee in default for failure to withhold taxes at source.
On appeal, the First Appellate Authority upheld the Tax Authorities contention. Aggrieved, the Taxpayer appealed before the Tribunal.
Held:
Under the Act
Under the Act, the term “royalty” includes any payment for the use of a process. The term process has also been defined under the Act to include transmission through cable, optic fibre etc., whether or not such process is secret. Further the Act provides that royalty shall include consideration in respect of a right or property whether or not the possession or control of the right is with the payer and whether or not the right or property is used directly by the payer.
On a combined reading of the above it can be understood that there is no requirement to ‘transfer’ a right to use. The condition of use or right to use would be satisfied even without having a direct control or a physical possession on the activity. Any other interpretation would lead to defeating the intention of the provision.
Thus in the present case, Taxpayer made payment to NTO for the use of a “process,” and hence, the payment qualifies as “process royalty” under the Act.
Under the DTAA
The “royalty” definition under the DTAAs includes use of, or the right to use, any copyright, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. However, the term “process” has not been defined under DTAAs.
The Madras HC in Verizon Singapore Pte Ltd1 dealt with an identical issue and held that the definition of the term “process” under the Act should be read into DTAA while evaluating royalty taxation under the provisions of DTAA . The facts in the case of Taxpayer are identical to the facts before the Madras HC. Various other decisions such as Viacom 18 Media (P) Ltd2 and Cognizant Technology Solution3 have followed the Madras HC ruling while dealing on a similar issue.
Thus, the decision of the Madras High Court is accordingly followed and any process, whether secret or not, falls under the ambit of royalty even under the DTAA . Therefore payment for inter connect charges amounts to royalty for the use of process.
A. Introduction & Objective
The
scheme of advance ruling was introduced from 1st June 1993 in Chapter
XIX-B of the Income-tax Act, 1961, for the benefit of non-residents to
enable them to obtain an advance ruling from the Authority for Advance
Ruling [AAR] so that they are relieved of uncertainty with regard to
taxability of income arising out of their business /investment,
activities or transaction undertaken or proposed to be undertaken in
India.
This provisions has now been extended to residents with
regard to taxability of income arising out of one or more transactions
valuing Rs. 100 crore or more.
The most striking feature of the
Indian system is that the proceeding is adversarial (in most countries,
proceedings are negotiated), which makes the decision binding on the
applicant and the revenue authorities. In most countries, the advance
rulings are delivered by the revenue authorities and not by a judicial
or quasi-judicial body. Therefore, these rulings are largely considered
to be nonbinding. However, in India the AAR has been set up as a
high-level quasi-judicial authority, which has been granted statutory
recognition. Owing to the binding nature of rulings on the applicant as
well as the revenue, this scheme is intended to significantly faster
dispute resolution process as compared to normal litigation process.
Constitution
The AAR is an independent quasi-judicial body. An AAR Bench, generally, comprises of three members:
The Chairman, who is a retired judge of the Supreme Court or the Vice-Chairman who has been a Judge of a High Court;
One
Revenue member from the Indian Revenue Service who is a Principal Chief
Commissioner, Principal Director General, Chief Commissioner or
Director General of Income-tax; and
One Law member from the Indian Legal Service who is an Additional Secretary to the Government of India.
Scope of Advance Ruling
Generally, applicants may raise any question which relates to tax liability –
Both ‘questions of law’ as well as ‘questions of fact’ can be raised before the AAR.
Questions can pertain to both concluded transactions as well as anticipated transactions.
Hypothetical questions cannot be raised before AAR.
Applicant can raise more than one question in one application.
The
questions may relate to any aspect of the applicant’s liability
including international aspects and aspects governed by the Double Tax
Avoidance Agreements (‘DTAA ’).
Advantages of AAR
Assurance to non-resident investors to obtain the ruling without undue delay and with certainty regarding its tax implications.
Best suited to sort out complex issues of taxation including those concerning interpretation of the applicable DTAA .
Rulings
binding on the applicant as well as the revenue, not only for one year
but for all the years unless there is a change in facts/ law.
Facility to modify or reframe the questions, agreements or projects till the time of hearing.
Confidentiality of proceedings is maintained.
Protracted hearing of the application is avoided.
Significantly faster dispute resolution process as compared to the normal litigation process.
The
AAR is by law mandated to pronounce its ruling within 6 months as
compared to more time involved even at the second level appellate
tribunal level.
B. Some Important Issues
1. Meaning of Advance Ruling – Section 245N
U/s. 245N(a)(i), a non-resident applicant can seek a ruling in relation to
a transaction undertaken or proposed to be undertaken by a non-resident
applicant. U/s. 245N(a) (ii), a resident applicant can seek a ruling in
relation to determination of the tax liability of a non-resident
arising out of a transaction undertaken or proposed to be undertaken
with such non-resident.
The words ‘tax liability’ has not
been a part of subclause (i) as compared to sub-clause (ii) & (iia)
of section 245N. While deciding on maintainability of application u/s
245N, a doubt had arisen as regards admissibility of application in case
of Umicore Finance [2009] 184 Taxman 99, since, on facts, it
appeared prima facie that the determination sought by the non-resident
applicant was in relation to the tax liability of an Indian Company. The
AAR held in favour of the assessee, as follows:
“6. It seems to us that the application is maintainable having
regard to the wider language of sub-clause (i) of section 245N(a) in
contrast with the language employed in sub-clause (ii). There is no
specific requirement in sub-clause (i) that determination should relate
to the tax liability of a non-resident. Going by the averments of
the applicant, it is clear that the capital gain tax issue arising in
the case of the acquired Indian company has a direct and substantial
impact on the applicant’s business in view of the stipulations in share
purchase agreement. Subclause (i) has to be construed in a wider sense and moreover a remedial provision shall be liberally construed.
We are, therefore, of the view that the question raised by the
applicant falls within the definition of ‘advance ruling’ under section
245N(a) of the Act. Accordingly, the application is allowed under
section 245R(2) and posted for hearing on merits on 11-8-2009.”
Previously, in case of Connecteurs Cinch, S.A. [2004] 138 Taxman 120, the application was rejected u/s. 245N(a), since the applicant sought ruling on tax liability of its Indian subsidiary,
which was considered as not a consequence of the transaction undertaken
or proposed to be undertaken by the non-resident applicant.
However, while interpreting the words ‘proposed transaction’
in case of Trade Circle Enterprises LLC [2014] 42 taxmann.com 287
(AAR), it has been held that the ruling of Umicore Finance is not
applicable. The AAR while rejecting the application as incompetent, held
as follows:
“…. In order to bring in the question within the
scope of section 245N of the Act, there has to be either a transaction
undertaken or proposed transaction to be undertaken by the non-resident
applicant. This is not the case in the present application. “Transaction” or “proposed transaction” are not the same as mere intention.
In this case the applicant intends to invest in a 100 per cent
subsidiary company in India which in turn intends to set up a consortium
by way of partnership firm with the Indian company and the partnership
firm propose to acquire the undertaking of the Indian company which is
stated to be eligible for deduction u/s 80IA of the Income-tax Act,
1961. We are of the view that the 100 per cent subsidiary company has to
exist in reality and the partnership firm has to be set up in order to
make transaction or proposed transaction of the applicant with the
Indian company/subsidiary. The question relates to proposed setting
up of the subsidiary and the partnership firm with the Indian company
and as to whether the subsidiary or the partnership firm will be
eligible to 100 per cent deduction u/s 80IA of the Income-tax Act. The
ruling of this Authority in the case of Umicore Finance, In re [2009]
FATCA was the US Government response to a series of investigations into US tax evasion scandals in or around 2006. Those interested may refer to report released in August 2006 titled ‘Tax Haven Abuses: The Enablers, the Tools and Secrecy’ and to the report titled ‘Tax Compliance and Enforcement Issues with respect to Offshore Accounts and Entities’ released in March 2009. In substance, these reports conclude that US taxpayers were not necessarily reporting their correct offshore incomes in their US tax returns.
FATCA is intended to increase transparency with respect to US taxpayers investing or earning income through non- US institutions and non-US investment entities. There is the underlying assumption that the US institutions are not encouraging tax evasion by US persons owing to the obligations that the Internal Revenue Code casts upon US institutions and US taxpayers are not omitting from their tax returns details of investments made or income earned through US institutions. It may be noted that US institutions have been subject to significant US regulations in so far as their transactions with US persons are concerned.
Obligations under FATCA
FATCA creates a tax information reporting regime under which financial institutions (FIs), both US (USFIs) and foreign (FFIs) are expected to report certain financial information in respect of a US taxpayer (generally referred to as a ‘US person’). If an FI does not report such information, the FI could be subject to 30% withholding in respect of its own US sourced income. The provisions of FAT CA and the regulations issued initially in February 2012 generated a lot of debate. The original implementation date was pushed back and FAT CA came into effect in two stages on July 1, 2014 and on January 1, 2015.
The global financial community questioned both subtly and overtly, the perceived extra-territorial nature of the FAT CA regulations. Even while this was happening, the enquiry into the nature of business models especially followed by certain businesses came under scrutiny by various Governments around the world. In the US, there were enquires into the US corporations keeping profits outside the US or restructuring themselves under ‘inversion’ structures to get out of the tax rigours applicable to US corporations. In the UK, there were enquires into the way some of the new technology product companies had large sales in the UK but were based out of Ireland. Closer home, the revelation of Indians having accounts in Swiss banks and the directive of the Supreme Court to appoint a Special Investigation Team (SIT) meant that a new era of global transparency in respect of financial transparency was arriving. The G20 endorsed the need for transparency and the OECD even mooted the idea of a multi-lateral tax information exchange agreement (TIEA).
The FATCA regime allowed for the US Internal Revenue Service to enter into agreements with other governments for sharing of information either on reciprocal basis or on unilateral basis. These are called Inter-Governmental Agreements (IGAs) on Model 1 and Model 2 respectively. Since completing negotiations with governments and signing agreements was time consuming, the approach taken was to agree to broad terms i.e. to arrive at an agreement ‘in substance’ with the intent to sign the final agreement by end of December 2014. This approach addressed several objections of various governments and of the financial institutions. In November 2014, the US IRS announced that the agreement in substance would be treated as being in force till the final agreement had been signed. India worked out an agreement ‘in substance’ in April 2014.
FFIs and US person
As stated earlier, FATCA requires reporting by FFIs in respect of certain financial transactions of US persons. The term ‘foreign financial institution’ is very broadly defined and encompasses a number of entities that have not traditionally been considered to be financial institutions. An FFI is any entity organised in a country (including a US possession) other than the US that:
Accepts deposits in the ordinary course of banking or similar business; or
As a substantial portion of its business, holds financial assets for the account of others; or
Is an investment entity; or
Is an insurance company (or the holding company of an insurance company) that issues or is obligated to make payments with respect to a cash value insurance or annuity contract; or
• Is an entity that is a holding company or treasury centre that is part of an expanded affiliated group that includes a depository institution, a custodial institution, a specified insurance company or an investment entity or is formed in connection with (or availed of by) a collective investment vehicle, mutual fund, exchange traded fund, private equity fund, hedge fund, venture capital fund, leveraged buyout fund or similar investment vehicle.
As we can see above, the coverage is quite wide and the definition quite complex. There are certain exclusions e.g. group entities that are non-financial foreign entities (NFFEs) and non-financial start-up companies for the first 24 months after the latter type of entities are organised. We now turn to who or what is a US person. The term ‘US person’ means:
An individual who is a US citizen or resident of the US; or
A partnership created or organised under the laws of the US or a State of the US; or
A corporation created or organised under the laws of the US or a State of the US; or
An estate of the decedent, who is a US person; or
Any trust if:
1. A court within the US is able to exercise primary supervision over the administration of the trust (i.e. the “Court test”); and
2. One or more US persons have the authority to control all substantial decisions of the trust (i.e. the ‘Control test”); or
The Government of the US, any State, municipality or other political subdivision, any whole owned agency or instrumentality of such governments.
Registration of FFI and FFI
Agreement
An FFI is, on application to be made electronically, allotted a ‘Global Intermediary Identification Number’ (GIIN). The GIIN is 20 character identification unique to each FFI. An FFI, whose application for GIIN is under process with the IRS, may provide a Form W-8 to its counterparty and state that it has ‘applied for’ against the GIIN field. Such a Form W-8 will be valid for 90 days during which it is expected that the FFI will be granted the GIIN.
An FFI will agree with the IRS to undertake, amongst others, account holder due diligence, reporting and withholding. The nature of the obligations of the FFI varies depending upon whether the FFI is located in an IGA country or outside.
An FFI which agrees to sign (or signs) the agreement with the US IRS is called a participating FFI (PFFI) and one which does not do so in non-participating FFI (NPFFI). A PFFI may also agree that it will do the FAT CA reporting on behalf any other FFI within the group.
Account Holder Due Diligence most FIS have historically never captured data which reveals the tax residency of the account holder. Generally, Know your Customer (KYC) norms have focussed on proof of identity, proof of address, nature of business. more recently, KYC norms tied in with anti- money laundering (AML) initiatives meant that FIs require information about nature of business of the account holder although there may be no loan or credit facility given to the account holder. this is now being further enhanced to capture information about whether the account holder is a US person. While FATCA allows for FIS to accept customer self-declarations, the institution is expected to make sufficient due diligence in respect of new accounts (nadd) opened after the coming into force of FATCA. it also requires the institutions to do due diligence in respect of pre-existing accounts (Padd). in particular, the due diligence has to focus on uS indicia appearing in the data relating to accounts of individuals. Generally, US indicia in the context of individual accounts are one or more of the following viz.,
In such cases, the institution has to exercise additional due diligence and obtain appropriate ‘cure’ documentation, which differs on the basis of the nature of the defect. For example, uS citizenship cannot be ignored unless the uS certifies that the individual concerned has given up his US citizenship. in the absence of cure documentation, it is presumed that the account holder is a uS person. For non-individuals, the nadd, Padd focuses on whether the entity is an FFI or it is non-financial foreign entity (NFFE). An FFI will have to provide its GIIN whereas an NFFE will have to provide information about its ownership in particular whether it has uS person(s) having substantial i.e. greater than 10% interest in the nFFe.
An account holder with a PFFI
Is an NFFE which fails to provide the required certification regarding substantial US owners or lack of such ownership; or
There are a few peculiar situations that arise owing to difference in US law and indian law. For example, a company incorporated under indian law could still be treated as a US person under US tax law. Similarly, the US law does not have any specific provision to address a hindu undivided Family (HUF), which is a traditional family institution peculiar to india.
Reporting
A PFFI will have to report, with respect to the financial accounts of uS persons, the following information in various stages viz.
1. for the period from july 1, 2014 to december 31, 2014
– name, address, uS tin, account balance for such accounts;
2. for 2015 – in addition to the information at 1 above, the income associated with such accounts;
3. for 2016 – in addition to the information at 1 and 2 above, gross proceeds from securities transactions.
The reporting is in all cases required to be done after the end of the calendar year. For FFIs located in countries with an IGA, the reporting deadline is September.
Withholding
As stated earlier, non-compliance with FatCa may result in a FatCa withhold being imposed on an FFI. A PFFI will not be subject to FATCA withholding. FATCA withholding would be imposed in respect of withholdable payments made to NPFFIs, non-compliant NFFE and recalcitrant account holders. after december 31, 2016, withholding may also extend to foreign pass-through payments.
a withholdable payment is a payment of uS source fixed or determinable, annual or periodical (FDAP) income. the term FdaP refers generally to income other than gains from the sale or disposition of property.
It includes interest (discount on issue of debt securities is treated as ‘interest’), dividends, substitute payments (quasi dividends not treated as employment income), royalties, payments on notional principal contracts (derivatives) and annuities.
In addition, from january 1, 2017, gross proceeds from sale or other disposition of property that can produce US source interest or dividend income could subject to FATCA withholding.
The US law treats an FDAP as being US source income on the basis of residence of the obligor. For example, interest paid to an account holder on uS treasury bond or where the borrower is a US corporation is a withholdable payment. in the same manner, dividend in respect of US stocks is a withholdable payment. After december 31, 2016, sale proceeds of stock of a US corporation or of US treasury bond or a bond where the borrower is a US corporation could be treated as withholdable payment.
The complex rules of foreign passthru payments are not discussed here. In the next part of the write up, we will touch upon the local regulatory aspects covering FatCa compliance in india.
Summary
FATCA is not a tax but a mechanism adopted by the US Government to get information about US persons’ financial accounts with FFIs. It requires due diligence in respect of financial account holders, obtaining relevant documentation and reporting certain information about the US persons financial accounts with the FFI.
Facts
The petitioner company engaged in the business of various household products, sold “Harpic and Lizol”; “Dettol” and paid tax @ 4% being covered by schedule entries relating to pesticides and drugs and medicine respectively. The vat authority in assessment levied higher rate of tax of 12.5% being covered by residual entry. The petitioner company filed writ petition before the Gauhati High Court against the impugned assessment order.
Held
The products “Harpic and Lizol” are admittedly disinfectants. By giving broader meaning of the term pesticides, disinfectants which primarily kill germs and bacteria would be covered within the meaning of “pests” and therefore liable to tax @ 4% under entry 19 of Pat A of Schedule II relating to pesticides. As regards sale of “Dettol” the High Court held that the main purpose of use of “Dettol” is to prevent infections which may occur due to minor cuts, injuries, abrasions, grazes, insect bites, etc. Thus by applying “users test”, it would be squarely falling under the definition of “Drugs’ as defined in Drugs and Cosmetics Act, as well as under the definition of Section of the Medicinal and Toilet Preparations (Excise Duty ) Act, 1955. The “Dettol” cannot be considered to be a cosmetic substance because the purpose of use of “Dettol” is to prevent infection and for sanitation because of its therapeutic and prophylactic properties. Accordingly, it was held as “Drugs and Medicine” covered by the entry 21 of the Schedule IV of the act and will not fall within the excluded category relating to cosmetic and toilet preparations under the Explanation. The High Court accordingly allowed the writ petition filed by the petitioner company and set aside the assessment orders passed by the department with direction to take consequential actions in accordance with law.
Facts
The respondent company entered into a contract with foreign supplier for conversion of still strips to blank coins at Italy. Thereafter, the company entered in to contract with Government of India for manufacture and supply of blank coins. The company claimed sale, to the Government of India, of blank coins as sale of goods in the course of import and exempt from payment of tax u/s. 5(2) of The Central Sales Tax Act, 1956. The Tribunal allowed the appeal against which the tax department filed a writ petition before the Madras High Court.
Held
In order to earn exemption from payment of tax as sale in the course of import of goods into India u/s. 5(2) of the Central Sales Tax Act, the goods must move from the foreign country to India in pursuance of condition of contract of sale between the foreign supplier and the local purchaser. In present case, the goods were imported from foreign country in pursuance of the contract between the foreign supplier and the first respondent. A conjunct reading of both agreements would make it clear that these two agreements are independent to one another and are different entities. The first respondent entered in to these agreements for import of goods for its own purpose and there is no privity of contract between the local purchaser, the Government and the foreign seller. Therefore the sale of goods by the respondent company to the local purchaser i.e. the Government of India is not exempt from payment of tax as sale in the course of import under section 5(2) of the act. The High Court accordingly allowed the writ petition filed by the department and the order of the Tribunal allowing the claim was set aside.
Facts
The
petitioner a Central Government public sector undertaking filed VAT
returns under the Orissa Vat Act and claimed input tax credit in respect
of tax paid on purchase of coal, alum, caustic soda, consumables used
on its captive power plant for generation of electricity which in turn
is used in continuous process of aluminum. The vat department in
assessment disallowed the input tax credit claimed by the company on
purchase of such goods that are used for generation of electricity,
which itself is a final product and exempt from payment of tax, and as
such no input tax credit is available under the act. The Company filed
writ petition before the Orissa High Court against such assessment
order.
Held
U/s. 17 of the act sale of goods
specified in Schedule A is exempt from payment of tax. Sale of
electricity appearing in item no. 13 of Schedule A is exempted from
payment of vat under the act. Consequently, no input tax credit is
allowed on purchases of input used in producing or manufacturing of
electrical energy in terms of section 20(k) of the act. Admittedly, the
company is not selling electrical energy but has used it in
manufacturing aluminum which is taxable under the act. Under the Act,
input tax credit is available on purchase of inputs either for resale or
for use in execution of works contract, or for manufacture and
processing against the output tax payable on sale of any taxable goods.
Power/energy is one of the primary and essential commodities which has a
direct relation in the manufacturing process. The purchase of inputs
used in generation of electrical energy which in turn is used for
manufacturing of aluminum taxable are “input” as defined in section
2(25) of the act and tax paid on purchases thereof is eligible for input
tax credit against output tax payable on sale of aluminum etc.
Accordingly,
the High Court allowed the writ petition filed by the company and
quashed the assessment order disallowing input tax credit on purchase of
such inputs.
Facts:
The respondents discharged service tax liability by way of utilisation of CENVAT Credit. However, debit in CENVAT Credit account was done belatedly. The department demanded interest for the period of delay vide section 75 of the Finance Act, 1994 from the due date for payment of tax to the actual payment of tax i.e. till the date of debit in CENVAT Credit Account. It was argued that there was sufficient balance in CENVAT Credit Account and only debit entry was passed belatedly. Accordingly, interest liability should not arise.
Held:
It was held that tax can be paid either in cash or by debiting in CENVAT Credit account or by both. If the tax is paid through CENVAT Credit, the date of debit in the CENVAT account should be considered to be the date of payment. Therefore, interest arises from the due date of payment of tax to the actual date of payment, i.e., the date of debit in CENVAT Credit Account in the present case.
Facts:
The
respondents provided roaming facility to international roamers
travelling in India. Whether the services were export of services in
terms of Export of Service Rules, 2005 or not.
Held:
It
was undisputed fact that the respondents provided services to customers
of foreign service provider and the consideration was received in
convertible foreign currency and therefore, following the ratio of
Tribunal’s own decision in respondent’s case (2013) 33 taxmann. com 358
(Mumbai-CESTAT ) and earlier precedents on the subject matter, service
tax paid in respect of such transactions was allowed.
Since issue of CENVAT Credit is highly disputed and subject to different interpretations by various Courts, penalties cannot be levied.
Facts:
CENVAT Credit in respect of certain input services was disallowed contending that the services were not related to business. The appellant contended that CENVAT Credit of travel agents services, courier services and insurance services was allowed by the Tribunal in its own case vide Final Order Nos. A/74 to 78/2011/SMB/C-IV & 23 to 27/2011/SMB/C-IV dated 10/12/2010. With respect to catering services, it was agreed to reverse proportionate credit to the extent the amounts were recovered from its employees and compliance report regarding such reversal was stated to be filed before the concerned adjudicating authority with a copy to the Tribunal. Relying on various judicial pronouncements, it was contested that construction services, travel, car services, catering services and clearing & forwarding agency services, were related to the business. Airport services, CHA services and port services were received for export of goods and port being the place of removal in case of exports, these services squarely qualify as eligible input services to claim CENVAT Credit.
Replying on the decision of the Calcutta High Court in case of Vesuvious India Ltd. 2014 (34) STR 26 (Cal), the department argued that only services upto the place of removal were eligible input services.
Held:
Courier services, storage & warehousing services, maintenance of xerox/fax machines and telephone services were related to the business of the appellants and service tax paid thereon was eligible CENVAT Credit. Security services were covered in the inclusive limb of the definition of input services. Since the factory of the appellants was located in a remote area, the said services were required for smooth running of the industry and therefore were allowed.
As the appellants did not press any grounds with respect to insurance services and servicing of motor vehicles, CENVAT Credit on these services was disallowed. Since complete facts were not known to the Adjudicating Authority regarding transport services, disallowance on ad hoc basis was held against natural justice and having regard to the contention of the appellants that transport services were mainly used to transport finished goods to its dealers, the matter was remanded back. In case of export, port is the place of removal. Accordingly, airport services, CHA services and port services were eligible input services. Since issue of CENVAT Credit is highly disputed and subject to different interpretations by various Courts and in absence of malafides, penalties were set aside.
Facts:
The appellants had asked repeatedly for extension to file reply to SCN on account of change in counsel and also in order to procure orders passed by other Authorities in respect of their distributors. During personal hearings, they appeared and prayed for extension of time. The Adjudication Authority, without accepting or rejecting their requests, passed ex parte order.
Held:
The Tribunal observed that as per recording of personal hearing, the appellants appeared and requested for extension of time to file reply to SCN. There was nothing on record regarding acceptance or rejection of such request from the Adjudicating Authority. If the assessee appears at each hearing and requests for extension of time, Adjudicating Authority is under a legal obligation to respond to the said request either by extending the period or by rejecting the request. Noncommunication regarding such request may be regarded as acceptance by the assessee. Since in the present case, principle of natural justice was violated, the matter was remanded back for fresh adjudication after providing reasonable opportunity of hearing.
Facts:
The Appellant was given a SCN proposing rejection of refund claim. Thereafter, a corrigendum was issued to the effect that CENVAT Credit on capital goods was also liable to be rejected as it was availed based on a document issued by their Head Office which was not a registered dealer. Ultimately, refund was sanctioned of excess amount paid after deducting CENVAT Credit claimed on capital goods. Commissioner (Appeals) also upheld such adjustment of unconfirmed demand. Accordingly, present appeal was made before Tribunal.
Held:
Tribunal observed that the Assistant Commissioner had sanctioned entire refund claim and thereafter, deducted unconfirmed demand. Further, no Show Cause Notice was issued for inadmissibility of CENVAT Credit. The corrigendum could not take colour of a SCN u/s. 73 of the Finance Act, 1994 since it is neither mentioned that it was issued u/s. 73 nor did it contain any grounds to state that the demand was not hit by time bar. It merely stated that the said amount appeared to be not admissible and straightaway called upon to show cause as to why the refund claim should not be rejected.
Accordingly, the Tribunal held that confirmed demand can be adjusted from refund amount but there was no legal authority to adjust unconfirmed demand from refund amount.
Facts:
The Appellant complied with the provisions of section 35F of the Central Excise Act, 1944 while filing appeal. DGCEI wrote a letter to the bankers of the Appellant to remit the amounts lying with the bank to the Government exchequer, in pursuance to which, the bankers froze the bank accounts.
Held:
In our considered view and as also statutorily once mandatory deposit of 7.5% is made, there is no reason for recovery of any further amount from the appellant and the action of the Dy. Director, DGCEI seems to be beyond the scope of law.
Facts:
During the course of Audit of the Appellant, discrepancy was noticed between the turnover in the balance sheet and the ST-3 Returns. On being pointed out the entire amount along with interest was paid. Show Cause Notice was issued for imposition of penalty u/s. 73(3) of the Finance Act, 1994. The Commissioner Appeals confirmed the demand hence the appeal before the Tribunal.
Held:
The Tribunal noted that the discrepancy is only because of the accounting system while the balance sheet was prepared on a mercantile basis, the payment of service tax was on receipt basis. Therefore, there was neither short payment nor any intention to avoid payment of duty. Further, Show Cause Notice should not have been issued when the service tax was paid within a week on being pointed out.
The assessee
was trading in mobile hand sets, other electronic items and accessories.
For the purpose of business it had incurred expenditure of Rs.11,51,40,004 on advertisement. The Assessing Officer treated the
expenditure as deffered revenue expenditure and allowed 25% thereof
observing that the balance amount would be allowed in the next three
years. The Tribunal allowed the full claim.
On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:
“i)
In the previous assessment year 2008-09 the Tribunal in the case of the
assessee allowed the advertisement expenditure as the expenditure of
revenue in nature. No information was available whether the Revenue has
preferred an appeal against the findings recorded by the Tribunal in the
assessee’s case for the A.Y. 2008-09. The reasoning given by the
Tribunal deserved affirmation.
ii) The Tribunal had rightly held
that the Assessing Officer could not treat the revenue expenditure as
deferred revenue expenditure because the Act itself does not have any
concept of differed revenue expenditure. Even otherwise, advertisement
expenditure normally is and should be treated as revenue in nature
because advertisements do not have long lasting effect and once the
advertisements stop, the effect thereof on the general public and
customer would diminish and vanish soon thereafter. Advertisement
expense is a day-to-day expense incurred for running the business and
improving sales.
iii) Keeping in view the nature and character
of the assessee’s business, every year expenditure has to be incurred to
make and keep the public informed and remain in the limelight. It is an
expenditure of trading nature. Therefore, the order of the Tribunal did
not call for interference.”
Before the Supreme Court the issue in a batch of appeals was whether the assessment of agricultural income received by a firm after it was dissolved in so far as the income of the firm pertained to actual cash receipts after the firm was dissolved but relating to income earned prior to dissolution.
The Supreme Court noted that in L.P. Cardoza vs. Agricultural ITO [1997] 227 ITR 421 (Karn.), the question involved was as to whether a dissolved firm could be assessed to agricultural income-tax after the date of its dissolution in respect of income received for supply of goods made by the firm prior to its dissolution. This question arose in the light of section 26(4) and section 27 as they then stood, that is, as they stood in 1987.
The Karnataka High Court had held that there was nothing in section 26(4), as it then stood or section 27, to indicate that where the firm is dissolved and income is received after dissolution in respect of agricultural produce supplied by the firm before dissolution, the firm itself could be assessed in the year of receipt of income notwithstanding its dissolution.
Faced with this decision of the Karnataka High Court, the Legislature amended section 26(4) retrospectively, that is, with effect from, 1st April, 1975. The amended provision as follows:
“26. (4) Where any business through which agricultural income is received by a company, firm or association of persons is discontinued or any such firm or association is dissolved in any year, any sum received after the discontinuance or dissolution shall be deemed to be income of the recipient and charged to tax accordingly in the year of receipt, if such would have been included in the total income of the person who carried on the business had such sum been received before such discontinuance or dissolution.
Explanation – For the removal of doubts, it is hereby declared that where before the discontinuance of such business or dissolution of a firm or association hitherto assessed as a firm or association, or as the case may be, on the company, the crop is harvested and disposed of, but full payment has not been received for such crop, or the crop is harvested and not disposed of, the income from such crop shall, notwithstanding the discontinuance or dissolution be deemed to be the income of the company, firm or association for the year or years in which it is received or receivable and the firm or association shall be deemed to be in existence, for such year or years and such income shall be assessed as the income of the company, firm or association according to the method of accounting regulatory employed by it immediately before such discontinuance or dissolution.”
The said amendment was the subject matter of challenge before a learned single judge of the Karnataka High Court. The single judge repelled the challenge basically on the ground that the Explanation only clarified the main provision and, therefore, did not go beyond the main provision. Equally, since the Legislature has the right to amend both prospectively and retrospectively, all that was done in the present case was an exercise of the legislative power retrospectively and, therefore, no question arose of any discrimination on this count. The single judge, therefore, dismissed the writ petitions before him.
In appeal before the Division Bench, the Division Bench set out all the aforesaid provisions and ultimately found, following the judgment in D. Cawasji & Co. vs. State of Mysore [1984] (Suppl.) SCC 490/ 150 ITR 648, that the Amending Act of 1997 suffered from the vice that was found in Cawasji’s case, namely, that it interfered directly with the judgment of the High Court and would, therefore, have to be struck down as unconstitutional on this score alone. This the Division Bench found because, according to the Division Bench, in the Statement of Objects and Reasons for the 1997 amendment, it was held that the object of the amendment was to undo the judgment of the High Court of Karnataka in Cardoza’s case.
The Supreme Court was thus concerned with the validity of Explanation added retrospectively to section 26(4) of the Karnataka Agricultural Income-tax Act (hereinafter referred to as “the Act”).
The Supreme Court noticed that in the amended section 26(4), two changes were made. Whereas in the original provision, no express reference was made to companies or association of persons, and no reference whatsoever was made to a dissolved firm, both were added. By the Explanation, which is for the removal of doubts, he Legislature declared that where before dissolution of a firm, full payment was not received in respect of income that has been earned pre-dissolution, then notwithstanding such dissolution, the said income would be deemed to be the income of the firm in the year in which it was received or receivable and the firm would be deemed to be in existence for such year for the purposes of assessment. By this amendment, the basis of the law as it stood when Cardoza’s case was decided had been changed.
The Supreme Court held that all that had been done in the present case was to remove the basis of the law as it stood in 1987 which was interpreted in Cardoza’s case as leading to a particular result. All that the Legislature has done in the present case is to say that with effect from 1st April, 1975, dissolved firms will by legal fiction, continue to be assessed, for the purposes of levy and collection of agricultural income-tax, in so far as they receive income post-dissolution but relating to transactions pre-dissolution. In no manner has the Legislature in the present case sought to directly nullify the judgment in Cardoza’s case. All that had happened was that the legal foundation on which the Cardoza’s case was built was retrospectively removed, something which was well within the legislative competence of the Legislature.
The Supreme Court further held that the judicial decision in Cardoza’s case had been rendered ineffective by enacting a valid law on a topic within the legislative field which fundamentally alters or change the character of legislation retrospectively. The changed or altered conditions are such that the previous decision would not have been rendered by the court if those conditions had existed at the time of declaring the law as invalid. The Legislature had not directly overruled the decision of any court but has only rendered, as has been stated above, such decision ineffective by removing the basis on which the decision was arrived at.
The Supreme Court set aside the impugned judgment of the Division Bench of the High Court, and allowed the appeals.
The suit was filed by respondent No. 1 – Smt. Baby for partition of Hindu joint family properties and for possession of her share from the properties. The suit was filed in respect of four agricultural lands and three house properties.
The applicant/defendant No. 1 is the father of plaintiff. Defendant Nos. 2 to 4 are also daughters of present applicant. It was contended by the plaintiff that the suit properties are the ancestral properties though they are in the hands of defendant No.1. It was contended that, in view of amendment made in Hindu Succession Act, the plaintiff needs to be treated as coparcener along with defendant No. 1 and other defendants and she has right to claim partition and possession of her share.
The Court relied on the following observations made by this Court in case of Vaishali Satish Ganorkar and Anr. vs. Satish Keshaorao Ganorkar & Ors (2012) (3) Mh. L.J. 669 “14. It may be mentioned, therefore, that ipso facto upon the passing of the Amendment Act all the daughters of a coparcener in a co-parcenary or a joint HUF do not become coparceners. The daughters who are born after such dates would certainly be coparceners by virtue of birth, but for a daughter who was born prior to the coming into force of the Amendment Act she would be a coparcener only upon a devolution of interest in coparcenary property taking place.”
Thus, the Court held that plaintiff has right to file suit for relief of partition in respect of co-parcenary properties though she was born prior to 09-09-2005 and the trial Court had not committed any error in rejecting the application filed by the applicant. In the result, the application stands dismissed.
