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2016 (43) STR 542 (Kar.) Commr. of ST, Bangalore vs. Kyocera Wireless (India) Pvt. Ltd.

I.High Court
Registration not a pre-requisite for claiming refund of CENVAT Credit

Facts:
The Respondent is an exporter of services and claimed refund of CENVAT credit. Department rejected the claim on two grounds; namely; absence of service tax registration and non-production of sufficient documents for input services and output services.

Held:
Relying upon the decision of mPortal India Wireless Solutions Pvt. Ltd. vs. CST, Bangalore [2012 (27) STR 34 (Kar.)], it was held that registration was not required to claim CENVAT credit and refund thereof. In absence of clear findings from original adjudicating authority as well as Tribunal, matter was remanded to adjudicating authority for verification of records within 3 months from the date when the order of the said decision is received.

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Retrospective cancellation of R.C. of the buyer vis-à-vis validity of C form

Introduction
When the sales are in the course of inter-state trade, one of the facilities available is applicability of lower rate of tax, if the sales are effected to a registered dealer under the CST Act. However, such lower rate is available to the transaction, if the said sale is supported by C form as obtained by the seller from the buyer. One of the conditions of C form is that the buyer, issuing C form, should be registered dealer under the CST Act at the time of purchase.

There are instances where the registration of the buying dealer is cancelled with retrospective effect. Under such circumstances, there is also cancellation of C form which is issued earlier. The effect is that the selling dealer may get affected because of such cancellation. Its sale will be considered as without valid C form, which will invite higher rate of tax.

Recent judgment
Hon. Delhi High Court had an occasion to deal with such situation in case of Jain Manufacturing (India) Pvt. Ltd. vs The Commissioner Value Added Tax & Anr (W.P.(C)1358 of 2016 dt.1.6.2016. The facts, as narrated in the judgment, are as under:

“3. The Petitioner made an inter-state sale of goods to Respondent No.2 (Purchasing Dealer) by way of two invoices both dated 10th March, 2015. The first invoice was for a sum of Rs.7,53,373/- and the second for a sum of Rs.2,49,715/-. In terms of Section 8(1) (b) of the CST Act with Respondent No. 2 being a dealer registered under the CST Act in New Delhi [apart from being registered under the Delhi Value Added Tax Act, 2004 (DVAT Act)] as of that date, and having purchased the goods from the Petitioner by way of inter-state sale, tax at the concessional rate of 2% was chargeable in the invoices and was accordingly included in the invoices raised by the Petitioner. The said two invoices accordingly mentioned the CST amounts as 15,067 and 4,994 respectively. The total sums of the 2 invoices were Rs.7,68,441/- and Rs. 2,54,709/- respectively. The payments for these invoices were made by RTGS into the Petitioner’s bank account.

4. On 13th April 2015, Respondent No. 2 obtained C-Form from the DT&T in respect of the aforementioned two invoices. A copy of the said C-Form is enclosed with the petition as Annexure P-4. It shows that it was a system generated C-Form containing details of the purchasing dealer i.e. Respondent No.2 with its Registration Certificate Number and the amount up to which such registration is valid. The name and address of the purchasing dealer i.e. Respondent No. 2 has also been indicated. It also bears the TIN and name of the selling dealer i.e. the Petitioner. It contains the details of the two invoices dated 10th March, 2015 with the respective amounts.

5. The Petitioner later learnt that the above C-Form had been cancelled by the DT&T. In order to verify this, the Petitioner checked the website of the DT&T. The status of the C-Form issued to the Petitioner was shown as cancelled on 27th November, 2015. The Petitioner also obtained a copy of an order passed by the Assistant Value Added Tax Officer (AVATO) in Form DVAT-11 on 4th August, 2015 cancelling the registration of Respondent No.2. A copy of the said cancellation order has been enclosed as Annexure P-6 to the petition. It was noticed that the cancellation was made retrospective from 26th February, 2014.

6. It is in these circumstances, the present petition has been filed contending that there was no power under the CST Act or in the Rules there under, viz., the Central Sales Tax Act (Registration & Turnover) Rules, 1957 or the Central Sales Tax (Delhi) Rules to cancel a C-Form issued by the DT&T.”

In the writ petition the petitioner made a submission that the C form had been cancelled because the registration of the buying dealer was cancelled retrospectively. It was argued that there is no power for retrospective cancellation of the Registration. It was further argued that as a selling dealer it is only required to ensure that on date of sale the buying dealer is holding valid registration certificate (RC) under CST Act. The retrospective cancellation cannot affect the selling dealer. The judgments in case of Suresh Trading Company (109 STC 439)(SC) and in case of Santosh kumar and Company (54 STC 322)(Ors) were cited.

On behalf of State, it was argued that the selling dealer was indulging in proxy litigation as the buying dealer, in whose case RC is cancelled, has not come forward. It was argued that the selling dealer, who is from Kanpur has no locus to contest the matter. It was also submitted that the transaction of sale was under cloud and it was suspected of being effected with collusion. It was further argued that there is no vested right in the purchasing dealer to insist issuance of C form in its favour. However, the State could not point out any provision under CST Act by which RC can be cancelled retrospectively.

After hearing both the sides Hon. High Court observed as under:

“16. The central issue in the present case is whether there exists a power in the Commissioner VAT, Delhi under the CST Act and the Rules there under to cancel a C-Form and further if such power exists then whether in the facts and circumstances of the present case such power was rightly exercised.

17. No provision in the CST Act has been brought to the notice of the Court which enables an authority issuing a C-Form to cancel the C-Form. Rule 5(4) of the Central Sales Tax (Delhi) Rules, 2005 enables the authority which has to issue a C-Form to “withhold” the C-Form. The contingencies under which a C Form may be withheld are set out in Rule 5(4). For instance, Rule 5 (4) (v) envisages that some adverse material has been found by the Commissioner “suggesting any concealment of sale or purchase or furnishing inaccurate particulars in the returns.” The Commissioner could, in terms of the proviso to Rule 5(4), instead of withholding the C-Form, issue to the applicant such forms in such numbers and subject to such conditions and restrictions, as he may consider necessary. However, there is no specific provision even under the aforementioned Rules which enables the Commissioner to cancel the C-Form that has already been issued.

18. There is merit in the contention that one of the primary requirements for issuance of a C-Form is that the dealer to whom the C-Form is issued has to have a valid CST registration on the date that the C Form is issued. If the purchasing dealer does not possess a valid CST registration on the date of the transaction of sale, then the selling dealer cannot insist on being issued a C-Form. In the present case, on the date of the transaction i.e. 10th March, 2015 the purchasing dealer viz., Respondent No. 2 did posses a valid CST registration. The name of the purchasing dealer as shown in the invoices, and the name and address of the registered purchasing dealer as reflected in the C-Forms issued by the DT&T matched. The cancellation of the CST registration of Respondent No. 2 took place subsequently on 4th August 2015. Therefore, there was no means for the Petitioner as the selling dealer to suspect as of the date of sale or soon thereafter that the payments made to it RTGS was not by Respondent No.2 but by some other entity with the same name. It is not possible, therefore, to straightaway infer any collusion between the Petitioner and Respondent No. 2 or for that matter the other entity of the same name spoken of by the DT&T.

19. In any event, from the point of view of the Petitioner, the requirement of section 8(1) of the CST stood fully satisfied. The purchasing dealer had a valid CST registration on the date of purchase of goods by the Respondent No. 2 from the Petitioner. The C-Form issued by the DT&T confirmed the registration of Respondent No.2 under the CST Act.”

The Hon. High Court has referred to various judgments in support of above holding. After above discussion Hon. High Court also discussed about the practical effect of the cancellation of C forms in following words:-

“26. It was submitted by Mr Narayan that there would be a practical difficulty in the DT&T seeking to inform every selling dealer in the country of the cancellation of registration of a purchasing dealer registered under the CST Act in Delhi and that the remedy of the selling dealers in such instance would be to proceed against the purchasing dealers. In the considered view of the Court, if the selling dealer has after making a diligent enquiry confirmed that on the date of the sale the purchasing dealer held a valid CST registration, and is also issued a valid C Form then such selling dealer cannot later be told that the C Form is invalid since the CST registration of the purchasing dealer has been retrospectively cancelled. Where, a selling dealer fails to make diligent enquiries and proceeds to sell goods to a purchasing dealer who does not, on the date of such sale, hold a valid CST registration then such selling dealer cannot later be seen to protest against the cancellation of the C-Form. As observed by the Supreme Court in Commissioner of Sales Tax, Delhi v. Shri Krishna Engg. (supra) the selling dealer in such instance will have to pay for his “recklessness”.

27.To answer the problem highlighted by Mr Narayan, the best course of action would be for an authority to cancel the CST registration prospectively and immediately place that information on its website. In such event, there would be no difficulty in the selling dealer being able to verify the validity of the CST registration of the purchasing dealer. However, where the cancellation of the registration and, consequently of the C-Form is sought to be done retrospectively, it would adversely affect the rights of bonafide sellers in other states who proceeded on the basis of the existence of valid CST registration of the purchasing dealer on the date of the inter-state sale. That outcome is not contemplated by the CST Act and the Rules there under.”

Conclusion
It is one of the much awaited judgments to protect the interest of genuine dealers. Now-a-days, under fiscal laws, there is a tendency to put more and more burden on the dealers and the authorities only exercise power of recoveries and that too from dealers who are otherwise regular and available. No attempt is made to nab the defaulters and fraudsters. Under such circumstances, the above judgment is path breaking. It is the department who should keep watch on defaulters and take necessary action against them for recovery and should not put burden on the genuine dealers.

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Transfer pricing- Reference to TPO (Opportunity of hearing)- Section 92CA of I. T. Act, 1961- A. Y. 2010-11- Assessing Officer is obliged to give assessee an opportunity of being heard prior to making reference where an objection as to jurisdiction is raised by assessee in relation to making a reference-

Indorama Synthetics (India) Ltd. vs. Addl. CIT; [2016] 71 taxmann.com 349 (Delhi):

The assessee-company entered into transactions of import of raw material amounting from ‘TPL’, a company incorporated in Thailand. It filed return of income declaring ‘Nil’ income. During pendency of assessment proceedings, the Assessing Officer referred the assessee’s case to TPO for determination of ALP in relation to the international transactions undertaken by the assessee with AE

The assessee filed writ petition contending that Assessing Officer could not have referred the matter to TPO without giving it an opportunity of being heard. The Delhi High Court allowed the assessee’s writ petition and held as under:

“i) The main issue is whether it was incumbent on the Assessing Officer to have given the assessee an opportunity of being heard before making a reference to the TPO u/s. 92CA(1). Section 92CA reveals that there are certain jurisdictional prerequisites for the making of a reference by the Assessing Officer to the TPO. In the first place, the Assessing Officer has to be satisfied that the assessee has entered into an international transaction or a specified domestic transaction. Whereas in the present case, the assessee raises a threshold objection that it has not entered into any international transaction within the meaning of section 92B, it is imperative for the Assessing Officer to deal with such an objection. If the Assessing Officer decides to nevertheless make a reference, he has to record the reasons, even prima facie, why he considers it necessary and expedient to make such a reference to the TPO.

ii) What is referred to the TPO is the determination of the ALP of the said international transaction or specified domestic transaction. Therefore, the satisfaction to be arrived at by the Assessing Officer regarding the existence of the international transaction or specified domestic transaction, even prima facie, is a sine qua non for making the reference to the TPO. Where such an accountant’s report is submitted by the assessee in Form 3CEB, then there should be no difficulty for the Assessing Officer to form an opinion, even a prima facie one, that it is necessary and expedient to make a reference to the TPO on the question of the determination of the ALP of such international transaction involving the assessee.

iii) CBDT’s Instruction No. 3 of 2003 categorically states that in order to make a reference to the TPO, the Assessing Officer has to satisfy himself that the assessee has entered into an international transaction with its AE. One of the sources from which the factual information regarding the international transaction can be gathered is Form No. 3 CEB filed with the return which is in the nature of an accountant’s report containing the details of the international transaction entered into by the taxpayer during the assessment year in question. Where no such report in Form 3 CEB is filed by the assessee, what will be the basis for the Assessing Officer to record that it is necessary and expedient to refer the question of determination of the ALP of such transaction to the TPO? Where the Assessing Officer is of the view that a transaction reflected in the filed return partakes of the character of an international transaction, he will put the assessee on notice of his proposal to make a reference to the TPO u/s. 92CA (1) of the Act. Before making a reference to the TPO, the Assessing Officer has to seek approval of the Commissioner/Director as contemplated under the Act. Therefore, all transactions have to be explicitly mentioned in the letter of reference. The very nature of this exercise is such that the Assessing Officer will first put the assessee on notice of his proposing to make a reference to the TPO and seek information and clarification from the assessee. If at this stage, the assessee raises an objection as to the very jurisdiction of the Assessing Officer to make the reference, then it will be incumbent on the Assessing Officer to deal with such objection on merits.

iv) While section 92CA (1) does not itself talk about a hearing having to be given to the assessee upon the latter raising an objection as to the jurisdiction of the Assessing Officer to make a reference, such requirement appears to be implicit in the very nature of the procedure that is expected to be followed by the Assessing Officer. As already noticed, the Assessing Officer has to record that he considers it necessary and expedient to make a reference. The Assessing Officer has to deal with the objections raised by the assessee. It is only thereafter that the Assessing Officer can come to the conclusion, even prime facie, that it is necessary and expedient to make the reference. This has to be done prior to making a reference

v) As far as the present case is concerned, the assessee has not filed the accountant’s report u/s. 92E yet the Assessing Officer has to proceed to determine the ALP u/s. 92C (3) or refer the matter to the TPO to determine the ALP u/s. 92CA (1) in case the assessee has not declared one or more international transactions in the report filed u/s. 92E of the Act. As explained above, the Assessing Officer must provide an opportunity of being heard to the taxpayer before recording his satisfaction or otherwise

vi) For all the aforesaid reasons, it is opined that the references made by the Assessing Officer to the TPO on the question of determination of ALP of the alleged international transactions involving the petitioner and its AE have been made without affording the petitioner an opportunity of being heard as was required by law. Accordingly, the said reference made by the Assessing Officer to the TPO is hereby set aside.

vii) The question of whether or not a reference should be made to the TPO, has to be determined by the Assessing Officer afresh after giving the assessee an opportunity of being heard.”

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TDS- Interest- Section 194A of I. T. Act, 1961- Motor Vehicles Act- Compensation to victims of motor accident- Tax not deductible from compensation or interest thereon-

MD Tamil Nadu State Transport Corporation (Salem) Ltd. vs. Chinnadurai; 385 ITR 656 (Mad):

Dealing with the scope of the provisions of TDS on compensation and interest thereon payable to victims of motor accidents, the Madras High Court held as under:

“i) If there is a conflict between a social welfare legislation and a taxation legislation legislation, then, the social welfare legislation should prevail since it subserves larger public interest. The Motor Vehicles Act, 1988 is one such legislation which has been passed with a benevolent intention for compensating the accident victims who have suffered bodily disablement or loss of life and the Income-tax Act which is primarily intended for tax collection by the state cannot spoke in the effective and efficacious enforcement of the Motor Vehicles Act.

ii) The Income-tax Department had issued a circular dated October 4, 2011 whereby deduction of incometax has been ordered on the award amount and the interest accrued on the deposits made under the order of the court in motor accident cases. Taking a serious view of this circular, the Division Bench of the Himachal Pradesh High Court took suomoto cognizance of the matter and considered it as public interest litigation in the Judgment reported in Court on its Motion vs. H. P. Co-operative Bank Ltd. 2014 SCC Online HP 4273 and quashed the circular.

iii) The compensation awarded by the Motor Accident Claims Tribunal or other interest accruing thereon cannot be subjected to deduction of tax at source and since the compensation and the interest awarded therein do not fall under the term “income” as defined under the Income-tax Act.”

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Speculation business- Section 73 of I. T. Act, 1961- A. Y. 2004-05- Trading in units of mutual funds or bonds- Not trading in shares- Not speculation business-

CIT vs. Hertz Chemicals Ltd.; 386 ITR 39 (Bom):

In the A. Y. 2004-05, the Assessing Officer found that the assessee had offered its profits and loss from share trading as profit and loss of speculation business for the purpose of section 73 of the Income-tax Act, 1961 and amounts received from mutual funds/bonds as business income. For the year ending on March 31, 2003, the assessee had offered profit and loss from share trading as well as from mutual funds as income from speculation business showing the closing stock of shares at Rs. 6.69 crore while the opening stock as on April 1, 2003 for the assessment year in question was shown as Rs. 1.01 crores and the balance of Rs. 5.67 crore was shown as opening stock of mutual funds and bonds. The Assessing Officer held that bifurcation was not permissible and considered the activity of dealing in mutual funds and bonds to be an activity of dealing in shares as speculation business. The Tribunal allowed the assessee’s claim and deleted the addition.

On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under: “i) Units were not shares and trading in units was not speculation business. The Tribunal was justified in confirming the deletion of the addition made by the Assessing Officer on account of the assesee’s trading activities in mutual funds and bonds. ii) No question of law arose.”

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Search and seizure- Cash seized from third person- Third person stating that cash belonged to asessee and assessee admitting it- Amount included in return filed by assessee- Request to adjust tax dues and return balance to assessee- Request cannot be refused on ground that cash had been seized from third person-

Hemal Dilipbhai Shah vs. ACIT; 386 ITR 91 (Guj):

In February 2012, Rs. 26 lakhs in cash were seized by the Department from one VS. VS stated that the cash did not belong to him but to the assessee. Such statement of VS was also confirmed by the assessee. The assessee filed his return for the A. Y. 2012-13 declaring total income of Rs. 27,52,100 including the income declared of Rs. 21,73,000 on account of unexplained cash. The assessee filed an application to the Assessing Officer to adjust the tax liability from the seized amount. Thereafter the asessee filed an application for release of the balance of the seized amount along with interest after adjusting the demand. By a communication, the Assessing Officer informed the assessee that the Department is not in a position to issue the refund until completion of assessment of the VS.

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

“i) The fact as emerging from the record clearly revealed that in proceedings u/s. 132A of the Income-tax Act, 1961, VS from whom the cash had been seized had clearly stated that it belonged to the assessee and the assessee had also in proceedings u/s. 153C admitted this.

ii) The Department had treated the cash as belonging to the assessee. There was no dispute as regards the title to the seized assets (cash). The Department was, therefore, not justified in not releasing the balance amount to the assessee on the ground that the cash had been seized from VS.

iii) The Department is directed to forthwith refund the balance amount after adjusting the tax dues of the petitioner with interest.”

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Income or capital- A. Y. 2009-10- Income from sale of carbon credits- Carbon credits not a by-product of business but an offshoot of environmental concerns- Is capital receipt and not income-

CIT vs. Subhash Kabini Power Corporation Ltd.; 385 ITR 592 (Karn):

Tribunal held that the receipts on sale of carbon credits is capital receipt and not chargeable to tax.

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

“(i) In order to find out whether the particular amount received is a capital receipt or income out of business, there cannot be any standard yardstick or a straight jacket formula.

ii) Carbon credit is not an offshoot of business, but an offshoot of environmental concerns. Income received by sale of carbon credits is a capital receipt.”

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Revision- Sections. 143, 145 and 163 of I. T. Act, 1961- A. Y. 2005-06- Solicitor following cash system of accounting- Advance deposits received from clients treated as liabilities in accounts and adjusted towards fees for expenditure incurred on behalf of clients in subsequent years- No loss of revenue- Revision to bring deposits shown in balance sheet to tax not proper-

CIT vs. Bijoy Kumar Jain; 385 ITR 339 (Cal):

The assessee was a solicitor and followed the cash method of accounting. He received advance deposits from his clients which he treated in his books as his liability. In subsequent years when expenses were incurred both out of pocket and on account of his fees the liability was adjusted. The advances were not treated as his income in his assessment. The Commissioner passed an order of revision u/s. 263 of the Income-tax Act, 1961 holding that the order of assessment was erroneous and prejudicial to the interest of the Revenue because the deposits had not been included in the assessee’s income despite the assessee’s following cash system of accounting. The Appellate Tribunal set aside the order passed by the Commissioner u/s. 263 interalia holding that the assessee had established that all the advances as on March 31, 2005 had been adjusted in the subsequent assessment years and the Department could not contradict the case of the assessee and that there was no justification for invoking the provisions of section 263.

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

“The deposits were treated by the assessee as a capital receipt and the deposits were adjusted in the subsequent years against the expenditure incurred for or on behalf of the client from whom the deposit was received. Such expenditure also included the fees of the assessee himself. It was at that stage that the money was earned by him. Before that, he was holding the money as a agent or as a fiduciary of his client. The Appellate Tribunal was right in taking the view that it did.”

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Charitable purpose- Registration of trusts- Application for registration- Audited accounts submitted subsequently- Registration to be allowed from the date of filing application and not from date on which defects in application cured-

CIT vs. Garment Exporters Association of Rajasthan; 386 ITR 20 (Raj):

The assessee, a charitable trust had filed an application u/s. 12AA(1)(b)(ii) of the Income-tax Act, 1961 for registration without submitting the audited accounts while filing the application. The audited accounts were subsequently filed. The Commissioner granted registration from the date of filing the audited accounts and refused to grant it from the date of application. The Tribunal found that the filing of the audited accounts along with the application was not mandatory and allowed the registration from the date of submission of the application.

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

“i) The application was filed without any defect and the audited accounts were submitted later on because submission of audited accounts along with the application was not mandatory.

ii) There was no error in the order of the Tribunal which allowed the registration from the date of submission of the application by the assessee. The Tribunal and the Department had not pointed out any defect in the application other than non filing of the audited accounts with the application, which was not mandatory.

iii) We find no error in the order passed by the Tribunal.”

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Business expenditure- Disallowance u/s. 43B of I. T. Act, 1961- Provident fund- Employers and employees contribution- Although technical reading of section 43B and the provisions of subsection (2) of section 24 (x) read with section 36 (1) (va) creates the impression that the employees’ contribution would continue to be treated differently under a different head of deduction, as the head of deduction is separate u/s. 43B and section 36 but on a broader reading of the amendments made to section 43B repeatedly and the intention of Parliament, there appears to be sufficient justification for taking the view that the employees’ and the employer’s contribution ought to be treated in the same manner-

Bihar State Warehousing Corporation Ltd. vs. CIT; [2016] 71 taxmann.com 247 (Patna):

The assessee was a Public Sector Undertaking of the Government of Bihar and was carrying on the business of warehousing. During assessment, the Assessing Officer after considering the fact that the contribution had been made after due date statutorily prescribed disallowed the payment of employer’s contribution to EPF u/s. 43B and also disallowed the employees’ contribution to Provident Fund treating the same as income from other sources as per the provision of sub-section (2) of section 24 read with section 36(1)(va). On appeal, the Commissioner(Appeals) allowed the appeal so far as the delayed payment of employer’s contribution to EPF u/s. 43B was concerned and deleted said addition. So far as the delayed payment of the employees’ contribution to EPF is concerned, the addition of the same was confirmed holding that no relief was allowable on the ground of section 43B as the omission of second proviso to the said section with effect from 1-4-2004 does not apply to delayed payment of employees’ contribution to any Provident Fund or any fund mentioned in sub-section (2) of section 24. The same was confirmed by the Tribunal.

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

“Both the Bombay High Court in CIT vs. Ghatge Patil Transports Ltd. [2014] 368 ITR 749 (Bom) and Punjab and Haryana High Court in the case of CIT vs. Hemla Embroidery Mills (P.) Ltd. [2014] 366 ITR 167 (P. & H.)) have deallt with the issue as to whether a distinction can be made between the employees’ contribution and employer’s contribution with regard to applicability of section 43B and held that both the employees’ and employer’s contributions are covered by the amendment of section 43B. Thus following same both contributions were to be treated on the same footing.”

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Educational Institution – Exemption – Where an educational institution carries on the activity of education primarily for educating persons, the fact that it makes a surplus does not lead to the conclusion that it ceases to exist solely for educational purposes and becomes as intuition for the purpose of making profits – Assessing Authorities must continuously monitor from assessment year to assessment year whether such institutions continue to apply their income and invest or deposit their funds in accordance with the law laid down.

Chief CIT vs. ST. Peter’s Educational Society [2016] 385 ITR 66 (SC)

The petitioner Society registered under the Societies Registration Act, 1860 as well as under the provisions of the Bombay Public Trusts Act, 1950, was engaged in imparting higher and specialised education. It is specialised in imparting education in the field of communication including advertising and its related subjects. The petitioner had also been granted the registration u/s. 12A of the Act. The Director of Income Tax (Exemption) had issued a notice u/s. 12AA(3) of the Act and called upon the petitioner to explain as to why its registration u/s. 12A of the Act should not be withdrawn. The said notice came to be challenged by the petitioner before the Gujarat High Court by filing a writ petition, which was withdrawn at a later stage in view of the fact that only show-cause notice was under challenge. However, the procedure initiated by the Director of income tax (Exemption) u/s. 12AA(3) of the Act were dropped by an order dated March 3, 2014 and accordingly the registration granted in favour of the petitioner u/s. 12A of the Act, remained intact. The petitioner submitted an application for getting an exemption certification u/s. 10 (23C)(vi) of the Act, for the assessment year 2013- 14 and onwards on September 30, 2013. The petitioner was called upon to make submissions. By two letters dated February 28, 2014 and August 13, 2014 detailed submissions were made before the Commissioner with whom the application was pending for adjudication. By the order dated September 29, 2014 the Commissioner refused to issue the certificate u/s. 10(23C)(vi) of the Act on various grounds.

By way of a writ petition under articles 14, 19(1)(g) and 226 of the Constitution of India the petitioner challenged the order dated September 29, 2014 passed by the Commissioner by which the application submitted by the by the petitioner to issue exemption certificate in its favour u/s. 10(23C)(vi) of the Act. had been refused.

The High Court noted that it was an admitted position that a certificate u/s. 12A of the Act had already been issued in favour of the petitioner and the same had continued till date. Therefore, according to the High Court it was established that the petitioner-institution was a charitable trust as far as applicability of the Income-tax Act was concerned.

The High Court held that the sole object of the institution was to impart education. By providing latest information and thereafter training to those people who were already in the field of advertising communication, etc. and in such process if certain persons became super-specialists in a particular field, and for which the institution was charging fee, such a case would not fall under proviso to section 2(15).

The High Court concluded that the petitioner institution was established for the sole purpose of imparting education in a specialized field.

Before the Supreme Court, the learned Solicitor General appearing for the Income-tax Department and the counsel appearing for the respondent-assessee in the appeal did not dispute that the issue involved in these appeals was squarely covered by the judgment of the Supreme Court in Queen’s Educational Society vs. CIT [2015] 372 ITR 699 (SC). The Supreme Court noted that the matter pertained to the exemption to the educational institutions u/s.10(23C) of the Income-tax Act, 1961. In the said judgment, the court summarized the legal position as under:

“11. Thus, the law common to section 10(23C) (iiiad) and (vi) may be summed up as follow:

(1) Where an educational institution carries on the activity of education primarily for educating persons, the fact that it makes a surplus does not lead to the conclusion that it ceases to exist solely for educational purposes and becomes as intuition for the purpose of making profits.

(2) The predominant object test be applied- the purpose of education should not be submerged by a profit making motive. .

(3) A distinction must be drawn between the making of the surplus and an institution being carried on ‘for profit’. No inference arises that merely because imparting education result in making a profit, it becomes an activity for profit.

(4) If after meeting the expenditure, a surplus arises incidentally from the activity carried on by the educational institution, it will not cease to be one existing solely for educational purposes.

(5) The ultimate test is whether on an overall view of the matter in the concerned assessment year the object is to make profit as opposed to educating persons.”

The Supreme Court noted that there was a difference of opinion amongst various High Courts on the aforesaid issue. While summarizing the law, it approved the judgments of Punjab and Haryana High Court, Delhi and Bombay High Courts and reversed the view taken by the Uttarakhand High Court. In so far as the judgment of the Punjab and Haryana High Court was concerned, it was given in the case of Pinegrove International Charitable Trust vs. Union of India [2010] 327 ITR 73 (P&H). The relevant para in this behalf which also stated as to how such cases were to be dealt with reads as under:

“25. We approve the judgment of the Punjab and Haryana, Delhi and Bombay High Courts. Since we have set aside the judgment the Uttarakhand High Court and since the Chief Commissioner of Income-tax’s orders cancelling exemption which were set aside by the Punjab and Haryana High Court were passed almost solely upon the law declared by the Uttarakhand High Court, it is clear that these orders cannot stand. Consequently, the Revenue’s appeal from the Punjab and Haryana High Court’s judgment dated January 29, 2010, and the judgments following it are dismissed. We reiterate that the correct tests which have been culled out in the three Supreme Court judgment stated above, namely, Surat Art Silk Cloth, Aditanar and American Hotel and Lodging, would all apply to determine whether an educational institution exists solely for educational purposes and not for purposes of profits. In addition, we hasten to add that the 13th proviso to section 10(23C) is of great importance in that assessing authorities must continuously monitor from assessment year to assessment year whether such institutions continue to apply their income and invest or deposit their funds in accordance with the law laid down. Further, it is of great importance that the activities of such institution be looked at carefully. If they are not genuine, or are not being carried out in accordance with all or any of the conditions subject to which approval has been given, such approval and exemption must forthwith be withdrawn. All these cases are disposed of making it clear that the Revenue is at liberty to pass fresh order if such necessity is felt after taking into consideration the various provisions of law contained in section 10(23C) read with section 11 of the Income-tax Act.”

The Supreme Court dismissed the appeal clarifying that the observations made in para. 25 in Queen’s Educational Society (supra) shall be followed

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Business expenditure- TDS- Disallowance- Section 40(a)(ia) of I. T. Act, 1961- A. Y. 2006- 07- Freight charges- Supplier making payments to transporters- Assessee, buyer, reimbursing transportation expenses- Liability to deduct TDS on supplier under agreement- No liability on assessee to deduct tax and disallowance u/s. 40(a) (ia) not attracted-

Hightension Switchgear Pvt. Ltd. vs. CIT; 385 ITR 575 (Cal):

For the A. Y. 2006-07, the Assessing Officer disallowed the payments made by the assessee on account of freight charges on the ground that it had failed to deduct tax at source u/s. 194C of the Income-tax Act, 1961. In its appeal before CIT(A) and the Tribunal the assesee submitted that its supplier, IPCL, had reimbursed the total freight charges in its invoices and had paid them to the transporter, RLL after deducting tax at source which had been deposited by the supplier with the Department. The Commissioner (Appeals) and the Tribunal upheld the disallowance.

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

“i) Under the contract of sale, the seller was bound to send the goods to the buyer. The relevant part of the price list had showed that the seller was bound to pay the transportation charges to the transport agency and was entitled to recover it from the buyer. The assessee had merely reimbursed the cost of transportation incurred by the seller. The liability to deduct and pay the tax was that of the seller who have admitted to have done that. In case the seller was unable to show that he had made the deduction, section 40(a)(ia) might be applied to his case but not to the case of the assessee who was the buyer.

ii) Even if it was assumed that the supplier, when it had transported the goods to the assessee, had acted as an agent of the assessee and the assessee had reimbursed the freight charges to the supplier, who in turn had paid to the transporters as the Tribunal had held, it was conceptually correct and no other conclusion was possible. The agent being the supplier had admittedly paid to the transporters and had also deducted tax at source. When the agent had complied with the provision, the principal could not have been visited with penal consequences. For one payment there could not have been two deductions. Moreover, when a person acted through another, in law, he acted himself.

iii) The Tribunal was wrong in holding that the assessee was liable to deduct tax at source in respect of the freight component. When the assessee was not liable to make any deduction u/s. 194C the rigours of section 40(a)(ia) could not have been applied to it. The question is answered in favour of the assessee.”

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SEBI’s proposal to regulate Algo/Hi frequency trades

Background
The Securities and Exchange Board of India has put up a discussion paper on 5th August 2016 for regulating algorithmic trading, hi-frequency trading, co-location and some related matters. It has described the background of the subject, highlighted the issues and has invited comments from the public, on certain measures for regulating such matters.

This has resulted in a vigorous debate in media, amongst stock brokers/investors and the public. There have been some views that SEBI should not regulate such matters at all since, amongst others, this creates hurdles in the development of technology . The suggested methods have also been critically analysed. On other hand, there have been other views that SEBI should indeed regulate such matters on ground such that some parties obtain certain special and unfair advantages through such trading. There are also concerns that these are being abused in a manner that the public and perhaps even SEBI does not realize such abuse, considering the sheer complexity involved.

Algo trading has increased exponentially. Indeed, the volumes are so large that just two figures should highlight it. As per SEBI, 80% of all orders and 40% of all trades are now generated through computer algorithms.

However, algo/hi-frequency trading have a dark side too. There has been a history in the United States of it being abused by certain traders to make huge profits at the cost of investors. There has been a huge debate over this in India too when SEBI is said to be investigating the alleged role of National Stock Exchange in a similar context.

Algorithmic/hi-frequency trading (“Algo trading”) is also said to have resulted in market crises (notable amongst these is the so-called Flash Crash of 2010 in the USA).

On other hand, there are obvious advantages of Algo trading including that of higher liquidity, lower spreads, etc.

These types of trades are also not understood well by investors and the public generally. Hence, the recent SEBI consultation paper can be a good opportunity to consider the background of the subject and some related matters.

Some concepts
Algo trading is conceptually simple to understand though, in practice, the manner in which such trades are carried out can be quite complex. The SEBI paper has explained some basic terms that are worth a review. This will also help one understand the various measures suggested by SEBI for regulating them.

Algorithmic Trading
The paper describes it as – “Algorithmic trading (for brevity, Algo), in simple words, is a step-by-step instruction for trading actions taken by computers (automated systems). Typically, trading algorithms enable the traders to automate the process of taking trading decisions based on the preset rules / strategies.”.

To put it simply, in Algo trading, the process of placing trades is automated using computers. Software is developed incorporating detailed instructions when to buy/sell, etc. and it monitors market data and places trades accordingly. There is nil or minimal human intervention. There are several advantages. The first, obviously, is very high speed. The time taken by a human operator to press a few keys is in computing time astronomically higher than the time the algo trading software takes to place/execute the order. Secondly, in case of repetitive situations, where the decision making follows standard parameters, it does not make sense using human intermediaries. Further, this also enables traders to carry out large trades usually at microscopic margins.

Hi-frequency trading (HFT)
Hi-frequency trading is really a type of Algorithmic trading. Algo trading as explained earlier is software-based trading with nil or minimal human intervention. HFT involves carrying out of extremely fast trades in very small fraction of seconds often taking advantage of the edge in information over others. The paper explains HFT as:-

“High Frequency Trading (HFT) is a subset of algorithmic trading that comprises latency-sensitive trading strategies and deploys technology including high speed networks, colocation, etc. to connect and trade on the trading platform. The growth and success of the high frequency trading (latency sensitive version of algorithmic trading) is largely attributed to their ability to react to trading opportunities that may last only for a very small fraction of a second.”

Co-location
Co-location (“Colo”) is considered to be a contentious issue. It basically means providing stock market intermediaries/hi-frequency traders’ servers a physical location that is very near stock market servers. Often, the servers are in the same building that the servers of the exchange are located in. Physical nearness to the exchange servers that receive and process trade data is critical since nearer the physical location to such servers, the faster can a intermediary/hi-frequency trader can receive and send back data. And thus act and profit on it, particularly if one is a hi-frequency trader.

High order-to-trade ratio
This means that the ratio of orders placed over actual trades executed is very high. The rest of orders are cancelled. This again is a common feature of HFT.

Issues faced
SEBI has identified the following issues that arise out of Algo trading and related aspects:-

(i) Unfair access or denial of faster access to persons not having co-location facility. To take a simple example, a person from New Delhi is physically quite far from the stock exchange servers in Mumbai and thus suffers a time disadvantage (even if of fraction of seconds) as compared to a person in Mumbai.

(ii) There is more price volatility.

(iii) HFT imposes costs on other market users

(iv) Algo trading results in a technological arms race.

(v) In times of high volatility, SEBI would get limited opportunities to intervene etc.

Solutions suggested by SEBI
SEBI has placed for discussion certain solutions. These are explained below with their advantages/disadvantages including experience in regard to these solutions in other countries.

(i) Minimum resting time for orders:- Under this method, each order is not allowed to be modified/cancelled till a minimum resting time elapses. This will ensure that the order will be available for some time for execution and thus fleeting orders would be reduced. It is interesting to note that the resting time proposed is 500 milliseconds (1 second = 1000 milliseconds). Thus, this would affect only those parties whose orders undergo change in fractions of seconds.

(ii) Frequent batch auctions:- Orders for a specified period of time of 100 milliseconds will be grouped together and matched, instead of the continuous order matching mechanism. Thus, the advantage of time that a person may have over others owing to co-location, better technological equipment, etc. would be neutralised to an extent.

(iii) Random speed bumps:- This involves delaying orders randomly by a few milliseconds. The result is that this neutralises to some extent the speed advantages.

(iv) Randomization of orders received during a specified period of say 1-2 seconds:- Thus, the orders received during this period would be shuffled randomly and their time sequence altered. All orders within a specified period would have an equal chance and once again the speed advantage is neutralised.

(v) Maximum order to trade ratio:- This will ensure lesser fleeting orders and also that orders are entered into the system with a greater opportunity of their being converted into trades.

(vi) Separate queues for co-location and non-co-location orders:- One order from each queue would be taken alternatingly. Once again, the objective of neutralising speed advantage may be achieved to an extent.

(vii) Providing tick-by-tick feeds to all market participants:- Tick-by-tick data feed, as SEBI describes, “provides details relating to orders (addition+ modification + cancellation) and trades on a real-time basis”. This data is provided by exchanges for a fee. SEBI has suggested that data of top 20/30/50 bids/asks, market depth, etc. be provided to all. This would create a level playing field to all participants irrespective of their technological or financial strength.

Consideration of solutions
The opposition to regulating Algo trading is on various grounds. The first, of course, is that SEBI would be putting hurdles to technological developments and this would not be a wise thing to do. Further, each of the methods suggested create their own inequities. There would also be software and other changes required to provide for such solutions. There would need to be regulatory check to ensure that these solutions are in place. Interfering with such trading would also result in higher ask-put price differences, lower liquidity, etc. Some of the solutions offered, as SEBI itself points out in the paper, have been rejected in some places where they were originally proposed or adopted.

Having said that, there are abuses that need to be considered. While SEBI has already mandated fair, transparent and equitable rules in granting nearness to exchange servers, there have been concerns about this in one way or the other. Further, the sheer complexity of algo trading may result in a group of insiders abusing it to their advantage by prior arrangement particularly if the exchange or its staff plays truant. Thus, the measures suggested may, even if indirectly, help control such abuses. Further, SEBI may also need to regulate such trading to prevent such abuses.

Abuse of hi-frequency trading
Serious abuses have been pointed out from HFT arising out nexus between HFT traders on one hand, and brokers/exchanges on the other. Through a complicated mechanism including giving preferential treatment to HFT traders, it has been found internationally (and allegedly in India too to an extent) that HFT traders hugely profited at the cost of investors. By monitoring quotes on multiple stock exchanges, they came to know in advance impending orders. Effectively, they thus bought (or sold) cheap and sold high (or low) to investors who were not only slower but were also duped by alleged unfair underlying understanding. This has been described in lucid detail in the bestselling book Flashboys by Michael Lewis.

In India too, there is a shadow of this. A whistle blower wrote to SEBI and Moneylife (a financial magazine) about alleged irregularities by National Stock Exchange. It appears that SEBI is looking into this matter.

Thus, abuse of HFT trading can be a serious issue. The HFT traders, as described in the book Flashboys, do not profit in large amounts per trade. Their skimming is small amounts. But on a cumulative basis, they would make large amount of profits. There is a cascading effect of this. Investors end up paying higher price. In turn, this raises the cost of capital for companies seeking to raise capital from the markets. Generally, this would harm the crediblity of markets too.

Conclusion
In the author’s view, SEBI is wrong in proposing measures to slow down the speed of trades/data exchange. This would be restraining developments in technology. Indeed, it is submitted, this is not the real issue at all. The real issue is alleged inequitable access to speedy information and alleged abuse of algo trading through irregular means. For this purpose, SEBI would have to understand and keep pace with the technical developments in algo trading and closely monitor such trading and provide for mechanism to monitor trades and uncover abuses. While the existing Regulations of SEBI relating to frauds and unfair trade practices are general and perhaps broad enough to cover such abuses, SEBI may consider providing for certain matters specifically, describe them in detail and provide for punishment.

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Part D: Ethics, Governance & Accountability

Judicial Transperancy

‘Open letter to Chief Justice Thakur: The latest call for judicial transparency must not be ignored’

Former Central Information Commissioner Shailesh Gandhi asks why the judiciary is loath to implement the Right to Information Act.

Dear Sir,
I am writing this letter in the spirit of seeking an improvement in the working of the judiciary, and not as an exercise in criticism. India has not been able to deliver the fruits of democracy as per the aspirations of its people. I would submit that the responsibility lies with all the four estates – legislature, executive, judiciary and the press – as well as the citizens. One of the attributes on which we have been weak, is in recognising the citizen’s right to information. Despite Parliament passing a Right To Information Act, which rates among the best five laws as far its provisions are concerned, our global rank in implementing it is a poor 66.

It is well recognised that the first clarion call for transparency was given by Justice Mathew who wrote:
“The people of this country have a right to know every public act, everything that is done in a public way by their public functionaries. They are entitled to know the particulars of every public transaction in all its bearing. Their right to know, which is derived from the concept of freedom of speech, though not absolute, is a factor which should make one wary when secrecy is claimed for transactions which can at any rate have no repercussion on public security”.
— (State of UP vs Raj Narain, 1975.)

The only restrictions on this fundamental right under Article 19(1)(a) permitted by the Constitution are those specified in Article 19(2). The exemptions in the Right To Information Act cover all of these. Yet the performance of all three estates in implementation has not been very good. There was a hope that the judiciary with its pronouncements on Right to Information would be a role model and enforcer of this right. This hope has been belied. There are various instances that can be highlighted. Here are two:
1.   The rules for Right to Information framed by many courts are not in consonance with the Right to Information Act. In fact, the Bombay High Court did not even frame the rules for a year, and some courts have exemptions not in the law. Some high courts have kept Rs 500 as the application fee, while most other competent authorities charge Rs 10.
2.   The Supreme Court Public Information Officer challenged an order of the Central Information Commission in the High Court, and despite it being dismissed by a division bench it has been stayed by the Supreme Court. The Supreme Court has not heard this matter since 2010.
3.
As Aniket Aga wrote in The Wire:
“While the government often comes under fire for not effectively implementing the RTI Act, few have noticed that India’s highest court violates the Act routinely, and with an impunity that makes the government’s evasion of the RTI Act seem benign.”

This is also evident in the way the court refuses to share information about the process of appointments and the reasoning behind it. Charges and complaints against judges are not shared with citizens, nor are the results of investigations. Lack of transparency and accountability are justified on the grounds of maintaining the independence of the judiciary. The little man – the citizen – is considered immature by the powerful to monitor them. Ills that afflict the other pillars of democracy are likely to be present in the judiciary as well. The best safeguard and disinfectant is transparency, and the demand for accountability that follows.

Justice Chelameswar has very boldly raised the issue of lack of transparency in the judiciary, and the nation is grateful to him. Please do not try to “sort it out”. You must take this opportunity to bring accountability and better governance to the nation. There is an urgent need to ensure that all judicial vacancies are filled by a proper, transparent process so that the faith of people in our democracy is restored. It is impossible that the judges can by themselves spare adequate time to select the new judges with proper diligence. You must be aware that the increase in backlog of cases is around 1.5% each year, whereas the vacancies in the judiciary are over 20%. This is the cause for pendencies. A proper process with adequate resource must do this job.

Please recognise Justice Chelameswar’s contribution to our democracy, take this opportunity to bring transparency to the judiciary and accept that mistakes may be made in all fields. A democracy providing an equitable and fair nation will evolve, not by having infallible public servants, but by devising institutional mechanisms that will correct the foibles of men.

We have lost the balance of the checks and balances designed by our Constitution. I beseech you sir, for the sake of our nation let us restore it with your authority and wisdom.

Yours truly

Shailesh Gandhi

RTI Clinic in October 2016: 2nd, 3rd, 4th Saturday, i.e. 8th, 15th, and 22nd 11.00 to 13.00 at BCAS premises.

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PART C: Information on & Around

Maharashtra Information Commission: Quick turnaround

Maharashtra’s information commission has set a blistering pace to tackle pending backlog, with a top official clearing a staggering 6,000 cases last year Anyone else would have thrown up their hands in despair on seeing over seven lakh right to information (RTI) applications at Maharashtra’s exceedingly busy information commission, but not the panel’s chief Ratnakar Gaikwad who took up the challenge and ensured that the cases were expedited. Ratnakar Gaikwad, the 64-year-old former Maharashtra chief secretary and IAS officer of 1975 batch, inherited a backlog of 4,074 cases of three years when he was named state chief information commissioner (CIC) in 2012. Within a month of joining, the bureaucrat came up with an ingenious solution – templates that helped speed up work. Gaikwad prepared 120 templates that fit a majority of the cases. It broadly covered certain legal provisions, and similar types of cases in which the facts are the same but the information may be different

RTI appeals pendency up 96 per cent in Pune as SIC shuttles between the city and Nashik

Of the seven SIC benches in the state, the ones in Nashik, Aurangabad and Amravati have been lying vacant.

Over the last few months, pendency of second appeals with the Pune bench of the State Information Commissionerate has seen a whopping 96 per cent rise. With 8,294 second appeals pending before it as of July 2016, the Pune bench has the second highest pendency in the state, the first being Amravati SIC bench having 8,340 appeals pending before it.

The SIC benches are practically the last stage of appeals for information seekers under the Right to Information (RTI) Act, 2005. Second appeals are filed after the information seeker has exhausted all efforts to obtain information with government offices. SICs have the power to fine/summon and order for information to be provided to the applicant.

At present, Maharashtra has seven SIC benches. State’s chief information commissioner Ratnakar Gaikwad is based in Mumbai.

Maharshtra government: Public Information Officers can’t answer RTIs seeking information on them

The onus of taking decisions about such applications has now been given to the public authorities or other public information officers (PIOs) and appellate authorities (AA).

In a move to address the long standing complaints of Right to Information (RTI) users, the state government has issued a circular which has now debarred public information officers (PIOs) and appellate authorities (AA) from hearing or taking decisions on RTI applications which seek personal information about them. The responsibility of taking decisions about such applications has now been given to the public authorities or other PIOs/AAs.

PIOS and AA are designated by the RTI Act to take decisions about the application requests from information seekers. In case of information related to PIO or AA, the decision is taken by those officials themselves. RTI activists had pointed out how this was in contravention to the set norms of jurisprudence. Judges are often known to refuse hearing of cases if they feel there would be a conflict of interest in them — “Not before me” — is the commonly used term in such cases.

The recent notification issued by the General Administrative Department (GAD) of the state government, other than barring the PIOS/AAs from hearing such applications, have issued several other directives. Such applications are to be duly registered and separate records should be kept of them. As mentioned above, the new notification has mandated that such applications would be heard by the public authority (this usually is the head of the establishment) or other PIOs/AAs.

(Source : News articles from Indian Express)

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Reassessment – Rent enhanced in 1994 with effect from 1-9-1987- Notice issued u/s.148 seeking to reopen the concluded assessment for the assessment year 1989-90- The notice was without jurisdiction inasmuch as such enhancement though with retrospective effect, was made only in the year 1994.

P.G. And W Sawoo Pvt. Ltd. vs. ACIT (SC) [2016] 385 ITR 60 (SC)

The premises belonging to the appellant were let out on rent to the Government of India. The rent was enhanced from Rs.4.00 to Rs. 8.11 per sq. ft. per month effective from September 1, 1987. The said enhancement of rent was made by a letter dated March 29, 1994 of the Estate Manager of the Government of India. The enhancement was subject to conditions including execution of a fresh lease agreement and communication of acceptance of the conditions incorporated therein. Such acceptance was communicated by the appellant by letter dated March 30, 1994.

A notice was issued u/s. 148 of the Income-tax Act, 1961 (“the Act”) seeking to reopen the concluded assessment of the appellant-assessee for the assessment year 1989- 90 (for the period of 21 month commencing on July 1, 1987 and ending on March 31, 1989).

The contention of the assessee before the Supreme Court was that having regard to the provisions of sections 5, 22 and 23 of the Act and the decision of the Supreme Court in E. D. Sassoon and Co. Ltd. v. CIT [1954] 26 ITR 27 (SC), no income accrued or arose and no annual value which is taxable under sections 22 and 23 of the Act was received or receivable by the assessee at any point of time during the previous year corresponding to the assessment year 1989-90. Hence, the impugned notice seeking to reopen the assessment in question was without jurisdiction or authority of law.

The Respondent –Revenue contended that the enhancement of rent was retrospective, i.e. from September 1, 1987 and, therefore, the income must have to be understood to have been received in the said assessment year, i.e. 1989-90.

The Supreme Court held that no such right to receive the rent accrued to the assessee at any point of time during the assessment year in question, inasmuch as such enhancement though with retrospective effect, was made only in the year 1994. The contention of Revenue that the enhancement was with retrospective effect did not alter the situation as retrospectivity was with regard to the right to receive rent with effect from an anterior date. The right, however, came to be vested only in the year 1994.

The Supreme Court therefore concluded that the notice seeking to reopen the assessment for the assessment year 1989-90 was without jurisdiction and authority of law. The said notice, therefore, was liable to be interfered with and the order of the High Court set aside. The Supreme Court ordered accordingly and consequently, the appeal was allowed.

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Business of Derivatives Trading & Explanation to Section 73

Issue for Consideration
Section 73 of
the Income Tax Act, 1961 provides that any loss, computed in respect of a
speculation business carried on by the assessee, cannot be set off
except against profits of another speculation business. Explanation 2 to
section 28 provides that where speculative transactions carried on by
an assessee are of such a nature as to constitute a business, the
business is deemed to be distinct and separate from any other business,
and is referred to as ‘speculation business’ for the purposes of the
Act.

Section 43(5) defines the term “speculative transaction”,
as a transaction in which a contract for the purchase or sale of any
commodity, including stocks and shares, is periodically or ultimately
settled otherwise than by the actual delivery or transfer of the
commodity or scrips. Proviso to section 43(5) lists certain exceptions
to the ‘speculative transactions’, vide clasues (a) to (e). Clause (d)
of the proviso provides that an ‘eligible transaction’ in respect of
trading in derivatives referred to in section 2(ac) of the Securities
Contracts (Regulation) Act, 1956 carried out on a recognised stock
exchange shall be deemed not to be a speculative transaction.

Therefore,
derivatives transactions satisfying the needs of being treated as
‘eligible transactions’ are not regarded as speculative transactions for
the purposes of computing business profits u/s. 28.

The
explanation to section 73 provides for a deeming fiction where under
certain business carried on by a company is deemed to be a speculation
business. This fiction of explanation to section 73 applies only to a
company. If any part of the business of the company consists in the
purchase and sale of shares of other companies, such company is deemed
to be carrying on a speculation business to the extent to which the
business consists of the purchase and sale of such shares. Certain
exceptions to this fiction are provided in this regard.

An
interesting issue which has come up for consideration before the courts
is as to whether the business of derivatives transactions, which are not
regarded as speculative transactions by virtue of the proviso to
section 43(5), can be deemed to be a speculation business by virtue of
the explanation to section 73. While the Delhi High Court has taken the
view that the provisions of the explanation to section 73 do apply to
such derivatives trading business, and it is therefore deemed to be a
speculation business, the Calcutta High Court has taken a contrary view
and held that the explanation to section 73 applies only to transactions
in shares, and not to transactions in derivatives, and that therefore
derivatives trading business cannot be deemed to be a speculation
business.

DLF Commercial Developers’ Case
The issue first came up before the Delhi High Court in the case of CIT vs. DLF Commercial Developers Ltd 218 Taxmann 45.

In
this case, the assessee claimed a loss of Rs 492.71 lakh on account of
purchase and sale of derivatives. It claimed that the loss in trading of
derivatives was not a speculation loss in terms of section 43(5), and
could not be disallowed as a speculation loss under any provisions of
the Income Tax Act. The assessing officer rejected that submission, and
held that the explanation to section 73 applied, since it was
independent of section 43(5). He therefore treated the loss as a
speculation loss, and did not permit the adjustment of the loss against
business income.

The Commissioner(Appeals) rejected the
assessee’s contention. In further appeal to the tribunal, the tribunal
held that the explanation to section 73 was not applicable, and granted
relief to the assessee.

Before the Delhi High Court, on behalf
of the revenue, it was argued that the explanation to section 73
categorically provided that where any part of the business of the
company included purchase and sale of shares of another company, it
should l be deemed that the company was carrying on speculation business
to the extent to which the business consisted of that activity. It was
further argued that the intention of section 43 was to define certain
terms for the purposes of sections 28 to 41. It was argued that clause
(d) of the proviso to section 43(5) had restricted application, in that
it excluded transactions in derivatives only for a limited purpose. It
was claimed that section 73 had wider application and related to all
manner of losses concerning shares.

Reliance was placed on
behalf of the revenue on the decisions in the cases of CIT vs.
Intermetal Trade Ltd 285 ITR 536 (MP), CIT vs. Arvind Investments Ltd
192 ITR 365 (Cal) and Eastern Aviation and Industries Ltd vs. CIT 208
ITR 1023 (Cal). It was argued that the specific inclusion of the
activity of sale and purchase of shares of other companies from the
otherwise general application of principles underlying section 73 meant
that those transactions could not claim the benefit of the provision of
s.43(5). It was pointed out that derivatives of the kind and nature
traded by the assessee in the case before the court related to stocks
and shares, and were the subject matter of transactions on a stock
exchange. It was therefore claimed that the tribunal ought not to have
permitted the assessee the benefit of set of such loss.

On
behalf of the assessee, it was argued that the transactions in
derivatives were specifically excluded from the definition of
speculative transactions. Even though that definition was in section
43(5), it could not be ignored, since there was no other definition of
derivatives in the Income Tax Act. It was highlighted that derivatives
need not be only in respect of stocks and shares, but could also be in
respect of commodities. Reliance was placed on the decision of the
Madras High Court in Rajshree Sugars and Chemicals Ltd vs. Axis Bank Ltd
AIR 2011 Mad 144, for this proposition. The attention of the court was
also drawn to the decision of the Bombay High Court in the case of CIT
vs. Bharat R Ruia (HUF) 337 ITR 452, where the court had considered the
pre-amended section 43(5) before insertion of clause (d) in the proviso,
and held that derivatives in the light of the then existing law were
speculative transactions, but that the position had changed after
1.4.2006, when clause (d) was inserted in the proviso to section 43(5).
It was therefore argued that the tribunal had correctly held that the
assessee was entitled to the benefit of set off of the losses.

The
Delhi High Court analysing the provisions of section 73 and section
43(5) held that ; the term “speculative transaction” was defined only in
section 43(5) and the scope of the definition was restricted in its
application to working out the mandate of sections 28 to 41 in as much
as those provisions dealt with the computation of business income and
that it was not possible for the court to ignore or overlook that the
definition was confined in its application, to the extent it excluded
such transactions from the mischief of the expression “speculative
transactions”.

The Delhi High Court observed that while it was
tempting to hold that since the expression “derivatives” was defined
only in section 43(5), and since it excluded such transaction from the
odium of speculative transactions, and further, since it had not been
excluded from section 73, the explanation to section 73 did not apply,
however by doing so, the court would be doing violence to the
parliamentary intendment. This was because a definition enacted for only
a restricted purpose or objective should not be applied to achieve
other ends or purposes. Doing so would be contrary to the statute.

The
High Court stressed the contextual application of a definition or term.
The High Court observed that the stated objective of section 73, as was
apparent from the tenor of its language, was to deny speculative
businesses the benefit of set off of losses against other business
income.

The explanation to section 73 had been enacted to
clarify beyond any shadow of doubt that share business of of companies,
subject to certin exceptions, was deemed to be speculative. The fact
that in another part of the statute, which dealt with the competition of
business income, derivatives were excluded from the definition of
speculative transaction only underlined that such exclusion was limited
for the purposes of those provisions or sections. In the case before it,
the High Court noted that the derivatives were based on stocks and
shares, which fell squarely within the explanation to section 73.

According
to the Delhi High Court, it was therefore ideal to contend that
derivatives did not fall within the provision, when the underlying asset
itself did not qualify for the benefit, as derivatives were entirely
dependent on stocks and shares for the determination of their value. The
Delhi High Court therefore held that the explanation to section 73
applied to the case before it, and that the loss on trading in
derivatives could not be set off against other income.

Asian Financial Services’ Case
The
issue again came up recently before the Calcutta High Court In the case
of Asian Financial Services Ltd vs. CIT 70 taxmann.com 9.

In
this case, the assessee, a company, incurred a loss of Rs. 3,24,76,185
in futures and options transactions in shares being loss in derivatives
transactions. It claimed that this loss should be set off against other
business income, including profit from transactions in shares. The
assessing officer, for the purposes of s. 73, treated such loss as a
deemed speculation loss and did not allow set off of the loss against
the business income, by applying the explanation to section 73. While
the Commissioner (Appeals) allowed the assessee’s appeal, the tribunal
held against the assessee, holding that the explanation to section 73
applied, and the loss was a speculation loss, which could not be set off
against any other income.

Before the Calcutta High Court, on
behalf of the assessee, it was argued that the loss was on account of
derivatives being the futures and options which was excepted from the
definition of the speculative transaction and as a consequence the loss
was to be treated as a business loss under the proviso to section 43(5).
It was argued that once it was deemed to be a business loss under the
proviso to section 43(5), the question of applying section 73 or the
explanation to that section for the purpose of refusing the loss to be
set off against business income was palpably wrong. It was claimed that
the decision of the Delhi High Court relied upon by the tribunal did not
lay down good law, and that the Delhi High Court erred in holding that
dealing in derivatives was also a speculation loss within the meaning of
section 73.

On behalf of the revenue, it was argued that
section 43(5) was a general provision, while section 73 was a specific
provision. Attention was drawn to the explanation to section 73 to
submit that a company dealing in purchase and sale of shares amongst
others, which did not come within the exceptions carved out in the
explanation itself, was hit by the mischief of the explanation. A
question was raised that whether it could be said that when a business
consisting of purchase and sale of shares of other companies amounted to
a speculation business, business in derivatives, which depended on the
value of the underlying shares, was anything other than a speculation
business. It was argued that the view taken by the Delhi High Court in
DLF Commercial Developers’ case ( supra) was the correct view.

The
Calcutta High Court rejected the arguments of the revenue, observing
that, it could not be said that section 43(5) was a general provision
and section 73 was a specific provision. The Calcutta High Court in
fact, expressed the contrary view that the object of section 43(5) was
to define “speculative business”. The High Court observed that chapter
IV-D of the Income Tax Act, consisting of sections 28 to 44DB, dealt
with profits and losses of business or profession. It observed that when
the statute talked of profit, it also referred to losses, because loss
had been construed as a negative profit.

The Calcutta High Court
noted the language of the explanation to section 28 and observed that
from a plain reading of the explanation, the following deductions could
be made:

1. speculative transactions carried on by an assessee might be of such a nature as to constitute a business;

2. such speculation business carried on by an assessee should be deemed to be distinct and separate from any other business.

The
Calcutta High Court therefore concluded that speculation transactions
might partake the character of deemed business where the statute so
provided. The court then noted the definition of speculative transaction
contained in section 43(5), and the five exceptions contained in the
proviso thereto, and observed that such excepted transactions came
within the category of deemed business, which was distinct and separate
from any other business.

Addressing the question as to whether
loss arising out of such deemed business could be set off against the
profit arising out of other business or businesses, the High Court noted
that the provisions of section 70 permitted an assessee to set off loss
against his income from any other source under the same head, unless
otherwise provided. Therefore, the losses from the deemed business could
be set off against other business profits, unless otherwise provided.
The question was whether the explanation to section 73 provided
otherwise. According to the Calcutta High Court, a plain reading of the
explanation showed that it did not provide otherwise. Therefore,
according to the Calcutta High Court, the irresistible conclusion was
that the assessee was entitled to set of such loss arising out of deemed
business against other business income.

While the Calcutta High
Court agreed with the view of the Delhi High Court that shares fell
squarely within the explanation to section 73, it expressed its
disagreement with the treatment of derivatives at par with shares by the
Delhi High Court, since the Legislature had treated them differently.

The
Calcutta High Court therefore allowed the appeal of the assessee,
holding that the loss in derivatives transactions was not covered by the
explanation to section 73, and could be set off against other business
profits.

Observations
The definition of “securities”
u/s. 2(h) of the Securities Contracts (Regulation Act), 1956 makes it
clear that shares and derivatives are distinct from each other, though
both are securities, and even though derivatives derive their value from
the underlying shares or commodities.

The Companies Act, 2013
eliminates any possibility of treating the derivatives and shares to be
one. Section 2(84) defines ‘shares’ while section 2(33) defines the term
’derivatives’ and section 2(81) defines ‘securities’ and a combined
reading of all of them clearly confirm that the shares are not
derivatives for the purposes of the Companies Act, 2013 and if they are
not so there is no reason to treat as one and the same unless they are
defined to mean so for the purposes of the Income tax Act. In fact,
clause(d) of section 43(5) in turn refers to clause (ac) of section 2 of
the SCRA for providing the meaning to the term ‘derivatives’ for the
purposes of the Income tax Act.

It is well settled that a
deeming fiction is to be strictly construed. The explanation to section
73 deems certain business to be a speculation business, and is therefore
a deeming fiction. This deeming fiction merely refers to purchase and
sale of shares, and does not refer to purchase and sale of any other
securities. Therefore, given the fact that derivatives are not referred
to in the explanation, the deeming fiction of the explanation cannot be
extended to cover derivatives.

This view is supported by the
decision of the Supreme Court in the case of CIT vs. Apollo Tyres Ltd
255 ITR 273, where the Supreme Court held that units of mutual funds
were not shares, and therefore that the business loss in dealing in such
units was not covered by the explanation to section 73. In the case of
units of mutual fund also, as in the case of derivatives, the value of
the mutual fund units is derived from the underlying assets, which are
shares. If transactions of trading in mutual fund units do not fall
within the ambit of the explanation to section 73, logically,
transactions of trading in derivatives should also not fall within the
ambit of the explanation.

We have no doubt that the decision of
the Delhi high court could have been different had the court’s attention
been drawn to the decision of the apex court delivered in the context
of explanation to section 73 i.e on the same subject as is the subject
of discussion here.

Further, the provisions of section 43(5),
explanation 2 to section 28, and section 73 should be regarded as one
integrated scheme, for the limited purpose of set off of business loss
against any other income.

The term “speculation” is not used in
any other section of the Income Tax Act, and therefore this is a logical
interpretation. In the absence of section 73, there was no necessity of
the definition of speculative transaction in section 43(5), nor of
explanation 2 to section 28. When an item is specifically excluded from
the provisions of section 43(5), the intention clearly is to exclude it
also from the provisions of section 73, unless section 73 expressly
provides to the contrary. In any case, the explanation to section 73
while referring only to shares, clearly indicates that loss of trading
in derivatives does not fall within the deeming fiction of the
explanation.

The better view, therefore, seems to be that of the
Calcutta High Court, that loss on trading in derivatives is not
governed by the explanation to section 73, and that such loss incurred
by companies can be set off against other income.

shailesh.kwebmaker

Is there a limitation for ‘reassessment’ when the return is processed U/s.143(1)?

The culminating point of the return filing exercise under the Income-tax Act, 1961 is its assessment. It may so happen that the income returned is accepted per se or subjected to some increase by virtue of the provisions of law. Section 2(8) very briefly defines the term ‘assessment’ as “assessment includes reassessment”. However, there is no definition of the term ‘reassessment’ under the Act.

When a return of income is filed by the taxpayer , it could be accepted. Later on, it could also be selected for detailed verification technically known as “scrutiny assessment”. However, there is a time limit for selecting a return for scrutiny assessment viz. six months from the end of the financial year in which the return was filed. Once this time limit expires, whether the tax authorities can invoke reassessment provisions which provide longer time limit has been litigated..

Recently, the Gujarat High Court in Olwin Tiles India P Ltd v. Dy. CIT (2016) 130 DTR (Guj) 209 analysed whether the Assessing Officer without having any extra material / information could reopen the case. This article discusses this decision which dissented from the decision in the case of CIT v. Orient Craft Ltd (2013) 87 DTR (Del) 313 / 354 ITR 536 (Del) as well asthe recent statutory amendments which require further fine tuning for having hassle free tax compliance in respect of the majority of taxpayers whose returns are accepted as it is by the tax authorities.

Olwin Tiles India (P) Ltd ’s case
The assessee filed its return of income declaring “nil” income. It was processed u/s. 143(1) and later on, a notice u/s. 148 was issued for reopening the assessment.

The reason given by the Assessing Officer for reopening the assessment was that the assessee had issued 60,000 equity shares of Rs.10 each at a premium of Rs.990 per share. The Assessing Officer based on the assets and liabilities furnished in the return of income computed the ‘net worth’ of the company and found book value of equity share to be Rs.33 per share. Hence, the Assessing Officer concluded that the shares were issued to the shareholders at a premium which was far above their book value or intrinsic worth.

Readers may note that the facts of the case relate to assessment year 2011-12 and hence clause (viib) of section 56(2) could not be applied as the said provision became operational by virtue of the Finance Act, 2012 w.e.f. the assessment year 2013-14.

The assessee submitted that the return having been accepted by the Assessing Officer cannot be subjected to reassessment on the basis of materials which are already available on record. It was contended that the Assessing Officer must have some tangible material which did not form part of the original record to enable him to reopen the case or else, it would amount to mere review of the earlier assessment, which is impermissible in law.

The reason recorded by the Assessing Officer was that the investors invested in the shares of the company at a value far above the net asset value which implied that the additional amounts represent unexplained cash credits chargeable to tax under section 68 of the Act.

The assessee relied on the decision in the case of CIT vs. Orient Craft Ltd (2013) 354 ITR 536 (Del).

Orient Craft’s case
The assessee in this case for the assessment year 2002- 03 filed its return of income declaring total income of Rs.445.35 lakh. The income returned included inter alia (i) claim of deduction u/s. 80HHC; and (ii) deduction u/s. 10B. The return was processed u/s. 143(1).

Later, a notice u/s. 148 was issued on the ground that the income chargeable to tax had escaped assessment by virtue of the items such as (i) duty drawback; (ii) DEPB; (iii) premium on DEPB; and (iv) sale of quota all of which were included in the ‘export turnover’ and thus excess deduction was allowed u/s. 80HHC. The assessee filed a return in response to the notice issued under section 148 declaring the same total income as was admitted in the original return.

The assessee questioned the reopening of assessment which the Assessing Officer rejected by citing clause (c) of the Explanation to section 147. The Assessing Officer claimed that the assessee had claimed excess deduction under section 80HHC by including ineligible items. The reassessment was completed by scaling down the deduction u/s. 80HHC to Rs.683.95 lakh from the original claim of Rs.874.21 lakh.

The assessee challenged the reassessment order both on the grounds of jurisdiction and merit. The CIT (Appeals) rejected the objection to jurisdiction , but on merit decided the issue in favour of the assessee. Before the tribunal, both the assessee and the Revenue filed cross appeals. The assessee challenged the jurisdiction assumed for reopening the assessment u/s. 147 as also certain other issues on merit which were decided against it by the CIT (Appeals).

The tribunal examined the assessee’s claim and found that the issue was decided in favour of the assessee for the earlier assessment years and accordingly decided the case by citing decision in the case of CIT vs. Kelvinator of India Ltd (2010) 320 ITR 561 (SC) in which it was observed “since there was no tangible material available with the Assessing Officer to form the requisite belief of escapement of income, the reopening of the completed assessment is unsustainable in the eyes of law. The same is, therefore cancelled”.

The matter went to the Delhi High Court where the court held that even an assessment u/s. 143(1) can be reopened u/s. 147 subject to fulfillment of the conditions precedent, which includes that the Assessing Officer must have “reason to believe” that income chargeable to tax has escaped assessment.

Though no assessment order was passed and intimation u/s. 143(1) is sent, the apex court in Asstt. CIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd (2007) 291 ITR 500 (SC) has held that for initiating the proceedings u/s. 147 the ingredients of section 147 are to be fulfilled. The ingredient is the presence of “reason to believe” that income chargeable to tax has escaped assessment. The court held that this judgment does not give carte blanche to disturb the finality of the intimation issued u/s. 143(1).

The Delhi High Court finally held that the reasons recorded by the Assessing Officer were not based on any tangible material which came to his possession subsequent to the issue of intimation u/s. 143(1). It held that reopening of assessment after issue of intimation without any fresh material reflects an arbitrary exercise of the powers conferred u/s. 147. The decision hence was in favour of the assessee.

Reasoning in Olwin Tiles case
The Gujarat High Court referred to its precedent in Inductotherm India (P) Ltd vs. M.Gopalan, Dy. CIT (2012) 356 ITR 481 (Guj) where it was held that no assessment had taken place when an intimation under section 143(1) was issued accepting the return filed by the assessee. It held that the Assessing Officer would not have formed any opinion with respect to any of the aspect arising in such return. The power to reopen assessment is available when a return has been accepted u/s. 143(1) or a scrutiny assessment has been framed u/s. 143(3) of the Act. The common requirement in both the situations is that the Assessing Officer should have reason to believe that any income chargeable to tax has escaped assessment.

The Gujarat High Court in Olwin Tiles case (Supra) hence held that it cannot accept the contention of the assessee that the Assessing Officer must have some material outside or extraneous to the records to enable him to form an opinion or entertain a belief that income chargeable to tax has escaped assessment. The only requirement to be fulfilled for issuing a notice for reopening the assessment is the ‘reason to believe’ that income chargeable to tax had escaped assessment.

It adverted to the decision of the Supreme Court in the case of Rajesh Jhaveri’s case (Supra) where it has been highlighted that ‘reason to believe’ does not have to be a final opinion that the additions would certainly be made to the income originally admitted / assessed. The reason recorded in Olwin Tiles case (Supra) by the Assessing Officer was that the share valuation of the company on the basis of balance sheet furnished in the return of income was only Rs.33 as against the issued price of Rs.1000 per share.

The court observed that the assessee-company had not commenced manufacturing activity and whether or not it has earned income cannot be gone into at this stage viz. at the time of deciding the validity of reassessment notice. The court accordingly held that it was not inclined to terminate the reassessment proceedings at this stage on the grounds put forth by the appellant.

Olwin Tiles vS. Orient Crafts – a comparative study
Prima facie the decision of the Gujarat High Court in Olwin Tiles case (Supra) was in favour of the Revenue and it dissented from the Delhi High Court decision in the case of Orient Crafts Ltd (Supra).

The decision rendered in Orient Craft’s case related to assessment year 2002-03 being an era preceding the electronic filing / processing of returns. Hence, at that time the assessee would have furnished the necessary details along with the return of income. Whereas in Olwin Tiles case (Supra) which pertained to assessment year 2011-12, the return of income would have been filed electronically and is an annexure-less return. No further details except the return form duly filled in were available with the tax authorities. This would show that a return processed u/s. 143(1) is prima facie an acknowledgement of the return, subject to a cursory verification of the claims contained therein.

Further tax returns are presently processed by Centralized Processing Centres (CPC). Though CPC is managed by the officials of the Department, it is not possible to analyse or validate the contents of the return filed by the taxpayers in the absence of supporting documents / evidences as the returns filed nowadays are annexure-less.

In this backdrop, it is debatable whether the return processed by CPC can be called as an appraisal of the return of income filed by the taxpayers. It appears that the e processing of the return is adequate only for detection of apparent errors or inconsistencies detected by the software based on the schedules forming part of the return, Thus processing of return and issue of intimation u/s. 143(1) in all fairness cannot taken as approval of the return filed by the taxpayers.

If the Delhi High Court (dealt with Orient Craft’s case) had dealt with the assessment year where the return is processed by CPC and not by the jurisdictional Assessing Officer, perhaps the decision may have been different. The decision of the Gujarat High Court (in Olwin Tiles case) is to be read in the context of the situation on the ground. Therefore a subsequent appraisal of the information contained in the return may also lead to formation of a reason to believe, and a consequent reopening.

Amendments in Finance Act, 2016
The Finance Act, 2016 probably taking note of the limitations in processing of returns by CPC enlarged the scope for adjustments on processing of returns which hitherto was limited to adjusting (i) arithmetical errors; and (ii) incorrect claims which are apparent from any information in the return.

Now w.e.f. 01.04.2017, four more sub-clauses to section 143(1) are inserted which validate adjustments to the returned income while processing the returns either by the Department (in the case of paper returns) or CPC which processes e-returns. These adjustments are popularly known as prima facie adjustments and they covers the following:

(i) Incorrect claim of brought forward loss when the return of the assessment year in which the loss was incurred, is filed beyond the ‘due date’ specified in section 139(1);

(ii) Disallowance of expenditure which could be deciphered from the audit report filed with the return but was not to be taken into account while computing the total income;

(iii) Disallowance of deduction under sections 10AA, 80- IA, 80-IAB, 80-IB, 80-IC, 80-ID or 80-IE when the return is furnished beyond the ‘due date’ specified in section 139(1); and

(iv) Addition of income due to mismatch of figures between Form 26AS or Form 16A or Form 16 vis a vis the income disclosed in the return.

Though the first three adjustments are are fully justified while processing the return u/s. 143(1), the fourth one could create substantial hardship, particularly when the mismatch arises on account of difference in method of accounting followed by the deductor and deductee. Consequently , if for any reason an adjustment falling within these categories is not made in processing u/s. 143(1), the provisions of section 148 cannot be resorted to subsequently. The tax authorities may invoke section 154 if such omitted adjustments would fall in the category of error apparent on record. Other debatable claim of expenditure or income, which do not require any disclosure in the return or in the audit report continue to remain beyond the scope of the said adjustments, and therefore possibly attract the provisions of section 148..An explicit amendment in sections 147 /148 would put an end to this kind of controversy.

Yet another subsisting controversy resolved by the Finance Act, 2016 relates to substitution of sub-section (1D) to section 143 by mandating processing of returns u/s. 143(1) before issue of notice u/s. 143(2). This is applicable w.e.f. 01.04.2017. However, processing of returns u/s. 143(1) is not permitted after issuance of an order u/s. 143(3). This amendment would provide the taxpayers the benefit of cash flow viz. refund of tax if any, on processing of return under section 143(1) which was hitherto kept in abeyance till the completion of assessment u/s. 143(3). Further as a corollary to insertion of sub-clauses (iii) to (vi) to section 143(1), the concept of limited scrutiny has been done away with by amending section 143(2) w.e.f. 01.06.2016.

Revision under section 263
Section 263 empowers the Commissioner to assume jurisdiction where any order passed by the Assessing Officer is erroneous or prejudicial to the interests of the revenue. Whether intimation u/s. 143(1) is an ‘order’ to permit the CIT to assume the revisionary jurisdiction u/s. 263 has also been litigated at various points of time.

The legislature by amending the law and the courts by interpreting the law have provided safeguards when Commissioner exercises revisionary powers u/s. 263 such as (i) revision not permissible in respect of debatable claims; (ii) mandating recording of reasons for revision; (iii) revision of matters limited to issues not pending in appeal; and (iv) wider meaning of ‘record’ for the purpose of permitting revision.

The catch phrase in section 263 is “any order passed therein by the Assessing Officer” which is erroneous or prejudicial to the interests of revenue. Prima facie, when the return is processed u/s. 143(1), there is no examination of the claims made in the return except prima facie items listed in section 143(1). Thus the intimation issued u/s. 143(1) may not qualify as an ‘order’ for the purpose of revision u/s. 263.

However, the Bombay High Court in CIT vs. Anderson Marine & Sons (P) Ltd (2004) 266 ITR 694 has held that the intimation u/s. 143(1) will have to be understood as having the force of an ‘order’ on self-assessment. By legal fiction, intimation u/s. 143(1) shall be deemed to be a notice of demand issued u/s.156 and all the provisions of the Act are applicable.

Thus the court held in the affirmative that intimation u/s. 143(1) is eligible for interference u/s. 263.

Conclusion
Based on the two legal decisions given at different points of time in the light of the fact that the returns were processed manually vis a vis electronically and the provisions of law as it stands now, one may summarize the position as follows:

(i) A return processed u/s. 143(1) in spite of the expanded scope of adjustments may be subjected to reassessment proceedings provided the Assessing Officer has reason to believe escapement of income or on the basis of some credible information from which he entertains the belief of escapement of income chargeable to tax.

(ii) Processing of a return u/s. 143(1), in the current scenario does not indicate appraisal of the return. Thus it appears that formation of the belief on the basis of a scrutiny of the return subsequent to the processing might result in a notice u/s. 148 and possession of information or knowledge by the tax authorities beyond the return may not be mandatory for issue of notice u/s. 148.

shailesh.kwebmaker

Let everyone play a game!

Three women, Sakshi, Sindhu and Deepa have done India proud by their achievements at the recently concluded Olympics in Rio. Predictably, they have been showered with awards and gifts by governments, individuals, associations and sponsors. While they undoubtedly deserve the honour that they have received, this postachievement support raises quite a few questions.

In the first few days when our athletes were not making a mark, many individuals were critical of their performance. It is a fact that while our sportspersons get bashed when they fail to perform, they get placed on a pedestal when they get results. However, very little attention is paid to their training and the effort that they have to put in, in the years before the competition takes place. A question is often raised as to why with a population of nearly 125 crore we have always faced a drought, in the medal tally. The problem I believe begins at home. Our children are rarely encouraged to participate in a sport. This is true across all households, with different economic backgrounds. In the case of the poor, it is of an economic constraint that prevents the child from taking up a sport; in the case of the middle class it is probably the desire to secure an economically sound future that drives the parents to force children to study rather than play. The situation is changing to some extent.

We must all realise, that merely having a large young population will not ensure Olympic medals for our country. For that all the children in the country must be able to play at least one sport of their choice. It is only then that we will have stellar achievers. In our country it is only those who achieve either national or international fame that can have an economically secure future. This must change. Even those who achieve some level in any sport must be in a position to make a reasonable living. This need not necessarily be achieved through reservation in jobs, but if the sport itself spreads far and wide, then that itself will give employment opportunities like, maintenance and creation of sports infrastructure, coaching et cetera. Every economist of repute has expressed the view that in order to achieve economic prosperity creation of a sound infrastructure is absolutely essential. This is equally true of any sport.

The next issue is in regard to the regulation of sports associations. It is true that over the last many decades many sports associations have been badly managed. There has been mismanagement of funds, in some cases even misappropriation. To run such institutions efficiently one has to strike a balance between those who have knowledge of the game and those who can administer it. A sportsman is not necessarily a good administrator and possibly a bureaucrat can fill in that role. Politicians can impress upon the government the requirements of the sport. While politicians and bureaucrats must not be permitted to misuse their positions to garner posts in such associations, a general bashing of these persons is also incorrect. When we are critical of politicians and bureaucrats as a class, we often forget that they have not fallen from heaven and are one amongst us. Many have actually contributed to the development of sport. Therefore while one welcomes regulation of sport, it must happen internally and through pressure from the public. The judiciary cannot do this job. Its role should be limited to nudging those concerned into action.

Finally, one must accept the role of sponsors and advertisers in the popularisation of a sport. Some are very critical of what they call “commercialisation” of a game. However, a game becomes popular only if it is viewed by more and more people. If that is so, then the needs of the public and their tastes have to be borne in mind. The IPL in cricket has been a total game changer. The format of the game has undergone a change. With the viewing public having less time on their hands, the T-20 form of the game has become more and more popular. With competition becoming more intense the skill levels have also increased tremendously. Very recently this format has been adopted by a local sport namely Kabaddi. A sport which was played mainly in Maharashtra and a few other parts of the country is now becoming a national sport and is increasing in popularity.

It needs to be accepted that sponsors and advertisers, the media moguls are here to stay. One must give them their due share, while ensuring that the game continues to be played fairly. A well regulated sport will be beneficial for those who enjoy it as well as those who play it. One hopes that the Olympic fever does not subside. If more and more children play a sport with standard facilities we will certainly see many more Olympic medals. It needs patience and perseverance. The Indian tricolour, being unfurled and the national anthem, being played at victory ceremonies will then not remain a dream but will become reality.

shailesh.kwebmaker

Transitional Period for Rotation of Auditors

BACKGROUND
May be to strengthen the road of independence of an auditor on which the very premise of any audit is built, the Companies Act, 2013 (“the 2013 Act”) has brought a prominent change in the appointment of auditors by introducing the concept of rotation of auditors. Many a times, an introduction of new provisions is subject matter of divergent views; the applicability of transitional provisions for the rotation of auditors faces the same fate. Presently, the companies are battling the question of how to interpret the transitional provision in relation to rotation of auditors as to whether the auditors, who have already been the auditors of the company for more than one or two terms of five years, as the case may be, are required to be changed in the annual general meeting (“AGM”) to be held on or before September 30, 2016 (for the companies having April to March as its financial year) or they can be continued for one more year, that is, upto AGM to be held on or before September 30, 2017 ? The issue has garnered a lot of attention and has been subject to varied and contrary views. Genesis of this article is to highlight the issue and provide an appropriate answer thereto.

PROVISIONS OF APPOINTMENT OF AUDITORS UNDER THE 2013 ACT
Section 139 of the 2013 Act deals with appointment of auditors. Section 139(1), inter alia, requires a Company to appoint auditor at the first AGM to hold office from the conclusion of that AGM till the conclusion of its sixth AGM and thereafter, till the conclusion of every sixth AGM. Section 139(2) provides for mandatory rotation of the auditors in case of all listed and other prescribed class of companies. Under the concept of rotation of auditors, the appointment of one term of five consecutive years for an individual as auditor or two terms of five consecutive years each for a firm as auditor is provided. The third proviso to section 139(2) provides for a transition period, that is, the companies existing on/before the commencement of the 2013 Act (from April 1, 2014), which are required to comply with such rotation are required to do so ‘within three years from the date of commencement of this Act’.

ISSUE TO INTERPRET
In the light of the third proviso to section 139(2), the issue that arises is – Whether the transition period for rotation is to be counted from the date of commencement of the 2013 Act, i.e. April 1, 2014, or from the date of conclusion of AGM held after the commencement of the 2013 Act ?

POSITION UNDER THE COMPANIES ACT, 1956
It is worthwhile to note that the appointment of the auditors has always been made from AGM to AGM, i.e. under the Companies Act, 1956 (for a year at a time) and continues to be so under the 2013 Act (though now for the maximum period of block of five years at a time). Thus, though auditors carry out audit for financial year(s), their appointment ranges from AGM to AGM and not for any particular year or financial year as such. This proposition, was also enunciated in the clarification issued by the Department of Company Affairs in the context of appointment of auditors under the Companies Act, 1956. In fact, in any event, if audit of more than one financial year is to be completed between two AGMs, the appointment would not be qua a specific financial year but the auditor so appointed at the AGM would carry out the audit of all financial years which were then pending for completion till the next AGM. Of course, it is a different matter that now under the 2013 Act, the provision for appointment is for a block of five years.

INTERPRETATION BY COMPANIES (AUDIT AND AUDITORS) RULES , 2014
Section 139(4) of the 2013 Act is very pertinent to the issue under discussion and which provides-

“The Central Government may, by rules, prescribe the manner in which the companies shall rotate their auditors in pursuance of s/s. (2).”

Rules prescribed in this regard by the Central Government are contained in the Companies (Audit and Auditors) Rules, 2014 and Rule 6 thereof is the most relevant to the issue. Rule 6, inter alia, contains illustrations explaining the rotation in case of individual auditor as well as in the case of an audit firm. The relevant portion of such Rule, being the illustration explaining rotation in case of audit firm, is reproduced herein:

Thus, whether one goes by Rule 6 or by the third proviso to section 139(2) to consider the transitional period ?

RULE 6 AND LEGISLATIVE INTENT
It must be appreciated that the provisions of law would have to be read and interpreted with underlying intent of the law makers. Such intent would have to be gathered from a combined reading of the provisions of the 2013 Act and the relevant Rules framed. It would be appreciated that, for such significant change in the provisions of law compared to prevailing position, law makers have thought it fit to provide for and grant enough transition time to the companies so as to smoothly adopt the new regime. In fact, the intention of the Legislature has been to provide reasonable time to companies so as to not only comply with the new requirement but also to do away with impediments or hardships which may result due to rotation of auditors. Such intention is evident from the discussion at the parliamentary committee (i.e. Yashwant Sinha Committee) before the enactment of the 2013 Act on the matter of section 139(2). Extract of minutes read as:

“…ii) Since a period of three years has been provided for companies as transitional period to align the tenure of auditors in accordance with the provisions of new Bill, which appears to be reasonable, no further change is necessary in the provisions…”

The words “….within three years from the date of commencement of this Act” should be read and interpreted in the manner which meets the underlying intent which is clearly spelt out in the Rules. In Rule 6, the illustration explaining the rotation mentions in the column heading, “Number of years for which an audit firm has been functioning as auditor in the same company [in the first AGM held after the commencement of provisions of section 139(2)]”. Thus, both law makers and law administrators obviously were aware of the fact that the term of an auditor is not with reference to ‘financial year’. This is also evidenced from the fact that the term used in the third proviso to section 139(2) is ‘year’ and not ‘financial year’.

If the term”….within three years from the date of commencement of this Act” is to be read verbatim, it would mean that the transition period would effectively be reduced to only two years instead of three years stated in the Act. While it is true that the literal rule of interpretation is the paramount rule of interpretation, there is no doubt that such literal interpretation should be in line with the intention of the legislature. A construction which will fructify the legislative intent is to be preferred. In fact, a beneficial provision is to be interpreted so liberally as to give it a wider meaning instead of giving it restrictive meaning which would negate the very object.

Now, note the observation and recommendation in the report of the Companies Law Committee (“the Committee Report”), set up on June 4, 2015, to make recommendations to the Government on issues arising from the implementation of the 2013 Act. Relevant Para 10.5 of the Committee Report reads as under:

“…The Committee noted that the three years’ transitional period provided to companies was reasonable and required no modification. Further, the intention of the legislation had been accurately translated in the Rules, and for this purpose, a transitional time period of three years had already been given. Hence, the Committee felt that there was no need for any change. However, the Committee, felt that Rule 6 ought to provide clarity that the three years’ transition period would be counted from AGM to AGM, and not from the commencement of the Act.”

[Underlined for emphasis]

The above recommendation of the Committee further leads to affirm that the intention of the legislature is that the transition period is to be computed not from the commencement of the Act but from AGM held after the commencement of the 2013 Act, as provided under Rule 6.

RULE TO PREVAIL
A question that may now be raised – would a rule override the provisions of the Act ? But it may also be appreciated that Rules made under an Act must be treated as if they are in the Act and have the same force as the sections in the Act. Rules can be resorted to for the purpose of construing the provisions of the statute where the provisions are ambiguous or doubtful and a particular construction has been put upon the statute by the rules.

In this connection, one must attend to the decision of the Hon’ble High Court of Delhi in the case of All India Lakshmi Commercial Bank Officers’ Union and Another vs. Union of India and Others [1985] 150 ITR 1, the relevant portion of which is reproduced herein:

“…Rule have to be so interpreted that they are intra vires. Recourse also cannot be had to the rules made under the authority of the Act for the purpose of construing the provisions of the statute except where the construction of the statute may be ambiguous or doubtful and a particular construction has been put upon the statute by the rules…”

In the present situation, the literal interpretation of the law, having regard to the intention of the legislature, no doubt that there exists some ambiguity in the provisions of the Act in relation to the computation of transitional period for rotation of auditors. Therefore, due consideration should be given to the interpretation laid down by the Rules, that is, Rule 6.

Further, the Hon’ble High Court of Delhi in the case of Bansal Export (P) Ltd. and Another vs. Union of India and Others 145 ITR 642 has held as under:

“…Delegated legislation should not be regarded as some form of inferior legislation – it carried out the maker’s command as effectively as does an Act or Parliament…” Also, the Hon’ble High Court of Allahabad in the case of Kanodia Cold Storage vs. Commissioner of Incometax [1995] 215 ITR 369 has observed as under:

“The Rules framed under the Act have statutory force of law, therefore…”

INSTANCES UNDER THE 2013 ACT WHERE RULES PROVIDED FOR SUBSTANTIVE LAW
Furthermore, there have been instances under the 2013 Act itself where the related rules have provided for something that was neither provided nor empowered by the Act. In fact, in few such cases, the Act was subsequently amended in order to incorporate such provisions so as to remove any kind of difficulty in interpretation or implementation thereof. Some such examples are –

Section 185 of Act prohibits a company from advancing any loan or giving any guarantee to its director or to any other person in whom the said director is interested. Transactions in the nature of loans and guarantees between a holding company and its wholly owned subsidiary (“WOS”) were exempted from the applicability of Section 185. This exemption was already provided for in the Companies (Meetings of Board and its Powers) Rules, 2014 as it has later been incorporated in the Act vide the Companies (Amendment) Act, 2015.

Further, the requirement of shareholders’ approval for a related party transaction between a holding company and WOS was dispensed with vide the Companies (Amendment) Act, 2015. This exception was earlier present under the Companies (Meetings of Board and its Powers) Rules, 2014 and now has been incorporated in the substantive law itself.

The Companies (Declaration and Payment of Dividend) Rules, 2014 were amended by the Companies (Declaration and Payment of Dividend) Amendment Rules, 2014 whereby companies were prohibited from declaring dividend unless the previous year or years’ losses and unabsorbed depreciation which had not been provided for by the company were set off against current year’s profits. This provision was incorporated in the substantive law by amendment to section 123 of the Act.

With regard to preparation of consolidated financial statements (“CFS”), Section 129(3) provided that a subsidiary includes a joint venture and associate. Through the Companies (Accounts) Rules, 2014, it was provided that the preparation of CFS shall not be required by a company which does not have a subsidiary or subsidiaries but has one or more associate companies or joint ventures or both for the financial year 2014-15.

In all these cases, since the related rules provided for unambiguous beneficial provisions, no noise was created about them. Our fraternity as well as the industry had accepted without any doubt the law created by the rules, even though it was not specifically provided under the Act. Ideally, the case of rotation of auditors would have followed suit. However, unfortunately, these provisions have been made subject to controversy.

CONCLUSION
One may argue that this provision contained in the rules should be incorporated in the substantive law by way of amendment in the Act or a suitable clarification. But, even in the absence of such an amendment or clarification, in view of the foregoing discussion, it leaves no doubt that for the auditors who are holding the office for 5 years or more or 10 years or more, as the case may be, before the commencement of the 2013 Act, the transition period of three years would be computed from AGM held after the commencement of the Act, that is, it would have commenced at the time when AGM was held on or after April 1, 2014 and would be operative till the time AGM is held somewhere in and around June – September 2017 to approve the financial statements for the financial year 2016-17.

It may also be appreciated that the rotation of auditors, being a transitional provision, would at the most, have effect only for another year, an amendment by way of an amendment Bill may never see the light of day. At best, a clarificatory notification may come through or the Central Government may exercise its power u/s. 470 of the 2013 Act and pass an order for removing the difficulty.

“The secret of change is to focus all of your energy, not on fighting the old, but on building the new.” – Socrates. The recent past has been a period of challenges with prosperity for the profession and the prosperity would sustain only if these changes and challenges are accepted in its right spirit. The mandatory provisions on rotation of auditors is a response to the aftermath of many crises that have been witnessed in the past and are here to stay. Thus, we accept the rotation as an effective tool for the independence in the auditing process so as to enhance the credibility of the financial statements.

shailesh.kwebmaker

Expectations – Forensic Audit

What exactly is forensic accounting or forensic audit? How does it differ from an audit?

A very simple description of forensic accounting is the use of accounting, auditing and investigative skills to analyse financial information for use in legal proceedings. The word is “Forensic” means “suitable for use in a court of law”. Forensic accountants, also referred to as forensic auditors or investigative auditors, often have to give expert evidence at the eventual trial. There are many differences between an audit and a forensic audit. The most important difference between the two can be described as follows.

An auditor usually relies on documentary evidence for expressing an opinion, while a forensic auditor examines the reliability of the documentary evidence for making an assertion or a statement in a court of law. The forensic accountant has much greater responsibility and his report may have far reaching ramifications in a court of law. Forensic audit is specific to an issue and more often than not, its’ genesis is a dispute and its objectives and deliverables are unique in each situation. The forensic accountant usually visualises what kind of deliverables would be possible and there is some degree of flexibility in this aspect. However, an audit usually does not stem from any dispute and the objectives and disclosures of audits mandated under the Companies Act, 2013, or the Income Tax Act, 1961 etc are defined in the relevant Acts.

Forensic Audit – case study :

The concept of forensic audit can be best understood through a real life case. The chairman of a bank was worried. A borrower had failed to repay a huge loan of Rs 70 crores. The bank had two options. One option was to take legal recourse and commence recovery proceedings. The second option was to agree to the borrower’s request to fund a further 8 crore to revive his business. The borrower claimed that the recessionary conditions, which had caused his losses, had receded and now he had some big export orders on hand. Therefore he had a good chance to turn the corner and he expected to repay the loan to the bank in 4 years. Should the bank take the first option? If so it was certain that the legal battle would drag on for years and the chances of recovery, in the foreseeable future, were slim. On the other hand, in option two, the bank would be able to get the money back in 4 years. But the question was: “Is the borrower taking the bank for a ride? Was the past loss purely due to recessionary conditions and not due to mismanagement or siphoning of funds?” The borrower had indeed provided audited statements of his company for the past few years. However the information given in the audited financial statement and the auditor’s reports did not spell out reasons for the business loss. The financial information was not sufficient for the bank to ascertain whether there could have been any malpractice or abuse or misuse of assets or funds. This was a situation where the bank wanted information which was more specific, to enable it to decide which of the two options stated above should be selected. Essentially the bank wanted to know whether the borrower was a genuine victim of recessionary business conditions or not. The bank had to rule out the probability that the borrower was a manipulative, conniving, or deceptive borrower who had hoodwinked the bank in the past. The bank chairman was advised to get a forensic audit conducted to get answers to all these questions. The bank thus appointed a forensic accountant who was able to find a lot of information which provided valuable insights for the bank to take the right decision. The forensic audit report, on the one hand, prevented the bank from losing a further sum of Rs 8 crore per option two. On the other hand, the report facilitated the bank to go in for option one of recovery and legal proceedings including a police complaint for criminal actions of fraud and falsification of documents. What did the forensic auditor find out that the other officials in the bank, the auditor, the internal auditor, the tax auditor and others in corporate governance were unable to find? The forensic auditor found that the borrower had been transferring funds to satellite entities, which were his family concerns. Personal expenses and expenses of those satellite companies had been debited to the borrower’s company to show losses. Moreover the forensic auditor did some field investigation which revealed that the borrower used to take a lot of income in cash, thereby showing lesser sales. The combined effect of all these methods was that the borrower had been able to siphon out huge funds from those loaned by the bank and palm off such transfers as expenses resulting into losses. This process of collection of specific information and evidence which the bank could use for decision making and also for court proceedings is what is forensic auditing all about. The terms forensic accounting and forensic audit mean the same and are often used interchangeably.

What are the typical kind of forensic accounting assignments?

A large part of forensic accounting work relates to fraud detection and fraud investigation. Forensic accountants are asked to take up assignments relating to disputes, financial crimes, corrupt practices, business leakages and siphoning of funds, whistleblowers’ complaints of any kind, and the many other situations where any wrongdoing is suspected. Forensic accountants can be appointed by corporate management, third parties affected in any situation, bankers, or even under the law or by government agencies. In the last decade some of the really intensive users of forensic accountants are the police, ED, Reserve Bank of India, tax authorities and large public sector corporations. A recent trend is emerging where in individual courtroom cases even judges appoint forensic accountants for their own evaluation of disputes.

Does forensic accounting relate only to financial fraud?

Generally speaking, the answer is yes. However it would be incorrect to say that forensic accountants are not approached to investigate non financial crimes. For example in a public listed company there was a lady employee who got an obscene letter placed on her desk. She threatened to complain to the police. However the ethics counsellor stepped in and assured the lady that the company would look at this matter seriously and investigate and apprehend the culprit. They requested her to hold on till they completed an internal investigation. She relented and the ethics counsellor approached a professional forensic accountant and he did a remarkable job. The forensic accountant used his team which had comprehensive skill sets to perform computer forensics, interviewing techniques, and handwriting evaluation to nail the culprit. The aggrieved lady was satisfied and the company management was saved by the astute forensic accounting work. Similarly forensic accountants may even be used for marital disputes to understand what kind of assets and finances are held by the opposite spouse and to facilitate a fairer settlement. However such non financial cases are fewer in number.

What are the tasks usually performed by a forensic accountant?

A forensic accountant is expected to be able to perform all the tasks that an accountant and an auditor is able to perform. In addition, he should have in his team, reasonable expertise in interviewing, interrogation, data mining and investigative analysis, field investigations, computer forensics and handwriting and specimen signature analysis.

Steps in preforming forensic accounting

The broad steps in forensic accounting are (a) Establishing a clear mandate outlining specific objectives and deliverables, (b) data and evidence collection, (c) data analysis, and (d) evaluation of all data and evidence collected and finally (d) reporting.

Forensic accounting and fraud investigation have been gaining more and more importance particularly after the commencement of Companies Act, 2013. Opportunities for Chartered Accountants are plenty and appear to be increasing every day. It would be well worth the effort for chartered accountants to learn and implement forensic type techniques. They will be useful in regular audits in any case and further enhance their areas of practice in the foreseeable future.

shailesh.kwebmaker

EXPECTATIONS AND ESSENCE STATUTORY – INTERNAL – FORENSIC AUDITS

Overview
The businesses in the today’s world have grown far bigger and complex. Who knew that a company will run the biggest taxi aggregation business without owning a single car and an e-commerce company will become the biggest retail marketplace without having any inventory or a warehouse. No one ever imagined that just with a click on the mobile phone one can do online shopping. Just when people started realizing the benefits of using plastic cards, cutting edge technology that replaced the need to carry the wades of paper currency, online wallets on the mobile phones came into vogue providing far more convenience to users for carrying out commercial transactions. With the new complexities in the businesses and to cover the monetary risks exposing the stakeholders the regulators across the globe have become stricter in terms of ensuring there is proper monitoring mechanisms and the interest of all is protected.

Stakeholders are using different kinds of audits to provide assurance to the capital markets, Board of Directors and also proactively prevent frauds.

The Companies Act, 2013 (“the Act”) has introduced certain path breaking concepts, such as mandatory auditor rotation, restriction on non-audit services etc. Under the Act every company needs to get its accounts audited by a statutory auditor meeting the qualifications prescribed thereunder, certain classes of companies need to get its internal audit carried out by a chartered / cost accountant. The Act has also introduced a requirement for the auditor to report on frauds noticed during the year to the Central Government. This points towards increasing focus and scrutiny over the operations and processes of the company requiring various types of audits being conducted, such as statutory audit, internal audit, forensic audit, etc. among other things. It is therefore important to understand the differences between these audits. These differ substantially in terms of its scope, legal requirements, status of the auditor, reporting, etc. In the ensuing sections we will try to cover the expectations of the stakeholders from these different types of audits in brief and understand the critical differences in their approaches and functioning.

Statutory Audit
Statutory audit is mandated by the Act under Section 143 and it requires that the books of account of the company, be audited by a chartered accountant who is a member of the Institute of Chartered Accountants of India (‘ICAI’). The appointment of statutory auditor is through a process whereby the appointment is proposed by the Board of Directors / Audit Committee and is approved by the Shareholders in the AGM.

The standards on auditing (‘SA’) issued by the ICAI states that the objective of audit is to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework.

The qualifications and disqualifications of the statutory auditor are specified under the Act. This covers, among other things, restriction on providing certain nonaudit services that could impair the statutory auditor’s independence, e.g. providing accounting services or internal audit services.

Generally the team of professionals carrying out the statutory audit comprises of chartered accountants who may be further assisted by tax specialists, IT specialists, etc. These specialists work under direct supervision of the statutory auditor who reviews the work performed by the specialists and takes responsibility for such work.

With the increasing complexity of the business operations and use of technology, the statutory auditors have also started rising up to the occasion by using technology in auditing, however, presently use of such technology is limited to:

– Sampling methodology
– Audit work flows
– CAATs
– Other analytical tools

The statutory auditor draws his powers from the statute that requires the company to provide access to the statutory auditor of company’s books of account, records and other information that is considered to be necessary for performing his duties.

From above it is clear that statutory audit entails examination of the books of account and records maintained by an entity so as to enable the auditor to satisfy himself that the financial statements are drawn as per the applicable reporting frame work and present a true and fair view of the financial state of affairs of the entity and profit or loss and cash flows for the period. The reporting format is as provided in the Standards on Auditing issued by the ICAI (now deemed to be prescribed by the Act) which is in the form of an expression of “an opinion” on the financial statements.

The primary objective of the statutory audit is to form an independent opinion on the financial statements and ensure that the financial statements confirm to the accounting framework prescribed under the relevant statute.

In summary the key features of statutory auditor comprise:

appointment by shareholders

auditor’s powers, qualifications, remuneration, responsibilities enshrined in the statute

communicates with the audit committee / board of directors

opines on the financial statements and the internal financial controls

opinion is made public

independent of the company which is being audited

report format prescribed by the ICAI

subject to class action suit

Internal Audit
The Act has prescribed internal audit for certain classes of companies which include all listed companies, unlisted public companies and private limited companies meeting the prescribed criteria. The internal auditor is appointed by the management, in consultation with the Board of Directors / Audit Committee. The ICAI has laid down Standards on Internal Auditing (SIA) for governing the audits carried out by chartered accountants in India. The Act also permits internal audit to be carried out by a cost accountant or such other professional as may be decided by the Board of Directors.

The Act has not defined any scope for the internal audit function. It is therefore driven more by the company’s / management’s requirements and can be very broad and may include any matter that affects the organizational objectives. Generally, there is a wide spectrum of areas as enlisted below covered through internal audit.

Risk management policies and procedures

Effectiveness, efficiency, and economy of operations and process

Internal controls and financial reporting

Routine operational activities

Analysis of financial and non-financial information

Audit of a particular areas of operations / financial reporting, e.g. factory assets, consumption process, cycle inventory counts, payroll system, payments of statutory dues, etc.

Audit of processes of the company over its procurements, sales, fixed assets and other records to report and financial statements close processes

Audit of compliance with factory laws, labour laws and other applicable laws, rules and regulations

Audit of IT systems Compared to statutory audit approach, use of technology in performing internal audit is more prevalent and includes but is not limited to:

– Sampling methodology
– Data analytics
– IT systems
– CAATs
– Other developed tools for business intelligence

The team performing internal audit can include chartered accountants, cost accountants, MBAs, Engineers or any commerce graduate. Members of the internal audit team can be employees of the company or external professional firm. The internal auditor, being appointed by the management and pursuance to the terms of reference of their engagement is governed by the internal policies of each company.

Hence the objective of internal audit extends more towards process improvements, identifying efficiencies and finding revenue leakages, etc. in operations rather than forming an opinion on the financial information. There is no specific format in which the internal auditor is required to report and the format generally varies – from issuing management letter comments, power point presentations to detailed textual report in the form of Agreed Upon Procedures (AUP) report. Unlike statutory audit, the report is not made available to the public.

In summary, the key features of internal audit are:

it is an appointment made by the audit committee / management
it is an “internal assurance function”
the report is for internal consumption
key focus is to ensure that operations of the company are carried out in an efficient manner
also ensure that operations of the company are carried out in accordance with the policies and procedures of the company

Forensic Audit
This audit is discretionary and is not governed under any statute. It is basically an investigative exercise. If the management or any stakeholder has any suspicion about the embezzlement or misappropriation of funds or other fraudulent activities occurring in the organization, a need for detailed investigation to confirm or dispense off such suspicion may be required and a forensic audit is undertaken.

Forensic engagements generally falls into several categories e.g.

Criminal offenses
Investigating fraudulent expense claims
Anti-Money Laundering,
Insurance claim damages;
Fraud relating to taxes;
Fraud relating to issuance / dealings in securities and other marketable instruments;
Disputes on pricing, covenants, warranties and representations, etc. in business combinations;
Dissolution, insolvency, bankruptcy and reconstruction;
Computer forensics.

Techniques such as data analytics through electronic data collation and mining with an objective to identify, reconstruct or confirm a financial fraud are widely used by the forensic auditors. The main steps involved in such forensic analytics are:

(a) collection of data that is required to be analysed,

(b) reconstructing and reorganizing data in a manner conducive to perform analytics,

(d) reporting the findings.

For example, exploration and analytical technique could effectively be applied in reviewing a procurement manager’s activity to assess whether there were any kickbacks taken. Another example is to perform analysis of the activities of sales team of a company to determine where the contracts were negotiated at a much lower price than the actual cost and resulting in loss to the company. The audit driven by high-end technology, and includes:
– Data analytics
– IT systems
– E-Discoveries
– GPS tracking
– Surveillances
– Cyber securities
– Professional hacking

Forensic audit requires an understanding of the business economics, financial reporting systems, data analytics for detecting frauds, gathering of evidence and investigation, and litigations and other civil/ criminal procedures. This will necessitate the requirement of specialized skills within the team performing such audits and could include chartered accountants, certified fraud examiners, lawyers, IT professionals, ex-police personnel, ex–investigators, etc. Banks have recently started conducting forensic audits to trace the end use of the funds and try to nail the defaulting borrowers.

Findings of the forensic auditor takes shape similar to that discussed in case of internal audit, i.e. it could vary in form of power point presentation to a detailed textual AUP report. Like internal audit report, the forensic audit report is also not available to the public.

Conclusion
As businesses are growing and becoming more complex there is a heightened expectations – through the objective, approach and reporting – from the three forms of audit, viz. statutory audit, internal audit and forensic audit. The skills required to perform these audit also vary and risks associated are also very different. The stakeholders clearly need specialized services and based on the aptitude and risk appetite we should decide which audits one should specialize in.

shailesh.kwebmaker

TS-245-ITAT-2016-TP Owens Corning (India) P. Ltd vs. DCIT A.Y.: 2007-08, Dateof order: 22.4.2016

Section115JB of the Act – a self-contained code – No provision under the Act permits A.O. to make adjustment on account of transfer pricing addition to the amount of profit shown by the Taxpayer

Facts
The Taxpayer is a company incorporated in India and engaged in the manufacturing and trading of glass fiber reinforcement products. During the course of assessment proceedings, Transfer pricing officer (TPO) had undertaken certain TP adjustment. A.O. additionally sought to increase the book profits by the amount of the TP adjustment for the purpose of S.115JB

Held
The TP adjustment made by TPO were deleted by the tribunal. On the additional issue of inclusion of TP adjustment in book profits, Tribunal held as follows:

Section 115JB is a self-contained code. Only those adjustments are permissible to the book profit as have been prescribed u/s 115JB.

The adjustment/additions made under the transfer pricing regulations are governed by altogether different sets of provision as contained in Chapter X of the Act.

Since no provision under the law permits the A.O. to make adjustment on account of transfer pricing addition to the amount of profit shown by the Taxpayer in its profit and loss account for the purpose of computing book profit u/s 115JB, the addition is deleted.

shailesh.kwebmaker

TS-278-ITAT-20162 DDIT vs. Reliance Industries Ltd. Various AYs, Date of order 18.5.2016

Purchase of Computer software does not qualify as use of copyright in literary work under the copyright Act – Such payment falls outside the ambit of royalty under the DTAA .

Facts
The Taxpayer is a public limited company incorporated in India. It had purchased different types of software from residents of different countries viz. Australia, Canada, Singapore, Netherlands, Germany, USA, UK, and France etc. (collectively referred to as FCo). The software purchased by the Taxpayer was operational software for the internal use of its business. Taxpayer contended that payment for purchase of software does not constitute royalty. Further as FCo does not have a PE in India such payment is not taxable in India. The A.O. however, argued that the consideration paid by the Taxpayer, falls in the definition of ‘royalty’ and hence taxable in India.

Aggrieved, Taxpayer appealed before the CIT(A). The CIT(A) upheld the contention of AO. Being aggrieved, the Taxpayer filed appeal before the Tribunal.

Held
Definition of royalty under the DTAA is short and restrictive definition, when compared to the definition under the Act. The Act was amended to include computer software within the ambit of “right, property or information” specified in S. 9(1)(vi). However, the right to use computer software program is not specifically mentioned in DTAA 3.

The contention of A.O. that the term literary work used in the DTAA includes software is incorrect for the following reasons.

• “Computer software has neither been included nor is deemed to be included within the scope or definition of “literary work under section 9(1)(vi) of the Act. Infact, computer software and literary work have been recognized as a separate item in s. 9(1) (vi) of the Act.

• It has been well settled that where a term is not defined under DTAA it should be understood as per the definition under the domestic laws applying the DTAA , unless the context requires otherwise. In the present case both “copyright’ and ‘literary work’ are not defined under the Act. However, they are defined under the Copyright Act. Thus the term ‘copyright’ under the DTAA has to be understood as per the Copyright Act in India.

• Computer software has been recognized as a literary work in India under the Copyright Act, if they are original intellectual creations. However, the issue that arises is whether sale of such computer software amounts to use of copyright in a literary work. Once it is incorporated on a media it becomes ‘goods’ and cannot be said to be a copyright in itself.

• To constitute “royalty under DTAA, it is the consideration for transfer of “use of copyright in the work and not the “use of work itself. Hence, one needs to understand the difference between the term “use of copy right in software and “use of software itself.

• In case of purchase of software embedded in a disk, what the buyer purchases is the copyrighted product and he is entitled to fair use of the product. The restriction or the terms mentioned in the agreement are the conditions of sale restricting misuse and cannot be said to be license to use. Moreover, the purchaser pays the price for the product itself and not for the license to use.

• Copyright Act provides certain exclusive rights to the owner of the work. The fair use of the work for the purpose it has been purchased does not constitute right to use the copy right in work or infringement of copyright.

• Sale of a CD ROM/diskette containing software is not a license but it is a sale of a product which is a copyrighted product and the owner of the copyright by way of agreement puts the conditions and restrictions on the use of the product so that his copyrights in such copyrighted article or the work, may not be infringed.

• As per the Copyright Act, even if the owner of the copyrighted work restricts the use or right to use the work by way of certain terms of the license agreement, it cannot be said to be grant of or infringement of copyright.

Thus consideration paid by the Taxpayer falls outside the scope of the definition of ”royalty” as provided in DTAA and would be taxable as business income of the recipient.

shailesh.kwebmaker

TS-226-ITAT-2016-TP Imerys Asia Pacific Pvt. Ltd. vs. DDIT A.Y.: 2010-11, Date of order: 15.4.2016

Article 11, 12, 24 of the India-Singapore DTAA – Benefits under DTAA available to the Taxpayer upon furnishing a valid TRC – Recipient of royalty income from sub-license of know-how to third party will be considered as beneficial owner of the same – As long as income is remitted to Singapore, even if in a different year, conditions under the limitation of relief (LOR) article will be considered as being satisfied

Facts
The Taxpayer, 100% subsidiary of French Company, was a company incorporated in Singapore and tax resident of Singapore. The Taxpayer was set up to act as headquarter for Asia-Pacific region and to render administrative, marketing and sales services to the group and affiliated companies as well as to trade in paper and performance minerals and other related business activities. The Taxpayer entered into an agreement with its affiliate UK Co on principal-to-principal basis for obtaining use of technical know-how. Subsequently, Taxpayer entered into an agreement with its Indian affiliate (I Co.) for sublicensing technical know-how received from UK Co, and received royalty income from I Co. Moreover, Taxpayer contended that it provided services to I Co through its employees, who travelled to India for rendering such services. Additionally, Taxpayer had granted loan to I Co. for which it received interest income.

Taxpayer furnished a valid tax residency certificate and accordingly offered royalty and interest income received from I Co to tax in India at a lower rate provided under the India-Singapore DTAA . However, the A.O. contended that Taxpayer was not the beneficial owner of the income and hence benefit under the DTAA should not be available. It was also argued that as per the Limitation of relief article in the DTAA , since the royalty and interest income was not received in Singapore, such incomes would not be eligible for the lower rates prescribed in the DTAA . Aggrieved, appeal was filed before the Dispute resolution panel (DRP), which confirmed the order of the A.O.

Aggrieved by the order of DRP, Taxpayer appealed to the Tribunal

Held:
Benefits available under the DTAA should be granted to the Taxpayer who furnishes a valid TRC as propounded by SC in UOI Vs. Azadi Bachao Andolan (2003) 263 ITR 706 (SC)

Tribunal noted that the Taxpayer entered into an agreement with UK Co under which UK Co granted right to use certain technology and know-how to Taxpayer in consideration of payment of royalty. Further as per the agreement Taxpayer was allowed to sub-license the know-how to other group companies. Accordingly, Taxpayer sub-licensed the same to I Co. Also, the Taxpayer provided certain services to ICo through its employees in relation to use of such know-how.

Since the taxpayer entered into an agreement with UK Co and received the know-how license in its own right, which it sub-licensed to ICo as well as provided further services to ICo, Taxpayer was the beneficial owner of royalty. Reliance in this regard was placed on decision of AAR in Shaan Marine Services Pvt. Ltd. v. DDIT (2014) 165 TTJ 952 (Pune).

Royalty for the relevant year was paid to Taxpayer not in same year, but in a subsequent year. Limitation of relief article does not require that the income be received in the same financial year for it to qualify for the benefits under the DTAA. Where royalty and interest income is remitted to Singapore and subject to tax therein, benefits of the DTAA should be available.

shailesh.kwebmaker

TS-252-ITAT-20161 Shri Soundarrajan Parthasarathy vs. DCIT A.Y.: 2011 -12 and 2012-13 Date of order: 5.5.2016

Section 17(2) of the Act- Benefits obtained under Stock Appreciation Rights (SAR s plan) received by employees of an Indian company (I Co) from ICo’s parent in USA (US Co) and exercised while the Taxpayers were resident – taxable in India as salary income in the hands of the employees.

Facts
Taxpayers were employees of I Co, a subsidiary of US Co. US Co rolled out a Stock Appreciation Rights plan (SARs plan) under which Taxpayers, as Employees of I Co, became eligible and received options under the SARs plan.

As per the terms of the SARs plan, Taxpayers were not offered any security or sweat equity shares, but, were given a right to receive cash equivalent of the appreciated value of certain specified number of securities of US Co. The rights under the SARs plan, vested in the Taxpayers while they were working outside India and were Nonresident (NRs). Rights were however exercised by the Taxpayers when they were residents of India. I Co withheld tax on benefit received by the Taxpayers under the SARs plan by treating it as salary Income. US Co also withheld taxes payable in the USA on the same benefits. Taxpayers in the return of income filed in India claimed that the SARs benefits were not taxable as salary Income. This claim was rejected by the A.O.

The First Appellate Authority confirmed A.O.’s action of taxing the SARs as Salary Income. Being aggrieved, Taxpayers appealed to the Tribunal.

Held
The Tribunal ruled in favor of the A.O. and upheld salary taxation on the following grounds:

SARs are not capital assets
• The Taxpayers were merely given the right to receive appreciation in value of shares in cash, and not shares itself. Hence, SARs did not represent capital assets. They were revenue receipt.

• The SARs were given to the Taxpayers as compensation for services rendered to I Co. They did not represent transfer of capital asset or termination of any source of income.

• Amount received under SARs was a revenue receipt.

The SAR benefit is taxable as Salary Income despite absence of a direct employer-employee relationship with US Co
• SARs were given to employees who are connected, directly or indirectly, with US Co so as to motivate the employees to perform their best work. But for employment with I Co, the Taxpayers would not have received the benefits. The SARs benefitted I Co directly and US Co indirectly.

• US Co promoted the SARs scheme to promote its business and for commercial expediency. The Taxpayers enriched themselves by accepting the offer.

• The SARs were in addition to salary for services rendered to I Co and, hence, they were taxable as salary, being benefit in lieu of salary for services rendered.

SARs trigger taxation in India if the exercise happens when a taxpayer is resident in India
• The Taxpayers exercised the SARs options when they were residents in India. Merely because the vesting happened when the Taxpayers were NRs and working outside India, does not relieve taxation at the time of exercise.

shailesh.kwebmaker

TS-310-ITAT-2016 Tapas Kr. Bandopadhyay vs. DDIT A.Y.: 2010-11, Date of order: 1.6.2016

Section 5, 15 of the Act – Salary paid by foreign employer from its bank account outside India and directly deposited in Non Resident External (NRE) account in India of employee, being ‘received in India’ is taxable in India since the Taxpayer had not brought facts on record to prove that he had control over salary income in foreign jurisdiction prior to its remittance to his NRE account in India.

Facts
The Taxpayer, an individual was engaged in providing marine engineering services to two foreign companies (FCos). In the relevant year, the Taxpayer was in international waters to render services to FCos for more than 182 days and hence qualified as a NR under the Act. Additionally, he was not a resident of any other country during the relevant year. During the year, FCos directly deposited salary of the Taxpayer in his Non Resident External (NRE) bank account in India.

The A.O. observed that the income was received directly in the taxpayer’s NRE account in India. As the first point of receipt of salary was in India, salary income was taxable in India u/s 5(1)(a) of the Act on receipt basis.

Taxpayer contended that services were rendered to FCo outside India and the payment for which was made in USD. Since the payment was made by FCo in USD, it should be considered as having been made at the time of payment in FCos’ jurisdiction. The amount was merely remitted to his NRE account in India at his behest. As the first receipt was outside India, overseas salary income cannot be taxed in India.

Aggrieved, Taxpayer appealed before CIT(A). The CIT(A) upheld the AO’s contention. Being aggrieved, the Taxpayer filed an appeal before the Tribunal.

Held
It is not the case of the Taxpayer that he received the salary on board of a ship on high seas which subsequently got deposited in his NRE account. On the other hand, money was transferred directly from the FCos’ account outside India to the Taxpayer’s NRE account in India. Thus, the Taxpayer’s contention that salary was received outside India and not in India is not acceptable.

Contention of the Taxpayer that he had control over salary income in international waters and remittance by employers in USD in his NRE account was at the behest of his instruction is not acceptable since this could be so only if the Taxpayer received hot currency and deposited that in his NRE account. However, in absence of any evidence on record to prove that the Taxpayer had any control over money in the form of salary income in foreign jurisdiction.

The receipt in NRE account in India is the first receipt by the Taxpayer and hence salary income is taxable in India.

Also, from the Indian tax perspective, Taxpayer was an NR. He was also not a resident of any other foreign jurisdiction. If the Taxpayer’s contention of nontaxability of income is accepted then income will neither be taxable in India nor in any foreign jurisdiction.

shailesh.kwebmaker

Equalization Levy – A step into uncharted territory

The Finance Act 2016 has levied a new tax called “Equalisation Levy” (EL) Which is levied on the nonresident online service providers who earn from Indian customers but do not pay any taxes in India in absence of Permanent Establishment (PE). The nature of specified services is such that it does not fall within the ambit of royalties of fees for technical services. Compared to them, any Indian company engaged in similar activities would be subject to regular income-tax in India. Therefore, in order to provide a level playing field so as to equalize the incidence of tax, a new levy is imposed on specified online services. This levy is an offshoot of the G-20 Nations’ initiative of the project on Base Erosion and Profits Shifting (BEPS) Action Plan 1, Addressing Tax Challenges of Digital Economy, led by OECD. This article highlights the salient features of the EL and related issues arising therefrom. For succinct understanding the subject, the EL is explained in question-answer format.

1.0 Background
Telecommunication and Information Technology has impacted our lives significantly, commerce being no exception. The ways of doing business and business models have undergone vast and significant changes in the last two decades. E-commerce (the new term used is “Digital Economy”) is indeed an off-shoot of this technological development. 1Digital economy has obviated the necessity of physical presence in the source State for doing business. This has resulted in billions of dollars worth trade in the source States without paying any taxes. Unfortunately tax laws have not kept pace with the technological developments and hence there are gaps or opportunities for tax planning or avoidance. Therefore, the G20 Nations considered the issues arising out of “digital economy” (a term wide enough to cover all sorts of e-commerce transactions) in Action Plan 1 of the BEPS project which was released in October, 2015. However, no consensus emerged on the methodology to tax such digital transactions. The report considered the following three options to address the broader tax challenges of the digital economy:

(i) New Nexus based on Significant Economic Presence
(ii) Withholding tax on digital transactions and
(iii) Equalisation Levy

1.1 Committee on Taxation of E-Commerce
Post BEPS report, the Indian Government set up a Committee on Taxation of E-Commerce with terms of reference to detail the business models for e-commerce, the direct tax issues in regard to e-commerce transactions and a suggested approach to deal with these issues under different business models. The Committee submitted its report in February 2016 and recommended to impose Equalisation Levy (EL) on specified online transactions. The Committee suggested enacting a separate law by introducing a chapter in the Finance Act, 2016 such that it becomes a distinct tax by itself and not in the nature of income- tax. If the EL partakes the character of income-tax, then it would not serve any purpose whatsoever, as tax treaty provisions would override the provisions of the Indian Income-tax Act and unless all the treaties are renegotiated and amended, the levy would be ineffectual. Although the Committee recommended thirteen specified transactions for the levying EL, at present only online advertisement/facility for online advertisement and digital advertising space are brought within the purview of EL.

1.2 Statutory Basis
EL has been imposed vide Chapter VII of the Finance Act, 2016 containing section 163 to section 180. It is a self-contained code which extends to the whole of India except the State of Jammu and Kashmir. It has come into effect from 1st June 2016. Though it is levied under a separate chapter in the Finance Act, and not supposed to be in the nature of income tax, it would be administered by the Income-tax authorities. Many administrative provisions under the Income-tax Act, 1961 (such as appeals, survey, collection and recovery of taxes etc.) are made applicable to EL as well. I n the backdrop of the above information, let us proceed to understand the implications of EL in depth by way of questions and answers.

2.0 What is Equalization Levy (EL) and how it is levied?
Ans: In simple words EL is a tax on gross revenue of non-resident providing specified services to Indian residents subject to certain conditions.

EL is a tax levied at the rate of six per cent on the amount of consideration for any specified services received or receivable by any non-resident person from –

(i) A person resident in India and carrying on business or profession; or
(ii) A non-resident having a PE in India.

Exemptions from EL
(i) A non-resident providing the specified services has a PE in India and such services are effectively connected with such PE;

(In the above case, the profits of the Indian PE of a non-resident will be taxed in India and therefore, there is no loss of revenue and consequently no need to levy EL)

(ii) The aggregate amount of consideration for any specified services received or receivable in a previous year by any non-resident person from a person resident in India and carrying on business or profession; or a non-resident having a PE in India does not exceed Rupees One Lakh;

(It means that a payer can make payment to a number of service providers below Rupees one lakh in a previous year without deducting tax at source; similarly a non-resident service provider can receive revenue from a number of resident payers without attracting EL as long as it is less than Rupees one lakh per payer)

(iii) Where the payment for specified service by the person resident in India, or the PE in India is not for purposes of carrying on business or profession.

(The above provision would provide relief to many small service recipients from the burden of tax deduction and tax compliance. As such they would not be claiming such payment as expenditure and therefore there will not be any base erosion in India on such payments)

Section 166 of the EL Chapter provides that a resident payer has to deduct the EL from the amount paid or payable to a non-resident and it is to be paid to the credit of the Government within seventh day of the month immediately following the said calendar month.

It is also provided that even if the payer fails to deduct the amount of the levy, he has to pay nonetheless the levy to the Government.

3.0 Which specified services are covered under EL?

Ans. Section 164 (i) defines “specified service” means online advertisement, any provision for digital advertising space or any other facility or services for the purpose of online advertisement and includes any other services as may be notified by the Central Government of India in this behalf.

Section 164 (f) defines “Online” means a facility or services or right or benefit or access that is obtained through internet or any other form of digital or telecommunications network.

It may be noted that the Committee on Taxation of E-commerce has recommended the following definition for ‘specified services’:-

(i) online advertising or any services, rights or use of software for online advertising, including advertising on radio & television;
(ii) digital advertising space;
(iii) designing, creating, hosting or maintenance of website;
(iv) digital space for website, advertising, e-mails, online computing, blogs, online content, online data or any other online facility;
(v) any provision, facility or service for uploading, storing or distribution of digital content;
(vi) online collection or processing of data related to online users in India;
(vii) any facility or service for online sale of goods or services or collecting online payments;
(viii) development or maintenance of participative online networks;
(ix) use or right to use or download online music, online movies, online games, online books or online software, without a right to make and distribute any copies thereof;
(x) online news, online search, online maps or global positioning system applications;
(xi) online software applications accessed or downloaded through internet or telecommunication networks;
(xii) online software computing facility of any kind for any purpose; and
(xiii) reimbursement of expenses of a nature that are included in any of the above.

At present only online advertisement/facility and digital advertising space are brought under the purview of EL. It is believed that the coverage of the EL may expand in future.

4.0 What are the implications of EL for the non-resident service provider?
Ans: The newly inserted section 10(50) of the Incometax Act, 1961 (the Act) provides that any income arising from any specified service provided and chargeable to EL shall not form part of total income i.e. be exempt from tax. It means that where the non-resident service provider is subject to EL, it would not be required to comply with any other provisions of the Act. EL is levied at 6 per cent on gross revenue, whereas royalties and fees for technical services are taxed at the rate of 10 per cent on gross basis. It may be possible that going forward (when more services are notified for EL) some of the services may overlap and at that time it would be advantageous for the non-resident service provider to opt for EL as there would not be any litigation as to the characterization of income.

Another positive implication for the non-resident service provider is that if its income is covered under EL, then provisions of Transfer Pricing and General Anti Avoidance Rules (GAAR) will not be applicable.

5.0 What are the implications of EL for the resident tax payer?
Ans: The Levy imposes various obligations on the resident tax payer, and prescribes various penal consequences for failure to comply with them, as follows:

5.1 Deduction of EL @ 6 per cent on gross payment exceeding one lakh rupees to a non-resident for specified services; [section 165]

5.2 Deposit to the credit of Government (meaning cheque should be cleared or online payment should be within the working hours) by the seventh day of the month immediately following the calendar month in which EL is so deducted or was deductible. The EL must be credited as aforesaid even if the assessee (resident payer) fails to deduct it from the payment to non-resident; [section 166]

There is no clarity as to whether the payer needs to gross up the EL if the non-resident service provider refuses to pay the same. Section 166(3) casts the obligation on the Indian resident payer to deposit the levy irrespective of the fact whether the same has been deducted or not. So if a deductor has to remit Rs. 100/- whether he is required to pay Rs.6/- as EL or Rs. 6.38 after grossing it up, as everywhere the terminology is used “deducted”.

5.3 Disallowance of expenditure u/s. 40(a)(ib) for failure to deduct or after deduction failure to pay, EL as aforesaid; [section 40(a)(ib)]

5.4 Furnishing of annual statement of specified services to be submitted electronically in Form No. 1 on or before 30th June immediately following the relevant previous year; [section 167 read with Rules 5 and 6]

5.5 Payer is exposed to following penalties:

-Delayed payment of EL->simple interest at the rate of one per cent of EL for every month or part of a month by which such credit of the EL or any part thereof is delayed [section 170]

-Failure to deduct EL->Penalty amount equal to EL [section 171]

-Deducted EL but failure to pay to the Government->Penalty of Rs. 1000/- for every day during which failure continues maximum up to the amount of EL [section 171]

-Failure to furnish annual statement in form 1->Penalty of Rs. 100 per day for each day during which the failure continues [section 172]

Section 173 provides that no penalties shall be imposed for offences listed in section 171 and 172 if the assessee proves to the satisfaction of the Assessing Officer that there was reasonable cause for such failure.

5.6 Section 174 and 175 respectively provide right of appeal (to the assessee) to CIT (appeals) and the Appellate Tribunal in respect of grievances on account of penalties.

6.0 W hat is the nature of EL – Direct tax or Indirect tax?

Ans: 6.1 Whether EL is Direct tax?
The report of the Committee on Transactions of E-Commerce has clarified that “the EL will be outside the income-tax Act. It is not a tax on income, as it is levied on payments. It is therefore also payable by enterprises not making any net profits”. EL is in the nature of turnover tax. It is not a tax or levy on income but on gross revenue. Under the Income-tax act certain income are taxed in the hands of the non-resident on presumptive basis e.g. profits and gains of shipping business or exploration of mineral oil and natural gas etc. However in all such cases, a certain percentage of the gross revenue is estimated to be income on which the tax is levied at the applicable rate, whereas EL is levied on gross consideration itself.

However, two arguments in favour of those who feel that the EL is in the nature of income-tax or a tax substantially similar to income tax (so as to qualify for treaty relief by invoking provisions of Article 2) are as follows:

(i) EL would be governed by the Income tax authorities and many provisions of the Act are made applicable to it. In short EL is not a complete code by itself;

(ii) The Revenue secretary in an interview to Business Today magazine dated 5th June, 2016 opined that EL in essence is income tax.

Appendix 2 of the report of the Committee on Taxation of E-Commerce has listed the objectives of EL where in it is mentioned as “to reduce the unfair tax advantage enjoyed by a multinational digital enterprise over its Indian competitors, and thereby ensure fair market competition. The unfair tax advantage arises when domestic enterprises are taxed but multinational enterprises are not taxed on their income arising from India.”

From the above objective it is clear that EL may be called by whatever name or levied in whatever manner it being understood that, the objective is to tax income arising to non-resident service providers who earn from Indian resident payers.

6.2 EL and tax Treaties

The characterization of EL is indeed significant from the treaty perspective as well. If EL is held to be income-tax or a tax substantially similar to income tax, then as per 2Article 2 of a tax treaty, EL would be covered and as per section 90(2) of the Act, treaty provisions would override the provisions of EL. The only saving grace is that section 90 (2) makes a reference to provisions of the incometax act and EL is outside the purview of the Act. However, it would be interesting to see if any nonresident or a treaty partner country invokes Mutual Agreement Procedure for seeking clarity on this issue.

It may be possible that a non-resident providing service in India and who is subject to EL may invoke the Article on non-discrimination on the ground that the non-residents who supply goods to India are not subjected to EL even though their business model is the same.

Appendix 2 paragraph 13, of the report of the Committee on Taxation of E-Commerce has stated that “as the Equalization Levy is not charged on income, it is not covered by Double Taxation Avoidance Agreements or tax treaties. Thus, no tax credits under the tax treaties will become available to the beneficial owner in the country of its residence, in respect of Equalization Levy charged in India”.

Considering the limitation or possibility of nonavailability of credit in respect of EL, the Committee recommended levy of six per cent as against normal tax of 10 per cent in case of royalties and FTS.

6.3 Whether EL is indirect tax?

Indirect tax like service tax and VAT are charged on gross turnover and in that sense EL is closer to them. However, one fundamental difference is that service tax is a destination based consumption tax and is supposed to be collected from the ultimate consumer of services. Thus actually, the non-resident service providers are supposed to get themselves registered under the Indian Service tax Provisions and Rules collect service tax on all taxable services and deposit it with the Indian Government. Australia has implemented this method of indirect tax collection. In India specified services for EL are also taxed under the provisions of relating to Service tax but under the reverse charge mechanism whereby the service recipient pays service tax and the non-resident is spared from all hassles. CENVAT credit is allowed in respect of service tax so paid by the service recipient in India and therefore, the incidence of tax is reduced.

EL, on the other hand, is a levy on the non-resident service provider and not on the service recipient. EL is over and above the service tax.

Thus, EL cannot be considered as an indirect tax.

7.0 Whether EL is constitutionally valid?

Ans: Entry 92C of List-I – Union List of the Seventh Schedule of the Indian Constitution empowers Central Government to levy taxes on services. Entry 97 of the List-I of the same Seventh Schedule empowers to levy tax on “any other matter not enumerated in List II or List III including any tax not mentioned in either of those Lists.

List II of the Seventh Schedule contains the entries reserved for States. Entry 55 of the said list provides that “taxes on advertisements other than advertisement published in the newspapers and advertisements broadcast by radio or television.”

Thus, there seems to be some overlapping. It would be interesting to see the developments in this regard if the EL is challenged for its constitutional validity.

8.0 Summation
India is perhaps the first country to introduce EL soon after the BEPS report. It has been introduced as per the recommendations of the expert Committee who have evaluated various options and deliberated on the issues threadbare from various angles. The law is in its nascent stage and would evolve in times to come. The entire world is watching India closely. In the initial stage, the burden of EL will be on Indian tax payers only, as it would be difficult for a small users of such services to bargain with giants like Google, Yahoo or Face book etc.

In our view in order to reduce the burden of EL on the Indian residents, wherever it is borne by them, it should be allowed as a deductible expenditure (express clarification is desired). Also penalty and other provisions should be made more liberal as the payer is rendering service to the Government by collecting (in many cases bearing the additional burden himself) taxes and paying it to the Government.

There is no provision of Appeal in respect of disputes pertaining to EL (appeals are prescribed only for penalties). It appears that in case of disputes pertaining to EL, the aggrieved person will have to file writ petition to the High Court which may further increase the cost of litigation.

There can be no two views on the necessity to get a fair share of revenue in respect of income generated in a country. The present rules of taxation of digital economy are in favour of country of residence (C of R) and there is apparent unwillingness of the C of R (who are usually developed nations) to share their revenue with the Country of Source (usually developing nations like India). This necessitated introduction of EL in the domestic tax laws. The best part is that it is one of the recommended options in the BEPS report and thus has a wider acceptability. The success of EL can be greater if the Government is able to introduce a mechanism whereby the non-resident service providers are forced to pay their taxes directly to the kitty of the Government and thereby absolving resident tax payers from all the hassles of tax compliance.

It would be interesting to watch further developments in this regard.

shailesh.kwebmaker

M/s. Permasteelisa (India) Pvt.Ltd. vs. State of Maharashtra, Sales Tax, Reference No.55/2014 and 80/ 2010 , dated 6th May, 2016, Bomay High Court.

Works Contract-Composition–Construction of Glass Curtain Wall – Not a Contract for Construction of Building, section 6A of The Maharashtra Sales Tax on the Transfer of Property in Goods involved in the Execution of Works Contracts (Re-enacted) Act, 1989,

Facts
The Applicant is engaged in activity of fixation of glass walls. It is the case of the Applicant that these glass walls also known as curtain walls are used in the construction of modern buildings. These glass walls are permanent walls and are constructed instead of usual brick walls. In the modern age of architecture these glass walls have replaced the traditional brick walls and many buildings are constructed and developed using glass walls. If the glass walls are erected for a building then brick walls are not required as these glass walls have all the characteristics of traditional brick walls as a result of which there are modern high rise buildings and skyscrapers. In applying the rate of composition as applicable under the Work Contracts Act, the Applicant has relied upon the Notification dated 8 March 2000 in terms of which certain contracts specified therein are identified as ‘construction contract’ eligible for beneficial rate of tax. According to the Applicant, the activities, it undertakes, are in respect of construction contracts or contracts incidental or ancillary to the construction contracts as set out in the Notification dated 8 March 2000 and it has raised invoices and filed returns accordingly.

The assessing authority held that the Applicant was not eligible for benefit under the said Notification dated 8 March 2000. The order of the Assessing Officer was upheld by the Deputy Commissioner of Sales Tax (Appeal). Aggrieved by the order of the Deputy Commissioner of Sales Tax (Appeal), the Applicant filed Appeal before the Tribunal. The Tribunal held that the activity undertaken by the Appellant was not construction and the contracts undertaken by the Applicant are not building construction contracts and would not be covered by the Notification dated 8 March 2000. Aggrieved by the order of the Tribunal, the Applicant preferred a Rectification Application which was dismissed by tribunal by an order passed in February 2013. The Tribunal, at the instance of the appellant, referred the question of law before the Bombay High Court.

Held
The Notification dated 8 March 2000 clearly mentions the contract for “construction of buildings”. The term “construction of buildings” would not involve the fixing of glass walls. Since the Applicant is seeking a lesser rate of tax, the burden to probe is on the Applicant and the provisions of the Notification dated 8 March 2000 have to be construed strictly .The word “construction” and the word “building” are not defined in the Act and are to be read in the context of their ordinary meaning. The work of fixing glass to a building can in no manner said to be an activity which is covered under Notification dated 8 March 2000. The work of the Applicant is also not covered under the term “incidental or ancillary activity to the construction of the building” as that would have to have a direct nexus to the construction of the building itself. Therefore, the alternative argument that the contract would get covered by paragraph B of the said Notification which includes incidental or ancillary contract to the contract of construction also cannot be accepted. What meaning is to be attached to the word “building” as mentioned in the Notification would have to be determined considering the facts and circumstances of each case. The reliance on the definition of ‘building’ in the Regulation 2(3)(11) of DCR is misplaced and would not assist the Applicant in any manner. That definition is in the context and purposes of DCR and cannot be imported and applied in the facts and circumstances of the present case. Accordingly, the High Court answered the question of law referred by the Tribunal as under:

The contracts of construction of glass curtain wall executed by the applicant would not constitute contracts for construction of buildings mentioned in para A of the Notification dated 8 March 2000 issued for the purpose of section 6A(1) of the Works Contract Act nor would it constitute contracts incidental or ancillary to the contracts as mentioned in paragraph B of the said Notification.

shailesh.kwebmaker

The Commissioner of Sales Tax vs. M/s. Neulife Nutrition System Pvt.Ltd., VAT Appeal No. 932of 2014, dated 6th May, 2016, Bombay High Court.

VAT- Classification of Goods- Health Drinks- Are Beverages- Concentrate in Powder Form –From Which Non-Alcoholic Beverages are Prepared- Are Covered by Entry C-107(11)(g)- Liable for 4% Tax, Schedule Entry C-107(11)(g) of The Maharashtra Value Added Tax Act, 2002

Facts
The Respondent dealer had filed an Application for determination u/s. 56 of the MVAT Act before the Commissioner of Sales Tax to decide the classification of its products and the rate of tax applicable for the relevant period i.e. 15-01-2011 to 31-03-2013. It had sought to determine the rates of tax applicable to ‘protein powders’.

It was the case of the Respondent-dealer, before the Commissioner of Sales Tax, that they were dealers in non-alcoholic beverage concentrate in powder form and the said products are general purpose protein powders from which non-alcoholic beverages are prepared. These powders are manufactured in USA and the proteins are obtained from those products which are remnants of cheese making process, these are sold in flavours, and, that the said products are covered under Schedule Entry No.C-107 (11)(g) of MVAT Act which are eligible to tax @ 5%. The Commissioner of Sales Tax, by his common order dated 18 July 2004, held that the said products were not covered by Schedule Entry C-107 (11) (g) of MVAT Act. Being aggrieved by the said order, the Respondent-dealer preferred two Appeals before the Tribunal. After hearing the parties, the Tribunal set aside the Commissioner’s order dated 18 July 2014 by allowing both the Appeals and held that the said products of the Respondent-dealer are classifiable under Schedule Entry C-107(11) (g) and liable for tax at the rate of 5%. Being aggrieved by the order of the Tribunal, the Appellant- Commissioner of Sales Tax has preferred the appeals before the Bombay High Court.

Held
It is well settled that the Entry in the Schedule is to be construed as it stands and when the Entry is clear and equivocal, it does not demand any outside interpretation. There can be no dispute that the said products of the Respondent- dealers are `powders’ from which ‘non-alcoholic’ drinks are prepared for the purpose of consumption by mixing the said powders with liquids like water, milk, juice, etc. There is no warrant for restricting the meaning of term “beverages” in Schedule Entry C-107 (11)(g) as sought to be contended by the learned Counsel for the Appellant. The Entry is clear and unambiguous. The Entry is couched with the non-technical word “beverages”, which has to be understood in its ordinary meaning. The meaning of “beverage” as stated in the Concise Oxford English Dictionary is “drink other than water”. Merely because a drink has more nutritive value in the form of proteins and meant for a certain class of consumers, it would not cease to be a “beverage”. Even if the potable drink made from the said powders are perceived as health drink, it does not fall out of the purview of the Entry. In view of the specific Entry 107-C (11)(g) to the Statute, it would override the general Entry. Even otherwise, the drink prepared from the said powders can be excluded from the term `beverages’, even assuming that the principle of common parlance were to apply, the Tribunal has rightly concluded that the `powders’ of the Respondent-Dealers are covered under Schedule Entry C-107 11(g) liable to tax @ 5%. Accordingly the High Court dismissed the appeal filed by the Department and confirmed the order of the Tribunal.

shailesh.kwebmaker

Commissioner, Delhi VAT vs. ABB Ltd, Civil Appeal Nos. 2989 – 3008 of 2016, dated 5th April, 2016, 2016 NTN (Vol-60) – 363 (SC)

Value Added Tax – Works Contract – Import of equipment – For Use in Execution of Works Contract -As per Requirement and Specification- Is Sale in Course of Import, s. 5(2) of The Central Sales Tax Act, 1956.

FACTS
The respondent is a Public Limited Company engaged, inter alia, in manufacture and sale of engineering goods including power distribution system and SCADA system. On 15.05.2003, DMRC invited tenders for supply, installation, testing and commissioning of traction electrification, power supply, power distribution and SCADA system for its Line 3 i.e. Barakhamba Road- Connaught Place-Dwarka Section. DMRC short listed the respondent and then executed the contract under which the respondent had to provide transformers, switch-gears, high voltage cables, SCADA system and also complete electrical solution, including control room for operation of trains. The respondent company claimed exemption from payment of tax on the ground of sale in course of import in respect of the importation of equipment which was strictly as per requirement and specification set-out by DMRC in their contract and only to meet such requirement of supply of specified goods which were imported, hence, the event of import and supply was clearly occasioned by the contract awarded to the respondent by the DMRC. There was a similar contention in respect of procurement of goods within the country and their movement from one State to another. The assessing authority rejected the claim and levied tax which was confirmed by the Tribunal. After carefully considering the relevant provisions of the contract, specifications of goods, requirement of inspection of goods at more than one occasion and right of rejecting the goods even on testing after supply, the High Court allowed appeal to accept the contentions advanced on behalf of respondent that the transactions leading to import of goods as well as movement of goods from one State to another were occasioned by the contract awarded by the DMRC to the respondent, hence, the transactions were not covered by the Delhi VAT Act but the CST Act. The department filed SLP before Supreme Court.

HELD
Based upon facts of the case, the SC held that the movement of goods by way of imports or by way of inter-state trade in this case was in pursuance of the conditions and/or as an incident of the contract between the assessee and DMRC. The goods were of specific quality and description for being used in the works contract awarded on turnkey basis to the assessee and there was no possibility of such goods being diverted by the assessee for any other purpose. Hence the law laid down in K.G. Khosla’s case has rightly been applied to this case by the High Court.

Accordingly, the appeal filed by the department was dismissed and the judgment of the High Court was upheld by the SC.

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[2016] 69 taxmann.com 328 (New Delhi – CESTAT) – Chambal Fertilizers & Chemicals Ltd vs. Commissioner of Central Excise, Jaipur

If service receiver has borne the incidence of tax, he can apply for refund of tax before his own jurisdictional officer.

Facts
Assessee is a manufacturer of exempted excisable goods which uses natural gas as a raw material. Transmission charges for transportation of natural gas is regulated. The regulated price was fixed at a lower rate than the price at which it was procured. The vendor issued credit notes for price differentials towards the value of the service, but no credit notes were issued for excess service tax collected by him from the assessee and paid to the Government. The Appellant being a service recipient of the service filed a refund claim with the jurisdictional tax authorities claiming refund of such tax. The application was considered as ‘not maintainable’ by both the authorities below on two grounds namely; (i) the tax amount is paid in the Government treasury by the vendor and not by the Appellant. (ii) the appropriate authority for sanction of the refund amount is the tax authorities having jurisdiction over the premises of the vendor and not the Appellant.

Held
Tribunal observed that there is no dispute as to the fact that excess tax has been paid for which refund application is maintainable under the statute. It held that since the recipient of service has filed the refund application before its jurisdictional authorities the same is proper and maintainable u/s. 11B of the Central Excise Act, 1944. As regards department’s stand that receiver is not entitled to file refund application, It was held that since the incidence of service tax has been borne by the appellant itself, the refund claim can very well be lodged by him claiming refund of excess service tax paid to the supplier of goods which was ultimately deposited into the Government Exchequer. In arriving at such conclusion, Tribunal relied upon its own decision in the case of Ms. Jindal Steel & Power Ltd. vs. CC & CE [2015] 64 taxmann.com 383 (New Delhi-CESTAT) and also decision of Hon’ble Allahabad High Court in the case of CC, CE & ST vs. Indian Farmer Fertilizers Co-op. Ltd. [2014] 47 GST 4/48 taxmann.com 79.

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62. [2016] 69 taxmann.com 176 (Mumbai – CESTAT) CCE vs. Cityland Associates

When failure to make 50% payment within time-limit prescribed under VCES is for the reasons not attributable to declarant but for the system error, benefit of the scheme cannot be denied.

Facts
Assessee applied for VCES Scheme on 31/12/2013 and after obtaining the service tax registration attempted to deposit 50% of declared tax dues. After making number of attempts on the website, the transaction could not be completed and error message “assessee code invalid” was reported all the time. Subsequently on 01/01/2014 the amount was deposited through banker’s cheque. The Adjudicating authority observed that since 50% dues were not paid on or before the 31/12/2013, benefit of VCES Scheme notified under Finance Act, 2013 was not available.

Held
Tribunal observed that admittedly, as per VCES Scheme, 2013, 50% of the declared dues is supposed to be deposited by 31/12/2013 and there is no provision for extension of that period for deposit. However in the present case, the respondent undisputedly applied for registration, obtained assessee code number and attempted to deposit 50% amount on 31/12/2013 however due to system fault the amount could not be deposited. It further observed that report which shows that “assessee code invalid” was also on record on 31/12/2013 and their bank account had credit balance of more than 50% amount which was to be deposited. In these factual circumstances, Tribunal held that assessee has scrupulously followed the procedure and complied with condition i.e. applied for registration and attempted to deposit the amount on the due date i.e. 31/12/2013 but only due to system fault online, the amount could not be deposited which is beyond their control therefore, it can be construed that there is no delay and though the payment is made on 01/01/2014, the same can be treated as if payment was made on 31/12/2013.

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PART B: RTI Act, 2005

Real time updates for Right to Information cases via email, SMS

The Central Information Commission (CIC) has taken an e-leap and would function like an e-court with all its case files moving digitally and the applicant being alerted about case hearings through an SMS and email. So now one can get real time updates while filing a complaint or appeal under Right to Information (RTI) Act.

Starting mid of September 2016, CIC would move to a new software, which would make the hearings faster and more convenient. As soon as an RTI applicant files an appeal or a complaint, he would be given a registration number and would get an alert on email and mobile phone about his case. The case would then be electronically transferred immediately to the concerned information commissioner’s registry electronically.

All this would be done within hours. At present, the process takes a few days.

The new system would also alert the RTI applicant about the date of hearing. An automatic SMS and email would be generated. Apart from this, the applicant would get an email in advance listing out the records given by him to CIC and the government’s submissions in his case. A senior CIC official told ET, “At present, the appellant and the ministry sometimes appear in the case without knowing what the submissions are. So this would help both sides in preparing for the case.”

The Commission would be able to expedite the processing of applications with the new software. At present, it also has to deal with complaints of loss of case files and non registration of cases. The facility would not only benefit the appellants but also information commissioners.

When a commissioner would open a case file on his computer, he would get a ready background of the specific case and also details about the appellant. The official said, “We would know if he has more appeals pending. This could facilitate hearing of multiple appeals of the same person on a given day. It would directly impact pendency as more cases would be disposed in a day.” CIC has already scanned 1.5 lakh files and converted them into electronic files.

(Source : Economic Times, September 05, 2016)

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TS-438-ITAT-2016(Ahd) ITO(IT) vs. Susanto Purnamo A.Y.: 2011-12, Date of order: 4th August, 2016

Article 15 and Article 12 of India – USA Double Taxation Avoidance Agreement (DTAA ) – Software development services rendered by an individual qualified as Independent professional services (IPS) as per Article 15. In absence of satisfaction of conditions provided in Article 15, such income was not taxable in India.

Facts
The Taxpayer, an individual resident in USA, carried on his business as a sole proprietor. During the year, Taxpayer had rendered certain software development services to an Indian company (ICo). As part of the software development services, Taxpayer was required to design, build and maintain a complete video streaming website for ICo.

Taxpayer contended that the income from the software development services was in the nature of business income and in absence of a PE or a fixed base in India, income from such services is not taxable in India under Article 7 as well as Article 15 of the DTAA. Further, even if one were to contend that the services were in the nature of technical services, as such services did not make available any technical knowledge or skill, it would not be covered by Fee for Included Services (FIS) Article.

AO rejected Taxpayer’s contention on the ground that services rendered by the Taxpayer were not in the nature of IPS but in the nature of FIS. Further it was contended that the services satisfied the “make available condition” and hence, income from software development services was taxable in India.

On appeal, the First Appellate Authority (FAA) held that software development services are covered by the IPS article. Further due to a specific carve out in FIS article, services covered by IPS article would fall outside the ambit of FIS. Since the Taxpayer did not have a fixed base in India, nor did his presence in India exceed 90 days, the income from such services was not taxable in India. Aggrieved, the AO filed an appeal with the Tribunal.

Held
On a conjoint reading of Article 12 and Article 15 of the India-USA DTAA, it is clear that once an amount is found to be of such a nature as it can be covered by IPS article, the same shall stand excluded from the ambit of FIS article.

The applicability of Article 15 is substantially influenced by the status of the recipient; whether the recipient is an individual or a corporate entity. Thus, although there may be overlapping effect in the scope of services covered by Article 12 and Article 15, as long as the services are rendered by an individual or group of individuals, rendition of such services is covered by Article 15. Reliance in this regard can be placed on decision of Mumbai Tribunal in Linklaters LLP vs. ITO (2011) 9 ITR Tri 271. In the context of India-USA DTAA, this is specifically exemplified by way of a specific carve out in Article 12.

The definition of professional service in Article 15 is only illustrative and not exhaustive. The emphasis is on the nature of services.

Software development service which essentially requires predominant intellectual skill and is dependent on individual characteristics of the person pursuing software development, and is based on specialized and advanced education and expertise qualifies as a professional service under Article 15. Reliance in this regard was placed on Kolkata Tribunal decision in the case of Graphite India Ltd (2002) 86 ITD 384

It was not in dispute that the Taxpayer did not have a fixed base in India, nor did his presence in India exceed 90 days in the relevant year. Thus, although the services are in the nature of IPS, in absence of satisfaction of conditions of Article 15, income from software development services was not taxable in India.

Whether the services satisfied the make available clause under the FIS Article is wholly academic and infructuous considering the above discussion.

shailesh.kwebmaker

[2016] 71 Taxmann.com 351 (Delhi-Trib) ADIT(IT) vs. International Technical Services LLC A.Y.: 2009-10, Date of order: 11th July, 2016

Sections 44BB , 44DA, 115A of the Act – Section 44BB of the Act does not mandate that the services should be provided directly by the party engaged in prospecting etc. of mineral oil; Provision of services of technical personnel for carrying out drilling activities is covered by Section 44BB of the Act.

Facts
The Taxpayer a non-resident (NR) provided services of highly specialized offshore personnel to a third party. The third party (also a non-resident) required these personnel for carrying out drilling operations in relation to its contract with an Indian company.

Taxpayer contended that provision of technical personnel is for carrying out drilling operations and hence would be covered by presumptive taxation provisions of section 44BB. However, the Assessing Officer (AO) argued that the income of the Taxpayer would be determined on net basis as per the provisions of section 44DA.

Aggrieved, the Taxpayer appealed before Dispute Resolution Panel (DRP), who subsequently directed the AO to compute income u/s 44BB.

The AO appealed before the Tribunal

Held
Taxpayer provided key technical personnel for conducting actual drilling operations. The service was an integral part of the drilling operations in connection with prospecting, extraction or production of mineral oil. Hence, it cannot be said that the activities of the Taxpayer were not “in connection with prospecting for or extraction or production of mineral oils”.

Section 44BB requires that the services/facilities provided by the Taxpayer should be “in connection with” prospecting etc. of mineral oil. It however, does not mandate that such services should be provided directly by the party engaged in prospecting etc. of mineral oil. Reliance in this regard was placed on the Mumbai Tribunal ruling in Micoperi S.P.A. Milano vs. DCIT (2002) 82 ITO 369 (Mum).

Section 115A was not applicable in the present case as payment was received from a NR. The decision in the case of CIT vs. Rolls Royce Pvt. Ltd. 170 Taxman 563 (Uttarakhand High Court) did not apply as in that case the services were rendered to an Indian company whereas in the present case services were rendered to a NR.

Thus services rendered by Taxpayer were covered by section 44BB.

shailesh.kwebmaker

GROWING SIGNIFICANCE OF PREVENTION OF MONEY LAUNDERING ACT, 2002

The Prevention of Money Laundering Act, 2002 [PMLA], which extends to whole of India including Jammu and Kashmir, came into force with effect from 1st July, 2005. Major amendments to the Law were made in the year 2009 and 2012. However, PMLA has been in news in recent past as in many cases PMLA is being regularly invoked and concrete action is visible and in some cases the same has been invoked against professionals closely associated with such persons, as well.

It is therefore, of utmost importance to understand PMLA and its growing significance not only for the professionals in practice but for those in industry as well.

In this article, we have attempted to provide a brief overview of the Law and recent developments relating to PMLA.

SYNOPSIS
1. Background
2. Object of pmla
3. Meaning of money laundering
a) proceeds of crime
b) meaning of the terms ‘property’, ‘person’ ‘offence of cross border implications’
c) scheduled offences
d) major acts covered in the schedule
4. Process of money laundering
5. Impact of money laundering
6. Steps taken by govt. Of india to prevent the menace of money laundering
7. Some recent cases where pmla is invoked
8. Flow of events under pmla
9. Obligations of the reporting entities
10. Possible actions which can be taken against persons / properties involved in money laundering
11. Invocation of pmla against professionals
12. Reciprocal arrangement for assistance in certain matters and procedure for attachment and confiscation of property
13. Conclusion

1. Background
Money-laundering has been a huge challenge for the international community for quite some time. Moneylaundering poses a serious threat not only to the financial and banking systems of countries, but also to their integrity and sovereignty. To obviate such threats, international community has taken various initiatives.

Some of the major initiatives taken by the international community, from time to time, to obviate such threats have been as follows:—

a) the United Nations [UN] Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, to which India is a party, called for prevention of laundering of proceeds of drug crimes and other connected activities and confiscation of proceeds derived from such offence.

b) the Basle Statement of Principles, enunciated in 1989, outlined basic policies and procedures that banks should follow in order to assist the law enforcement agencies in tackling the problem of money laundering.

c) the Financial Action Task Force [FATF] established at the summit of seven major industrial nations, held in Paris from 14th to 16th July, 1989, to examine the problem of money-laundering had made forty recommendations, which provided the foundation material for comprehensive legislation to combat the problem of money laundering. The recommendations were classified under various heads. Some of the important heads are –

i. declaration of laundering of monies carried through serious crimes a criminal offence;

ii. to work out modalities of disclosure by financial institutions regarding reportable transactions;

iii. confiscation of the proceeds of crime;

iv. declaring money-laundering to be an extraditable offence; and

v. promoting international co-operation in investigation of money laundering.

d) the Political Declaration and Global Programme of Action adopted by UN General Assembly by its Resolution No. S-17/2 of 23rd February, 1990, inter alia, called upon the member States to develop mechanism to prevent financial institutions from being used for laundering of drug related money and enactment of legislation to prevent such laundering.

e) the UN in the Special Session on Countering World Drug Problem Together concluded on the 8th to the 10th June, 1998 had made another Declaration regarding the need to combat money laundering. India is a signatory to this Declaration.

2. Object of pmla
As stated in the Preamble to the Act, it is an Act to prevent money-laundering and to provide for confiscation of property derived from, or involved in, money-laundering and to punish those who commit the offence of money laundering.

3. Meaning of money laundering
The goal of a large number of criminal activities is to generate profit for an individual or a group. Money laundering is the processing of these criminal proceeds to disguise their illegal origin.

Illegal arms sales, smuggling and other organized crimes, including illicit gambling and betting drug trafficking and prostitution rings, can generate huge amounts of money. Embezzlement, insider trading, bribery and computer fraud schemes can also produce large profits and create the incentive to “legitimize” the ill-gotten gains through money laundering. The money so generated is tainted and is in the nature of ‘dirty money’. Money Laundering is the process of conversion of such proceeds of crime, the ‘dirty money’, to make it appear as ‘legitimate’ money. Section 2(p) of the PMLA provides that ‘“moneylaundering” has the meaning assigned to it in section 3.’

Section 3 of the PMLA provides for Offence of Moneylaundering as follows:

‘Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming it as untainted property shall be guilty of offence of money laundering.”

a) PROCEEDS OF CRIME – Section 2(1)(u) “
“Proceeds of crime” means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property.”

b) MEANING OF THE TERMS ‘PROPERTY’, ‘PERSON’ ‘OFFENCE OF CROSS BORDER IMPLICATIONS’
“(v) “property” means any property or assets of every description, whether corporeal or incorporeal, movable or immovable, tangible or intangible and includes deeds and instruments evidencing title to, or interest in, such property or assets, wherever located;”

Explanation.—For the removal of doubts, it is hereby clarified that the term “property” includes property of any kind used in the commission of an offence under this Act or any of the scheduled offences;”

“(s) “person” includes;—

(i) an individual,
(ii) a Hindu undivided family,
(iii) a company,
(iv) a firm,
(v) an association of persons or a body of individuals, whether incorporated or not,
(vi) every artificial juridical person, not falling within any of the preceding sub-clauses, and
(vii) any agency, office or branch owned or controlled by any of the above persons mentioned in the preceding sub-clauses;”

“(ra) “offence of cross border implications”, means –

(i) any conduct by a person at a place outside India which constitutes an offence at that place and which would have constituted an offence specified in Part A, Part B or Part C of the Schedule, had it been committed in India and if such person 2[transfers in any manner] the proceeds of such conduct or part thereof to India; or

(ii) any offence specified in Part A, Part B or Part C of the Schedule which has been committed in India and the proceeds of crime, or part thereof have been transferred to a place outside India or any attempt has been made to transfer the proceeds of crime, or part thereof from India to a place outside India.

Explanation.—Nothing contained in this clause shall adversely affect any investigation, enquiry, trial or proceeding before any authority in respect of the offences specified in Part A or Part B of the Schedule to the Act before the commencement of the Prevention of Money-laundering (Amendment) Act, 2009.”

c) SCHEDULED OFFENCES

The offences listed in the Schedule to the PMLA are scheduled offences in terms of section 2(1)(y) of the Act. The scheduled offences are divided into three parts – Part A, B & C.

In Part A, offences to the Schedule have been listed in 28 paragraphs and it comprises of offences under Indian Penal Code, Narcotic Drugs and Psychotropic Substances Act, Explosive Substances Act, Unlawful Activities (Prevention) Act, Arms Act, Wild Life (Protection) Act, the Immoral Traffic (Prevention) Act, the Prevention of Corruption Act, the Explosives Act, Antiquities & Arts Treasures Act etc.

Prior to 15th February, 2013, i.e. the date of notification of the amendments carried out in PMLA, the Schedule also had Part B for scheduled offences where the monetary threshold of rupees thirty lakhs was relevant for initiating investigations for the offence of money laundering. However, all these scheduled offences, hitherto in Part B of the Schedule, have now been included in Part A of Schedule w.e.f 15.02.2013. Consequently, there is no monetary threshold to initiate investigations under PMLA.

The Finance Act, 2015, w.e.f. 14-5-2015 has again inserted section 132 of the Customs Act, 1962 relating to false Declaration, false documents etc. in Part B.

Part ‘C’ deals with trans-border crimes, and is a vital step in tackling Money Laundering across International Boundaries.

Every Scheduled Offence is a Predicate Offence. The Scheduled Offence is called Predicate Offence and the occurrence of the same is a pre requisite for initiating investigation into the offence of money laundering.

d) MAJOR ACTS COVERED IN THE SCHEDULE
(i) Indian Penal Code, 1860;
(ii) N arcotic Drugs and Psychotropic Substances
Act, 1985;
(iii) Unlawful Activities (Prevention ) Act, 1967;
(iv) Prevention of Corruption Act, 1988;
(v) Customs Act, 1962;
(vi) SEBI Act, 1992;
(vii) Copyright Act, 1957;
(viii) Trade Marks Act, 1999;
(ix) Information Technology Act, 2000;
(x) Explosive Substances Act, 1908;
(xi) Wild Life (Protection) Act, 1972;
(xii) Passport Act, 1967;
(xiii) Environment Protection Act, 1986;
(xiv) Arms Act, 1959.
(xv) The offence of wilful attempt to evade any tax, penalty or interest referred to in section 51 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.

4. Process of money laundering

Money laundering is a single process. However, its cycle can be broken down into three distinct stages namely, placement stage, layering stage and integration stage.

a) Placement Stage: It is the stage at which criminally derived funds are introduced in the financial system. At this stage, the launderer inserts the “dirty” money into a legitimate financial institution often in the form of cash deposits in banks. This is the riskiest stage of the laundering process because large amounts of cash are pretty conspicuous, and banks are required to report high-value transactions. To curb the risks, large amounts of cash is broken up into less conspicuous smaller sums that are then deposited directly into a bank account, or by purchasing a series of monetary instruments (cheques, money orders, etc.) that are then collected and deposited into accounts at another location.

b) Layering Stage: It is the stage at which complex financial transactions are carried out in order to camouflage the illegal source. At this stage, the launderer engages in a series of conversions or movements of the money in order to distant them from their source. In other words, the money is sent through various financial transactions so as to change its form and make it difficult to follow. Layering may consist of several bankto- bank transfers, wire transfers between different accounts in different names in different countries, making deposits and withdrawals to continually vary the amount of money in the accounts, changing the money’s currency, and purchasing high-value items such as houses, boats, diamonds and cars to change the form of the money. This is the most complex step in any laundering scheme, and it’s all about making the origin of the money as hard to trace as possible. In some instances, the launderer might disguise the transfers as payments for goods or services, thus giving them a legitimate appearance.

c) Integration stage: It is the final stage at which the ‘laundered’ property is re-introduced into the legitimate economy. At this stage, the launderer might choose to invest the funds into real estate, luxury assets, or business ventures. At this point, the launderer can use the money without getting caught. It’s very difficult to catch a launderer during the integration stage if there is no documentation during the previous stages.

The above three steps may not always follow each other. At times, illegal money may be mixed with legitimate money, even prior to placement in the financial system. In certain cash rich businesses, like Casinos (Gambling) and Real Estate, the proceeds of crime may be invested without entering the mainstream financial system at all.

The Process of money laundering may be explained simply by way of diagram as follows:

Various techniques or methods used: At each of the three stages of money laundering various techniques can be utilized. Following are the various measures adopted all over the world for money laundering, even though it is not exhaustive but it encompasses some of the most widely used methods:

1. Structuring Deposits: This is also known as smurfing. This is a method of placement whereby cash is broken into smaller deposits of money, used to defeat suspicion of money laundering and avoid antimoney laundering reporting requirements.

Smurfs – A popular method used to launder cash in the placement stage. This technique involves the use of many individuals (the “smurfs”) who exchange illicit funds (in smaller, less conspicuous amounts) for highly liquid items such as traveller cheques, bank drafts, or deposited directly into savings accounts. These instruments are then given to the launderer who then begins the layering stage. For example, ten smurfs could “place” $1 million into financial institutions using this technique in less than two weeks.

2. Shell companies: These are fake companies that exist for no other reason than to launder money. They take in dirty money as “payment” for supposed goods or services but actually provide no goods or services; they simply create the appearance of legitimate transactions through fake invoices and balance sheets.

3. Third-Party Cheques: Counter cheques or banker’s drafts drawn on different institutions are utilized and cleared via various third-party accounts. Third party cheques and travellers’ cheques are often purchased using proceeds of crime. Since these are negotiable in many countries, the nexus with the source money is difficult to establish.

4. Bulk cash smuggling: This involves physically smuggling cash to another jurisdiction and depositing it in a financial institution, such as an offshore bank, with greater bank secrecy or less rigorous money laundering enforcement.

5. Impact of Money laundering
Launderers are continuously looking for new routes for laundering their funds. Economies with growing or developing financial centres, but inadequate controls are particularly vulnerable as established financial centre countries implement comprehensive anti-money laundering regimes. Differences between national anti-money laundering systems are being exploited by launderers, who tend to move their networks to countries and financial systems with weak or ineffective counter measures.

The possible social and political costs of money laundering, if left unchecked or dealt with ineffectively, are serious. Organised crime can infiltrate financial institutions, acquire control of large sectors of the economy through investment, or offer bribes to public officials and indeed governments. The economic and political influence of criminal organisations can weaken the social fabric, collective ethical standards, and ultimately the democratic institutions of the society as is evident in many countries in Latin America. In countries transitioning to democratic systems, this criminal influence can undermine the transition.

If left unchecked, money laundering can erode a nation’s economy by changing the demand for cash, making interest and exchange rates more volatile, and by causing high inflation in countries where criminal elements are doing business. The draining of huge amounts of money a year from normal economic growth poses a real danger for the financial health of every country which in turn adversely affects the global market. Most fundamentally, money laundering is inextricably linked to the underlying criminal activity that generated it. Laundering enables criminal activity to continue and flourish.

Thus, the impact of money laundering can be summed up into the following points:

Potential damage to reputation of financial institutions and market

Weakens the “democratic institutions” of the society

Destabilises economy of the country causing financial crisis

Give impetus to criminal activities

Policy distortion occurs because of measurement error and misallocation of resources

Discourages foreign investors

Encourages tax evasion culture

Results in exchange and interest rates volatility

Provides opportunity to criminals to hijack the process of privatization

Contaminates legal transaction.

Results in provision of financial support toTerrorists activities

6. Steps taken by govt. of india to prevent the menace of money laundering

Government of India is committed to tackle the menace of Money Laundering and has always been part of the global efforts in this direction. India is signatory to the following UN Conventions, which deal with Anti Money Laundering / Countering the Financing of Terrorism:

1. International Convention for the Suppression of the Financing of Terrorism (1999);

2. UN Convention against Transnational Organized Crime (2000); and

3. UN Convention against Corruption (2003).

In pursuance to the political Declaration adopted at the special session of the United Nations General Assembly (UNGASS) held on 8th to 10th June 1998 (of which India is one of the signatories) calling upon member States to adopt Anti Money Laundering Legislation & Programme, the Parliament has enacted PMLA. This Act has been substantially amended, by way of enlarging its scope, in 2009 (w.e.f. 01.06.2009), by enactment of PML (Amendment) Act, 2009. The Act was further amended by PML (Amendment) Act, 2012 w.e.f. 15-02-2013.

7. Some recent high profile cases where PMLA is invoked

A. As per the media reports

a. Chhagan Bhujbal’s case:
Former Deputy Chief Minister of Maharashtra Mr. Chhagan Bhujbal and his family members and various real estate developer firms and other associated with them.

b. Himachal Pradesh’s Chief minister Virbhadra singh and family’s case

c. Former King Fisher Chairman Vijay Mallya’s case

d. FTIL promoter Jignesh Shah in the NSEL’s case

e. Gujarat Cadre IAS Officer Pradeep Sharma’s case

f. Zoom Developers Pvt. Ltd.’s promoters Vijay Choudhary and his co-director Sharad Kabra’s case

g. Lalit Modi’s case

h. Bank of Baroda Money laundering case

i. As per the Law reports

j. B. Rama Raju v. Union of India [2011] 12 taxmann .com 181 (AP)

k. Union of India v. Hassan Ali Khan [2011] 14 taxmann.com 127 (SC)

The number of cases filed under the Prevention of Money Laundering Act, 2002 from the year 2008 to mid-2015 in various High Courts and the Supreme Court are:

The number of cases filed in the Appellate Tribunal under the Prevention of Money Laundering Act, 2002 from the year 2009 till 2014 are:

8. Flow of events under PMLA

The flow of events under PMLA is graphically depicted as follows:

9. Obligations of the reporting entities

Section 2(1)(wa) – “Reporting Entity” means a banking company, financial institution, intermediary or a person carrying on a designated business or profession. Section 2(1)(sa) – Persons carrying on Designated Business or Profession means:-

(i) a person carrying on activities for playing games of chance for cash or kind, and includes such activities associated with casino;

(ii) a Registrar or Sub-Registrar appointed u/s. 6 of the Registration Act, 1908, as may be notified by the Central Government.

(iii) real estate agent, as may be notified by the Central Government.

(iv) dealer in precious metals, precious stones and other high value goods, as may be notified by the Central Government.

(v) person engaged in safekeeping and administration of cash and liquid securities on behalf of other persons, as may be notified by the Central Government; or

(vi) person carrying on such other activities as the Central Government may, by notification, so designate, from time to time.

Obligations [Section 12]

(i) Every reporting entity have to maintain a record of all transactions covered as per the nature and value of which may be prescribed, in such manner as to enable it to reconstruct individual transactions;

(ii) They shall furnish to the Director (FIU) within such time as may be prescribed information relating to such transactions, whether attempted or executed, the nature and value of which may be prescribed;

(iii) They shall verify the identity of its clients in such manner and subject to such conditions as may be prescribed;

(iv) They shall identify the beneficial owner, if any, of such of its clients, as may be prescribed;

(v) They shall maintain record of documents evidencing identity of their clients and beneficial owners as well as account files and business correspondence relating to their clients for a period of five years in case of record and information relating to transactions; and

(vi) They shall maintain the same for a period of five years after the business relationship between a client and the reporting entity has ended or the account has been closed, whichever is later.

10. Possible actions which can be taken against persons / properties involved in money laundering

Following actions can be taken against the persons involved in Money Laundering:-

(a) Attachment of property u/s. 5, seizure/ freezing of property and records u/s. 17 or Section 18. Property also includes property of any kind used in the commission of an offence under PMLA, 2002 or any of the scheduled offences.

(b) Persons found guilty of an offence of Money Laundering are punishable with imprisonment for a term which shall not be less than three years but may extend up to seven years and shall also be liable to fine [Section 4].

(c) When the scheduled offence committed is under the Narcotics and Psychotropic Substances Act, 1985 the punishment shall be imprisonment for a term which shall not be less than three years but which may extend up to ten years and shall also be liable to fine.

(d) The prosecution or conviction of any legal juridical person is not contingent on the prosecution or conviction of any individual.

11. Risk of invocation of pmla against professionals

a. As pointed out above, section 3 of the PMLA dealing with the Offence of Money-laundering provides that ‘Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming it as untainted property shall be guilty of offence of money laundering.” Thus, the language of Section 3 of PMLA has widest possible amplitude.

b. As per the media reports, PMLA has been invoked against the Chartered Accountant involved in the Chhagan Bhujbal case.

c. In CBI vs V. Vijay Sai Reddy Criminal Appeal No. 729 of 2013, a case relating to offence under Prevention of Corruption Act, the Supreme Court in its order dated 9th May, 2013, after analysing the facts while cancelling the bail of the respondent Chartered Accountant, observed as follows:

“26) Finally, though it is claimed that respondent herein (A-2) being only a C.A. had rendered his professional advise, in the light of the various serious allegations against him, his nexus with the main accused A-1, contacts with many investors all over India prima facie it cannot be claimed that he acted only as a C.A. and nothing more. It is the assertion of the CBI that the respondent herein (A-2) is the brain behind the alleged economic offence of huge magnitude. The said assertion, in the light of the materials relied on before the Special Court and the High Court and placed in the course of argument before this Court, cannot be ignored lightly.”

d. In order to ensure that a professional is not caught into the quagmire of PMLA it would be advisable to do a proper due diligence and KYC of the prospective clients and to ensure that one does not fall within very broad scope and contours of section 3 of PMLA. In other words, a Professional should ensure that he does not deal with clients who are engaged in various criminal activities included in the Schedule PMLA.

12. Reciprocal arrangement for assistance in certain matters and procedure for attachment and confiscation of property

a. Meaning of “Contracting State”
“Contracting State” means any country or place outside India in respect of which arrangements have been made by the Central Government with the Government of such country through a treaty or otherwise [Section 55].

b. Mechanism to obtain evidence required in connection with investigation into an offence or proceedings under PMLA if such evidence may be available in any place in a contracting State

An application is to be made to a Special Court by the Investigating Officer or any officer superior in rank to the Investigating Officer and the Special Court, on being satisfied, may issue a Letter of Request to a court or an authority in the contracting State competent to deal with such request to—

(i) examine facts and circumstances of the case,
(ii) take such steps as the Special Court may specify in such letter of request, and
(iii) forward all the evidence so taken or collected to the Special Court issuing such letter of request.

Every statement recorded or document or thing received from a Contracting State shall be deemed to be the evidence collected during the course of investigation [Section 57].

c. Mechanism to provide assistance to a Contracting State

Where a Letter of Request is received by the Central Government from a court or authority in a contracting State requesting for investigation into an offence or proceedings under PMLA, 2002 and forwarding to such court or authority any evidence connected therewith, the Central Government may forward such Letter of Request to the Special Court or to any authority under the Act for execution of such request [Section 58].

d. Confiscation of the properties involved in money laundering located in India, where the offence of money laundering has been committed outside India

The properties involved in money laundering located in India, where the offence of money laundering has been committed outside India, can be ordered to be confiscated by the Special Court/Adjudicating Authority on an application moved to the Special Court/ Adjudicating Authority [Sections 58B & 62A].

e. Reciprocal arrangements for processes and assistance for transfer of accused persons

(1) A Special Court, in relation to an offence punishable under section 4 for the service or execution of a summons, a warrant or a search warrant in a Contracting State shall send such summons or warrant, in duplicate, in prescribed form to the Court, Judge or Magistrate through specified Authorities.

(2) Similarly, a summons, a warrant or a search warrant in relation to an offence punishable under section 4, received for service or execution from a Contracting State, shall be served or executed as if it were a summons or warrant received by it from another Court in the said territories for service or execution.

After execution of summon or search warrant received from a Contracting State, the documents or other things produced or things found during search shall be forwarded to the Court issuing the summons or search-warrant through the specified Authority [Section 59].

f. Attachment or seizure of the property involved in money laundering and located in the Contracting State

In such cases, after issue of an order for attachment of any property made u/s. 5 or freezing u/s. 17(1A) or confirmation of attachment by Adjudicating Authority under Section 8 or confiscation by Special Court under Section 8, the Special Court, on an application by the Director or the Administrator may issue a Letter of Request to a court or an authority in the Contracting State for execution of such order as per the provisions of corresponding law of that country [Section 60(1)].

13. Conclusion

India has taken up various Anti-Money Laundering measures to deal with this issue but these measures somewhere or the other have some loopholes or lacunas and thus are not fulfilling their intended purpose. Some of such problems are pointed out below:

a) Growth of Technology: With the advent of technology at such a greater speed, it has been possible for the money launderers to act on obscuring the origin of proceeds of crime by cyber finance techniques. The enforcement agencies are not able to catch up with the speed of growing technologies.

b) Lack of awareness about the problem: The issue of money laundering is growing at a very high pace. Its unawareness among the common public is an impediment for implementation of proper anti-money laundering measures. The poor and illiterate people, instead of going through lengthy paper work transactions in Banks, prefer the Hawala system where there are fewer complexities and formalities, little or no documentation, lower rates and they also provide security and anonymity. Thus, they become unwitting accessories. This is mainly because such people don’t know the seriousness of this crime and are not aware of its harmful after effects.

c) Non-fulfilment of the purpose of KYC Norms: RBI has issued the policy of KYC norms with the objective to prevent banks from being used by criminals for money laundering or terrorist financing activities. However, it does not cease or abstain from the problem of Hawala transactions as RBI cannot regulate them. Further, such norms are only a mockery as the implementing agencies are indifferent to it. Also, the increasing competition in the market is forcing the Banks to lower their guards and thus facilitating the money launderers to make illicit use of the banking system in furtherance of their crime.

d) The widespread act of smuggling: There are a number of black market channels in India for the purpose of selling goods offering many imported consumers goods such as food items, electronics etc. which are routinely sold. The black market merchants deal in cash transactions and avoid custom duties thus offering better prices than the regular merchants. After liberalization of the economy, though this problem has been lessened but it has not been done away with completely and still poses a threat to a nation’s economy.

e) Lack of comprehensive enforcement agencies: The offence of money laundering is no more stuck to one area of operation but has expanded its scope include many different areas of operation. In India, there are separate wings of law enforcement agencies dealing with money laundering, cybercrimes, terrorist crimes, economic offences etc. Such agencies lack convergence among themselves. The issue of money laundering, as we have seen, is a borderless world but these agencies are still stuck with the laws and procedures of the states.

Combating the offence of money laundering is a dynamic process since the criminals involved in it are continuously looking for new ways to do it and achieve their illicit motives.

Apart from that, many a people are of the opinion that money laundering seem to be a victimless crime. They are unaware of the harmful effects of such a crime on the Nation’s economy and Democratic Institutions. So there is a need to educate such people and create awareness among them and therefore infuse a sense of watchfulness towards the instances of money laundering. This would also help in better law enforcement as it would be subject to public examination.

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MVAT Amendment (Fifth) Rules, 2016

VAT.1516/CR-86/Taxation-1 dated 6.8.2016

The Government of Maharashtra has issued Notification to amend Rule 17A whereby power has been given to Commissioner to issue Notification to specify order, certificate, notice, intimation or any other document which may be issued in an electronic form with or without digital signature.

New Rule 21A has been inserted with effect from 1.4.2011 to specify class of dealer, commodity and manner to determine fair market price under sec 28A.

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MVAT Amendment (Fourth) Rules, 2016

VAT.1516/CR-85/Taxation-1 dated 6.8.2016

The Government of Maharashtra has issued this Notification to amend Rule 52A for set-off in respect of the goods manufactured by mega units and Rule 83A for declaration to be issued by mega units.

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Service Tax Liability in case of hiring of goods without the transfer of right to use goods

Circular No. 198/8/2016 dated 17 08 2016

Transfer of Right to use goods for cash, deferred payment or valuable consideration is considered as deemed sales under sub-clause (d) of Article 366(29A) of Constitution of India and consequently liable to Sales Tax/VAT. Whereas in terms of Section 66E(f) of the Finance Act, 1994 transfer of goods by way of hiring, leasing, licensing or in any such manner without transfer of right to use such goods is a “Declared Service “ and hence liable to Service Tax.

The CBEC, vide this Circular has clarified the issue of applicability of service tax on hiring of goods without transfer of right to use of goods in line with the criteria laid down by the Hon’ble Supreme Court in BSNL case.

CBEC has clarified that whether a transaction is a transfer of the right to use the goods or a service is essentially a question of fact which has to be determined in each case having regard to the terms of the contract. The transfer of effective control and possession of the goods in each case is important in determining whether it is a deemed sale or service.

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Service Tax on Freight Forwarders on transportation of goods from India :

SERVICE TAX UPDATES

Circular No. 197/7/2016-ST dated 12 08 2016

CBEC has issued this Circular to clarify doubts about “Service Tax liability of Freight Forwarders collecting “Freight”, for shipments moving from Indian Port to any place outside India”.

CBEC has clarified that as per Rule 10 of Place of Provision of Services (POPS) Rules 2012, since destination of the services is outside India, and the freight forwarder is acting as “Principal” therefore, the transaction will not attract Service tax.

CBEC has further clarified that as per Rule 2(f) read with Rule 9 of POPS Rules 2012, if the freight forwarder is acting as pure agent, then services of the freight forwarder will be taxable..

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Mahyco Monsanto Biotech (India) Pvt. Ltd., vs. The Union of India And Others And M/S. Subway Systems India Pvt. Ltd V. The State Of Maharashtra And Others, WP. No. 9175 Of 2015 And 497 Of 2015, Dated 11th August, 2016 ( Bom).

(a) Value Added Tax- Transfer Of Technical Know How- Sale- Liable To Vat.
(b) Value Added Tax- Frenchise Agreements- Not A Transfer Of Right To Use- Not A Sale- Not Liable For Vat, Schedule Entry C-39 of The Maharashtra Value Added Tax Act, 2002.

Facts
i) The Petitioner Monsanto India, a joint venture company of Monsanto Investment India Private Limited (“MIIPL”) and the Maharashtra Hybrid Seeds Co. Monsanto India developed and commercialized insect-resistant hybrid cotton seeds using a proprietary “Bollgard Technology”, one that is licensed to Monsanto India by Monsanto USA through its wholly-owned subsidiary, Monsanto Holdings Private Limited (“MHPL”). This technology is further sublicensed by Monsanto India to various seed companies on a non-exclusive and nontransferable basis to use, test, produce and sell genetically modified hybrid cotton planting seeds. In return for this technology, Monsanto India received trait fees based on the number of packets of seeds sold by the sub-licensees. These sub-licensing agreements, with almost 40 seed companies, were the transactions in question. The petitioner paid service tax on these transactions and did not paid vat. The department levied vat on these transactions treating transfer of technical knowhow as sale liable to vat. The petitioner file writ petition before the Bombay High Court.

ii) In other case the petitioner Subway was granted a non-exclusive sub-license by Subway International B.V. (“SIBV”), a Dutch limited liability corporation to establish, operate and franchise others to operate SUBWAY – branded restaurants in India. This non-exclusive license was granted to SIBV itself by Subway Systems International Ansalt, which in turn was granted such a license by Doctor’s Associates Inc., an entity that owns the proprietary system for setting up and operating these restaurants. These restaurants serve sandwiches and salads under the trade mark ‘SUBWAY’. The agreement includes not only the trade mark SUBWAY, but also associated confidential information and goodwill, such as policies, forms, recipes, trade secrets and the like. Typically, Subway enters into franchise agreements with third parties, under which it provides specified services to the franchisee. In return, the franchisee undertakes to carry on the business of operating sandwich shops in Subway’s name. The agreement only provides for a very limited representational or display right, and the franchisee cannot transfer or assign these exclusive rights to any third person. Subway also reserves the right to compete with these franchisees in the agreement. Under this agreement, Subway received two kinds of consideration, one being a one-time franchisee fee which is paid when the agreement is signed; and the second is a royalty fee paid weekly by the franchisee on the basis of its weekly turnover. Under these agreements, the franchisees have no more than a right to display Subway’s intellectual property in the form of marks and logos, and a mere right to use such confidential information as Subway discloses and as prescribed by the franchise agreement. Since September 2003, Subway was paying service tax to the Union of India on the consideration received by it from the franchisees. The vat department took the view that this consideration should be subject to VAT and passed the orders levying tax, interest and penalty against which the Subway filed writ petition before the Bombay High Court.

The High Court disposed both writ petitions by common order.

Held
(a) In first case the High Court held that the first question is whether there is a ‘transfer’ within the meaning of Article 366(29A)(d) the answer is yes. It is true that the essence of a ‘transfer’ is the divesting of a right or goods from transferor and the investing of the same in the transferee, and this is what Salmond on Jurisprudence and Corpus Juris Secundum both say. The seeds embedded with the technology are, in fact, transferred. Monsanto India is divested of that portion of the technology embedded in those fifty seeds and those were fully vested in the sub-licensee. It is not correct to say that the effective control of the ‘goods’ is with Monsanto India. The effective control over the seeds, and, therefore that portion of the technology that is embedded in the seeds, is entirely with the sub-licensee. That sub licensee is not bound to use the seeds (and the embedded technology) in accordance with Monsanto India’s wishes. Monsanto India cannot further dictate to the sub-licensee what he or it may do with these technology-infused seeds. The sub-licensee can do as it wishes with them. It may not use them at all. It may even destroy the seeds. Once the transaction is complete, i.e., once possession of the technology-imbued seeds is effected, and those seeds are delivered, Monsanto India has nothing at all to do with the technology embedded in those fifty seeds given to the sub-licensee. At no point does Monsanto India have access to this portion of the technology. In other words, the transfer is to the exclusion of Monsanto India. Further, the High Court held that the Monsanto India sub-licensing transaction could only be a service in one circumstance, i.e., if the seed companies gave Monsanto India a bag of seeds to mutate and improve with the Bollgard Technology which would, thereafter, be returned to the seed companies. That might perhaps be a service contract. Accordingly, the High Court held that it is a clear case of sale of goods liable to tax (Vat).

As regards plea of petitioner for transfer of the amount paid as service tax from the Consolidated Fund of India to the Consolidated Fund of State of Maharashtra, the High Court did not give any direction and left it to Monsanto India to adopt suitable proceedings in this behalf, and left their contentions open to the necessary extent.

(b) It is not true that the eligibility of Vat is to be determined by the State, and therefore it could levy sales tax on a transaction which already attracts service tax. The decisions in BSNL, Imagic Creative, and Associated Lease Finance are exactly on this. Service Tax and Sales Tax are mutually exclusive of each other. The agreement between Subway and its franchisees is not a sale, but it is in fact a bare permission to use. It is, therefore, subject only to service tax. The fact that the agreement between Subway and its franchisee is limited to the precise period of time stipulated in the agreement is vital to Subway’s case. At the end of the period of the agreement, or before in case there was any breach of its terms, the right of the franchisee to display the mark ‘Subway’ and its trade dress, and all other permissions would also end. This is what sets this agreement apart from the case of Monsanto and its sub licensee. There, the seed companies could do as they pleased with the seeds; they could alienate or even destroy them. In Subway’s case, there are set terms provided by the agreement which have to be followed. A breach of these would result in termination of the agreement. There is no passage of any kind of control or exclusivity to the franchisees. In fact, this agreement is a classic example of permissive use. It can be nothing else. For all the reasons in law and fact that the sub-licensing of technology in Monsanto is held to be a transfer of right to use, this franchising agreement must be held to be permissive use. It does not mean every franchise agreement will necessarily fall outside the purview of the amended MVAT Act. There is conceivably a class of franchise agreements that would have all the incidents of a ‘sale’ or a ‘deemed sale’ (i.e., a transfer of the right to use). Black’s Law Dictionary defines a franchise, in the context of a commercial transaction as: “The sole right granted by the owner of a trade mark or a trade name to engage in business or to sell a good or service e in a certain area”.

On facts, the High Court found that the Subway franchise does not meet these tests. There is no such exclusivity. The agreement itself says that Subway may itself open and operate its own outlets in direct competition with the franchisee. The agreements themselves expressly contemplate that Subway may create further franchisees in the very area in which these franchisees operate. The franchisee cannot unilaterally sub-franchise. The right of transferability is extremely restricted and it is impossible without Subway’s control throughout. Similarly, if there is no requirement of having to cease display and use or return the intangible property at the end of the franchise agreement’s term, then the transaction might arguably be a sale. Exercises in co-branding or sub-branding, where one party franchises its mark on a territorially-restricted basis and allows the franchisee to combine it with its own or other marks may also well have an element of sale. Similarly, where a dealership for, say, automobiles, has a territorial exclusivity, then it may amount to a franchise. The Subway franchise model has none of these elements. The so-called ‘system’ is controlled by Subway and it is exclusive to Subway. At the end of the franchise term, it cannot be used. The agreement gives Subway deep and pervasive control and dominion over the franchisee’s daily operations, without, at the same time, ceding to the franchisee the slightest hint or latitude in what it may do with the permitted marks and technology. This is, therefore, diametrically opposed to the Monsanto model, for Monsanto India has no control whatever in what its licensee does with the BT-infused donor seeds; that licensee may choose not to use them at all. There is also no question of any ‘return’ or ‘cessation’ to Monsanto India. Thus, viewed from any perspective, and on the facts of the case, the Subway franchise agreements does not have any of the necessary elements of a sale or a deemed sale.

Equally, the High Court rejected any general proposition to the effect that anything that is nothing but a service can be artificially converted into or treated as a sale merely by the insertion of an omnibus clause in a state-level taxing statute. To accept this argument, one would have to accept that the State Legislature can encroach upon the legislative powers of the Union in respect of items in the Union List simply by inserting such amendments that would by some process of fiscal and legal alchemy convert a pure service into a sale. The introduction of the word ‘franchise’ in the amended MVAT Act by way of a notification will have to be read to mean those franchises that can reasonably and plausibly be construed to have the effect of a sale; it cannot be widened to include agreements styled as ‘franchise’ agreements simply because of the nomenclature. Presumably, what the Legislature intended was to include only those franchise agreements that involved a transfer of the right to use or some other aspect of a deemed sale as defined under Article 366(29A) of the Constitution. The Subway’s franchise agreement grants to the franchisee nothing more than mere permissive use of defined intangible rights. It is therefore a service, and is not amenable to VAT .

Accordingly, the High Court disposed both writ petitions.

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Smt. B. Narsamma vs. The Deputy Commissioner Commercial Taxes, Karnataka & Anor., Civil Appeal Nos. 4149 of 2007,4318 of 2007,.4319 OF 2007, 7400 of 2016 , 7401-7872 of 2016 and 7873- 7916 of 2016, dated 11th August, 2016, (SC).

a) Value Added Tax – Works Contract – Use of Reinforced Iron and Steel used in Construction –Remains Declared Goods – Liable to tax @ 4%.
b) Value Added Tax- Works Contract – Use of Iron and Steel for Fabrication of Doors and Windows – Which are Used in Construction- Does not Remain Iron and Steel – Not Exempt From Payment of Tax, section 5B of The Karnataka Sales Tax Act, 1957 and section 4 of The Karnataka Value Added Tax Act, 2003.

FACTS
The group of appeals, concerning the rate of taxability o f declared goods i.e. goods declared to be of special importance u/s. 14 of the Central Sales Tax Act, 1956 were filed before the SC. The common issue involved in all these appeals was whether iron and steel reinforcements of cement concrete that are used in buildings looses their character as iron and steel at the point of taxability, that is, at the point of accretion in a works contract. All these appeals came from the State of Karnataka relatable to the provisions of the Karnataka Sales Tax Act, 1957, post 01.04.2005, and relatable to the Karnataka Value Added Tax Act, 2003. The facts in these appeals were more or less similar. Iron and Steel products were used in the execution of works contracts for reinforcement of cement, the iron and steel products becoming part of pillars, beams, roofs, etc. which were all parts of the ultimate immovable structure that is the building or other structure to be constructed.

In the other case appellant engaged in works contracts of fabrication and creation of doors, window frames, grills, etc. in which they claimed exemption under rule 6(4) of The Karnataka Sales Tax Rules, 1957, for iron and steel goods that went into the creation of these items, after which they said doors, window frames, grills, etc. were fitted into buildings and other structures. The High Court denied the exemption as the iron and steel is not used in the same form in which it was purchased against which appeal was filed by the appellant.

The SC heard all those appeals and delivered a common judgment.

HELD
Given the fact, situation in those appeals relating to use of iron and steel for reinforcement of cement for construction of building, the SC held that where, commercial goods without change of their identity as such, are merely subject to some processing or finishing, or are merely joined together, and therefore remain commercially the same goods which cannot be taxed again, given the rigor of section 15 of the Central Sales Tax Act. Accordingly it is taxable as declared goods attracting rate of 4% under both acts.

In case of use of iron and steel for fabrication and creation of doors, window frames, grills, etc. which were fitted into buildings and other structures the SC held that the iron and steel goods, after being purchased, are used in the manufacture of other goods, namely, doors, window frames, grills, etc. which in turn are used in the execution of works contracts and are therefore not exempt from payment of tax.

Accordingly, the SC disposed all these appeals.

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2016 (43) STR 301 (Tri.-Bang.) Kirthi Constructions vs. CCE. & ST., Mangalore

Even if refund of service tax is on account of mistake of law, provisions of “time bar” and ‘unjust enrichment’ would apply.

Facts
Refund of service tax paid on construction services was claimed as it was not leviable to service tax. Appellants contested that since service tax was paid by mistake of law and it was not collected from buyers, refund claim cannot be held as time barred. Revenue demanded service tax as it was not a case of self-service, service tax was collected from buyers and in any case, the refund was time barred.

Held
Since the typical arrangement was that the Appellants were first selling the plot of land and then the buyer was appointing the Appellant for construction, it was covered by the exclusion clause of construction services. Accordingly, no service tax was payable. Relying on Hon’ble Supreme Court’s decision in case of Mafatlal Industries Ltd. vs. UOI (1997 (89) ELT 247 (SC)), it was held that all refund claims except unconstitutional levies have to pass the test of limitation of one year (time bar) and non-passing of service tax burden to buyers (unjust enrichment).

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2016 (43) STR 280 (Tri.-Mum.) JSW Steel Coated Products Ltd vs. CCE, Thane II

CENVAT credit eligibility for input services and capital goods for generation of electricity which is partly consumed captively and partly sold to MSEB.

Facts
The Appellant is a manufacturer of excisable goods and had installed power plant for generating electricity. Some proportion of electricity generated was consumed captively and balance was sold. CENVAT credit on capital goods was rejected on the ground that they were used for the sale of electricity. Further, in view of non-maintenance of separate records for captive consumption and sale of electricity, demand was raised for payment on value of electricity sold vide Rule 6 (3) of CENVAT Credit Rules, 2004. It was argued that when exclusively used for exempted production CENVAT credit on capital goods is not available. Further, CENVAT credit on input services was taken at the end of the month having regard to the actual captive consumption and therefore, proper records were maintained and therefore, CENVAT credit was not deniable and no payment was required to be made as per Rule 6 (3).

Held
Relying on the decision of H.E.G. Ltd. 2012 (275) ELT 316 (Chhattisgarh), it was held that since capital goods were not exclusively used in electricity sold, CENVAT credit cannot be denied. Further CENVAT credit was not availed on input services used in generation of electricity sold and therefore, relying on the decision of Hon’ble Supreme Court in case of Maruti Suzuki Ltd. 2009 (240) ELT 641 (SC), payment was not required to be made under Rule 6 (3).

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Res – judicata – Not apply in tax matter – Each assessment year gives rise to a separate cause of action: Capital Gain or business income – Sale of Shares

Veena S. Kalra vs. The Assistant Commissioner of Income tax & anr. [ Income tax Appeal no 2437 of 2013 dt : 07/06/2016 (Bombay High Court)].[ACIT- Circle 16(1) vs. Veena S. Kalra. [ITA No. 2403/MUM/2012 ; Bench : F ; dated 10/07/2013 ; A Y: 2008- 2009. Mum. ITAT ]

The assessee is an individual and filed the return declaring the total income of Rs. 3.16 crore. Assessee is engaged in the business of dealing in derivatives and F&O. The return was revised u/s 139(5) of the Act making downward revisions of his income to Rs. 2,78,55,600/-. In the revised return of income, assessee made a significant revision qua the STCG from Rs. 2,54,92,016/- to Rs 2,17,24,104/-. Thus, as per the revised return of income, STCG was Rs.2,17,24,104/-; income from other sources is Rs.1,70,071/-; business income was Rs. 60,03,269/-. The dividend income declared was Rs. 9,68,732/- and the LTCG was Rs. 8,65,373/-. During the assessment proceedings, AO raised the issue of treating the STCG as business income of the assessee. Assessee submitted the following reply which is as under:

(a) All investments had been made from own funds, and there were borrowed funds

(b) She had earned dividend as well as LTCG, which show the intent

(c) In the AY 2006-07 & 2007-08, the assessee had returned STCG as well as LTCG and classified her share holdings as “investment” and not as “Stock in Trade”. An investment register was maintained on FIFO basis.

(d) The total number of scrips were 31, number of purchase transactions were 70 and sale were transactions 104. Number of days on which transactions took place are less than 150. Therefore, the activity could not be termed as trading.

AO reasoned that the assessee, who wasalready in the business of dealing in shares, derivatives, Futures & Options and dealt with the common scrips qua the capital gains transactions, is only segregated certain shares/ business profits as short term Capital Gains for the benefits of the tax rate. Further, he distinguished the decision relied upon by the assessee. Finally, relying on the decision of the Tribunal in the case of Smt. Harsha N Mehta vs. DCIT in ITA No.1859/Mum/2009, dated 17.7.2010 and also keeping in view the contents of Circular No.4/2007 of the CBDT, dated 15.6.2007, AO treated the impugned STCG of Rs. 2,17,24,104/- as business income of the assessee.

In appeal, the CIT(A) sustained the order of the Assessing Officer to the extent of Rs.21.50 lakh holding that the same was assessable as business income in respect of 11 scrips as the assessee had re-entered the same after selling it. However, the balance amount of Rs.1.96 crore was held to be as short term capital gain.

The Revenue carried the issue in appeal to the Tribunal. The Tribunal on a detailed analysis of the transactions which were carried out by the assessee concluded that for the subject AY , the entire amount of Rs.1.96 crore is also to be brought to tax under the head ‘business income’. Thus, the entire amount of Rs.2.17 crore i.e. Rs.21.50 lakh + Rs.1.96 crore was to be brought to tax as business income. The Tribunal held that the intention of the assessee while doing business in shares was to make quick profit and not hold the shares as investment. It was observed that during the subject AY the assessee had purchased shares valued at Rs.25.37 crore and sold shares valued at Rs.28.92 crore. Thus indicating that what was purchased during the year had been sold in its entirety during the same year. The stock turnover ratio and capital turnover ratio is recorded in the order at 1:16 and 1:10 during the subject AY . On these facts, the Tribunal allowed the Revenue’s appeal treating the entire amount of Rs.2.17 crore as income from trading in shares i.e. business income.

Being aggrieved , the assessee filed a appeal before High Court. The contended that for the earlier and subsequent AY ’s the Revenue has accepted the assessee’s claim of trading in shares as being an action of investment resulting in short term capital gains. Thus, invoking the decision of this Court in CIT vs. Gopal Purohit 336 ITR 287 it was submitted that consistency has to be followed and in this year also the profits made on account of purchase and sale of shares should be taxed under the head ‘short term capital gain’.

The Hon. High Court held that the order of the Tribunal has elaborately dealt with the contention of the assessee that as for the earlier and subsequent AYs profits arising on account of purchase and sale of shares has been classified as short term capital gains, the same should be done in the subject AY . The Tribunal on analysis of the facts noticed that the facts in the subject AY are different from the facts in the earlier and subsequent AY ’s. Particularly the number of transactions in shares were in single or double digits in the years sought to be compared while transactions of purchase and sale of shares is of the magnitude of 346 transactions in the subject AY . Further differences in facts was also brought out in a chart in the impugned order on 13 parameters between the subject AY and the earlier and subsequent AY ’s. In these circumstances the order was upheld . It was further held that the rule of consistency would not apply in the present case as there was a change in facts existing in the subject AY . In fact the decision in the case of Gopal Purohit (supra) relied upon by the assessee itself proceeds on the basis of no change in facts and circumstances in the two years. It is a settled principle of law that res judicata does not apply in tax matters However, as held by the Apex Court in BSNL vs. Union of India 282 ITR 273 the orders passed in the earlier AY s are generally accepted and followed not on the basis of principle of res judicata but on the doctrine of precedence so as to ensure that on identical facts in the absence of change in law the Revenue is bound to follow the view taken earlier.

Thus, the Appeal of assessee was dismissed.

shailesh.kwebmaker

[2016] 69 taxmann.com 101 (New Delhi-CESTAT) – Intertool Engg. & Trading Co. (P.) Ltd. vs. Commissioner of Central Excise, Delhi-II

Credit of capital goods used for both the activities of job-work as well as for manufacturing dutiable products is admissible in terms of Rule 6(4) of CCR, 2004. Further once capital goods are transferred under cover of invoice, transferee is not required to prove the correctness of CENVAT credit availed by transferor.

Facts:
Appellant received a crane from its sister concern under a cover of an invoice which showed its depreciated value. Appellant took CENVAT credit of the entire duty which was paid by its sister concern at the time of acquisition of the crane. Department contended that CENVAT credit available to the Appellant is restricted to duty payable on depreciated value mentioned in the invoice. It was submitted that if sister concern has paid any excess duty, said issue is required to be taken up at supplying unit’s viz. sister concern’s end. Further, CENVAT credit in respect of another machine was denied by revenue contending that such machine is used exclusively for job work undertaken by Appellant and not used for manufacture of dutiable goods.

Held
As regards availment of CENVAT credit on acquisition of crane, Tribunal noted that in terms of Rule 3(5) of the CENVAT Credit Rules, 2004, if the capital goods were removed as such i.e. as capital goods, the sister concern of the Appellant was required to pay amount equivalent to CENVAT credit availed in respect of such crane. Once the duty paid on the crane was shown in the invoice, CENVAT credit was available to that extent. Further it was held that as regards question of correctness of payment of duty by its sister concern, such issue shall be dealt with by the authority having jurisdiction over the supplying unit. As regards availment of credit on capital goods used for job-work, the Tribunal noted that since it was clarified that machine used in its manufacturing unit was used for job-work as well as in the manufacture of dutiable goods and balance-sheet figures showed both charges received from job-work activities and sales made of dutiable goods, the Tribunal held that CENVAT credit was undoubtedly available in respect of such machine. Accordingly credit was allowed.

Note: Readers may also refer to the decision in the case of [2016] 69 taxmann.com 331 (New Delhi-CESTAT) – Shree Rajasthan Syntex vs. Commissioner of Central Excise, Jaipur-II which deals with entitlement of CENVAT credit on capital goods used initially towards manufacture of exempted goods and subsequently towards manufacture of dutiable goods. Amendment to Rule 6(4) of CCR, 2004 w.e.f. 01/04/2016 provides that if capital goods are used exclusively in manufacture of exempted goods/provision of exempted services for a period of two years from the date of commencement of commercial production or provision of service, or as the case may be installation of capital goods (if such capital goods are received after the date of commencement of commercial production), no CENVAT credit would be available, even if, after expiry of two years, such capital goods are used in manufacture of dutiable goods or provision of taxable services.

shailesh.kwebmaker

Representation In Respect Of Direct Tax Dispute Resolution Scheme 2016

1.Eligibility

1.1 Partial disputed amounts
Issue
Where part of the demand determined for a year is undisputed and remains unpaid, it is not clear as to whether the declarant is entitled to waiver of interest/ penalty on the total outstanding amount or can the penalty be levied on the undisputed amount?

In this regard useful inference can be made to Instruction u/s 96 of the Finance (No. 2) Act, 1998. The Question 8 of Clarification 1 of the Circular: Samadhan 2/98 dated 3-9-1998 under Kar Vivad Samadhan Scheme, 1998 [KVSS] is reproduced:

    “Q 8. Where only certain items of addition are in dispute can the assessee take advantage of the Scheme for the entire demand of the year?

    Ans. Yes. The Scheme is applicable to the entire demand of an assessment year.”

Suggestion
It is suggested that necessary clarification in this regard should be issued keeping in view the intention and the objectives to be achieved in this scheme.

1.2 Relevant cutoff date
Doubt have arisen as to whether a declaration can be filed in a case where assessment order was passed on 15th February 2016 and appeal filed on 1st March 2016 within the due date?

In respect of an appeal filed after 29th February 2016 but within the time limit specified u/s 249 of the Act, the non-eligibility of making declaration under the Scheme may lead to discrimination.

Suggestion
It is suggested that necessary clarifications in this regard be issued.

2.Refund of Interest and Penalty
Issues
2.1If the demand raised on assessment has been paid / adjusted and interest u/s 220 of the Act has also been charged/paid, whether the declarant will be entitled to refund of the interest u/s 220 since u/s 202(I)(a) of FA, interest is payable only upto the date of assessment?
Section 206 of the Scheme states that any amount paid in pursuance of a declaration made u/s 202 of the FA shall not be refundable under any circumstances. However, in the cases referred in 2.1 above, the interest / penalty etc paid is not in pursuance of a declaration u/s 202, and hence refund should be granted in such cases.

Suggestion
It is suggested that necessary clarification and instructions in this regard should be issued, considering the objects and intent of the Scheme.

3. Penalty appeal pending before CIT (A) and quantum appeal pending before ITAT

3.1 Where the appeal against levy of penalty is pending before the CIT(A) and the quantum appeal is pending before the ITAT or higher forum, whether the ITAT appeal has to be given up in order to avail of the benefit under the Scheme for the penalty?

There are no provisions in the scheme to suggest that.

Section 203(2) provides that when declaration is in respect of tax arrear, consequent to such declaration the appeal filed before CIT (A) would be deemed to be withdrawn. The said deeming fiction does not refer to appeal before any other level / any other appeal other than the appeal for which declaration is made under the Scheme.

3.2 Further, in the above referred cases whether the declarant is required to pay only taxes or interest u/s 220 of the Act? The relevant Clause 3 (b) and (c) of Form 1-Part A relating to penalty order prescribed under Rule 3(1) of the Direct Tax Dispute Resolution Scheme Rules, 2016 [the Rules] seems to lack clarity in this regard.

3.3 In case of penalty which is not relatable to income such as penalties under sections 271A, 271B, 271BA, 271BB, 271D, 271E etc, whether the quantum appeal pending has any relevance? Clause 3 of the Declaration Form 1-Part A regarding penalty appeal, requires details of tax and interest determined on total income and outstanding demand as on the date of declaration, to be given. As per clause 3(g), the amount payable u/s 202(1)(b) would include outstanding demand plus 25% of minimum penalty.

Suggestion
It is suggested that necessary clarifications in this regard should be issued.

4. Determination of outstanding demand in cases where rectifications are pending
For the purpose of determining the “tax arrear”, what would be the manner of determining the ‘demand outstanding’ where rectification application is pending for non-grant of credit for TDS / tax payments or other mistakes apparent from record?

Suggestion
The demand outstanding should be determined after granting credit for legitimate TDS/ tax payments and rectifying other mistakes apparent from record.

It is suggested that necessary clarification in this regard should be issued.

5. Specified Tax
Specified Tax is defined u/s 201(1)(g) as tax determined in consequence of retrospective amendment and relating to a period prior to the date of assent of President for amendment which is under dispute in respect of which such tax is pending as on 29th February 2016.

5.1 If the dispute is pending before the ITAT or higher forums and part of the demand is not on account of retrospective amendment but in the nature of “tax arrear”, not eligible for declaration since it is not pending before CIT(A)). Can a declaration under the Scheme be made only in respect of specified tax by withdrawing the relevant grounds in appeal and continue the litigation for the balance demand relating to other issues?
Or can the assessee, if he so wishes, take benefit of the Scheme in respect Specified Tax as well as tax determined in respect of other issues in the appeal? In this regard useful inference can be made to Instruction u/s 96 of the Finance (No. 2) Act, 1998, Question 8 of Clarification 1 of the Circular: Samadhan 2/98 dated 3-9-1998 under KVSS, which is reproduced in point 1.2 above.

Suggestion
It is suggested that necessary clarification in this regard should be issued.

5.2 The undertaking u/s 203 of FA, in Form 2 refers to waiver of rights in respect of Specified Tax. Is there any procedure to be followed for waiving rights and timelines for the same?

Suggestion
It is suggested that necessary procedures and time lines in respect of the same should be laid down.

5.3 If the declaration under the Scheme is not accepted can the dispute be reinstated?

Suggestion
Section 203(5) of the FA lays down criteria where the declaration shall be presumed to be withdrawn and the pending proceedings against the declarant shall be deemed to be revived.

It is suggested that necessary clarification in this regard should be issued.

5.4 The Form of declaration u/s 203 of FA, Form 1-Part B-Clauses 4 to 7 – apparently refers to `amount payable as per assessment order’ i.e. to entire demand and not relating to specified tax only.

Suggestion
It is suggested that necessary clarification in this regard be issued.

6. Dilution of Assessee’s claim
Whether filing of the declaration under the Scheme, would result in diluting the claim of the assessee on similar issues in subsequent years assessment proceedings?
In this regard useful inference can be drawn from the following:

i. Instruction under section 96 of the Finance (No. 2) Act, 1998, Question 21 of Clarification 2 of the Circular Samadhan 3/98 dated 7-10-1998 under KVSS which is reproduced as under:

“Question 21: By filing declaration under Samadhan Scheme for one assessment year, does the taxpayer forego his right of appeal on the same issue in other assessment years?

Ans.:No. The order under the Samadhan Scheme does not decide any judicial issue. It only determines the sum payable under the Scheme with reference to tax arrears.”

ii. Clarification 5 vide Letter: Do [No. 3372 – CH (DT)/98, dated 22-12-1998] under KVSS which is reproduced as under:
“Your understanding that, if an assessee comes under the Kar Vivad Samadhan Scheme for some years this fact will not amount to a decision of the Issue involved and therefore no prejudice will be caused to the declarant in respect of that issue for any other assessment year in any other proceeding which might be pending under the Income-tax Act, is correct. The Board has already clarified this point in a reference which had been received earlier.”

iii. Clarification 6 vide Letter: Dated 22-12-1998 under KVSS which is reproduced as under:

It has already been clarified in Question No. 21 and answer thereto issued by the Government with reference to Kar Vivad Samadhan Scheme, 1998 that the order passed by designated authority under the Scheme does not decide any judicial issue. It only determines the sum payable under the Scheme with reference to tax arrears. If the assessee goes for Samadhan Scheme for some years, the decision in other years not covered under Samadhan will not get prejudiced either against the assessee or against the revenue, even though the issues remain the same.

Suggestion
It is suggested that necessary clarification in this regard be issued.

7. Waiver of interest and penalty in Form 3 – Certificate of Intimation

Section 204(1) of the Scheme provides that the designated authority shall, within a period of 60 days from the date of the declaration, determine the amount payable by the declarant in accordance with the provisions of this Scheme and grant a certificate in such form as may be prescribed, to the declarant setting forth therein the particulars of the tax arrear or the specified tax, as the case may be, and the sum payable after such determination.

Rule 4 of the Rules provide that the designated authority shall issue a certificate referred to in sub-section (1) of section 204 in Form 3.
On an analysis of Form 3, it is observed that the Certificate does not include a waiver of interest and penalty.

Suggestion
It is suggested that the Certificate should specifically include a waiver of interest and penalty.

8. To cover appeals pending at any Forum
The object of the Scheme is to reduce huge backlog of appeals and to enable the Government to recover its dues expeditiously. Further, a lot of time, cost and energy of the Revenue are being blocked as also wasted in pursuing a large number of pending appeals before various appellate forums.

The present Scheme covers only the appeals pending before the first Appellate Authority in case of tax arrears and only limited issues with respect to specified tax pending before any Appellate Forum. As can be seen, restricting the scope of the Scheme to the above referred pending appeals runs contrary to the objects and intent of formulating the Scheme.

Suggestion
In order to reduce pending litigation to a great extent as also to unlock the revenue blocked due to such pending appeals, the Scheme may be made applicable to tax arrears in all the appeals pending before any Appellate Forum.

9. Appeals set aside by higher appellate authority with a direction to CIT(A) to decide the appeal denovo
The present Scheme requires the pendency of appeal before the first appellate authority as on February 29, 2016. However, the Scheme does not cover a case where appeals are set aside by a higher appellate authority to CIT(A), in case of the following instances:

a. Where a higher Appellate Authority like Income Tax Appellate Tribunal (“ITAT”), High Court, Supreme Court has set aside the order of the first Appellate Authority with directions to hear the entire appeal denovo;

b.Where the higher Appellate Authority has set aside some of the grounds of appeal to the file of the first Appellate Authority to decide the same denovo;

c.Where the first Appellate Authority decided the appeal based on the grounds of appeal filed originally without admitting additional grounds of appeal raised by the assessee in the course of the appellate proceedings and the ITAT has set aside the appeal to the file of the first Appellate Authority to hear the additional grounds of appeal and decide the same on merits;

d.Where the higher Appellate Authority has passed the order on or before February 29, 2016 whereby it has set aside the appeal to the file of the first Appellate Authority to decide the same denovo but the order with respect to same has not been received by the declarant assessee or the first appellate authority on or before February 29, 2016;

e.Where the higher Appellate Authority’s order has been received on or before February 29, 2016 by the assessee whereby the appeal is set aside to the file of first Appellate Authority to decide the same denovo, but, the first Appellate Authority was not intimated about such order by the assessee; and

f.As an extension to (e) above, the first Appellate Authority was intimated about the order of higher Authority for setting aside the same to his file to decide the appeal denovo, but the first Appellate Authority has not initiated any action.

Suggestion
If all such appeals are pending before the first Appellate Authority on or before February 29, 2016 then, the same may be considered as fit appeals for the purposes of taking benefit of the Scheme.

10. Determination of tax and interest
The Scheme covers tax, interest and penalty as per assessment order and penalty order respectively. However, it does not cover following:

Where the First Appellate Authority has decided the appeal with respect to grounds of appeal filed by the assessee originally without admitting the additional ground of appeal raised by the assessee in the course of appellate proceedings and subsequent to such order, the assessing officer passes an order giving effect to the order of first Appellate Authority which results in reduction of tax, interest, vis-a-vis penalty. Now, on further appeal by the assessee, the ITAT directed the first Appellate authority to hear the additional grounds of appeal on merits. In this case, the reduced tax and interest based on order giving effect to the order of the first Appellate Authority needs to be considered instead of figures as per assessment order. Similarly, the penalty to that extent will get reduced, hence, penalty as per penalty order should not be considered in this kind of cases.

Suggestion:
The above situation requires attention and needs to be clarified.

11. When a person is barred from making declaration under the Scheme:
Clause (c) of section 208 of the Finance Act, 2016 provides that prosecution under a specified enactment must be instituted on or before filling of declaration by the declarant to bar such person from making declaration under the Scheme. However, clause (b) of section 208 does not stipulate as to when order of detention should be made i.e. such order should be before declaration under the Scheme or any time thereafter.

Suggestion
Clause (b) of section 208 should specify as to when the detention order should be made. It is suggested that it should be made before filling declaration under the Scheme.

shailesh.kwebmaker

Direct Tax Dispute Resolution Scheme, 2016

13^th
September, 2016

Ms Rani Singh Nair

Chairperson

Central Board of Direct Taxes,

Ministry
of Finance

New
Delhi.

Dear
Madam

Sub:
Direct Tax Dispute Resolution Scheme,
2016

We
write to you on behalf of members of our respective organisations and also on
behalf of the citizens of India at large.

We
wholeheartedly support the initiative of the Government of India for reducing
the huge backlog of litigation by providing a window to the litigants to settle
the matter by paying some amount of tax/penalty/interest and withdraw the
pending appeal(s).

In
principle, the Direct Tax Dispute Resolution Scheme, 2016 is a step in the
right direction for achieving the stated objective. In order to make the Scheme
more successful and thereby reduce the backlog of pending appeals as well as
unblock the massive amounts of disputed tax demands in the country, in the
interest of the tax paying community and in the larger interest of the nation,
we would like to drawn your kind attention to certain issues that arise from
the Scheme. These issues have not been addressed in the clarifications issued
on 12^th September.

We
earnestly request you to kindly issue clarifications on these issues at the
earliest. Upon receipt of the same, we shall give it extensive publicity
amongst our members as well as amongst the tax paying community.

Assuring
you and the Government of India our fullest support in the massive nation
building exercise that is in progress,

We
remain,

Yours
sincerely,

Chetan
M. Shah Raju
C Shah

President,
President,

Bombay
Chartered Accountants’ Society Chartered Accountants’ Association – Ahmedabad

Hitesh
Shah Raghavendra
Puranik

President President

Chamber
of Tax Consultants Karnataka
State Chartered Accountants’ Association

Dhruv Seth

President,

Lucknow
Chartered Accountants’ Society

shailesh.kwebmaker

Guthka, Whether Tobacco?

Introduction

Under
Sales Tax Laws, the rate of tax depends upon classification
of the given product under a particular entry. There are certain entries which
are with reference to classification under Central Excise Tariff act etc. in
other words, the entry may provide that if the item is covered by a particular Excise
Tariff, then the said item may be liable at nil rate or concessional rate.

under the
MVAT Act, there
are several such
items which are classified in different entries with reference to
classification under Central Excise Tariff.

Recent controversy about classification of Guthka:

After
coming into effect of the Maharashtra Value Added Tax Act, 2002, new
classification came into effect. Amongst others, exempted goods are covered by
entries in Schedule A and other taxable items are classified under Schedule B,
C, D and E. there is also an entry for tobacco (modified from time to time).
The controversy about classification of ‘guthka’ prevailed for initial two
years i.e. 2005-06 & 2006-07.

The
Hon. Bombay High Court had an occasion to decide such dispute in case of Ghodawat Energy Pvt. Ltd. Writ Petition No.
8572 of 2015 dt. 4.10.2016.

In
the above case, the dealer, m/s. Ghodawat energy india Pvt. ltd. Was classifying its item ‘guthka’ under above
entry as tobacco. However, the department, based on explanation, held the item
as not covered by Schedule A and therefore levied tax under residuary entry E-1
at 12.5%.

To
challenge the Constitutional validity of levy of tax as well as to contend that
explanation is not retrospective and can apply only from 1.2.2006, the above
Writ Petition was filed before the Hon. Bombay High Court.

The
facts noted by the Hon. High Court in the judgment are as under:

“3.
The writ petition is filed by contending that the petitioner in this writ
petition is a private limited company, incorporated and registered under the indian
Companies act, 1956, having its registered office at the address mentioned
herein above.

4.
Respondents nos.1 to 4 are the authorities exercising powers together with the
State itself under the Maharashtra Value Added
Tax Act, 2002 (for short “MVAT”).

5.
The petitioner, inter-alia, engages itself in the business of manufacturing pan
masala. During the period under dispute, namely, financial year 2005-2006, the petitioner has
manufactured and sold pan masala with or without tobacco. The petitioner claims
that it has discharged its vat liability under the MVAT act. The petitioner
manufactures pan masala not containing tobacco under the brand name “Star Pan
masala” classifiable under tariff heading 21069020 of the Central Excise Tariff
act, 1985. The petitioner claims that it has discharged its vat liability of
12.5% on the sale of such pan masala not containing tobacco. At annexure-a
collectively are copies of invoices for sale of such pan masala.

6.
The petitioner also manufactured and sold pan masala containing tobacco,
commonly known as “Guthka” / “mawa” under various brand names. That is
classifiable under tariff heading 24939990 of the Central Excise Tariff act,
1985 during the relevant period. The petitioner has claimed exemption on
payment of vat on sale of such pan masala containing tobacco under Schedule
entry A-45 of the MVAT act, 2002. The relevant period is 1st April, 2005 to
31st march, 2007.

7.
The said pan masala containing tobacco
is described in column (2) of the first
Schedule to the additional duties of excise (Goods of Special
importance) act,1957 (for short “ADE act, 1957”). during the period 1st April,
2005 to 28th February, 2006, the petitioners have discharged ade at
18% on the sale of such pan masala containing tobacco.

8.For
the period 1st April, 2005 to 28th
February, 2006, therefore, the petitioners have claimed exemption from
payment of vat on sale of such pan masala containing tobacco under Schedule
entry A-45 of the MVAT act, 2002.

9.
Entry 45 of the Schedule a to the MVAT
Act, 2002, as introduced, reads as under:

Sr. no.

name of the

Commodity

Conditions
and ex- ceptions

Rate of tax (%)

date
of
effect

Sugar, fabrics

Nil %

1-4-2005

and tobacco as

to 31-1-

described from

time to time in column 3 of the First schedule

to the additional duties of excise
[Goods of Spe- cial Importance) act, 1957.

2006

10.
However, in exercise of the powers
conferred u/s. 9(1) of the MVAT act, 2002, the State Government of Maharashtra,
vide notification no. VAT/1505/Cr-382/

Taxation-1 dated
21st January, 2006,
amended the Schedule a and
Schedule C with effect from 1st February, 2006, by inserting explanation to
Schedule entry A-45 as under :

“Explanation-
for removal of doubts, it is hereby declared that tobacco shall not include Pan
masala, that is to say, any preparation containing betel nuts and tobacco and
any one or more of the following ingredients, namely :

(i) Lime,
and

(ii) Kattha (Catechu)

Whether
or not containing any other ingredient such as cardamom, copra and menthol.”

11. With effect from 1st march, 2006, pan
masala containing tobacco falling under 24039990 of the first Schedule to ade
act, 1957, was liable to additional duty of excise @ 18% under the said
Schedule. However, the said tobacco product was exempt from payment of
additional duty of excise in view of exemption notification no.11/2006-C.E. dated
1st March, 2006.

12.
Simultaneously, the rate
of basic excise
duty leviable on such tobacco products under Chapter 24 of the Central Excise
Tariff act, 1985, was suitably increased with no change in total excise duty.
In other words, practically there was no exemption from ADE Act, 1957.

13. Consequently, with effect from 1st march,
2006, on sale of pan masala containing tobacco, petitioners paid increased
amount of central excise duty. It continued to avail exemption from payment of
vat vide entry A-45 of the MVAT for the period from 1st March, 2006 till 31st
march, 2007.

14.
Since the said pan masala containing tobacco is
described in column
(3) of the
first Schedule to the additional duties of excise (Goods of
Special importance) act, 1957, during the relevant period of time, the
petitioners have discharged ade at 18% on the sale of such pan masala
containing tobacco. Illustrative copies of the invoices for sale of such pan
masala containing tobacco are annexed collectively as annexure-B of the paper
book.”

In
the judgment, arguments
of both the
sides have been elaborately
noted. on behalf of the petitioner, the
argument was that
since additional duties
of excise are applicable, no tax
can be levied as per entry a-45. It was also argued that since State Government
shares additional duties of excise, there is a Constitutional bar on levy of
sales tax. Judgment of hon. Supreme Court in case of Godfrey Phillips (India)
Limited & Anr. vs. State of Uttar Pradesh & Ors. (2005) 2 SCC 515 was
relied upon.

In
respect of retrospective effect of explanation, it was submitted that it is issued
under a delegated power and under such circumstances, there cannot be power to
issue notification with retrospective effect.

On
behalf of department, it was submitted
that sharing of additional duties is a matter between State and Centre and it
cannot affect the Constitutional right of a State to levy tax.

The
explanation was only for clarification of doubt and hence it was submitted that
it had retrospective effect.

The
Hon. High Court observed as under:

“63. The
constitutional provisions,so far referred to, our mind do not indicate
that the State is denuded, much less divested of its power to levy and impose a
tax on sale or purchase of goods. Therefore,
Schedule VII list II entry 54 authorises the State legislature to impose taxes on sale or purchase of goods
other than newspapers, subject to the provisions of entry 92A of list I.

64.
We have
no hesitation in
agreeing with Mrs. Jeejeebhoy when she submits that these
constitutional provisions create no
embargo on the
State’s power to impose tax on
the sale or purchase of pan masala containing tobacco.

68.
A bare perusal of this would indicate that the doubts were sought to be
removed. The doubts whether tobacco would include pan masala. That has been
clarified by declaring that tobacco shall not include pan masala i.e. to say
any preparation containing betel-nuts and tobacco and any one or more of the
ingredients in sub- clause (1) to clause (10). to be precise, the Government of
Maharashtra amended by the notification with effect from 1st February,
2006, Schedules a and C appended to the Maharashtra value added tax act
in terms of the powers conferred by section 9(1) of the MVAT act. That power is
of adding or modifying or deleting any entry in the schedule. The power is of amendment
of the Schedule as above and equally to reduce or enhance the rates of tax or
for specifying the rates of tax or for specifying the rates of tax, where nil
rates are specified.”

Conclusion

Thus,
the Hon’ble High Court rejected both the grounds and upheld levy from
retrospective effect. The classification of product under fiscal entries is a
complicated process. It appears that in respect of additional duties, the law
is still not settled and a clarification on such issues at the beginning of
classification will be more appreciated.

shailesh.kwebmaker

Taxability of Discounts/incentives

Preliminary

It
is widely known that, post introduction of negative List based taxation of
Services, the ambit of taxation of services has expanded manifold. the scope of ‘service’ and in particular as to
what constitutes “activity carried out for a consideration” and scope of
“declared services”, has been a subject of extensive deliberations. In this
write up, an attempt is made to discuss this aspect, with a recent ruling of
authority for advance ruling (Central excise, Customs & Service tax) [AAR
(CEST)]

Relevant statutory Provisions

Section
65B (44) of the Finance act, 1994
as amended (Act):

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

(a)
An activity which constitutes merely, –

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

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

iii)
A transaction in money or actionable claim;

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

Section 66E of the
act – Declared Services:

The
following shall constitute declared services, namely –

(e)
Agreeing to the obligation to refrain from an act, or to tolerate an act or a
situation, or to do an act.

Ruling of AAR (CEST) in AKQA media India (P) ltd. (2016) 55
GST 720 (AAR – New Delhi) (2016) 69
taxman.com. 390:

Facts in Brief

In
this case, applicant intended to carry out the activity of an advertising
agency (‘AA’), whereby it would provide professional services to its clients
(i.e. advertisers) in relation to placement of advertisements on various media.
Further, the applicant intended to charge commission from such clients as a
consideration for provision of its
services. While the applicant is to provide services only to advertisers,
depending on the quantum of its advertisements placed by the applicant on
various media, the applicant could be entitled to an incentive / volume
discount from the media owners (MO). The applicants propose to undertake two
business models, which are described hereafter briefly:

Proposed business model 1
– Placement of advertisement in traditional media on behalf of the advertiser
(Steps involved) [“BM 1”]:

Client
Contract

Preparation
of media Plan

Approval
of the media Plan

Issuance
of estimate by advertising agency

Issuance
of release order by advertising agency

Monitoring
of Campaign

Receipt
of invoice from media vendor

Raising
of invoice by advertising agency

Receipt
of volume discount

Proposed business model 2
– Buying and Selling of advertisement Inventory in non – traditional media, on
its own account (steps involved) [“BM 2”]

More
or less on similar lines as BM 1

under
proposed BM 1, while the applicant shall be appointed by its clients (i.e. the
advertiser) to provide services, will incidental receipt of incentives / volume
discounts from MO shall be considered to be providing a service, as defined
under the Act, to the MO and shall the same be liable to Service tax ?

under proposed
BM 2, while the
applicant shall buy and sell the media inventory on its own
account to the advertiser, will incidental receipt of incentives / volume
discounts from MO shall be considered to be providing a services as defined
under the Act, to the MO and shall the same be liable to service tax?

In
case, it is considered that the applicant is providing any service to the MO,
in the course of providing advertisement placement services to its client, then
on what value should the Service tax be applicable under the Act?

Submissions of Applicants

The
incidental receipt of incentives / volume discounts by the applicant from MO are
gratuitous payment not for providing services. No service tax is payable on
such incentives in as much as the applicant does not enter into any contract
for provision of service with the MO;

The
applicant places the order on behalf of the advertiser and the advertiser is
liable to pay the cost of the advertisement to the MO and the agency commission
to the applicant. The applicant pays service tax on the said agency commission;

No
‘service’ is provided or agreed to be provided by the applicant to the MO and
that the incentives / volume discounts are paid at the sole discretion of the MO
and there is no obligation, either contractual or otherwise, on the MO to pay
incentives / volume discounts to the applicant;

The
concerned issue has been examined by the CEST at in the case of Grey Worldwide
India (P.) Ltd. vs. CST [2015] 52 GST 1020 / (Mum. – CESTAT) wherein it was
held that no service tax is payable on such amount (i.e. incentives / volume
discounts) received by the AA from the
MO;

In
any event, once MO discharges service tax on the gross amount charged by them
to the advertisers and the applicant having discharged service tax on such
agency commission received,
no further service
tax is payable as
consideration for services
charged by the MO and the applicant has already suffered service
tax in full;

In
regard to the proposed BM 2, the applicant would be paying service tax on the
gross amount charged to the advertiser for the media inventory (except non –
taxable media such as print media) and the MO would charge the applicant
service tax on the gross amount charged to the applicant. any incentives /
volume discount received by the applicant from the MO post issuance of the
taxable invoice on the applicant for the gross amount charged to the applicant,
no service tax will be payable on the gross amount charged to the applicant on
the said incentive volume discount, as the service tax, at the first instance
will be paid on the gross amount charged to the applicant. The applicant, in
turn, will pay service tax on the gross amount charged by the applicant to the
advertiser.

Submissions of Revenue

As
far as proposed BM 1 is concerned, the volume discount received by the
applicant for the services provided to the MO is liable to service tax in as
much as the invoices from MO only mentions the name of the applicant, thus
there is contractual relationship for provision of service between the
applicant and mo. the entire amount
payable to MO in respect of media is to be paid by the applicant and the
applicant is to receive separate amount as consideration for the services
provided to the advertiser.

As
far as BM 2 is concerned, applicant is to sell media inventory on his own
account to the advertiser and in such a case, applicant needs to discharge
service tax liability on the total sale price invoiced to the advertiser. In
this BM 2 also, applicant is required to pay service tax on the amount received
from the MO treating the said amount as consideration for the services
provided.

Observations of AAR (CEST)

As
far as BM 1 is concerned, it is contended by the revenue that, the amount
received by the applicant from the MO is in the nature of consideration
received for the services provided and liable to service tax for following
reasons:

(i)
Invoices pertaining to transaction from MO only mention the name of the
applicant. Consequently, contractual relationship for provision of service
exists only between these two parties.

(ii)
Entire amount payable to MO in respect of space and time for media is payable
by the applicant.

(iii)
Applicant receives separate amount
as consideration for the service provided to the advertiser.

It is
noticed that “Step
7 (receipt of
invoice from media vendor”) of BM
1, clearly mentions that the MO raises its invoices for the cost of the media
inventory sold to the advertiser. Further, invoice will mention the name of
advertiser and also the name of the applicant, besides other details,
therefore, it is evident that the media
inventory is sold to the advertiser and not to the applicant. Also, Revenue is incorrect in stating that
invoice will only mention the name of the applicant. The submission of
revenue that the entire amount is payable to MO in respect of space and time
for media by the applicant is also incorrect. In Step 7 of BM 1, it has been
made amply clear that AA makes the payment for the media inventory to the mo,
on behalf of the advertiser after retaining its commission. It is further alleged
by the revenue that applicant receives separate amount as consideration for the
services provided to the advertiser. Step 8 of BM 1 mentions that the amount
received by the applicant from the advertiser is its fees / agency commission
plus service tax. It is to be observed
that the question raised by Revenue relating to BM 1 is based on incorrect
appreciation of facts.

In
respect of BM 2, it is contended by the revenue that the applicant sells media
inventory on his own account to the advertiser. In such case, applicant needs
to discharge service tax liability on the total sale price invoiced to the
advertiser. Applicant has confirmed that they would be paying service tax (if
any) on the gross amount charged to the advertiser for the media inventory (except
non – taxable media such as print media). Based on the above assumptions which
are factually incorrect, revenue has concluded that applicant is required to
pay service tax on the amount received from MO treating said amount as
consideration for services provided. The
question raised by the Revenue are based on incorrect appreciation of facts,
the subject question does not survive.

Revenue
further contended that as per section 65B of the act, ‘service’ has following
ingredients;

–
any activity

–
by one person for another

–
for consideration

And
in the present case, all 3 ingredients are satisfied, thus service provided to MO
by the applicant will be liable to service tax. Applicant submitted that they
will not carry out any activity for consideration. It is to be observed that in
the definition of ‘service’, there has to be nexus between activity and
consideration. In case, there is no nexus between the activity and
consideration, such an activity shall not
fall under the
definition of “service”, as the concept “activity for
consideration” involves an element of contractual relationship. This
relationship could be express or implied, for which the burden of proof would
be on the revenue. In the subject case,
no iota of the evidence has been produced before us by the Revenue to indicate
that there is an activity undertaken by the applicant, which resulted in MO giving
volume discount to the applicant, especially when the
choice of selecting
MO is reportedly with the advertiser and not with
the aa (applicant). Therefore, volume discount that could be received from the MO
by the applicant is not in relation to any activity undertaken by the
applicant. Therefore, it is not service.

Revenue
also argued that the applicant provides “declared   service”
in   terms   of
section   66E(e)   of the act,

It
is observed that there is no agreement or contractual obligation between the
applicant and the MO to give volume discount to the applicant by the mo. volume
discount is not fixed and is to be given at the discretion of mo. Further,
volume discount is gratuitous. Applicant /AA cannot claim it as a matter of
right. Therefore, applicant is not providing declared services to the MO.

Revenue
has raised another issue that applicant provides promotion or marketing
services to the MO by giving preferential treatment to the them, which provide
volume discounts / incentives. It is noticed that MO are not under any legal
obligation to pay volume discounts and it is purely discretionary on the part
of mo. Applicant is not carrying out any
activity to promote any mo’s business.
Further, which MO is to be engaged is the decision of the advertiser and not of
the applicant. Therefore, applicant
cannot be said to provide promotion or marketing services to MO.

Further,
in Grey Worldwide India (P.) Ltd. vs. CST [Order No. A /1337 – 1338 /
14/CSTB/C-1, dated 30-7-2014], tribunal
held that media
giving certain incentives
by way of volume discounts cannot be levied to service tax. Relevant extracts
from the Judgment are reproduced hereafter:

“Thereafter, at the end of the year, depending upon the
volume of business given by the advertising agency, the media gives certain
incentives by way of volume discounts / rate difference. There is no agreement
or understanding or any contract between the advertising agency and the media
for promotion of the media’s business activities. There is also no obligation
on the part of the media to Give these incentives.

These payments are made only as a gratuitous payment for
the advertisements placed
on the media. There is no contractual obligation between the advertising
agency and the media for provision of any services. In the absence of such a
contractual obligation, it is difficult to accept the Revenue’s contention that
on the incentives received, the appellant is liable to service tax under
“business auxiliary Services”. This was the view taken by this
Tribunal consistently in a series of decisions starting from Euro RSCG
advertising Ltd.”

Ruling:

In
view of the above, AAR (CEST) ruled as under:

In
proposed BM 1, while the applicant shall be appointed by its clients i.e. the
advertiser to provide services, incidental receipt of incentives / volume
discounts from MO shall not be considered to be providing a service, as defined
under the Finance Act, 1994, to the MO and shall not be liable to service tax.

In
proposed BM 2, while the applicant shall buy and sell the media inventory on
its own account to the advertiser, incidental receipt of incentives / volume
discounts from MO shall not be considered to be providing a service, as defined
under the Act, to the MO and shall not be liable to Service tax.

In
view of rulings 1 and 2 above, Question 3 becomes infructuous

Conclusion:

Despite
categorical ruling by AAR (CEST) based on examination of facts placed before
them, it is a common knowledge that at a practical level advertising agencies
are authorized by media owners. Hence, they could be regarded implied agents of
media owners who book advertisements on their behalf.

Further, acting as an agent itself, may
constitute activity for consideration inasmuch as the same could tantamount to
providing representational services. In light of the foregoing, it is felt that
conclusion arrived at by AAR (CEST) may have to be tested before a Court of
law.

shailesh.kwebmaker

Welcome GST Input Tax Credit Under GST Regime – Model GST Law

Invoice-to-invoice Matching

“An
important item in our agenda for 1986-87 is to initiate reform in the system of
indirect taxes. … In excise taxation a vexatious question which has been often
encountered is the taxation of inputs and the cascading effect of this
on the value of the final product. … . This scheme, which has been referred as
Modified Value Added Tax (MODVAT) scheme … allows the manufacturer to
obtain instant and complete reimbursement of the excise duty paid on
the components and raw materials. … Introduction of MODVAT will decrease the
cost of the final product considerably through the availability of instant
credit of the duties paid on the inputs and consequential reduction of interest
costs. The MODVAT scheme will be in force from 1st March, 1986.”

– Shri V. P. Singh, union minister of finance,
on introducing the union Budget for 1986-87

Instant
credit was the cardinal principle when MODVAT scheme was first introduced in
1986. Under the Central excise law, the
credit has been available instantly on receipt of goods in the premises of the
manufacturer. Under the State-vat laws
also, credit is available to the dealer on the purchase of goods. under the
service tax law, this cardinal principle is followed currently, subject to
specified condition viz. payment of invoice is made within specified period.
However, under the proposed GST regime,
input tax credit would not be instant; it would be subject to
‘invoice-to-invoice matching’. The
invoice-to-invoice matching requires the details of the inward supply of
the recipient to be matched with that of corresponding details of the outward
supply of the supplier; so as to claim input tax credit in respect of invoices
relating to inward supply.

Global
leader for indirect taxes of a large accounting firm was recently quoted
saying, “Invoice-to-invoice matching under the proposed goods and services tax
in India will make it harder for the cash economy and other parts of the world
will soon like to emulate this feature. India is the only country that is doing
it (invoice-to-invoice matching). This is unique ….people will to comply or
they will fall out of the GST chain.
Only those who play in the cash economy will feel the pressure as they
will lose credit. Is it the right time to do as it’s a new tax.”

Missing
trader fraud (also known as missing trader intra- Community fraud) within the
european union (eu), abusing the vat rules on cross-border transactions within
the eu or the ‘missing trader’ fraud as seen in the case of Mahalaxmi Cotton
Ginning Pressing and Oil Industries vs. The State of Maharashtra & Others
51 VST 1 (Bom.) could also be the added reasons for this proposed change.

The
recommendations in the report of the technology advisory Group for unique
Projects, january 2011, included that the Common GST Portal would also act as a
tax booster, matching the input tax credits in the returns to detect tax
evasion. Hence, this change is being considered and designed since 2011. The businesses in India, however, are still
not in a position to assimilate the proposed change and the change is perceived
as inconceivable; possibly in view of the current practice and mind frame to
take credit instantly.

The
Common GST Portal created and managed by
GSTn is suppose to do this matching on the basis of invoice level data filed as
part of return by all taxpayers, including for inter-state supplies.

Detailed
provisions are there in the model CGST / SGST law to deal with situations –

-Where
the input tax credit claimed by the recipient in respect of an inward supply is
in excess of the tax declared by the supplier for the same supply (Section 29);

–
Where the input tax credit claimed by the recipient in respect
of an inward
supply is not
declared by the supplier
as outward supply
in his valid
returns (Section 29);

–
For duplication of claims of input tax credit (Section 29);

–
Reduction of input tax credit by the recipient where the output tax is reduced
by output supplier by issuing a credit note (Section 29A).

Manner of Taking input Tax credit

(Section 16 of the model CGST / SGST law)

“Input
tax credit” is defined in Model CGST / SGST Law to mean credit of ‘input tax’.

“input
tax” in relation to a taxable person, means the {iGST and CGST}/{iGST and
SGST} charged on any supply of goods and/or services to him which are used, or
are intended to be used, in the course or furtherance of his business and
includes the tax payable under reverse charge mechanism.

It
is key to note that though the law has defined the terms‘ input’, ‘input
service’ and ‘capital goods’, these terms have not been used in the definition
of ‘input tax’ / ‘input tax credit’. “input tax” is the tax charged on any
supply of goods and/ or services and it is not a tax charged on ‘input’ /
‘input services’ / ‘capital goods’.
Hence, wherever the provision, in model GST law, deals with input tax credit, it would have to
be read currently in the context of supply of goods and/ or services. Wherever the model GST law
has referred to input / input service / capital goods with reference to ‘input
tax credit’, either that should get rectified in the final law in favour of
goods and/or services or the definition of ‘input’, ‘input service’ and
‘capital goods’ should be revisited considering one of the objects of GST to remove cascading effect of taxes.

Every
registered taxable person is entitled to take credit of input tax admissible to
him, subject to the followings:

-He
is in possession of a tax invoice, debit note, supplementary invoiceor such
other taxpaying document as may be prescribed, issued by a supplier registered
under the GST law;

–
He has received the goods and/or services (where the goods are received in lots
or instalments, upon receipt of the last lot or instalment) – for this purpose,
it shall be deemed that the taxable person has received the goods where the
goods are delivered by the supplier to a recipient or any other person on the
direction of such taxable person, whether acting as an agent or otherwise,
before or during movement of goods, either by way of transfer of documents of
title to goods or otherwise;

–
The tax charged in respect of such supply has been actually paid to the credit
of the appropriate Government, either in cash or through utilisation of input
tax credit admissible in respect of the said supply; and

–
He has furnished valid returns, as required

In
case the goods and/or services are used partly for business purposes / taxable
supplies and zero-rated supplies and partly for other purposes / non-taxable
supplies and exempted supplies, input tax shall be restricted to so much as it
is attributable to business purposes / taxable supplies and zero-rated
supplies. The manner of attribution for such purposes would be prescribed.

The
input tax credit in respect of any invoice needs to be taken before

-Filing
of the return u/s. 27 for the month of September following the end of financial
year to which such invoice pertains or

-Filing
of the relevant annual return whichever is earlier.

Negative list for input Tax credit

Input
tax credit will not be available in respect of the following (Section 16(9) of
the model CGS / SGST law):

-Motor
vehicles, except when they are supplied in the usual course of business or are
used for providing the following taxable services

(i) Transportation of passengers, or

(ii) Transportation of goods, or

(iii) Imparting training on motor driving
skills;

-Goods
and / or services provided in relation to food and beverages, outdoor catering,
beauty treatment, health services, cosmetic and plastic surgery, membership of
a club, health and fitness centre, life insurance, health insurance and travel
benefits extended to employees on vacation such as leave or home travel
concession, when such goods and/or services are used primarily for personal use
or consumption of any employee;

– Goods and/or services acquired by the
principal in the execution of works contract when such contract results in
construction of immovable property, other than plant and machinery;

–
Goods acquired by a principal, the property in which is not transferred
(whether as goods or in some other form) to any other person, which are used in
the construction of immovable property, other than plant and machinery;

–
Goods and/or services on which composition tax has been paid; and

–
Goods and/or services used for private or personal consumption, to the extent
they are so consumed

–
Capital goods, where depreciation is claimed under the income tax act, 1961 on
the tax component of the cost of such capital goods[the restriction specified
herein is not on all goods but only on ‘capital goods’; capital assets and
capital goods, both are defined separately and have different meaning]

Supply (Removal) of capital Goods on Which input Tax credit
Was Taken

On
supply of capital goods on which input tax credit has been taken, higher of the
following is required to be paid:

– An amount equal to the input tax credit taken
on the said capital goods reduced by the percentage points as may be specified
in this behalf; or

– Tax on the transaction value of such capital
goods

Transfer of input Tax credit

in
case there is change in the constitution of a registered taxable person on
account of sale, merger, demerger, amalgamation, lease or transfer of the
business with the specific provision for transfer of liabilities, the input tax
credit that remains unutilised in its books of accountsof the registered
taxable person (transferor) would be allowed to be transferred such sold,
merged, demerged, amalgamated, leased or transferred business.

Utilisation of input Tax credit

Every
taxable person would be entitled to take input tax credit; however, till he
discharges his self-assessed tax liability vide valid tax returns he will not
be allowed to utilize such input tax credit (Section 28 of model CGST/SGST law). Such restriction on utilisation of input tax
credit is not prevalent in the current indirect tax regime.

The
input tax credit is to be utilised as follows (Section 35(5)

Input tax credit on
account of

Utilization, towards
payment of

IGST

First, IGST, remaining for CGST

and
SGST in that order

CGST

First, CGST, remaining
for IGST

SGST

First, SGST, remaining
for IGST

Input
tax credit on account of CGST cannot be utilised for payment of SGST and
vice-versa.

Unutilised
input tax credit at the end of the tax period can be claimed as refund (Section
38(2) of model CGST / SGST law) in cases of:

– Exports (other than the goods exported which
are subject to export duty)

– Credit accumulation is on account of rate of
tax on inputs being higher than the rate of tax on outputs. [‘input’ has been
defined to mean goods other than capital goods. ‘Output’ has not been defined.]

Input Tax credit on stock, When registration is applied for

The
following persons are entitled to take credit of input tax within one year from
the date of issue of the tax invoice in respect of inputs held in stock and
inputs contained in semi- finished or finished goods held in stock, to be
calculated as per Generally accepted accounting Principles:

Person

Stock held on

A person applying for registra- tion
within 30 days from the date he becomes liable to reg- istration and has been
granted such registration

On
the day immediately preceding the date from which he becomes liable to pay
tax

A person taking voluntary registration

On
the day immediately preceding the date of registration

A person who ceases to pay composition tax

On
the day immediately preceding the date from which he becomes liable to pay
tax under regular mechanism

The
provisions currently are silent in respect of capital goods held on the date of
registration / date he becomes liable to pay tax under regular scheme and in
respect of credit of input tax on services received before the date of
registration / date he becomes liable to pay tax.

Switching To composition levy / Goods or services become
exempt

On
switching over from the regular mechanism to composition levy, or the goods and
/or services become exempt, the registered taxable person is required to pay an
amount equal to the input tax credit in respect of inputs held in stock and
inputs contained in semi-finished or finished goods held in stock on the day
immediately preceding the date of such switch over or, as the case may be, the
date of such exemption, to be calculated as per Generally accepted accounting
Principles. Balance of input tax credit,
if any, would lapse.

Input Tax credit of Goods sent for Job Work (section 16a of
The Model CGS / SGST law)

The
principal is entitled to take input tax credit on inputs / capital goods sent
to job worker, including sent directly without being first brought to the
premises of the principal, if the said inputs / capital goods are received back
by the principal within the specified period.

Input service Distributor (section 17 of The Model CGS /
SGST law)

“Input
Service Distributor”(ISD) means an office of the supplier of goods and / or
services which receives tax invoices issued u/s. 23 towards receipt of input
services and issues tax invoice or such other document as prescribed for the
purposes of distributing the credit of CGST
(SGST in State acts) and / or IGST paid on the said services to a
supplier of taxable goods and / or services having same PAN as that of the
office referred to above.

Explanation. – for the purposes of distributing the
credit of CGST (SGST in State acts) and / or IGST, input Service
distributor shall be deemed to be a supplier of services.

An
ISD is allowed to distribute the credits as follows

Credit of

Credit
distributed as

ISD and the recipient of credit

IGST

are
in different State

CGST

SGST

IGST

CGST

are in same State (different business vertical)

CGST

IGST

SGST

The
manner for computing the credit to be distributed is not yet prescribed.

Account and records for input Tax credit

Every
registered person is required to keep and maintain a true and correct account
of input tax credit availed (Section 42 of model CGST / SGST law).

An
input tax credit ledger in electronic form would be maintained at the common
portal for each registered taxable person, to be called as “electronic credit
ledger”. The amount of input tax credit will be credited to electronic credit
ledger of the registered taxable person.

Transition provisions

A
registered taxable person is entitled to take credit of the amount of Cenvat
credit / vat credit carried forward in the return furnished under the earlier
law. A registered taxable person is also
entitled to take credit of the unavailed Cenvat credit / vat credit in respect
of capital goods, not carried forward in the return furnished under the earlier
law. Such credits can be taken only if the amount was admissible as Cenvat
credit / vat credit under the earlier law and is also admissible as input tax
credit under the GST law.

Transition
provisions have been provided for situations:

– –Where the goods manufactured / traded were exempted under
earlier law and are liable to tax under GST law

–
–Where the person is going to be
taxable person under the regular mechanism under GST law, however, was under
the composition scheme under the earlier law

Transition
provisions have not been provided for situations:

– –Cenvat
credit was taken on input services, however the invoice was not paid within
three months, hence Cenvat credit taken was reversed; the invoice would be paid
after the appointed date or the invoice would be paid after the filing of
return u/s. 27 for the month of September following the end of first financial
year under GST Law andafter filing of the relevant annual return

–
–Unavailed Cenvat credit in respect
of natural resources (where Cenvat credit is currently availed over the period
of three years)

Disputes under earlier law for claim / recovery of Cenvat
credit / VAT credit

The
proceedings relating to claim / recovery of Cenvat credit / vat credit under
the earlier law shall be disposed of in accordance with the provisions of earlier
law. Any amount of credit found to be admissible to the claimant shall be
refunded to him in cash and any amount of credit becomes recoverable shall be
recovered as an arrear of tax under GST law. The said amount admissible /
recovered would not be admissible as input tax credit under the GST law.

shailesh.kwebmaker

[2016] 73 taxmann.com 363 (Pune – Trib.) Quality Industries vs. ACIT A.Y.: 2010-11 Date of Order: 9th September, 2016

Section 14A – interest paid on
partners’ capital does not qualify as `expenditure’ for the purpose of section
14A.

Facts

The assessee firm, engaged in the
business of manufacturing of chemicals etc., filed return of income for assessment
year 2010-11 declaring
total income of Rs.95,65,090/-.
in the course of assessment proceedings,
the Assessing Officer (AO)
noticed that the assessee has,
inter-alia, earned tax free dividend income amounting to Rs.24,63,700/- from
investment in mutual funds which was claimed as exempt income under section
10(35) of the Act. The AO also noted
that the assessee’s investments in mutual funds as on 31.3.2010 was Rs.4,41,88,955/- and the corresponding amount
as on 31.03.2009 was Rs.3,18,39,548/-. He observed that the partners of the
assessee firm were charging interest on capital introduced by them into the
firm. Total interest claimed as deduction against taxable income was Rs. 75,63,615
which comprised of interest on bank loans Rs.75,615/- and interest on partner’s
capital to the tune of Rs.74,88,000/-.

The assessee contended that interest on partners
capital is not an `expenditure’ per se, as specified u/s.14A of the act and
that even income-tax law understands it this way as such interest in partners’
hand is taxable as “profits from business” and not as “income from other
sources”. It was also contended that expenditure needs presence of two parties
i.e. spender and earner. The firm has no separate existence from its partners.
The assessee firm is a separate entity under income-tax act only for taxation
purposes. This is the very reason that deduction of interest and salary to partners is allowed
as a separate deduction and not as an expenditure under separate section from
sections 30 to 43 of the act. These interest and salaries
to partners are
for this very reason
not liable to TDS provisions under the act. The AO, however, Held that assessee has incurred
expenditure including interest expenses which are attributable to earning
dividend income from investment in mutual funds which is exempt and not
includible in total income. he invoked
the provisions of section 14a of the act read with rule 8D of the income-tax
rules, 1962 (“rules”) and disallowed the a sum Rs. 29,25,362 being estimated
expenditure incurred in relation to dividend income so earned in terms of the
formula provided under rule 8D of the rules.

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

Aggrieved, the assessee preferred
an appeal to the tribunal.

Held

The tribunal noted that interest
and salary received by the partners are treated on a different footing by the
act and not in its ordinary sense of term. Section 28(v) treats the passive
income accrued by way of interest as also salary received by a partner of the
firm as a ‘business receipt’ unlike different treatments given to similar
receipts in the hands of entities other than partners. The tribunal observed that under proviso to section 28(v),
the disallowance of such interest is only in reference to section 40(b) and not
section 36 or section 37. This also gives a clue that deduction towards
interest is regulated only under section 40(b) and the deduction of such interest
to partners is out of the purview of section 36 or 37 of the act.

Firm and partners of the firm are
not separate person under Partnership act although separate unit of assessment
for tax purposes. There cannot therefore be a relationship inferred between
partner and firm as that of lender of funds (capital) and borrower, hence,
section 36(1)(iii) is not applicable at all.
Section 40(b) is the only section governing deduction towards interest
to partners. In view of section 40(b) of the Act, the Assessing Officer
purportedly has no jurisdiction to apply the test laid down u/s. 36 of the Act
to find out whether the capital was borrowed for the purposes of business or
not. Thus, the question of allowability
or otherwise of deduction does not arise except for section 40(b) of the act.

The interest paid to partners and
simultaneously getting subjected to tax in the hands of its partners is merely
in the nature of contra items in the hands of the firms and partners.
Consequently interest paid to its partners cannot be treated at par with the
other interest payable to outside parties. Thus, in substance, the revenue is
not adversely affected at all by the claim of interest on capital employed with
the firm by the partnership firm and partners put together. Thus, capital
diverted in the mutual funds to generate alleged tax free income does not lead
to any loss in revenue by this action of the assessee. In view of the inherent
mutuality, when the partnership firm and its partners are seen holistically and
in a combined manner with costs towards interest eliminated in contra, the
investment in mutual funds generating tax free income bears the characteristic
of and attributable to its own capital where no disallowance u/s.14A read with
rule 8D is warranted. The tribunal Held
that it found merit in the plea of the assessee in so far as interest
attributable to partners.

The Tribunal allowed the ground
of appeal filed by the assessee to the extent of interest on partners capital.

shailesh.kwebmaker

[2016] 74 taxmann.com 90 (Kolkata – Trib.) Soma Rani Ghosh vs. DCIT A.Y.: 2012-13 Date of Order: 9th September,2016

Sections 40(a)(ia), 194C – Since the assessee had, in the
course of assessment proceedings, submitted to the AO PAN and addresses of the transporters,
in respect of whose payments tax was not deducted at source, disallowance u/s.
40(a)(ia) is not called for.

Facts

The assessee,
an individual, carried
on proprietary export business in
export of Chemical, Surgical and Clinical
Goods. During the previous
year relevant to the assessment year under consideration
the assessee incurred transport charges by way of lorry hire Charges, both in relation to Purchases,
referred to as Carriage inward, and exports to Bangladesh referred to as
Carriage outward.

The
Assessing Officer (AO) on the premise that the assessee was required to deduct
tax at source under the provisions of section 194C of the act disallowed the
expenses of rs.1,63,78,648/- claimed towards Carriage inward and rs.1,13,00,980/- claimed as Carriage
outward by invoking the provisions of
section 40(a)(ia) of the act, since the
assessee had not deducted tax at source.

Aggrieved, the
assessee preferred an
appeal to the CIT(A) and contended
that because of
the provision of section 194C(6),
she was not liable to deduct tax at source on payments to transporters who had
submitted their Pan, and those details
of Pan and addressees of the transporters
were filed during the course of scrutiny assessment before the AO.

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

Aggrieved, the
assessee preferred an
appeal to the Tribunal.

Held

The
Tribunal noted that the CIT(A) had
dismissed the appeal of the assessee on the ground that the assessee is a
contractor making payments to the transporter for carrying of goods and was
thus liable to deduct TDS on such payment. According to the CIT(A), section
194C(6) will not apply to payments made by a person who himself is not a transporter,
to another sub-contractor for plying, hiring or leasing goods carriage.
Further, the CIT(A) Held that provisions
of section 194C(6) and 194C(7) have to be read together and the benefit u/s.
194C (6) is available only when the assessee fulfils the conditions laid down
in s/s. 194C(7) of the act.

The
Tribunal Held that –

(a) in the context of section 194C (1), person
undertaking to do the work is the contractor and the person so engaging the
contractor is the contractee;

(b) by
virtue of the
amendment introduced by the
finance (no.2) act 2009, the distinction
between a contractor and a sub-contractor has been done away with and
clause(iii) of explanation u/s. 194C(7) now clarifies that contract shall
include sub-contract;

(c) subject to compliance with the provisions of
section 194C (6), immunity from TDS u/s. 194C (1) in relation to payments to
transporters applies transporter and non-transporter contractees alike;

(d) u/s. 194C (6), as it stood prior to the
amendment in 2015, in order to get immunity from the obligation of TDS, filing
of PAN of the payee transporter alone is sufficient and no confirmation letter
is required;

(e) Section 194C (6) and section 194C (7) are
independent of each other and cannot be read together to attract disallowance
u/s. 40(a) (ia) read with section 194C; and

(f) if
the assessee complies
with the provisions
of section 194C(6), no disallowance u/s. 40(a)(ia) is permissible, even
there is violation of the provisions of section 194C(7).

Therefore,
the payments made by the assessee to the transporters for carriage inward and
carriage outward were not disallowable u/s. 40(a)(ia).

The
Tribunal allowed the appeal filed by the assessee.

shailesh.kwebmaker

Asst. CIT vs. Majmudar & Co. ITAT “B” Bench, Mumbai Before Mahavir Singh (J. M.) and Rajesh Kumar (A. M.) ITA No. 3063 to 3067 and 6604 /Mum/2012 A.Ys.: 2004-05 to 2009-10. Date of order: 19th August, 2016 Counsel for Revenue / Assessee: N.P. Singh / Arvind Sonde

Section 10B – Export of legal data base eligible for deduction.

Facts

The assessee, a firm of Advocate & Solicitors, is engaged in production and export of customised electronic data or legal database. The unit of the firm was recognised as a 100% EOU by the development Commissioner SEZ, SEEPZ and its entire sale proceeds from export of such legal services was brought in india in convertible foreign exchange. according to the assessee, it has transferred the customised electronic data to its client therefore it forms part of computer software as per explanation 2 to section 10B of the act. accordingly, it claimed deduction u/s 10B of the act. However, the claim of the assessee was rejected by the AO on the grounds amongst others that, the assessee was engaged in providing legal services to its foreign clients and not engaged in exporting legal database which was one of the items notified by the CBDT for the purpose of “Computer Software” on which deduction u/s. 10B was admissible. Rendering of legal services by the assessee firm to the foreign clients cannot be termed as export of legal database from india.

Held

The tribunal noted that the services provided by the assessee i.e. legal services, are recognised by the Government of India for the various benefits under the scheme of EOU as per EXIM Policy 2002-2007. Section 10B of the Act was introduced to give benefit to such EOU under the Income-tax Act, reflecting the intention of law to provide encouragement to the exporters of services to enhance their capacity for provision of services and in turn earn valuable foreign exchange for our country. According to the Tribunal, the assessee has fulfilled the specific requirements of Section 10B by providing legal Services using legal database. legal database is recognised by the Board vide its notification No. S.O.890(E) dated September 26, 2000 as one of the eligible information technology enabled services. Explanation 2(i) (b) defines computer software to include, inter alia, a “Customised Electronic Service as notified by the Board”. As legal database is notified by the Board for this purpose and the assessee has provided services by using such legal database via electronic media i.e. via emails and internet facilities, the claim of the assessee for deduction u/s. 10B of the Act in the light of Explanation 2(i) (b) is fully justified.

shailesh.kwebmaker

[2016] 74 taxmann.com 99 (Mumbai – Trib.) Voltas Ltd. vs. ITO A.Y.: 2005-06 Date of Order: 16th September, 2016

Section 50C – Provisions of section 50C are not applicable
to transfer of development rights in land.

Facts

The
assessee company owned a plot of land at Panchpakdi, thane, in respect of which it entered into a
development agreement with m/s. Sheth developers Pvt. Ltd.,
on 8.6.2004. In
the return of
income filed by the assessee,
long term capital gains arising as a result of entering into the development
agreement were computed with reference to consideration mentioned in the
agreement.

During
the course of assessment proceedings, the Assessing Officer (AO) asked the
assessee to show cause why sales consideration should not be substituted with
the value adopted by the stamp valuation authority in view of section 50C of
the act. In response, the assessee objected to the value adopted by the stamp
valuation authority and also objected to the very invoking of section 50C of
the act upon the impugned transaction of sale of development rights.

The
AO referred the matter to District Valuation Officer for valuation of the sales
consideration as well as cost of acquisition of the property. But,
valuation report of the dvo was
not received by the ao till conclusion of
the   assessment   proceedings
and   therefore   the ao adopted value of stamp valuation
authority and substituted it with actual sales consideration shown by the assessee
and computed the long term capital gains on sale of development rights of the
land accordingly. Subsequently, upon receiving the valuation from the DVO, the
AO rectified the assessment order by passing an order u/s.154 of the Act.

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

Aggrieved,
the assessee preferred an appeal to the Tribunal where it, interalia, contended
that the transaction of sale of development rights is not covered u/s 50C.

Held

The
Tribunal Held that the scope of term ‘capital asset’ mentioned in the section
50C specifically refers and confines its meaning to ‘land or building or both’.
The scope of section 50C is restricted by the legislature itself to these two
types of capital assets only.

It
noted that the capital asset transferred by the assessee was ‘development rights in the land’
and not the ‘land’
itself.

The Tribunal having noted a few other similar
provisions of the act found that in section 269a and section 269UA ‘rights’ in
`land & building’ have been specifically included as per requirement of
these sections. It concluded that term ‘land & building’ and ‘rights
therein’ have been clearly understood and treated as independent from each
other. A perusal of the definitions given in these sections when compared with
section 50C shows that legislature was conscious about the proper expression to
be used as per its intention, scope, object and purpose of the section 50C,
wherein it has been expressly mentioned that capital asset should be ‘land or
building or both’. It has not been mentioned that any type of ‘rights’ shall
also be included in the definition of capital assets to be transferred by an
assessee.

Since
the provisions of section 50C are deeming provisions, the settled law and well
accepted rule of interpretation is that deeming provisions are to be construed
strictly. While interpreting deeming provisions neither any words can be added
nor deleted from language used expressly. The Tribunal Held that the ‘rule of
Strict interpretation’ as well as ‘rule of literal Construction’ should be
applied while understanding the meaning and scope of deeming provisions. it
Held that the provisions of section 50C have been wrongly applied to the
impugned transaction since the capital asset transferred by the assessee, upon
which long term capital gain has been computed by the ao, is development rights
in the land of the assessee. The land itself has not been transferred by the
assessee. The Tribunal reversed the action of lower authorities in applying the
provisions of section 50C and in substituting any value other than the amount
of actual sales consideration received by the assessee.

This
ground of the appeal filed by the assessee was allowed.

shailesh.kwebmaker

Rajeev B. Shah vs. ITO ITAT “SMC” Bench, Mumbai Before Mahavir Singh, Judicial Member ITA No.: 262/Mum/2015. A.Y.: 2010-11. Date of Order: 8th July, 2016 Counsel for Assessee / Revenue: Subhash Shetty & R. N. Vasani / Somanath S. Ukkali

Section 54F – due to fault of the builder project not
completed on time. assessee entitled to relief.

Facts
The assessee sold a plot of land for a consideration of Rs.19.35 lakh and
earned long term Capital Gains of Rs.14.81 lakh. The assessee invested a
sum of Rs. 18.60 lakhs for buying a residential flat under construction. The
Developer allotted flat no.602 in the project for a sum of Rs.143.96 lakh on
the terms and conditions given in the letter of allotment issued to him by the
Builder dated 1603-2010. The AO rejected the claim of deduction u/s. 54F of
the act on the ground that the property is incomplete and registered document
was not filed by the assessee to claim deduction u/s. 54F of the act.

Before the Tribunal, the assessee explained that the builder was avoiding the
customers due to disputes and the project was also stalled and there was no
further progress in construction of the project. the assessee also
filed civil suit before the Hon’ble Bombay High Court for an order and direction
calling upon the developer to commence construction of the project as per the
agreement evidenced by the allotment letter.

Held
According to the Tribunal, it was not in the assessee’s hands to get the
flat completed or to get the flat registered in his name. The intention of the
assessee was very clear and he has invested almost the entire sale
consideration of land in purchase of this residential flat. It was impossible
for the assessee to complete the formalities i.e. taking over possession for
getting the flat registered in his name and this cannot be the reason for
denying the claim of the assessee for deduction u/s. 54 of the act. in view of
the above, the Tribunal held that the assessee is entitled for deduction u/s.
54F of the Act.

shailesh.kwebmaker

Penalty- When amount received from affiliated companies was not chargeable to tax – interpretation placed upon the DTAA – Not liable: Section 271(1)(c)

DCIT vs. Koninklijke-DSM-NV. [Income tax Appeal no: 432 of
2014 dt : 07/09/2016 (Bombay High Court)].

[DCIT vs. Koninklijke-DSM-NV. [ITA No. 978/PN/2011
; Bench : B ; dated 15/07/2013 ; A Y: 2006- 2007. PUNE. ITAT ]

The assessee was a company incorporated and based
in Netherlands. The assessee qualified as a tax resident of netherlands as per
dtaa between india and netherlands. The assessee had affiliated companies operating in India and
received income from them. This income was in respect of Corporate Services and
CICT Charges (cost incurred on share of email, network and internet charges).
however, the assessee being of the view that
the above income was not chargeable to tax, in its return of income
filed electronically for A.Y. 2006-07
declared total income at nil. During assessment proceedings, the
assessing Officer on examination of the DTAA, held that the fees received in
respect of CICT Services and for Corporate Services from its affiliated
companies was in fact in the nature of
fees for technical services. This was on the basis of article 12 of the dtaa between india and netherlands
and therefore chargeable to tax in
india. Consequently, the income of Rs.2.34
crores received from its indian affiliates on the above two counts was
brought to tax by an assessment order.

The assessee
tried to justify its claim of
non-taxability of those incomes in india. according to the information given by
the assessee, C-ICT charges represented cost incurred by
the assessee on
share of e-mail,
network and internet charges.
The assessing Officer
examined the agreement between
the assessee and
its affiliates more particularly
between DEPIPL. after examining the
agreement between the assessee and its affiliates, the Assessing Officer
concluded that the
assessee was not only providing
the basic it services such as e-mail, network
and internet charges
but much more
than that which was the it infrastructure to have access to those
facilities.

The
assessee did not contest the assessment order. The Assessing Officer issued the
show cause notice to the assessee why the penalty should not be levied u/s.
271(1) (c) of the Act.

The
assessee while responding pointed out that all the relevant facts and details
with regard to the nature of receipt on account of CICT Service and Corporate
Services along with the basis of its non-taxability was mentioned in the notes
to its accounts. The above amount of Rs. 2.34 crore on the above two counts was
not offered to tax on the basis of its interpretation of the DTAA and judicial
decisions. This led to a bonafide belief that the receipt of amounts from its
affiliated companies was not chargeable to tax. Thus, it was submitted that it
was not a case of filing inaccurate particulars of income or concealment of
income which would warrant imposition of penalty u/s. 271(1)(c) of the Act. The
Assessing Officer did not accept the aforesaid contention and imposed a penalty
of rs.25 lakh u/s. 271(1) (c) of the Act.

Being
aggrieved, the assessee carried the issue in appeal to the CIT(A). the CIT(A) noted that identical services were
being rendered by the assessee to its Indian affiliated companies from the
assessment year 2002-03 onwards and in
the earlier returns also the receipt from the affiliated companies were not
shown as income. On the contrary, the tax which was deducted at source by the
affiliated companies while making payments to the assessee, was refunded by the
revenue. It was further noted that for several assessment years before the
filing of returns by Corporates in electronic form was made mandatory in the
subject AY, the notes to accounts filed along with the returns of income
completely disclosed not only the facts of receipt of amounts from affiliated
companies but the nature of the receipts. The filing of return in Electronic
media did not provide for filing notes to Accounts along with the Return. Thus
the non offering of Income to tax was bonafide. This was based upon past practice
and grant of refund of the tax deducted by the affiliated companies on the
payments made to it. Moreover, the entire basis of holding that the amount
received from affiliated companies was not chargeable to tax was the
interpretation placed upon the dtaa by the assessee. On the aforesaid facts,
the CIT(A) held that there was no concealing of particulars of income or
furnishing inaccurate particulars of income. Accordingly, the penalty was
deleted.

Being
aggrieved, the revenue carried the issue in appeal to the
tribunal. The tribunal,
by the impugned
order, upheld the finding of the CIT(A). In particular, the impugned
order records the fact that the compulsory filing of e-return by Corporates had
started for the first time only from the subject assessment year. This new
system had no provision for attaching the computation or notes while filing the
return in the prescribed form. The impugned order of the tribunal also records
the fact that the balance sheet and books of accounts also duly reflected that
the Assessee had received payments from its Indian affiliates for providing
services. Thus, mere non-acceptance of
the claim made by the assessee, would
not by itself lead to an imposition of penalty, when the claim made was
bonafide. Further, the impugned order holds that even the Assessing Officer had
on an interpretation of article 12 of the dtaa came to a conclusion that the
amounts received from the affiliated companies are chargeable to tax as they
were in the nature of fees for technical services. The impugned order also
placed reliance upon the decision of the apex Court in CIT vs. Reliance Petroproducts Pvt. Ltd. to conclude that a
bonafide claim not accepted by the Assessing Officer would not by itself
warrant imposition of penalty.

Being
aggrieved, the revenue carried the issue in appeal to the high Court. High
Court held assessee’s claim that amount received from its
affiliated companies on account of CICT and Corporate Services is not taxable
was based on an interpretation of DTAA. It is a settled position of law that
where the issue is debatable then mere making of a claim on the basis of a
particular interpretation would not lead to an imposition of penalty. Bearing
in mind that for the earlier assessment years, the assessee had claimed and
been granted refund of taxes deducted at source by the affiliated companies in
respect of the payment received by it for Corporate Services and CICT Services
would also establish that the claim made by the assessee that the income
received is not chargeable to tax was a bonafide claim.

In
view of the above concurrent finding of fact by CIT(A) and the tribunal the appeal
of revenue was dismissed.

shailesh.kwebmaker

Service tax – no deduction claimed on account of service tax which is payable to the Government – Section 43B of the Act would have no application – Section 145A(a)(ii) deals with goods and not services- Section 43B rws 145A(a)(ii) of the Act.

CIT -2 vs. Knight Frank (India) Pvt. Ltd. [Income tax Appeal
no. 247 of 2014 with 255 of 2014, dt : 16/08/2016 (Bombay High Court)].

[Knight Frank (India) Pvt. Ltd.. vs. Asst. CIT ,. [ITA No. 2021/MUM/2011,
6286/MUM/2010, 123/MUM/2011, 178/ MUM/2012 ;
Bench : A ; dated 10/07/2013 ;
AYs : 2007- 2008 & 2008-2009. Mum. ITAT ]

The
assessee was engaged in the business of real estate consultancy / agency and
property management services. during the course of the assessment proceedings,
the assessing Officer sought to include the service tax billed by it for
rendering services to the service receivers as trading receipts on invocation
of section 145A(ii) of the act. Besides, the assessing Officer also sought to
invoke section 43B of the act on the ground that the billed amount of service
tax had not been paid over to the Government till the due date of filing the
return of income. The assessing Officer also sought to recast the assessee
profit and loss account so as to reflect the receivable service tax as a part
of the consideration for the services rendered. The assessee contended that
section 145A(a)(ii) of the act would have no application to the present facts
as service tax is not mentioned therein. Further, it was submitted that as the assessee has
claimed no deduction on account of service tax which is payable to the
Government, and therefore, section 43B of the act would have no application.
However, the same was not accepted by the Assessing Officer and he added the
service tax billed by the assessee to its service receivers as a part of its
turnover / consideration received for services rendered. Further, section 43B of the act was invoked to add the
service tax billed, which has not been paid over to the Government.

In
appeal, the CIT(A) held that section 145A(a)(ii) of the act would apply as it
is not restricted only to manufacturing and trading companies. It was concluded
that the service tax stands on the same footing as excise duties, sales tax and
other taxes, which are collected to be paid over to the Government. Similarly,
the order of the Assessing Officer with regard to section 43B of the act was
also upheld.

On
further appeal, the tribunal by the impugned order held that section 145A(a)(ii)
of the act would have no application in respect of the service tax billed on
rendering of services. This for the reason the section 145A(a)(ii) deals with
goods and not services. It also held that section 43B of the act would have no
application in the present facts as no liability to pay the same to the
Government arose before the last date of filing of the Returns. Besides, it
held that no deduction had been claimed on the aforesaid amounts while
determining its income. Accordingly,
the appeal of
the assessee was allowed.

On
further appeal to the high Court, it was held that it is very clear from the
reading of section 145A(a)(ii) of the act that it only covers cases where the
amount of tax, duty, cess or fee is actually paid or incurred by the assessee
to bring the goods to the place of its location and condition as on the date of
valuation. In this case, the assessee has admittedly not paid or incurred any
liability for the purposes of bringing any goods to the place of its location.
In this case, the assessee is rendering services. Thus, on the plain reading of section145A(a)(ii) of
the act, it is self evident that the same would not apply to the service tax
billed on rendering of services. This is so as the service tax billed has no
relation to any goods, nor does it have anything to do with bringing the goods
to a particular location. The explanation to section 145A(a) of the act does
not expand its scope. An explanation normally does not widen the scope of the
main section. It merely helps clarifying an ambiguity. (relied on : Zakiyr
Begam v/s. Shanaz Ali & Ors., 2010 (9) SCC 280). The main part of the
section specifically restricts its ambit only to valuation of purchase and sale
of goods and inventory. Rendering of service is not goods or inventory. The
Explanation in this case clarifies/explains that any tax, duty, cess or fee paid
or incurred will have to be taken into account for valuation of goods even if
such payment results in any benefit/right to the person making the payment. It
does not even remotely deal with the issue of service tax. Thus, it is clear
that the legislature never intended to restrict the applicability of section 145A
of the act only to goods and not extend it to Services. as observed by the apex
Court In State of Bihar vs. S. K. Roy
AIR 1966 (SC) 1995:“ It is well recognised principle in dealing with
construction that a subsequent legislation may be looked at in order to see
what is the proper interpretation to be put upon an earlier Act where the
earlier Act is obscure or capable of more then one interpretation.”

Therefore,
section 145A of the act would have no application in cases where service is
provided by the assessee. The assessee had not claimed any deduction on account
of the service tax payable in order to determine its taxable income. In the
above view, there can be no occasion to invoke section 43B of the act.
Accordingly, both the appeals were dismissed.

shailesh.kwebmaker

TDS – Fees for technical services- Section 194J – Assessee purchasing and selling electricity – Transmission of electricity by State Power Transmission Corporation – Not technical services – Tax not deductible u/s. 194J on amount paid for such transmission –

ACIT vs. Gulbarga Electricity Supply Co. Ltd.- 387 ITR 484
(Karn):

The
assessee was in the business of buying and selling of electricity. The assessee
purchased electricity from the generators of the Karnataka Power Corporation
etc. and sold it to different categories of consumers in its jurisdiction. The
power from the generation point to the customers was transmitted
through the transmission
network of the Corporation. The
Assessing Officer found that the assessee had made payment of transmission charges
to the Corporation, without deducting tax at source thereon. He held that the
assessee was an assessee in default u/s. 201(1) of the income-tax act, 1961 in
respect of payment of transmission charges u/s. 194J. The Commissioner
(appeals) and the tribunal set aside the order.

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

“i)
The
provisions of section 194J of the
act, was not attracted in the present case and the assessee was not liable to
deduct the tax at source from the payment of transmission charges made to the
Corporation and the order of the Assessing Officer was rightly set aside by the
tribunal.

ii) Accordingly, appeal of the revenue is
dismissed.”

shailesh.kwebmaker

TDS – Commission- Sections 194H and 201(1) – A. Ys. 2008-09 to 2010-11- Assessee paying incentive under trade discount scheme to retail dealers through del creder agents – Transactions between assessee and retail dealers on principal to principal basis- No principal agent relationship – No services rendered by retail dealers to assesse – Incentive given only to promote sales – not commission – Tax not deductible

CIT vs. United Breweries Ltd.; 387 ITR 150 (T&AP):

The
assessee was engaged in the manufacture and sale of beer to the andhra Pradesh
Beverage Corporation. The Corporation, in turn, sold beer purchased from the
assessee, to retail dealers. The assessee paid incentives under the trade
discount scheme to the retail dealers through del creder agents. The Assessing
Officer held that for the payment made to the retail dealers, section 194H of
the income-tax act, 1961 was applicable and the assessee had committed default
in terms of section 201(1) in not having deducted tax at source on the payments
and levied interest u/s. 201(1A) of the act in respect of the amounts paid
under the trade scheme and discounts. The tribunal held the payments
constituted sales promotion expenses and did not fall in the category of
“commission” attracting 194H of the act.

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

“i) It was evident that beer was sold by the
assessee to the Corporation, and the Corporation, in turn, sold the beer
purchased from the assessee, to retail dealers. The two transactions were
independent of each other, and were on a principal to principal basis. No
services rendered by the retail dealers to the assessee, and the incentive
given by the assessee to the retailers as trade discount was only to promote
their sales.

ii)
The tribunal rightly held that in the absence of a relationship of principal
and agent, and as there was no direct relationship between the assessee and the
retailer, the discount offered by the assessee to the retailers could only be
treated as sales promotion expenses, and not as commission, as no services were
rendered by the retailers to the assessee.”

shailesh.kwebmaker

Search and seizure – Block assessment – Notice u/s158BC – Where condition precedent to issue notice u/s. 158BC, viz. undisclosed income found during search proceedings was not satisfied, no notice u/s. 158BC could have been be issued to petitioner

Dr. Gautam Sen vs. CCIT; [2016] 74 taxmann.com 128 (Bom):

Revenue carried out the search on
16th january, 1999 u/s. 132 of the income-tax act, 1961 on the Petitioner and
his premises. During the course of the search, an amount of Rs.20,000/- in cash
was found in his house which was explained to the satisfaction of the revenue. Nothing
incriminating was found during the course of search. However, a notice dated 16th May 2000 was
issued u/s. 158BC of the Act to the Petitioner to file his return of income for
the block period covered by the search.

The petitioner filed a writ
petition before the Bombay High Court challenging the validity of the notice on
the ground that during course of search, nothing was found with the Petitioner,
so as to infer that he was in possession of any undisclosed income either at
the time of search or at any time prior thereto. Consequently, in the absence
of there being undisclosed income, the Assessing Officer would not have any
justification to issue the impugned notice u/s. 158BC of the act.

The Bombay high Court allowed the
writ petition and held as under:

“i) Action of the revenue in
issuing section 158BC notice despite the appraisal report clearly stating that
no incriminating material was found against petitioner was highly deplorable as
it amounted to harassment of the taxpayer. The Officers of the income tax
department are obliged to proceed
in accordance with
the statutory provisions and cannot act on their whim and
fancy. The department should adopt a standard operating procedure to provide
adequate safeguards before issuing notices under Chapter XVIB.

ii) In the above facts, the impugned notice is
quashed and set aside.

iii) This is the fit case where
costs should be awarded to the Petitioner. The Respondents-revenue i.e. the jurisdictional Chief Commissioner of income
tax (respondent no.1) is directed to pay the costs of Rs.20,000/- to the
Petitioner within four weeks from today.”

shailesh.kwebmaker

Search and seizure- Assessment of third person- Section 153C – A. Ys. 2003-04 to 2008-09- Condition precedent – Cheque book pertaining to assessee reflecting issue of cheques only document seized during search – No other evidence of undisclosed income – Proceedings u/s. 153C not valid

CIT vs. Refam Management Services P. Ltd.; 386 ITR 693 (Del)

Pursuant to a search and seizure
operation undertaken u/s. 132 of the income-tax act, 1961 in the case of a
third party, cheque books of the assessee reflecting issue of cheques were
found. Assessments were made for the assessment years 2003-04 to 2008-09 u/s.
153C of the act. Certain additions u/s. 69C and certain disallowances were
made. The CIT(a) and the tribunal deleted the additions and disallowances. In
view of such deletion assesee’s ground that assessments were illegal and
invalid were not decided.

On appeal by the revenue, the
assessee raised the ground that the assessments u/s. 153C were illegal and
invalid.

The Delhi High Court held as
under:

“The only document seized during the search was a
cheque book pertaining to the assessee which reflected the issue
of cheques during
the period august 2008 to october 2008, relevant to the A. Y. 2009-10. Since there was no other evidence
of undisclosed income, the proceedings u/s. 153C were not valid.”

shailesh.kwebmaker

Search and seizure- Limitation for assessment- Period reckoned from date of conclusion of search- Restraint order not extended and no action taken pursuant to search after three months- Search to be taken to have been concluded on expiry of restraint order- Visit of officers to assessee’s premises two years later to record conclusion of search not material- Period of limitation to pass assessment order not to be reckoned from such date- Assessment barred by limitation

CIT vs. Ritika Ltd.; 284 ITR 434 (Cal):

Pursuant to a search and seizure in the premises of the assessee, a restraint order was issued on October 15, 1998 for a period of sixty days which was later extended for another thirty days upto January 15, 1999. Thereafter it was not extended. On November 21 2000, the Department called on the assessee at his premises for the purpose of recording that the search was at an end. Thereafter assessment order was passed after January 2001. The Department took the view that the period of limitation of two years commenced from November 21, 2000 and therefore the assessment order is passed within the period of limitation. The Tribunal held that the period of limitation of two years for passing assessment order was to be reckoned from 15th January 1999 and not from 21st November 2000 and accordingly the assessment order was passed beyond the period of limitation.

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

“i) The Tribunal’s order was unimpeachable. The restraint order was not extended by the Department after January 15, 1999, which meant that the search was also abandoned and had ended. The search did not stand revived when the officers of the Department called at the house of the assessee merely for the purpose of recording that the search was at an end almost after two years.

ii) The order of assessment was passed beyond the limitation period of two years after conclusion of the search and hence was invalid.”

shailesh.kwebmaker

Return of loss- Section 139(1), (3) of I. T. Act, 1961- A. Y. 2010-11- Delay of one day in filing return satisfactorily explained by assessee- Assessee not to be denied carry forward of loss- direction to CBDT to accept return of assessee-

Regen Infrastructure and Services Pvt. Ltd. vs. CBDT; 384 ITR 407 (Mad):

For the A. Y. 2010-11, the last date for filing returns was extended to October 15, 2010.The assessee filed return of loss on the last day i.e. October 15, 2010. The uploading was delayed by a few hours due to a technical snag. The Assessing Officer took the date of filing as October 16, 2010 but did not treat it as a belated return and passed an assessment order u/s. 143(3) of the Income-tax Act, 1961, allowing the claim to carry forward loss. The Commissioner issued a show cause notice u/s. 263 of the Act stating that the benefit of carry forward of losses allowed to the assessee was erroneous and prejudicial to the Revenue due to the assessee’s delay in filing the return. The assessee filed an application to the CBDT for condonation of delay of two hours due to which the date of filing was reckoned as October 16, 2010. CBDT rejected the application on the ground that there was no justifiable reason to condone the delay.

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

“i) When the assesee was entitled to claim the carry forward of loss u/s. 139(3) of the Act, it could not have been stated that the delay in filing the return had occurred deliberately on account of culpable negligence or on account of mala fides. Mere delay ought not to have defeated the claim of the assessee. When the delay was satisfactorily explained by the assessee, the approach of the CBDT should have been justice oriented so as to have advanced the cause of justice and the delay should have been condoned.

ii) The CBDT is directed to accept the return filed by the petitioner company for the A. Y. 2010-11 u/s. 139(1) of the Act.”

shailesh.kwebmaker

Recovery of tax pending stay application – Ss. 220(6) and 226(3) – A. Y. 2009-10 – Notice of demand – Attachment of bank accounts – No recovery permissible till stay application is disposed of – Pending stay application withdrawal of part of attached amount from banks is without jurisdiction and unlawful – Garnishee notice quashed – Direction issued to deposit withdrawn amount and dispose of stay application –

Khandelwal Laboratories P. Ltd. vs. Dy. CIT; 383 ITR 485 (Bom):

For the A. Y. 2009-10, the assessee had filed an appeal against the order u/s. 143(3) of the Income-tax Act, 1961 and had also made an application for stay of the demand u/s. 220(6) of the Act, inter alia on the ground that the issue arising in this case had been concluded in its favour by the decision of the Tribunal in its own case for the A. Y. 2000-01. The Assessing Officer attached the bank accounts of the assessee u/s. 226(3) of the Act and later withdrew amounts of Rs. 7,59,185/- and Rs. 34,265/- from the assessee’s bank accounts.

The Bombay High Court allowed the assessee’s writ petition and held as under:
“i) The right to file an application u/s. 220(6) of the Act is a statutory right available to an assessee. Any action to recover taxes adopting coercive means is not permissible till the assessee’s application for stay u/s. 220(6) of the Act is disposed of. An order disposing of the stay application must give some prima facie reasons in the context of the submission for stay made by the assessee.

ii) The Assessing Officer had only dealt with the assessee’s rectification application and not with the assessee’s application for stay. The third paragraph in that order calling upon the assessee to pay the entire demand within five days, could not be read as a communication rejecting the stay application filed by the assessee.

iii) In any case, the order was bereft of any consideration of the assessee’s primary contention that the issue in appeal is concluded in its favour by virtue of a Tribunal’s order for A. Y. 2000-01 in the assessee’s own case. Thus, the application for stay filed had not yet been disposed of by the Assessing Officer.

iv) Therefore, the action of the Assessing Officer in attaching the assessee’s bank accounts was without jurisdiction and bad in law. The notices u/s. 226(3) of the Act, issued by the Assessing Officer to the assessee’s bankers were to be quashed and set aside. The Assessing Officer was to deposit the amounts of Rs. 7,59,185 and Rs. 34,265 respectively in the assessee’s bank accounts and dispose of the assessee’s pending stay application in accordance with law.”

shailesh.kwebmaker

Income from house property vs. income from other sources – Section 22, 28(i) & 56 – A. Y. 2008-09 – Income from licensing of terrace floor for telecom antenna, constructing room for its personnel and storage – receipts are income from house property –

Naigara Hotels and Builders (P) Ltd. vs. CIT; 286 CTR 94 (Del):

The assessee had let out the terrace floor for raising telecom antenna and constructing a room for its personnel and storage. The Assessee offered the license fees as income from house property. The Assessing Officer assessed it as business income. The Tribunal held that it is income from other sources.

On appeal the Delhi High Court allowed the assessee’s claim and held that the income is to be assed under the head “Income from house property.”

shailesh.kwebmaker

Inland port – Deduction u/s. 80-IA – A. Y. 2009- 10 – Container freight stations are inland ports within the meaning of section 80IA(4)(i) – Assessee entitled to benefit u/s. 80IA –

CIT vs. Kailash Shipping Services P. Ltd.; 283 ITR 630 (Mad):

The assessee is a clearing and forwarding agent. For the A. Y. 2009-10 the assessee claimed deduction u/s. 80IA of the Income-tax Act, 1961, on the container freight station. The Assessing Officer disallowed the claim holding that the container freight station could not be classified as an inland port for the purpose of section 80IA(4)(i) of the Act. The Commissioner (Appeals) and the Tribunal allowed the assessee’s claim.

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

“i) The office memorandum of Ministry of Commerce and Industry dated May 21, 2009 clarified the status of the container freight stations as inland ports and the Chennai Port Trust had issued a certificate stating that the container freight station of the assessee might be considered an extended arm of the port in accordance with the CBDT Circular No. 793 dated 23/06/2000 read with Circular No. 133 of 1995 dated 22/12/1995 of CBEC.

ii) The assessee was entitled to the benefit u/s. 80IA of the Act.”

shailesh.kwebmaker

Industrial Undertaking – Special Deduction – Profits derived from business – So long as the profits and gains emanate directly from the business itself, the fact that the immediate source of the subsidies (which reimburses, wholly or partially, costs actually incurred) is the Government would make no difference and thus are qualified for deduction u/s. 80-IB(4)

CIT vs. Meghalaya Steels Ltd. [2016] 383 ITR 217 (SC)

The
assessee was engaged in the business of manufacturing of steel and
ferro silicon. The assessee submitted its return of income for the year
2004-05 disclosing an income of Rs.2,06,970 after claiming deduction
u/s. 80-IB of the Income Tax Act, 1961 on the profits and gains of
business of its industrial undertaking. The assessee had received the
following amounts on account of subsides:

The
Assessing Officer, in the assessment order held that the amounts
received by the assessee as subsides were revenue receipts and did not
qualify for deduction u/s. 80-IB(4) of the Act and accordingly, the
assessee’s claim for deduction of an amount of Rs.2,74,09,386 on account
of the three subsidies aforementioned were disallowed. The assessee
preferred an appeal before the Commissioner of Income-tax (Appeals),
who, dismissed the appeal of the assessee. Aggrieved by the aforesaid
order, the assessee preferred an appeal before the Income-tax Appellate
Tribunal which allowed the appeal of the assessee. The Revenue carried
the matter to the High Court u/s. 260A of the Act, which decided the
matter against the Revenue. The Revenue therefore filed an appeal before
the Supreme Court against this judgment.

The Supreme Court
analysed all the decisions cited on behalf of the Revenue. The Supreme
Court noted that in the first decision, that is, in Cambay Electric
Supply Industrial Co. Ltd. vs. CIT (113 ITR 84), it was held that since
an expression of wider import had been used, namely, “attributable to”
instead of “derived from”, the Legislature intended to cover receipts
from sources other than the actual conduct of the business of generation
and distribution of electricity. In short, a step removed from the
business of the industrial undertaking would also be subsumed within the
meaning of the expression “attributable to”. The Supreme Court observed
that since it was directly concerned with the expression “derived
from”, this judgment was relevant only in so far as it made distinction
between the expression “derived from”, as being something directly from,
as opposed to “attributable to”, which could be said to include
something which was indirect as well.

The Supreme Court noted
that the judgment in Sterling Foods (237 ITR 579) laid down a very
important test in order to determine whether profits and gains are
derived from business or an industrial undertaking. It has stated that
there would be a direct nexus between such profits and gains and the
industrial undertaking or business. Such nexus cannot be only
incidental. It therefore found, on the facts before it, that by reason
of an export promotion scheme, an assessee was entitled to import
entitlements which it would thereafter sell. Obviously, the sale
consideration therefrom could not be said directly from profits and
gains by the industrial undertaking but only attributable to such
industrial undertaking inasmuch as such import entitlements did not
relate to manufacture or sale of the products of the undertaking, but
related only to an event which was post manufacture namely, export. The
Supreme Court held that on an application of the aforesaid test to the
facts of the present case, it could be said that as all the four
subsidies in the present case were revenue receipts which were
reimbursed to the assessee for elements of cost relating to manufacture
or sale of their products, there could certainly be said to be a direct
nexus between profits and gains of the industrial undertaking or
business, and reimbursement of such subsidies. The Supreme Court noted
that according to the Counsel for the Revenue the fact that the
immediate source of the subsides was the fact that the Government gave
them and that, therefore, the immediate source not being from the
business of the assessee, the element of directness was missing. The
Supreme Court did not agree with this contention. According to the
Supreme Court, what is to be seen for the applicability of section 80-IB
and 80-IC is whether the profits and gains are derived from the
business. So long as profits and gains emanate directly from the
business itself, the fact that the immediate source of the subsidies is
the Government would make no difference, as it cannot be disputed that
the said subsidies are only in order to reimburse, wholly or partially,
costs actually incurred by the assessee in the manufacturing and selling
of its products. The “profits and gains” spoken of by sections 80-IB
and 80-IC have reference to net profit. And net profit can only be
calculated by deducting from the sale price of an article all elements
of cost which go into manufacturing or selling it. Thus understood, it
was clear that profits and gains are derived from the business of the
assessee, namely profits arrived at after deducting manufacturing cost
and selling costs reimbursed to the assessee by the Government
concerned.

According to the Supreme Court the judgment in
Pandian Chemicals Limited vs. CIT (262 ITR 278) was also
distinguishable, as interest on a deposit made for supply of electricity
was not an element of cost at all, and this being so, was therefore a
step removed from the business of the industrial undertaking. The
derivation of profits on such a deposit made with the Electricity Board
could not therefore be said to flow directly from the industrial
undertaking itself, unlike the facts of the present case, in which, as
has held above, all the subsidies aforementioned went towards
reimbursement of actual costs of manufacture and sale of the product of
the business of the assessee.

Further, the Supreme Court
observed that Liberty India (317 ITR 218) being the fourth judgment in
this line also did not help the Revenue. What the court was concerned
with was an export incentive, which was very far removed from
reimbursement of an element of cost. A Duty Entitlement Pass Book
Drawback Scheme was not related to the business of an industrial
undertaking or selling its products. Duty entitlement pass book
entitlement arose only when the undertaking exported the said product,
that is after it manufactured or produced the same. Pithily put, if
there were no export, there were no duty entitlement pass book
entitlement, and therefore its relation to manufacture of a product and
or sale within India was not proximate or direct but was one step
removed. Also, the object behind the duty entitlement pass book
entitlement, as has been held by the court, was to neutralize the
incidence of customs duty payment on the import content of the export
product which was provided for by credit to customs duty against the
export product. In such a scenario, it could not be said that such duty
exemption scheme was derived from profits and gains made by the
industrial undertaking or business itself.

The Supreme Court
referred to the decision of the Calcutta High Court in Merinoply and
Chemicals Ltd. vs. CIT [1994] 209 ITR 508 (Cal), in which it was held
that transport subsidies were inseparably connected with the business
carried on by the assessee.

The Supreme Court noted that
however, in CIT vs. Andaman Timber Industries Ltd.[2000] 242 ITR
204(Cal), the same High Court had arrived at an opposite conclusion in
considering whether a deduction was allowable u/s. 80HH of the Act in
respect of transport subsidy without noticing the aforesaid earlier
judgment of a Division Bench of that very court.

The Supreme
Court further observed that a Division Bench of the Calcutta High Court
in CIT v. Cement Manufacturing Company Limited, distinguished the
judgment in CIT vs. Andaman Timber Industries Ltd. and followed the
impugned judgment of the Gauhati High Court in the present case.

According
to the Supreme Court the judgment in Merinoply and Chemicals Ltd. and
the recent judgment of the Calcutta High Court had correctly appreciated
the legal position.

The Supreme Court thereafter referred to
the judgment in Jai Bhagwan Oil and Flour Mills [(2009) 14 SCC 63] in
which it was held that and economically viable transport subsidy was
given so that industry could become competitive.

Further, the
Supreme Court referred to the decision in Sahney Steel and Press Works
Ltd. vs. CIT[1997] 228 ITR 253(SC), which dealt with subsidy received
from the state Government in the form of refund of sales tax paid on raw
materials, machinery, and finished goods subsidy on power consumed by
the industry; and exemption from water rate. It was held that such
subsidies were treated as assistance given for the purpose of carrying
on the business of the assessee.

The Supreme Court thereafter
referred to a Delhi High Court judgment in CIT vs. Dharam Pal Prem Chand
Ltd. [2009] 317 ITR 353 (Delhi) from which a special leave petition
preferred in the Supreme Court was dismissed. This judgment also
concerned itself with section 80-IB of the Act, in which it was held
that refund of excise duty should not be excluded in arriving at the
profit derived from business for the purpose of claiming deduction u/s.
80-IB of the Act.

The Supreme Court thereafter considered one
further argument made by the Counsel for the Revenue. He had argued that
as the subsidies that were received by the respondent, would be income
from other sources referable to section 56 of the Income-tax Act, any
deduction that was to be made, could only be made from income from other
sources and not from profits and gains of business, which was a
separate and distinct head as recognised by section 14 of the Income-tax
Act. The Supreme Court held that the Counsel for the Revenue was not
correct in his submission that assistance by way of subsidies which were
reimbursed on the incurring of costs relatable to a business, were
under the head “Income from other sources”, which is a residuary head of
income that could be availed only if income did not fall under any of
the other four heads of income. The Supreme Court held that section
28(iii)(b) specifically states that income from cash assistance, by
whatever name called, received or receivable by any person against
exports under any scheme of the Government of India, would be income
chargeable to income-tax under the head “Profits and gains of business
or profession”. If cash assistance received or receivable against
exports schemes are included as being income under the head “Profits and
gains of business or profession”, it was obvious that subsidies which
go to reimbursement of cost in the production of goods of a particular
business would also have to be included under the head “Profits and
gains of business of profession”, and not under the head “Income from
other sources”.

The Supreme Court therefore dismissed the appeal.

shailesh.kwebmaker

Charitable purpose – Depreciation – Disallowance u/s. 11(6) – A. Y. 2005-06 – Section 11(6) barring allowance of depreciation on such assets is prospective in nature operating w.e.f. 01/04/2015 – Depreciation on assets allowable for earlier period –

DIT vs. Al-Ameen Charitable Fund Trust; 283 ITR 517 (Karn):

The assessee is a charitable institution registered u/ss. 12AA and 10(23C) . For the A. Y. 2005-06, the Assessing Officer completed the assessment u/s. 144 of the Act denying exemption u/s. 10(23C) of the Act. The Assessing Officer disallowed the claim for depreciation on the ground that the assets were acquired out of the exempt income. The Commissioner(Appeals) and the Tribunal allowed the assessee’s claim.

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

“i) The argument advanced by the Department apprehending double deduction was misconceived. While in the year of acquiring the capital asset, what is allowed as exemption is income out of which such acquisition is made, when depreciation is allowed in the subsequent years, it is for the losses or expenses representing the wear and tear of such capital incurred, and if it is not allowed there is no way to preserve the corpus for deriving its income. The Appellate Tribunal was right in holding that depreciation was allowable u/s. 11 of the Act and there was no double claim of the capital expenditure.

ii) Section 11(6) of the Act, which provides for disallowance of the depreciation is prospective in nature and operates w.e.f. April 1, 2015.”

shailesh.kwebmaker

Disallowance of expenditure in respect of exempt income – Section 14A – A. Y. 2009-10 – Investment from common pool – Non-interest bearing funds more than investment in tax free securities No interest disallowance can be made u/s. 14A –

CIT vs. Microlabs; 383 ITR 490 (Karn):

Dealing with the scope of section 14A read with Rule 8D the Karnataka High Court held as under:

“When investments are made out of a common pool of funds and non-interest bearing funds were more than the investments in tax-free securities, no disallowance of interest expenditure can be made u/s. 14A of the Incometax Act, 1961.”

shailesh.kwebmaker

Reassessment – Validity – Section 147 – A. Y. 1993 -94 – Non-supply by the AO of reasons recorded for reopening the assessment (even where the 14 reopening is prior to GKN Driveshafts 259 ITR 19 (SC)) renders the reassessment order bad as being without jurisdiction

CIT vs. IDBI (Bom); ITA No. 494 of 2014 dated 19/09/2016; www.itatonline.org:

For the A. Y. 1993-94, the
assessment of the assessee was reopened by issuing notice u/s. 148 of the
income tax Act, 1961. The assessee filed return in response to the notice and
requested the reasons for reopening. In spite of the repeated request the
reasons were not furnished but the reassessment was completed. The assesee
challenged the reassessment order on the ground that the reassessment made
without furnishing the reasons for reopening is invalid. The tribunal accepted
the assessee’s claim and held that the reassessment order is invalid.

On appeal by the revenue, the
Bombay high Court upheld the decision of the tribunal and held as under:

“i) The question as framed proceeds on the basis
that the respondent assessee was aware of the reasons for reassessment.
the only basis for the aforesaid
submission is the submission made by the revenue before the tribunal that the
respondent assessee is a public sector institution who was aware that search
action has been initiated on certain lessees in respect of transactions with
idBi i.e. assessee. On the basis of the above, it is to be inferred that the
reason for reassessment was known to the respondent assessee.

ii) The supply of reason in
support of the notice for reopening of an assessment is a jurisdictional
requirement. The reasons recorded form the basis to examine whether the
Assessing Officer had at all applied his mind to the facts and had reasons to
believe that taxable income has escaped reassessment. It is these reasons,
which have to be made available to the assessee and it could give rise to a
challenge to the reopening notice. It is undisputed that the reasons recorded
for issuing reopening notice were never communicated to the respondent assessee
in spite of its repeated requests. Thus, the grievance of the revenue on the
above count is unsustainable.

iii) An alternative submission is made on behalf of
the revenue that the obligation to supply reasons on the Assessing Officer was
consequent to the decision of the apex Court that GKN Driveshafts (India) Ltd.
vs. Income-tax Officer (2003) 259 ITR 19 (SC) rendered in 2003 while, in the
present case, the reopening notice is dated 9th
December 1996. Thus it submitted at the time when the notice u/s. 148 of
the act was issued and the time when assessment was completed, there was no
such requirement to furnish to the assessee
a copy of the reasons recorded. This
submission is not correct. We find that the impugned order relies upon the
decision of this Court in Seista Steel Construction (P.) ltd. [1984] 17 taxman 122(Bom.) when it is held
that in the absence of supply of reasons recorded for issue of reopening notice
the assessment order would be without jurisdiction and needs to be quashed. The
above view as taken by the tribunal has also been taken by this Court in CIT
vs. Videsh Sanchar Nigam Ltd. [2012] 21 Taxmann 53 (Bombay) viz. non-supply of
reasons recorded to issue a reopening notice would make the order of assessment
passed thereon bad as being without jurisdiction.

iv) In view of the above, the
appeal is dismissed”

shailesh.kwebmaker

Coparcener – Vested right after adoption – A coparcener/son continues to have vested right in joint family property of birth even after adoption. [Hindu Adoptions and Maintenance Act, 1956, 12(b); Hindu Succession Act, 1956, Section 30].

Purushottam Das Bangur AIR 2016 Cal. 227.

In the present case, son (born in a Mithakshara Undivided Hindu Family) given in adoption filed a caveat in the proceedings for probate of the will of his deceased natural father. The propounders seeking probate of the will asked for the discharge of the caveator on the ground that the caveator being given in adoption, had ceased to have any right in the natural family in view of the provisions of section 12(b) of the Hindu Adoptions and Maintenance Act, 1956. The Propounders relied upon decisions of Devgonda Raygonda Patil vs. Shamgonda Raygonda Patil & Anr AIR 1992 Bom 189 and Santosh Kumar Jalan vs. Chandra Kishore Jalan & Anr AIR Patna 125, wherein it was held that until the joint family property is partitioned, there can be no vesting i.e. only if the Joint property is partitioned before the adoption, only then does the coparcenor continue to have a vested right in Joint family property even after adoption.

However, the Court, taking a contrary view held that, a vested interest in a property is understood to mean that a person has acquired proprietary interest therein. However, the enjoyment of such proprietary interest may be postponed till the happening of a certain event. Once that event happens such person would enjoy proprietary rights in respect of the property. A coparcener in a Mitakshara coparcenary acquires an interest in the properties of the Hindu family on his birth. His interest is capable of variation by events such as birth, adoption or death in the coparcenary. In the event of a partition of the coparcenary, a coparcener is entitled to a share of the properties belonging to joint Hindu family. On partition his share gets defined. He can still continue to enjoy his share in jointness with other family members or he can ask for partition of the properties by metes and bounds in accordance with the shares. On partition his share gets defined. This interest which the coparcener in a Mitakshara family acquires by his birth in the natural family continues to remain with him in spite of the adoption in view of section 12(b) of the Hindu Adoptions and Maintenance Act, 1956.

shailesh.kwebmaker

Twitter Treats

When the Constitutional Amendment Bill to pave the way for GST was passed, the world of Twitter was flooded with GST related tweets. Some of these are shared below for our readers:

@adhia03
We are ready with state of art IT design for GST implementation. Hardware and software will all be ready for testing by january 17.

@v_shrivsatish
Passing of 15 bills including that of GST shows the maturity and the real spirit of cooperative federalism reflected by meaningful debates.

@bhawnakat
In the Lists of items that can’t be understand GST reached at second place!! Wife’s mood still on top

@MVenkaiahNaidu
Congrats to d people of Assam and its CM Shri @ sarbanandsonwal 4 becoming d 1st State 2 ratify GST bill. This time North East has taken lead

Twitter Storm of the month
Often, a controversial tweet by a well known personality causes a storm in the world of social media. This month, there was one such controversial tweet by well known socialite Shobhaa De. Her tweet criticising the Indian contingent’s performance at the Rio Olympics evoked immediate response. Her tweet and some of the responses are reproduced below:

@DeShobhaa
Goal of Team India at the Olympics: Rio jao. Selfies lo. Khaali haath wapas aao. What a waste of money and opportunity.

Abhinav Bindra @Abhinav_Bindra
@DeShobhaa that’s a tad unfair. You should be proud of your athletes perusing human excellence against the whole world.

Nishant Gambhir @madnish30 Aug 8
Not even worth a selfie. If scaring babies was Olympic sport, @DeShobhaa would strike gold!

Ra_Bies@Ra_Bies
By the time our kids put their feet in the swimming pool & scream “Mummy paani bahut thhanda hai”, Micheal Phelps wins another gold medal

#USA @CJBForHeisman Aug 8
If you ever feel useless just remember that someone is a lifeguard for the Olympic #swimming events Ra_Bies

@Ra_Bies 2h2 hours ago
Bill for 6 months maternity leave for women passed. Too glad, ultimately parliament delivered

Zeddonymous @ZeddRebel Aug 10
Trump voter: “I like Trump because he says exactly what he means.” Trump: ‘Somebody shoot my opponent’ Trump voter: ‘He didn’t mean that’

@_Buddha_Quotes
Let no one deceive another or despise anyone anywhere, or through anger or irritation wish for another to suffer.

@FinMinIndia
Till 5th August 2016, about 20.81 lakh refunds for AY 2016-17(current year returns) totaling Rs 2,922 crore have been issued by IT dept

And here are this month’s recommendations of famous people that you can follow. This time, the celebrities are from the corporate world.

Aanand Mahindra @anandmahindra
Harsh Mariwala @hcmariwala
Kiran Mazumdar Shaw @kiranshaw
Nita Mukesh Ambani @NitaMAmbani
Bill Gates @BillGates
Richard Branson @richardbranson
Ronnie Screwvala @RonnieScrewvala
Uday Kotak @udaykotak
Sajjan Jindal @sajjanjindal59
Harsh Goenka @hvgoenka

shailesh.kwebmaker

Banking overhaul

Most of the current discussion on Indian banks is naturally focused on the bad loans mess.

Reserve Bank of India governor Raghuram Rajan has done well to highlight more fundamental challenges as well. The banking system is a mess at various levels. The multiplicity of regulators has led to poor outcomes. Bank boards have few powers. The government often uses the banks it owns to further its political goals. There is no reason to have central bank appointees on bank boards. The lack of talent means a missing middle in organizational charts. Bank officials are often generalists rather than specialists.

All this creates a problem of perverse incentives.

An organizational overhaul is overdue. So is a regulatory one. But these will take time. The longer they take, the more market share will public sector banks lose to more nimble private sector competitors. People in the financial markets are already describing the process as privatization by stealth. Will it be the airlines story all over again?

(Source: Mint Newspaper dated 17-08-2016)

shailesh.kwebmaker

Lesson for the state

Abhinav Bindra bowed out of the Olympics and signed off on his career with a brave performance that came within a whisker of securing him another medal. Sania Mirza and Rohan Bopanna suffered heartbreak in the tennis mixed doubles semi-finals. Dipa Karmakar has pushed herself to the limit, as has the rest of India’s Olympics contingent. Union sports minister Vijay Goel, meanwhile, has managed to earn an official rebuke from organizers who threatened to cancel his accreditation for allegedly unbecoming and aggressive behaviour.

This feels like a teachable moment-a particularly apt one at the time of India’s 70th Independence Day.

Ordinary citizens trying to do their best while the state absents itself from giving them adequate support? Check. The state making its presence abundantly known where it has no business? Also check.

We’ve seen this plenty of times before in every walk of life. It’s time to actually learn the lesson.

(Source: Mint Newspaper dated 15-08-2016)

shailesh.kwebmaker

Waiting for justice: Resolve the faceoff over judges’ appointments fast, it is really hurting citizens

In the year 2016 Indians deserve a modern and streamlined judicial system. Instead what they are stuck with is a deficient structure groaning under a great pendency of cases. And the crisis only seems to be worsening, as a bench headed by Chief Justice T S Thakur has accused government of bringing the judiciary to a standstill by stalling judges’ appointments.

This eyeball to eyeball confrontation is part of a prolonged battle over the procedure to appoint judges. While the judicial collegium is criticised for opacity and favouritism, the National Judicial Appointments Commission, which envisaged a broader panel to choose judges and was passed by Parliament, was struck down by the apex court in October 2015.

The longer government and the collegium take to finalise a new memorandum of procedure to appoint HC and SC judges, the more citizens awaiting justice suffer. In practical terms, the high courts are now operating with 44.3% vacancies; pendency has risen to four million cases.

Any attempt at securing justice is an ordeal on its own, and financially ruinous for many people. As the CJI himself has noted, “By the time an appeal can be heard, the accused would already have served a life sentence.” Clearly the current clash of wills between the executive and the judiciary has only worsened matters. Remember that appointments had also remained frozen for nearly a year when the apex court scrutinised the constitutional validity of the proposed NJAC. Instead of wallowing on their respective sides of the legal logjam, both government and the judiciary must show much more teamsmanship – not only to finalise a new procedure to appoint judges but also to implement broader reforms to remedy judicial delays.

(Source: The Times of India dated 15-08-2016)

shailesh.kwebmaker

Representation in respect of the Model Goods and Services Tax Law.

18th August, 2016

To,
Mr. Ravneet Khurana,
Deputy Commissioner (GST),
CBEC, Ministry of Finance,
Directorate General of Goods & Service Tax
NACEN, Centre of Excellence, 3rd Floor,
Tower 3 & 4, NBCC Plaza, Pushp Vihar,
Sector -5, Saket, New Delhii- 110017.

Dear Sir,

Subject:- Representation in respect of the Model Goods and Services Tax Law.

We enclose herewith our representation and suggestions in respect of the Model Goods & Service Tax Law, for your consideration.

We sincerely hope that our representation would receive favourable consideration.

Thanking you,
We remain,
Yours truly,

For Bombay Chartered Account ants ‘ Society

Chetan Shah
President

Govind G. Goyal
Chairman – Indirect Taxation Committee

GOODS AND SERVICE TAX SUMMARY OF IMPORTANT REPRESENTATIONS

1. Structure Of GST

1.1. Currently, the role of the GST Council under Article 279A is merely “recommendatory” in nature. This could result in some States deviating from the model GST law or the substantive provisions therein. Since GST is an indirect tax ecosystem, with each constituent dependent on another for smooth implementation of the law, it is suggested that though the role of GST Council under Article 279A is merely “recommendatory” in nature, the Centre as well as the States respect all the recommendations made by the GST Council and do not deviate from the same.

1.2. One important reason for the implementation of GST is to bring about uniformity of taxation across the country. It is therefore strongly recommended that the exemptions, rate of tax, classification and all other rules should be uniform for all the States. It may be noted that any deviation by a particular State can result in tax arbitrage, distortion of business processes and increased business compliances. Further it would also complicate the operations of the GST Network and could derail the entire GST Mechanism in the country.

1.3. The Constitution as well as the model GST Laws provide for the notification of the effective date from which GST will be implemented. It is recommended that this effective date should be common for all the States and that GST should be implemented from the first date of any financial year. Further, it is recommended that sufficient time should be provided to the industry and the Department Officers to prepare for GST and therefore, all relevant information should be made available in public domain at earliest opportune time.

2. SUPPLY

2.1. Section 3(1) and Schedule I of the model GST Law provides for taxation of supplies whether they are made for a consideration or otherwise. This can result in many difficulties and unforeseen situations of tax liabilities. Essentially, free supplies of not only goods but also services will become taxable. For example, retail chains providing products under free scheme would be required to discharge GST. Similarly, a common citizen downloading free software from the internet and using websites like Google, Facebook, etc. will be exposed to GST. Volunteers and NGOs will also be required to discharge GST on activities carried out by them without any charge.

2.2. It is therefore recommended that supplies should be taxed only if there is a consideration. Supplies made without consideration, especially in the case of services, should not be taxed.

2.3. Further, if the intent is to tax branch transfers, only such branch transfer of goods should be deemed to be supply and the term should be clearly defined to include only goods transferred from a branch in one State to another branch in another State for the purposes of further manufacture or resale.

2.4. The proviso inserted in Schedule I excludes supplies to the job worker following procedure under Section 43A. As per Section 43A, there is requirement to obtain permission from the Commissioner for such exempt movement of goods on account of job work. Such requirement for permission would not only increase the process time but would also conflict with the core attribute of GST being system driven.

3. NATURE OF SUPPLY

3.1. Under the model GST Law, on a reading of the definition of goods u/s 2(48) and services u/s 2(88), it appears that only supply of money and employment services are excluded from the scope of supply. This results in certain cases where the transaction is essentially of investment and not of consumption (like immoveable properties and securities) becoming liable for GST.

3.2. It is therefore recommended that supplies of immoveable properties and securities should be excluded from GST

4. TIME OF SUPPLY

4.1. Sections 12 and 13 of the model GST Law provides for complicated provisions requiring discharge of GST at the earliest of 4-5 trigger points. This should be done away with, since the provisions relating to time of supply do not create a tax liability but only state the time of paying the liability

4.2. It is therefore recommended that the time of supply should be the date of invoice. As an anti-avoidance measure, if required, the law may prescribe a maximum time (currently 30 days under the service tax law) from the date of removal of goods/ completion of service for the raising of the invoice

5. VALUE OF SUPPLY

5.1. The model GST Law provides for inclusion of various amounts in the value of the taxable supply. Since each of the specific inclusions in the value under Section 15(2) is an independent supply liable for GST, such inclusions are uncalled for and would result in double taxation. It is therefore recommended that the provisions for such notional inclusions should be done away with and only the consideration should be included in the value of supplies

6. PLACE OF SUPPLY

6.1. High Seas Sale should be excluded from the purview of IGST since the subsequent transaction is a subject matter of Customs Duty

6.2. The benefit of ‘zero rating’ provided under Section 2(109) to exports should be extended to deemed exports and supplies to SEZ, EOU and STP

6.3. It should be clarified that the location of supplier under Section 2(65) would be determined based on the person/establishment entitled to receive the consideration, this would bring parity with the definition of location of recipient of service.

6.4. Section 6(4) provides for the source rule in case of services connected with immoveable property. The said rule should cover only services “directly in relation to immovable property…” and should not cover services connected with vessels since they are moveable in nature

6.5. In case of re-classification issues between IGST vs. CGST/SGST, the respective Governments should internally transfer the funds and not require the assessee to once again pay the tax. Similar relaxation should be provided in case of issues of interpretation of place of supply in case of IGST transactions. Section 30 of the IGST Act may be suitably amended.

7. INPUT TAX CREDIT
7.1. Since GST has comprehensive coverage, all credits should be allowed. In fact the FA Q issued by the Government clearly acknowledges that it is a tax on value addition at each stage and there would be no cascading effect. In the light of this core aspect of GST, the restrictions provided under Section 16(9) should be done away with.

7.2. Genuine Credit should not be denied merely due to non reflection in the GST Network. The provisions for reversal of credit on account of mis-match under Section 29 should be done away with.

7.3. Non payment of tax by the vendor should not result in denial of credit to the taxpayer. The condition under Section 16(11)(c) should be deleted.

7.4. Input Service Distributor should be permitted to freely transfer the credits to any of its’ branches. Provisions of Section 17 should be suitably amended.

7.5. The current CENVAT Credit Rules defer the entitlement of credit in certain cases to a future date. While transition provision has been enacted for the claim of credit of second instalment of capital goods, many other transition provisions are not incorporated. It should therefore be provided that in all cases where the credit would have been allowable under the erstwhile CENVAT Credit Rules, the same should be permitted under the GST Law as well. Some examples are listed below

• Re-credit of service tax under proviso to Rule 4(7) in case of delayed payment to the vendor.
• Re-credit of amount revered under Rule 6(3) on finalisation of ratio of exempted turnover to total turnover
• Delayed receipt of invoices from the vendors
• Staggered Credit in respect of Spectrum Payments

8. RATES AND EXEMPTIONS
8.1. Threshold of Aggregate Turnover of Rs. 10 lakhs is across all States, includes exempted and exported supplies and therefore is fairly low when compared to the excise threshold of Rs. 150 lakhs. This will result in substantial hardship to small entrepreneurs. Further, this will also result in substantial increase in the number of assesses to be administered by the Centre (a rough estimate suggests at least 40 times the current bench strength), resulting in a huge pressure on the officials as well as on the network. It is therefore suggested that the aggregate turnover for exemption should be Rs. 50 lakhs with an optional compounding scheme upto Rs. 150 lakhs.

8.2. Exemption provided for agriculturist under Section 9 needs to be extended to cover agricultural produce throughout the supply chain. Further the definition of agriculture under Section 2(7) needs to be widely provided and activities like poultry, diary, etc. should be considered as part of agriculture.

8.3. At present, various tax exemptions are provided to units set up in specific areas. The said exemptions should also continue under the GST law since the units were set up in those areas due to the tax benefit provided. The government should provide clarity on the same.

8.4. In view of the comprehensive coverage and the self policing nature of GST, the base for taxation would increase fundamentally. Therefore, the revenue neutral rate suggested by the Arvind Subramaniam Committee is fair and adequate to meet the revenue requirements of the Centre and the States. It is therefore recommended that the standard rate of GST should not be higher than 18%.

8.5. The rates of GST need to be realigned considering the current rate structures. Many products which are currently exempted or liable for a very low rate of tax should not be directly moved to the RNR but either the exemption should be continued or such products should be kept under the merit rate.

9. REFUND
9.1. Section 38 allows refund only in two situations i.e. Export and Inverted Duty Structure. However, refund should also be allowed in cases where the credit which is accumulated due to other reasons.

10. PROCEDURAL ASPECTS

10.1. The model GST Law provides for strict timeline for various compliances as under
• Filing of Details of Outward Supplies by 10th
• Filing of Details of Inward Supplies by 15th
• Filing of Return by 20th

10.2. S ince transaction level details are to be uploaded onto the GST Network, the above timelines are too short. Considering the diversity of the country, with frequent power cuts and unavailability of internet network in many parts of the country, these timelines cannot be complied with. Further, the volume of data to be uploaded on the GST Network is unprecedented and we do not have any prior benchmark of the same. Therefore, it is suggested that for the first two years, the time lines provided above should be relaxed and based on the stability of the new system, the timelines can be revisited

10.3. There is no justification to subject the taxpayer to two assessments for the same base and similar law. It is suggested that some suitable allocation of the taxpayers be decided such that some taxpayers are assessed by the State Authorities and some taxpayers are assessed by the Centre.

10.4. There are very wide powers to make rules, prosecution, confiscation, etc. which should be avoided. All such provisions merely result in harassment of the asssesees and reduce the ‘ease of doing business’ without any corresponding benefit to the exchequer.

shailesh.kwebmaker

Brexit- A Few Thoughts

Query:
Why Britain separated from EU? What are its implications on – Britain, EU, and on India.

I submit my views.

Summary:
Britain is already on a downward slide. By exiting from European Union, it has hastened its fall. It is a non-event for rest of the world. Unless…the Britishers wake up and put their act together.

There is nothing unique in Britain’s tendency to bring harm upon itself. India has done it repeatedly. US is doing it right now very seriously.

1. Details.
History is Process Driven :
In studying human history, we tend to look at events. This is micro view. It would be better to look at the whole process that has resulted into the event; and then see:

(i) What caused the event;
(ii) If the process continues, what can be the consequences; and
(iii) If the process stops or reverses itself, what can be the consequences.

For this we also have to consider the human psychology, and the laws of philosophy. Realise that the process itself consists of several cycles – some virtuous cycles and some vicious cycles. The cycles keep changing in several manners – speed, intensity, direction etc. The interaction of all these cycles produces several events. We notice some.

This may be the practical Macro view, encompassing more than what the economists call a “Macro View”.

2. The British Process of Exit:
2.1 The Britishers left EU because, they still believe – majority still believes – that they are superior to rest of the world. (This is a universal human weakness). And their currency – Pound sterling is the best currency. They cannot be subordinate to anyone. EU was perceived as – making them lose their sovereignty and hence unacceptable. This was the first cause.

2.2 British economy is downhill. There is unemployment. The American economic crisis of the year 2008, has only exacerbated the British economic crisis. All the supply of additional money (Bail outs & Quantitative Easing) has not lifted the economy. People who are unemployed are dissatisfied with their own Government; EU Government and with many other causes that they can identify. After changing the British Governments, economy has not improved. So what do you do? Can’t change EU Government. So leave EU.

2.3 The U.K. current account deficit at 7% is an all-time high. With Brexit this deficit is likely to increase. This will devalue the sterling pound further. However, some believe it is good for Britain. Hence leave EU.

2.4 Despite the fact that British economy is down, the perception of majority of Britishers is that EU is dysfunctional and is a sinking ship. So leave EU.

2.5 The EU policy is that any citizen of EU can move anywhere within EU and can settle down anywhere that he likes. People from Eastern Europe and many countries where economy is far worse than in UK, did migrate into the UK and started working there for a lower pay. This was perceived as causing unemployment amongst the Britishers. This perception ignored the fact that many Britishers live in EU.

2.6 The Syrian refugee crisis exacerbated the fear of unemployment. Sheer number of refugees, and the fact that almost all of them were Muslims, made them unacceptable. And then media publicized news that the refugees were raping European women, terrorists enter Europe with refugees etc. These are big reasons for making refugees unacceptable. But refugees cannot be prevented from entering Britain as long as Britain is part of EU. So leave EU.

Remember the year 1971 when more than a crore of Bangladeshi refugees came into India. Western World advised India to accept them on humanitarian grounds. The refugees are still in India. At Wadala – Antop Hill, there is a whole area known as Bangladeshi Colony. This is just one of the areas spread all over India.

Also note that the USA – which is at the root of the Syrian crisis is not affected by the refugee crisis.

2.7 Then came a sheer coincidence. Cameron made a promise in his election campaign that he will call for a referendum – ‘whether UK should continue in the EU or not’. Having made the promise, when he won election, he was duty bound to call for the referendum. Cameron himself believed that UK should continue with the EU. He had made the promise just to get more votes. If no referendum was called, there would be no exit. But the referendum was called and there is BREXIT.

There were people who were dissatisfied with the EU for psychological reasons. Economics & Geopolitics were not on their mind. They seized the opportunity, canvassed heavily for exit. Most Britishers do not understand Global politics & economics. They only know whether they or their close ones have lost their jobs. People canvassing for Brexit also did not expect a win. When they won the referendum, they were shocked and went in the background.

3. Impact:
3.1 “United we stand & divided we fall” is understood by all. However, this is practised by few. European Union together is the largest economy. It can influence global politics and even challenge US influence. When one unit out of the Union separates, the strength of the Union certainly goes down. Hence, to that extent EU will suffer. To that extent, US might be happy.

3.2 Culturally and psychologically, Britain and Europe have always considered themselves separate and different. British ego increased and sharpened that separation.

However, the irony is that Britain is seeking to delay the exit whereas EU is working for an early exit.

3.3 Also, Britain has no strong leader. It is not in a position to impact world sentiment, leave aside world economics and politics. Its own economy is in doldrums. By exiting EU, worst sufferer will be UK. Pound sterling has already lost 10% of its value since the exit vote making import of raw materials and consumables expensive. This increases both the cost of production and cost of living – impacting industry, jobs and the common Britisher. Scotland and Ireland are reviewing their relationship with Britain.

3.4 If we consider the theory of “Butterfly Effect”, everything affects everything. There will be some impact on India as our exports to UK will become expensive. But the impact will be so small that does not merit discussion. Because of Brexit Netherlands, one of EU’s founding members will call for a UK like referendum and Hungary’s forthcoming October referendum will be on EU migrant policy. Mr. Geert Wilders leader of the Party for Freedom of Netherlands in the party’s manifesto has pledged to withdraw from EU. As opposed to this Germany is working for ?better Europe’ and not `more Europe’. Despite these developments E.U. will still be the second largest economy. Hence I am of the opinion that there will be little impact on world economy.

4. Principles of analysis :
Considering an event and then trying to project future events and consequences – amounts to ignoring an important principle of analysis. Human beings are an important cause of all the cycles and the total process. After the event, they are not going to sleep. They will act. How they will act will affect the cycles and hence future course of events. How humans will act in future is a difficult matter to project and I cannot cover it in this brief article. Hence my view: Future was always unpredictable, and will remain unpredictable and

‘Brexit is a non-event’.

shailesh.kwebmaker

Withdrawal of Open offer – lessons from Supreme Court/SAT/SEBI decisions

Background
What happens when an open offer is made under the SEBI Takeover Regulations and thereafter the offerer, for some reason, changes his mind? Should he be allowed to withdraw his offer? If yes, under what circumstances? Can it be a unilateral withdrawal at his discretion or should it be under certain conditions only? Or should he be required to take approval of SEBI? Should SEBI have wide powers – and hence duty – to allow such withdrawal? What is the criteria SEBI should follow for permitting such withdrawal?

The stakes involved in such a case are large. For example there is a listed company whose market capitalisation is Rs. 1000 crore. The market price of its share is Rs. 100. An offerer believes that the shares are under priced and decides to acquire control and makes an open offer at Rs.150 per share. However, sometime later, for reasons such as new information coming to light, fresh developments or even change of mind, he wants to withdraw the open offer. However, the offer would have had consequences on the market. There may be persons who would have bought shares from the market at higher price. The Company would have faced restrictions in carrying out certain activities during the offer period under the Regulations. Further, withdrawal without regulation may make the whole process frivolous since offerers may make offers, disrupt the company and the market, perhaps profit from such disruption and then withdraw. Open offers thus may lose sanctity. At the same time, an absolute bar from withdrawal may result in heavy costs for the offerer even where there were genuine reasons for withdrawal. In the example, the offerer would have to pay about Rs. 390 crore to acquire the 26% from the shareholders. The offerer would thus be stuck with a huge lot of shares, whose value may have diluted for reasons beyond his control and perhaps not gain control of the company too.

Considering the huge stakes involved and also considering that this issue could often arise, the matter has been subject matter of serious litigation. The matter has twice reached the Supreme Court and litigated before the Securities Appellate Tribunal. Recently, once again, SEBI has passed an order (dated August 1, 2016 in respect of open offer for Jyoti Limited) which is under the latest SEBI (SAST) Regulations 2011 (“the Takeover Regulations”). Curiously, in each of these cases, the application to withdraw the open offer was rejected, but for differing reasons/facts. Study of these issues has importance for persons acquiring large stakes in companies to know whether and when they may be allowed to withdraw. They would carefully need to structure and prepare for their transactions since an inadvertent lapse may result into an irreversible open offer and huge losses. At the same time, the Regulations, which have been drafted in the interests of investors, are such that open offer is triggered off at a very early stage.

This issue is also relevant because the relevant provisions for withdrawal have been tweaked in the 2011 Takeover Regulations as compared to the 1997 Regulations. While these changes have not affected the outcome in each of these matters, they are relevant to future open offers.

Provisions of the Regulations for withdrawal of open offer Regulation 23(1) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, deals with withdrawal of open offer. Regulation 23(1) provides 3 specific reasons and one general/residuary one under which an open offer can be withdrawn. Amongst the specific reasons, the first permits withdrawal where statutory approvals required for the open offer/acquisitions have not been received, provided due disclosures were made. The second reason permits withdrawal where the offerer, a natural person, has died. The third sub-clause provides for a situation where the agreement to acquire shares contained a condition that the acquirer/offerer could not meet for reasons beyond his reasonable control and provided that conditions were disclosed in advance, and that lead to rescinding of the agreement, withdrawal of offer is allowed.

Finally, there is the general/residuary ground, which is also the ground under which litigation has arisen. SEBI has discretion to grant withdrawal pursuant to “such circumstances as in the opinion of the Board, merit withdrawal.”. The question is whether this means there has to be an impossibility, taking color from the previous three grounds, as contended by SEBI? Or whether withdrawal can be permitted on other grounds such as the offer becoming uneconomical or other reasons, as contended by offerers? On this aspect, the law under the 1997 Regulations, on which preceding decisions have been rendered, is the same as under the 2011 Regulations on which the latest decision of SEBI has been rendered.

Decisions of the Supreme Court
The Supreme Court has on two occasions to dealt with this issue. In Nirma Industries Limited vs. SEBI (2013] 121 SCL 149 (SC) (“Nirma”), the offerer, a lender company, had lent monies to certain promoter entities of a listed company against pledge of shares of such listed company. On default, it exercised the pledge and thus acquired the shares which in turn resulted in obligation to make an open offer. However, it was claimed that later investigation brought to light that the Promoters of such listed company had allegedly siphoned off huge amount of funds, there were undisclosed liabilities, etc. and, thus, the value of the shares suffered in value. Yet, the lender was now stuck with the open offer at a price being as per the formula under the Regulations. Obviously, this would result in huge losses to the lender. It approached SEBI seeking withdrawal. SEBI rejected such application. Finally, the issue came before the Supreme Court. The core issue was whether the power of SEBI to grant withdrawal under the residuary clause was wide. Thus, whether it could allow withdrawal under varying circumstances at its discretion? Or whether it had very narrow powers, limited, on principles of ejusdem generis, to the nature of circumstances under the first three clauses under which withdrawal was permitted? In essence, thus, the issue was, whether power of SEBI to grant withdrawal was only if the offer was impossible to be proceeded with? The Supreme Court considered the facts of the case and the nature, scheme and purpose of the Regulations and held that SEBI could grant withdrawal only if there was impossibility in proceeding with the open offer. In the case before it, the offerer could still go ahead with the open offer and it has not become impossible merely because of changed circumstances.

The Court thus concluded that “Therefore, the term such circumstances in clause (d) would also be restricted to situation which would make it impossible for the acquirer to perform the public offer. The discretion has been left to the Board”. Merely because the offerer may suffer losses does not make the offer impossible to make or to be proceeded with. In the words of the Hon’ble Supreme Court, “The possibility that the acquirer would end-up making loses instead of generating a huge profit would not bring the situation within the realm of impossibility.” Thus, the plea of the lender/offerer was rejected.

The Supreme Court had soon thereafter again to deal with a similar matter. In SEBI vs. Akshya Infrastructure (P.) Ltd. (126 SCL 125 (SC)(2014))(“Akshya”) too, the question was whether, if the open offer becomes uneconomical owing to changed circumstances (curiously, this was allegedly owing to huge delay by SEBI in approving the open offer document), should it be allowed to be withdrawn? The Court followed Nirma and observed that:-

“This impossibility envisioned under the aforesaid regulation would not include a contingency where voluntary open offer once made can be permitted to be withdrawn on the ground that it has now become economically unviable.”.

The Court also explained the rationale of this conclusion as follows:

“Accepting such a submission, would give a field day to unscrupulous elements in the securities market to make Public Announcement for acquiring shares in the Target Company, knowing perfectly well that they can pull out when the prices of the shares have been inflated, due to the public offer.”

Decision of SAT
A similar issue was agitated in case of an open offer for shares of Golden Tobacco Limited (“GTL”) (in Pramod Jain vs. SEBI [2014] 48 taxmann.com 226 (SAT – Mumbai)). Here too, an open offer was made to acquire shares at a certain point of time. However, during the intervening time (which again included a huge delay allegedly caused by time taken by SEBI in approving the offer document), the offerer alleged that owing to acts by the Promoters of GTL, the shares of the Company lost hugely in value. The offerer thus sought to withdraw the open offer. Following and applying Nirma and Akshaya, the SAT, in a majority decision, refused to allow the offer to be withdrawn since there was no impossibility in proceeding with the offer.

Decision in case of open offer for shares of Jyoti Limited. In this latest case, SEBI had occasion to consider a peculiar case though with underlying similar issues. The offerer had made an open offer to acquire 75% of the shares and thus control of the listed company at a price of Rs. 63 per share. However, it came to light that the Company was a sick industrial company, having lost its net worth. The BIFR ordered status quo on operations/controlling stake and change in control of the Company was prohibited in the interim. Appeal of the offerer against such order of BIFR was dismissed by the Appellate Authority for Industrial and Financial Reconstruction. The question was whether, since the open offer could not be proceeded with, this was a fit case for permitting withdrawal of open offer. SEBI noted that the BIFR had not prohibited the open offer, but had merely given a stay to it, pending final decision. It was thus possible for the offerer to proceed with the open offer post such decision. In other words, the pre-condition of impossibility did not exist. Hence, applying Nirma and Akshaya, SEBI rejected the application of the offerer to withdraw the open offer.

Conclusion
It would be a rare case, thus, that an open offer would be allowed to be withdrawn. The offerer will have to demonstrate that either one of the three specific circumstances as laid down in Regulation 23(1) existed or there should be some other impossibility in proceeding with an open offer. If something happens in between, even if caused by SEBI’s delay or actions by the Company/its Promoters, or other unavoidable circumstances, so long as it is possible to proceed with the open offer, SEBI will not allow withdrawal. As explained earlier, the Regulations have sensitive triggers for the open offer to arise and once a trigger is set off, it is more or less irreversible. The offerer would thus have to proceed warily and with adequate planning to ensure that (i) either the open offer does not arise (ii) if it does arise, he is prepared to proceed through it till completion, whatever arises in between. Apart from difficulties in negotiated takeovers, this can make hostile open offers near-infeasible. Even in negotiated cases, often owing to delayed processing by SEBI, disputes in the interim with the Company/Promoters, changed circumstances, etc. could create problems. Nevertheless, there is an underlying sensible principle involved here. Offerers should not be given a broad leeway that offers can be made and withdrawn at their discretion. This would, inter alia, play havoc with markets and harm interests of investors.

shailesh.kwebmaker

Search and Seizure – Block Assessment – Limitation – As a general rule, when there is no stay of the assessment proceedings passed by the court, Explanation 1 to section 158BE of the Act may not be attracted. In those cases where stay of some other nature is granted than the stay of the assessment proceedings but the effect of such stay is to prevent the Assessing Officer from effectively passing assessment order, even that kind of stay order may be treated as stay of the assessment proceedings. Search and Seizure – Block Assessment – Limitation to be reckoned with the last panchnama when the search is finally concluded in the absence any challenge to subsequent searches

VLS Finance Ltd. & Anr. vs. CIT & Anr. [2016] 384 ITR 1 (SC)

Search and seizure took place in the business premises of the appellant companies on June 22, 1998 on the strength of warrant of authorisation dated June 19, 1998, which went up to in the morning hours of June 23, 1998. It was followed by further searches from time to time which went on till August 5.

Notice u/s. 158BC(c) of the Income-tax Act, 1991 (hereinafter referred to as the “Act”), was issued on June 28, 1999 requiring the appellants to furnish return for the block period from April 1, 1988 to June 22, 1998. This notice was withdrawn and another notice was issued on July 26, 1999. In response thereto, the appellants filed return for the aforesaid block period on September 10, 1999. As per section 158BE of the Act, assessment is to be completed within two years from the end of the month in which the last of the authorised for search under section 132 or for requisition u/s. 132A, as the case may be. However, the Assessing Officer could not do so because of certain developments which took place.

A direction u/s. 142(2A) was issued on June 29, 2000, which was served to the appellants on July 19, 2000 for conducting special audit for the aforesaid block period.

A writ petition (Civil) no.4685 of 2000 was filed by the Appellants, wherein a challenge was laid to the aforesaid order dated June 29, 2000, issued by Respondent No.2 directing a special audit in respect of appellants u/s. 142(2A) of the Act. In the said writ petition, the appellants also challenged the clarificatory order dated August 10, 2000 issued by respondent No.2 with regasrd to special audit in respect of appellant No.1 for the period from the assessment year 1994-95 to assessment year 1998-99 and in so far as appellant No.2 the period for assessment year 1994-95 to assessment year 1996-97.

During the pendency of the writ petition, as amendment application was filed being CM No. 9305 of 2006, seeking to add addional ground that the block assessment proceedings u/s. 158BC (c) of the Act were time barred. The appellant submitted that the time limit for completion of block assessment expired on June 30, 2000 in terms of section 158BE of the Act, since 2 years period expired on that date. It was further submitted that the authorization executed on June 22, 1998 could not have been utilised for conducting further search till August, 1998. It was also contended that the order u/s. 142(2A) of the Act was issued in violation of principles of natural justice as there was no complexity in the accounts of the appellants and, therefore, there was no justification in law to order special audit u/s. 142(2A) of the Act.

The respondents filed their affidavit in reply to the show cause explaining that the order for special audit u/s. 142(2A) of the Act was issued with proper authorization made by the Commissioner of Income Tax after due deliberation and on the basis of the report of the Assessing Officer, viz., Assistant Commissioner of Income Tax, New Delhi. It was further submitted that the period of completion of block assessment was to expire on August 31, 2000 and not on June 30, 2000 as claimed by the appellants. As per the respondents, since seizure operations were conducted from June 22, 1998 and there operations concluded only on August 5, 1998, the time limit of two years for completion of “block assessment” was to expire only on August 31, 2000.

In Writ Petition (Civil) No.4685 of 2000, interim order dated August 24, 2000 was passed, giving interim stay of the orders dated June 29, 2000.

This stay remained in operation during the pendency of the writ petition.

The matter was finally heard and decided by the Delhi High Court vide judgment dated December 15, 2006. It has quashed the direction for special audit in view of the fact that no hearing was afforded to the appellant before issuing such direction, which was necessary as per the law laid down in the case of Rajesh Kumar vs. Deputy CIT(287 ITR 91).

However, the High Court decided the question of limitation in favour of the Department holding that the period between August 24, 2000, i.e., date on which interim order was passed staying special audit direction under section 142(2A) dated June 29, 2000 and December 15, 2016, i.e., when the High Court has passed the order setting aside the direction for appeal audit, be excluded in counting limitation for concluding block assessment.

The appellant contended before the High Court that since there was no stay on block assessment proceedings in terms of interim order dated August 24, 2000, the direction to exclude the period between August 24, 2000 to December 15, 2006 was beyond its jurisdiction. It was alternatively contended before the High Court that the limitation for passing the block assessment having expired on June 30, 2000 in terms of section 158.

BE(1) of the Act, the direction to exclude the limitation period between August 24, 2000 to December 15, 2006 would not, in any case, save limitation. While rejecting the aforesaid contentions raised by the appellants, the High Court held that since special audit was an important and integral step in the assessment proceedings, once the direction for special audit was stayed by the High Court, assessment proceedings ipso facto could not go on. The High Court rejected the assessee’s second alternative argument holding that limitation period of two years was years was to be calculated from August 5, 1998, on which date last panchnama was drawn.

On appeal, the Supreme Court observed that in effect the central issue was one of limitation, which had the following two facts, viz:

(a) Whether the period of limitation expired on August 31, 2000 or the last date for completing block assessment was June 30, 2000?

(b) Whether the period between August 24, 2000 and December 15, 2006, when interim stay was in operation, required to be excluded for the purposes of counting limitation period?

The Supreme Court taking the second issue first, noted that it was not in dispute that the period during which interim stay of the order passed by the court was in operation had to be excluded while computing the period of two years as limitation period prescribed for completing the block assessment. The parties had, however, joined issue on the nature of stay order which qualify for such exclusion.

The Supreme Court noted that the plea of the appellants was that only that period could be excluded in computing the period of limitation, during which assessment proceedings were stayed. A certain distinction was tried to be drawn in the instant case by referring to the interim order which was passed by the High Court on August 24, 2000 which had stayed the order of the Department directing compulsory audit. It was, thus, argued that stay was limited only to conducting compulsory audit and there was no stay of the assessment proceedings.

The Supreme Court referring the language of Explanation 1 held that it was not in doubt that this explanation granted benefit of exclusion only for those cases where “the assessment proceeding is stayed by an order or injunction” of the court. On literal construction, therefore, it became clear from the reading of this provision that the period that was to be excluded while computing the period of limitation for completion of block assessments was the period during which assessment proceedings are stayed by an order of a court and this provision shall not apply if the stay of some other kind, i.e., other than staying the assessment proceedings, was passed. The counsel for the appellants were justified in their contention that the provision relating to limitation need to be strictly construed.

The Supreme Court further held that as a general rule, therefore, when there is no stay of the assessment proceedings passed by the court, Explanation 1 to section 158BE of the Act may not be attracted. However, this general statement of legal principle has to be read subject to an exception in order to interpret it rationally and practically. In those cases where stay of some other nature is granted than the stay of the assessment proceedings but the effect of such stay is to prevent the Assessing Officer from effectively passing assessment order, even that kind of stay order may be treated as stay of the assessment proceedings because of the reason that such stay order becomes an obstacle for the Assessing Officer to pass an assessment order thereby preventing the Assessing Officer to proceed with the assessment proceedings and carry out appropriate assessment. For an example, if the court passes an order injecting the Assessing Officer from summoning certain records either from the assessee or even from a third party and without those records it is not possible to proceed with the assessment proceedings and pass the assessment order even such type of order may amount to staying the assessment proceedings. In that context, the High Court, in the impugned judgment had propounded the correct and relevant test, viz,. whether the special audit is an intergral pat of the assessment proceedings, i.e., without special audit it is not possible for the Assessing Officer to carry out the assessment ? If it is so, the stay of the special audit may qualify as stay of assessment proceedings and, therefore, would be covered by the said Explanation.

The Supreme Court agreed with the High Court that the special audit was an integral step towards assessment proceedings. The argument of the appellants that the writ petition of the appellant was ultimately allowed and the court had quashed the order directing special audit would mean that no special audit was needed and, therefore, it was not open to the respondent to wait for special audit, would not be a valid argument to the issue that was being dealt with. The Assessing Officer had, after going through the matter, formed an opinion that there was a need for special audit and the report of special audit was necessary for carrying out the assessment. Once such an opinion was formed, naturally, the Assessing Officer would not proceed with the assessment till the time that special audit report is received, inasmuch as in his opinion, report of the special audit was necessary. Take a situation where the order of special audit is not challenged. The Assessing Officer would naturally wait for this report before proceeding further. Order of special audit followed by conducting special audit and report thereof, thus, become part of assessment proceedings. If the order directing special audit is challenged and an interim order is granted staying the making of a special report, the Assessing Officer would not proceed with the assessment in the absence of the audit as he thought, in his wisdom, that special audit report is needed. That would be the normal and natural approach of the Assessing Officer at that time. It is stated at the cost of repetition that in the estimation of the Assessing Officer special audit was essential for passing proper assessment order. If the court, while undertaking judicial review of such an order of the Assessing Officer directing special audit ultimately holds that such an order is wrong (for whatever reason) that event happens at a later date and would not mean that the benefit of exclusion of the period during which there was a stay order is not to be given to the Revenue. Explanation 1 which permits exclusion of such a time is not dependent upon the final outcome of the proceedings in which interim stay was granted.

The Supreme Court therefore, answered this question in favour of Revenue.

With this, the Supreme Court reverted to the other question, viz., from which date the period of limitation was to be counted, i.e., from June 22, 1998 when the respondent authorities visited the premises of the appellants on the basis of warrant of authorization dated June 19, 1998 or August 5, 1998, on which date the Revenue authorities last visited the premises of the appellants on the basis of the same warrant of authorization dated June 19, 1998 and conducted the search of the appellant’s premises. If the period was to be counted from June 19, 1998, the last date by which the assessment was to be carried would be June 30, 2000. If it was to be counted from August 5, 1998, then the limitation period was to expire on August 31, 2000. In the event the last date for completing the block assessment was held to be June 30, 2000, then the assessment became time barred even before the interim stay was granted by the High Court as it was granted on August 24, 2000, i.e., after the supposed limitation period was over and, therefore, the conclusion was reached in answering the other question, as above, would not come to the rescue of the Department. On the other hand, if the period of limitation was to expire on August 31, 2000, then by virtue of our answer to the first issue, the period of limitation for block assessment had not expired inasmuch as this court had passed an order dated February 5, 2007 that audit may go on but no final assessment order be passed.

The Supreme Court observed that the Revenue authorities visited and searched the premises of the appellants for the first time on June 22, 1998. In the panchanama drawn on that date, it was remarked “temporarily concluded”, meaning thereby, according to the Revenue authorities, search had not been concluded. For this reason, the respondent authorities visited many times on subsequent occasions and every time panchnama was drawn with the same remarks, i.e., “temporarily concluded”. It was only on August 5, 1998 when the premises were searched last, the panchnama drawn on that date recorded the remarks that the search was “finally concluded”. Thus, according to the respondents, the search had finally been completed only on August 5, 1998 and panchnama was duly drawn on the said date as well. The appellants, in the writ petition filed, had nowhere challenged the validity of searches on the subsequent dates raising a plea that the same were illegal in the absence of any fresh and valid authorization. On the contrary, the appellant proceeded on the basis that search was conducted from June 22, 1998 and finally concluded on August 5, 1998.

On the aforesaid facts and in the absence of any challenge by the appellants to the subsequent searches, the Court held that it cannot countenance the arguments of the appellants that limitation period was not to be counted from the last date of search when the search operation completed, i.e., August 5, 1998. The Supreme Court, therefore, decided this issue also in favour of the respondents.

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Whether payment of transaction charges to stock exchange amounts FTS – SecTION 194J – Part – II

CIT vS. Kotak Securities Ltd . – Unreported – Civil Appeal No. 3141 of 2016 (SC)

3. As stated in Part I of this write-up, the Bombay High Court in the case of Kotak Securities Ltd. took the view that the Stock Exchange is rendering managerial services by providing in-built mechanism for trading in securities to its members and therefore, the payment of transaction charges by the members to the Stock Exchange is ‘fees for technical services’ [FTS] as the definition of the FTS includes consideration for ‘managerial services’ and accordingly, the same is covered by section 194J. At the same time, the High Court also held that both the parties for a decade proceeded on the footing that provisions to Sec. 194J were not applicable in this case and therefore, the disallowance u/s. 40(a)(ia) is not justified. Taking this judgment of the Bombay High Court as a lead case for the purpose of deciding the similar issues arising in various appeals before the Apex Court, the Court dealt with the judgment of the Bombay High Court for the purpose of deciding the issue referred to in para 1.5 of Part-I of this write-up.

3.1 For the purpose of deciding the issue of applicability of section 194J to the payment of transaction charges and consequent disallowance of the expenses in computing the business income, the Court noted the view taken by the Bombay High Court referred to in para 3 above. Before the Apex Court, the assessee had challenged the view of the Bombay High Court that the payment of the transaction charges to the Stock Exchange amounts to FTS covered u/s. 194J and the Revenue had challenged the view of the High Court that the disallowance u/s. 40(a)(ia) cannot be made for the Asst. Year in question.

3.2 The Court then noted the relevant parts of provisions of section 194J, Sec. 40(a)(ia) and the definition of FTS given in the said Explanation to section 9(1)(vii) as they stood at the relevant time.

3.3 Having referred to the relevant provisions of the Act, the Court stated that the moot question is what meaning should be ascribed to the expression ‘technical services’ [TS] appearing in the definition of FTS. For this purpose, the Court noted the following observations from its judgment in the case of Bharti Cellular Ltd (referred to in para 1.4 of Part –I of this write-up) :

“Right from 1979, various judgments of the High Courts and Tribunals have taken the view that the words “technical services” have got to be read in the narrower sense by applying the rule of noscitur a sociis, particularly, because the words “technical services” in section 9(1)(vii) read with Explanation 2 comes in between the words “managerial and consultancy services”.

3.3.1 Dealing with the above view taken in the case of Bharti Cellular Ltd (supra), the Court observed as under:

“Managerial and consultancy services” and, therefore, necessarily “technical services”, would obviously involve services rendered by human efforts. This has been the consistent view taken by the courts including this Court in Bharti Cellular Ltd. (supra). However, it cannot be lost sight of that modern day scientific and technological developments may tend to blur the specific human element in an otherwise fully automated process by which such services may be provided. The search for a more effective basis, therefore, must be made.”

3.4 Referring to a lengthy discourse on the services made available by the Stock Exchange contained in the Assessment order, the Court observed that this would go to show that apart from facilities of a faceless screen-based transaction, a constant up gradation of such services and surveillance of the essential parameters connected with the trade including those of a particular/single transaction that would lead credence to its authenticity is provided by the Stock Exchange and specifically noted that all such fully automated services are available to all the members of Stock Exchange in respect of every transaction entered into by them. The Court also noted that there is nothing special/exclusive or customized in the service that is rendered by the Stock Exchange.

3.4.1 Having noted the above factual position, the Court proceeded to deal with the meaning of words ‘technical services’ in the context of the definition of the FTS and its applicability to the present case. In this context, the Court stated as under:

“. . .Technical services” like “Managerial and Consultancy service” would denote seeking of services to cater to the special needs of the consumer/user as may be felt necessary and the making of the same available by the service provider. It is the above feature that would distinguish/identify a service provided from a facility offered. While the former is special and exclusive to the seeker of the service, the latter, even if termed as a service, is available to all and would therefore stand out in distinction to the former. The service provided by the Stock Exchange for which transaction charges are paid fails to satisfy the aforesaid test of specialized, exclusive and individual requirement of the user or consumer who may approach the service provider for such assistance/service. It is only service of the above kind that, according to us, should come within the ambit of the expression “technical services” appearing in Explanation 2 of Section 9(1)(vii) of the Act. In the absence of the above distinguishing feature, service, though rendered, would be mere in the nature of a facility offered or available which would not be covered by the aforesaid provision of the Act. ”

3.4.2 Having taken a view that the services rendered by the Stock Exchange would be merely in the nature of facility offered or available to its all members which cannot be regarded as ‘technical services’ as contemplated in the definition of the FTS as given in the said Explanation, the Court felt that another aspect of this matter also requires to be specifically noted and that is, each and every transaction by a member involves the use of such services provided by the Stock Exchange on compulsory payment of additional charges based on transaction value over and above the membership charges. The Court also noted that the view taken by the High Court that the member of the Stock Exchange has the option of trading through an alternative mode is not correct and the member has no option in this matter but to avail of such services. Having noted this additional specific aspect, the Court further stated as under:

“. . . The above features of the services provided by the Stock Exchange would make the same a kind of a facility provided by the Stock Exchange for transacting business rather than a technical service provided to one or a section of the members of the Stock Exchange to deal with special situations faced by such a member(s) or the special needs of such member(s) in the conduct of business in the Stock Exchange. In other words, there is no exclusivity to the services rendered by the Stock Exchange and each and every member has to necessarily avail of such services in the normal course of trading in securities in the Stock Exchange. Such services, therefore, would undoubtedly be appropriate to be termed as facilities provided by the Stock Exchange on payment and does not amount to “technical services” provided by the Stock Exchange, not being services specifically sought for by the user or the consumer. It is the aforesaid latter feature of a service rendered which is the essential hallmark of the expression “technical services” as appearing in Explanation 2 to section 9(1)(vii) of the Act.”

3.5 Finally, while deciding the issue raised by the assessee in appeal in its favour, the Court concluded as under:

“For the aforesaid reasons, we hold that the view taken by the Bombay High court that the transaction charges paid to the Bombay Stock Exchange by its members are for ‘technical services’ rendered is not an appropriate view. Such charges, really, are in the nature of payments made for facilities provided by the Stock Exchange. No TDS on such payments would, therefore, be deductible under Section 194J of the Act.”

3.6 Having decided that the services rendered by the Stock Exchange would be termed as facilities provided by the Stock Exchange which does not amount to TS as contemplated in the definition of the FTS given in the said Explanation and hence, the payment of transaction charges does not amount to FTS u/s. 194J, the Court further decided that in view of this conclusion, it is not necessary to examine the correctness of the view of the Bombay High Court with regard to the issue of disallowance u/s. 40(a)(ia). As such, this issue still remains open.

Conclusions
4 From the above judgment, the position is now settled that there is a clear distinction between services and facilities provided by the service provider and the latter, even if termed as a service, cannot be regarded as TS within the narrower meaning of those words appearing in the definition of FTS.

4.1.1 From the above judgment, in the context of meaning of the words TS appearing in the definition of FTS, it becomes clear that for a service to be regarded as TS, like ‘managerial and consultancy service’, it should cater to special needs of the customer/ user, as may be felt necessary, which is rendered by the service provider. Accordingly, it should be specialised and exclusive to the service seeker. It has to be a service specifically sought by the user or customer. This feature of a service rendered is the essential hallmark of the expression TS. As such, in this context, the test of specialised, exclusive and individual requirement of the user/ consumer [`exclusivity test’] should be satisfied to treat the consideration for service as FTS. Therefore, it appears that the general/standard services provided by an entity, which is available to everyone who intends to avail the same, should be regarded as service in the nature of facility offered or available to all and the same will not fall within the meaning of TS as contemplated in the definition of FTS.

4.1.2 The above meaning of the words TS appearing in the definition of FTS would go a long way in considering the applicability of section 9(1)(vii) as well as of section 194J. As such, this would also be very useful for interpreting the expression FTS under many Double Tax Avoidance Agreements (‘tax treaties’) entered into by India with other countries where the relevant portion of the definition of the expression FTS is identical to the one given in the said Explanation.

4.1.3 The services provided by the Stock Exchange in the above case do not satisfy the ‘exclusivity test’. As such payment of transaction charges does not amount to FTS and therefore, cannot be regarded as TS.

4.2 From the observations of the Apex Court in the above case mentioned in para 3.3 above, it would appear that the Court reiterated the principle emerging from the judgment of Apex Court in the case of Bharat Cellular Ltd. (supra) that the words TS appearing in the definition of FTS have got to be read in a narrower sense.

4.2.1 In the above context, the Court also reaffirmed the interpretation that human involvement is necessary for treating a service provided as TS within the meaning of the definition of FTS.

4.2.2 Further, in the above context, the Court also felt that modern day scientific and technological developments may tend to blur the specific human element in an otherwise fully automated process by which service may be provided and hence, search for a more effective basis may be made. It seems that these observations of the Court do not affect the settled position referred to in paras 4.2 and 4.2.1 and the same should be read in the context of the facts of the case before the Court.

4.3 Interestingly, the Bombay High Court treated the payment of transaction charges as FTS covered u/s. 194J on the ground that the services rendered by the Stock Exchange are in the nature of ‘managerial services’ as mentioned in para 2.8.1 of Part-I of this write-up and para 3 above. However, the Apex Court did not deal with this specific view taken by the Bombay High Court but dealt with the meaning of the words TS appearing in the definition of FTS and proceeded on that basis to decide the issue without considering the aspect of ‘managerial services’ considered by the Bombay High Court. However, it seems to us that this should not make any difference to the final view taken by the Apex Court. In the above case, the Court has also held that the services rendered by the Stock Exchange are in the nature of facility offered or available and they also do not satisfy the ‘exclusivity test’.

4.4 As pointed out in para 2.9 of Part- I of this write-up and para 3 above, the Bombay High Court also took the view that for a decade, both the parties have proceeded on the footing that section 194J was not applicable to the payment of transaction charges. On this peculiar facts, the disallowance u/s. 40(a) (ia) cannot be made for the year in question before the Court. The correctness of this view has not been examined by the Apex Court as stated in the para 3.6 above. In view of this, the said view of the Bombay High Court stills holds good and could be useful to contest the disallowance u/s. 40(a)(ia), if the facts of a particular case are similar to the case before the Bombay High Court in the case of Kotak Securities Ltd. (supra)

4.5 As mentioned in para 1.1 of Part- I of this writeup, section 194J is amended with effect from 13/7/2006 to include within its scope payment by way of ’royalty’. For this purpose, the definition of royalty given in Explanation 2 to section 9(1)(vi) is made applicable, which, in turn, is very wide and includes any consideration paid for the use of any industrial, commercial or scientific equipment (with some exceptions) – popularly known as ‘equipment royalty’, etc,. From the judgment of the Bombay High Court in the above case, it appears that the assessee had started deducting tax u/s. 194J from the subsequent year from payment of transaction charges as ‘royalty’ as observed by the Bombay High Court (refer para 2.9 of Part- I of this write-up).

4.5.1 In the above judgment, the Apex Court has taken a view that the Stock Exchange is rendering services which are in the nature of facility provided/offered and therefore, not a TS within the meaning of the definition of FTS as mentioned in paras 3.4.1 & 3.4.2 above. Therefore, the moot question may arise as to whether the payment of transaction charges could at all be regarded as ‘royalty’, the same being paid primarily for the services rendered, which, though, may be regarded as in the nature of facility provided/offered. This may need separate consideration.

4.6 In view of the amendment made in section 40(a) (ia) by the Finance Act, 2012, with the introduction of the second proviso w.e.f. 1/4/2013, providing relaxation from the rigor of this provision for disallowance, when certain conditions mentioned in the first proviso [introduced by the Finance Act, 2012 w.e.f. 1/7/2012] to section 201(1) are met [such as the resident payee has furnished the Return of Income u/s. 139, he has taken into account such payment in computing his income, etc.], the disallowance u/s. 40(a)(ia) could be avoided on that basis. However, this relaxation applies only when the payee is a resident and, the benefit of this relaxation is not available if the payee is not a resident. As such, the above judgment would be more useful in cases where the payee is not a resident and the applicability of TDS requirement to the payment for services as well as disallowance u/s. 40(a)(i) is to be contested.

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Interest paid on borrowings for purchase of house- SECTION 24 & SECTION 48

ISSUE FOR CONSIDERATION
An assessee acquiring a house property with borrowed funds, pays interest on such borrowed funds, till such time as the borrowed funds are repaid by him. In most of the cases, the funds are repaid over a period of years, for which the interest is paid on the borrowings made.

In computing the income from such house property, a deduction is allowed u/s. 24(b) of the Income Tax Act of interest on such borrowings subject to certain conditions contained in the said provisions.

The interest so paid, over the period of years, is paid for the purposes of acquiring a capital asset, namely, the house property, and accordingly, the interest paid constitutes the cost of acquisition or the cost of improvement for the purposes of section 48 and generally qualifies for deduction in computing the capital gains arising on transfer of such house property.

Cases have come up wherein the assesses, who are allowed a deduction u/s. 24(b) of interest paid in computing the income from house property, have, on transfer of the house property, claimed deduction for the said interest in computing the capital gains on the ground that such an interest was a part of the cost of acquisition /improvement of the said asset. Obviously the Income Tax department, in such cases, has refused to allow deduction for interest paid in computing the capital gains on the ground that a deduction was already allowed, in the past assessment years, in computing the income from house property.

Conflicting decisions by different benches of the Income Tax Appellate Tribunal have warranted attention to this interesting issue. The Chennai bench of the tribunal has held that the deduction in computing the capital gains for interest is allowable while the Bangalore bench has held that such a deduction is not permissible in computing the capital gains.

C. Ramabrahmam’s case
The issue arose in the case of ACIT v. C. Ramabrahmam, 57 SOT 130 (Chennai), for the A.Y 2007-08 during which year the assessee had transferred a house property for a valuable consideration. In computing the capital gains, on transfer of the said house property, a deduction was claimed for an amount of Rs. 4,82,042, which amount represented the interest paid on a housing loan, taken in the year 2003, for purchasing the property, a deduction for which was allowed u/s. 24(b), in computing total income for A.Y. 2004-05 to 2006-07. The Assessing Officer disallowed the claim for deduction of the said interest in computing the capital gains for A.Y. 2007-08. On appeal, the CIT(A) allowed the claim of the assessee, by holding that the assessee was entitled to claim the deduction for interest u/s. 48, despite the fact that the same had been claimed u/s. 24(b) while computing income from house property.

In appeal to the tribunal, the Revenue contended that once the assessee had availed a deduction u/s. 24(b) for interest, he could not claim again a deduction for the same amount for the purposes of computation of Capital Gains. In reply, the assessee relied upon the findings and the order of the CIT(A).

The tribunal noted that there was no dispute about the fact that the interest in question was claimed and allowed as a deduction in the past in computing the income from house property under the statutory provisions of section 24(b). It further noted that the assessee had chosen to claim the said interest again as a deduction in computing the Capital Gains.

The Chennai tribunal, on consideration of the facts and the law, held in Para 8 of the order that; “We are of the opinion that deduction u/s. 24(b) and computation of capital gains u/s. 48 of the “Act” are altogether covered by different heads of income i.e., ‘income from house property’ and ‘capital gains’. Further, a perusal of both the provisions makes it unambiguous that none of them excludes operation of the other. In other words, a deduction u/s. 24(b) is claimed when concerned assessee declares income from ‘house property’, whereas, the cost of the same asset is taken into consideration when it is sold and capital gains are computed u/s 48. We do not have even a slightest doubt that the interest in question is indeed an expenditure in acquiring the asset. Since both provisions are altogether different, the assessee in the instant case is certainly entitled to include the interest amount at the time of computing capital gains u/s 48 of the “Act”. Therefore, the CIT(A) has rightly accepted the assessee’s contention and deleted the addition made by the Assessing officer. Hence, qua this ground, we uphold the order of the CIT(A).”

Captain B. L. Lingaraju’s case
The issue once again arose in the case of Captain B L Lingaraju vs. ACIT, before the Bangalore bench of the tribunal in ITA No. 906/Bang/2014 for A.Y 2009-10. In that case, the claim of the assessee for deduction u/s.48, of interest paid on a loan amounting to Rs.13,24,841, was disallowed by the A.O. on the ground that the said interest was allowed as the deduction u/s.24(b), in computing the income from house property. The action of the A.O. was upheld by the CIT(A).

In appeal to the tribunal, the assessee filed a paperbook containing written submissions and supported his claim by relying on the decisions of the Karnataka high court in the cases of CIT vs. Sri Hariram Hotels (P) Ltd., 229 TR 455 and CIT vs. Maithreyi Pai, 152 ITR 247 and also on the decisions of the Delhi and Madras high courts. He however did not appear for hearing and the appeal was decided ex-parte, qua the assessee.

The tribunal, on consideration of the written submissions and the decisions relied upon by the assessee therein, noted that the Court in the case of Sri Hariram Hotels (supra) had followed its earlier decision in the case of Maithreyi Pai (supra) to hold in Hariram Hotels case, that an interest paid on borrowings for the acquisition of capital asset must fall for deduction u/s.48 only if the same was not allowable as deduction u/s.57 of the Act and that no assessee under the scheme of the Act could be allowed a deduction of the same amount twice over. On the facts in B L Lingaraju’s case, the tribunal noted that the assessee had claimed a deduction of interest of Rs.1,50,000 in computing the income from self-occupied house property as per section 24(b) of the Act. Relying on the decision of the jurisdictional Karnataka high court in the case of Maithreyi Pai (supra), the tribunal held that no deduction u/s.48 could be allowed for the same interest in computing the Capital Gains, where it was allowed as deduction or was allowable as a deduction. The appeal of the assessee was thus dismissed by the tribunal.

Observations
Section 24(b) reads as under:

“Income chargeable under the head “Income from house property” shall be computed after making the following deductions, namely:—
(a) …………………………………..

(b) where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital:

Provided ………………………………”

The relevant part of Section 48 reads as under:

“The income chargeable under the head “Capital gains” shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :—

(i) expenditure incurred wholly and exclusively in connection with such transfer;

(ii) the cost of acquisition of the asset and the cost of any improvement thereto:

Provided ……………………………”

The principle that the cost of acquisition is a dynamic and a fluctuating number is by now widely accepted; it may increase in a subsequent year as a result of a liability or expenditure incurred after the date of acquisition. The cost of acquisition can increase on account of the interest paid, post acquisition of asset, on borrowings made for the acquisition of the asset. CIT vs. Mithlesh Kumar 92 ITR 9(Delhi), CIT vs. K.S Gupta 119 ITR 372 (AP), CIT vs. A.R Damodara Mudaliar & Co. 119 ITR 583 (Madras), CIT vs. K Raja Gopala Rao 252 ITR 459 (Madras) and CIT vs. Maithreyi Pai 152 ITR 247 (supra).

While the above stated principle permits increase in the cost of acquisition by the amount of interest, such an increase has been made conditional by the Karnataka high court in Maithreyi Pai’s case(supra), by observing that an interest which had already been allowed as revenue expenditure could not be virtually deducted again u/s 48 MLG Enterprise vs. CIT 167 ITR 11.

Usually unless otherwise prohibited, a deduction under a specific provision cannot be denied under a different provision for the same expenditure. The Act has a few parallels wherein such deductions or allowances are found by the courts to be allowable; for example the investments in depreciable assets are treated as an application for charitable purposes, and depreciation on such assets has been held to be eligible for deduction again from income u/s 11, in computing the income of a charitable institution.

The Income Tax Act is replete with examples of the provisions which specifically provide that no deduction under any other provision of the Act would be allowable in the cases where a deduction is allowed under a particular provision; e.g. section 35AD(3). The present day’s trend therefore appears to be that the legislature, wherever intended, makes a specific provision for denying double deductions. No such express provision is found either in section 24(b) or in section 48, as has been confirmed by the Chennai bench of the tribunal. These provisions operate in different fields and that too for computation of income under two different heads of income. Further the deduction in one case is a statutory deduction, whereas in the other, it is on capital account. One may at the same time have to look into the reasons behind the observations of the Karnataka high court in the case of Maithreyi Pai (supra) wherein the court observed that an interest for which a deduction had already been allowed could not be allowed twice over while computing the capital gains u/s. 48. Apparently, one does not find any express provisions in any of the provisions of the Act, at least not in section 48 and section 24(b), which could have formed the basis for the court to have observed as it did.

One may also ascertain whether there is anything in the law of taxation that has prompted the court to hold that a deduction u/s. 48 was not allowable once it was allowed in the past. The Supreme court held in Escorts Ltd vs. UOI, 191 ITR 43 a double deduction could not be a matter of inference; it must be provided for in clear and expressive language, regard being had to its unusual nature and its serious impact on the revenues of the State. Having noted the findings of the apex court, one is required to appreciate that the case of the assessee, in the issue under consideration, is not a case of having claimed a deduction for revenue expenditure at all. In the facts of the case, under the issue, a specific deduction is allowed u/s. 24(b) in computing the income from house property and, in another case, the interest constitutes the cost of acquisition and is therefore claimed as a deduction representing the capital expenditure. Considering the distinction, it may be possible to contend that the case under consideration, is not squarely covered by the decision of the Supreme court in Escort’s case. Whether it is a case of double deduction, at all, is the question that remains to be concluded.

In B. L. Lingaraju’s case, the deduction for interest was restricted to Rs.1,50,000/-, though actual interest paid was much higher than the said amount, leaving open a possibility for claiming a deduction u/s. 48, at least for the balance unclaimed amount of interest, that was not allowed and was not even allowable.

shailesh.kwebmaker

RULE FOR INTERPRETATION OF TAX STATUTES PAR T-IV

Introduction:
In the April, May and June issues of the BCAJ I had discussed the basic rules of interpretation of tax statutes and have tried to explain some rules with binding precedents. Other rules / concepts / dictums are finally discussed hereafter.

1. Harmonious Construction :

It is well settled that the provisions of a statute must be read harmoniously together. However, if this is not possible then it is settled law that where there is a conflict between two sections, and one cannot reconcile the two, one has to determine which is the leading provision and which is the subordinate provision, and which must give way to the other. A legislative instrument must be construed on the prima facie basis that its provisions are intended to give effect to harmonious goals. Where conflict appears to arise from the language of particular provisions, the conflict must be alleviated, so far as possible, by adjusting the meaning of the competing provisions to achieve that result which will best give effect to the purpose and language of those provisions while maintaining the unity of all the statutory provisions. Reconciling conflict provisions will often require to determine which is the leading provision and which the subordinate provision, and which must give way to the other. Only by determining the hierarchy of the provisions will it be possible in many cases to give each provision the meaning which best gives effect to its purpose and language while maintaining the unity of the statutory scheme.

2. Construction of a document :

A document, as is well known, must be read in its entirety. When character of a document is in question, although the heading thereof would not be conclusive, it plays a significant role. Intention of the parties must be gathered from the document itself but therefore circumstances attending thereto would also be relevant; particularly when the relationship between the parties is in question. For the said purpose, it is essential that all parts of the deed should be read in their entirety. A document as is well known, must primarily be construed on the basis of the terms and conditions contained therein. It is also trite that while construing a document the court shall not supply any words which the author thereof did not use.

3. Ratio decendi, the words and expressions :

It is a well settled principle of law that the decision on an interpretation of one statute can be followed while interpreting another provided both the statutes are in parimateria and they deal with identical scheme. However, the definition of an expression in one statute cannot be automatically applied to another statute whose object and purpose are entirely different. One should not place reliance on decisions without discussing how the factual situation fits in with the fact situation of the decision on which reliance is placed. There is always peril in treating the words of a speech or judgment as though they were words in a legislative enactment. Judicial utterances are made in the setting of the facts of particular cases. Circumstantial flexibility, one additional or different fact may make a world of difference between conclusions in two cases.

3.1. For reliance on the words and expressions defined in one statute and applying to the other statute it has also to be seen as to whether the aim and object of the two legislation, is similar. When the word is not so defined in the Act it may be permissible to refer to the dictionary to find out the meaning of that word as it is understood in the common parlance. But where the dictionary gives divergent or more than one meaning of a word, in that case it is not safe to construe the said word according to the suggested dictionary meaning of that word. In such a situation, the word has to be construed in the context of the provisions of the Act and regard must also be had to the legislative history of the provisions of the Act and the scheme of the Act. It is a settled principle of interpretation that the meaning of the words, occurring in the provisions of the Act must take their colour from the context in which they are so used. In other words, for arriving at the true meaning of a word, the said word should not be detached from the context. Thus, when the word; read in the context conveys a meaning, that meaning would be the appropriate meaning of that word and in that case we need not rely upon the dictionary meaning of that word.

4. Discretion :

Many provisions confer discretion on the Court or the Authority. Discretion should be exercised judiciously as a judicial authority well versed in law. In Halsbury’s Laws of England, it has been observed: “A statutory discretion is not, however, necessarily or, indeed, usually absolute; it may be qualified by express and implied legal duties to comply with substantive and procedural requirements before a decision is taken whether to act and how to act. Moreover, there may be a discretion whether to exercise a power, but; no discretion as to the mode of its exercise; or a duty to act when certain conditions are present, but a discretion how to act. Discretion may thus be coupled with duties”.

4.1. Discretion, in general, is the discernment of what is right and proper. It denotes knowledge and prudence, that discernment which enables a person to judge critically of what is correct and proper united with caution; nice discernment, and judgment directed by circumspection; deliberate judgement; soundness of judgment; a science or understanding to discern between falsity and truth between wrong and right, between shadow and substance, between equity and colourable glosses and pretences, and not to do according to the will and private affections of persons. When it is said that something is to be done within the discretion of the authorities, that something is to be done according to the rules of reason and justice, not according to private opinion; according to law and not humour. It is to be not arbitrary, vague, and fanciful, but legal and regular. And it must be exercised within the limit, to which an honest man, competent to the discharge of his office ought to confine; himself. (See S.G. Jaisinghani vs. Unkon of India and other AIR 1967 SC 1427.

4.2. The word ‘discretion’ standing single and unsupported by circumstances signifies exercise of judgement, skill or wisdom as distinguished from folly, unthinking or haste; evidently therefore a discretion cannot be arbitrary but must be a result of judicial thinking. The word in itself implies vigilant circumspection and care; therefore, where the Legislature concedes discretion it also imposes a heavy responsibility to exercise it soundly and properly.

5. Other Considerations :

Recourse to construction or interpretation of statute is necessary when there is ambiguity, obscurity or inconsistency therein and not otherwise. An effort must be made to give effect to all parts of statute and unless absolutely necessary, no part thereof shall be rendered surplus or redundant. True meaning of a provision of law has to be determined on the basis of what provides by its clear language, with due regard to the scheme of law. Scope of the legislation on the intention of the Legislature cannot be enlarged when the language of the provision is plain and unambiguous. In other words statutory enactments must ordinarily be construed according to its plain meaning and no words shall be added, altered or modified unless it is plainly necessary to do so to prevent a provision from being unintelligible, absurd, unreasonable, unworkable or totally irreconcilable with the rest of the statute. It is also well settled that a beneficent provision of legislation must be liberally construed so as to fulfill the statutory purpose and not to frustrate it.

5.1. In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can look fairly at the language used.” This view has been reiterated by the Supreme Court time and again. In State of Bombay vs. Automobile and Agricultural Industries Corporation (1961) 12 STC 122, the court said (page 125) : “But the courts in interpreting a taxing statute will not be justified in adding words thereto so as to make out some presumed object of the Legislature……. If the Legislature has failed to clarify its meaning by the use of appropriate language, the benefit thereof must go to the taxpayer. It is settled law that in case of doubt, that interpretation of a taxing statute which is beneficial to the taxpayer must be adopted.”

5.2. To the extent not prohibited by the statute, the incidents of the general law are attracted to ascertain the legal nature and character of a transaction. This is quite apart from distinguishing the “substance” of the transaction from its “form”. The court is not precluded from treating what the transaction is in point of fact as one in point of law also. To say that the court could not resort to the so-called “equitable construction” of a taxing statute is not to say that, where a strict literal construction leads to a result not intended to subserve the object of the legislation another construction, permissible in the context, should not be adopted. In this respect, taxing statutes are not different from other statutes.

5.3. A public authority cannot be stopped from doing its duty, but can be estopped from relying on a technicality as said by the Lord Denning. Francis Bennion in his Statutory Interpretation, “Unnecessary technically : Modern courts seek to cut down technicalities attendant upon a statutory procedure where these cannot be shown to be necessary to the fulfilment of the purposes of the Legislation.”

5.4. The definition section of the Act in which various terms have been defined, if it opens with the words “in this Act, unless the context otherwise requires” would indicate that the definitions, which are indicated to be conclusive may not be treated to be conclusive if it was otherwise required by the context. This implies that a definition, like any other word in a statute, has to be read in the light of the context and scheme of the Act as also the object for which the Act was made by the legislature. While interpreting a definition, it has to be borne in mind that the interpretation placed on it should not only be not repugnant to the context, it should also be such as would aid the achievement of the purpose which is sought to be served by the Act. A construction which would defeat or was likely to defeat the purpose of the Act has to be ignored and not accepted.

5.5. In Raja Jagdambika Pratap Narain Singh vs. C.B.D.T. (1975) 100-ITR-698, Supreme Court held that “equity and income-tax have been described as strangers”. The Act, in the very nature of things, cannot be absolutely cast upon logic. It is to be read and understood according to its language. If a plain reading of the language compels the court to adopt an approach different from that dictated by any rule of logic, the court may have to adopt it, vide Azam Jah Bahadur (H.H. Prince) vs. E.T.O. (1972) 83- ITR-82 (SC). Logic alone will not be determinative of a controversy arising from a taxing statute. Equally, common sense is a stranger and an incompatible partner to the Income-tax Act. It does not concern itself with the principles of morality or ethics. It is concerned with the very limited question as to whether the amount brought to tax constitutes the income of the assessee. It is equally settled law that if the language is plain and unambiguous, one can only look fairly at the language used and interpret it to give effect to the legislative intention. Nevertheless, tax laws have to be interpreted reasonably and in consonance with justice adopting a purposive approach. The contextual meaning has to be ascertained and given effect to. A provision for deduction, exemption or relief should be construed reasonably and in favour of the assessee.

5.6. When a word is not defined in the Act itself, it is permissible to refer to dictionaries to find out the general sense in which that word is understood in common parlance. However, in selecting one out of the various meanings of a word, regard must always be had to the context, as it is a fundamental rule that ‘the meaning of words and expressions used in an Act must take their colour from the context in which they appear’.”

5.7. When a recognized body of accountants, such as the Institute of Chartered Accountants of India, after due deliberation and consideration publishes certain material for its members, one can rely upon it. The meaning given by the Institute clearly denotes that in normal accounting parlance the word “turnover” would mean “total sales”. The sales would definitely not include scrap which is either to be deducted from the cost of raw material or is to be shown separately under a different head. There is no reason not to accept the meaning of the term “turnover” given by a body of accountants, having statutory recognition. If all accountants, auditors, businessmen, manufacturers normally interpret the term “turnover” as sale proceeds of the commodity in which the business unit is dealing, there is no reason to take a different view, as held in C.I.T. vs. Punjab Stainless Steel Industries (2014) 364-ITR-144 (SC).

5.8. The principle of statutory interpretation embodies the policy of the law, which is in turn based on public policy. The court presumes, unless the contrary intention appears, that the legislator intended to conform to this legal policy. A principle of statutory interpretation can therefore be described as a principle of legal policy formulated as a guide to legislative intention.

5.9. Justice P. N. Bhagwati in Francis Coralie Mullin vs. Administrator, Union Territory of Delhi, AIR 1981 S.C. 746 ‘emphasized the importance of reading the text of the Constitution in a progressive manner in tune with the social reality and to serve the cause of improverished sections of humanity : “The principle of interpretation which requires that a constitutional provision must be construed, not in a narrow and constricted sense, but in a wide and liberal manner so as to anticipate and take account of changing conditions and purposes so that constitutional provision does not get atrophied or fossilized but remains flexible enough to meet the newly emerging problems and challenges….”

6. Some Words & Doctrines :

(i) “Profit” : means the gross proceeds of a business transaction less the costs of the transaction. Profits imply a comparison of the value of an asset when the asset is acquired with the value of the asset when the asset is transferred and the difference between the two values is the amount of profit or gain made by a person. E.D. Sassoon and Company Ltd. vs. CIT (1954) 26-ITR-27 (SC).

(ii) “Without Prejudice” : The term “without prejudice” means (i) that the cause of the matter has not been decided on merits, (ii) that fresh proceedings according to law were not barred, as held in Superintendent (Tech.I) Central Excise, I.D.D. Jabalpur vs. Pratap Rai (1978) 114- ITR-231 (SC). It signifies that the mere filing of a return will not be allowed to be used against the assessee implying its admission. “Without prejudice” implies future rectification in accordance with law, as held in C.W.T. vs. Apar Ltd. (2004) 267-ITR-705 (Bom.).

(iii) “Sums Paid” : The context in which the expression “sums paid by the assessee” has been used makes the legislative intent clear that it refers to the amount of money paid by the assessee as donation, as held in H.H. Sri Rama Verma vs. C.I.T. (1991) 187-ITR-303 (SC).

(iv) “Presumption” : A presumption is an inference of fact drawn from other known or proved facts. It is a rule of law under which courts are authorized to draw a particular reference from a particular fact. It is of three types, (i) “may presume”, (ii) “shall presume” and (iii) “conclusive proof”. “May presume” leaves it to the discretion of the court to make the presumption according to the circumstances of the case. “Shall presume” leaves no option with the court not to make the presumption. The court is bound to take the fact as proved until evidence is given to disprove it. In this sense such presumption is also rebuttable. “Conclusive proof” gives an artificial probative effect by the law to certain facts. No evidence is allowed to be produced with a view to combating that effect. In this sense, this is an irrebuttable presumption- as held in P.R. Metrani vs. C.I.T. (2006) 287-ITR-209 (SC) at 211.

(v) “Suo Moto” : “Means of own accord or on its own motion. However the Judge, even when he is free, is still not wholly free. He is not to innovate at pleasure. He is not a knighterrant roaming at will in pursuit of his own ideal of beauty or of goodness. He is to draw his inspiration from consecrated principles. He is not to yield to spasmodic sentiment, to vague and unregulated benevolence. He is to exercise a discretion informed by tradition, methodized by analogy, disciplined by system, and subordinated to “the primordial necessity of order in the social life”. Wide enough in all conscience is the field of discretion that remains” as observed by Benjamin N. Cardozo in the legal classic “The Nature of the Judicial Process”.

(vi) Doctrine of lifting Veil : The doctrine of ‘piercing the veil’ is applied to reach at reality, substance and avoid façade. It can be invoked if the public interest so requires or if there is allegation of violation of law by using the device of corporate entity or when the corporate personality is being blatantly used as a cloak for fraud or improper conduct or where the protection of public interests is of paramount importance or where the Company has been formed to evade obligations imposed by law or to evade an existing obligation to circumvent a statue or to avoid a welfare legislation etc. State of Rajasthan vs. Gotam Lime Khanij Udhyog Pvt. Ltd. – AIR 2016 S.C. 510.

7. Conclusion :

General principles of interpretation of Law including the Tax Laws are to protect a citizen against the excesses of the Executive, Administration, Corrupt authority, erring individuals and the Legislature. It is an aid to protect and uphold ‘enduring values’ enshrined in the Constitution and Laws enacted by the Parliament/Legislatures. It is to assist, to arrive at the real intention, object and purpose for which Laws are enacted and to make life of each citizen worth living. Let the hopes of the framers of the Constitution and the father of Nation, Mahatma Gandhi, inspire all Constitutional functionaries, Judges, Jurists, Members of Tribunals, Advocates, Chartered Accountants and the people of India to preserve their freedom and mould their lives on sound principles of interpretation of Laws. Endeavour should be to deliver justice, which is a divine act.

shailesh.kwebmaker

Expectations From The Profession

As I write this editorial, the results of the referendum in UK are out. By a small majority, the country has voted for an exit from the European Union (EU). The difference in the manner in which various parts of the United Kingdom voted was a revelation. To majority of the stakeholders, their expectations from the EU were not fulfilled while others expected that remaining with EU would be to their long-term benefit. Life is full of expectations but these are different for each individual. This leads one to either clamour for change or resist it.

The expectations from our profession have ben manifold and are ever increasing. The role of Chartered Accountants has seen a complete metamorphosis in a century. From being mere bookkeepers, we have now become consultants who advise on complex business strategies. As our role has increased so have the expectations. Keeping this in mind, we at the Society have kept the theme for this special issue of the journal as “Expectations from the profession”.

While, as chartered accountants, we play various roles, our niche area is that of audit. When businesses were small, in a majority of the cases there was complete identity between the management and the ownership. Consequently, the assurance that was required from the auditor was limited. As businesses became more complex, the number of stakeholders underwent a continuous increment. Today, the financial statements authenticated by auditors are relied on by investors from the public, lending banks and financial institutions, regulators and tax gatherers. The expectations of all these stakeholders are different, distinct and at times contradictory.

In order to cater to all the different expectations, audits have also been divided into different categories. A statutory audit assures the reader that the financial statements depict a true and fair view, an internal auditor reports on various areas of interest to the management, while a forensic audit seeks to detect fraud where the management or appointing authority suspects one. Unfortunately, neither can these roles be divided into straitjacket compartments, nor is the distinction understood by various stakeholders. This is the challenge that the profession has to meet. In fact, various changes in the reporting requirements under various statutes have increased the responsibilities of an auditor manifold. Apart from various amendments to CARO, an auditor is now required to comment on the adequacy or otherwise of internal financial controls. It is expected that once an amendment to the tax audit report is notified, the tax auditor may have to comment on compliance with Income Computation and Disclosure Standards (ICDS) as well.

One can often sympathise with the auditor as he strives to meet these different and often contradictory expectations. The management expects the financial statements to be drawn up in a manner that the investor is happy to remain invested and the lender is willing to lend. The investor expects that the statements are true and reflect the actual position (and possibly indicate what will happen in future) and expects the auditor to warn him of aberrations, if any. The public expects that the accounts are free from fraud / error and sees the auditor as a whistle blower, while the taxman expects the audited statements and the report thereon to reflect all the data required for computation of income.

While our profession is expected to meet all the expectations from the stakeholders which I have discussed above, it has two other challenges to overcome. The first is to convince the business houses to maintain that level of documentation which will enable the auditor to establish that he has done his duty properly. The second is to ensure that while doing his duty he maintains his independence and reports fearlessly. Although the statutes which deal with the reporting requirements, as well as the regulators do give him some support, that may not necessarily be adequate.

Apart from the role of an auditor in different forms, businesses expect a chartered accountant to perform an advisory function. On account of the expertise that he possesses, his advice in regard to conduct of business, mergers, acquisitions and restructuring thereof, as well as financial planning is extremely valuable. In this special issue, Akeel Master and Gaurish Divekar deal with the distinct expectations from statutory, internal and forensic audits, Chetan Dalal examines the role of forensic audits, while Dinesh Kanabar discusses the role of a chartered accountant as an advisor. I am grateful to these eminent chartered accountants for having authored these articles despite their busy schedules.

I hope that these articles will make interesting reading.

shailesh.kwebmaker

A. P. (DIR Series) Circular No. 70 dated May 19, 2016

Money Transfer Service Scheme – Submission of statement/returns under XBRL

This circular states that all Authorized Persons, who are Indian Agents under Money Transfer Service Scheme (MTSS) have to submit the statement on quantum of remittances from the quarter ending June 2016 in eXtensible Business Reporting Language (XBRL) system which can be accessed at https://secweb.rbi.org.in/orfsxbrl/.

shailesh.kwebmaker

A. P. (DIR Series) Circular No. 69[(1)/22(R)] dated May 12, 2016

Notification No. FEMA 22 (R)/2016-RB dated March 31, 2016

Establishment of Branch Office (BO)/ Liaison Office (LO) / Project Office (PO) in India by foreign entities – procedural guidelines

This Notification repeals and replaces the earlier Notification No. FEMA 22/2000-RB dated May 3, 2000 pertaining to Foreign Exchange Management (Establishment in India of branch or office or other place of business) Regulations, 2000.

shailesh.kwebmaker

A. P. (DIR Series) Circular No. 68[(1)/23(R)] dated May 12, 2016

Notification No. FEMA 23 (R)/2015-RB dated January 12, 2016

Foreign Exchange Management (Exports of Goods and Services) Regulations, 2015

This Notification repeals and replaces the earlier Notification No. FEMA 23/2000-RB dated May 3, 2000 pertaining to Foreign Exchange Management (Export of Goods and Services) Regulations, 2000.

shailesh.kwebmaker

A. P. (DIR Series) Circular No. 67/2015- 16[(1)/23(R)] dated May 02, 2016

Notification No. FEMA 5 (R)/2016-RB dated April 01, 2016

Foreign Exchange Management (Deposit) Regulations, 2016

This Notification repeals and replaces the earlier Notification No. FEMA 5/2000-RB dated May 3, 2000 pertaining to Foreign Exchange Management (Deposit) Regulations, 2000.

shailesh.kwebmaker

A. P. (DIR Series) Circular No. 66 dated April 28, 2016

Opening and Maintenance of Rupee / Foreign Currency Vostro Accounts of Non- Resident Exchange Houses: Rupee Drawing Arrangement

Presently, Exchanges Houses are required to maintain a collateral equivalent to one day’s estimated drawings under Rupee Drawing Arrangement with respect to Vostro Accounts.

This circular has done away with the requirement of mandatorily maintaining a collateral by Exchange Houses under Rupee Drawing Arrangement with respect to Vostro Accounts. However, banks are free to frame their own policies and decide whether to request for a collateral or not from Exchange Houses.

shailesh.kwebmaker

A. P. (DIR Series) Circular No. 65 dated April 28, 2016

Import of Goods: Import Data Processing and Monitoring System (IDPMS )

This circular states that an Import Data Processing and Monitoring System (IDPMS) on the lines of Export Data Processing and Monitoring System (EDPMS) is to be developed. For this purpose Customs will modify the Bill of Entry format and non-EDI (manual) ports will be upgraded to EDI Ports.

This circular also contains guidelines to be following once the IDPMS system becomes operational. The guidelines pertain to: –

1. Write off of import bills due to discounts, fluctuation in exchange rates, change in the amount of freight, insurance, quality issues; short shipment or destruction of goods by the port / Customs / health authorities, etc.

2. Extension of Time for settlement of import dues

3. Follow-up for Evidence of Import.

shailesh.kwebmaker

A. P. (DIR Series) Circular No. 64/2015-16 [(1)/13(R)] dated April 28, 2016

Notification No. FEMA 13 (R)/2016-RB dated April 01, 2016

Foreign Exchange Management (Remittance of Assets) Regulations, 2016

This Notification repeals and replaces the earlier Notification No. FEMA 13/2000-RB dated May 3, 2000 pertaining to Foreign Exchange Management (Remittance of Assets) Regulations, 2000.

shailesh.kwebmaker

Benami Transactions

Introduction
A Benami Transaction is a transaction in which the property is acquired by one person in the name of another person or a business may be carried on by some person in the name of another person. Thus, the real or beneficial owner remains unknown and the apparent owner is only a name lender. As the word ‘benami” suggests it is one without a name. This practice of benami transactions has been extremely prevalent in India for several years. Benami transactions are one of the main sources of utilisation of black money, tax and duty evasion, corruption, etc. Benami transactions are quite common in the real estate business. However, they have also entered the arena of the stock market and other areas. Benami transactions were also used as a device for asset protection as the creditors would never be able to get their hands on a property which did not legally belong to their debtor. To deal with and curb benami transactions, the Benami Transactions (Prohibition) Act, 1988 (“the Act”) was passed. However, this law suffered from various inadequacies. Accordingly, the Benami Transactions (Prohibition) Amendment Bill, 2016 was moved by the Central Government to substantially modify the Act. This Bill was passed by the Lok Sabha on 27th July 2016 and by the Rajya Sabha on 2nd August 2016 and has also received the assent of the President and has been notified in the Official Gazette on 11th August 2016, thereby, becoming the Benami Transactions (Prohibition) Amendment Act, 2016 (“the Amendment Act”). One important feature of the Amendment Act is that it empowers the Government to frame Rules something which the original Act did not have.

Definitions

Benami Transaction
A Benami Transaction had been originally defined to mean a transaction in which the property is transferred to one person for a consideration paid or provided by another person. Thus, in a benami transaction, there are two persons, the real or beneficial owner who actually owns the property, but the property does not stand in his name and the second person is the one in whose name the property stands who is but a mere front i.e., the benamidar. The term “Benami” means one which has no name. Thus, the definition of a benami transaction may be summarised as under :

It is a transaction
(i) in which a property is bought by one person and transferred to another person; or

(ii) in which the property is directly bought by one person in the name of another person

The Amendment Act seeks to considerably enhance the definition of a benami transaction. The modified definition defines it as under:

(A) a transaction or an arrangement-

(i) where a property is transferred to, or is held by, a person, and the consideration for such property has been provided, or paid by, another person; and

(ii) the property is held for the immediate or future benefit, direct or indirect, of the person who has provided the consideration;

(B) a transaction or an arrangement in respect of a property carried out or made in a fictitious name; or

(C) a transaction or an arrangement in respect of a property where the owner of the property is not aware of, or, denies the knowledge of, such ownership;

(D) a transaction or an arrangement in respect of a property where the person providing the consideration is not traceable or is fictitious.

Thus, even a transaction wherein the real owner is not aware of ownership has been added. Further, in cases where the consideration provider is untraceable or fictitious would also qualify as a benami transaction. The Amendment Act also seeks to carve out certain exceptions to the definition of a benami transaction:

(i) property held by a Karta, or a member of an HUF on behalf of the HUF where the consideration for such property has been paid by the HUF;

(ii) property held by a person standing in a fiduciary capacity for the benefit of another person towards whom he stands in such capacity and includes a trustee, executor, partner, director of a company, a depository or a depository participant and any other person as may be notified by the Central Government for this purpose;

(iii) property held by an individual in the name of his spouse / his child and the consideration for such property has been paid by the individual;

(iv) property held by any person in the name of his brother or sister or lineal ascendant or descendant, where the names of such relative and the individual appear as joint-owners, and the consideration for such property has been paid by the individual.

(v) property the possession of which has been obtained in part performance of a contract referred to in section 53 of the Transfer of Property Act, 1882 provided the contract has been stamped and registered.

The Supreme Court in the case of SreeMeenakshi Mills Ltd., 31 ITR 28 (SC) has defined a benami transaction as thus:

“……..The word benami is used to denote two classes of transactions which differ from each other in their legal character and incidents. In one sense, it signifies a transaction which is real, as for example, when A sells properties to B but the sale deed mentions X as the purchase. Here the sale itself is genuine, but the real purchaser is B, X being his benamidar. This is the class of transactions which is usually termed as benami. But the word “Benami” is also occasionally used, perhaps not quite accurately, to refer to a sham transaction, as for example, when A purports to sell his property to B without intending that his title should cease or pass to B.

The fundamental difference between these two classes of transactions is that whereas in the former there is an operative transfer resulting in the vesting of title in the transferee, in the latter there is none such, the transferor continuing to retain the title notwithstanding the execution of the transfer deed.

It is only in the former class of cases that it would be necessary, when a dispute arises as to whether the person named in the deed is the real transferee or B, to enquire into the question as to who paid the consideration for the transfer, X or B. But in the latter class of cases, when the question is whether the transfer is genuine or sham, the point for decision would be, not who paid the consideration but whether any consideration was paid.”

Property
The definition of Property has been expanded by the Amendment Act and is now defined to mean, Property of any kind:

(a) Whether movable or immovable,

(b) Whether tangible or intangible,

(c) Including any right or interest or legal documents evidencing title or interest in such property. I t includes proceeds from the property also

Benami Property
This is a new definition and is defined to mean any property which is the subject matter of a benami transaction and includes proceeds from such property.

Benamidar and Beneficial owner
The Amendment Act adds two new definitions. While a benamidar is defined to mean the person / the fictitious person in whose name the benami property is transferred or one who is the name lender; the beneficial owner is the mysterious person for whose benefit the benamidar holds the benami property.

Prohibition of Benami Transactions
Section 3 is the operative section of the Act. It provides that no person shall enter into any benami transactions. The Act provided that a benami offence would be bailable and non-cognizable. This has now been deleted by the Amendment Amendment Act.

Consequences of Benami Properties
In case of a benami property, the real owner of the property cannot enforce or maintain any right against the benamidar or any other person. Thus, the real owner or any person on his behalf is prevented from filing any of a suit, claim or action against the namesake owner.

Similarly, the real owner or any person on his behalf cannot take up a defence based on any right in respect of the benami property against the benamidar or any other person.

Confiscation of Benami Properties
All benami properties are liable to be confiscated by the Central Government. For this purpose, the Amendment Act seeks to appoint an Adjudicating Authority and Initiating Officers. The Deputy Commissioner of the Income tax would be the Initiating Officer. Where the Initiating Officer has, based on material he possesses, reason to believe that any person is a benamidar of a property, he may ask him to show cause why the property should not be treated as benami property. He can also provisionally attach the property for a maximum period of 90 days. He must then draw up a statement of case and refer it to the Adjudicating Authority. The Authority must provide a hearing to the person affected and pass an order either holding the property to be a benami property or holding it not to be a benami property. The Authority has a maximum period of 1 year from the date of reference to pass its order. The affected person can appear before the Authority in person or through his lawyer / CA.

Once an order is passed by the Authority treating a property to be a benami property, it must pass an order confiscating the benami property. An appeal lies against the orders of the Adjudicating Authority to the Appellate Tribunal to be constituted under the Act. An appellant can appear before the Tribunal in person or through his lawyer / CA. The orders of the Appellate Tribunal can appealed before the High Court.

Once a property is confiscated, the Income-tax Officer would be appointed as the Administrator of such benami property who will take possession of the property and manage it.

The Act provides that if an Initiating Officer has issued a notice seeking to treat a property as benami property, then after the issuance of such a Notice, the subsequent transfer of the property shall be ignored. If the property is subsequently confiscated then the transfer will be deemed to be null and void.

Re-transfer of Benami Property
A benamidar cannot re-transfer the benami property held by him to the beneficial owner or any other person acting on his behalf. If any benami property is re-transferred the transaction of such a benami property shall be deemed to be null and void. However, this does not apply to a re-transfer of benami property initiated pursuant to a declaration made under the Income Declaration Scheme, 2016. In this respect, section 190 of the Finance Act, 2016 provides that the Benami Act shall not apply in respect of the declaration of the undisclosed asset, if the benamidar transfers such benami property to the declarant who is the real beneficial owner within the period notified by the Central Government, i.e., on or before 30th September 2017.

Repeal of Certain Sections
The original Act had repealed the following sections, which continue under the Amendment Act:
(a) Sections 81, 82 and 94 of the Indian Trusts, Act, 1882;
(b) Section 66 of the Code of Civil Procedure, 1908; and
(c) Section 281A of the Income-tax Act.

Trusts Act
The Trusts Act originally recognised and allowed the concept of benamidar under certain situations which were covered under the repealed sections.

(i) Section 81 originally provided that where the owner of a property, transfers / bequeaths (by will) it and It is not possible to infer from the surrounding circumstances that the transferor intended to depose of the beneficial interest contained therein, then the transferee may hold the property for the benefit of the owner or his legal representative.

(ii) Section 82 originally provided that where the property is transferred to one person and the consideration is paid for by another person and it appears that such other person did not intend to pay for the same then the Transferee must hold the property for the benefit of the payer.

(iii) Section 94 originally applied where there was no trust and the possessor of the property did not have the entire beneficial interest in the property, then in such a case he must hold the property for the benefit of the beneficiary. Thus, now even honest benami transactions are prohibited.

Civil Procedure Code
Section 66 of the Code originally provided that no suit shall be maintained against any person claiming title under a Court certified purchase on the ground that the purchase was made on behalf of the plaintiff. Thus, after the repeal of section 66 it is no longer possible to raise a defence on the plea of benami.

Income Tax Act
Section 281A of this Act originally provided that in case the real owner desired to file a suit in respect of a benami property against the benamidar or any other person, then he could not do so unless he had first given a notice in prescribed format to the Commissioner of Income tax within one year of the acquisition of the property. In case the suit related to a property exceeding Rs. 50,000 in value, then it was sufficient if the notice was given at any time before the suit.

Thus, the above sections provided statutory recognition to certain genuine benami transactions but after the enactment of the 1988 Act they were rendered inconsistent and hence, the 1988 Act has repealed them which repeal has been continued under the Amendment Act.

Punishment
If any person enters into a benami transaction in order to defeat the provisions of any law or to avoid payment of statutory dues or to avoid payment to creditors, the beneficial owner, benamidar and any other person who abets or induces any person to enter into the benami transaction, shall be guilty of the offence of a benami transaction. Any person guilty of the offence of benami transaction shall be punishable with rigorous imprisonment for a term which shall not be less than one year, but which may extend to seven years and shall also be liable to fine which may extend to 25% of the fair market value of the property.

Thus, in addition to the compulsory acquisition of the property, the Act also provides for a severe penalty. The offence of entering into a benami transaction is not bailable and is non-cognizable.

The penalty for giving false information is punishable with rigorous imprisonment from 6 months to 5 years and fine up to 10% of the fair market value of the property.

In case a Company enters into any benami transaction, not only is the property liable to be acquired but the every person who at the time of the contravention was in charge of and responsible for the conduct of the business would be proceeded against and punished.

Conclusion
This is one more step in the Government’s fight against black money. While the Black Money Act, 2015 is a weapon against foreign black money, the Benami Act seeks to fight domestic black money.

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Independence

Arjun (A) — Slogging! Slogging!! Slogging!!! Please help me God. Oh Shrikrishna, where are you?

Shrikrishna (S) — My dear Arjun, I am always with you. I am everywhere! Omni-present!.

A — And Omnipotent, Omniscient as well! You have no boundaries; but we are bound by so many constraints.

S — Didn’t you celebrate your Independence Day?

A — There was that flag – hoisting in our housing society. But who will wake up early on a holiday? I never attend it.

S
— Oh! Shame on you. Don’t you remember the martyrs that sacrificed
everything for independence of the country? Even their lives! How dare
you be so callous about independence?

A — Oh, Lord, please pardon me. I never meant offence to anyone.

S — I thought, at least you would be valuing the independence above all!

A — Yes. I do. In fact, our profession is expected to be ‘independent’. We are supposed to act without fear or favour.

S — Then how can you afford to sleep when flag hoisting is on? You CAs should be in the forefront.

A
— I agree. But you know, we get so tired. So much of tension. Last
time, I narrated all our difficulties. You advised us to gear ourselves
up.

S — Then what have you done about it? You are in the habit of mere crying.

A — What to do? We are so helpless. Clients are not serious. Our staff is also useless. Everything comes on us.

S
— But you are an independent professional. You have to overcome the
situation some day or the other. How many years you can pull on like
this?

A — Lord, ‘Independence’ is a myth. Everybody dictates on
us. Regulators, Clients, staff, articles, our Institute; and even our
family members.

S — Ha ! Ha !! Ha !! Rukmini and Satyabhama also
keep dominating on me. Jokes apart; tell me, have you taken steps to
complete the audits in time?

A — Ah! There is so much time upto 30th September. Clients wake up only after 15th of September.

S — Let clients not wake up. What about you yourself? You need to be eternally vigilant. That is the cost of independence!

A
— So many holidays in August. Independence Day, Parsi New Year, then
Rakhi, then your own birthday of Krishnashtami. Again in September,
Ganapati will take away our time! I think, we cannot do things in time.
We must start crying for extension. You only said, we need to be
‘proactive’!

S — Wah! Great thought! You are very much aware
that this year courts will not support you. Tell me, have you studied
new CARO; have you looked into IFC?

A — IFC? What is that?

S — Internal Financial Controls. You have to specifically report on that. And CFS?

A — You are giving me surprises. What is this new ghost?

S — Consolidated Financial Statements. Are you at least aware that even your CARO format is changed?

A — Yes, Yes. I have heard about it. Frankly, I have not studied the new company law as yet. So much of ambiguity there!

S
— True. But you can’t afford to be totally ignorant. Remember,
Government is appointing new regulatory authority to look into the
quality of your work.

A — Baap Re! Already we have disciplinary
committee, consumer forum, NFRA, and what not! And on the top of it,
this new Authority? God save the profession.

S — I will surely save you, only if you are vigilant and diligent.

A — Oh Lord, I know, I am rather lethargic. I have to be constantly on my toes. Even slightest of relaxation may be suicidal.

S
— Assure you that so long as you can prove honest efforts and support
it by documentation, your Council will always help you. Don’t worry.

A — Thank you, Lord!

Om Shanti.

The
above dialogue aims at highlighting the importance of having the right
attitude towards the profession. Being alert and proactive towards the
dynamic laws becomes extremely important in today’s world.

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Interpretation of Statutes – Construction of Rules – Prospective or Retrospective – Any legislation said to be dealing with substantive rights shall be prospective in nature and not retrospective. [General Clauses Act, 1897, Section 6]

Collector vs. K. Govindaraj (2016) 4 SCC 763 (SC)

In the present case, a notification dated 09.10.1996 was published by the Appellant (Collector) inviting applications for grant of stone quarrying leases. This notification was issued under the provisions of Rule 8(8) of the Tamil Nadu Minor Mineral Concession Rules, 1959 and it was stated therein that lease would be granted for a period of five years. However, when these leases were still in operation and the said period of five years for which these leases were granted had not expired, rule came to be amended vide G.O. dated 17.11.2000. The amended rule provided that the period for quarrying stone in respect of virgin areas, which had not been subjected to quarrying earlier, shall be ten years whereas the period of lease for quarrying stone in respect of other areas shall be five years. On the basis of this amendment, the Respondents pleaded that since they were granted lease for quarrying stone in respect of virgin areas, amended provision was applicable in their cases and they were entitled to continue on lease for a period of ten years.

The Supreme Court held that, “though the Legislature has plenary powers of legislation within the fields assigned to it and can legislate prospectively or retrospectively, the general rule is that in the absence of the enactment specifically mentioning that the concerned legislation or legislative amendment is retrospectively made, the same is to be treated as prospective in nature. It would be more so when the statute is dealing with substantive rights. No doubt, in contrast to statute dealing with substantive rights, wherever a statute deals with merely a matter of procedure, such a statute/amendment in the statute is presumed to be retrospective unless such a construction is textually inadmissible. At the same time, it is to be borne in mind that a particular provision in a procedural statute may be substantive in nature and such a provision cannot be given retrospective effect. To put it otherwise, the classification of a statute, either substantive or procedural, does not necessarily determine whether it may have a retrospective operation”. It was thus held by the Hon’ble Supreme Court, that the right which is substantive in nature, accrued to the virgin areas for the first time by way of amendment only.

It was thus an unamended Rule under which the notification dated 09.10.1996 was issued and tenders were invited and auction held. Rule 8(8) of the 1959 Rules which prescribes period for grant of lease is not procedural but substantive in nature. It is only in respect of virgin areas that the period of lease stands enhanced to ten years whereas in respect of other areas the period of lease continues to be five years. This was clearly a substantive amendment which had nothing to do with any procedure. There was no concept of “virgin area” in the unamended rule which has been introduced for the first time by way of aforesaid amendment.

These appeals were accordingly allowed.

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Evidence – Compact Disk – Primary or Secondary evidence – A Compact Disk produced as a source of information of corrupt practice is inadmissible as a primary evidence . [Evidence Act, 1872, Section 65-B]

Mohammad Akbar vs. Ashok Sahu & Ors. AIR 2016 (NOC) 428 (CHH).

The Court held that where a compact disk is produced as a source of information of corrupt practice, it shall be admissible only as a secondary evidence and not as a primary evidence, where the compact disk did not contain any certificate as required u/s 65-B(4), hence not admissible as Evidence.

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Contempt – Non-Compliance of order of a Court on the ground that the appeal is pending against the Court’s order is not permissible. [Contempt of Courts Act, Section 2]

Sk. Abdul Matleb vs. R.P.S. Khalon & Ors. AIR 2016 Cal. 235.

The alleged respondents were not ready to comply with the Court’s directions on the ground that they had filed an appeal.

It is a well settled law that till the order passed by a competent Court is set aside/or stayed and/or varied and/ or modified, the said order remains valid and subsisting and is required to be complied with, both in law and in spirit.

However, if one has to accept the stand taken by the respondents, it would mean that no order passed by any competent Court will be ever complied with, till the person aggrieved exhausts all his appellate remedies which certainly is not in conformity with the scheme for rendering effective justice in any matter. The Court in such circumstances, issued Rule of Contempt against the respondents.

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Arrest – Procedure to be followed by Police Officer – The police must follow the procedures laid down by the courts – if any situation/circumstance is covered u/s. 41 and 41-A of the CR.P.C proper reasoning for the arrest is required [Criminal Procedure Code, 1974 Section 41, 41-A]

Dr. Rini Johar & Another vs. State of M.P. & Ors. AIR 2016 SC 2679

In the present case, Petitioners being a lady doctor and a lady advocate, against whom a complaint was filed and an FIR u/s. 420 (cheating) and 34 of IPC and Section 66D of the Information Technology Act, 2000, was registered by the Cyber Police. Petitioners submitted that this Court should look into the manner in which they had been arrested, how the norms fixed by this Court had been flagrantly violated and how their dignity was sullied permitting the atrocities to reign. It was urged that if this Court is prima facie satisfied that violations are absolutely impermissible in law, they would be entitled to compensation.

The Hon’ble Supreme Court (SC) held that before the police proceed to arrest, certain guidelines as prescribed by the SC in the case of D.K. Basu vs. State of W.B. (1977) SC 416 should be adhered to.

Thereafter, the Court referred to Section 41 of the Code of Criminal Procedure (inserted by Amendment Act of 2009) and analysing the said provision, opined that a person accused of an offence punishable with imprisonment for a term which may be less than seven years or which may extend to seven years with or without fine, cannot be arrested by the police officer only on his satisfaction that such person had committed the offence. It has been further held that a police officer before arrest, in such cases has to be further satisfied that such arrest is necessary to prevent such person from committing any further offence; or for proper investigation of the case; or to prevent the accused from causing the evidence of the offence to disappear; or tampering with such evidence in any manner; or to prevent such person from making any inducement, threat or promise to a witness so as to dissuade him from disclosing such facts to the court or the police officer; or unless such accused person is arrested, his presence in the court whenever required cannot be ensured.

It has been held that section 41A of the Code of Criminal Procedure makes it clear that where the arrest of a person is not required u/s. 41(1) of the Code of Criminal Procedure, the police officer is required to issue notice directing the accused to appear before him at a specified place and time. Law obliges such an accused to appear before the police officer and it further mandates that if such an accused complies with the terms of notice he shall not be arrested, unless for reasons to be recorded, the police officer is of the opinion that the arrest is necessary. At this stage also, the condition precedent for arrest as envisaged under Section 41 of the Code of Criminal Procedure has to be complied and shall be subject to the same scrutiny by the Magistrate as aforesaid.

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Representation on Model GST Law

29th August, 2016

To,
Shri Arun Jaitley
The Finance Minister
Government of India
134/North Block
New Delhi – 110 001

Respected Sir,

Subject:- Representation on Model GST Law

This is with reference to draft Model GST Law released by the Empowered Committee and hosted on the website of DOR inviting comments from stake holders and public at large. We would like to take this opportunity to present before you some of the views and suggestions of our members.

May we request your good selves to kindly consider the same appropriately while preparing the final Model GST Law and related business processes on proposed Goods and Services Tax (GST).

Yours sincerely,

For Bombay Chartered Accountants ‘ Society

Chetan Shah
President

Govind G. Goyal
Chairman – Indirect Taxation Committee

Indirect Taxation Committee Observations and Suggestions on DRAFT MODEL GST LAW

Major Areas of Concern, which need to be addressed appropriately

1. The Draft Model GST Law, coupled with Reports on Business Processes under GST, has conveyed a very negative feeling among the trade and industries. The same needs to be addressed immediately (may be through a 2nd revised draft or so).

2. There is wide spread confusion about the uniformity of taxation across the country particularly regarding classification, valuation, exemptions and rates of tax.

3. There is an urgent need to dispel the fear of artificial disallowance of Input Tax Credit (ITC), through monthly matching concepts, etc., and, excessive compliance burden in the proposed GST regime.

4. Sanctity of ‘Tax Invoice’, issued by a registered dealer, and seamless Input Tax Credit are basic tenet of any successful VAT law. The same should be maintained.

5. It is also necessary to clarify how dual control by Central and States will be exercised over the same assessee in respect of same transaction liable to tax for CGST and SGST, or for IGST.

6. Small manufacturers, vendors and job workers, in small scale industries (SSI) and Cottage Industries, etc., are clueless about their future in the proposed GST regime. It may be noted that such units constitute a significantly large number of business population of India. Their genuine concerns need to be addressed satisfactorily before deciding about introduction of GST in the proposed format.

7. The proposed threshold of Rs. 10 lakh for compulsory registration is too low a limit. It may back fire. Considering various aspects of smooth transition it would be necessary to seriously reconsider the same. (An appropriate limit, in present conditions, may be Rs. 50 lakh of taxable supplies)

8. It would be necessary to design simple and convenient Composition Schemes for various categories of dealers and for certain specific types of businesses (may be on the lines of composition schemes designed in some of the State VAT laws and various other countries who have successfully implemented VAT /GST).

9. Being entirely new system of taxation across the country, it may not be possible for anyone to determine correct RNR at present. There are several factors, particularly in the present scenario of diverse system of indirect taxation by the Centre and States, and, organized as well as unorganized sectors of manufacture, trade and services, etc. It would be necessary, therefore, that the rates of tax are decided in accordance with the acceptability of such rate/s by the ultimate consumers (who are the real tax payers).

10. The best policy in deciding rates of tax is that the Government should get adequate revenue, trade & industry should not have any burden and the consumers feel happy. To achieve this, it may be necessary to decide in advance (a) the list of exempted goods and services, (b) list of goods and services which deserve a merit rate, (c) list of goods and services which needs to be taxed at very low rate in the beginning (special merit rate) and (d) list of goods and services which can be taxed at fairly high rate. However, it should be ensured that all States apply the same rate on such commonly agreed lists of goods and services.

11. Taking clue from various sources, the general rate of GST @ 15% may be the most appropriate rate, with merit rate (5% to 8%), special merit rate @ 2% and higher rates (25% to 35%).

12. Various definitions, contained in section 2 of draft Model GST Act, need appropriate review and necessary modifications.

13. The terms like ‘supply’ in section 3 and Schedule-1, ‘nature of supply’ in section 2, ‘time of supply’ in section 12 &13, ‘value of supply’ in section 15 and ‘place of supply’ in various sections, need a thorough review.

14. The provisions like RCM, TDS and TCS have made the draft law much more cumbersome. Only those provisions need to be kept, which are necessary. The Reverse Charge Mechanism (RCM) should apply in respect of international transactions only.

15. One needs to look into whether such elaborate provisions of valuation are required in the proposed GST regime where tax is being levied till final stage of consumption. Ultimately tax cannot be levied at a price (value) more than what the consumer has paid to the supplier.

16. Procedural aspects have to be designed in such a manner that all assessees, all over India, are able to comply with the requirements well within time and without facing undue burden of time and money.

17. Appropriate transition provisions need to be spelled out clearly so there is no undue burden on the existing tax payers. Similarly taxation of continuing contracts may need to be clarified appropriately.

18. Interest of those units, presently enjoying exemption under various promotional schemes, needs to be protected.

19. Applicability of IGST on various types of transactions of supply of goods as well as services needs much more clarity.

20. Although, the Government has shown its intention to implement GST with effect from 1st April 2017, there is no harm if it is implemented from a later date. For smooth implementation of such a major reform, it is necessary that the final law is designed after considering all aspects. And sufficient time is given to trade, industry and the Government Departments to gear up for the new regime.

Our observations and suggestions on some of the important provisions are enclosed herewith for your kind consideration.

Complete Representation on Model GST Law can be viewed and downloaded from BCAS home page www.bcasonline.org

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Impact on MAT from First Time Adoption (FTA) of Ind AS

The MAT Ind AS Committee (hereinafter referred to as ‘Committee’) on 18th March 2016 issued a draft report on the ‘Framework for computation of book profit for the purposes of levy of Minimum Alternate Tax (MAT) u/s. 115JB of the Income-tax Act 1961 for Indian Accounting Standards (lnd AS) compliant companies in the year of adoption and thereafter’. The Report was revised on 23rd July 2016 (hereinafter referred to as ‘Framework’). The Framework is a draft and is subject to public comments and final changes. Once the Framework is final, the same will have to be incorporated in the Income-tax Act, to make it effective.

This article discusses the issues and challenges on first time adoption (FTA ) of Ind AS and the consequences for companies that fall under MAT . Though the revised Framework is an improvement from the pre-revised draft, the provisions do not appear to be fair or reasonable, and will significantly hamper the ease of doing business. In addition, the environment is most likely to become very litigious and painful.

The accounting policies that an entity uses in its opening Ind AS balance sheet at the time of FTA may differ from those that it previously used in its Indian GAAP financial statements. An entity is required to record these adjustments directly in retained earnings/reserves at the date of transition to Ind AS. The Committee noted that several of these items would subsequently never be reclassified to the statement of P&L account or included in the computation of book profits.

Consider a company has a net worth of Rs 500 crore, and therefore falls under phase 1of Ind AS implementation. Its date of transition to Ind AS is 1 April, 2015; comparative period is financial year 2015-16, and first Ind AS reporting period is financial year 2016-17. The company is engaged in several businesses and makes the following seven transition decisions at 1 April, 2015 in order to comply with Ind AS.

1. The company’s accounting policy for fixed assets is cost less depreciation under Ind AS. However, as per option available in Ind AS 101 all fixed assets are stated at fair value at date of transition. The revalued amount is a deemed cost of fixed assets at 1 April, 2015. In other words, the company’s policy is not to use revaluation on a go forward basis as the accounting policy. The uplift on revaluation is recorded in retained earnings and will never be recycled to the P&L account.

2. In the stand-alone accounts the company has several investments in subsidiaries which under Indian GAAP are stated at cost less diminution other than temporary. Under Ind AS the company will continue to account them at cost less impairment. However, as per option available in Ind AS 101 the investments in subsidiaries are stated at fair value at date of transition. The fair value is the deemed cost of investments at 1 April, 2015. Subsequently, the investments in subsidiaries are not fair valued but tested only for impairment. The uplift on fair valuation is recorded in retained earnings and will never be recycled to the P&L account.

3. Under Indian GAAP, the company discloses assets under a service concession arrangement (SCA) as intangible assets at cost and which does not include construction margin. On date of transition, the company accounts for the intangible assets in accordance with Ind AS 11 (Appendix A), treating them as service concession assets. Consequently, under Ind AS 11 (Appendix A), the construction margin is also reflected in the value of the intangible asset.Therefore at transition date, the value of the intangible assets will be increased with a corresponding increase in retained earnings. The increase in retained earnings will never be recycled to the P&L account. However, the increase in the value of the intangible asset will be amortized in the future years.

4. At 31 March 2015, the Company has a lease equalization liability under Indian GAAP for an operating lease. Under Ind AS 17, the Company is required to charge operating lease payments in the P&L account without equalizing the lease payments, since those lease payments are indexed to inflation. Consequently on the transition date, the company reverses the lease equalization liability and takes the credit to retained earnings. The increase in retained earnings will never be recycled to the P&L account.

5. The Company has a cash flow hedge reserve at 31 March 2015 under Indian GAAP, which meets all hedge accounting requirements under Ind AS. In accordance with Ind AS 101, the Company is required to maintain the cash flow hedge reserve, and recycle the same to the P&L account, in accordance with the principles of Ind AS 109.

6. The Company has a foreign branch and a positive foreign currency translation reserve (FCTR) in Indian GAAP stand alone accounts at 31 March 2015. In accordance with Ind AS 101, it restates the FCTR to zero on 1 April, 2015 – the date of transition. Consequently the corresponding effect is taken to retained earnings. The increase in retained earnings will never be recycled to the P&L account.

7. In addition to investments in subsidiaries the company has investments in unquoted securities that are held long term for strategic reasons, but which are neither, subsidiaries, associates or joint ventures. The Company designates these investments as FVOCI (Fair Value through Other Comprehensive Income). As per this accounting policy choice, the fair value changes are permanently recorded in reserves (not retained earnings) and are never recycled to the P&L account.

As per the Framework, the MAT implication for the above seven FTA items is given below, along with the author’s recommendation of the changes required and grounds for such recommendations.

The FTA adjustments made at 1 April, 2015 are to be appropriately dealt with to determine the book profits for MAT purposes. The big question is – Is it included in the book profits over three years starting from the comparative period, ie, financial year 2015-16 or in the year of FTA, ie, financial year 2016-17? Though the intent of the government may have been to include the adjustments in the book profits for 2015-16, it is no longer practically feasible to do so. It is most likely that the adjustments would be included to determine the book profits starting from the financial year 2016-17. Hopefully that clarity will come in the forthcoming budget, as this requirement would require an amendment to the Act. This is again an unpleasant outcome, given that companies would be paying advance taxes without the knowledge of the final law on this subject.

Conclusion
Companies need to make careful choices of FTA options to minimize a negative MAT impact. They can make those choices up till financial statements for year ended 31 March 2017 are finalized. However, changes in those choices will cause significant fluctuations in 2016- 17 quarterly results. For example, a company decides to carry forward fixed assets at previous GAAP carrying value as a transition choice to avoid any MAT liability on fair value uplift. Subsequently, in the last quarter, the budget clarifies that the fair value uplift on fixed assets will be completely tax neutral from MAT perspective. Because of the clarity, the Company prefers to fair value the fixed assets from the transition date instead of carrying them at previous GAAP carrying value. This would mean that the lower depreciation charge in the earlier quarters and the comparative period will have to be adjusted, thereby resulting in significant change in the reported numbers in the last quarter.

As a bold step, the Government may consider simplifying the MAT provision, and lower the MAT rates. Alternatively, AMT (Alternate Minimum Tax) regime applicable to noncorporate assesses and which is highly successful may be introduced for corporate assesses. However, given the time constraint it is generally understood, that the Government may not explore these choices.

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