2016 Archives

Disgorgement of profits – profits made in violati on of SEBI directions vs. profits made in violation of law

SEBI has passed an order dated 16 June 2016 in the case of Beejay Investment & Financial Consultants Private Limited and others that has interesting implications. SEBI now has power to forfeit profits made through illegitimate transactions in securities markets. Generally, SEBI directs that such illegitimate profits made by parties through price manipulation, insider trading, etc. should be forfeited.

In the present case, however, there is an interesting twist. To put it simply , in this case, the profits were made in the ordinary course of business. Hence, the profit made can be said to be legitimate. However, the transactions were carried on during a time when SEBI had debarred the parties from carrying on such transactions. SEBI ordered forfeiture of such profits.

Background of case
The rationale behind forfeiting (i.e., disgorging) of illegitimate profits needs discussion. SEBI often finds manipulations and other illegalities in the securities market. Profits made are illegitimate or losses are avoided. Such profits are usually made at the cost of persons such as investing public, the company, etc. The credibility of markets also suffers. SEBI has considerable powers to penalise and prosecute such persons. It also has powers to issue directions such as ordering such persons not to access the capital markets, not to trade in such markets, suspend/cancel registration of intermediaries, etc. The monetary penalty can be a multiple of such profits.

However, a question arises about the profits made by such persons through such wrong doings. Clearly, allowing them to retain such profits would be allowing them to keep the rewards of their wrongful acts. Thus, irrespective of other actions taken, it is in fitness of things that such profits are taken away from the wrong doers. Such forfeiture is called disgorgement. At one time, there were two views whether SEBI had power to disgorge such profits. However, a recent amendment has clarified that SEBI has and did have the power to disgorge profits and issue directions restricting their operations.

For example, a person may buy shares of a company at a low price, manipulate the share price of the company by various means to a higher level, and then sell the shares to unsuspecting investor. Such profits are clearly illegitimate. SEBI thus requires power to disgorge these profits. This is of course apart from other adverse action SEBI would take. For example, one such other adverse action is debarring such a person from dealing in securities markets for a specified period.

If a person, who has been so directed not to deal in securities for a specified period, yet violates it and deals in securities, there are obviously consequences under law. Such a person can be, as will be seen, penalised under law and even prosecuted.

However, there can be an interesting situation. A person has been held to have carried out price manipulation in the capital market. He has then been directed not to deal in the capital market for a specified period of time. He yet carries out such dealings by buying and selling shares. The dealings are, however, in the ordinary course of business and no manipulation is alleged or even suspected. In such a case, still, there is violation of SEBI’s directions. The issue is whether profits made out of such trades be disgorged? Even if the person has not committed any violation while carrying out such trades?

Facts of the case
In this case, SEBI had passed orders against certain persons whereby it had “prohibited them from buying, selling or dealing in the securities market, directly or indirectly.”. While such directions were in force, such parties allegedly dealt in shares in the securities markets indirectly and earned profit of nearly Rs. 19 crore. SEBI alleged that these parties carried out such trades by transferring funds to other parties to enable them to carry out trades and earn / make profits.

However, in dealings carried out during this prohibition period, SEBI had not alleged, nor even suspected that such persons had carried out any price manipulation or committed any other wrong act. Since the dealings were carried out despite of such prohibitions, SEBI passed an order impounding such profit and levying interest of Rs. 8.45 crore, viz., in all seeking payment of Rs. 27.44 crore. To give effect to such impounding, it asked such parties to deposit the amount in an escrow account with a lien in favor of SEBI. Till the amount was deposited, SEBI directed that they shall not alienate any of their assets. Their bank/demat accounts were frozen, in the sense that the banks/depositories were ordered not to allow debits except for purposes of creation of the escrow account. They were also directed to submit a list of their assets to SEBI presumably so that SEBI can keep track of their assets and perhaps freeze them too.

This order is an interim and ex-parte order pending completion of investigation after which SEBI may pass final orders for disgorgement of such profits. If the finding of such investigation is that the allegations are true, then the profits would be disgorged and interest will be charged i.e., effectively forfeiting the gain made through a third party.

The question thus to be examined is whether SEBI can in law can pass such orders forfeiting profits made through legitimate deals, albeit in violation of orders not to deal in securities.

Are prohibitory orders preventive or penal?
In this context, it would be relevant to examine whether prohibitory orders are preventive or penal. A person is found to have committed price manipulation in capital markets. He should obviously be punished. However, it may also be in the interest of market that such person be prevented from carrying out trades. Thus, the order prohibiting him from dealing may be prevention, though in practice it works as a penalty / punishment.

The distinction is important because a penal order requires specific powers. A similar question arose before the Supreme Court in SEBI vs. Ajay Agarwal ((2010) 3 SCC 765) albeit in the context of whether power to issue such directions given by an amendment can have a retrospective effect. If it was a penal power, then obviously SEBI could not have issued preventive directions. However, the Court held that it was not a penal power.

The relevance here is that if the parties were issued prohibitory directions not to trade as a preventive measure to avoid repetitive manipulation. That does not make the wrong of disobeying such directions right, but at least the spirit of the original direction was not seriously violated since there was no manipulation that the direction intended to prevent.

Can and should such profits be disgorged?
Having considered the above, the question is whether SEBI can order disgorgement in such a situation and whether it should order such disgorgement? In the first instance, the question is whether SEBI has powers in law to order such disgorgement. In the second instance, the question is whether it would be right to do so.

Can SEBI order such disgorgement?
As mentioned earlier, the power of SEBI to disgorge profits made in violation of the law was contentious. The SEBI Act, 1992, however, was amended in 2014 by way of adding an Explanation. This Explanation to section 11B of the SEBI Act clarifies that SEBI has power to order disgorgement of “wrongful gains” (or loss averted) made “by indulging in any transaction or activity in contravention of the provisions of this Act or regulations made thereunder”. Thus, it can be seen that the requirements for disgorging profits are as follows:-

a. There have to be wrongful gains.

b. Such gains should be by indulging in any transaction or activity.

c. Such transaction or activity should be in contravention of the provision of the Act or Regulations made thereunder.

Thus, there have to be specific provisions in the Act/ Regulations and the profits made should be arising out of transactions/activity in contravention of such provisions. For example, the SEBI Prohibition of Insider Trading Regulations prohibit dealing in shares by insiders while in possession of unpublished price sensitive information. If a person still carries out such insider trading, such trading would be in contravention of the Regulations. Such profits are thus liable for disgorgement.

However, what if, as in the present case, the profits are made in violation of the directions of SEBI and not directly in violation of the Act/Regulations? Can SEBI thus disgorge profits made in violation of its directions? On one hand, it is arguable that provisions granting powers to disgorge money should be interpreted strictly. Thus, if the law does not expressly provide for forfeiture of profits made in violation of directions, such forfeiture cannot be made. On other hand, the question may be whether the law could be purposively and broadly interpreted. Thus, if powers to give such directions are given under the Act, then violation can of such directions be treated as violation of the Act?

It is also noteworthy that SEBI does have power to levy penalty where any person does not comply with directions of SEBI. Section 15HB provides for a penalty of upto Rs. 1 crore on persons “fails to comply with any provision of this Act, the rules or the regulations made or directions issued by the Board”.

Should SEBI disgorge such profits?
Whether SEBI should disgorge such profits is an interesting question! Needless to clarify, this is not to say that what is right is necessarily legal. However, it is seen that a person who violates directions not to trade can suffer a penalty of a maximum amount of Rs. 1 crore. He can also be prosecuted. However, in the meantime, as is alleged in the present case, he could make a profit of several times the maximum penalty leviable. Thus, it is submitted that SEBI should have power to disgorge such profits or, alternatively, levy a penalty that is related to the profits made. Such power to levy penalty that is related to the profits already exists in cases where there is price manipulation, insider trading, etc.

Conclusion
One looks forward to the final order in this case. The issues, as explained earlier, are not just of law but also of power of SEBI to effectively prevent blatant disregard of its directions. Hopefully, if SEBI does order disgorgement, it will give detailed reasoning and legal basis for disgorgement.

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SREI Equipment Finance Pvt. Ltd. vs. Assistant Commissioner, Hyderabad, [2013] 66 VST 68 (AP).

Entry Tax –Person Liable- Who Caused entry of Goods In to The State- Need Not Be Owner- Dispatch Of Motor Vehicles – By Lessor to Lessee- Entry Tax Payable By Lessee- And Not By Owner (Lessor), s/s. 2(1)(g) and 3(4) of The Andhra Pradesh Tax on Entry of Motor Vehicles Into Local Areas Act, 1996.

Facts
The petitioner a company registered under the Companies Act incorporated in to carry on the business of financing and leasing for purchase of equipment and other infrastructure, machinery tohis customers. In the regular course of its business it had entered into an agreement dated May 8, 2008 with one M/s. V.P.R. Mining Infrastructure Private Limited for giving equipment and operating on lease to the said mining industries private limited whose registered office is based at Calcutta. Under the agreement, the petitioner provided the dumper trucks on lease, from its registered office at Calcutta to Andhra Pradesh. The department passed assessment order under the Andhra Pradesh Tax on Entry of Motor Vehicles into Local Areas Act, 1996 (for short, “the Act”) and demanded entry tax on entry of dumpers inside the State.The contention of the petitioner was that though they were the owners of the three dumpers they are not exigible to tax under the Act. Inasmuch as it was their customer who had brought the said dumpers into the State ofAndhra Pradesh and merely because they continued to be the owners on account of the financial arrangement and contract entered into between their company and the customer they cannot be visited with the liability under the Act. The department did not accept the contentions of the Company and levied tax. The company filed writ petition before the Andhra Pradesh High Court against the said assessment order levying entry tax.

Held
Under section 3(2) of the Act, the tax is payable by the importer and it is the duty of the court to discover who is the importer for the purpose of section 3 of the Act. Section 3(3) of the Act elucidates that aperson who causes the entry of the vehicle into the local area for use or sale specially deemed to be the importer who is liable to pay the tax. In other words merely because an owner of the vehicle satisfied the definition as importer in the context of section 3 of the Act the word “importer” need not necessarily be the owner and in the context the importer has to be considered to be the person who is responsible or who causes the entry of the motor vehicle into any local area for useor sale.

The argument of the learned counsel for the respondent supporting the assessment to the effect that the petitioner being the owner and satisfying the definition of “importer” is the one who is liable to pay the tax was not accepted by the Court in view of the interpretation placed on section 3 of the Act which is the charging section.

The Court further held that the purpose of definition is limited and only to illustrate what is being defined. The definition by itself does not fasten the liability especially in the taxing statute. The expression which is used occurring in the main text of the statute in the context of the section has to be interpreted to find the true meaning. it was the lessee of the petitioner, viz., M/s. VPR Mining Infrastructure Private Limited who had brought the dumpers in question into the local area situated within the State for use and utilization. Applying section 3(3) of the Act to the facts of the case though the petitioner being the owner of the dumpers may satisfy the definition of “importer” yet for the purpose ofsection 3(3) of the Act, the liability to pay tax arises on the entry of the dumpers into the State and the liability gets fastened on the person who brings the same for use or sale into the State. In this case, the customer of the petitioner, M/s. VPR Mining Infrastructure Private Limited, has satisfied the definition of “importer” inasmuch as the customer is the one who cause the entry of goods inside the State and liable to tax. The High Court accordingly allowed the writ petition filed by the Company and set aside the impugned assessment order.

shailesh.kwebmaker

[2016] 70 taxmann.com 276 (Mumbai – CESTAT) Global Networking Recourses vs. Principal Commissioner, Service Tax, Pune

There is no provision in the VCES to condone the delay in payment of tax dues beyond the prescribed time limit. Hence, non-compliance as regards the conditions of payment would lead to rejection of declaration and no show cause notice would be required to be given in such case.

Facts
The Appellant filed VCES declaration, however failed to pay 50% of the declared liability before 31/12/2013 and a small portion was paid on 02/01/2014. The designated authority issued show cause notice proposing rejection of VCES declaration on the ground of non-payment of requisite 50% amount before due date. The Appellant contended that due to system error this balance amount could not be deposited and also produced snap shot, bank website as a token of proof of their attempt to make payment on 31/12/2013 and prayed that since it is beyond the control of the Appellant, delay if any, occurred should be condoned.

He further contended that no show cause notice within one month of the filing of declaration as clarified by Circular No. 170/05/2013-ST dated 08/08/2013 was issued.

Held
Hon’ble Tribunal noted that the Appellant had admittedly not paid entire 50% of the total dues declared by them on or before 31/12/2013 and have also shown reason for non-payment of part of the said amount before that date. However it held that even if the reason given is accepted, there is no provision in the scheme to condone the delay in payment and therefore time line prescribed under the scheme cannot be extended in absence of any provision for condoning the delay. As regards issue of show cause notice, the Tribunal observed that issuance of show cause notice referred to in the circular is with reference to section 106(2) which provides that if any deficiency or error is found in the declaration filed under the said section, notice is required to be issued, whereas in case of failure to deposit of an amount as provided under 107 there is no provision for issuance of any notice. Therefore, even the notice given to the Appellant was also not required for rejecting declaration. Accordingly, appeal was dismissed.

(Note: Readers may note a contrary decision of the same bench in the case of Commissioner of Customs & Central Excise Vs. Cityland Associates [2016] 69 taxmann.com 176 (Mumbai- CESTAT ) reported in the BCAJ July 2016 issue wherein the same bench held that delay in payment due to system fault cannot be attributed to assessee and the declaration was held as valid.

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[2016] 70 taxmann.com 303 (Mumbai-CESTAT) – Giriraj Construction vs. Commissioner of Central Excise & Customs, Service Tax, Nasik.

Refund cannot be granted if the claim is filed beyond time limit set out in section 11B, irrespective of whether such refund claim pertains to amount mistakenly paid as duty/ tax or amount correctly paid as duty/tax.

Facts
The Appellant mistakenly paid service tax in respect of certain services provided by it but which were not liable to service tax. A refund claim in respect of such mistaken services was filed after one year from relevant date. When revenue rejected refund claim as unsustainable being time barred, Appellant contended that since the service to which the refund claim relates as not liable for service tax, service tax paid by them was without authority of law and hence, time limit of one year as prescribed u/s. 11B of the Central Excise Act, 1994 would not be applicable to refund claim filed by the Appellant. Revenue submitted that in various judicial pronouncements, it has been categorically held that refund of any amount is governed by the provisions of section 11B in absence of any other provision dealing with refund claims.

Held
The Tribunal held that it would not be correct to state that section 11B is not applicable in cases, where the applicant has paid service tax although there was no levy. In every case of refund, the refundable amounts are neither service tax nor excise duty and such amount becomes refundable only where it is not payable as per law and therefore, every such amount shall be treated as payment without authority of law. At the time of payment the assessee pays the amount under a particular head such as service tax, excise duty etc. and when subsequently it is found that this amount is not payable, the same amount stand refundable to the assessee and such refund is treated as refund of service tax/duty only. Therefore, for the purpose of claiming refund of such amount of service tax, section 11B of the Central Excise Act read with section 83 of the Finance Act 1994 is the only provision and the amount claimed for refund by the Appellant can be refunded only under that section, the limitation provided therein also would apply. Any other interpretation would make section 11B redundant. Relying upon the various decisions of Supreme Court and Hon’ble Bombay High Court, the Tribunal disallowed the claim.

(Note: Readers may note a similar decision in the case of Benzy Tours & Travels (P) Ltd vs. CST [2016-TIOL-1104-CESTAT – MUM] reported in the June 2016 issue of BCAJ.

shailesh.kwebmaker

[2016] 70 taxmann.com 59 (Mumbai CESTAT) – Sanjay Automobiles Engineers (P) Ltd. vs. Commissioner of Central Excise, Pune-III.

Demand cannot be raised by invoking extended period when EA-2000 audit is already conducted by the department and no objections were raised in the audit report on a particular point, in respect of which appropriate disclosure is contained in financial statements.

Facts
During the period July 2003 to March 2007, Appellant earned commission income and provided infrastructural support services but did not pay service tax on it. The Revenue alleged that such receipts were liable to service tax under “business support services”/”business auxiliary services”. Appellant challenged the adjudication order by contending that the demand is barred by limitation as no point regarding taxability of commission was raised by the audit party of the department during EA-2000 audit conducted for period July 2001 to March 2006. Appellant’s contention was rebutted by the department by submitting that the mandate for the audit party of the Commissionerate was very limited and audit party was not required to look into entire records in detail to conclude that all angles are covered.

Held
The Tribunal held that the commission received by the assessee from the financial institutions and the insurance companies would be taxable pursuant to decision of Larger Bench in the case of Pagariya Auto Centre vs. CCE [2014] 44 GST 23/42 taxmann.com 371 (Mum). However, as regards the question of limitation, the Hon’ble Tribunal observed that Audit Party conducted detailed audit of the records of the assessee on various days and except for one small amount of interest not paid on the incentives, no objections were raised in the Audit report. It therefore held that the Revenue authorities were aware of the amount received as commission by the Appellant and recorded in the balance sheet. Tribunal further stated that, is a common knowledge that the EA-2000 audit is an extensive audit of the records of the assessee. Accordingly, relying upon the ratio laid down by Hon’ble Karnataka High Court in case of CCE vs. MTR Foods Ltd. 2012 (282) ELT 196 the Tribunal held that since no objection was raised regarding particular issue during the audit of records, the demand raised by issuing extended period is barred by limitation.

shailesh.kwebmaker

2016 (42) STR 290 (Tri.- Mum) Tata Technologies Ltd. vs. Commissioner of Central Excise, Pune – I

CENVAT credit cannot be denied on belated filing of declaration under Rule 6(3A)

Facts
The Appellant is engaged in providing taxable as well as exempt service. It had made a declaration as provided by Rule 6(3A) of the CENVAT Credit Rules, 2004 but the declaration was filed belatedly. Delay in filing declaration was considered as non-filing of declaration by the department and credit was denied.

Held
Condition of filing declaration is only directory and not mandatory. Intention of the legislation is that assessee should not get any undue benefit in the form of CENVAT credit which is attributable to the exempt services. Substantial benefit cannot be denied due to minor procedural lapse. Rule 6 of CENVAT Credit Rules, 2004 cannot be used as a tool of oppression to extract the amount which is much beyond remedial measure and what cannot be connected directly cannot be collected indirectly as well. Accordingly appeal was allowed.

shailesh.kwebmaker

2016(41) STR 236(Tri.-Del) Travel Inn India Pvt. Ltd. vs. Commissioner of Service Tax, Delhi

Payment of CENVAT credit availed along with interest at a later stage shall be considered as non-availment of CENVAT credit.

Facts
The Appellants are providing Tour Operator Service and were availing CENVAT credit on input services for providing output services. Notification No. 01/2006-ST had been issued granting exemption to the above services stating that exemption will not apply if CENVAT credit has been taken. On realizing the exemption and its condition, the credit taken was immediately paid along with applicable interest. However, department disallowed the exemption since they had not only availed the credit but had also utilized it for payment of service tax and therefore the conditions of the exemption were not satisfied.

Held
The Tribunal relied upon the decision of Khyati Tours and Travels [2011 (24) STR 456 (Tri.-Ahmd)] wherein it was held that reversing CENVAT credit with interest shall amount to non-availment of CENVAT credit. Paying the CENVAT amount along with interest amounts to non-availment of CENVAT credit and therefore exemption is available.

shailesh.kwebmaker

2016 (41) STR 213 ((Tri.-Del) Charanjeet Singh Khanuja vs. CST, Indore/Lucknow/Jaipur/ Ludhiana

Buying of branded goods at lower price by Distributors and selling at MRP and getting of commission on the bulk purchases is not considered as a service

Facts
The Appellants are distributors of Amway India Enterprises Pvt. Ltd who are engaged and are remunerated for acquiring goods from Amway at Distributor’s acquisition price and selling them at Retail Selling Price. Commission/ Bonus is provided by Amway depending on their monthly purchases. Commission is also paid on monthly purchases done by sub-distributors enrolled through the Appellants. The revenue confirmed demand of service tax on the commission income. It was contended that they are not engaged in promoting the sale of products and moreover the substantial portion of the commission is based on volume of purchases. Further till 30th April, 2004 definition of Business Auxiliary Service included the word “provided by Commercial Concern” and since they all are individuals they cannot be termed as a Commercial Concern.

Held
Business Auxiliary Service would include promotion of sale of goods which are produced or provided by or belonging to a third person. In the present case the goods are procured at Distributor’s acquisition price and subsequently sold at MRP which is a sale of goods and cannot be termed as any service provided. When the goods are purchased by the Distributors, they cease to be owned by Amway and the ownership transfers from Amway to the Distributors. Similarly, commission received by the Distributors for buying certain quantum of goods are in a nature of bulk discount and cannot be termed as promotion of sale of goods. However, the activity wherein Distributor appoints another distributor and gets remunerated based on the purchases made by the elected distributor comes within the definition of Business Auxiliary Service and is taxable. Further since branded goods are involved, the benefit of small scale exemption will be available. It was further noted that commercial concerns can be of a proprietary nature and therefore the appellants even though individuals can be considered as commercial concerns. It was also held that only on the reason that registration was not applied and returns were not filed, period of limitation cannot be invoked. Since there was an ambiguity amongst the department on the taxability of the service itself, longer period of limitation cannot be invoked.

shailesh.kwebmaker

2016 (42) STR 1009 (Tri.-Del.) Ashoka Industries vs. CCE, Jaipur-I

CENVAT credit on outward transportation and insurance of goods from factory to buyer’s premises shall be eligible if the terms of the contract are “FOR at buyer’s premises”.

Facts
The appellants had availed CENVAT credit on transportation and transit insurance on finished goods from factory to buyer’s premises on the basis that the place of removal was buyer’s premises where the goods were delivered since the terms of the contract were “FOR at buyer’s premises” and the transportation is included in assessable value of finished goods. CENVAT credit was disallowed since as per definition of “input services” transportation “upto the place of removal” was only allowed.

Held :
Since ownership and responsibility of goods were transferred by way of sale to the buyer on delivery at the destination, place of removal was buyer’s premises and therefore, CENVAT credit was allowed.

shailesh.kwebmaker

[2016-TIOL-1507-CESTAT-MAD] M/s JAKG Communications Pvt. Ltd vs. Commissioner of Central Excise, Chennai-III

There is no provision for reversal of CENVAT credit availed in respect of output services for which the amount to be realized is written off as bad debt.

Facts
In the course of provision of service certain amount receivable from the recipient of service could not be realized by the Appellant. Revenue contended that on the amount not realized CENVAT credit is to be reversed.

Held
The Tribunal noted that there is no mandate in the statute for reversal of the CENVAT credit already availed in respect of the output service provided and the consideration thereof not realized for which such receivable amount is written off as bad debt, thus the Appellant cannot be directed to reverse proportionate CENVAT credit. Law is well settled that where tax paid has gone into the treasury, credit thereof should be available unless there is a fraud involved. Thus the appeal is allowed.

shailesh.kwebmaker

[2016-TIOL-1571-CESTAT-MUM] Nirlon Ltd vs. Commissioner of Central Excise, Mumbai

Renting of Property not possible unless it comes into existence – input credit of Service tax on services used during construction Available against renting services.

Facts
Appellant availed CENVAT credit of service tax paid on input services, goods used in construction services against their service tax liability under the category of Renting of Immovable Property Service. Relying on Circular No. 96/7/2007-ST amended by Circular No. 98/1/2008-ST the department contended that such credit is ineligible and a show cause notice was issued. The adjudicating authority confirmed the demands and therefore the present appeal is filed.

Held
The Tribunal noted that due service tax is discharged under the category of “Renting of Immovable Property Service”. Such service tax payment is not possible unless the immovable property comes into existence. Thus without its construction the same cannot be rented out. Relying on the decision of the Andhra Pradesh High Court in the case Sai Samhita Storages [2011-TIOL-863- HC-AP-CX] and the decision in the case of Navaratna S.G. Highway [2012-TIOL-1245-CESTAT -AHM] the credit was allowed.

Note: Readers may note a similar decision in the case of Maharashtra Cricket Association vs. Commissioner of Central Excise, Pune-III [2015-TIOL-2418-CESTAT -MUM] refer digest in the BCAJ December 2015 issue and Vamona Developers P. Ltd [2015-TIOL-2705-CESTAT -MUM] refer digest in the BCAJ January 2016 issue. Further w.e.f. 01.04.2011 only services used in respect of modernization, renovation, repairs of premises from where service is provided are admissible for CENVAT credit and ‘setting’ up of the premises has been omitted.

shailesh.kwebmaker

[2016-TIOL-1572-CESTAT-MUM] United Phosphorous Ltd vs. Commissioner of Service Tax, Mumbai

When the CENVAT credit of service tax paid under reverse charge mechanism is available to the assessee itself, the situation being revenue neutral the demand of interest and penalties on the said tax is liable to be set aside.

Facts
The Appellant raised an amount as External Commercial Borrowing (ECB) in the form of convertible bond and paid amounts to various entities abroad for services rendered. Revenue contended that the amount paid abroad is liable to service tax under reverse charge mechanism. The service tax liability was discharged and the matter was contested. The demand for the period prior to 18/04/2006 was dropped by following the decision of the Apex Court in the case of Indian National Ship Owners Association [2010 (17) STR J-57]. However the demand for the post period was confirmed along with interest and penalties. CENVAT credit was availed of the service tax paid and therefore the present Appeal is filed contesting the interest and penalties only.

Held
The Tribunal relied on the decision in the case of Jain Irrigation Systems Ltd [2015-TIOL-1674-CESTAT-MUM] wherein it was held that since the duty stands paid and the credit of the duty paid is admissible to the Assessee itself, the interest and penalties are set aside. Accordingly the demand of interest and penalty is set aside.

Note: Readers may also note the decision in the case of Lime Chemicals Ltd [2016-TIOL-1567-CESTAT-MUM] wherein the Tribunal held that when the situation is revenue neutral, the assessee would naturally not get any benefit by not paying such tax therefore the extended period could not be invoked and the penalties were set aside.

shailesh.kwebmaker

[2016-TIOL-1536-CESTAT-HYD] M/s Ramboll Imisoft Pvt Ltd vs. CC,CE & ST, Hyderabad-II

II Tribunal

Service tax paid on common input services used for providing services in the State of Jammu and Kashmir and other parts of India is fully available as CENVAT credit. Further for the period prior to April 2011 group insurance services availed for the benefit of employees is an eligible input service.

Facts
The Appellant availed CENVAT credit on input services used for providing output services in the State of Jammu and Kashmir and other parts of India. The department observed that since the Finance Act, 1994 is not applicable to Jammu and Kashmir the services rendered in that state are exempted services and therefore since separate accounts are not maintained as per Rule 6(2) of the CENVAT Credit Rules 2004 for providing taxable and exempted services, credit reversal is required on the common input services in terms of Rule 6(3)(ii) read with Rule 6(3A)(b)(iii) of the said rules. Further reversal is also sought for the service tax paid on the insurance premium paid for the family members of the employees for the period prior to April 2011.

Held
The Tribunal noted that undisputedly common input services have been used for providing services to Jammu and Kashmir and other parts of India. As per Rule 2(e) of the CENVAT Credit Rules, 2004 a service becomes exempted when it is exempted by notification or law. Since the services provided in Jammu and Kashmir are not liable to service tax u/s. 64 of Chapter V of the Finance Act, 1994, these services are neither taxable nor exempted. Further the proviso to sub-clause (2) of Rule 1 of the CENVAT Credit Rules, 2004 clearly states “nothing contained in these rules relating to availment and utilization of credit of service tax shall apply to the State of Jammu and Kashmir”. Thus reversal of credit on input services used for providing service in State of Jammu and Kashmir is justified. However in respect of common input services the Tribunal observed that though it is doubtful as to whether such services can be construed as “output services” in any case the service cannot be construed as an exempted service. It is a non-taxable service. Rule 6(2) does not apply to a situation where the service provider renders both taxable and non-taxable services and the law is silent in this regard. Therefore it was held that reversal of credit on common input services is unsustainable. With regard to credit of service tax paid on insurance premium it was noted that the premium is uniform to all employees and has no regard to the number of dependents and therefore service availed for the benefit of employees qualifies as input service.

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2016(42) STR 3(Bom) Commissioner of Central Excise, Pune-I vs. S. S. Engineers

Cross utilization of credit of excise duty and service tax is allowed.

Facts
Assessee is engaged in manufacture and is also providing services for which they have taken separate registration with the respective authorities. During scrutiny, it was observed that credit of service tax paid on services which were required in connection with erection and commissioning service were utilized for payment of excise duty on manufacture which the departmental authorities disputed. The adjudicating authority confirmed the demand. Therefore an appeal was filed before the Tribunal wherein it was held that CENVAT Credit Rules, 2004 provides restrictions on utilisation of CENVAT credit but such restrictions do not cover cross utilization of credit of excise and service tax, as a general proposition and the intention appears to be to permit cross utilization of excise duty and service tax.

Held
The Court observed that Rule 3(1) of the CENVAT Credit Rules, 2004 provides that a manufacturer or a service provider shall be allowed to take credit on various duties which includes excise duty, service tax etc. and that is a substantive provision in the rules. Therefore Tribunal has rightly come to the conclusion that cross-utilization is permitted. It was further noted that department has issued a circular dated 30/03/2010 on the issue of cross utilization guiding the departmental officers on the accounting aspects and on verification of the credits in both the excise and service tax returns. The Appeal is accordingly dismissed.

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2016 (42) STR 948 (Bom.) Cleartrip Private Ltd. vs. Union of India

Unless investigation is completed and prosecution is launched, coercive measures including arrest cannot be taken by Department.

Facts
Petitioners were engaged in facilitating provision of services of hotel accommodation and travel. The hoteliers collect and discharge appropriate service tax and the Petitioner does not collect any service tax on room bookings through their portal. Department had arrested officials of Make-My-Trip since they had collected and failed to deposit service tax. Since the Petitioner is in similar line of business, assuming similar case under service tax, department officials demanded service tax. On the apprehension that the department may take coercive actions including arrest without issuance of Show Cause Notice or adjudication, Writ Petition is filed. Department contested that on the facts of the case, service tax was collected more than what was permissible under service tax Laws. Further, department assured that due process of law would be followed for adjudication and prosecution.

Held
When investigation is underway, it does not mean that arrest would be effected. Arrest under Finance Act, 1994 could arise only when investigation is completed and prosecution is launched. Further, there is no question of recovery by coercive means unless SCN is issued, opportunity of being heard is given and reasoned adjudication order is passed. Therefore, in view of facts and circumstances of the case it was held that any recovery by coercive measures is not permissible straightway without following the due process of law.

shailesh.kwebmaker

[2016-TIOL-1061-HC-DEL-ST] Mega Cabs Pvt. Ltd vs. Union of India and ORS

I. High Court

Rule 5A(2) of the Service Tax Rules, 1994 and the Circulars issued by the CBEC exceed the scope of the Finance Act, 1994 and are therefore ultra vires.

Facts
In this petition, Rule 5A(2) of the Service Tax Rules, 1994 empowering deputation of officers from the Comptroller and Auditor General of India to demand documents was challenged. Further validity of section 94(2)(k) of the Finance Act, 1994 was also challenged which gives uncontrolled delegated powers to the Central Government to frame rules. Lastly a letter issued by the Commissioner of Service Tax informing that the records of the petitioner would be verified by a team of officers was challenged. Pursuant to the decision in the case of Travelite (India) vs. Union of India [2014 (35) STR 653 (Delhi)] wherein a division bench of this Court struck down Rule 5A(2) as being ultra vires section 72A read with section 94(2) of the Act, an amendment was made to the said rule and section 94(2)(k) was inserted in the Act. Circular No. 181/7/2014- ST dated 10/12/2014 clarified that the department officers could now proceed with the Audit as before and thereafter norms for conducting audit were issued vide circular no. 995/2/2015-CX dated 27/02/2015 followed by an Audit Manual 2015. It was contended that the amendment continues to be ultra vires section 72A of the Act which contemplates only a special audit by a cost accountant or a chartered accountant whereas Rule 5A(2) permits any officer of the Government to ask for production of books on demand and without observing any safeguards spelt out in section 72A of the Act.

Held
The Court noted the provisions of section 72 of the Finance Act and observed that for invocation of the said section it has to be established that the return filed is not in accordance with the law without which the records cannot be called for mechanically. Further section 72A also requires the Commissioner to record the “reasons to believe” that any of the three contingencies as required in the said section exists. Only after such ascertainment the records can be audited only by a chartered accountant or a cost accountant nominated by the Commissioner. Section 73 also requires the issuance of a show cause notice to the person who has short paid or not paid the service tax. Even the powers to search the premises under section 82 are not without any guidelines or restrictions.

Thus the Court was of the view that before the records is called for, the assessee should be provided with a predecisional hearing to explain his case. Further Rule 5A(2) of the Rules require production of records in addition to those mentioned in Rule 5(2) of Rules which is not envisaged under any provisions of the Act and itself is beyond the Finance Act. Further it was noted that there is no authorization under the Finance Act provided to the officers of the department or the CAG to examine the books of accounts of the assessee and if any such officer is deputed it will result in harassment of the assessees. It was noted that the term ‘verify’ in section 94(2)(k) is not wide enough to include the audit of accounts of an assessee.

Further the Circular issued by the CBEC appears to be without any reference to the applicable provisions in the Act or the Rules and thus the lacuna pointed out in Travelite India (supra) has not been set right. It was held that audit is a special function which has to be carried out by duly qualified persons like a cost accountant or a chartered accountant and cannot be undertaken by any officer of the department. Thus Rule 5A(2) and the circulars exceeds the scope of the Act tested vis-à-vis sections 72, 72A,73 and 82 and is therefore ultra vires.

shailesh.kwebmaker

Fate of ‘Hoarding’, hanging !

Introduction
The issue about levy of VAT on transactions of ‘transfer of right to use goods’ (lease transaction), has become highly debatable. On one hand dealers are paying service tax, whereas the sales tax departments are levying VAT considering the same as transactions of ‘lease’, therefore, ‘deemed sale of goods’.

Particularly, the controversy relating to levy of tax on charges for advertisement hoardings, has become more complex due to conflicting judgments of various.

Hoarding – the concept
The hoardings are normally put up on strategic locations like on the roads, buildings, flyovers etc. Normally these properties belong to government authorities or may belong to private parties. Such authorities or parties, as the case may be, grant licenses for putting up hoardings by accepting proposals through tender etc. On getting such permission, the advertising agencies create necessary infrastructure on the given premises. Normally, hoardings are fixed on a metal frame, which are again fixed into the walls/land etc., and sometimes may require civil work also. The actual customer, desiring to put advertisement, will stick their printed material on paper/flex or other such material on such hoarding. The period of display is normally pre-agreed. Against such advertisements the advertising agency gets charges. Considering such activity as of rendering services either advertisement services or leasing of immovable property etc., service tax is paid.

Whether hoarding charges liable under VAT?
There are different judgments on the above issue.

Selvel Advertising Private Ltd. vs. Commercial Tax Officer (89 STC 1) (WBTT)
In this judgment, the West Bengal Taxation Tribunal, by majority, held that the receipts towards hoardings are liable to Sales Tax as lease sales. The structure/hoarding was held as movable property.

The State of Tamil Nadu vs. Tvl. Jayalakshmi Enterprises 2011-12 (17) TNCT-J P. 92.(Mad)

Held, structure is immovable property and hoardings are not liable to VAT /Sales Tax.

M/s.TIM Delhi Airport Advertising Pvt. Ltd. vs. Special Comm.-II, Dept. of Trade and Taxes (W.P.(C)1625/2014 & CM 3374/2014 dt.2.5.2016) (Delhi)

The hoardings were situated in Airports, a restricted area. High Court held that, there is no possibility of advertiser giving control of hoarding and hence not liable to VAT .

Recent Judgment
Recently Hon. Kerala High Court had an occasion to deal with above issue in case of Delta Communications vs. The State of Kerala (90 VST 438)(Ker). The facts, as noted by Hon. High Court, are as under:

“2. Brief facts relevant for the disposal of the revision are stated hereunder:

The revision petitioner is a partnership firm engaged in the business of outdoor marketing media at Kottayam. The advertisements are displayed in hoardings for the above purpose. The appellant acquires land on lease in various places in the State of Kerala, and structures are erected on the property taken on lease. Thereafter, hoardings are fixed on this structure and it is let out to various companies for advertising their products. The revision petitioner receives rental charges for letting out the hoardings. During the year 2007-2008, the revision petitioner received rental charges amounting to Rs.36,70,983/-. “

The prime argument of dealer was that it is immovable property, hence, cannot liable to VAT . There was also argument based on ground that there is no passing of effective control, to consider the transaction as lease transaction.

Hon. Kerala High Court referred to various judgments cited on both sides about meaning of nature of immovable property. Hon. High Court rejected the contention of dealer about immovable nature of hoarding in following words;

“14. It is clear that so far as the structures involved in this case are concerned, same are constructed using tempered steel/thick steel poles by attaching the same to a concrete structure embedded on earth and erected using nuts and bolts. The Assessing Authority had evaluated the factual circumstances and came to the finding that the structure erected is ‘goods’ as defined under the Act and therefore is exigible to tax. This finding was confirmed by the First Appellate Authority as well as the Tribunal after taking into account the principles laid down in various judgments of the Apex Court and other Courts and Tribunals. According to us, so far as the structure involved in this case is concerned, taking into account of the explanations of the learned counsel for the petitioner, it is fastened to earth and is detachable easily and therefore, is not an immovable property. Further the structure so erected is never a complicated installation unlike a heavy machinery fitted in a factory premises by assembling various components and then attached to earth, which becomes a complicated procedure, whereas a hoarding is fastened to a concrete structure on earth using nuts and bolts, the removal of which is a simple procedure which makes it a movable article under the Act. In this connection counsel for the petitioner has brought to our attention the judgment in ‘State of Tamilnadu vs. TVL Jayalakshmi Enterprises’ [T.C. (Review) No.430/2006 dated 7.7.2011] and contended that in the said case also the issue related to the leasing out of hoardings for the purpose of advertisement and that the Madras High Court has held that since the hoardings erected on the concrete foundation, not capable of removal without causing any damage to the structure, is part of the immovable property and ceased to be goods for the purpose of attracting levy of tax u/s. 3A of the Act. But, according to us, the Madras High Court has considered the said case on appreciation of the covenants contained in the agreement between the parties and thereupon found that the entire responsibilities were carried out by the assessee and that therefore there is no transfer of right to use goods.”

Regarding contention of effective control also Hon. High Court held in the negative observing as under:

“17. But, according to us, so far as leasing out of hoardings in this case are concerned, once it is let out by entering into an agreement or work order, the owner of the goods ceases to have any control over the same for the reason that the advertisements are affixed on the hoarding by putting up and displaying necessary materials in accordance with the directions of the lessee and he has the effective control of the hoardings throughout the contract period entered into by him with the revision petitioner. The revision petitioner is unable to interfere with the nature of the advertisement carried out by the lessee in the hoardings since as per Annexure-D work order, it is his absolute right to finalise the nature of advertisement that is put up on the hoardings. Therefore, according to us, the absolute control of the hoardings is transferred to the lessee by virtue of Annexure-D work order. Therefore, we are of the definite opinion that the control of the hoardings once it is passed for erecting advertising materials is left with the lessee absolutely for the period specified and therefore there is transfer of right to use as provided u/s. 6(1)(c) of the Act. Therefore the second question raised by the assessee is also answered in the negative and in favour of the Revenue.”

Ultimate argument of payment of Service Tax
Dealer in this case also tried to argue that it has paid service tax on very same receipts. It was canvassed that service tax and VAT are mutually exclusive and hence when service tax is levied and paid, no VAT should apply. This contention was also rejected by Hon. High Court observing as under:

“20. In the second cited decision also, a Division Bench of this Court was considering the question whether the Parliament is competent to authorise levy of service tax on banking and other financial services including equipments leasing and hire purchase. It was concluded that Article 366 (29A) empowers the authorities to impose levy of tax on deemed sale and purchase of goods and the same is not mutually exclusive with the liability for Service Tax. Therefore, according to us, the above two judgments are an authority for the proposition that the service tax and Value Added Tax are not mutually exclusive and if there is liability, both are to be paid by the concerned assessee. Viewed in that background, the contention raised by the revision petitioner that since it is paying service tax, is not liable to pay Value Added Tax can never be sustained.” Thus rejecting all contentions, Hon. High Court upheld taxation under VAT .

Conclusion
It can be seen that there are conflicting judgments on the given issue. It clearly appears that the matter is not decided by any common principle but based on facts/terms of agreements in each transaction and it’s appreciation by the concerned court. In such a situation Dealers will have hard time to visualise their liability. The tragedy is that such a dealer will be liable to pay both Service Tax and VAT on the same transaction. This will be a hard blow to financial viability of dealer. It is felt that not only fate of taxation of hoarding is hanging but the financial existence of dealer itself will be in jeopardy Let there be clarity by law makers on the issue at the earliest to save the plight of the dealers.

shailesh.kwebmaker

Valuation of constructed units given to landowners in lieu of Development Rights – A Burning Issue

Relevant Statutory Provisions

Section 65B (44) of the Finance Act, 1994 (‘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) a 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
b) a provision of service by an employee to the employer in the course of or in relation to his employment;
c) fees taken in any Court or Tribunal established under any law for the time being in force.
………………..

Section 66E of the Act – Declared Services

The following shall constitute declared services, namely: – …………

(b) Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of completion certificate by the competent authority.

Explanation. – for the purposes of this clause, –
……………….

(1) The expression ‘construction’ includes additions, alterations, replacements or remodeling of any existing civil structure;
……………..
Service portion in the execution of a works contract.

Section 67 of Act – Valuation of taxable services for charging service tax

(1) Subject to the provisions of this Chapter, where service tax is chargeable on any taxable service with reference to its value, then such value shall,
–

i) in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him;

ii) in a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money as, with the addition of service tax charged, is equivalent to the consideration;

iii) in a case where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner.

Service Tax (Determination of Value) Rules, 2006 (“Valuation Rules”)

Rule 3 – Manner of determination of value

Subject to the provisions of section 67, the value of taxable service, where such value is not ascertainable, shall be determined by the service provider in the following manner –

a) the value of such taxable service shall be equivalent to the gross amount charged by the service provider to provide similar service to any other person in the ordinary course of trade and the gross amount charged is the sole consideration;

b) where the value cannot be determined in accordance with clause (a), the service provider shall determine the equivalent money value of such consideration which shall, in no case be less than the cost of provision of such taxable service.

Background
In Larsen & Toubro Ltd vs. State of Karnataka [2014] 34 STR 481 (SC) the Supreme Court held that building / construction contract is a ‘works contract as well as transfer of immovable property. In a building / construction contract, goods like cement, concrete, steel, bricks etc. are intended to be incorporated in structure and fact that they lost their identity as goods, does not prevent them from being goods.

However, the activity of construction undertaken by developer would be works contract only from the stage the developer enters into a contract with flat purchaser. If a contract with flat purchaser is entered only after construction is completed, goods used in construction cannot be deemed to have been sold for the fact that it is the building which is intended for sale ultimately.

Taxability of Joint Development Agreements usually involves three parties viz.

Landowner;

Builder and

Buyers of constructed units.

The same has been subject to several interpretations from time to time by CBEC and various High Courts and Tribunals. One of the burning issues in such agreements has been taxability of flats given by a builder to landowner in consideration of the grant of land development rights.

The Burning Issue is whether such flats given to landowner are to be valued:

at the price of land / land development rights given by landowner to the builder / developer or

at the price charged for similar flats from other buyers

To examine this, it is relevant to refer to the following circulars issued by the Government.

Clarification vide CBEC Circular No. 151/2/2012 – ST dated 10/02/2012 (Relevant Extracts)

Para 2.1

In case of Tripartite Business Model, the parties involved are:

i) landowner;

ii) builder or developer; and

iii) contractor who undertakes construction. Here two important transactions are identifiable viz.

Sale of land by the landowner which is not a taxable service; and

Construction service provided by the builder / developer.

The builder / developer receive consideration for the construction service provided by him, from two categories of service receivers:
a) From landowner: in the form of land / development rights; and
b) From other buyers: normally in cash.

For the period prior to 01/07/2010, construction service provided by the builder / development rights of the land was received by the builder / developer will not be taxable in terms of CBEC Circular No. 108/2/2009 – ST dated 21/01/2009.

For the period after 01/07/2010, construction services provided by the builder / developer is taxable in case any part of the payment / development rights of the land was received before the issuance of completion certificate and the service tax would be required to be paid by builder / developers even for the flats given to the landowner.

Value, in the case of flats given to landowner, is determinable in terms of section 67(1) (iii) read with Rule 3(a) of Service Tax (Determination of Value) Rules, 2006, as the consideration for these flats i.e., value of land / development rights in the land may not be ascertainable ordinarily. Accordingly, the value of these flats would be equal to the value of similar flats charged by the builder / developer from the second category of service receivers. In case the prices of flats / houses undergo a change over the period of sale (from the first sale of flat / house in the residential complex to the last sale of the flat / house) the value of similar flats as are sold nearer to the date on which land is being made available for construction should be used for arriving at the value for the purpose of tax. Service tax is liable to be paid by the builder / developer on the “construction service” involved in the flats to be given to the landowner, at the time when the possession or right in the property of the said flats are transferred to the landowner by entering into a conveyance deed or similar instrument (e.g. allotment letter).

Clarification vide Education Guide dated 20/06/2012

Para 6.2.1

In case of flats / houses agreed to be given by builder / developer to the land owner towards the land / development rights and to other buyers, two important transactions are identifiable:

Sale of land by the landowner which is not a taxable service; and

Construction service provided by the builder / developer.

The builder / developer receive consideration for the construction service provided by him from two categories of service receivers: (a) from landowner: in the form of land / development rights; and (b) from other buyers; normally in cash. Construction service provided by the builder / developer is taxable in case any part of the payment / development rights of the land was received by the builder / developer before the issuance of completion certificate and the service tax would be required to be paid by builder / developers even for the flats given to the landowner. ………….

Value, in the case of flats given to first category of service receiver will be the value of the land when the same is transferred and the point of taxation will also be determined accordingly.

Clarification vide CBEC Circular F. No. 354 /311/ 2015 TRU dated 20/01/2016 which supersedes Education Guide dated 20/06/2012 and revives Circular dated 10/02/2012.

Para 4

The Circular dated 10/02/2012 is in accordance with the provisions relating to valuation as laid down in the Finance Act, 1994 and the Service tax (Determination of Value ) Rules, 2006. As regards the Education Guide, it has been clearly stated in the Education Guide, 2012 that it is merely an educational aid based on a broad understanding of a team of officers on the issues. It is neither a “Departmental Circular” nor a manual of instructions issued by the Central Board of Excise and Customs. To that extent it does not command the required legal backing to be binding on either side in any manner. The guide was released purely as a measure of facilitation so that all stakeholders could obtain some preliminary understanding of the new issues for smooth transition to the new regime. Hence, Circulars such as the present one would prevail over the Education Guide, 2012. Hence, in valuing the service of construction provided by a builder / developer to a landowner who transfers his land / development rights to builder for getting in return constructed flats / dwellings from builder / developer, the service tax assessing authorities should be guided by the said Board Circular dated 20/02/2012 and not the Education Guide.

Ruling of Madras High Court in Southern Properties & Promoters vs. CCE (2015) 52 GST 413 (MAD)

In this case the appellant was providing taxable service under the category of “Construction of Residential Complex Service”. They entered into a joint venture agreement with a land owner for construction of 72 flats in three blocks, (viz. 24 flats in each block). The appellant, by virtue of the joint venture agreement, owned 48 flats and the land owner owned the remaining 24 flats as his share equivalent to the land. That the appellant paid service tax on the sale of 48 flats to independent third parties after claiming the benefit of abatement. But they failed to pay service tax on the cost of 24 flats alleged to be the share of the land owner and the reason stated by the appellant was that they had not received any amount from the landowner for the construction of the flats allotted to them. Hence, show cause notice was issued demanding service tax. The appellant filed a reply stating that since they did not pay any amount to the land owner towards the land cost, they had not paid service tax for the flats held by the land owner.

The Adjudicating Authority adjudicated the case and came to hold that the classification of the service provided by them was not in dispute. In so holding the Adjudicating Authority further held as under:

“I observe that it is the ‘appellant’ who provided the service of construction of flats by virtue of entering into a ‘JV’. As per section 65 (105)(zzzh) of the Act, taxable service means “any service provided or to be provided to any person in relation to construction of complex”. The phrase “any service” in relation to construction of residential complex service is wide enough to cover all services including construction service.” ………………………

(f) Further, in the Finance Act, 2010 communicated vide Board’s DOF No. 334/1/2010 – TRU, dated 26/02/2010, in order to achieve the legislative intent and bring in parity in tax treatment, an explanation to sub-clause to section 65(105)(zzzh) of the Act had been inserted to provide that unless the entire payment for the property is paid by the prospective buyer or on his behalf after completion of construction (including its certification by local authorities), the activity of construction would be deemed to be a taxable service provided by the builder or promoter or developer to be the prospective buyer and the service tax would be charged accordingly. The above explanation to sub-clause to section 65(105) (zzzh) of the Act has applicability from the date of existence of the section and hence is having retrospective effect from 16/06/2005. Therefore, I observe that all the earlier Board’s Circulars are to be read with the above explanation.”

Accordingly, the Adjudicating Authority confirmed the demand.

The contention of appellant before the Tribunal was that the appellant had not received any consideration in the form of money in respect of 24 flats handed over to the landowner and therefore tax should be demanded on the basis of the cost of land. The plea of the department before the Tribunal was that the value of taxable service should be equivalent to the gross amount charged by the appellant to provide construction of the similar 48 flats. The contention of the department before the Tribunal is reproduced, hereafter:

“3…… He drew the attention of the Bench to Rule 3 of the Service Tax (Determination of Value) Rules, 2006. He submits that the value of such taxable service shall be equivalent to the gross amount charged by the applicant to provide construction of the similar 48 flats. He relied upon the decision of the Tribunal in the case of Prince Foundation Ltd. vs. CST (2014) 33 STR 448 (Tri. – Chen.), where stay was granted partially.”

After hearing both sides, the Tribunal on a consideration of Rule 3 of the Valuation Rules, which provides the manner of determination of value in respect of taxable service, namely the service defined u/s. 65(105)(zzzh) of the Act, came to hold that the value of taxable service should be equivalent to the gross amount charged by the service provider to provide similar service to any other person, that is to say, the value of taxable service rendered in relation to the flats sold to independent persons. Accordingly, the Tribunal held that the appellant has failed to make out a prima facie case for waiver of pre-deposit.

Aggrieved by the Tribunal’s order of pre-deposit, the appellant approached the Court. The observations of the High Court are as under:

“From a reading of the above said provisions, it is clear that section 65(105)(zzzh) of the Finance Act, 1994 relates to construction of complex, whereas section 65(105)(zzzza) of the Finance Act, 1994 relates to works contract. It is not in dispute that the appellant is engaged in the promotion and construction of residential complexes and not engaged in works contract. It is relevant to note that the plea now taken by the learned counsel appearing for the appellant that the appellant is entitled to the benefit of Notification No. 29 dated 22nd May, 2007 has not been taken by the appellant either before the Adjudicating Authority or before the Commissioner (Appeals) (Para 18).

Prima facie, we are not inclined to entertain this appeal, in view of the specific admission by the appellant before the Adjudicating Authority that the services rendered by the appellant would fall u/s. 65(105)(zzzh) of the Finance Act, 1994. Even otherwise, the language of section 65(105)(zzzh) and the nature of the services provided by the appellant is for construction of flats provided to the land owner and the transfer of land is only for the purpose of providing such taxable service, we fail to understand as to how the appellant would say that there is no liability to pay service tax in respect of 24 flats handed over to the land owner after rendering taxable service as defined u/s. 65(105)(zzzh) of the Finance Act, 1994. If there is no monetary consideration in the transaction, then section 65 of the Finance Act, 1994 provides for various methods for valuation. Hence, it is for the appellant to establish that his plea that the value of the land should be taken into consideration is a matter for the Tribunal to decide on merits at the time of hearing of the appeal (Para 19)..

At the first blush, we are not inclined to accept the plea of the department that the case in respect of valuation, it may fall under Rule 2 or 3 of Valuation Rules and the amendment made in the year 2012. We are not inclined to go into the effect of amendment as pleaded by the standing counsel and we are not inclined to make any observation as that would influence the mind of the Tribunal as to the applicability of such Rule on the merits of the case…… (Para 20).

The Tribunal is justified in ordering pre–deposit of Rs.12 lakh as against demand of Rs. 27 lakh.

Relevant overseas judgment on the Issue

In Direktor na Direktsia ‘Obzhalvane I upravlenie na izpalnenieto’ – grad Burgas pri Tsentralno upravlenie na Natsionalnata agentsia za prihodite vs. Orfey Balgaria EOOD [2013] 38 STT 289 (ECJ), assessee acquired building right over land owned by various owners and agreed to provide certain portions of constructed property in consideration thereof. Department argued that assessee had agreed to provide construction services and received consideration thereof on date of establishment of building right. It was also argued that value of consideration received by assessee was open market value of construction services provided.

The European Court of Justice ruled that:

When building right was established in favour of assessee as a consideration for construction services agreed to be provided, such establishment of building right amounted to receipt of consideration and such construction services became chargeable on date of establishment of building right.

Such charge will arise only if, at time when right is established, all relevant information concerning that future supply of services is already known and value of that right may be expressed in monetary terms.

Moreover, value of such building right cannot be based on open market value of construction services to be provided; it must be based on value of building rights received.

Mere possibility that building right may get extinguished by assessee not exercising such right does not bar charge of service tax, as on such extinguishment, assessee may seek refund / credit of tax paid earlier.

Conclusion
The ruling of Madras High Court, though in the context of law prevalent prior to 01/07/2012 is relevant despite the fact that the matter has been remanded to Tribunal for final determination of valuation, the Court has observed in para 20 that they are not inclined to accept the plea of the department that the case in respect of valuation may fall under Rule 2 or 3 of the Valuation Rules.

Based on the judgment of ECJ referred in para 7 above and considering the principle of reciprocal consideration, a view could be adopted that the value of construction services by builder to landowner should be based on the value of land development rights received in return from the landowner by the builder. The value of land development rights is clearly discernible in the form of prorata value of land given up by the landowner and such value of land should be determined at the time of entering into the contract.

The value of land is always available at the time of execution of development contract. In the State of Maharashtra, development rights are liable for stamp duty and market value of such rights is prescribed vide the Government Ready Reckoner. Hence, as a reasonable view in terms of provisions of section 67(1)(i) & (ii) of the Act, the prorata value of land rights given up by the landowner can only be taken as basis for determining the value of construction services provided by builder because that is what the builder gets in return. It appears that Education Guide dated 20/06/2012 represents the correct position of law. If the value however, is not ascertainable, only then resort can be made to section 67(1)(iii) of the Act read with Rule 3(a) of Valuation Rules.

However, caution is advised while adopting the view stated in paras (a) to (c) above inasmuch as, more particularly post issue of CBEC circular dated 20/01/2016, the service tax department has issued show cause notices in large number to demand service tax on the basis of market value of similar flats in terms of Rule 3(a) of the Valuation Rules. Hence, this issue is likely to witness an extensive round of litigations and finality thereon could take a very long time. Considering far reaching implications of the matter on the real estate sector, it is suggested that CBEC needs to understand these transactions and then clarify the matter vide a detailed order u/s. 37 B of the Central Excise Act, 1944 which is also applicable to service tax.

The entire discussion above is however subject to the basic ‘fact’ which requires to be understood by all concerned that when a landowner is given constructed units or flats by the developer, it is part of the ‘cost’ of the developer. The consideration payable to the landowner towards land or purchase of development rights comprises of constructed premises with/without consideration in monetary terms. The consideration for the service that the developer provides both to the landowner and other purchasers of units, comes only from the other purchasers and on which the service tax is already paid / payable. No other consideration for the ‘service’ provided by the developer is received by him. Therefore without the receipt of any additional consideration, fastening liability on the value other than that is attributable to service would be beyond the scope of section 67. Secondly, the market value of the newly constructed units is attributable to the “land value” and not towards construction service. Therefore, the whole exercise initiated by the department is capable of being challenged.

shailesh.kwebmaker

Welcome GST – “Supply” under proposed Indian GST – ‘Model GST Law’

1. Proposed taxable event – ‘supply’

Any event or transaction or occurrence that results in a tax consequence / liability can be said to be a taxable event. Under the current Indian indirect tax regime such event /transaction /occurrence include manufacturing, sale, provision of service, import of goods into India, export of goods from India, entry of goods into a specified area for sale /use / consumption, admission to an entertainment etc. Under the proposed Indian Goods and Services Tax (GST) regime majority of these taxable events would be subsumed into a single taxable event – “supply”. The GST Constitution Amendment Bill1 defines2 GST as – “goods and services tax means any tax on supply of goods, or services or both except taxes on supply of the alcoholic liquor for human consumption”. The term ‘supply’ has not been defined therein.

2. ‘Supply’, a taxable event under different jurisdictions

Under the Directive3 issued by the Council of the European Union, the ‘chargeable event’ is defined as – “chargeable event shall mean the occurrence by virtue of which the legal conditions necessary for VAT to become chargeable are fulfilled”. Under the Directives, “the chargeable event shall occur and VAT shall become chargeable when the goods or the services are supplied”. Following are further defined –
– ‘Supply of goods’ shall mean the transfer of the right to dispose of tangible property as owner.
– ‘Supply of services’ shall mean any transaction which does not constitute a supply of goods.

In Canada, for levy of Goods and Services Tax4, ‘taxable supply means a supply that is made in the course of a commercial activity’. Further, ‘supply means, subject to sections 133 and 134, the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, rental, lease, gift or disposition’.

In United Kingdom, scope of Valued Added Tax is specified5 as – (1) VAT shall be charged on any supply of goods or services made in the United Kingdom, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him. (2)A taxable supply is a supply of goods or services made in the United Kingdom other than an exempt supply. In turn, ‘supply is defined as “supply” in this Act includes all forms of supply, but not anything done otherwise than for a consideration. Further, anything which is not a supply of goods but is done for a consideration (including, if so done, the granting, assignment or surrender of any right) is a supply of services.

In Singapore, for levy of Goods and Services Tax6, ‘A taxable supply is a supply of goods or services made in Singapore other than an exempt supply’.. In turn, ‘supply is defined as “supply” in this Act includes all forms of supply, but not anything done otherwise than for a consideration. Further, anything which is not a supply of goods but is done for a consideration (including, if so done, the granting, assignment or surrender of any right) is a supply of services.

In Malaysia, for levy of Goods and Services Tax7 , ‘supply means all forms of supply, including supply of imported services, done for a consideration and anything which is not a supply of goods but is done for a consideration is a supply of services’.

In Australia, ‘taxable supplies’8 is defined as follows:

You make a taxable supply if:
(a) youmake the supplyfor consideration; and
(b) the supply is made in the course or furtherance of an enterprise that you carry on; and
(c) the supply is connected with the indirect tax zone; and
(d) you are registered, or required to be registered.

However, the supply is not a taxable supply to the extent that it is GST free or input taxed.

Meaning of supply , in turn, in Australia, is as follows:

(1) A supply is any form of supply whatsoever.
(2) Without limiting subsection (1), supply includes any of these:
(a) a supply of goods;
(b) a supply of services;
(c) a provision of advice or information;
(d) a grant, assignment or surrender of real property;
(e) a creation, grant, transfer, assignment or surrender of any right;
(f) a financial supply;
(g) an entry into, or release from, an obligation:
(i) to do anything; or
(ii) to refrain from an act; or
(iii) to tolerate an act or situation;
(h) any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).

(3) It does not matter whether it is lawful to do, to refrain from doing or to tolerate the act or situation constituting the supply.

(3A) For the avoidance of doubt, the delivery of:
(a) livestock for slaughtering or processing into food; or

(b) game for processing into food;

under an arrangement under which the entity making the delivery only relinquishes title after food has been produced, is the supply of the livestock or game (regardless of when the entity relinquishes title). The supply does not take place on or after the subsequent relinquishment of title.

(4) However, a supply does not include a supply of money unless the money is provided as consideration for a supply that is a supply of money.

In majority of these jurisdictions, the term ‘supply’ has been stated to be – ‘supply’ in all forms or in any form or in any manner.

3. Meaning of the term ‘supply’

The word “supply” is defined in the Standard Dictionary as ‘that which is or can be supplied; available aggregate of things needed or demanded; an amount sufficient for a given use or purpose”. In the Imperial Dictionary, ‘that which is supplied; sufficiency of things for use or want; a quantity of something furnished or on hand”10.

Apex Court while dealing11 with the words ‘duty on supply of electricity’ employed in charging section 3 of the Kerala Electricity Surcharge (Levy and Collection) Act, 1989, in light of Entry 53 of State List of Seventh Schedule to the Constitution of India viz., ‘Taxes on the consumption or sale of electricity’; held that the word `supply’ used in the charging section 3 should, receive liberal interpretation to include sale or consumption of electricity as envisaged in Entry 53 of the State List.

From the sub-station, electricity is connected to the industrial units through the meter put up in the factory. Continuity of supply and consumption starts from the moment the electrical energy passes through the meters and sale simultaneously takes place as soon as meter reading is recorded. It is true that from the place of generating electricity, the electricity is supplied to the sub-station installed at the units of the consumers through electrical hightension transformers and from there electricity is supplied to the meter. But the moment electricity is supplied through the meter, consumption and sale simultaneously take place. It is true that in the definitions given in the New Encyclopaedia Britanica, Vol. 4, p.842 cited before us, distinction between supply and consumption is stated but adopting a pragmatic and realistic approach, we are of the considered view that as soon as the electrical energy is supplied to the consumers and is transmitted through the meter, consumption takes place simultaneously with the supply.

Under Section 9A of the Representation of the People Act, 1951, a person is disqualified if, and for so long as, there subsists a contract entered into by him in the course of his trade or business with the appropriate Government for the supply of goods to, or for the execution of any works undertaken by that Government. The Orissa High Court, held12 that in the context of its use in the provision, the word ‘supply’ has to be construed as a form of sale and despatch.

The word “supply” means “to give”, or “to provide or to afford something that is necessary”. In the context of its use in the provision, it has to be construed as a form of sale and despatch. The conception of supply of goods must be interpreted in the conception of sale. For the purpose of Section 9A, there can be no supply of goods unless there is a sale to the State. As observed in West Survey Water Co. vs. Chertsey, (1894) 3 Ch 519: “To ‘supply’ anything –e.g., water — means passing it from one who has it to those who want it; you may ‘provide’ a thing for yourself, but that is not ‘supplying it’”.

In the context of definition of ‘supply’ in Australia, it has been clarified13 that –

The words ‘A supply is any form of supply whatsoever’ in s/s. 9-10(1) cover all supplies regardless of whether they concern goods or services. This is defined broadly and is intended to encompass supplies as widely as possible. The intended scope of s/s. 9-10(1) is more fully illustrated in s/s. 9-10(2), which provides a list of things that are included as supplies. It is not an exhaustive list. It does not limit the possible breadth of the definition of supply in s/s. 9-10(1).Something that is not listed in s/s. 9-10(2) but falls within s/s. 9-10(1) will be a supply.

For the purpose of GST / VAT , the word ‘supply’ is not only likely to be defined broadly but would encompass supplies as widely as possible. It appears that the word ‘supply’ for a tax consequence would not have a restrictive meaning.

4. “Supply” – meaning as assigned in Indian Model GST Law14

It, prima facie, appears that the Model GST Law has not been reviewed by the legal eye of draftsmen. Assuming this, the observations discussed herein are on conceptual basis only.

The term ‘supply’ has been assigned meaning in section 3 of the Model GST Law as: “3. Meaning and scope of supply

(1) Supply includes
(a) all forms of supply of goods and/or services such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business,
(b) importation of service, whether or not for a consideration and whether or not in the course or furtherance of business, and
(c) a supply specified in Schedule I, made or agreed to be made without a consideration.

(2) Schedule II, in respect of matters mentioned therein, shall apply for determining what is, or is to be treated as a supply of goods or a supply of services.

(2A) Where a person acting as an agent who, for an agreed commission or brokerage, either supplies or receives any goods and/or services on behalf of any principal, the transaction between such principal and agent shall be deemed to be a supply.

(3) Subject to s/s. (2), the Central or a State Government may, upon recommendation of the Council, specify, by notification, the transactions that are to be treated as—

(i) a supply of goods and not as a supply of services; or

(ii) a supply of services and not as a supply of goods; or

(iii) neither a supply of goods nor a supply of services.

(4) Notwithstanding anything contained in s/s. (1), the supply of any branded service by an aggregator, as defined in section 43B, under a brand name or trade name owned by him shall be deemed to be a supply of the said service by the said aggregator.”

In a UK case, of British Airways15, it had an arrangement where food outlets provided food to passengers of delayed flights. When there was a flight delay, an announcement was made to passengers that vouchers of a specified amount were available for passengers’ use at food outlets. Passengers could use their boarding pass when a voucher was not available. For British Airways to succeed in claiming input tax credit for the VAT included in the charge to it for the refreshments provided to delayed passengers there must have been a ‘supply’ of something by the outlets to British Airways. The issue was did British Airways obtain ‘anything – anything at all?’ The VAT Tribunal held that – Yes, British Airways obtained the right to have its delayed passengers fed at its expense – and that was clearly for the purpose of its business. The Tribunal held that there was a supply of services made to British Airways. British Airways had earlier also disputed the VAT treatment of this arrangement. Earlier British Airways had argued there was a supply of goods rather than services to it. The definition of supply of goods under the UK VAT Law required a transfer of dispositive power. As British Airways never had dispositive power over the supply of food, it was earlier held that a supply of goods had not been made to British Airways.

For every supply there ought to be a ‘supplier’ and a ‘recipient’. The terms ‘supplier’ and ‘recipient’ are defined in the Model GST Law. Also, for claiming input tax credit, it would be essential to identify the ‘supplier’, the ‘recipient’, the ‘supply’ made and the nature (goods or services or anything else) of supply.

In the definition, ‘supply includes all forms of supply ….. made….’. The Australian law uses the word ‘make’; in this context it was held16 that GST only applies where the ‘supplier’ makes a voluntary supply and not where a supply occurs without any action by the entity (‘supplier’) had there been a supply.

Only those supplies made for a consideration would be regarded as ‘supply’. Term ‘consideration’ is defined in Model GST Law. A restaurant accepts tips from its customers, including tips on bills paid by credit card. These tips are unsolicited and are in addition to the price stipulated by the restaurant in the bills presented to the customers. The restaurant does not pass these tips on to the restaurant’s employees. The tips are voluntary payments made in connection with the restaurant supplies made by the restaurant to its customers. Although there is no obligation on the customers to make these payments, the question that would arise is should the tips retained by the restaurant form part of the consideration for the restaurant supplies by the restaurant to its customers. If the restaurant passes the tips on to the restaurant’s employees, the payments are not for the restaurant supplies by the restaurant. The tips constitute income of the restaurant employees and would such payments be subject to GST as the employees are not carrying on an enterprise for GST purposes.

The following transactions / occurrences has been / could be evaluated for being treated as ‘supply’ or not:

Penalty

Under the New Zealand GST Act ‘services’ means ‘anything which is not goods or money’. In Case S6517 the Court warned that there are limits to this definition. In this case a costs order was made against a solicitor who was struck off the roll by the New Zealand Law Practitioners Disciplinary Tribunal. The costs order required the solicitor to pay amounts to the New Zealand Law Society and the District Law Society for their costs and expenses relating to the disciplinary proceedings. The Court held that these payments were not consideration for a supply of services by the Law Societies to the solicitor. The Court ruled that the ordinary meaning of the word ‘supply’ limited the breadth of the phrase ‘supply of services’, which was only so wide as to include activities where the provider has done something for, not against, the recipient. To rule otherwise would lead to absurdity because it would allow the concept of a supply to encompass situations where a person sues for recovery of property, or steals something from someone else.

Out-of-court settlement

Matters in dispute may be resolved either by the judgment of a court, or (at a time prior to the court delivering its judgment) by agreement between the parties. Such an agreement between parties is generally referred as an out-of-court settlement. Out-of-court settlements could include any form of dispute resolution in which the terms of the resolution are agreed between the parties, rather than imposed by the court. These terms of the resolution may create supplies for GST purposes, which may be characterised as:

(i) surrendering a right to pursue further legal action; or

(ii) entering into an obligation to refrain from further legal action; or

(iii) releasing another party from further obligations in relation to the dispute.

Financial Assistance / Grant

A Government Agency, say, offers manufacturers a rebate / incentive of an amount when they purchase and install a new machine in their factory. The new machine can be purchased from anywhere. To be eligible for the rebate / incentive the new machine must be installed in new factory and the new machine must meet a specified energy efficiency rating. To obtain the rebate / incentive the manufacturer must submit an application form with copies of their purchase and installation invoices. The manufacturer does not enter into any obligations, other than providing further evidence to support their claim in accordance with the eligibility criteria. The rebate / incentive granted by the Government Agency, in fulfilment of specified conditions and against the application submitted by the manufacturer and the agreement to provide further evidence in support of their claim may be treated as a supply or may not be regarded as a ‘ supply’.

4.2 “Supply” in Indian Model GST Law – Section 3(1)(b)

Import of service, whether or not for a consideration and whether or not in the course or furtherance of business is included in the definition of ‘supply’. An import of services by an individual, not in the course of furtherance of business, would be ‘supply’. The inclusion of supplies not for a consideration raises certain doubts as to what types of transactions are intended to be covered therein, which should be clarified / specified.

In the context of cross-border supplies and the growth of the digital economy where consumption is of a private/ domestic nature, currently, indirect tax / service tax do not apply / is exempted to such supplies made by nonresidents to consumers in India. This treatment causes disadvantage to local suppliers. Sub-section (1)(b) of the Model GST Law will result in supplies of digital products, such as streaming or downloading of movies, music, apps, games, e-books as well as other services such as consultancy and professional services, receiving similar GST treatment whether they are supplied by a local or foreign supplier. However, clarity would be required in respect of such supplies received by non-residents (tourists) when they are temporarily in India.

Action 1 of the Action Plans on Base Erosion and Profit Shifting issued by Organisation for Economic Cooperation and Development (OECD)– ‘Address the tax challenges of the digital economy’ – requires to identify the main difficulties that the digital economy poses for the application of existing international tax rules and develop detailed options to address these difficulties, taking a holistic approach and considering both direct and indirect taxation. Action 1 also requires examination as to how to ensure the effective collection of VAT /GST with respect to the cross-border supply of digital goods and services. It is recognised that non-resident suppliers should register and account for VAT in as many foreign jurisdictions as they have consumers of remotely delivered services. This may impose compliance burdens on these suppliers and countries should therefore consider the use of simplified registration regimes and registration thresholds to minimise the potential compliance burden on businesses.

Australian GST Law is proposed18 to be amended to ensure that digital products and other imported services supplied to Australian consumers by foreign entities are subject to GST in a similar way to equivalent supplies made by Australian entities. It is also proposed that in some circumstances, responsibility for GST liability may be shifted from the supplier to the operator of an electronic distribution platform, where the supply is made through such a platform, and the operator controls any of the key elements of the supply such as price, terms and conditions or delivery arrangements. Under the current Australian GST Law, non-resident suppliers are required to register for GST if their projected or current turnover is greater than the registration turnover threshold.

Norway was the first country to have implemented such mechanism for taxation of e-services / digital services effective from July 2011.

A combined reading of section 4(3) of Model IGST Law read with section 9(3)(c) and Para 5(iii) of Schedule III of the Model CGST/SGST Law suggests that such an individual may be required to register and pay GST. Alternatively, combined reading of section 4(3) of Model IGST Law read with Para 5(iv) of Schedule III of the Model CGST/SGST Law may be interpreted that non-resident taxable person may be required to register and pay GST.

4.3 “Supply” in Indian Model GST Law – Section 3(1)(c)
Certain specified supplies made or agreed to be made without a consideration are included in the definition of ‘supply’. Such supplies specified in Schedule I to Model GST Law, are as follows:

1. Permanent transfer/disposal of business assets.
2. Temporary application of business assets to a private or non-business use.
3. Services put to a private or non-business use.
4. Assets retained after deregistration.

5. Supply of goods and / or services by a taxable person to another taxable or non-taxable person in the course or furtherance of business.

Provided that the supply of goods by a registered taxable person to a job-worker in terms of section 43A shall not be treated as supply of goods.

In the earlier unofficial draft of Model GST Law released in October 2015, there was an entry – ‘self supply of goods and/or services’, which is not appearing in this Schedule. Entry 5 was not there in the earlier Schedule. One view being propagated is that Entry 5 deals with ‘self-supply’. Entry 5 deals with supply of goods and/or services by a taxable person to another taxable person. As far as number of laws is concerned there would one CGST Law, one IGST Law and different State GST Laws. This Schedule I would appear in all such laws. For a State, say Maharashtra GST Law, the Entry 5 would have to be considered in the context of Maharashtra GST Law alone. For interpreting Entry 5 as appearing in Maharashtra GST Law, one would not / cannot read Schedule / Entry in other Laws (CGST Law, IGST Law, Other State GST Law).Supply without a consideration should be by a taxable person (as understood under Maharashtra GST Law) to another taxable person (also as understood under Maharashtra GST Law). If a supply is not by one taxable person to another under the Maharashtra GST Law, then Entry 5 would not apply. Similar would be the position under CGST Law & IGST Law. Under CGST Law, even if one is registered in different States, one would be regarded as a single ‘taxable person’ under the CGST Law, having different registrations or being regarded as more than one ‘registered person’19. Hence, it appears that Entry 5 does not deal with ‘self-supply’ .Entry 5 appears to be dealing with free supplies.

Other Entries of the Schedule should also trigger GST liability and input tax credit, accordingly, would not be impacted.

Currently, treatment of goods that are lost, stolen, damaged or destroyed is not provided in the Model GST Law.

It is further provided that supply of goods by a registered taxable person (principal) to a job worker, where such principal takes responsibility of payment of GST on goods after completion of job work (terms of Section 43A of the Model GST Law), shall not be treated as supply of goods. In that case, the work done by the job-worker of treatment or process to principal’s goods is a supply of services. Incidentally, if the terms of section 43A are not satisfied by the principal and supply of goods by principal to a job worker is treated as ‘supply’ and return of the goods by job-worker is also treated, consequentially, ‘supply of goods’; then the work done by the job-worker of treatment or process to principal’s goods ought not to be treated as a ‘supply of services’ – this provision is currently not there in the Model GST Law.

4.4 “Supply” in Indian Model GST Law – Section 3(2) and Section 3(3)

Sub-section (2) of Section 3 of the Model GST Law, as such does not limit or expand ‘supply’, but specifies – in Schedule II to the Model GST Law – asto what is or is to be treated as ‘supply of goods’ or a ‘supply of services’.

Sub-section (3) of Section 3 of the Model GST Law provides for the power with the Government of specifying as to what is not to be treated as ‘supply of goods’ or a ‘supply of services’ or both. Schedule II is given as Annexure herein. What is being treated as goods or services is not being discussed herein.

Goods is defined as ‘ “goods’’ means every kind of movable property other than actionable claim and money but includes securities, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under the contract ofsupply; Explanation.– For the purpose of this clause, the term ‘moveable property’ shall not include any intangible property’.

Services is defined as ‘ “services’’ means anything other than goods;

Explanation: Services include intangible property and actionable claim but does not include money’.

A significant outcome of specifying what is or is to be treated as ‘supply of goods’ and ‘supply of services’, is the possible elimination of the applicability of dual taxes.

4.5 “Supply” in Indian Model GST Law – Section 3(2A)
Sub-section (2A) of Section 3 provides that an agent who either supplies or receives any goods and/or services on behalf of any principal, the transaction between such principal and agent shall be deemed to be a supply.

Agent is defined as ‘ “agent” means a person who carries on the business of supply or receipt of goods and/or services on behalf of another, whether disclosed or not and includes a factor, broker, commission agent, arhatia, del credere agent, intermediary or an auctioneer or any other mercantile agent, by whatever name called, and whether of the same description as hereinbefore mentioned or not’.

Principal is defined as ‘ “principal” means a person on whose behalf an agent carries on the business of supply or receipt of goods and/or services”.

As agent, generally, will be involved in at least two separate supplies at any one time:

– the supply made between the principal and the third party
– the supply of agent’s own services to the principal

An agent, who on behalf the principal carries on the business of supply or receipt of goods would, generally, (i) receive or deliver goods; (ii) hold stock of goods for principal; and (iii) make or receive payment.

What has been deemed to be a supply is the “transaction” between the principal and agent. Only those transactions where the agent carries on the business of supply or receipt of goods and/or services is intended to be covered by section 3(2A).

Accordingly –
– the transaction between the agent and the third party is also to be deemed to be a supply; and
– in such cases, supply of agent’s own services to the principal should be deemed as not a supply.

These provisionare currently not there in the Model GST Law.

The proposed provision in Model GST Law would have the following impact, as far as tax related disclosures are concerned –

Hence, for the basis threshold limit for registration, where agent was considering 10 in the current regime (for service tax purposes), for the same transaction, it would now have to consider 100 (for GST purposes); the threshold limit (Rs. 10 lakhs), however, is likely to remain same.

Where the agent is not carrying on the business of supply or receipt of goods and/or services viz. factor, delcredere agent, estate agent etc. would not be covered for determining such deemed supply.

Incidentally, a clearing and forwarding agent might get covered by such deemed supply provision, which appears to be un-intended. A travel agent would also be covered under such provision of deemed supply.

The Directive issued by the Council of the European Union, in this regards provides as follows:

Where a taxable person acting in his own name but on behalf of another person takes part in a supply of services, he shall be deemed to have received and supplied those services himself.

Under the said Directive, special scheme has been laid out for travel agents, including tour operators. For goods, similar provisions as in Model GST Law are provided for undisclosed agent only.

Redrow case
In a UK House of Lords case of Redrow26, a builder, Redrow, constructed new houses for sale. Most prospective Redrow purchasers could not purchase a Redrow home unless they had a buyer for their existing home. To expedite sales of its homes Redrow instructed an estate agent to value the prospective purchaser’s existing home and to handle the sale. Redrow monitored progress in the marketing of the property, maintaining pressure on the agent to achieve a sale. Redrow entered into an agreement with both the agent and the prospective purchaser that it would pay the estate agent’s fee plus VAT if the prospective purchaser bought a Redrow home. Redrow was not liable to pay the agent’s fee if the prospective purchaser did not purchase a Redrow home.

Redrow advised the agent to enter into a separate agreement in the normal terms with the prospective purchaser, to provide cover in the event that Redrow was not liable to pay the fee if the prospective purchaser bought elsewhere. The instructions to the agent could not be changed without Redrow’s agreement. The agent made a supply of services on which it was obliged under the UK VAT Law to charge VAT .

The issue was whether Redrow’s expenditure was consideration for services supplied by the agent to Redrow. Redrow was only entitled to input tax credit of the tax it paid if the estate agent supplied services to Redrow. The UK Commissioners contended that the estate agent was only supplying services to the prospective purchaser. The House of Lords held that estate agent services were supplied to Redrow:

The service is that which is done in return for the consideration…Questions such as who benefits from the service or who is the consumer of it are not helpful. The answers are more likely to differ according to the interest which various people have in the transaction… The fact that someone else – in this case, the prospective purchaser – also received a service as part of the same transaction does not deprive the person who instructed the service and who has had to pay for it of the benefit of the deduction. … Everything which the agents did was done at the taxpayer’s request and in accordance with its instructions and, in the events which happened, at its expense. The doing of those acts constituted a supply of services to the taxpayer.

Redrow is unusual because both Redrow and the prospective purchaser contracted for a supply of services from the agent. Usually when an entity arranges for a supply to be provided to another entity, it is only the first entity that contracts for the supply.

4.6 “Supply” in Indian Model GST Law – Section 3(4)

Sub-section (4) of Section 3 provides that the supply of any branded service by an aggregator, as defined in section 43B, under a brand name or trade name owned by him shall be deemed to be a supply of the said service by the said aggregator.

What was probably intended to be said here was ‘any service which is branded by an aggregator’ instead of “any branded service by an aggregator”.

Branded services is defined27 as – ‘branded services’ means services which are supplied by an electronic commerce operator under its own brand name or trade name, whether registered or not”. ‘Electronic commerce operator’, in turn, is defined separately, which has a different meaning as that of the ‘aggregator’.

Aggregator is defined as – ‘aggregator’ means a person, who owns and manages an electronic platform, and by means of the application and a communication device, enables a potential customer to connect with the persons providing service of a particular kind under the brand name or trade name of the said aggregator”.

Here also, what is missing is that the supply by persons providing service of particular kind needs to be deemed to be a supply to the aggregator.

5. “Supply” – parting remarks

Hope, this article is not treated as ‘supply’ by the Member (author) to the Bombay Chartered Accountants’ Society (BCAS) or by BCAS to the Member, in any manner so as to result in a GST liability?

Annexure

Schedule II – Matters to be treated as supply of goods or services

1. Transfer
(1) Any transfer of the title in goods is a supply of goods.
(2) Any transfer of goods or of right in goods or of undivided share in goods without the transfer of title thereof, is a supply of services.
(3) Any transfer of title in goods under an agreement which stipulates that property in goods will pass at a future date upon payment of full consideration as agreed, is a supply of goods.

2. Land and Building
(1) Any lease, tenancy, easement, licence to occupy land is a supply of services.
(2) Any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly, is a supply of services.

3. Treatment or process
Any treatment or process which is being applied to another person’s goods is a supply of services.

4. Transfer of business assets
(1) Where goods forming part of the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so as no longer to form part of those assets, whether or not for a consideration, such transfer or disposal is a supply of goods by the person.
(2) Where, by or under the direction of a person carrying on a business, goods held or used for the purposes of the business are put to any private use or are used, or made available to any person for use, for any purpose other than a purpose of the business, whether or not for a consideration, the usage or making available of such goods is a supply of services.
(3) Where any goods, forming part of the business assets of a taxable person, are sold by any other person who has the power to do so to recover any debt owed by the taxable person, the goods shall be deemed to be supplied by the taxable person in the course or furtherance of his business.
(4) Where any person ceases to be a taxable person, any goods forming part of the assets of any business carried on by him shall be deemed to be supplied by him in the course or furtherance of his business immediately before he ceases to be a taxable person, unless—
(a) the business is transferred as a going concern to another person; or
(b) the business is carried on by a personal representative who is deemed to be a taxable person.

5. The following shall be treated as “supply of service”
(a) renting of immovable property;
(b) construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or before its first occupation, whichever is earlier.

Explanation.- For the purposes of this clause-
(1) the expression “competent authority” means the Government or any authority authorized to issue completion certificate under any law for the time being in force and in case of non-requirement of such certificate from such authority, from any of the following, namely:–

(i) an architect registered with the Council of Architecture constituted under the Architects Act, 1972; or

(ii) a chartered engineer registered with the Institution of Engineers (India); or

(iii) a licensed surveyor of the respective local body of the city or town or village or development or planning authority;

(2) the expression “construction” includes additions, alterations, replacements or remodelling of any existing civil structure;

(d) development,design, programming, customisation, adaptation, upgradation, enhancement, implementation of information technology software;

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

(f) works contract including transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;

(g) transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration; and

(h) supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration.

6. The following shall be treated as supply of goods (a) supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration.

shailesh.kwebmaker

Interpolation of seized material – There are no other materials – Notings recorded on the seized material found with the searched person other than the assessee- SLP Dismissed-

CIT. vs. Kumar Co, (2016) 383 ITR (St) 7 ; (Affirmed CIT vs. Kumar Co ITA. No. 912/2011 dt 9/4/2014 (Bom))

The assessee is a partnership firm. There was a search and seizure operation under section 132 on 1st September 2004 in the case of Raut Group of Cases (Rauts) and one Shri Sandeep S Deo. Pertinently, there is no search on the assessee. The search of Raut and Deo resulted in seizure of various documents from their premises. The statements of both were recorded. The discovery and the seizure of page 82 of loose paper bundle no.1 from the premises of Deo and seizure of page 42 to 46 from the premises of Rauts is claimed to be an important one. The issue in the Appeals is in relation to additions by way of estimation of sale of TDRs

The assessee had sold a total of 2,16,507.10 sq.ft of Transferable Development Rights (“TDR”). Out of this, sale of 4133 sq.mt of TDR is mentioned at page 82 of the document. On the facts of the case, the Tribunal directed that as against the rate of Rs.225/applied by the Assessing Officer, the rate of Rs.220/should apply to work out unaccounted receipts. However, the Tribunal directed that this rate should be applied only in respect of TDR of 4133 against the entire sale of 21,650 sq.mt.

The Tribunal held that apart from the loose sheet page 82 and page 42 containing an unsigned copy of the Agreement indirectly confirming the contents of page 82, there are no other materials. Therefore, there is no material to estimate the sale of other TDR’s. The above documents at best would enable estimation of those TDR’s mentioned at page 82. The page 42 is also not conclusive evidence and merely relying on certain notings recorded on the seized material found with the searched person other than the assessee. It also refers to the second limb about failure to take cognizance of direct evidence such as confirmation letter by the respective purchasers of TDR. The Tribunal dismissed the revenue’s Appeals.

Aggrieved by the ITAT order, Revenue filed an appeal before High Court. The Hon. High Court dismissed the appeals affirming the order of the ITAT. The High Court observed that there is no material to estimate the sale of other TDR’s.

The Revenue filed SLP before Supreme Court which was dismissed.

shailesh.kwebmaker

TRIBUTE TO MR. NARAYAN VARMA, RTI ACTIVIST

August 20, 2016, 85th birth anniversary of our beloved Narayan Sir.
Can’t express in words what you mean to us, Sir, only thing we wish to tell you is
THANK YOU!

As we look back over time
We find ourselves wondering …..
Did we remember to thank you enough
For all you have done for us?
For all the times you were by our sides
To help and support us …..
To celebrate our successes
To understand our problems
And accept our defeats?
Or for teaching us by your example,
The value of hard work, good judgement,
Courage and integrity?
We wonder if we ever thanked you
For the sacrifices you made.
To let us have the very best?
And for the simple things
Like laughter, smiles and times we shared?
If we have forgotten to show our
Gratitude enough for all the things you did,
We’re thanking you now.
And we are hoping you knew all along,
How much you meant to us.

THANK YOU SIR. WE MISS YOU A LOT.

shailesh.kwebmaker

Part D REMEMBERING NARAYAN VARMA

I first met Narayanbhai Varma in 2006 when we were organizing a big RTI drive in about 40 places across India. We needed volunteers and had decided to get different organizations to take up the responsibility of paying for different requirements so that there was no need for any fund collection. Narayanbhai asked what I expected from BCAS. I requested him to either agree to pay the rent for the fortnight for the hall at Government Law college, or get some volunteers. He first asked me a few questions and then with a twinkle in his eye said he would do both. He agreed to pay for the hall from BCAS and also helped to get about a dozen very good volunteers. He came up with a small booklet on RTI which was distributed during the camp. After the event was over with over 3000 RTI applications being filed, he showed his appreciation by saying that BCAS would happily give us place for RTI meetings. We held many meetings at BCAS since there was no need to worry about payments.

He had a good commitment and grasp for law, having been a successful Chartered Accountant. This came through very well when we discussed some finer points of the RTI Act. Despite his age and failing health in the last few years, he happily came to RTI meetings for discussions, planning strategy or holding a RTI convention. I am aware that he was instrumental in getting RTI clinics at BCAS, IMC, Giants and PCGT.

He wrote an article on RTI for every issue of BCA journal, which was provided guidance to many users and practitioners of RTI . I am sure BCAS will continue this commitment to RTI . For many years if a RTI event was to be held Narayanbhai would contribute his time, wisdom and money without any hesitation, or seeking any specific recognition.

When I became a Central Information Commissioner he was very joyous and informed many people. When I met him, he embraced me with such warmth and love, I felt I was being embraced by my father who was no more. Narayanbhai always displayed his love for me and would forgive any mistakes very generously. After I went to Delhi he would often praise my work before others who told me of the pride he displayed when referring to my decisions and work.

There is one incident which I will always remember because it showed Narayanbhai’s unique humility and intellectual greatness. When the 97th Constitutional amendment was passed, he and many other activists thought one implication was that it would have the implication of covering Cooperative Societies in the domain of RTI . He called me and said he wanted to hold a meeting to discuss this issue and would call for a meeting at the IMC. I had not read the amendment but agreed to his request that I should be the main speaker on this subject. On the day before the meeting I carefully read the amendment and the arguments advanced by other RTI activists. I came to the conclusion that this amendment would not mean that Cooperative societies had come in the ambit of RTI . I called up Narayanbhai and explained the position to him and suggested that there could be some other person as the main speaker. Without any hesitation he said I would be the main speaker and should give my views, even if they did not agree with his. This was a man who readily accepted a different opinion and respected it. He had internalized the fundamentals of freedom of speech and information.

Narayanbhai wrote consistently on RTI and was very keen to empower citizens with it. He had understood the power and potential of this law to bring better governance for India. His demise was a personal loss for me, which I have felt very deeply. Narayanbhai’s contribution is an inspiration for all of us, and we owe it to his memory to bring greater life and vigour to its implementation. RTI is great tool for our democracy and better governance and Narayanbhai’s contribution to it has been very significant.

shailesh.kwebmaker

Search and seizure- Assessment- Ss. 132, 153A of I. T. Act, 1961: A. Y. 2005-06: No assessment pending at time of initiation of search proceedings- Finding by Tribunal that no incriminating evidence found during course of search- Finalised assessment or reassessment shall not abate

CIT Vs. Gurinder Singh Bawa; 386 ITR 483 (Bom):

For the A. Y. 2005-06, the assesee’s return was processed u/s. 143(1) of the Income-tax Act, 1961 and no notice u/s. 143(2) was issued. Thereafter on January 5, 2007 a search was conducted in the case of the assessee but no incriminating material was found. However, proceedings u/s. 153A were initiated for the A. Y. 2005-06 and the Assessing Officer added an amount of Rs. 93.72 lakhs u/s. 68 and Rs. 43.67 u/s. 2(22)(e) of the Act. The assesee challenged the validity of the assessment made u/s. 153A, on the ground that no assessment in respect of the six assessment years was pending so as to have abated. The Tribunal accepted the assessee’s submission and held that no incriminating material having been found during the course of search, the entire proceeding u/s. 153A were without jurisdiction and therefore, the addition made had to be deleted.

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

“Once an assessment was not pending but had attained finality for a particular year, it could not be subject to proceedings u/s. 153A of the Act, if no incriminating materials were gathered in the course of the search or during the proceedings u/s. 153A, which were contrary to and were not disclosed during the regular assessment proceedings.”

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Reassessment- Ss. 147, 148, 152 of I. T. Act, 1961- A. Y. 2011-12- Effect of section 152- Reassessment not resulting in assessment of higher income

Notice not valid- Motto Tiles P. Ltd.; 386 ITR 280 (Guj):

For the A. Y. 2011-12, the assessee had filed return of income computing a loss of Rs. 77,51,810/- and a book profit of Rs. 35,96,518/- and the same was processed u/s. 143(1) of the Income-tax Act, 1961. The assessment was reopened by issuing notice u/s. 148 proposing to make an addition of Rs. 81,18,000/- to the normal income. The objections filed by the assessee were rejected.

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

“i) The learned counsel for the petitioner has drawn the attention of the court to the provisions of section 152(2) of the Act, which provides that where an assessment is reopened u/s. 147, the assessee may, if he has not impugned any part of the original assessment order for that year either u/ss 246 to 248 or u/s. 264, claim that the proceedings u/s. 147 shall be dropped on his showing that he had been assessed on an amount or to a sum not lower than what he would be rightly liable for if the income alleged to have escaped assessment had been taken into account, or the assessment or computation had been properly made. It was submitted that in view of the above provision, the proceedings are required to be dropped because even if the income which is alleged to have escaped assessment is taken into account, the petitioner would not be assessed at a higher amount.

ii) The controversy stands squarely concluded by the decision of this court in the case of India Gelatine and Chemicals Ltd. Vs. ACIT; 364 ITR 649 (Guj), wherein the court in a case where the assessee had declared a loss of Rs. 1.44 crores under the normal computation and the assessment was framed on book profits of Rs. 2.89 crores, had held that even if the expenditure of Rs. 116.86 lakhs is disallowed, there would no change in the resultant change in the petitioner’s tax liability since the petitioner had already paid much higher tax and had allowed the petition.

iii) It appears that the Revenue had accepted the said decision and had not challenged the same before the higher forum. The learned counsel for the Respondent has urged that the decision requires reconsideration. Having regard to the facts and circumstances of the case, as well as the fact that the Revenue had accepted the said decision, the court does not find any reason to refer the matter for consideration to a larger bench.

iv) For the foregoing reasons, the petition succeeds and is accordingly allowed.”

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Penalty- Concealment of income- S. 271(1)(c) of I. T. Act, 1961: A. Y. 2005-06- Compensation paid for mining ores claimed as deduction in year of payment but allowed over five year period of mining- Assessee accepting order and revising subsequent returns- Levy of penalty u/s. 271(1)(c) not warranted

CIT Vs. Thakur Prasad Sao and Sons (P) Ltd.; 386 ITR 448 (Cal):

The assessee had paid Rs. 2.75 crores on account of compensation for mining ores for a period of five years which claimed as revenue expenditure in the A. Y. 2005-06. The Assessing Officer was of the view that the expenditure was allowable over a period of five years which was the period during which the mining was to be conducted. The assessee accepted that order and accordingly revised the subsequent returns. The Assessing Officer levied penalty u/s. 271(1)(c) of the Income-tax Act, 1961. The Tribunal held that it was not possible to hold that the assessee furnished inaccurate particulars or concealed its income and accordingly deleted the penalty.

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

“The assessee did not accept the disallowance; that there was no disallowance as such. The imposition of penalty was not warranted.”

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Export- Hotel business- Deduction u/ss. 80HHC and 80HHD of I. T. Act, 1961- A. Y. 2004-05- Computation- Deduction for export earnings not to be affected by computation of deduction for hotel business- Assessee entitled to deduction on both- Total turnover for computation of deduction of profits from export to be taken excluding foreign exchange receipts from hotel business

CIT Vs. ITC Ltd.; 386 ITR 487 (Cal):

Assessee was engaged in the business of hotel and export of goods with receipts in foreign exchange. For the A. Y. 2004-05, the Assessing Officer allowed the deduction u/s. 80HHD of the Income-tax Act, 1961 on the income of the hotel business and in arriving at the income earned by the assessee from export business for computing the deduction u/s. 80HHC, he was of opinion that the turnover of the hotel business had to be taken into account, i.e., he included it in the total turnover, thus reducing the percentage of profit available for deduction. The Tribunal held in favour of the assessee following its own earlier judgment wherein it had held that the turnover has to be restricted to such receipts which had an element of profit derived from the export of goods and that the total turnover had to be reduced by the amount of gross receipts from the hotel business in order to keep the parity between the numerator and the denominator.

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

“i) The assessee was entitled to deductions both u/s. 80HHC and s. 80HHD of the Act. The assessee had income from convertible foreign exchange which arose from its hotel business in India and income from its export business. It was not the legislative intent that the benefit u/s. 80HHC was to be regulated by the turnover of the hotel business to which section 80HHD was applicable.

ii) The reasons advanced by the Tribunal in its earlier judgments were proper.”

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Business expenditure- S. 37 of I. T. Act, 1961- A. Y. 2003-04- Fines and penalties- Penalty charges paid to Pollution Control Board for failure to install pollution control equipment at factory premises- Is expenditure incurred for compensating damage caused to environment- Payment according to “polluter pays” principle- Compensation for purpose of business

Expenditure allowable- Shyam Sel Ltd. Vs. Dy. CIT; 386 ITR 492 (Cal):

For the A. Y. 2003-04, the assessee debited in the profit and loss account the penalty charges paid to the Pollution Control Board for non installation of pollution control equipment at the factory premises. The Assessing Officer disallowed the expenditure which was upheld by the Tribunal.

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

“i) The payment made by the assessee was for the purpose of compensating the damage to the environment and this compensation was recovered on the “polluter pays” principle adopted by the Organization for Economic Co-operation and Development, which was judicially recognised.
ii) It was not the case that the business pursued by the assessee was illegal. The compensation was paid because the assessee had failed to install the pollution control device within the time prescribed. Therefore, the penalty payment made by the assessee was not hit by Explanation 1 to section 37 of the Income-tax Act, 1961. The payment was undoubtedly for the purpose of business or was in consequence of business carried on by the assessee and was thus covered by section 37 of the Act. The question is answered in favour of the assessee.”

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Assessment – Limitation – Draft Assessment Order – Income Tax Authorities ¬– Even though an order is made u/s. 125A(1) empowering the Inspecting Assistant Commissioner (IAC) to perform the function of an Income Tax Officer, yet if he has not exercised the power or performed the function of Income-Tax Officer, the provisions requiring approval or sanction of the IAC would be applicable – Provisions of section 144B would not apply only if the Inspecting Assistant Commissioner exercises powers or performs the function of Income-tax Officer – In absence of actual exercise of powers the period during which the draft assessment order was forwarded to the IAC till the receiving of the instructions from IAC u/s. 144B is to be excluded in computing the period of limitation.

CIT v. Saurasthra Cement and Chem. Industries Ltd. and Saraya Sugar Mills Pvt. Ltd. v. CIT (2016) 384 ITR 186 (SC)

In terms of section 153 of the Income-tax Act 1961 (hereinafter referred to as “the Act”), time limit for completion of the assessment to be made under section 143 or 144 of the Act is at any time before the expiry of two years from the end of the assessment year in which the income is first assessable, where assessment year is commencing on or after April 1, 1969. On this reckoning, the date by which assessment should have been carried out by the Assessing Officer in respect of the assessment year 1981-82 was March 31, 1984. The assessment order was, however, passed on September 1, 1984. The Revenue claimed that this assessment order was still within the prescribed period of limitation because of the reason that on March 13, 1984 draft assessment order was passed pertaining to the aforesaid assessment year and forwarded to the Inspecting Assistant Commissioner, Central Range-II, Ahmadabad on March 13, 1984 (i.e., before March 31, 1984). The Inspecting Assistant Commissioner issued instructions under section 144B of the Act on August 31, 1984 and based on that the Assessing Officer framed the assessment on September 1, 1984 under section 143(3) of the Act read with section 144B of the Act.

The Supreme Court noted that the position that was taken by the Revenue was that the period from March13, 1984 to August 31, 1984, when the matter was before the Inspecting Assistant Commissioner, had to be excluded while computing the period of limitation of two years and once the period is excluded the assessment order was passed within the period of limitation.
The contention of the responding-assessee, on the other hand, was that, by order dated August 29, 1983, the Commissioner of Income Tax, Central, Ahmedabad passed under section 125A(1) of the Act had assigned all the powers and functions of the Income Tax Officer, Central Circle, Jamnagar to the Inspecting Assistant Commissioner. This order was passed specifically in case of the respondent herein which became effective from September 1, 1983. It was the submission that once, by virtue of the aforesaid order dated August 29, 1983, passed by the Commissioner of Income-tax, the Inspecting Assistant Commissioner is conferred concurrent jurisdiction, along with the Income-tax Office, empowering him to make assessment order in the case of the assessee, there was no question of forwarding the draft assessment order by the Income-tax Officer to the Inspecting Assistant Commissioner and this unnecessary and superfluous exercise would not enure to the advantage of the Revenue giving it the benefit of the period from March 13, 1984 to August 31, 1984 while calculating the period of limitation of two years provided under section 153 of the Act.

The Supreme Court noted that the Income-tax Appellate Tribunal found force in the said submission of the assessee and allowed the appeal thereby setting aside the assessment order. The Gujarat High Court, upheld this view of the Income-tax Appellate Tribunal, resulting in the dismissal of the appeal of the Appellant.

The Supreme Court also noted that in the appeal arising out of SLP(C) No.13766 of 2001 which was preferred by the assessee M/s. Saraya Sugar Mills Pvt. Ltd., in the same circumstances, on the same question, the Allahabad High Court has taken a contrary view. The High Court of Allahabad has found merit in the stand taken by the Revenue and excluded the period during which the draft assessment was forwarded to the Inspecting Assistant Commissioner till the date of receiving the instructions from the Inspecting Assistant Commissioner under section 144B of the Act.

The Supreme Court thus, faced with two conflicting views and had to decide as to which High Court had correctly decided the issue of limitation.

The Supreme Court noted that section 144B of the Act deals with a situation where the Income-tax Officer intends to pass an assessment order which is in variation to the income or loss that is shown in the return of the assessee and the amount of such variation exceeds the amount that can be fixed by the Board under sub-section (6) thereof. In such a situation, the Income-tax Officer is under obligation to first forward a draft of the proposed order of assessment to the assessee who can file his objections within 7 days thereof and if the objections are received, the Income-tax Officer is to forward the draft order together with objections to the Inspecting Assistant Commissioner. The Inspecting Assistant Commissioner, after considering the draft order and the objections, is empowered to issue such direction as he thinks fit for the guidance of the Income-Tax Officer to complete the assessment.

The Supreme Court further noted from the reading of section 153, the period (not exceeding 180 days) commencing from the date on which the Income –tax Officer forwards the draft order under sub-section (1) of section 144B to the assessee and ending with the date on which the Income-tax Officer receives the directions from the Inspecting Assistant Commissioner under sub-section (a) of section 144B, is to be excluded while computing the period of limitation.

Before the Supreme Court, thrust of the counsel for the assessee was on sub-section (4) of section 125A with the submission that on the conferment of the concurrent jurisdiction, provisions of the Act requiring approval and the sanction of the Inspecting Assistant Commissioner were not applicable and, therefore, the provisions of section 144B ceased to apply and should not have been invoked by the Income-tax Officer in the instant case. It was also argued that the High Court in the impugned judgment had rightly discussed that with the passing of a specific order dated August 29, 1983 by the Commissioner of Income-tax directing that all the powers and functions assigned to the Income-tax Officer, Central Circle, Jamnagar were thereby available to the Inspecting Assistant Commissioner, Central Range II, Ahmedabad, the Inspecting Assistant Commissioner, Central Range II, Ahmedabad was brought at par with the Income-tax Officer, in so far as it pertains to the assessment of the assessee herein and he did not remain an Officer higher in status than the Income-tax Officer in so far as assessment of the assessee was concerned and for this reason also no such reference to the Inspecting Assistant Commissioner was called for.

According to the Supreme Court, these arguments were without any force and the result which the respondent-assessee wants did not flow from the reading of section 125A of the Act. The Supreme Court held that a bare reading of sub-section (4) of section 125A of the Act provides that where –

(a) An order is made under sub-section (1), and

(b) The Inspecting Assistant Commissioner exercises the powers or performs the functions of an Income-tax Officer in relation to any area, or persons or classes of persons, or incomes or classes of income, or cases or classes of cases –

(i) references in this Act or in any rule made there under to the Income-tax Officer shall be constructed as references to the Inspecting Assistant Commissioner, and

(ii) any provision of this Act requiring approval or sanction of the Inspecting Assistant Commissioner will not be applicable.

The Supreme Court held that, hence, the provision of the Act requiring the approval or sanction of the Inspecting Assistant Commissioner will not be applicable only in those cases where both the aforementioned conditions (a) and (b) are are satisfied. It would mean that, even though an order is made under section 125A(1) empowering the Inspecting Assistant Commissioner to perform the functions of an Income-tax Officer, yet if he has not exercised the power or performed the function of an Income-tax Officer, the provisions requiring approval or sanction of the Inspecting Assistant Commissioner will be applicable. Sub-section (4) nowhere provides that, if some directions by the Inspecting Assistant Commissioner are issued as provided under sub-section (2), the provisions requiring approval or sanction of the Inspecting Assistant Commissioner will not be applicable.

The Supreme Court, in the instant case, found that it was not the Inspecting Assistant Commissioner who exercised the powers or performed the functions of the Income-tax Officer, even when such a power was conferred upon him, concurrently with the Incom-tax Officer. The significant feature of section 125A of the Act is that even when the Inspecting Assistant Commissioner is given the same powers and functions which are to be performed by the Income-tax Officer in relation to any area or classes or person or income or classes of income or cases or classes of cases, on the conferment of such powers, the Income Tax Officer does not stand denuded of those powers. With conferment of such powers on the Inspecting Assistant Commissioner gives him “concurrent” jurisdiction which means that both, the Income-tax Officer as well as the Inspecting Assistant Commissioner, are empowered to exercise those functions including passing assessment order. It is still open to the Income-tax Officer to assume the jurisdiction and pass the order in case the Inspecting Assistant Commissioner does not exercise those powers in respect of the assessment year. Provisions of section 144B would not apply only if the Inspecting Assistant Commissioner exercises powers or performs the functions of Income-tax Officer. What is important is the actual exercise of powers and not merely conferment of the powers that are borne out from the bare reading of sub-section (4) of section 125B.

According to the Supreme Court, the position would become abundantly clear when one reads section 144B, particularly, sub-section (7) thereof.

Sub-section (7), in no uncertain terms, mentions that section 144B will not apply in that case where the Inspecting Assistant Commissioner “exercises the powers or performs the functions of an Income-tax Officer” in pursuance of an order made under section 125 or section 125A.

The Supreme Court observed that in the instant case, as already noted above, no such power was exercised or function of an Income-tax Officer was performed by the Inspecting Assistant Commissioner.

The Supreme Court observed that the High Court of Gujarat while dismissing the appeal of the Revenue failed to take into account the earlier judgment of the Co-ordinate Bench of the High Court in CIT v. Shree Digvijay Woolllen Mills Ltd. [1995] 212 ITR 310 (Guj), which had taken the above view. The Supreme Court agreed with the view taken in CIT v. Shree Digvijay Woolllen Mills Ltd. thereby allowed Civil Appeal No.2984 of 2008 and setting aside the impugned judgment of the Gujarat High Court.

For these reasons, the Civil Appeal arising out of SLP(C) No.13766 of 2011 filed by the assessee against the judgment of the Allahabad High Court was dismissed affirming the view in the said case.

shailesh.kwebmaker

3.Commissioner of Income Tax-4 vs. M/s. J.M. Financial Securities Pvt. Ltd. [ Income tax Appeal no 235 of 2014 dt : 27/07/2016 (Bombay High Court)].

[Affirmed M/s. J.M. Financial Securities
Pvt. Ltd. vs Asst CIT – 4(3) . [ITA No.
4289/Mum/11 ; Bench : J ; dated 19/04/2013 ; A Y: 2004- 2005,
Mum. ITAT ]

Expenses
– Liability Disputed – Once
the assessee stopped contesting the claim of SEBI, the liability was crystallized
during the year: Sec 37

The
Assessing Officer disallowed assessee’s claim for expenditure aggregating to
Rs.1.86 crores. This expenditure was on account of payment to SEBI of Registration
Fees and interest paid thereon on account of late payment. The explanation of
the assessee was that there was a dispute
between SEBI and assessee with regard to the fees payable for registration in
respect of its taking over the business of M/s. J.M. Financial & Investment
Consultancy Services Ltd. However, in the subject assessment year, the assessee
decided to accept the contention of the SEBI on the question of fees payable
for registration with SEBI along with interest as contended by the SEBI. This
was warranted in view of the communication dated 19th November, 2003 from SEBI
to National Stock Exchange returning its application for trading in Future and
Options.

Being
aggrieved the assessee carried the issue in appeal to the CIT(A). The CIT(A)
dismissed the assessee’s appeal.

On further
appeal, the Tribunal held that the only reason for not accepting the claim of
the assessee as given by the lower
Authorities was that the assessee was not able to produce supporting documents
to evidence that the payment in fact had been made to SEBI. The evidence of
payment provided was a copy of the cheque issued in favour of SEBI drawn on
HDFC Bank.

The Hon’ble
High Court observed that there was no dispute that the assessee had taken over the business of one
M/s. J.M. Financial Investment Consultant Services Pvt. Ltd. and a final
registration had to be applied for with SEBI. The assessee had earlier
contested the claim of SEBI in respect of the fees payable. However, during the
previous year relevant to the subject assessment year, the assessee decided to accept the claim of SEBI
and pay the fees.

Once the assessee
acceptedthe claim of SEBI, the liability had crystallized during the year and
had to be allowed as an expenditure. So far as payment during the year is
concerned, the examination thereof may strictly be not necessary in view of the
above findings as the assessee is following Mercantile System of Accounting.
Nevertheless, the view taken by the Tribunal is a factual finding. The evidence
was in the form of copy of a cheque in favour of SEBI drawn on HDFC Bank.
Accordingly, appeal of the dept was dismissed as the question framed does not give rise to
any substantial question of law.

shailesh.kwebmaker

2.CIT -16 vs. Sadanand B. Sule. [ Income tax Appeal no 300 of 2014,: 02/08/2016 (Bombay High Court)]. [Affirmed DCIT 16(2) vs. Sadanand B. Sule,. [ITA No. 831/MUM/2009, ; Bench : E ; dated : 07/08/2013 ; A Y: 2005- 2006, Mum. ITAT ]

Cost of Acquisition of Shares –Vendor not disclosing the
receipt in their return – Assessee cannot be held responsible – for default
made by the vendors – Consideration for
the sale of shares by account payee cheques is also significant:

The Assessee
sold 7,49,000 equity shares and 29,97,867 6% redeemable preference shares of
Lavasa Corporation Pvt. Ltd in the year under consideration, to Hindustan
Construction Corporation Ltd.. The Assessee disclosed long term capital gains
on sale of 7,49,000 equity shares and 24,97,867 6% redeemable preference shares
of Lavasa Corporation Ltd and short term capital gains on sale of 5,00,000 6%
redeemable preference shares of Lavasa Corporation Ltd.

The Assessee
had obtained 12,48,750 equity shares and 26,64,000 6% redeemable preference
shares of Lavasa Corporation on the merger of Yashomala Leasing & Finance
(P) Ltd. with Lake City Corporation (former name Lavasa Corporation) on the
basis of scheme of amalgamation approved by the Bombay High Court dated 1st
Aug. 2002. The assessee further purchased 5,00,000 6% redeemable preference
shares in the year 2003.

As far as the long term capital gains was
concerned the assessee had considered the investment in the shares of the
company, Yashomala Leasing & Finance (P) Ltd. as the cost of acquisition as
he had obtained the shares sold, on the merger of the Yashomala Finance & Leasing
(P) Ltd with Lake City Corporation Ltd. The assessee purchased 1665 shares of
Yashomala Leasing Finance Pvt. Ltd on April, 2001 from Mr. Arvind Bhale and Mrs.
Jyoti Bhale. Yashomala had directly allotted one share to the assessee.

The
Assessing Officer does not dispute that the
assessee was owner of the 1665 shares in Lavasa Corporation Ltd. and had
sold the shares along with other shares in the company during the previous year
relevant to the subject assessment year. However, during the assessment
proceedings the Assessing Officer by order dated 31st December, 2007 held that
the assessee had failed to establish the purchase of 1665 shares in 2001. In
particular he noted that the consideration claimed to have been paid by the assessee
to the vendors of the 1665 shares viz. Mr. and Mrs. Bhale was not found
unreliable. This was for the reason that the vendors had not shown any receipt
on account of sale of 1665 shares in its returns of income for Assessment Year
2001-02. On the basis of the above, the Assessing Officer concluded that as
date of acquisition of the shares is not known, the entire receipt on sale of
the shares has to be treated as short term capital gain and not at the value
claimed by the assessee but at an value worked out by him.

The CIT(A) allowed the assessee’s appeal on
consideration of facts .. It held that the basis of the Assessing Officer not
accepting the cost and the date of purchase of 1665 equity shares from Mr. and
Mrs. Bhale was not correct in view of explanation offered by the assessee. In
the explanation, the assessee’s claim of having purchased the shares during the
assessment year 2002-03 and the cost of acquisition was taken at Rs.41.25 lakhs
for computation of capital gains on its sale.

Being
aggrieved, the Revenue carried the issue in appeal before the Tribunal. The
Tribunal upheld the order of the CIT(A). In particular, it noted that the
assessee could not be held responsible for the failure of the vendors of the
shares i.e. Mr. and Mrs. Bhale to show the receipts on sale of shares in its
return of income for paying tax on the same. It noted the fact that all
payments made for the purchase of shares from Mr. and Mrs. Bhale were made
through account payee cheques. Further there were confirmation letters filed by
the vendors Mr. and Mrs. Bhale which were not even considered by the Assessing
Officer. The ITAT order also found that the order of the CIT(A) accepting the
explanation of the assessee for the discrepancies in its return of income could
not be found fault with. The Tribunal upheld the order of the CIT(A).

Being aggrieved, the Revenue filed a appeal before High Court. The Hon. High court held that the
purchasers of shares cannot be held responsible for default made by the vendors
of shares in filing their return of income and not disclosing consideration
received by them for sale of their shares. It was further observed that the
Assessing Officer completely ignored the confirmation letter given by vendors
of 1665 shares. Further fact that the assessee had paid the consideration for
the sale of 1665 shares by account payee cheques is also significant .. The
view taken by both authorities on the basis of evidence and explanation made
available before them was a possible and reasonable view. In the above view the
question raised does not give rise to any substantial question of law. High
court upheld the Tribunal order and dismissed the Revenue appeal.

shailesh.kwebmaker

Revision – Jurisdiction – Condition Precedent – Satisfaction that an order passed by the authority under the Act is erroneous and prejudicial to the interest of the Revenue – Once satisfaction is reached, jurisdiction to exercise the power would be available subject to observance of the principles of natural justice – Unlike the power of reopening an assessment u/s. 147 of the Act, the power of revision u/s. 263 is not contingent on the giving of a notice to show cause.

CIT v. Amitabh Bachchan [2016] 384 ITR 200 (SC)

For the assessment year 2001-02 the
assessment order was passed on March 30, 2004.
After the assessment as above was finalized, a show-cause notice dated
November 7, 2005 under section 263 of the Act was issed by the learned
Commissioner of Income Tax detailing as many as eleven (11) issues/grounds on
which the assessment order was proposed to be revised under section 263 of the
Act. The respondent-assessee filed his
reply to the said show-case notice on consideration of which by order dated
March 20, 2006 the learned Commissioner of Income Tax set aside the order of assessment dated March 30, 2004 and
directed a fresh assessment to be made.
Aggrieved, the respondent-assessee challenged the said order before the
learned Tribunal which was allowed by the order dated August 28, 2007.

Aggrieved
by the order dated August 28, 2007 of the learned Tribunal, the Revenue filed
an appeal under section 260A of the Act before the High Court of Bombay.
The aforesaid appeal, i.e. I.T.A. No.293 of 2008 was dismissed by the
High Court by the order dated August 7, 2008 holding that as the Commissioner
of Income Tax had gone beyond the scope of the show-cause notice dated
November7, 2005 and had dealt with the issues not covered/mentioned in the said
notice, the revisional order dated March 20, 2006 was in
violation of the principles of natural justice.
So far as the question as to whether the Assessing Officer had made
sufficient enquiries about the assessee’s claim of expenses made in the
re-revised return of income was concerned, which question was formulated as
question No.2 for the High Court’s consideration, the High Court took the view
that the said question raised pure questions of fact and, therefore, ought not
to be examined under section 260A of the Act.
The appeal of the Revenue was consequently dismissed. Aggrieved, appeal was filed before the Supreme
Court upon grant of leave under article 136 of the Constitution of India.

The
Supreme Court noted that the assessment in question was set aside by the Commissioner of Income Tax by the order dated
March 20, 2006 on the principal ground that requisite and due enquires were not
made by the Assessing Officer prior to finalization of the assessment by order
dated March 30, 2004. In this
connection, the   Commissioner of Income Tax on consideration of
the facts of the case and the record of the proceedings came to the conclusion
that in the course of the assessment proceedings despite several opportunities
the assessee did not submit the requisite books of account and documents and
deliberately dragged the matter leading to one adjournment after the other.
Eventually, the Assessing Officer, to avoid the bar of limitation, had
no option but to “hurriedly” finalise the assessment proceedings which on due
and proper scrutiny disclosed that the necessary enquires were not made. On the said basis the Commissioner of Income
Tax came to the conclusion that the assessment order in question was erroneous
and prejudicial to the interests of the Revenue warranting exercise of power
under section 263 of the Act. Consequently,
the assessment for the year 2001-02 was set aside and a fresh assessment was
ordered. In the order dated March 20,
2006 the Commissioner of Income Tax
arrived at findings and conclusions in respect of issues which were not
specifically mentioned in the show-cause notice dated November 7, 2005. In fact, on as many as seven/eight (07/08)
issues mentioned in the said show-cause notice the   Commissioner of Income Tax did not record any
finding   whereas conclusions adverse to the assessee
were recorded on issues not specifically mentioned in the said notice before
proceeding to hold that the assessment needs to be set aside. However, three (03) of the issues, were common to the show-cause notice as well as the
revisional order of the learned Commissioner of Income Tax.

On
appeal, the Tribunal took the view that the Commissioner of Income Tax exercising powers
under section 263 of the Act could not have gone beyond the issues mentioned in
the show-cause notice dated November 7, 2005.
The Tribunal, therefore, thought it proper to take the view that in
respect of the issues not mentioned in the show-cause notice the findings as
recorded in the revisional order dated March 20, 2006 have to be understood to
be in breach of the principles of natural justice. The Tribunal also specifically considered the
three (03) common issues mentioned above and on such consideration arrived at
the conclusion that the reasons disclosed by the Commissioner of Income Tax in the order dated March
20, 2006 for holding the assessment to be liable for cancellation on that basis
were not tenable. Accordingly, the
Tribunal allowed the appeal of the assessee and reversed the order of the suo motu revision dated March 20,
2006.

The
Supreme Court, in an appeal filed by the Revenue, observed that under the Act
different shades of power have been conferred on different authorities to deal
with orders of assessment passed by the primary authority. While section 147 confers power on the
assessing authority itself to proceed against income escaping assessment, section
154 of the Act empowers such authority to correct a mistake apparent on the
face of the record. The power of appeal
and revision is contained in Chapter XX of the Act which includes section 263 that concern suo
motu power of revision on the Commissioner of Income Tax. The different shades of power conferred on
different authorities under the Act has to be exercised within the areas
specifically delineated by the Act and the exercise of power under one
provision cannot trench upon the powers available under another provision of
the Act.

The
Supreme Court reverting to the specific provisions of section 263 of the Act held
that what has to be seen is that a satisfaction that an order passed by the
authority under the Act is erroneous and prejudicial to the interests of the
Revenue is the basic pre-condition for exercise of jurisdiction under section
263 of the Act. Both are twin conditions
that have to be conjointly present. Once
such satisfaction is reached, jurisdiction to exercise the power would be
available subject to observance of the principles of natural justice which is
implicit in the requirement cast by the section to give the assessee an
opportunity of being heard. It is in the
context of the above position that this court has repeatedly held that unlike
the power of reopening an assessment under section 147 of the Act, the power of
revision under section 263 is not contingent on the giving of a notice to show
cause. In fact, section 263 has been
understood not to require any specific show-cause notice to be served on the
assessee. Rather, what is required under
the said provision is an opportunity of hearing to the assessee. The two requirements are different; the first
would comprehend a prior notice detailing the specific grounds on which
revision of the assessment order is tentatively being proposed. Such a notice is not required. What is contemplated by section 263, is an
opportunity of hearing to be afforded to the assessee. Failure to give such an opportunity would
render the revisional order legally fragile not on the ground of lack of
jurisdiction but on the ground of violation of principles of natural justice.

It
may be that in a given case and in most cases it is so done a notice proposing
the revisional exercise is given to the assessee indicating therein broadly or
even specifically the grounds on which the exercise is felt necessary. But there is nothing in the section (section 263) to raise the said notice to the
status of a mandatory show-cause notice affecting the initiation of the
exercise in the absence thereof or to require the Commissioner of Income Tax to
confine himself to the terms of the notice and foreclosing consideration of any
other issue or question of fact. This is
not the purport of section 263. There
can be no dispute that while the Commissioner of Income Tax is free to exercise
his jurisdiction on consideration of all relevant facts, a full opportunity to
controvert the same and to explain the circumstances surrounding such facts,
as may be considered relevant by the
assessee, must be afforded to him by the Commissioner of Income Tax prior to
the finalization of the decision.

The
Supreme Court held that in the present case, there was no dispute that in the
order dated March 20, 2006 passed by the Commissioner of Income Tax under section 263
of the Act findings have been recorded on issues that are not specifically
mentioned in the show-cause notice dated November 7, 2005 though there are
three (03) issues mentioned in the show-cause notice dated 7, 2005 which had
specifically been dealt with in order dated March 20, 2006. The Tribunal in its order dated August 28,
2007 put the aforesaid two features of the case into two different
compartments. In so far as the first
question, i.e., findings contained in the order of the Commissioner of Income
Tax dated March 20, 2006 beyond the issues mentioned in the show-cause notice was
concerned, the Tribunal held that the revision order was bad in law and also
violative of principles of natural justice and thus not maintainable.

According
to the Supreme Court, the above ground which had led the Tribunal to interfere
with the order of the Commissioner of Income Tax seemed to be contrary to the
settled position in law, as indicated above and the two decisions of the
Supreme Court in Gita Devi Aggarwal (76 ITR 496) and Electro House (82 ITR 824). The Tribunal in its order dated August 28, 2007
had not recorded any findings that in course of the suo motu revisional
proceedings, hearing of which was spread over many days and attended to by the
authorized representative of the assessee, opportunity of hearing was not
afforded to the assessee and that the assessee was denied an opportunity to
contest the facts on the basis of which the Commissioner of Income Tax had come to his
conclusions as recorded in the order dated March 20, 2006.

The
Supreme Court observed that in the course of the revisional exercise relevant
facts, documents and books of account which were over looked in the assessment
proceedings were considered. On such
re-scrutiny it was revealed that the original assessment order on several heads
was erroneous and had the potential of causing loss of revenue to the
State. It is on the aforesaid basis that
the necessary satisfaction that the assessment order dated March 30, 2004 was
erroneous and prejudicial to the interests of the Revenue was recorded by the
Commissioner of Income Tax. At each
stage of the revisional proceedings, the authorized representative of the
assessee had appeared and had full opportunity to contest the basis on which
the revisional authority was proceeding/ had proceeded in the matter. The Supreme Court held that if the revisional
authority had come to its conclusions in the matter on the basis of the record
of the assessment proceedings which was open for scrutiny by the assessee and
available to his authorized representative at all times, it was difficult to
see as to how the requirement of giving of reasonable opportunity of being
heard as contemplated by section 263 of the Act had been breached in the
present case. The order of the Tribunal in so far as the first issue i.e. the
revisional order going beyond the show-cause notice was concerned, therefore, could not accepted.

The
Supreme Court therefore considered the second limb of the case as dealt with by
the Tribunal, namely, that tenability of the order of the Commissioner of
Income Tax on the three (03) issues mentioned in the show-cause notice and also
dealt with in the revisional order dated March 20, 2006. The aforesaid three (03) issues were:

(i) The
assessee maintaining 5 bank accounts and the Assessing Officer not examining
the 5^th bank account, books of account and any other bank account
where receipts related to KBC were banked.

(ii) Regarding
claim of deposit of Rs.5206 lakh in Bank the a/c No. 11155 under the head
“Receipt on behalf of Mrs. Jaya Bachchan, and

(iii) Regarding
the claim of additional expenses in the re-revised return.

On the
above issues, the Tribunal had given detailed reasons for not
accepting the grounds cited in the revisional order for setting aside the
assessment under section 263 of the Act.
According to the Supreme Court, the reasons cited by the Tribunal in so far as the first two issues
were concerned may not justify a serious
relook and hence not be gone into. The Supreme
Court however was of the opinion the third question would, however, require
some detailed attention. The said
question was with regard to the claim of additional expenses made by the
assessee in its re-revised return which was subsequently withdrawn.

The Supreme Court held
that there could be no doubt that so
long as the view taken by the Assessing officer is a possible view, the same
ought not to be interfered with by the Commissioner of Income Tax under section
263 of the Act merelyon the ground that there is another possible view of the
matter. Permitting exercise of
revisional power in a situation where two views are possible would really
amount of conferring some kind of an appellate power in the revisional
authority. This is a course of action
that must be desisted from. However, according
to the Supreme Court the above was not the situation in the present case in
view of the reasons stated by the Commissioner of Income Tax on the basis of
which the said authority felt that the matter needed further investigation, a
view with which the Supreme Court wholly agreed. Making a claim which would prima facie
disclose that the expenses in respect of which deduction had been claimed had
been incurred and thereafter abandoning/withdrawing the same gave rise to the
necessity of further enquiry in the interests of the Revenue. The notice issued under section 69C of the
Act could not have been simply dropped on the ground that the claim had been
withdrawn. The Supreme Court, therefore,
was of the opinion that the Commissioner of Income Tax was perfectly
justified in coming to his conclusions in so far as the issue No. (iii) was
concerned and in passing the impugned order on that basis. The Tribunal as well as the High Court, therefore,
ought not to have interfered with the said conclusion.

The Supreme Court concluded that the present was a fit case for
exercise of the suo motu revisional powers of the Commissioner of Income Tax under section 263
of the Act.

shailesh.kwebmaker

1.Commissioner of Income tax- 3 vs. SICOM LTD. [ Income tax Appeal no 137 of 2014 dt : 08/08/2016 (Bombay High Court)].

[Affirmed SICOM LTD vs. Dy. Commissioner of Income Tax Range 3(3),. [ITA No. 3130/MUM/2011 ; Bench : E ; dated 10/10/2012 ; A Y: 2003- 2004. (Mum). ITAT ]

Reopening – Within 4 years – Change of opinion – reopening not permissible :Sec 148

The
assessee company is engaged in the business of finance, leasing, banking and
investment company (non-banking financial company). The return was filed
declaring total loss of Rs. 84,29,79,390/- for AY 2003-04 . The assessment was
completed for an income of Rs. 30,90,29,470/-
u/s 143(3) of the Act.

Subsequently, the A.O. reopened the assessment by
issuance of notice u/s 148 of the Act on 28-3-2008 after recording the reasons relating to write off of inter corporate deposit (ICD), investment etc.

The assessee vide letter dtd. 18-7-2008 stated that
there has been no failure on their part to disclose all the material facts in
its return of income. However, the WA.O. observed that the assessee failed to furnish
necessary details in respect of nature of assets written off. Therefore, it was
a failure on the part of the assessee to disclose all the material facts in its
return of income.

According to the A.O., the write off of investment wasa
capital loss, and the same couldnot be
allowed as a revenue expenditure. Similarly, ICD and other assets written off
constituted capital loss as these were the capital assets of the assessee,
therefore, they were also not allowable as revenue expenditure and accordingly
the A.O. added the same.

The assessee on the reopening of the assessment submitted
that the assessee in response to the query raised by the A.O. in respect of
write off done in the books of accounts of inter-corporate deposits, other
assets and investment has filed detailed reply dtd. 10-11-2005 supported by the
finding given by the Tribunal in assessee’s own case for the AY’s 1981-82,
1982-83 and 1983-84. It was further submitted that the A.O. after
considering the same has passed the assessment order u/s 143(3) of the Act. It
was further submitted that reopening of
the assessment on the same sets of fact is
not permissible as it amounts to change of opinion.

The ITAT observed that in the course of original
assessment proceeding the A.O. has considered and examined the particular
aspect, the said aspect cannot be made a ground to reopen and initiate
reassessment proceedings. The assessing authority cannot have a fresh look and reopen
an assessment on the ground of change of opinion. The A.O. had considered and
examined whether or not write off of the amount of inter-corporate deposits,
other assets and investments was of revenue nature. The A.O. accepted the stand
of the assessee and has made no addition in the original assessment
proceedings. The reassessment proceeding cannot, therefore, be initiated on the
ground that the said claim of the assessee cannot be allowed as permissible deduction
under the provisions of the Act. In the
present case it is noticeable that the assessee had disclosed fully and truly
all the material facts relevant for the assessment. There is no indication and
it is not alleged that there was “tangible material” to come to the conclusion
that there is escapement of income from assessment. The reassessment proceeding were quashed.

Being aggrieved by the order of ITAT, the Revenue filed
appeal before the Hon. High Court. The High court upheld the Tribunal order and dismissed
the Revenue appeal holding that Revenue has not been able to point out any
fallacy in the reasoning of the Tribunal to come to the conclusion that the
reopening notice is without jurisdiction

shailesh.kwebmaker

NEED FOR DEPOSITS UNDER CAPITAL GAIN ACCOUNTS SCHEME

Issues for Consideration

Section
54(2) and a set of other similar provisions, provide for the deposit of Capital
Gains or the net consideration in a bank account in accordance with the Capital
Gains Account Schemes, 1988, in a case where such amount is not appropriated or
utilized by the assessee towards the purchase or construction of the new asset
before the date of furnishing return of income u/s. 139 of the Income Tax Act.

The amount so
deposited under this Scheme, is required to be utilized for investment in the
specified new asset, within the specified period by withdrawal from the same account
in accordance with the Scheme. The amount in the bank account remaining
unutilized, shall be charged as the Capital Gains for the year in which the
period of reinvestment expires and the assessee shall be entitled to withdraw
the same unutilized balance.

Instances happen
whereunder, an assessee utilizes the amount of the Capital Gains or the net
consideration in reinvesting the same in the specified new asset, within the
permissible time of 2 or 3 years, after filing the return of income u/s. 139,
without first depositing such amount in the designated account and routing the
investment through such account.

Issues arise in such
cases about the eligibility of the assessee, for claim of exemption from the
liability to tax on Capital Gains. The courts, in considering the issue, have
delivered conflicting decisions. The Karnataka High Court had held, that the assessee
should be eligible for the relief once the amount in question was utilized
within the permissible time. However, the Bombay High Court recently held, that
it was essential for an assessee to first deposit the unutilized amount in the
designated account and any failure to do so would result in denial of the
relief, even where he had utilized the amount of gains or consideration in
purchase or construction of a new asset with the overall permissible time
frame.

K Ramachandra Rao’s case

The issue arose before the Karnataka High Court in the case of the CIT
v. K. Ramachandra Rao, 230 Taxman 334. In that case, the assessee sold
certain converted lands for a consideration of Rs.2.87 crore. The assessee
constructed the residential premises on another plot of land owned by him,
for which certain payments towards construction were made within a period of one
year of the transfer of the said lands, some payments were made within one
year before the transfer of the said lands and balance payments were made after
the transfer and after the due date of filing return of income u/s 139(1)
directly, without depositing the same in the designated bank account under
the Capital Gains Scheme. The construction of the premises was completed
within a period of three years of the transfer. The assessee claimed
exemption u/s 54F from taxation in respect of the capital gains arising on
the transfer of the said lands. The AO denied the claim for exemption on the
ground that a part was invested before the transfer of the said lands in
construction, and that the balance was invested directly without depositing
the same in the designated bank account.

On appeal, the Commissioner(Appeals) held that the payments made within
one year before the date of transfer and also the payments made after
transfer were eligible for exemption in spite of the fact that the proceeds
were not deposited in the designated bank account. The tribunal, on appeal by
the revenue, confirmed the findings of the Commissioner(Appeals).

In appeal to the High Court, the Revenue, besides another question, raised
the following substantial question of law:

“When the assessee invests the entire sale consideration construction of
a residential house within three years from the date of transfer can he be
denied exemption under Section 54F on the ground that he did not deposit the
said amount in capital gains account scheme before the due date prescribed
under Section 139(1) of the IT Act?”

The decision,
as reported, does not record the conflicting stands presented by the parties to
the appeal nor does it record the observations of the court that led to the
decision of the High Court rejecting the
appeal of the Revenue, which held as
under;

“As is clear from
Sub-section (4) in the event of the assessee not investing the capital gains
either in purchasing the residential house or in constructing a residential house
within the period stipulated in Section 54F(1), if the assessee wants the
benefit of Section 54F, then he should deposit the said capital gains in an
account which is duly notified by the Central Government. In other words if he
want of (sic) claim exemption from payment of income tax by retaining the cash,
then the said amount is to be invested in the said account. If the intention is
not to retain cash but to invest in construction or any purchase of the
property and if such investment is made within the period stipulated therein,
then Section 54F(4) is not at all attracted and therefore the contention that
the assessee has not deposited the amount in the Bank account as stipulated and
therefore, he is not entitled to the benefit even though he has invested the
money in construction is also not correct.”

Humayun Suleman Merchant’s case

The issue again
came up recently before the Bombay High Court in the case of Humayun Suleman
Merchant v CCIT, ITA No 545 of 2002 dated 18^th August 2016.

In this case,
the assessee sold a plot of land for a consideration of Rs. 85.33 lakh on 29^th
April 1995. The due date of filing of his return of income was 31^st
October 1996. He entered into an agreement to purchase a flat for a
consideration of Rs. 69.60 lakh on 16^th July 1996. Under this
agreement, 2 instalments of Rs. 10 lakh each were paid on 17^th July
1996 and 23^rd October 1996 to the developer/builder. A further
payment of Rs. 15 lakh was made on 1^st November 1996 under the
agreement to purchase the flat. The possession of the new flat was obtained on
27^th January 1997. No amount was deposited in the capital gains
account scheme.

The assessee
filed his return of income on 4^th November 1996, after the due date
of filing of his return of income. In the return, exemption under section 54F
was claimed in respect of the entire cost of the new flat of Rs. 69.60 lakh.

The assessing
officer allowed exemption from capital gains under section 54F in respect of
the amount of Rs. 35 lakh paid till the date of the filing of the return, and
did not consider the balance amount of Rs 34.60 lakh paid subsequently for the
flat, on account of the assessee’s failure to deposit the unutilised consideration
for purchase on the flat in the specified bank account in accordance with the
capital gains account scheme. The Commissioner(Appeals) upheld the order of the
assessing officer. The tribunal also dismissed the appeal of the assessee.

Before the Bombay
High Court, on behalf of the assessee, it was argued that:

1. The issue was covered by the decision of the Bombay High Court in the case
of CIT v Hilla J B Wadia 261 ITR 376, read with CBDT circulars dated 15 October
1986 and 16 December 1993. Further, the decision of the Madhya Pradesh High
Court in the case of Smt Shashi Varma v CIT 224 ITR 106 also applied. Besides,
the decision of the Karnataka High Court in the case of K Ramachandra Rao
(supra) covered the issue.

2. Section 54F had been brought into the Act with the object of encouraging
the housing sector. Therefore, a liberal/beneficial interpretation/construction
should be given to section 54F(4). Reliance was placed upon the decision of the
Delhi High Court in the case of CIT v Ravinder Kumar Arora 342 ITR 38.

3. Section 54F(4) deliberately use the word “appropriation” while extending
the benefit, since it intended to expand the scope of the benefit. Since the
word “appropriation” meant setting apart, once an agreement to purchase the
flat was executed in July 1996, and the consideration was set aside, though not
paid, it should be considered to be appropriated towards the purchase of a
flat, and hence the benefit of section 54F was available.

4. Alternatively, the requirements of section 54F(4) had been satisfied, as
the entire amount had been paid to the developer before the last date
prescribed to file the return of income [the date prescribed under section 139
(4)], as held by the Gauhati High Court in the case of CIT v Rajesh Kumar Jalan
286 ITR 274.

On behalf of
the revenue, it was argued that:

1. on a plain reading of section 54F(4), the assessee had not utilised the
entire net consideration taxable under the head capital gains for purchase of
the flat, nor had he deposited the balance unutilised consideration in a
specified bank account as notified in terms of section 54F(4), and was
therefore not entitled to the benefit of exemption from capital gains under
section 54F to the extent the requirements of the section were not met.

2. The decision of the Bombay High Court in Hilla J B Wadia (supra), as well
as the circulars cited on behalf of the assessee had no application to the
facts of the case, as these were not in the context of section 54F(4), which
was not existing in the statute books at that point of time.

3. The word “appropriation” only covered cases where the flat had already been
purchased within one year before the date on which the capital gains arose on
the transfer of the asset. In the present case, there was no purchase of a flat
prior to the sale of the capital asset, but the purchase was post sale of the
capital asset, which required utilisation and deposit in the specified account
to the extent not utilised.

4. The decision of the Gauhati High Court in Rajesh Kumar Jalan had no
application to this case, as the amounts had not been utilised or deposited in
the specified bank account before the assessee filed his return of income on 4^th
November 1996.

The Bombay High
Court analysed the provisions of section 54F. It noted that, while implementing
section 54F, it was noticed that at times assessments were completed prior to
the expiry of the period of 2 or 3 years from the date of sale of the capital
asset, and the assessee had not utilised the amount within the prescribed
period. This led to assessment orders being rectified by appropriate orders, to
withdraw the excess exemption allowed under section 54F. It was for this reason
that section 54F(4) was introduced. Further, the provisions of section 54F(1)
were made subject to the provisions of section 54F(4). Therefore, where the
consideration received on sale of the capital asset was not appropriated (where
purchase was earlier than sale) or utilised (where purchase was after the
sale), then the gains were subject to the charge of capital gains tax, unless
the unutilised amounts were deposited in the specified bank account as notified
under the capital gains account scheme. The exemption was available to the
unutilised amounts only if the mandate of section 54F(4) was complied with. A
further safeguard was provided to the revenue, where the assessee had not
invested the amounts in purchase/construction of a house property within the
specified time under section 54F(1), by providing that in such cases, capital
gains would be charged on the unutilised amount as income of the previous year
in which the period of 3 years from the date of the transfer of the capital
asset expired.

Applying this
analysis of the provisions to the facts before it, the Bombay High Court noted
that the entire net consideration which was to be utilised in purchase of the
new flat and which had not been utilised, had not been deposited in the
specified bank account before the due date of filing of the return under
section 139(1). The High Court noted that except Rs. 35 lakh, the balance of
the net consideration to be utilised, had not been utilised before the date of
furnishing of the return, 4^th November 1996. Therefore, according to
the High Court, the order of the tribunal was correct.

The Bombay High
Court noted that the ratio of the cases of Hilla J B Wadia (supra) and Smt.
Shashi Varma did not apply, as in those cases, at the relevant point of time,
there was no requirement of depositing any unutilised amount in a specified
bank account under the capital gains account scheme. Further, the Bombay High
Court noted that the 2 CBDT circulars relied upon on behalf of the assessee did
not do away with and/or relax the statutory mandate of depositing the
unutilised amount in the specified bank account as required by section 54F(4).

Referring to
the decision of the Karnataka High Court in K Ramachandra Rao (supra), the
Bombay High Court expressed its inability to accept the reasoning adopted by
the Karnataka High Court. According to the Bombay High Court, the mandate of
section 54F(4) was clear, that an amount which had not been utilised in
construction and/or purchase of property before filing the return of income
must necessarily be deposited in an account under the capital gains account
scheme, so as to claim exemption. According to the Bombay High Court, this
aspect had not been noticed by the Karnataka High Court, and the entire basis
of the decision of the Karnataka High Court was the intent of the parties.
According to the Bombay High Court, in interpreting a fiscal statute, one must
have regard to the strict letter of law, and intent can never override the
plain and unambiguous letter of the law. The Bombay High Court observed that
while it should not easily depart from a view taken by another High Court on
considerations of certainty and consistency in law, the view of other High
Courts were not binding upon it unlike a decision of the Supreme Court or of a
larger or coordinate bench of the same court. If, on an examination of the
decision of the other High Court, it was unable to accept the same, it was not
bound to follow/accept the interpretation of the other High Court, leading to a
particular conclusion.

In the case
before it, the Bombay High Court found that the decision of the Karnataka High
Court was rendered sub-silentio; i.e. no argument was made with regard to the
requirement of deposit in notified bank account under the capital gains account
scheme before the due date as required by section 54F(4). The Bombay High Court
relied on Salmond’s Jurisprudence for the proposition that a precedent
sub-silentio is not authoritative. The Bombay High Court therefore held that it
could not place any reliance upon the decision to conclude the issue on the
basis of that decision.

The
Bombay High Court further rejected the reliance on the decision of the Delhi
High Court in the case of Ravindra Kumar Arora (supra), where the court had
held that the provisions of section 54F should be liberally construed, on the
grounds that in that case, all the requirements of section 54F stood satisfied,
and the only issue was the addition of the name of his wife in the purchase, on
the ground that that case had no application to the facts before it.

According
to the Bombay High Court, no occasion to give a beneficial constructions to a
statute could arise when there was no ambiguity in the provision of law, which
was subject to interpretation. In the face of the clear words of the statute,
the intent of parties and/or beneficial construction was irrelevant. It relied
on the decisions of the Supreme Court in the cases of Sales Tax Commissioner,
vs Modi Sugar Mills 12 STC 182, Mathuram Agarwal vs State of Madhya Pradesh 8
SCC 67 and CIT vs. Thana Electricity Supply Ltd 206 ITR 727 for this
proposition.

The
Bombay High Court also rejected the argument that since the funds had been
earmarked to be invested in construction of a house, the funds could be
regarded as appropriated for the purpose of purchase of new residential house,
and therefore the requirements of section 54F(4) were satisfied. According to
the Bombay High Court, the word “appropriated” had been used with reference to
the cases where property had already been purchased prior to the sale of the
capital asset, and the amount received on sale of the capital asset was
appropriated towards consideration which had been paid for purchase of the
property. According to it, the plain language of the section made a clear
distinction between cases of appropriation (purchase prior to sale of capital
asset) and utilisation (purchase/construction after the sale of capital assets).
Therefore, the word “appropriated” would have no application in cases of
purchase/construction of a house after the sale of capital asset, as was the
fact in the case before it.

Referring
to the argument on behalf of the assessee, that since the entire amount had
been paid before the last due date to file the return specified in section
139(4), the exemption was available, based on the decision of the Gauhati High
Court in the case of Rajesh Kumar Jalan, the Bombay High Court noted that the
factual situation before it was different. In the case before the Gauhati High
Court, the amounts were utilised before the date of filing of the return of
income, whereas in the case before the Bombay High Court, only a part of the
amounts were utilised before the date of filing of the return of income.
Therefore, the Bombay High Court was of the view that the decision of the
Gauhati High Court in that case was not applicable to the case before it.

The
Bombay High Court therefore held that the assessee was entitled to an exemption
under section 54F only in respect of the amount of Rs. 35 lakh actually paid
before the date of filing of the return of income, and not in respect of the
entire amount of Rs. 69.60 lakh agreed to be paid for purchase of the new
house.

Observations

Section 54 (2) reads
as under:

The amount of the capital gain which is not
appropriated by the assessee towards the purchase of the new asset made within
one year before the date on which the transfer of the original asset took
place, or which is not utilised by him for the purchase or construction of the
new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return [such deposit
being made in any case not later than the due date applicable in the case of
the assessee for furnishing the return of income under sub-section (1) of section 139] in an account in any such bank or institution as may be
specified in, and utilised in accordance with, any Scheme which the Central
Government may, by notification in the Official Gazette, frame in this behalf
and such return shall be accompanied by proof of such deposit; and, for the
purposes of sub-section (1), the amount, if any, already utilised by the
assessee for the purchase or construction of the new asset together with the
amount so deposited shall be deemed to be the cost of the new asset :

Provided that if the amount deposited under this
sub-section is not utilised wholly or partly for the purchase or construction
of the new asset within the period specified in sub-section (1), then,—

(i) The amount not so
utilized shall be charged under section 45 as the income of the previous year in which
the period of three years from the date of the transfer of the original asset
expires; and

(ii) The assessee shall be
entitled to withdraw such amount in accordance with the Scheme aforesaid.

The said sub-section
was introduced in the Finance Act, 1987 w.e.f. 01.04.1988. The intention behind
the introduction is explained vide memorandum explaining the provisions, as
under:

“The existing provisions under sec. 54, ….. the original assessments
need rectification whenever the taxpayer fails to acquire the corresponding new
asset. With a view to dispensing with such rectification of assessment, the
bill seeks to provide for new Scheme for deposit of amounts meant for
reinvestment in the new asset. Under the proposed amendment, … also.”

Circular No. 495 dt.
22.9.1987 has explained the amendment vide para 26.2 & 26.3 to avoid the
need for rectification of the assessment order of the year of transfer on
account of the assessee’s failure to acquire corresponding new asset within the
permissible time.

On a combined reading,
it is gathered that sub-section 2 has been introduced to provide for the
deposit of that part of the gain which has remained unutilized upto the date of
filing of return. The provision simultaneously ensures that the amount so
deposited in the designated account shall be deemed to be the cost of the new
asset, so as to enable an assessee to claim relief for the assessment year
corresponding to the year of transfer of the original asset without any further
compliance needed. As it is seen, the provision is primarily introduced to
avoid any rectification of the original assessment that maybe required, to meet
the consequences of the failure of the assessee to acquire the new asset within
the overall time permitted by law. Apparently, the law of sec. 54 and other
similar sections permitted and continue to permit an assessee to reinvest the
gains or the consideration within the prescribed time. This relief has neither
been taken away by the amendment nor is it intended to be taken away. In that view
of the matter, the core requirement for a relief continues to be the reinvestment
of the gains or consideration within the overall framework of the law.

The only purpose of
the amendment, therefore is to provide for a procedural mechanism in the form
of introduction of the Scheme so as to avoid the consequential rectification in
limited cases of failure of an assessee to reinvest. It may therefore not be
appropriate, to altogether deny the benefit to an assessee in a case where he
has reinvested the gains or the consideration in new asset within the
permissible time, though without depositing the gain or the consideration under
the Scheme. This more so, as in the case before the Bombay High Court, the
entire payment has been made before the date of the assessment.

In reality, one
routinely comes across cases where the payment of consideration is deferred for
several reasons, leading to non-compliance of conditions for deposit under the Scheme.
However, the transferor, on receipt of the consideration after the filing of
return of income, acquires or is in a position to acquire the new asset within
the specified period. Many intended transactions are seen to be not implemented
simply for inability to realize the funds by the due date of filing the return
of income. A provision introduced to facilitate the smooth assessment cannot be
so construed as to defeat the provisions of law.

The Courts seem to be favoring
the view that the deposits made within the extended time of s.139(4) would be
in compliance with the provisions of law. The Courts also seem to be of the
view that the benefit of the sections should not be denied in cases where the
new asset is purchased or constructed within the time extended u/s.139(4), even
where the deposits are made under the Scheme. Under the circumstances, no
serious controversy should arise in cases where reinvestment is made within
such extended time, with or without routing the investment through the
designated account.

One may also consider
the possibility of always routing the reinvestment through the designated
account, irrespective of the delay in depositing the gains or consideration
under the Scheme. This may help the assessee in contending that he has complied
with the provisions of law, but for the delay in depositing under the Scheme,
which delay may be condoned.

There is no doubt that
the entire Scheme of exempting the Capital Gains from taxation on reinvestment is
for the benefit of the assessee and for directing the investments in the
desired channels. It is a settled position in law that such provisions being beneficial
provisions for the assessee, should be construed liberally, so as to facilitate
the deduction and not to deny it.

In view of the above
discussion, it appears that the view of the Karnataka High Court is a better
view, in as much as the court has taken a view that promotes the legislative
intent behind the main provisions of law. It is respectfully submitted that an
important factor that should have been appreciated in Humayun’s case was that
there had been no loss of revenue nor was there any delay in reinvestment, and
that the entire payment for the new house had been made by the time the
assessment was completed.

shailesh.kwebmaker

Welcome GST IGST and Place of Supply Rules

1. Introduction

1.1. Goods and Service Tax (“GST”) is a landmark indirect tax reform knocking at our doors. The Constitution Amendment Bill has been assented recently paving the way for introduction of dual GST to replace a plethora of indirect taxes. In June 2016, the Government had released a set of model GST laws for public comments, thereby reinforcing its commitment to introduce GST at the earliest opportune time. The Finance Minister has indicated his willingness to implement this landmark reform with effect from 01.04.2017.

1.2. Under the proposed dual GST Model, both the Central and the State Governments would levy Central GST (“CGST”) and State GST (“SGST”) respectively on the same comprehensive base of all supplies.

1.3. Since the State Governments would also have jurisdiction to levy tax on supplies, the need for addressing issues related to interstate supplies arises. As an integral part of the design, GST is proposed to be a destination based consumption tax and therefore in case of interstate supplies, the tax on the interstate supply must accrue to the Destination State. This would also enable seamless flow of credit in case of interstate supplies for business purposes.

1.4. Extending the principle of destination based consumption tax, supplies imported into the country would attract GST whereas supplies exported from the country need to be zero rated (i.e. not liable for payment of GST with unfettered input credit).

1.5. To enable a smooth implementation of the above propositions and to avoid conflicts of differing interpretations, the powers to enact provisions relating to inter-state supplies rests with the Centre. Accordingly, interstate supplies, imports and exports are to be governed by an Integrated GST (“IGST”) Law. The IGST rate is proposed to be determined by considering the CGST and SGST Rates. Effectively, in IGST, there would be two components i.e. CGST and SGST, out of which, the portion of CGST will be held by the Central Government and the portion of SGST will be transferred to the destination State Government. Thus, for IGST, the Central Government will work as a clearing house for the States where consumption takes place. IGST will also enable smooth flow of credits between the origin and the destination States by permitting cross utilisation of credits.

1.6. The spirit of GST being a tax on consumption and not a tax on business is achieved through the process of granting seamless credits. Accordingly, for transactions between businesses, essentially the tax charged by the supplying business is automatically eligible for credit to the receiving business. This basically implies that GST remains a creditable tax and therefore not a cost for any business. Since it is not a cost for any business, it is also not a revenue proposition for any Government (either Central or any of the State Governments)

1.7. This ‘wash’ nature of the tax across businesses has been an important driving principle in the formulation of the concept of IGST, its’ settlement matrix to the consuming State and the formulation of the Place of Supply Rules.

1.8. Therefore, to the extent that the inter-state supply is for a creditable purpose at the recipient’s end, the IGST payment stays in the common pool with the Central Government. It is only when the inter-state supply is not for a creditable purpose at the recipient’s end, the settlement provisions and allocation of the tax to the Central Government and the consuming State Government takes place. Similarly, the general rule for the place of supply of services and many of the specific rules determine the place of supply to be the location of the address of the registered person.

2. Levy

2.1. Section 7(1) of the CGST/SGST Act prescribes the levy under the respective enactments as under:

There shall be levied a tax called the Central/State Goods and Services Tax (CGST/SGST) on all intra-State supplies of goods and/or services at the rate specified in the Schedule . . . to this Act and collected in such manner as may be prescribed.

2.2. Similarly, Section 4(1) of the IGST Act prescribes the levy as under:

There shall be levied a tax called the Integrated Goods and Services Tax on all supplies of goods and/or services made in the course of inter-State trade or commerce at the rate specified in the Schedule to this Act and collected in such manner as may be prescribed.

2.3. From the above provisions, it is very clear that the levy under either of the enactments is dependent on the classification of the supply as either an intra-State Supply or an Inter-State Supply. The principles to determine whether a supply is an intra-state supply or an inter-state supply are provided under Sections 3 and 3A of the IGST Act.

2.4. Section 3 of the IGST Act states as under:

(1) Subject to the provisions of section 5, supply of goods in the course of inter-State trade or commerce means any supply where the location of the supplier and the place of supply are in different States.

(2) Subject to the provisions of section 6, supply of services in the course of inter-State trade or commerce means any supply where the location of the supplier and the place of supply are in different States.

2.5. Similarly, Section 3A of the IGST Act states as under

(1) Subject to the provisions of section 5, intra-state supply of goods means any supply where the location of the supplier and the place of supply are in the same State.

(2) Subject to the provisions of section 6, intra-state supply of services means any supply where the location of the supplier and the place of supply are in the same State.

2.6. Based on the above provisions, it is evident that the anchor point for determining whether a supply is an intra-state supply or an interstate supply is dependent on the location of the supplier and the place of supply. If the location of supplier and the place of supply is in the same State, it is to be treated as intra-state Sale and therefore liable for a combination of CGST and SGST whereas if the location of supplier and the place of supply are in different States, then the supply has to be treated as inter-state supply and liable for IGST

2.7. It may be noted that though the CGST as well as the IGST Acts apply to the whole of India, the levies under both the laws are anchored on the aspect of the “State”. Therefore, there would be challenges in interpretation of the place of supplies in case of territories which are not a part of any State (though a part of India). For example, it may be difficult to consider supplies to the extended continental Shelf either as intra-state or inter-state. It may however be noted that the definition of States includes Union Territories with Legislature (For example, Delhi and Puducherry)

3. Place of Supply for Goods

3.1. Section 5 of the IGST Act defines the place of supply of goods. The said provisions are fundamentally different from the current provisions since they are based on the destination principle rather than the origin principle.

3.2. The following table summarizes the place of supply of goods as defined under the GST Act and under the IGST Act:

Situation

Place of Supply as
per Section 5 of IGST Act

Supply involving movement of goods

Location of termination of movement for
delivery

Supply by way of transfer of documents of title

Principal place of business of the buyer

Supply not involving movement of goods

Location of goods

Goods assembled or installed at site

Place of installation or assembly

Goods supplied on board of conveyance

Location at which goods are taken on
board

3.3. Section 5(2) of the IGST Act prescribes the general rule for place of supply as under:

Where the supply involves movement of goods, whether by the supplier or the recipient or by any other person, the place of supply of goods shall be the location of the goods at the time at which the movement of goods terminates for delivery to the recipient.

3.4. The above prescription is based on ‘supply involving movement of goods’ and not ‘supply causing movement of goods’. Further, the anchor point is the location where the movement of goods terminates for delivery to the recipient and not a generic termination of movement of goods. This can present some challenges in taxation of supplies on Ex-Works principle

3.5. Under the current provisions of the Central Sales Tax Act, 1956, if a transaction causes a movement of goods from one State to another, it is considered as an inter-state supply even if the said transaction per se does not involve the movement of goods. Therefore, Ex-Works Sales are treated as inter-state sales if the supplier is able to establish an inextricable nexus of the delivery at the factory gate, with a subsequent movement of the said goods by the buyer to another State. However, since the model GST law determines the place of supply on the basis of location at which the goods are delivered to the receiver, it is possible that the place of supply of such ex-works sales shall be considered as the factory gate itself.

3.6. Section 5(2A) of the IGST Act deals with the place of supply of goods in cases where three persons are involved in the supply. The rule states as under:

Where the goods are delivered by the supplier to a recipient or any other person, on the direction of a third person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to the goods or otherwise, it shall be deemed that the said third person has received the goods and the place of supply of such goods shall be the principal place of business of such person.

3.7. The above provision will cover various situations. A very commonplace situation is that of direct delivery of goods to a third person under instructions of the buyer. This is commonly referred to as the “Bill To”/ “Ship To” Model. For example, if A in Mumbai places an order to B in Gujarat and tells him to directly deliver the goods to C in Karnataka, there would be two supplies involved, supply by B to A and another supply by A to C. The supply by B to A will be governed under Section 5(2A) and the place of supply will be Maharashtra (principal place of business of A). B in Gujarat will charge IGST to A in Maharashtra. Further, the second supply by A to C will be governed by Section 5(2) and the place of supply will be Karnataka (place where the goods are finally delivered). A in Maharashtra will charge IGST to C in Karnataka and claim the corresponding credit of the tax charged to him by B in Gujarat.

3.8. Section 5(2A) will also cover various other situations like sale in transit, sale in bonded warehouse, high seas sales, etc.

3.9. However, in situations where the supply does not involve movement of goods, whether by the supplier or the recipient, the place of supply shall be the location of such goods at the time of the delivery to the recipient. This is specifically provided under Section 5(3)

3.10. Section 5(4) provides that where the goods are assembled or installed at site, the place of supply shall be the place of such installation or assembly. Under the current tax regime, we have issues in determination of situs of sale in case of composite works contracts. The Originating States demand a tax based on the theory of inextricable link between the movement of goods from their State and the final accretion at the Site. The Destination States also demand a tax if there is some intermediary processing or fabrication prior to the final accretion at the Site. Further, in most of the cases, taxes are deducted in the Destination State. The proposed Section 5(4) brings to rest these controversies and associated cash flow issues and is therefore a welcome change.

3.11. Section 5(5) states that where the goods are supplied on board a conveyance, such as a vessel, an aircraft, a train or a motor vehicle, the place of supply shall be the location at which such goods are taken on board

3.12. The above provision applies only in cases where the supply is made on board a conveyance and not to cases where the supplier supplies to the owner/representative of the conveyance when the conveyance is not in motion.

3.13. Consider the example of a person (X) who sells food to an airline and delivers the same to the crew of the aircraft at the loading point, such that the airline thereafter sells to the passengers during the flight. The supply of food by X to the airline would not be governed by Section 5(5) but will be governed by Section 5(2). However, the subsequent sale by the airline to the passenger will be governed by Section 5(5).

4. Place of Supply for Services – Objectives and Relevance

4.1. As stated earlier, the concept of IGST serves multiple objectives. Since the services are essentially intangible in nature, the place of supply rules for services are drafted considering these objectives in mind.

4.2. Some extracts from the Education Guide at the time of introduction of the negative list based taxation of services are very relevant and hence are reproduced below

The essence of indirect taxation is that a service should be taxed in the jurisdiction of its consumption. In terms of this principle, exports are not charged to tax, as the consumption is elsewhere, and services are taxed on their importation into the taxable territory. However, this determination is not easy. Services could be provided by a person located at one location, actually performed at another while being delivered to a person located at a third location, and occasionally actually consumed at a third location or over a larger geographical territory, falling in more than one taxable jurisdiction.

As a result it is necessary to lay down rules determining the exact place of provision, while ensuring a certain level of harmonization with international practices in order to avoid both the double taxation as well as double non-taxation of services.

It is also a common practice to largely tax services provided by business to other business entities, based on the location of the customers and other services from business to consumers based on the location of the service provider. Since the determination in terms of above principle is not easy, or sometimes not practicable, nearest proxies are adopted to provide specificity in the interpretation as well as application of the law.

4.3. Further to the above objectives, the place of supply rules under IGST also need to deal with situations of supplies amongst two or more States, where also the guiding principle is ensuring a seamless flow of credits amongst businesses and transfer of tax to the correct State of Consumption.

5. Place of Supply for Services – General Principle

5.1. Section 6 defines the place of supply of services. The general rules in relation to services arereproduced below

Section 6(2) (IGST)

The place of supply of services, except the services specified in sub-sections (4), (5), (6), (7), (8), (9), (10), (11), (12), (13), (14) and (15), made to a registered person shall be the location of such person.

Section 6(3) (IGST)

The place of supply of services, except the services specified in sub-sections (4), (5), (6), (7), (8), (9), (10), (11), (12), (13), (14) and (15), made to any person other than a registered person shall be

(i) the location of the recipient where the address on record exists, and

(ii) the location of the supplier of services in other cases

5.2. The above provisions are tabulated below for ready reference:

Section

Test

Location

6(2) of the IGST Act

Supplied to a registered person

Location of service receiver

6(3) of the IGST Act

Supplied to any other person

1. Location of service recipient where
address on record exists

2. Location of service provider in other
cases

5.3. The above rulesare subject to various exceptions, which are explained later.

5.4. Section 6(2) deals with cases where the supply is between two businesses. In that case, the place of supply is defined to be the location of the service receiver. For example, if a consultant located in Maharashtra provides a consultancy service to a client who is registered in the State of Gujarat, the place of supply will be considered as Gujarat and the consultant will charge IGST to the client. Since the client is registered in Gujarat, he would be eligible to claim the credit of this IGST in the State of Gujarat and therefore, essentially, the tax is not a cost to either of the parties and is not a revenue for any of the Governments.

5.5. It may be noted that the rule does not require any further analysis on what is the end purpose of the consultancy or who is the beneficiary of the consultancy service. For example, the consultant could have provided an advice on whether the client should set up a base in Maharashtra and also advised on various laws which might be applicable to him if the client sets up the base in Maharashtra. In another situation, the service may be connected with due diligence review of a target company located in Maharashtra (to help the acquiring company located in Gujarat take a decision on acquisition or otherwise). These underlying activities may be performed in Maharashtra. The perceived benefits may accrue in the territory of Maharashtra. However, these factors will be irrelevant in the determination of the place of supply of service. The place of supply of service will be determined by the general rule which is the location of the service recipient.

5.6. Under the current service tax regime, there have been disputes on this aspect (in the context of cross border transactions) and Courts have time and again laid down a few principles. The first principle is that the recipient of service will have to be determined based on the contractual obligation and not based on the ultimate beneficiary. The second principle is that actual performance of an activity cannot determine the location of the recipient of service. Useful reference may be made to the cases of Paul Merchants Ltd. [2013 (29) S.T.R. 257 (Tribunal)], Microsoft Corporation (I) Pvt. Ltd. 2014 (36) S.T.R. 766 (Tribunal), Vodafone India Limited [2015 (37) STR 286 (Tri – Mum)], British Airways [2014 (36) S.T.R. 598 (Tri. – Del.)], Jet Airways Ltd. [2014 (36) S.T.R. 290 (Tri. – Mumbai)], Infosys Ltd. [2015 (37) S.T.R. 862 (Tri. – Bang.)], Tech Mahindra Ltd. [2014 (36) S.T.R. 241 (Bom.)], etc.

5.7. In fact, the definition of recipient of service provided under Section 2(80) of the CGST/SGST Acts also strengthens the above line of thought. The said section defines the recipient of service as the person who is liable to pay the consideration.

5.8. Section 6(3) deals with situations where the service recipient is not a registered person. Here also, the primary emphasis is on the address on record in the books of the supplier. Therefore, in all cases where the supplier has the customer’s address on record, the place of supply is determined to be the location of the recipient. However, if the supplier does not have the address on record, the location of the supplier will determine the place of supply of service.

5.9. The multiple objectives of enacting the place of supply rules highlighted earlier are clearly satisfied when one reads the general rule of place of supply of services. The same is explained in the table below:

Sr.

Situation

Place of Supply

Impact

Underlying Objective

Supply by Indian service provider to
registered person

Location of Recipient

IGST charged by the service provider would
be available as credit to the recipient

Seamless flow of Credit

Supply by Indian service provider to
unregistered person with address on record

Location of Recipient

IGST

Transfer of Tax to the Consumption State

Supply by Indian service provider to
unregistered person (address not available on record)

Location of Supplier

CGST+SGST

Brings certainty to taxation.

Supply by a foreign service provider to
registered person in India

Location of Recipient

IGST payable as import of services

Brings level playing field between Indian
and foreign service providers

Supply by a foreign service provider to
unregistered person in India (generally address is not available on record)

Location of Supplier

Not to be treated as import of services

Procedural and Administrative Convenience.
Difficult to capture and administer such cases

Supply by Indian service provider to foreign
unregistered person where address is available on record (generally foreign
customers would be unregistered)

Location of Recipient

To be treated as Export of Services

To enable zero rating in such cases

6. Place of Supply for Services – Exceptions

6.1. As can be seen above, the general place of supply rule for services based on the destination principle achieves multiple objectives, which inter alia, include objectives to zero rate export of services, tax import of services, provide for seamless credit mechanism and transfer of tax to the appropriate consuming State. However, in certain cases, it was felt that the services are predominantly local in nature and therefore, the source rule will be more appropriate than the destination rule. Accordingly, various exceptions are provided to the general place of supply rule.

6.2. The following table provides an exhaustive list of exceptions to the general rule:

Sub-section of Section 6	Examples	Place of Supply
4(a)	Services in relation to Immovable property	Location of immovable property
4(b)	Services of hotels	Location of immovable property
4(c)	Mandap-keeper services	Location of immovable property
4(d)	Ancillary services related to the above	Location of immovable property
Explanation to section 4	Services in relation to accommodation on boats and vessels	Place where the boat/ vessel is located or intended to be located, if intended to be located in more than one state, on a proportionate reasonable basis
5	Services in relation to restaurant, catering, personal grooming, fitness, beauty treatment, health services, cosmetic and plastic surgery	Place of performance of service
6	Services in relation to training and performance appraisal	1. Provided to registered person- Location of service recipient 2. Provided to others- place of performance
7	Services in relation to admission to an event	Place of the event, if held in more than one state, proportionate basis
8	Organization of events, ancillary services and sponsorship	1. Provided to registered person- Location of service recipient 2. Provided to others- place of event
9(a)	Services in relation to transportation of goods (including mail or courier) provided to a registered person	Location of service receiver
9(b)	Services in relation to transportation of goods (including mail or courier) provided to any other person	Location of handing over of goods
10(a)	Services in relation to passenger transportation to a registered person	Location of service receiver
10(b)	Services to others in relation to passenger transportation where embarkation place is known	Place of embarkation
Proviso to 10(b)	Services to others in relation to passenger transportation where embarkation place is not known	As per sub-section (2) and (3)
11	Services supplied on board of a conveyance	First scheduled point of departure
12(a)	Telecommunication services including data, broadcasting, cable and DTH through fixed communication line, leased circuits, cable or dish antenna	Location of installation of fixed communication line, leased circuits, cable or dish antenna
12(b)	Telecommunication services by way of a postpaid mobile connection	Location of service receiver on record
12(c)	Telecommunication services by way of a prepaid mobile connection	Location of receipt of pre-payment or where the voucher is sold. In case of payment through internet banking, location of receiver on record
13	Banking, Financial and stock broking service where service is linked to the account	Location of service receiver
Proviso to 13	Banking, Financial and stock broking service where service is not linked to the account	Location of service provider
14(a)	Insurance service provided to a registered person	Location of service receiver
14(b)	Insurance service provided to any other person	Location of service provider
15	Advertisement service provided to Central Government, State Government, Statutory body or local authority	Respective state in specified proportions

Sub-section of Section 6

Examples

Place of Supply

4(a)

Services in relation to Immovable property

Location
of immovable property

4(b)

Services of hotels

Location
of immovable property

4(c)

Mandap-keeper services

Location
of immovable property

4(d)

Ancillary services related to the above

Location
of immovable property

Explanation to section 4

Services in relation to accommodation on boats and vessels

Place where the boat/ vessel is located or intended to be located, if
intended to be located in more than one state, on a proportionate reasonable
basis

Services in relation to restaurant, catering, personal grooming,
fitness, beauty treatment, health services, cosmetic and plastic surgery

Place
of performance of service

Services in relation to training and performance appraisal

1. Provided to registered person- Location
of service recipient

2. Provided to others- place of performance

Services in relation to admission to an event

Place of the event, if held in more than one state, proportionate
basis

Organization of events, ancillary services and sponsorship

1. Provided to registered person- Location
of service recipient

2. Provided to others- place of event

9(a)

Services in relation to transportation of goods (including mail or
courier) provided to a registered person

Location of service receiver

9(b)

Services in relation to transportation of goods (including mail or
courier) provided to any other person

Location of handing over of goods

10(a)

Services in relation to passenger transportation to a registered
person

Location of service receiver

10(b)

Services to others in relation to passenger transportation where
embarkation place is known

Place of embarkation

Proviso to 10(b)

Services to others in relation to passenger transportation where
embarkation place is not known

As per sub-section (2) and (3)

Services supplied on board of a
conveyance

First scheduled point of departure

12(a)

Telecommunication services including data, broadcasting, cable and DTH
through fixed communication line, leased circuits, cable or dish antenna

Location of installation of fixed communication line, leased circuits,
cable or dish antenna

12(b)

Telecommunication services by way of a postpaid mobile connection

Location of service receiver on record

12(c)

Telecommunication services by way of a prepaid mobile connection

Location of receipt of pre-payment or where the voucher is sold. In
case of payment through internet banking, location of receiver on record

Banking, Financial and stock broking service where service is linked
to the account

Location of service receiver

Proviso to 13

Banking, Financial and stock broking service where service is not
linked to the account

Location of service provider

14(a)

Insurance service provided to a registered person

Location of service receiver

14(b)

Insurance service provided to any other person

Location of service provider

Advertisement service provided to Central Government, State
Government, Statutory body or local authority

Respective state in specified proportions

6.3. All the above exceptions can be broadly divided into two baskets:

· Exceptions where the Source Principle is in full play (Example, immoveable property related services) – “Pure Source Principle”

· Exceptions where the Source Principle is in play only for unregistered persons (example, passenger/goods transportation services), whereas the destination principle applies for registered persons – “Hybrid Principle”

6.4. The underlying themes and objectives of these two baskets are analysed in detail in subsequent paragraphs.

7. Place of Supply for Services –Pure Source Principle

7.1. The following are important examples of services which would get classified under this principle

· Services in relation to Immovable property

· Hotels , Mandap-keeper services

· Restaurant, catering, personal grooming, fitness, beauty treatment, health services, cosmetic and plastic surgery

· Services in relation to admission to an event

· Services supplied on board of a conveyance

7.2. While there are specific tests for each of these examples, the underlying theme is to enforce Source State Taxation. This impacts the objectives which were laid down for the general place of supply rule. The same is explained through the example of immoveable property where the test is based on the location of immoveable property. Similar principles will apply for other examples listed above as well.

This is tabulated in the table appearing hereafter:

Sr.

Situation

Place of Supply

Impact

Underlying Objective

Supply by Indian service provider to
registered person

Location of Immoveable Property

CGST/SGST
charged by the service provider would not be available as credit to
the recipient unless he is located in the Same State

Credit will be available only within the
same State and will not flow to another State (therefore the credit is not
seamless, unless ISD Concept is used to distribute the credit)

Supply by Indian service provider to
unregistered person

Location of Immoveable Property

CGST/SGST

No Transfer of Tax to the Destination State

Supply by a foreign service provider to
person in India

Location of Immoveable Property

Not to be treated as import of service

Since such services cannot be substituted
between Indian service provider and foreign service provider, the risk of non
level playing field is low

Supply by Indian service provider to
foreign person

Location of Immoveable Property

CGST/SGST

No benefit of export of services

7.3. At a practical level, businesses may see cascading effect of taxes when the executives travel to other States and stay in hotels. Unless the business is registered in the other State (either as a supplier or as an input service distributor), the credit will not be available, resulting in cascading effect of taxes. It may therefore be represented to the Government that Section 6(4) be suitably amended so as to reclassify the same from the source principle to the hybrid principle (explained later) and thereby permit seamless flow of credit.

8. Place of Supply for Services –Hybrid Principle

8.1.As stated earlier, this basket of exclusions covers cases where the source principle is in play only for unregistered persons (example, passenger/goods transportation services) whereas the destination principle applies for registered persons.

8.2.The following are important examples of services which would get classified under this principle

· Training and Performance Appraisal

· Organisation of events and ancilliary services including sponsorship

· Transportation of Goods including mail and courier

· Passenger Transportation Services

8.3. The objectives of these tests are two fold – to ensure seamless credit flow amongst registered persons and at the same time enforce the source principle vis-à-vis the Indian territory as a whole. Again, there are specific tests for each of these examples, but the underlying theme is explained through the example of goods transportation where the test is based on the place from where the goods are loaded (only in cases where the customer is not registered). Similar principles will apply for other examples listed above as well

Sr.

Situation

Place of Supply

Impact

Underlying Objective

Supply by Indian service provider to registered
person

Location of Recipient

IGST charged by the service provider would
be available as credit to the recipient

Seamless flow of Credit

Supply by Indian service provider to
unregistered person

Place of Loading of Goods

CGST/SGST

No Transfer of Tax to the Destination State

Supply by a foreign service provider to
registered person in India

Location of Recipient

IGST payable as import of services

Brings level playing field between Indian
and foreign service providers

Supply by a foreign service provider to
unregistered person in India

Place of Loading of Goods (generally
outside India)

Not to be treated as import of services

Procedural and Administrative Convenience.

Supply by Indian service provider to
foreign unregistered person

Place of Loading of Goods (generally in
India)

CGST/SGST

No benefit of export of services

9. Conclusion

9.1. The concept of IGST and the place of supply rules in respect of inter-state transactions are totally new and unique to the Indian context. While the policy makers have tried their best to keep the rules as simple as possible and also achieve the multifarious objectives embedded therein, there could be many areas where the situation may not have been foreseen by the Government resulting in unintended hardship.

9.2. The determination of the location of the supplier or the recipient in case of entities which are located in multiple States is based on the test of ‘establishment most directly connected with the supply’. The determination of such establishment can be a challenge and may also be subjective to a large extent. However, since the said determination is similarly worded in many jurisdictions, the international jurisprudence in this regard may assist the tax payers and the consultants till the time the judiciary reiterates some fundamental propositions in this regard. In the interim, it definitely appears that the prescribed model laws represent a good start on the topic.

shailesh.kwebmaker

Adoption and Inheritance

Introduction
Adoption of children is becoming a common feature in modern India with several people either not capable of having or not willing to have biological children. In a country such as India where there are a large number of orphans this is a welcome phenomenon. However, adoption too comes with its unique share of problems. As always the root cause of most disputes relates to inheritance. However, in the case of adoption there can be not one but two inheritance disputes – one relating to the adopted child’s adopted parents and the other relating to those of his biological parents. Recently, the Supreme Court has cleared the air on one such issue. Let us analyse some of the facets of inheritance in the context of an adopted child!

Law
The Hindu Adoptions and Maintenance Act, 1956 (“the Act”) is a codified law which overrules any text, custom, usage of Hindu Law in the context of adoption by a Hindu. All adoptions by a Hindu male or female must be in accordance with the provisions of the Act or else the shall be void. The consequences of a void adoption are:

(a) it does not create any rights in the adoptive family in favour of the adopted child; and
(b) his rights in the family of his natural birth also subsist and continue.

Thus, it naturally follows that in a case of a void adoption, the adopted child would not be entitled to any inheritance or succession benefits in his adopted family.

On the other hand, the effect of a valid adoption is that from the date of adoption the adopted child will be considered to be the natural child of the adoptive family and all his ties with the original family are severed. However, section 12 provides an important exception that the adopted child is not deprived of the estate vested in him or her prior to his/ her adoption when he/she lived in his/her natural family.

The Supreme Court in Chandan Bilasini vs. Aftabuddin Khan, (1996) 7 SCC 13, has held as follows:

“Section 12 of the Hindu Adoptions and Maintenance Act clearly provides that an adopted child shall be deemed to be the child of his adoptive father or mother for all purposes with effect from the date of the adoption and from such date all ties of the child in the family of his or her birth shall be deemed to be severed and replaced by those created by the adoption in the adoptive family.”

Inheritance in Adopted Father’s Property
The wordings of section 12 make it clear that an adopted child shall become the child of the adopted parent for all purposes. Hence, it stands to reason that he would also become entitled to inherit the properties of his adopted parents. The Supreme Court had an occasion to consider this issue in Pawan Kumar Pathak vs. Mohan Prasad, CA 4456/2016. The brief facts of this case are interesting. There was a succession dispute after the death of a person between his brother and the deceased’s adopted son. The adopted son claimed he was the natural heir and hence entitled to property of his father. This plea was contested by the uncle. Thereafter the son tried amending his plaint to add that he was the adopted son of the deceased and even tried producing an adoption deed to prove the same. However, all the lower courts until the High Court refused to take this document on record stating it was nowhere pleaded initially that he was the adopted son and hence, now the plea could not be amended to include the same. Thus, the issue travelled up to the Supreme Court.

The Supreme Court set aside the ruling of the High Court. It held that the appellant had in no uncertain terms claimed that he was the only son and the only legal heir who was alive after the demise of his parents. The only controversy according to the Court was that the appellant has never claimed that he was the adopted son, which claim was now sought to be made by amending the plaint.

The Court opined that once the plaintiff had mentioned in the plaint that he was the only son of the deceased, it was not necessary for him to specifically plead that he was an adopted son. For this it relied upon section 3(57) of the General Clauses Act, 1897 which defined a ‘son’ as under:

“’son’ in the case of any one whose personal law permits adoption, shall include an adopted son;”

The Apex Court further observed that once the law recognised an adopted son to be known as a son, it failed to understand why it was necessary for him to specifically plead that he was the adopted son. His averment to the effect that he was the only son, according to the Court, was sufficient to lay the claim of his inheritance on that basis. In fact, it was not even necessary for the appellant to move an application with an attempt to take a specific plea that he was the adopted son as, his plea to the effect that he was the son of the deceased was an adequate plea and to prove that he was the son. Thus, the Supreme Court set aside the lower Court rulings. An important ruling that the Court gave was that an adopted son can claim inheritance of his parents’ property.

This decision, would assist one in taking a stand that an adopted son would be a son even for the purposes of the definition of a relative u/s. 56(2)(vii) of the Income-tax Act or even concessional stamp duty of Rs. 200 in case of gift of residential property under Art. 34 of Schedule-I to the Maharashtra Stamp Act, 1958.

Inheritance in Natural Father’s Property
Section 12 of the Act provides that the adopted child is not deprived of the estate vested in him or her prior to his/her adoption when he/she lived in his/her natural family. Thus, any property of his natural family vested in the adopted child prior to adoption would continue to be available to him even after adoption. This would be so even though he is deemed to have severed all ties with his biological family and becomes a part of the adopted family. Thus, the Act makes it perfectly clear that a person even after adoption, takes the property along with him which was earlier vested in that person.

Inheritance in Natural Family’s Coparcenary Property
While the law is well settled on inheritance in the vested property belonging to the adopted child’s natural family, there is a judicial controversy over whether he can claim inheritance in the coparcenary property belonging to his natural family. The moot question is whether he can claim to have a vested interest in HUF property or is his share ambulatory and fluctuating and hence, not vested? There are decisions of the High Courts both for and against this question.

The Division Bench of the Andhra Pradesh High Court in Yarlagadda Nayudamma vs. Government of Andhra Pradesh, 1981 AIR(A.P.) 19 has held that an adopted son continues to have a right in coparcenary property belonging to his natural family. It opined that the property vests in a coparcener by birth and hence he gets a vested right in that property by virtue of inheritance. All property vested in the son in his natural family whether self-acquired, obtained by will or inherited from his father or other ancestor or collateral (which is not coparcenary property held along with other coparcener or coparceners) including property held by him as the sole surviving coparcener would not be divested on adoption but would continue to be vested and to belong to the son even after adoption. The Court considered whether it be denied that the interest of a coparcener in the joint family property, though fluctuating, is a vested interest, whatever may be the extent of that interest? It observed that the interest of a deceased coparcener can devolve upon his heirs mentioned in the proviso to section 6 of the Hindu Succession Act and not by survivorship. Similarly, then why can it not be said that by virtue of the provision of Clause (b) of section 12 of the Act, the undivided interest of a person in a Mitakshara coparcenary property will not, on his adoption, be divested but will continue to vest in him even after adoption? It further held that property in the HUF estate is by birth. The coparcener had got every right u/s. 30 of the Hindu Succession Act to will away his property or to dispose of or alienate in whichever way he desired, which he is entitled by birth. It ultimately concluded that a person in Mitakshara family had a vested right even in the undivided property of his natural family and even on adoption he continued to have a right over it.

This decision was followed by a Single Judge of the Bombay High Court in the case of Shivaji Anantrao Deshmukh vs. Anantrao Deshmukh, 1990 (1) Mh. LJ 598. It further held that it was clear that so far as the coparcener is concerned, his right accrued on his birth. For this it relied upon a Supreme Court decision in Controller of Estate Duty, Madras vs. Alladi Kuppuswamy, A.I.R. 1977 S.C. 2069. In every coparcenary, therefore, the son, the grandson or great grandson obtained an interest by birth in the coparcenary property so as to be able to control and restrain improper dealings with the property by another coparcener. Section 30 of the Hindu Succession Act, 1956 clearly showed that undivided share of coparcener can be disposed of by testamentary disposition and this was one of the aspects leading to the conclusion that the right of the coparcener in the undivided share is a right of the owner. This legal sanction had thus strengthened the concept of the undivided share of a coparcener being vested in him as the full owner on birth. Such vesting was not divorced or deferred by any contingency or event. Birth and vesting were simultaneous processes and integrally connected, and nothing could intervene in that process so as to indicate that vesting had been postponed. The Court therefore, concluded that the undivided interest in the coparcenary property continued to vest in the adopted son even after the adoption. Section 12 read along with proviso (b) also clearly laid down that on adoption, there was virtually a severance of the adopted child from the coparcenary. There was thus a partition between the adopted son and other members.

However, a Single Judge of the Bombay High Court in a latter decision in the case of Devgonda Raygonda Patil vs. Shamgonda Raygonda Patil, 1991 (3) Bom. CR 165 has held that on adoption an adopted son ceases to lose his right in the family property of his natural family. It considered and dissented from the decision of the Division Bench of the Andhra Pradesh High Court discussed above. It observed that a coparcener got a right by birth in coparcenary property. However, the said right or interest of coparcener was liable to fluctuation, increasing by the death of a coparcener and decreasing by birth of a new coparcener. A coparcener had right to partition of the coparcenary property. On such partition, the shares of coparceners were defined and then specific property was vested in him. Till partition took place, he was having a right of joint possession and enjoyment. There was community of interest between all members of the joint family and every coparcener was entitled to joint possession and enjoyment of coparcenary property and to be maintained. It was well established that the essence of coparcenary under Mitakshara Law was unity of ownership. The ownership of the coparcenary property vested in the whole body of coparceners. According to the true notion of an undivided family governed by the Mitakshara law, no individual member of that family, whilst it remained undivided could predicate that he had a definite share in the joint and undivided property. His interest was a fluctuating interest, capable of being enlarged by deaths in the family and liable to be diminished by births in the family. It was only on a partition that he became entitled to a definite share. Considering this, according to the Court, there was no vested property in a coparcener and therefore proviso (b) to section 12 could not be attracted. It was only those properties which were already vested in the adoptee prior to adoption by inheritance or by partition in the natural family or as sole surviving coparcener which could pass on to him after the adoption. Therefore the properties which had already become vested in him before adoption as absolute owner were not forfeited by the adoption and the adoptee continued to hold them in the new family. But in the case of coparcenary property it cannot be said that a coparcener had a right to a particular part of it so as to get it vested. It held that section 30 of the Hindu Succession Act supported the view that coparcenary property was not vested in the coparcener. The legislature therefore included section 30 with a view to enable a coparcener to dispose of his interest in the coparcenary property by Will or other testamentary disposition. Ultimately, the Single Judge concluded that if there was coparcenary or joint family in existence in the family of birth on date of adoption, then the adoptee could not be said to have any vested properly. The property did not vest and therefore provision of section 12(b) were not attracted. Vested property meant where indefeasible right was created i.e., on no contingency it can be defeated in respect of particular property. In other words where full ownership were conferred in respect of a particular property. But this was not the position in case of coparcenary properly. The coparcenary property was not owned by a coparcener and never any particular property. All the properties vested in the joint family and were held by it.

Subsequently, another Single Judge of the Bombay High Court in the case of Somanath Radhakrishna More vs. Ujjawala Sudhakar Pawar, 2013 (6) Bom. C.R. 397 has also taken a view that on adoption an adopted son ceases to lose his right in the family property of his natural family. This decision has not considered any of the decisions explained above. It held that on adoption a son’s rights in ancestral property were extinguished. He would no longer be a coparcener in law. He did not have any legal right in the joint property of his natural family. Due to adoption those rights ceased. Even if he continued to stay with his natural family and look after their property his rights could not be rejuvenated.

It is humbly submitted that the two decisions of the Bombay High Court in Devgonda (supra) and Radhakrishna (supra) require a reconsideration for they suffer from judicial impropriety. They have both been issued without notice of an earlier favourable decision of a Single Judge of the Bombay High Court in Shivaji’s case on the same issue and hence, they are rendered per incuriam. It is a settled principle of law that a Single Judge of a High Court cannot give a decision contrary to an earlier judgment of a Single Judge of the same High Court – Food Corporation of India vs. Yadav Engineer and Contractor AIR 1982 SC 1302. Moreover, these contrary Single Judge decisions have even gone against the Division Bench ruling of the Andhra Pradesh High Court. This is against a second principle of law that a Single Judge Ruling of one High Court cannot go against the Division Bench Ruling of another High Court. The correct procedure for the Single Judge in both these adverse rulings, If he did not find himself in agreement with the earlier favourable Rulings, was to refer the binding decision and direct the papers to be placed before the Chief Justice of the Bombay High Court to enable him to constitute a Division Bench to examine the question. This approach finds favour in the Rulings of CIT vs. BR Constructions, 202 ITR 222 (AP FB) and CIT vs. Thana Electricity Supply Ltd, 202 ITR 727 (Bom).

On a separate note, notwithstanding the judicial impropriety, it is submitted that the decisions of the Andhra Pradesh Division Bench and the Bombay High Court in Shivaji appear to be more correct.

Conclusion
The Supreme Court’s decision has helped clear a major issue in inheritance of adopted children. One only wishes that the other issue relating to inheritance in HUF property of the natural family is also settled quickly. This would go a long way in reducing several succession disputes.

shailesh.kwebmaker

(Balanced behaviour)

(Balanced behaviour)

Arjun (A) — Bhagwan, in last so many meetings, you have been telling me about our professional ethics. I am rather fed up with your stories. Tell me something new.

Shrikrishna (S) — Arjun, Ethics is an all-pervasive concept. Your profession is your mission. People look upon a professional with certain expectations. Any deviation from ideal behaviour on your part is not acceptable.

A — But why? We are human beings. And today, whole world is behaving in whatever way they like.

S — True. But you can’t do that!

A — Let everyone mend his ways; then we will also change ourselves.

S — Oh! It is like standing on the bank of a river and saying – ‘Let the entire water flow away; then only I will cross it!’

A — Let me tell you one thing. By and large, we are ethical

S — That’s the problem! In ethics, one can be either ethical or unethical. There is no in between stage!

A — But why we alone are subjected to this burden?

S — Because you are intellectuals. You are expected to lead the society. You can’t follow the common lot who don’t think. They follow you. It is not a burden; it is your shield.

A — Our clients always dictate their terms. We can’t resist beyond a certain limit

S — Unfortunately, you people not only succumb to the pressures, but at times, you yourselves initiate unethical tricks!

A — Yes. Agreed. There are a few of us who indulge in this instances like that.

S — Remember these few spoil the image of the entire profession.

A — One cannot generalise. There are quacks in every profession.

S — Agreed. Still, even the basic professionalism is often lacking. You study lot of academics; but not learn the communication skills. Courtesy, etiquettes – all these are very important.

A — But that is lacking even in other professionals – like lawyers!

S — True. Do you think that justifies the lack in your profession!

A — See, many times, some disgruntled members of a company call us directly for some information. This is irritating that we don’t feel like talking to such persons.

S — Avoid taking their calls or meeting them! Right? And if they write to you, you feel you are not obliged to reply. Is it not?

A — You said it!

S — That precisely is the problem. If you feel that they should seek information from the management and not from you, why don’t you write to them firmly but politely?

A — Who has time to do that?

S — Dear Arjun, you don’t understand that their ego is hurt. They feel that you don’t have even the basic courtesy to reply to them. They approach the Institute with a complaint. Most of the complaints are made out of `ego’ problems

A — There is a point in what you say.

S — This behaviour is unbecoming of a professional. It creates a very bad impression about the profession, just as you blamed the lawyers a while ago.

A — How can this be a misconduct attracting disciplinary proceedings?

S — I agree. But then these people find out some loophole or the other in your work. In fact, your own professional brothers help them in doing that!

A — Yes. I have also noticed this. It gives them sadistic pleasure or sometimes, they act out of jealousy.

S — It takes at least 3 to 4 years to establish your innocence! This mental agony is more severe than the actual punishment, if at all you are held guilty! Please remember that in these proceedings, small things like lack of courtesy, lack of professional behaviour count a lot

A — I am realising that ethics is a very wide concept. It is not purely a legalistic idea. It travels beyond that. Even insignificant actions or inactions are a part of Ethics! Thank you Lord!

S — Bless you!

Om Shanti.
The purpose of the above dialogue is to bring forth the importance of certain simple courtesies the professional practice. Very often, it is seen that the disciplinary proceedings are initiated out of ego clashes. Such ego clashes can be minimised to a very large extent by following certain simple professional courtesies like timely and proper communication.

shailesh.kwebmaker

Right to Information Act – Information pertaining to development plan cannot be withheld by Municipal Corporation. [Right to Information Act, 2005, Section 6,8]

Ferani Hotels Pvt. Ltd. vs. State Information Commissioner AIR 2016 (NOC) 384 (Bom.).

The Sole administrator of the estate and effects of one late E.F. Dinshaw

[3rd respondent] submitted an application under section 6(1) of the Act, to the Public Information Officer of the Municipal Corporation of Greater Bombay on December 10, 2012 demanding information pertaining to certain lands. The information as applied was for the certified copies of the property card, certified copies of plans and amendments to the plans as submitted by Ferani Hotels Pvt. Ltd. [Petitioner] or its architects, certified copies of all layouts, sub division plans and amendments, certified copies of development plans and amendments thereon and certified copies of all reports submitted to the Municipal Commissioner and his approval thereto. It was the petitioner’s case that the 3rd respondent was a competitor of the petitioner and disclosure of the information would cause harm and injury to the business of the petitioner company as also would violate the intellectual property rights.

The information as sought by the 3rd respondent was also trade secret and thus would be detrimental to the business of petitioner interest as also in the pending suit and proceedings in various Courts.

The High Court held that information sought was regarding development proposal of land and development plan submitted to and in custody of Municipal Corporation. Municipal Corporation had granted approval to development proposal. Larger public interest requires that said information should be supplied. It was neither trade secret nor disclosure involving infringement of copyright. Such information cannot be withheld.

shailesh.kwebmaker

Precedent – High Court should be very slow in taking a view different than the view of other High Court. [Customs Act, 1962]

Dharmesh Devchand Pansuriya vs. UOI 2016 (336) E.L.T 402 (Guj.)

The settlement commission under the Customs Act, 1962 had held that it had no jurisdiction. Hence, Special Civil Application was filed by the Petitioner in Gujarat High Court. It was pointed out by the revenue that view of settlement commission was supported by decision of Additional Commissioner of Customs vs. Ram Niwas Verma, reported in 2015 (323) ELT (Del) (HC) and C.S. India vs. Additional Director General, DCEI, Bangalore, 2015 (325) ELT (Karn) (HC).

It was held by the Gujarat High Court that Customs Act, 1962 being a central statute bearing tax implications, we would, even otherwise, be slow in taking different view from two reasoned judgments of other High Courts. Even if, therefore, another view was possible, for the sake of consistency, we would have respectfully followed the view of other High Courts.

shailesh.kwebmaker

Hindu Widow’s Remarriage – On remarriage of Hindu widow, she gets divested of right, title and interest in deceased husband’s property. [Hindu Widows Remarriage Act, 1856 Section 2 ]

Balak Ram (By LR’s) & Ors vs. Rukhi & Ors. AIR 2016 Chhattisgarh 68.

The Chhattisgarh High Court held that a perusal of section 2 of Hindu Widows Remarriage Act, 1856 reveals that upon remarriage, all rights and interests of the widow in her deceased husband’s property by way of maintenance, or by inheritance to her husband or to his lineal successors, or by virtue of any Will or testamentary disposition conferring upon her, without express permission to remarry, only a limited interest in such property, with no power of alienating the same, shall, upon her remarriage, cease and determine. The legislative intention of a total disassociation of widow upon remarriage is clearly manifested by providing that upon remarriage, all interests and rights would cease and determine as if she had then died. This provision of strong import of civil death of the widow upon remarriage is sufficiently indicative of legislative intention that remarriage shall lead to determination and cessation of all rights and interests of widow in the property of the deceased. The provision is comprehensive in nature and every possible rights and interests which a widow might have in the property of the deceased including limited estate of maintenance have been brought within the ambit of the provision.

The High Court further held that at the time of commencement of the Hindu Succession Act, 1956 with effect from 17-6-1956 respondent Sukhmen had no subsisting interest or estate in the property of her husband. For that reason, there is no occasion of application of section 14 of the Hindu Succession Act, 1956 in the present case to the aid of the defendant Sukhmen because section 14 of the Hindu Succession Act, 1956 provides that limited estate shall become absolute in favour of a female survivor. The provision by itself does not create any new right or estate which the widow or the female relative did not have at the time of coming into force of the said Act.

shailesh.kwebmaker

Hindu Succession – Property inherited by female Hindu widow from her husband would devolve upon heirs of husband in absence of any son and daughter. [Hindu Succession Act, 1956 Section 15, 16].

Mahadev S. More vs. Sukhdev S More AIR 2016 BOM 151.

The Bombay High Court held as per section 15(2) of the Hindu Succession Act, 1956 any property inherited by a female Hindu from husband or father in law will devolve upon heirs of husband in the absence of any son or daughter of the deceased. Further, as per section16 of the said Act the property of intestate shall devolve as if the property had been the fathers or mothers or husbands as the case may be.

shailesh.kwebmaker

Hindu Marriage Act – Recording of statement of witness through video conferencing is permissible. [Hindu Marriage Act, Section 13B]

Shilpa Chaudhary (Smt.) vs. Principal Judge & Anr. AIR 2016 ALL 122.

The lower court noted in the impugned order that merely on the basis of an affidavit, the marriage cannot be dissolved in proceedings u/s. 13B of Hindu Marriage Act, 1955 (the Act). The presence of the parties is mandatory. Further, the electronic facility available in the court cannot be used, as there being no device for interacting with a party who is residing outside the country.

The Allahabad High Court held that the word “after hearing the parties” used in subsection (2) of section 13B of the Act, however, does not necessarily mean that both parties have to be examined. The word “hearing” is often used in a broad sense which need not always mean personal hearing. When there are no suspicious circumstances or any particular reason to think that the averments in the affidavit may not be true, there is absolutely no reason why the Court should not act on the affidavit filed by one of the parties. The family courts are entitled to ascertain the views of the parties, but however, if one of the parties, appears before the family court and expresses no objection to an affidavit of the other party to be taken on record and is not desirous of cross-examining the deponent of the affidavit, the family court can entertain, unhesitatingly any such application. Increasingly family courts have been noticing that one of the parties is stationed abroad. It may not be always possible for such parties to undertake trip to India, for variety of good reasons. On the intended day of examination of a particular party, the proceedings may not go on, or even get completed, possibly, sometimes due to pre-occupation with any other more pressing work in the Court. However, technology, particularly, in the Information sector has improved by leaps and bounds. Courts in India are also making efforts to put to use the technologies available. Skype is one such facility, which is easily available. Therefore, the Family Courts are justified in seeking the assistance of any practicing lawyer to provide the necessary skype facility in any particular case. For that purpose, the parties can be permitted to be represented by a legal practitioner, who can bring a mobile device. By using the skype technology, parties who are staying abroad can not only be identified by the Family Court, but also enquired about the free will and consent of such party. This will enable the litigation costs to be reduced greatly and will also save precious time of the Court. Further, the other party available in the Court can also help the Court in not only identifying the other party, but would be able to ascertain the required information.

shailesh.kwebmaker

CHANGING PARADIGMS OF CORPORATE SOCIAL RESPONSIBILITY

Not a New Issue
The concept of “Corporate Social Responsibility” (CSR) is not a new concept for business organisations. In fact, many organisations , both in the private and public sector, have pioneered the concept of CSR in India as part of their business responsibilities in different forms. Whilst the most common form of CSR has been the various employee welfare measures undertaken, quite a few companies / business groups have also been involved in charitable causes of different types either through their own “Not for Profit” entities or by tying up with NGOs or simply by making donations to avail of tax benefits.

Recent Developments
The concept of CSR has recently been in the limelight due to it being made mandatory under the Companies Act, 2013 (“the Act”) and the rules framed thereunder for certain classes of companies. It has been widely discussed that such mandatory provisions are not part of any other country’s corporate law provisions and in that sense it could be considered as an innovative provision. The provisions governing CSR are laid down in section 135 of the Act and the Companies (Corporate Social Responsibility Policy) Rules, 2014 (“the Rules”) and are applicable with effect from 1st April, 2014. The provisions broadly cover the following:

Companies having a net worth (Rs. 500 crore or more), turnover (Rs. 1,000 crore or more) or net profits (Rs. 5 crore or more) are required to mandatorily spend in every financial year starting from 1st April, 2014, atleast two percent of their “average net profits” of the three immediately preceding financial years calculated as per section 198 of the Act (for determining the managerial remuneration limits), on prescribed CSR activities.

The Rules define net profit of a company to mean the net profit as per its financial statements prepared in accordance with the Act, but excludes any profit arising from any overseas branch or branches of the company, whether or not operated as a separate company and any dividend received from other companies in India that are covered under and complying with CSR provisions. Net profit in respect of a financial year for which financial statements have been prepared as per the Companies Act, 1956 is not required to be re-calculated as per the 2013 Act.

Constitution of a CSR Committee of the Board of Directors having atleast one Independent Director (as defined in the Act). However, the Rules have clarified that in the following cases, the committee need not have an Independent Director:

• Unlisted public and private companies who are not required to appoint an Independent Director under the Act.

• Private Companies having only two directors may constitute the committee with the said directors.

• In case of foreign companies, the committee shall comprise of its authorized representative in India and any other nominated person.

The above CSR Committee shall formulate and recommend to the Board of Directors, a CSR Policy which shall specify the activities to be undertaken by the Company as prescribed in Schedule VII of the Act (discussed below) and no other activities even if they are in the nature of social activities would be eligible.

The Rules specify various procedural activities to be undertaken by the above committee and the management like specifying the amount which can be spent on the prescribed activities and the monitoring thereof, displaying the policy on the web site, format for disclosures in the Annual Report, clarifying that expenses incurred for the benefit of only employees and their families would not be considered for inclusion in the prescribed limits, political contributions not covered, etc.

The following are some of the eligible CSR spending which have been prescribed in Schedule VII of the Act:

a) Promoting preventive health care and sanitation and making available safe drinking water;

b) Setting up homes, hostels for women and orphans; old age homes, day care centres and other related activities;

c) E nsuring ecological balance, and other related matters;

d) Livelihood enhancement projects;

e) Protection of national heritage, art and related activities;

f) Measures for the benefit of armed forces veterans, war widows and their dependents;

g) Training to promote rural sports, nationally recognised sports, Olympic sports etc;

h) Contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government;

i) Promoting education and employment enhancing vocational skills;

j) Rural development projects;

k) Contribution to Prime Minister’s National Relief Fund or any other fund set up by the Central Government for socio-economic development and welfare of scheduled castes, scheduled tribes, minorities and women.

Changing Paradigms
As with any new concept, the above legislative changes are expected to bring about a paradigm shift; both positive and negative in how corporates in particular and society in general could view CSR activities; the important ones amongst them are briefly discussed hereunder:

Commercialisation
Experience indicates that any new idea or concept which is mandated and thrust upon society drives its commercialisation, which is nothing but a formalised and systematic approach at launching the same. CSR which was hitherto largely seen as a voluntary concept is now mandatory, which would require companies, through the CSR Committee, to formalise various processes and formulate policies on various matters which are laid down in the Rules. The policies and procedures should cover various aspects like when, where, what and how to launch such activities within ethical and legal boundaries and keeping in mind the overall social responsibilities which are expected to take care of the interest of various stakeholders. These questions would need to be kept in mind by the CSR Committee and the Management whilst framing the CSR policy.

Certain specific aspects laid down in the Rules which would need to be kept in mind whilst framing the CSR policies and procedures are as under:

• The expenditure is required to be incurred only in respect of activities which are prescribed. This would require companies which are already undertaking CSR activities to reassess whether the same meet the criteria of eligible CSR spend. Also, any activities undertaken in the normal course of business though they may be in the nature of CSR activities need to be excluded. e.g a bank which lends money towards Clean Development Mechanism (CDM) projects and provides project and advisory services towards trading in Certified Emission Reductions (CER) even though it may facilitate in maintaining ecological balance and protecting the environment.

• CSR projects / programs / activities are required to be undertaken in India only.

• CSR projects / programs / activities benefitting only the employees of the Company and their families will not be considered as CSR activities.

• Contribution of any amount directly or indirectly to any political party will not be considered as CSR activity.

• The policy shall specify that any surplus arising out of the CSR projects or programs or activities shall not form part of the business profit of the Company.

Further, the Rules provide that the CSR programmes / activities which are approved can be implemented through either of the following:

• registered trust, or
• a registered society, or
• a company

established by the company or its holding or subsidiary or associate company whether as a “not for profit” company or otherwise.

If any of the above entities is not established by the company or its holding or subsidiary or associate company, it must have an established track record of 3 years in undertaking similar programs or projects. The company must also specify the projects or programs to be undertaken through these entities, the modalities of utilization of funds on such projects and programs and the monitoring and reporting mechanism.

The Rules also provide that the companies may build CSR capacities of their own personnel as well as those of their implementing agencies through institutions with established track record of at least three financial years. However, such expenditure is capped at 5% of total CSR expenditure of the company in a particular financial year. Also, collaboration with other companies for undertaking CSR activities is permissible provided that the CSR Committees of respective companies are in a position to report separately.

The above provisions if implemented in the right spirit would lead to a significant amount of funds getting channelized for the poorer and disadvantaged sections resulting in sustainable and all-round development. However, for companies which are already incurring expenses towards the benefit of their employees and families or in respect of other social causes which are not specifically within the purview of CSR activities prescribed in the Rules would have to incur additional expenses which may lead to a reduction of the distributable profits and consequentially lower returns to the shareholders. Hence, it is imperative that companies engage in a dialogue with the various stakeholders when formulating the CSR policy.

Professionalism
Professionalism is inevitable when commercialisation creeps in and the same is bound to happen also in the case of CSR. Professionalism encompasses taking the help of specialists and consultants. It is expected that many companies would take the help of professionals in formulation of customised CSR strategies aligned with the company’s core values as well as on various types of activities to be undertaken and the effective implementation thereof within the boundaries imposed by regulations so as not to fail on the legal front and be exposed to penalties. This would also open up opportunities for professionals at the same time increasing the cost for companies in the form of fees. Professionalism would also creep in internally through setting up of specialised departments by companies staffed by experienced professionals with the desired competencies to enable companies to navigate through the CSR regulatory maze.

Transparency
Commercialisation and professionalism make transparency inevitable. Further, the Act and the Rules contain various provisions / requirements which would bring about transparency, some of which are as follows:

• Displaying the CSR policy duly approved by the Board of Directors on the company’s web site.

• Detailed disclosures in the Board Report regarding the policy developed and implemented by the Company and the specific initiatives undertaken by the Company on the CSR front.

Many companies have already been disclosing in their Annual Reports on a voluntary basis their CSR initiatives. Further, SEBI through an amendment to the Listing Agreement, mandated the top 100 companies in terms of market capitalisation to include a Business Responsibility Report containing prescribed particulars dealing with various aspects of the company’s contribution towards various sustainability initiatives which amongst others would also include its CSR initiatives, including the amount spent towards the same. This could lead to some amount of duplication and information overload between the disclosures under the Act and the Listing Agreement for the large companies.

Whilst greater transparency is always desirable, it could also have negative connotations since competing recipients / donors of services could demand greater benefits for themselves thereby putting undue pressure on companies.

Employee Benefits
Presently most of the companies equate CSR with providing benefits to their employees and their families in the form of housing, education and medical benefits. However, these activities that benefit only the employees of the company and their families are not considered as CSR activities in the revised guidelines. Hence, most of the companies would have to go much beyond their employees to fulfill their CSR obligations. Further, any social service activities undertaken by the employees of the company not represented by actual spending by the company on the prescribed activities would not be considered to fall within the purview of CSR.

Political Overtones
Though donations to political parties and political contributions are not covered as eligible CSR spend, the CSR mandate could lead to certain forms of indirect contributions to political parties under which companies could be forced to incur CSR spend through organisations which have some form of political patronage or in areas of specific interest to the local political parties. However, it may be noted that contribution to the Prime Ministers’ National Relief is one of the permissible avenues for CSR spend.

Conclusion
Whilst the objectives and intentions of the above innovative provisions are laudable and a step in the right direction for a developing country like ours, it needs to be seen as to how India Incorporated navigates through its various positives and pitfalls.

shailesh.kwebmaker

Can a Company have two functional currencies?

Query
Can a Company have two functional currencies for its two autonomous divisions? Travel & Logistics Ltd (TL or the Company) an Indian registered company has two independent business divisions, namely, hotel division which runs hotels in India and shipping division which runs global shipping operations. TL assessed the functional currency of the hotel division as rupee (INR) and shipping division as US $. It may be noted that substantial income and expense of the shipping division is in US $. If the shipping division was housed in a separate company, its functional currency would be US $.

In which currency, TL will prepare its Ind AS financial statements? Will it be (a) INR (b) US $ or (c) INR for hotel division and US $ for shipping division?

Response
A similar issue was discussed by the Ind AS Transition Facilitation Group (ITFG). The view of the ITFG and the Author’s view are expressed below.

View of ITFG
As per paragraph 8 of Ind AS 21, The Effects of Changes in Foreign Exchange Rates, functional currency is the currency of the primary economic environment in which the entity operates.

Further, paragraph 17 of Ind AS 21 states that: “In preparing financial statements, each entity – whether a stand-alone entity, an entity with foreign operations (such as a parent) or a foreign operation (such as a subsidiary or branch)—determines its functional currency in accordance with paragraphs 9–14 of Ind AS 21.”

Paragraphs 9-14 of Ind AS 21, elaborate the factors that need to be considered by an entity while determining its functional currency.

In view of the above, it is concluded that functional currency needs to be identified at the entity level, considering the economic environment in which the entity operates, and not at the level of a business or a division. Accordingly, if after applying paragraphs 9-14 of Ind AS 21, the Company concludes that its functional currency is USD at the entity level, then it shall prepare its financial statements as per USD.

Though not stated, the obvious extension of this interpretation is that if the Company concludes that its functional currency is INR at the entity level, then it shall prepare its financial statements as per INR.

Authors view
Under Ind AS 21, foreign operations are defined as “Foreign operation is an entity that is a subsidiary, associate, joint arrangement or branch of a reporting entity, the activities of which are based or conducted in a country or currency other than those of the reporting entity.”

It is interesting to note that the activities of the branch may be conducted in a different country or in the same country but in a different currency. Ind AS 21 uses the term ‘branch’ to describe an operation within a legal entity that may have a different functional currency from the entity itself. It does not describe a branch, in the classical sense, such as a Company in Mumbai has a branch in Chennai.

An entity may have an operation, eg a division that operates in a different currency environment from the rest of the entity. Though this may not be a branch in a classical sense, it would be a branch for the purposes of Ind AS 21, provided the operation of that division represents a sufficiently autonomous business unit.

Therefore in the given fact pattern, the entity will apply functional currency US $ for shipping division and INR for hotel division. This interpretation would not be challenged if the shipping division was registered as a separate company in India or as a separate branch abroad. Therefore it does not make any logical sense to challenge this view just because it is housed in one entity and is called a ‘division’ rather than a ‘branch’. Besides given the way the term branch is used in the Ind AS 21 context, the shipping division and hotel division should be evaluated separately for the purposes of determining the functional currency.

To state the entity’s Ind AS financial statements in the presentation currency, the results and financial position of its operations having different functional currencies will be included using the translation method set out in paragraph 38-43 of Ind AS 21. The entity shall translate: (a) assets and liabilities at the closing rate; (b) income and expenses at period average exchange rates; and all resulting exchange differences shall be recognised in other comprehensive income.

Conclusion
In view of the discussion and arguments provided above, the ITFG may reconsider its view on the above matter. In any case, the ITFG views are only recommendatory and are not binding.

shailesh.kwebmaker

[2015] 63 taxmann.com 124 (Bangalore) DCIT vs. Subex Technology Ltd A.Y.:2009-10, Date of order: 1 October, 2015

Section 90 of the Act –In absence of any specific provision in the Act denial of grant of foreign tax credit against MAT liability is invalid

Facts
The Taxpayer was an Indian company. During the relevant assessment year, the income of Taxpayer was subject to Minimum Alternate Tax (“MAT ”) under the provisions of section 115JB of the Act. Since, the Taxpayer had paid taxes in foreign countries, it claimed credit in terms of section 90 of the Act for taxes paid abroad against its MAT liability u/s. 115JB.

During assessment proceedings, the AO disallowed the claim of foreign tax credit on the ground that provisions of section 115JB stood on a different footing than the normal provisions of the Act.

Held
The income on which tax was paid abroad was included in ‘book profit’ computed for the purpose of section 115JB. Once taxable income was determined either under the normal provisions or u/s. 115JB, the computation of tax was to be governed by the normal provisions of the Act1 .

As there was no provision in the Act for restricting the grant of foreign tax credit, such credit should be allowed against MAT liability.

shailesh.kwebmaker

[2016] 70 taxmann.com 1 (Delhi) ZTE Corporation vs. ADIT Date of order: 30 May, 2016

Articles 5, 7, 12 of India-China DTAA; section 9 of the Act, Rule 10 of I T Rules – (i) level of participation of PE in economic life of source country should determine attribution of profit to PE (ii) If supply of software is integrally connected to supply of hardware, receipts from supply of software could not be taxed as royalty.

Facts – 1
The Taxpayer was resident of China. It was engaged in the business of supplying telecom equipment and mobile handsets to Indian customers. It did not furnish return of its income in India on the ground that it did not have PE in India in terms of Article 5 of India-China DTAA .

According to the AO, since the Taxpayer was carrying on business in India through fixed base for long period, it had fixed place PE, installation PE and dependent agency PE in India. Therefore, the AO proceeded to determine the profits from supply of telecom equipment and mobile handsets that were attributable to the PE in India. Moreover, since the Taxpayer had not maintained separate books of account for its Indian operations, the AO invoked Rule 10(ii) of I T Rules and attributed 20% of net global profits arising out of revenues realized from India.

Facts – 2
In terms of consolidated offshore supply contract executed by the Taxpayer, the Taxpayer also supplied software. The Taxpayer contended that such software was integral and essential part of telecom equipment and hence, payment towards such software should not be treated as royalty. However, the AO concluded that the payments made for use of software were royalty in terms of Article 12(3) of India-China DTAA as well as section 9(1) of the Act.

Held – 1
As regards attribution of profits to PE
Since the Taxpayer had not maintained books of account pertaining to PE in India, indirect method of attribution as per rule 10 should be resorted to.

Primarily, taxable income arises to Taxpayer from nexus between source country and activities of PE. Hence, level of participation of PE in economic life of source country is the most important aspect.

The order of the AO and that of CIT(A) gives clear picture of level of operations of the PE. The level of operations carried out by the Taxpayer through its PE in India was considerable enough to conclude that almost entire sales function was carried out in India.

Since in the present case the hardware and software supplied to Indian customers involved supply, installation, commissioning etc.,, 35% of net global profits of the Taxpayer from its transactions with India were to be attributed to PE in India.

Held – 2
As regards integrally connected supply of software

Since supply of software was integrally connected to supply of hardware, receipts from supply of software could not be taxed as royalty.

shailesh.kwebmaker

TS-365-ITAT-2016 (CHNY) Intelsat Global Sales and Marketing Ltd A.Ys.: 2002-03 to 2012-13, Date of order: 1 July, 2016

Article 5 of India-UK DTAA – Since maintenance of satellite signal quality was obligation of the taxpayer, equipment installed in India for signal testing and monitoring would result in rendering of service in India.

Facts
The Taxpayer, a company incorporated in UK, was providing satellite capacity and related services to telecasting/telecom companies in India (“Indian customers”). Indian customers uplinked data/signals to satellite of the Taxpayer. These were processed through the transponder in the satellite and retransmitted to earth stations, which were owned by Indian customers. A group company of the Taxpayer in India had installed testing and monitoring equipment in India to ascertain quality of the signals received in India.

According to the taxpayer, the function of equipment was only to monitor the signals and since the earth stations were owned by the Indian customers, it had not rendered any service or carried on any business in India. Further, as per Article 5 of India-UK DTAA , it did not have a Permanent Establishment (PE) in India. It also contended that tax authority could tax only such portion of income which could be attributable to operations carried out in India. Also, the fact that a UK company controls a group company in India would not, by itself, constitute PE of the UK Company in India. The Taxpayer relied on various decisions to contend that the payments received by it were not royalties and since the services provided were standard services, they were also not Fee for Technical Service (FTS).

Held
If Taxpayer was maintaining a satellite in orbit and Indian customers were uploading data/signals, which were retransmitted to India to earth stations owned by Indian customers, the Taxpayer may not be rendering any service in India.

However, the Taxpayer was also maintaining testing equipment in India because the Taxpayer was under obligation to maintain the quality of the signals.

Even though the equipment was maintained by group company of the Taxpayer, it was for testing the signal transmitted by the Taxpayer. Hence, the Taxpayer should be construed as rendering services in India.

As the Taxpayer claims to have dismantled the equipment, and since it was under obligation to maintain quality of signals, it should be examined how taxpayer tested and maintained quality of signals after dismantling the equipment and also certain other technical aspects. Therefore, the assessment was set aside and matter remanded to AO.

shailesh.kwebmaker

[2016] 71 taxmann.com 120 (Mumbai) Mrs Shalini Seekond vs. ITO A.Y.: 2007-08, Date of order: 7 July, 2016

Article 4, 6 and 24 of India-Sri Lanka DTAA; section 90(3) of the Act – (i) on applying tiebreaker test, Taxpayer was resident in India as habitual abode and center of vital interests was in India (ii) Notification issued under section 90(3) being clarificatory in nature, has retrospective applicability (iii) having regard to Notification under section 90(3), capital gain on sale of immovable property in Sri Lanka is chargeable to tax in India.

Facts
The Taxpayer was a Sri Lankan national married to an Indian national. Post-marriage she was living in India. During the relevant year, she was resident of India in terms of the Act and, based on her fiscal domicile, was also a resident of Sri Lanka in terms of Sri Lankan domestic law. The Taxpayer owned immovable property in Sri Lanka, which she had sold during the year. She invested the sale proceeds in mutual funds and a property in India.

According to the Taxpayer, based on tie-breaker rule in India-Sri Lanka DTAA , she was resident of Sri Lanka. Based on certain decisions of Supreme Court, it was argued that the capital gains on sale of immovable property situated in Sri Lanka were to be taxed only in Sri Lanka.

According to the AO, the Taxpayer was resident in India and hence her global income was taxable in India. Since the Taxpayer had not paid any tax in Sri Lanka, no relief could be granted and capital gain arising in Sri Lanka was fully taxable in India. The AO relied on Notification No 91 of 2008 dated 28-08-2008 clarifying that where a DTAA uses the expression “may be taxed in the other country”, the income should be included in total income chargeable to tax in India and relief should be granted in accordance with the method for elimination or avoidance of double taxation provided in DTAA .

The issue before the Tribunal was whether the gains derived from sale of immovable property was taxable in India.

Held
(i) As regards applying tie-breaker rule for resolving dual residency

It is undisputed that the Taxpayer was a resident in India as per the Act, which was further confirmed by the Taxpayer who declared her status as being “resident in India” in the return of income.

Under the tie-breaker rule of India-Sri Lanka DTAA , the Taxpayer qualified as resident of India since:
• Post-marriage Taxpayer had a permanent home (home of her husband) available to her in India. The availability of a permanent home has nothing to do with ownership of a home in the country of residence, but refers to a place of abode or dwelling in the country of residence and an abode available to her at all times continuously and not occasionally for a short duration.
• The word “habitual abode” requires actual living habitually, consistently and regularly in a country. Mere ownership of an immovable property or living of parents of a married woman in Sri Lanka does not make Sri Lanka her habitual abode, unless it is demonstrated with cogent evidences that the Taxpayer was living both in India and in Sri Lanka permanently, regularly and consistently.
• Post-marriage with an Indian national, the Taxpayer’s economic and personal relations have close proximity to India. She has retained her centre of vital interest in India after her marriage by moving to India to stay with the Indian national permanently.
• The Taxpayer held lifelong, valid multiple visa issued by GoI to enable her to stay in India indefinitely with her husband. This also reflected her intention to stay or settle permanently in India.
• By utilizing the sale proceeds of Sri Lankan property for buying assets in India, the Taxpayer clearly reflected the strategic shift of vital economic interest to India from Sri Lanka.
• Accordingly, the Taxpayer was a treaty resident of India

(ii) As regards connotation of “may be taxed”

Under section 90(3) of the Act, GoI can assign meaning to any undefined term in the Act or DTAA provided the assigned meaning is not inconsistent with their provisions, or unless the context otherwise requires. Accordingly, GoI issued the Notification assigning meaning to the expression “may be taxed”.

Since the meaning assigned is with intent and objective as understood during the negotiations of DTAA , it should be read from the date when India– Sri Lanka DTAA came into force.

Plain language used in the Notification shows that it is merely procedural in nature and no additional liability is sought to be fastened on the Taxpayer. Hence, its retrospective applicability cannot be questioned.

(iii) As regards taxability of capital gains under DTAA

Right to tax capital gains from the sale of the immovable property situated in Sri Lanka is allocated to Sri Lanka under the DTAA . The fact that the tax liability on such gains is nil or zero does not impact the right of taxation allocated in terms of the DTAA .

However, having regard to the Notification, such capital gain should be included in the income of the Taxpayer chargeable to tax in India under the provisions of the Act. Double taxation relief may be granted as per the provisions of the DTAA which in the present case is Nil as no taxes were paid in Sri Lanka.

shailesh.kwebmaker

[2016] 67 taxmann.com 68 (Bangalore) e4e Business Solutions India (P) Ltd vs. DCIT A.Y.: 2009-10, Date of order: 10 November, 2015

Section 92C of the Act – Foreign exchange gain which has direct nexus with international transactions, is to be considered as part of operating profit of Taxpayer.

Facts
The Taxpayer was engaged in the business of end-to-end BPO Services. It had entered into service agreement with its Associated Enterprise (“AE”) based in USA, which was its holding company. For computing its operating profit margin for transfer pricing purpose, the taxpayer had included foreign exchange gains.

However, TPO recomputed the operating profit margin by excluding foreign exchange gain for benchmarking the international transaction. The DRP did not accept the objections of the Taxpayer and confirmed the proposed adjustment.

Held
It was undisputed that the foreign exchange gain pertained to income from service provided to the AE. Therefore, it had direct nexus with international transactions and service provided by the Taxpayer to its AE.

The tax authority had contended that the economic and other factors affected foreign exchange gains and such gain was not dependent on operations of the Taxpayer. However, such factors also affected the business transactions and price determination between the parties. Since foreign exchange gain had arisen only because of international transactions, it had direct nexus with international transactions. Therefore, such gain was part of operating revenue, and consequently part of operating profit of the Taxpayer for the purpose of determining the ALP in respect of the international transaction.

However, while comparing the margins of the comparable, foreign exchange gain should also be included for computing operating profit margin.

shailesh.kwebmaker

Foreign Tax Credit Rules 2016 – An Analysis

1 Background
Most of the countries follow a mix of source and residence based concept of taxation i.e. a country seeks to tax the global income of a person who is a resident in that country as well as tax all the income which arises to a person (whether resident or nonresident) in its territory.

This leads to dual taxation of the same income, firstly in the country of source of income and secondly in the country of residence of the person earning income. Countries enter into Double Taxation Avoidance Agreements (‘DTAA ’), inter-alia, to eliminate this double taxation of the same income. Further, the tax which is paid in the source country by the person receiving income is either allowed as a credit by the country of residence while computing the tax payable therein or exempts such income from taxation. Additionally, most countries also provide for unilateral relief under their domestic law, which would aid in eliminating tax cascading where no DTAA exists.

Sections 90 and 90A of the Income-tax Act, 1961 (“the Act” or “ITA ”) provides for relief from double taxation of income in India if there exists a DTAA between India and a foreign country/specified territory. Typically, DTAA s entered into by India provide for availability of credits of foreign taxes with a view to afford relief from double taxation.

Similarly, section 91(1) of the Act provides for unilateral relief in respect of taxes paid on the income arising in a country with which India has not concluded a DTAA . This section provides for a credit on doubly taxed income, at the Indian rate of tax or the rate of tax of the other country, whichever is lower.

However, the Act did not specify any guidelines or rules outlining the manner and mechanism for computing the eligible tax credit as in line with Countries like USA, UK etc., resulting in avoidable litigation on various issues connected with claim for Foreign Tax Credit (FTC). In August 2013, Indian Government constituted Tax Administration Reform Commission (‘TAR C’) headed by Dr. Parthasarathi Shome, where one of the key recommendation by TAR C in its report was that Central Board of Direct Taxes (‘CBDT’) should come out with clear FTC (i.e., credit for the income tax paid by the taxpayer in another Country) guidelines in order to simplify the tax administration in India. This lead to the insertion of section 295(2)(ha) by the Finance Act, 2015 which empowered the CBDT to prescribe rules for granting relief under the Act in respect of foreign taxes paid.

Apart from the above, there are no provisions in the Act or the Rules that deal with the detailed aspects of the availability and claims for foreign tax credits. The First Report of the TAR C had recommended that the CBDT come out with clear guidelines in respect of availing FTC. Accordingly, the CBDT issued the draft FTC rules on 18 April 2016 and comments from stakeholders and general public were invited by 2nd May 2016.

2 Foreign Tax Credit Rules, 2016

After considering the comments received from the public, the CBDT has issued a Notification dated June 27th 2016 which amend the Income tax Rules 1962 to provide for a separate segment on Foreign Tax Credit Rules, 2016 (“Rules”). These rules clarify the nature and conditions for the availability of the FTC to the tax payers and provide guidance to claim FTC in India. The Rule 128(10) specifies reporting of carry backward of losses of the Current Year whereby it results in a refund of Foreign Tax for which credit had been claimed in any earlier previous year or years. The rules also provide guidelines for granting tax credit if and when the tax dispute in the foreign country is settled against the tax payer. The rules also provide that where income on which foreign taxes are paid is reflected in multiple years, the credit for FTC shall be allowed proportionately. The rules also provide for relaxation in documentation requirements and self certification supported by proof of payment of foreign taxes.

2.2 Analysis of the Rule

Salient features of Rule 128 are as follows:

2.2.1 Grant of FTC to residents:
FTC shall be allowed to a resident of India for the amount of any foreign tax paid by him, by way of deduction or otherwise.

2.2.2 Grant of FTC in the year of assessment of income:

i) FTC shall be allowed in the year in which the income (corresponding to the foreign tax paid) is offered to tax or assessed to tax in India.

ii) However, if the income (corresponding to the foreign tax paid) has been offered to tax in India in more than one year, FTC shall be allowed proportionate to the income offered in each of the years.

2.2.3 Meaning of foreign tax:
Foreign tax would mean the taxes covered under the applicable DTAA and, in other cases, the taxes covered under the double tax relief provisions of the ITA . As per Explanation (iv) to section 91 of the ITA (which grants unilateral FTC), income tax includes any excess profits tax or business profits tax charged on the profits.

2.2.4 Indian taxes for providing FTC:

i) FTC would be allowed against the amount of Indian income tax, as well as surcharge and cess payable under the ITA .

ii) No credit shall be allowed against any sum payable by way of interest, fee or penalty.

iii) In a case where minimum alternate tax (MAT ) or alternate minimum tax (AMT) is payable under the ITA , FTC shall be allowed against such MAT /AMT in the same manner as is allowable against normal tax payable under the ITA . However, where the amount of FTC available against MAT / AMT is in excess of FTC credit available against normal tax, MAT /AMT credit would be reduced to the extent of such excess [Refer Rule 128(7)].

2.2.5 Disputed foreign tax:

i) Where the foreign tax paid or any part thereof has been disputed in any manner by the taxpayer, such foreign tax would not qualify for FTC.

ii) However, FTC of such disputed foreign tax shall be allowed for the year in which such income is offered or assessed to tax in India if the taxpayer submits the following details within a period of six months from the end of the month in which the dispute is finally settled:

• Proof of settlement of dispute
• Proof of discharge of liability of such foreign tax
• Undertaking that no refund has been/shall be claimed by the taxpayer, directly or indirectly

2.2.6 Mechanism to compute FTC

i) Currency conversion rate: Foreign tax paid in foreign currency shall be converted into Indian currency by applying “telegraphic transfer buying rate” on the last day of the month immediately preceding the month in which such foreign tax was paid or deducted.

ii) Maximum credit: FTC shall be restricted to the lower of tax payable under the ITA on such income or the foreign tax paid on such income. Further, if the foreign tax paid exceeds the amount of tax payable under the DTAA , such excess shall be ignored.

iii) Source-by-source approach: FTC shall be computed separately for each source of income arising from a particular jurisdiction.

2.2.7 Documents to be furnished to claim FTC:

Mandatory documents to be furnished by a taxpayer to be eligible to claim FTC are as follows:

i) S tatement providing details of the foreign income, offered for tax for the tax year, and foreign tax paid or deducted thereon in prescribed form and

ii) Certificate or statement specifying the nature of income and the amount of tax deducted or paid thereon:

• From the tax authority of the concerned foreign jurisdiction or

• From the person responsible for with holding tax or

• Self-declaration from taxpayer, along with:

a) acknowledgement of online payment or bank counter foil or challan where for eign tax has been paid by the taxpayer

b) proof of deduction where tax been de ducted

Documents as prescribed need to be furnished on or before the due date of filing of return of income in India.

2.2.8 Details to be provided in the prescribed statement in Form No. 67 :
i) Name of the taxpayer
ii) PAN
iii) Address
iv) Assessment Year
v) Details of foreign income and FTC claimed which includes:
• Name of the country
• Source of income
• Foreign income and tax paid outside India
• Tax payable on such income in India
• Credit claimed under DTAA
• Credit claimed under double tax relief provisions of the ITA

vi) Refund of foreign tax claimed, if any, as a result of carry backward of losses providing details of the accounting year to which such loss pertains and the year in which the set off of such loss has been undertaken.
vii) If any foreign tax is in dispute, the nature and the amount of income in respect of which the tax is disputed and the amount of such disputed tax.

2.2.9. Carry backward of losses: Further, prescribed statement should also be furnished in case where there is carry backward of loss resulting in refund of foreign tax for which FTC was claimed in any of the earlier previous year(s) [Refer Rule 128(10)].

3 Open Issues :

Some of the issues which have not been dealt with in the FTC Rules are as under:

3.1 Underlying Tax Credit
The rule is silent on underlying tax credit on dividend income received by the Indian Companies from their overseas subsidiary/ associate company. It is to be noted that India have such beneficial clause in DTAA with USA, UK, Cyprus, Australia, Japan, Mauritius and Singapore subject to conditions. However, the Indian taxpayer may still claim such underlying tax credit based on Section 90(2) of the Act which allows the taxpayer to take benefit of provisions made in the DTAA to the extent such provision is beneficial to the tax payer.

3.2 Tax Sparing
Tax Sparing is a credit mechanism by which resident country allows credit for such taxes which would have been payable by the taxpayer in the source country but for such tax exemptions. In other words, credit for taxes spared by the country of source is given by the country of residence on deemed basis. DTAA s with many countries such as Mauritius, Israel, Bangladesh, Singapore, Spain etc., provides for tax sparing benefit in respect of tax holidays covered under the respective tax treaties. However, the FTC Rules are silent in respect of Tax Sparing Credit.

ecently Delhi ITAT bench in the case of Krishak Bharati Cooperative Ltd. [TS-117-ITAT-2016(DEL)] allowed FTC to the taxpayer (a co-operative society registered in India) under section 90 of the Act read with Article 25(4) of India-Oman DTAA in respect of dividend received from its Joint Venture company in Oman which was specifally tax exempt in Oman.

3.3 Carry Forward of FTC

Countries such as USA, Canada, Singapore, UK, Japan etc., allows carry forward of excess FTC for a limited period. Excess FTC can arise mainly on account of following two reasons:

• Effective tax rate in the foreign country on such income is higher than effective tax rate in the home country; or

• Ratio of high-tax income or the ratio of income earned from a high-tax rate country during a financial year is high.

However, Indian FTC Rules do not contain any provision for carry forward of such excess FTC. In absence of any mechanism to carry forward the FTC, it may lead to litigation between taxpayer and revenue.

3.4 Branch Profit Tax
Many Countries such as USA, Canada, France, Philippines, Indonesia etc., have additional branch profit tax where branches of foreign companies are taxed on profit after tax on repatriation of earning from the branch at the time of closure or termination of such branch in the foreign country. In some of the Countries, branch profit tax is as high as 30%.

As per the Act, any business profit of the branch of Indian Company is taxed under the head business income in the year of accrual, and no further tax is payable on receipt of such income from branch. Hence, in most cases where branch profit tax is paid by the taxpayer in the foreign country upon repatriation. is not eligible for FTC.

4 Concluding Remarks:

In the wake of significantly increased cross border transactions by Indian Companies, the FTC Rules were much awaited in India. The FTC Rules are expected to provide a uniform mechanism to grant FTC in India. It is also the intention of the present Government to provide certainty in taxation and reduce litigation. The FTC Rules aim to provide clear guidance in respect of some of the persisting issues in the computation of FTC Credit viz. Credit qua each source of Income, year of credit, availability of FTC against MAT etc.

The easing of documentation requirements for claiming FTC, allowance of FTC in respect of disputed tax settled subsequently and to some extent taking care of timing mismatches, is welcome and reflects an open-minded approach of the Government.

Though the claim of FTC in respect of disputed tax subsequently settled has been allowed, further clarity is required on the procedural aspects for claiming such credit, especially when the dispute is settled after the expiry of time limit for filing revised return of income under the Act.

The FTC rules as finalized also need to provide further clarity on certain other aspects e.g. calculation of underlying tax credits and tax sparing credits as envisaged by certain Indian DTAA s, eligibility to claim FTC in case of hybrid entities and in cases of mismatch in characterization of income.

Further, the FTC rules fall short of industry expectation that consistent with global practice, the taxpayer may be provided an option to claim credit on an aggregate basis by pooling all overseas tax payments, rather than adopt the source-by-source approach which typically results in increased compliance burden and leads to sub-optimal availability of credit. There are also expectations that the taxpayers are permitted grant of underlying tax credit, an option to carry forward or carry back excess FTC, ability or an option to claim deduction as an expenditure in respect of foreign tax which is not creditable against Indian tax etc.

Further, clarity has been provided on the availability of tax credit for State taxes paid in a foreign jurisdiction. It would also be interesting to see whether the restriction on MAT/AMT credit will come in conflict with the provisions of the Act or application of the relevant Tax Treaty.

The notified Rules require statement in Form 67 to be filed on or before the due date of filing return of income prescribed u/s. 139(1) of the Act, as a condition precedent for claiming FTC. The prima facie implication is that FTC will not be available if Form 67 is filed later at any stage, including with a revised return. This is likely to lead to disputes and litigation. Not only this appears to be unreasonable but also may be ultra vires the Act and the tax treaties which have no such condition envisaged for grant of FTC. The notified Rules will come into effect from April 1, 2017. Given that the notified Rules contain not only the procedure for claiming FTC, but also impacts the amount of credit, they may not apply to years prior to AY 2017-18.

Thus while some aspects have not been dealt with by the notified Rules, some clarity has been achieved and may lead to reduction in disputes and litigation surrounding FTC.

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Assistant Commissioner (CT), T. Nagar (South) and Joint Commissioner (CT), Chennai V. M/s. Pamban Oil Mills (P) Ltd. 2013 66 VST (Madras) [W.A. NO.2044 OF 2013 & M.P.NO.1 of 2013]

Sales Tax – Settlement of Arrears- Order Passed for Refund Prior to Act- Refund Can Not Be Denied, s/s. 8, 9 and 10 of The Tamil Nadu Sales Tax (Settlement of Arrears) Act, 2008.

Facts
The best judgment assessment order was passed on November 30, 1998, which was subsequently revised on March 28, 2002. The respondent filed an appeal in A.P. No. 207/07, and with the sole objective of giving an opportunity to the respondent. The Appellate Assistant Commissioner set aside the assessment order and remanded back the matter to the assessing authority. As directed, after verification of the accounts, the first appellant passed orders of assessment on October 3, 2008 whereby the turnover was revised and it was declared that the respondent had in fact made excess payment of tax of Rs. 9,75,447 and found eligible for refund. Form C confirming the entitlement to refund was also issued on October 3, 2008 itself. The only formality that remained was the issuance of refund voucher and the respondent sent representations for the same. Earlier a notice dated June 27, 2007 was issued by the first appellant to the respondent demanding penal interest u/s. 24(3) of the Act for delayed payment of amount due under the deferral scheme and the same was still pending. Before further action could be taken, the Tamil Nadu Government had promulgated Tamil Nadu Ordinance No. 7 of 2008 and floated the Samadhan Scheme. The Rules commemorating the Ordinance was published in the gazette on October 31, 2008. The respondent approached the second appellant under section 5 of the Scheme for settlement of interest for the assessment year 1996-97 on October 30, 2009. Parallely, since the representations seeking refund did not yield any results, the respondent approached the Madras High Court in W.P. No. 18508 of 2010 and the same was disposed of with a direction to consider the representation dated December 21, 2009 and pass orders, within four weeks from the date ofreceipt of copy of the order. By an order dated September 23, 2010, the claim of refund was rejected on the grounds that any order passed by the assessing authority subsequent to the application for settlement under Samadhan Scheme could not be reopened and the claim was not admissible under sections 9 and 10 of the Tamil Nadu Sales Tax (Settlement of Arrears) Act, 2008. Aggrieved by the same, once again, the writ petition was filed by the respondent alleging, inter alia, that the payment of interest under the Samadhan Scheme will not affect the refund claim, which was alreadydecided by the department and therefore the same will not come within the purview of Samadhan Scheme. Even though, no claim of interest for belated refund was made earlier, the respondent company also claimed interest. The writ petition was partly allowed by single judge with regard to refund. However, therespondent’s claim of interest was not allowed but liberty was given to work out his remedy. The respondent has not preferred any appeal against the portion of the order wherein his claim of interest was negated. The department filed writ before the Division Bench of Madras High Court against the judgment of single judge allowing refund to the respondent company. ‘

Held
Admittedly, the respondent was entitled for refund of Rs. 9,75,447 and the issue to be decided is whether after approaching the department under the Samadhan Scheme, without reference to the referred claim, the right of refund continues or not. Section 9 of the Ordinance or Tamil Nadu Act No. 60 of 2008 providing bar to reopen any proceedings is applicable only in respect of the certificate issued under section 8 of the said act. Section 10 providing for withdrawal of appeal or revision is applicable to the issue pending before the authority must be with the certificate issued u/s. 8 of the Act and that the order of refund must have been made after the application for settlement u/s. 5. In the case before High Court the certificate was issued only with respect to the application of settlement of interest. The bar emphasized under sections 9 and 10 of the Act applicable only if the dealer wants to claim refund of the amount paid under the Samadhan Scheme and not the refund which was ordered before floating of the scheme.

The refund order was passed on October 3, 2008 i.e. even before the date of publication of ordinance. Therefore, no reliance can be placed upon sections 9 and 10 of the Settlement of Arrears Act. Accordingly the High Court dismissed the petition filed by the department and confirmed the order of single Judge allowing refund to the company.

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Mangal Singh Palsania vs. ACIT ITAT Jaipur Bench Before Vikram Singh Yadav (AM) and Laliet Kumar (JM) ITA No. 53/JP/14 A.Y.: 2008-09. Date of order: 31.03.2016 Counsel for Assessee / Revenue: M. Gargieya / Ajay Malik

Section 32(1) – In order to claim depreciation on vehicles, registration of vehicles under the Motor Vehicle Act is not essential requirement.

FACTS
The assessee derives income from transport business. The tankers used in the business were not registered in the name of the assessee. Hence, the depreciation claimed Rs. 21.02 lacs was denied by the AO. On appeal, the CIT(A) confirmed the order of the AO.

Being aggrieved the assessee appealed before the Tribunal. Before the Tribunal, the revenue submitted that the test of ownership is governed by the registration under the Motor Vehicle Act and since the tankers were not registered in the name of the assessee, the AO was justified in denying the depreciation claim.

HELD
The Tribunal referred to the observations of the Supreme Court in the case of I.C.D.S vs. CIT (29 Taxman 129) that the repository of a general statement of law on ownership may be the Sale of Goods Act. The Motor Vehicle Act was not a statement of law on ownership. Further, it also noted the observation of the Apex Court in the case of Mysore Minerals Ltd. vs. CIT (239 ITR 779) that anyone in possession of property in his own title exercising such dominion over the property as would enable others being excluded therefrom and having right to use and occupy the property in his own right would be considered as the owner of the property for the purpose of section 32(1) though a formal deed of title may not have been executed and registered. According to the Tribunal, the above proposition of law was fully satisfied by the assessee. The assessee was having possession and dominion over the income and control over the operation of the tankers. Accordingly, the Tribunal held that the assessee was eligible to claim depreciation.

Income Tax Officer vs. Rajeshwaree Shipping & Logistics ITAT “D” Bench, Mumbai

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[2016] 70 taxmann.com 33 (Ahmedabad – Trib.) Urvi Chirag Sheth vs. ITO ITA Nos. 630 /Ahd/2016 A.Y.: 2012-13 Date of order: 31.05.2016

Section 56 – Interest on accident compensation, which is a capital receipt, can be characterized as income only if interest is a kind of statutory interest. Otherwise it retains the same character as that of the compensation and is not liable to tax

FACTS
The assessee met with a serious accident leaving her permanently disabled. She claimed compensation of Rs. 15,00,000 which was awarded to her by the Supreme Court. The Supreme Court also granted her interest at the rate of 8% on the enhanced compensation from the date of filing the claim petition before Motor Accidents Claims Tribunal (MACT) till the date of realisation. The amount of interest worked to Rs. 7,47,143. The Assessing Officer held that this interest of Rs. 7,47,143 is taxable and is covered by section 145A(b) r.w.s. 56(viii) of the Act.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal noted that the payment made to the assessee was in the nature of compensation for the loss of her mobility and physical damages and was therefore a capital receipt and beyond the ambit of taxability of income since only such capital receipts can be brought to tax which are specifically taxable under section 45. What is termed as interest also is of the same character and seeks to compensate the time value of money on account of delay in payment. On the first principles, such an interest cannot have a standalone character of income, unless the interest itself is a kind of statutory interest at the prescribed rate. It noted that in the present case interest was awarded by the Supreme Court in its complete and somewhat unfettered discretion. An interest of this nature is essentially a compensation in the sense it accounts for a fall in value of money itself at the point of time when compensation became payable vis-à-vis the point of time when it was actually paid, or for the shrinkage of, what can be termed as, a measuring rod of value of compensation. If the money was given on the date of presenting the claim before the MACT, it would have been Rs 15 lacs but since there was an inordinate delay, though partially, delay in payment of this amount, interest is to factor for fall in the value of money in the meantime. The transaction thus remains the same, i.e. compensation for disability, and the interest rate, on a rather notional basis, is taken into account to compute the present value of the compensation which was lawfully due to the assessee in the distant past. Viewed thus, the amount of compensation received at this point of time, whichever way it is computed, has the same character. If compensation itself is not taxable, the interest on account of delay in payment of compensation cannot be taxable either. The Tribunal held that the conclusion of the Allahabad High Court in the case of CIT v. Oriental Insurance Co. Ltd. 92012) 211 Taxman 369 (All) supports the school of thought that when principal transaction, i.e. accident compensation for delayed payment of which interest is awarded, itself is outside the ambit of taxation, similar fate must follow for the subsidiary transaction, i.e. interest for delay in payment of compensation as well. It also noted that the decision of the Punjab & Haryana High Court in the case of CIT v. B Rai (2004) 264 ITR 617 (P & H) which draws a line of demarcation between the interest granted under a statutory provision and interest granted under discretion of the court and holds that the latter is outside the scope of `income’ which can be brought to tax under the Act. It noted that the situation before it is covered by the observation of the Punjab & Haryana High Court viz. “where interest ….. is to be paid is in the discretion of the court, as in the present case, the said interest would not amount to `income’ for the purposes of income-tax”.

The Tribunal held that the authorities below were completely in error in bringing the interest awarded by the Supreme Court to tax. The Tribunal vacated the action of the AO and disapproved the CIT(A)’s action of confirming the same.

The appeal filed by the assessee was allowed.

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2016 – TIOL – 1063 – ITAT – VIZAG ITO vs. Mother Theresa Educational Society ITA No. 326/Vizag/2013 A. Y.: 2009-10 Date of order: 31.03.2016

Ss. 40(a)(ia) and 43B – When income is computed under section 11 of the Act, the provisions of section 40(a)(ia) and 43B are not applicable.

FACTS
The assessee society, registered under Andhra Pradesh Societies Registration Act and also registered under section 12A of the Act, filed its return of income declaring total income to be Nil by claiming exemption under section 11 of the Act. In the course of assessment proceedings the AO noticed that assessee was deriving income from various sources such as fees from students, income from hospital, income from pharmacy, rent from premises and interest on bank deposits against which various expenses such as salaries of faculty and administrative staff, administrative expenses, college maintenance, etc were claimed. The AO observed that the receipts of the society increased from Rs. 1,58,84,406 to Rs. 22,57,55,509 over a period of four years from AY 2005-06 to 2008-09. He also noticed that the society had availed term loans from banks for construction of college buildings, etc.

The AO observed that though the objects are not under dispute, not is any case being made out for reconsidering the exemptions by virtue of registration under section 12A of the Act. However, he held that since the assessee’s activities are akin to any commercial activity income needs to be assessed under the head `income from business’. While assessing income under the head `Income from Business’, he disallowed various expenditures by invoking provisions of sections 40(a)(ia) and 43B of the Act.

Aggrieved, the assessee preferred an appeal to the CIT(A) who allowed the appeal filed by the assessee.

Aggrieved, the revenue preferred an appeal to the Tribunal.

HELD
The Tribunal observed that the AO has neither doubted the genuineness of the activities nor pointed out any violations referred to in sections 13(1)(c) or 13(1)(d), which are preconditions for denying exemption u/s. 11. The Tribunal held that the AO was not correct in denying exemption under section 11 and having assessed income under the head `profits and gains of business or profession’.

The Tribunal noted that Chapter III of the Act deals with incomes which do not form part of total income. Sections 11, 12 and 13 deal with income from property held for charitable or religious purposes and the mode of computation of income subject to certain conditions. Accordingly, income of any charitable trust or society is exempt from tax, if such conditions are fulfilled. Sections 40(a)(ia) and 43B fall under Chapter IVD, which deals with computation of profits and gains from business or profession. The provisions of sections 40(a)(ia) and 43B are relevant if income is computed under the head `profits and gains of business or profession’.

The Tribunal held that the concept of computation of income under section 11 is real income concept, which is computed on the principles of real income generated from property held under trust and not notional income like under other provisions of the Act. Section 11(1)(a) provides for application of income for charitable purpose, therefore, the question of application of income arises only when income is available for application. If any expenditure is disallowed by invoking the provisions of section 40(a)(ia) and 43B, it leads to a situation where assessee income available for application is enhanced without there being any real income for application for charitable purpose, which leads to an absurd situation where the trusts / societies enjoying exemption u/s 11 have to pay taxes. This is because, the assessee claiming exemption under section 11 shall apply 85% of income for objects of the trust. The legislature in its wisdom has kept separate provisions which are independent from any other provisions of the Act for computation of income of trusts claiming exemption u/s 11 of the Act. The Tribunal held that when income is computed under section 11 of the Act, the provisions of section 40(a)(ia) and section 43B of the Act are not applicable. This was also the ratio of the decision of the co-ordinate Bench in the case of Mahatma Gandhi Seva Mandir v. DDIT (Exemption) (2012) 52 SOT 26 (Mum.).

The Tribunal held that the CIT(A) had rightly deleted the additions.

The appeal filed by the revenue was dismissed.

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[2016] 158 ITD 329 (Bangalore Trib.) T. Shiva Kumar vs. ITO A.Y.: 2009-10. Date of order: 19.02.2016

Section 54 – Where assessee after selling residential property; pays sale consideration to another person, within the time limit prescribed under section 54, for purchase of house property then assessee’s claim for deduction under section 54 is to be allowed even though the said purchase transaction does not eventually materialise and another person refunds the consideration paid by the assessee.

FACTS
For the relevant assessment year, the assessee had filed his return declaring income of about 3 lakhs. During the course of assessment proceedings, the AO noted that the assessee had sold a house property and the conveyance deed in relation to the said sale was executed on 15-4- 2008. However, the assessee had not shown any capital gains in his return of income.

The assessee’s case was that it had intention to invest in a residential house building from the very beginning as the entire sum realized on sale was given by him to his brother for acquiring a house property owned by his brother. However, the transaction did not go through and the amount was returned to the assessee.

Subsequently, said sum was paid to one ‘M’ for acquiring a residence owned by her on basis of agreement entered into on 10-3-2010. The said transaction also did not eventually materialise.

The AO thus denied the exemption claimed by assessee u/s. 54 as the assessee could neither show that he purchased a house within two years from the date of transfer of the original asset nor could the assessee show that he had constructed a residential house within three years of such transfer.

The CIT(A) confirmed the order of the AO.

On second appeal before the Tribunal.

HELD
The time period allowed for making a purchase if it is done after the date of transfer is two years and if it is construction it is three years. Thus, if the intention was to construct a residential house the period is three years, the outer limit of three years for constructing a house in the given case was 14-4-2011. Vide sub-section (2) of section 54 a deposit under capital gains scheme, if the capital gain is not appropriated for such construction, has to be done before the due date for furnishing the return of income under section (1) of section 139.

The Hon’ble Punjab & Haryana High Court in the case of CIT vs. Ms Jagriti Aggarwal [2011] 339 ITR 610 has held that sub-section (4) of section 139 can only be construed as a proviso to sub-section (1) and thus, the due date of furnishing the return mentioned in section 139(1) is subject to the extended period provided under section 139(4). The impugned assessment year is assessment year 2009-10, and the extended time period under section 139(4) is before expiry of one year from the end of the relevant assessment year or before completion of assessment whichever is earlier. One year from the end of the impugned assessment year would expire only on 31-3-2011.

The assessment for the impugned assessment year having been completed only on 29-12-2011 the date to be reckoned for the purpose of application of sub-section (2) of section 54 in this case is 31-3-2011. Thus, it is clear that the assessee had time upto 31-3-2011 to deposit the capital gains in capital gains account scheme, if he could not utilise it for acquiring or constructing a residence.

This brings us to the question of whether assessee can be considered to have constructed or acquired a residence before 31-3-2011. Apart from the transaction that assessee claimed to have made with his brother, the assessee had undisputedly entered into a purchase agreement with one ‘M’ on 10-3-2010. The assessee had also paid a post-dated cheque pursuant to such agreement. The agreement dated 30-3-2011 through which consideration originally agreed by the assessee with ‘M’ was reduced from Rs. 70 lakhs to Rs. 40 lakhs has been placed on record. It is clearly mentioned therein that assessee had issued a cheque dated 2-12-2010 to ‘M’ for Rs. 40 lakhs. The bank account of the assessee shows that the above cheque was encashed by ‘M’ on 18- 12-2010. The agreement clearly mentions the intention of the seller to sell a building. It is also mentioned therein that the reduction in the consideration was due to vendor’s inability to complete the work of the residence before the agreed date. The agreement also mentions that the vendor had delivered to the assessee the original documents of title and the vacant possession of the scheduled property.

The liberal interpretation of the term purchase as it appears in section 54 has to be given also to the term ‘constructs’ appearing therein, in conjunction to the former. The Hon’ble Karnataka High Court in the case of CIT vs. Smt. B. S. Shanthakumari [2015] 233 Taxman 347 has held that the completion of construction within three years period was not mandatory and what was necessary was that the construction should have commenced. There is no dispute that the construction of the property for which agreement was entered by the assessee with ‘M’ had already begun. The question whether the above agreement finally fructified is a different matter altogether. Assessee had for all purposes satisfied the conditions u/s. 54 and earnestly demonstrated his intention to invest the capital gain in a residential house. Therefore, the disallowance of such claim stands deleted.

In the result, the appeal filed by the assessee is treated as allowed.

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[2016] 158 ITD 179 (Hyderabad Trib.) Heritage Hospitality Ltd. vs. DCIT A.Y.: 2007-08. Date of order: 22.01.2016.

Sections 28(i) and 22 – Where assessee does not let out any property but receives occupancy charges on daily basis for accommodating employees of various companies and moreover assessee’s memorandum of association indicates that main object of the company is to carry on the business of hotels, resorts, boarding, lodges, guest houses, etc, the occupancy charges so received is assessed as income from business and not income from house property.

FACTS
The assessee owns property on which it is running the hospitality business. The assessee had entered into agreements with various companies for accommodating their employees in assessee’s guest rooms and received rental receipts charged on daily basis for the same. Such incomes had been accepted up to assessment year 2006- 07 as ‘income from business’.

For relevant assessment year, the Assessing Officer (AO) opined that the assessee had let out the property and did not have any license to run the catering part and on enquiry it was found out that the assessee was not running a kitchen but providing food by outsourcing, on cost to cost basis. He, accordingly, held that the income received by the assessee should be brought to tax as ‘income from house property’.

The AO also noted that various companies deducted tax at source u/s. 194-I and, consequently, the rentals received were to be assessed as ‘income from house property’. The AO also opined that in case assessee’s incomes were to be assessed as ‘business income’, the expenditure could not be allowed fully. Therefore, he had substantially disallowed the amounts on a protective basis.

The CIT(A) confirmed the order of the AO.

On second appeal before the Tribunal.

HELD
There is no dispute with reference to certain facts as follows; (i) assessee owns the property on which it is running the hospitality business; (ii) assessee has not let out property per se but has entered into agreement for providing accommodation to the software engineers of various companies in its property; (iii) the agreement indicates that the charges are payable on occupancy basis on per day basis without any food, except providing coffee and tea and light snacks; (iv) the receipts which are received are for occupancy only of the seven rooms assessee is owning.

There is no letting out of any property as such, but the amounts were paid by the said companies as rent for occupation of the property. It is also not in dispute that in earlier years, assessee’s receipts were accepted under the head ‘business’. Moreover, assessee’s memorandum of association indicates that main object of the company is to carry on the business of hotels, resorts, boarding, lodges, guest houses, etc.

The Hon’ble Supreme Court in the case of Chennai Properties & Investments Ltd. vs. CIT [2015] 373 ITR 673 has held that where in terms of Memorandum of Association, main object of the assessee-company was to acquire properties and earn income by letting out the same, the said income is to be brought to tax as ‘income from business’ and not as ‘income from house property’. In assessee’s case, assessee has not let out any property but has allowed the occupancy of its properties charged on a daily rental basis and thus AO’s contention that income has to be assessed under ‘house property’ has no basis at all.

Provisions of section 194-I may be applied for any rental income paid, but as seen from the definition of ‘rent’ in section 194-I, rent includes any payment by whatever name called, for use of buildings including factory buildings, equipment, furniture or fittings. Even if machinery was leased, the consequent rent comes under the definition of section 194-I. But machinery lease cannot be considered under ‘income from house property’. Thus AO’s opinion that since TDS made under section 194-I, incomes are to be assessed under head ‘income from house property’ cannot be accepted.

Therefore, both on facts of the case and also on law, as established by the Hon’ble Supreme Court in the above said case, receipts of the assessee cannot be brought to tax under the head ‘house property’. The same is to be assessed under the head ‘Profits and gains of business or profession’ only. Thus the issue of head of income to be assessed is decided in favour of assessee and the issue of allowance of expenditure is restored to the file of AO for fresh consideration.

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The CIT 11 vs. M/s. Goodwill Theatres Pvt.Ltd [Income tax Appeal no- 2356 of 2013 dt – 6/06/2016 (Bombay High Court)].[Affirmed The CIT 11 vs. M/s. Goodwill Theatres Pvt.Ltd) ; ITA No. 8185/Mum/2011 Bench G ; dt 19/6/2013 (A Y: 2008-09 )]

Mesne Profits- Not taxable- Amount received from a person in wrongful possession of its property, would be mesne profits and was capital in nature.

The assessee company received mense profit for unauthorised occupation of the premises (Novelty Chambers) from Central Bank of India who was in possession of the rented premise in the Novelty Chambers. The tenancy of Central Bank of India ended on 1.6.2000. As per the order of the Supreme Court in which the court directed the Bank to hand over the possession to the assessee company by 30/06/2003 due to which the Bank gave possession of Novelty Chambers to the assessee company on 30/09/2003. Hence a suit was filed by the assessee company for mesne profit for the aforesaid period. The Small Causes Court at Mumbai passed an order dated 28/03/2007 wherein the Mesne Profit was fixed at Rs.8,33,474/- per month for the period between 1/06/2000 to 30/09/2003 plus interest thereon. The period was decided on the basis of the fact that the tenancy of Central Bank of India was terminated on 1/06/2000 and it vacated the premises and gave peaceful possession to the assessee company on 30/09/2003. The total compensation was thus fixed at Rs.3,33,38,960/- plus interest thereon at the rate of 6%. Thereafter, Central Bank of India filed an Application to the Small Causes Court for staying execution and operation of the order dated 28/03/2007 which was disposed by directing the appellant to pay Rs.1,47,28,280/-. Central Bank of India had also preferred an appeal against the said determination of mesne profit which was admitted and was pending. Thus, in the mean time during AY 08-09, Central Bank of India paid Rs.1,47,18,280/- to the assessee company which the assessee company had directly taken to the capital reserve without crediting the profit and loss account holding it to be a capital receipt exempt from Income-tax. The appeal of the Central Bank of India was still pending for adjudication.

The Department did not accept the assessee’s contention that mesne profits of Rs.1,47,18,280/- received by it constituted a capital receipt not chargeable to tax, in spite of the decision of the Hon’ble Madras High Court in the case of CIT vs. P. Mariappa Gounder, 147 ITR 676, holding the same to be revenue in nature.

Assessee preferred appeal before the CIT(A). Since the mesne profit was capital in nature in view of the decision of the Special Bench, in case of Narang Overseas Pvt Ltd. therefore, they cannot be brought to tax under Section 115JB of the Act. Even the Explanation 2 to Section 115JB supports the case of the assessee. The CIT (A) allowed the appeal. The ITAT confirmed the order of CIT(A)

The Revenue filed an appeal before the High Court challenging the order of ITAT . Revenue had preferred an appeal against the decision of the Special Bench in Narang Overseas Pvt. Ltd. 100 ITD (Mum)(SB)

The Hon’ble COurt found that the issue before the Special Bench of the Tribunal in Narang Overseas Pvt. Ltd., (supra) was to determine the character of mesne profits being either capital or revenue in nature. The Special Bench of the Tribunal in Narang Overseas Pvt. Ltd., (supra) held that the same is capital in nature. There was no doubt that the issue arising herein was also with regard to the character of mesne profits received by the Assessee. Accordingly, the appeal if the revenue was dismissed.

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Palkhi Investments & Trading Co. P. Ltd., Mumbai .. vs. The Income Tax Officer, Mumbai [INCOME TAX APPEAL NO.50 OF 2014; dt 9/6/2016 (Bombay High Court )] Affirmed [Palkhi Investments & Trading Co. Pvt Ltd vs. ITO CIR 9(2)(4) (ITA No.2623/Mum/2011 AY-2005-06; 24- 07-2013)]

Penalty u/s. 271(1)(c) – Addition made u/s 41(1) of the Act on account cessation of liabilities – Liabilities not genuine- Reflecting such liabilities without bonafide belief of their existence amounted to furnishing of inaccurate particulars:

The Assessing Officer made an addition of Rs.1.26 crore to the total income declared by the assessee. This addition was in respect of trade liabilities which had ceased to exist and represented income in terms of Sec. 41(1) of the Act. Being aggrieved the assessee carried the issue in appeal to the CIT (Appeal), who confirmed the same. On further appeal, the Tribunal reduced the addition u/s. 41(1) of the Act from Rs.1.26 crores to Rs.1.05 crores. The assessee carried the issue in further appeal to the High Court. The Court by order dated 16th November, 2010 dismissed the appeal interalia recording as under :

“The tribunal also recorded a finding that one of the creditors had even denied that any amount was due to it from the assessee. The tribunal has also recorded a finding of fact that some of the creditors named by the assessee were not found available at the addresses given by the assessee.”

The appellant filed SLP to the Supreme Court and the same was also dismissed. Thereafter review petition before High court was also dismissed on 4th August, 2015.

The Assessing Officer imposed penalty u/s 271(1)(c) of the Act. This was for furnishing inaccurate particulars of income and concealing income in its return of income for subject assessment year. The order of the Assessing Officer imposing penalty was confirmed by the CIT (A).

The Tribunal recorded the fact that the assessee was unable to prove genuineness of the amount shown as outstanding liabilities to the extent of Rs.1.05 crore. In the above view the assessee had to show on the basis of some evidence that it had a bonafide belief that the liability shown in the balance sheet was existing. During the course of hearing in penalty proceedings the Tribunal raised two queries, namely, evidence to prove as to when liability claimed to be subsisting arose for first time and other whether the assessee had received any letter from HDFC Ltd. stating that the amount due to M/s. Karamchand Chunnilal should be paid over to them as it had taken over its business as contended by the assessee. The impugned order records that the assessee was not in position to respond on both the issues. The impugned order further recorded that the claim made with regard to existing liabilities was not genuine claim as already established in quantum proceedings. The tribunal held that it was established that the assessee had filed inaccurate particulars of claim of income resulting in concealing of income. In above view, the tribunal upheld the order of AO imposing penalty of Rs.38.71 lakhs u/s. 271(1)(c) of the Act.

The Hon’ble Court observed that in quantum proceedings which were taken up to the Supreme Court the Tribunal had recorded a fact that a creditor had denied that any amount was due to the appellant and one of them was also not found at the address given. Further, in penalty proceedings all three authorities have concurrently arrived at a finding of fact that the claim made by the assessee with regard to its outstanding liabilities for subject assessment year was false. These findings of fact are not shown to be perverse in any manner. The legal claim made before the court that once a liablility is shown in the balance sheet, it must follow that it is bonafide, is not understood. The liability shown in the balance sheet as existing is found to be false. The assessee has to show the reason why he believed at the time he filed his balance sheet, it was true. No such attempt was even made.

The fact is that in terms of section 139 of the Act a return of income under the Act has to be filed along with the balance sheet and profit and loss account. In its absence the return of income is defective. Thus, same are to be considered as a part of the return of income. Further by showing a non existing liability as an existing liability, in the subject AY , the attempt was to escape offering of the ceased liability as income obliged to do u/s. 41(1) of the Act. Thus, not offering to tax, the above ceased liabilities would by itself amounted to furnishing inaccurate particulars of income leading to escapement of income from tax. In view of the above the assessee’s appeal was dismissed.

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DIT (E) vs. M/s. Khar Gymkhana Income tax Appeal no -2349 of 2013 dt : 6/06/2016 (Bombay High Court).[Affirmed M/s Khar Gymkhana vs. DIT (E) ; ITA No. 373/Mum/2012 Bench: A ; dt 10/7/2013 ;(A Y: 2009-10 )]

Charitable Institution- Registration of a charitable institution granted u/s. 12AA – cancellation of registration is to be initiated strictly in accordance with sections 12AA (3) and 12AA (4):

The assessee came into being by virtue of Deed of Trust dated 04.10.1934 for the promotion of sports, physical culture and social inter-course among members. The assessee trust had facilities such as promotion and advancement of games like cricket, tennis, badminton, a library consisting of sports books and periodicals, other indoor and outdoor games facilities. The CIT, Bombay City IV, allowed the registration of the trust u/s. 12A(a). Since then, the assessee was enjoying the exemption granted by the Income Tax department.

In the assessment proceedings for AY : 2009-10, the AO came to a conclusion that the assessee trust was carrying on the activities, which were in the nature of trade, commerce, business etc. This, he concluded by noticing that out of the receipts, the assessee had earned income by the sale of liquor at Rs. 1,45,99,037/-, canteen compensation at Rs. 20,67,807/- card and daily games at Rs. 81,883/-, guests fee at Rs. 31,50,078/- and income from banquet hall. The AO, therefore, asked the assessee to explain as to why the registration may not be cancelled in view of the newly inserted proviso to section 2(15), applicable from 2009-10, as the objects are not merely the advancement of games and social interaction, and the activities were of nature set out in the proviso i.e.:

a) any activity in the nature of trade, commerce or business or

b) any activity of rendering any service in relation to any trade, commerce or business.

as prescribed by Circular No. 11/2008, dated 19.12.2008. The AO held that if any trust/Institution whose main object is “for advancement of any other object of general public utility” carries out any activities which are in the nature of any trade, commerce or business for a cess or fee , it brings all actions of a trust which are resulting in such receipts as part of its earnings under the ambit of aforesaid proviso. Since the receipts were in excess of monitory limit as led down in the aforesaid proviso, there was a clear cut contravention of the provisions of Section 2(15) r.w. proviso.

The Tribunal held that it was not the case of the department that the assessee crossed the twin conditions, as mentioned in the section 12AA(3), which are, ” … that the activities of such trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution …”. In the instant case, the department has nowhere mentioned that “social inter-course among members” was not one of the objects of the trust, when it was originally formed on 04.10.1934. The revenue authorities have erred in cancelling the registration u/s 12AA(3).

The Revenue filed an appeal before the High Court challenging the order of ITAT .

It was submitted by the assessee that in view of the CBDT Circular having Circular No. 21 of 2016 dated 27th May, 2016, the Revenue cannot press this appeal.

The Hon’ble Court observed the Circular No.21 of 2016 when read as a whole, specifically lists out in paragraphs 4 and 5 that the Registration granted under Section 12AA could not be cancelled, only when the receipts on account of business exceeded the cutoff, specified in the proviso to section 2(15) of the Act. The jurisdiction to cancel the Registration only arises if there is change in the nature of activities of the institution or the activities of the institution, are not genuine. The aforesaid Circular by placing reliance upon 13(8) of the Act inter alia provides that the Registration granted to the Trust would continue even when the receipts on account of business is in excess of Rs.25 lakhs.

In view of the issue being covered by the CBDT Circular No.21 of 2016, no grievance against the impugned order can be made by the Revenue. Therefore, the appeal of the revenue was dismissed.

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The CIT: 21 vs. Parleshwar Coop. Housing Society Ltd. [Income tax Appeal no 1569 of 2007 dt -08/06/2016 (Bombay High Court)]. Affirmed decision in[Shree Parleshwar Co-Op. Housing vs. ITO, Ward 21(2)(4); AY- 1998-99 to 2000-2001 (2006 8 SOT 668 Mum)]

Character of income- Contribution received by the Society from its four new members would be covered by the concept of mutuality and not chargeable to tax – Principle of mutuality :

The assessee was a, housing co-operative society, registered under the Maharashtra Co-operative Societies Act, 1960. The assessee fell in the category known as “tenant co-partnership housing society”. The main feature of such a society is that it owns both land and building either on leasehold or freehold basis and on construction of tenements they are allotted to its members. The society constructed 198 flats from 1954 till 1956 and allotted them to members, who, among others, had a right to transfer their right of membership and other attendant privileges.

During these assessment years the assessee society collected interest free loans from the incoming members. The AO was of the view that the loans so taken are really not refundable and consequently represented income in its hand, liable to be taxed. The assessee submitted that the loans in question were all repayable sums. In fact, all the loans were eventually repaid .

The assessee before ITAT contended that the department did not properly appreciate that the loans in question were only in the nature of loans and did not have the character of income. Even otherwise, on the basis of mutuality the sum could not be brought to tax.

The issue stood concluded against the Revenue and in favour of the assessee by the decision of the Apex Court in the case of Siddheshwar Sahakari Sakhar Karkhana Ltd. vs. Commissioner of IncomeTax, (2004), 270 ITR 1.

As regards second issue the said Society owned both the land and the building and only alloted its tenaments to its members. The respondent society was constituted in the year 1954 and had 198 members occupying its tenaments. The respondent Society had available unutilised FSI (Floor Space Index) and sought to exploit it by constructing four additional tenaments and also enclosing the balconies (Verandah) of the existing tenaments resulting in additional l00 sq.ft. to its members. None of the existing members came forward to seek allotment of the four additional tenaments which were to be constructed on exploitation of the unutilised FSI.

In 1998, four persons sought membership of the Society. The above four new members were subsequently alloted the tenaments on construction by the respondent Society. The four new members had after becoming members contributed to the Society in the aggregate an amount of Rs.1.10 Crore. This resulted in allotment of four new tenaments constructed by the Society. However, the aforesaid contribution received from the four new members was not offered to tax by the Society on the principle of mutuality. However, the Assessing Officer did not accept assessee’s contention in respect of mutuality and held that the contribution from the four new members is in fact consideration received for sale of four new tenaments and, therefore, chargeable to tax as the income of the Society.

The CIT (A) dismissed the Society’s appeal holding there is no reason to disturb the findings of the Assessing Officer.

On further appeal by the Society, the Tribunal while allowing the Society’s appeal placed reliance upon the decision of the Apex Court in Commissioner of Income Tax vs. Bankipur Club Ltd. 226 ITR 97 wherein it was held that where a number of persons combine together and contribute to a common fund for the financing of some venture or object and will in this respect have no dealings or relations with any outside body, then any surplus returned to those persons cannot be regarded in any sense as profit. There must be complete identity between the contributors and the participators.

The tribunal held that the contribution received by the Society from its four new members would be covered by the concept of mutuality and not chargeable to tax

The Revenue filed an appeal before the High court challenging the order of ITAT . The High Court held that the test to determine the satisfaction of mutuality had been laid down by the decision of the Apex Court in Banglore Club vs. CIT 350 ITR, 509. The Apex Court has observed that the basis of not taxing surplus funds in the hands of an Assessee on the principle of Mutuality found its origin in the concept that no man can make a profit of himself. The Apex Court in Banglore Club (supra) set out three tests to be satisfied as under before the principle of mutuality can be applied as under :

i) There must be a complete identity between the contributors and the participants as a class;

(ii) The actions of the participants and contributors must be in furtherance of the activities of the assessee; and
(iii) There must be no scope of profiteering by the contributors from a fund made by them, which could only be expended or returned to them.

Thus, on facts, tests are satisfied therefore the Appeal of the revenue is dismissed.

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CIT- 15 vs. Sanjay Manohar Vazirani. [ Income tax Appeal no 2442 of 2013 dated- 07/06/2016 (Bombay High Court)]. Affirmed [Sanjay Manohar Vazirani vs. Commissioner of Income Tax 15 . [ITA No. 5178/MUM/2012 ; Bench – E ; dated 30/01/2013 ; A Y: 2009- 2010. Mum. ITAT ]

New Claim – Without filing revised return before AO – No Bar to entertain such claim by Appellate authority – Borrowing funds for its business of sale and purchase of shares held allowable:

The assessee in his return of income had claimed carry forward short term loss of Rs.1,17,70,414/-, in respect of sale and purchase of shares. During the course of assessment proceedings the assessee vide letter dated 17/10/2011 claimed that the activity of the assessee regarding sale and purchase of shares should be considered to be in the nature of business activity. It was pleaded that loss arising out of sale and purchase of shares should be allowed as loss arising out of business of sale and purchase of shares. A loss of Rs.5,40,98,454/- was computed by the assessee in respect of sale and purchase of shares . It was submitted that the activity of sale and purchase of shares should be considered to be business activity as all the necessary ingredients which are required to hold an activity as business activity have been fulfilled viz. (i) there is a high frequency of purchase and sale of shares; (ii) the transactions are substantial ; (iii) there is a voluminous trade as the total purchase are to the tune of Rs.51.24 crores and sales are of Rs.49.00 crores; (iv) the holding period of shares is very low; (v) the assessee has utilized borrowed funds for purchasing and holding the shares.

The AO did not accept such contentions of the assessee The AO also rejected the claim of the assessee regarding interest on loans which was claimed to the tune of Rs.71,18,278/- as according to AO only a portion of the said interest could be considered for the purpose of purchase and sale of shares. AO held that 40% of such interest is disallowable. Accordingly, he made disallowance of Rs.28,47,311/- .

Before the CIT (A) the assessee raised the same contentions . The Ld.CIT(A) did not accept the submission of the assessee on the ground that the assessee himself, in the return of income, has disclosed the income arising out of share transactions under the head capital gain; in the balance sheet, the stock had been shown under the head investment. He held that the claim made by the assessee during the course of assessment proceedings was an after thought the assessee could not be allowed to change the stand just to take advantage of some provisions of the Act; the assessee was not a trader of shares and purchase and sale of shares by him was only a part time activity because the assessee was getting regular salary income from the company; mere frequency of transactions could not be a proof of trading activity. Therefore, he held that AO was right in treating such income under the head “capital gain” and in this manner CIT(A) confirmed the action of the AO. The CIT(A) also confirmed the disallowance made by the AO in respect of interest.

The ITAT held that activity of sale and purchase entered into by the assessee was in the nature of business, as it had not been disputed by the revenue that borrowed funds on which interest had been paid by the assessee were utilized for the purpose of purchase of shares, the same was allowable out of income earned by the assessee from the activity of sale and purchase of shares. Thus appeal filed by the assessee was allowed .

The Revenue filed an appeal before the High court challenging the order of ITAT . The High Court held that the Tribunal has followed the decision of this Court in CIT vs. Pruthvi Brokers and Shareholders Pvt. Ltd. 349 ITR 336. Thus, the assessee’s contention was accepted that the gain on account of purchase and sale of shares was in the nature of business income. Consequently the interest paid by the assessee for borrowing funds for its business had necessarily to be allowed. In the above view, Appeal was dismissed.

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TDS – Perquisite – A. Y. 1993-94 – Free interairline tickets provided to the employees of the assessee by other airlines – Cannot be considered as perquisite provided by assessee – No tax deductible at source –

CIT vs. Air France; 384 ITR 142 (Del):

The assessee is in the business of air transport. The Assessing Officer treated as perquisite the free interairline tickets provided to the employees of the assessee by other airlines. He held the assessee liable for short deduction of tax at source. The CIT(Appeals) and the Tribunal allowed the assessee’s claim that there is no perquisite.

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

“The Tribunal did not commit any error in deleting the addition. The Department was unable to explain how the free air ticket provided to the employees of the assessee by some other airlines could be treated as perquisites provided by the assessee.”

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TDS – Compensation or interest accruing from the compensation that has been awarded by the Motor Accident Claims Tribunal cannot be subjected to TDS and the same cannot be insisted to be paid to the Tax Authorities since the compensation and the interest awarded therein does not fall under the term income –

Managing Director, Tamil Nadu State Transport Corpn. (Salem) Ltd. vs. Chinnadurai; [2016] 70 taxmann.com 53 (Mad)

In this case the Madras High Court considered the question as to whether it would be appropriate to insist the victim who is awarded compensation in motor accident cases to part with it or the interest that accrued on it towards payment as Tax Deduction at Source (TDS) ?

The High Court held as under:

“i) If there is a conflict between a social welfare legislation and a taxation legislation, then, this Court is of the view that a social welfare legislation should prevail since it subserves larger public interest. The Motor Vehicle Act 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 put spokes in the effective and efficacious enforcement of the Motor Vehicles Act. In fact, if one might deeply analyse, it could be seen that there is no direct conflict between any provisions of the Income Tax Act and the Motor Vehicles Act and it is only by the interpretation of the provisions the concept of compulsory payment of TDS has crept into the realm of compensation payment in Motor Vehicle Accident cases.

ii) This Court arrives at the conclusion that the compensation awarded or the interest accruing therein from the compensation that has been awarded by the Motor Accident Claims Tribunal cannot be subjected to TDS and the same cannot be insisted to be paid to the Tax Authorities since the compensation and the interest awarded therein does not fall under the term ‘income’ as defined under the Income Tax Act, 1961.

iii) Therefore, this Court directs that the Petitioner Corporation cannot deduct any amount towards TDS and the same shall also be deposited in addition to the amount that has already been deposited to the credit of M.CO.P.No.879 of 2006, on the file of the Motor Accident Claims Tribunal, Additional District Judge, Fast Track Court, Dharmapuri, within a period of four weeks from the date of receipt of a copy of this order and the Respondent is entitled to take appropriate steps in a manner known to law to withdraw the amount.”

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Search and seizure – Retention of seized assets – Section 132B – Application for release of seized articles within time and explanation furnished regarding the articles – Department has no authority to retain seized articles if no dispute raised within 120 days – Direction to authorities to immediately release seized articles –

Mul Chand Malu (HUF) vs. ACIT; 384 ITR 46 (Gau):

The assessee’s were members of a HUF. Under searches conducted in different premises of the assesses, jewellery ornaments and bullion amounting to Rs. 13,44,70,018 were seized. The assesses filed application under first proviso to section 132B(1)(i) on 26/11/2014 for release of the assets. Without taking any decision on the application within the stipulated period of 120 days from the date on which the last authorization for search was executed, the assesses were informed that by an order dated 28/01/2015 centralisation of their cases has been done and therefore jurisdiction of the office of the Assistant Commissioner of Income- Tax, Gauhati had ceased and that the application dated 26/11/2014 was treated as disposed of in the light of the order dated 28/01/2015.

The Gauhati High Court allowed the writ petition filed by the assesses for release of the assets and held as under:

“i) When an application is made for the release of the assets under the first proviso to section 132B(1)(i) of the Act explaining the nature and source of the seized assets and if no dispute was raised by the Department during the permissible time of 120 days, it had no authority to retain the seized assets in view of the mandate contained in second proviso to section 132B(1)(ii) of the Act.

ii) The authorities are directed to release the seized assets of the assesses immediately.”

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TDS: Credit for TDS – A. Y. 2009-10 – TDS belonging to sister concern credited to Form 26AS of assessee – TDS deducted from payment to REPL, sister concern of assessee – Deductor mistakenly mentioned PAN of assessee and hence TDS amount appeared in Form 26AS of assessee – REPL paid taxes without claiming adjustment of said TDS and also not objecting to grant of credit of the same to the assessee –

Assessee is entitled to credit of the said amount of TDS: CIT vs. RELCOM; 286 CTR 102 (Del):

In the A.Y. 2009-10, one of the customers, in its TDS return mentioned the PAN of the assessee in respect of the TDS from payment to the sister concern REPL. REPL did not claim the credit of the said TDS and paid tax on its income. REPL did not have objection in giving credit of the said TDS in favour of the asessee. The said TDS reflected in Form 26AS in the case of the assessee and the assessee claimed credit of the same. The Assessing Officer refused to give credit of the said amount to the assessee. The Tribunal allowed the assessee’s claim.

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

“i) The Revenue relies on the phrase “shall be treated as a payment of tax on behalf of the person from whose income the deduction was made” in section 199 to contend that the assessee’s TDS claim cannot be based on the receipts of REPL.. However, the assessee fairly admitted throughout the proceedings for its TDS claim of Rs. 1,20,73,097 that the benefit of such claim has not been availed by REPL. Therefore, the Revenue, having assessed, REPL’s income in respect to such TDS claim cannot now deny the assessee’s claim on the mere technical ground that the income in respect of such TDS claim was not that of the assessee, given that the assessee and REPL are sister concerns and REPL has not raised any objection with regard to the assessee’s TDS claim.

ii) Procedure is the handmaid of justice, and it cannot be used to hamper the cause of justice. Therefore, the Revenue’s contention that the assesse, instead of claiming the entire TDS amount, ought to have sought a correction of the vendors mistake, would unnecessarily prolong the entire process of seeking refund based on TDS credit.

iii) The question of law is answered against the Revenue and the appeal is dismissed.”

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Search and seizure – Release of seized assets – Ss. 132A and 132B(1)(i) – Time limit for disposing application – If no decision taken within time department cannot wait for outcome of assessment but bound to release asset –

Nadim Dilipbhai Panjvani vs. ITO; 383 ITR 375 (Guj):

The Department seized cash from the petitioner while he was travelling on March 25, 2014. The petitioner applied for release of cash under petition dated April 14, 2014 which was filed on April 17, 2014. The application was rejected on 20/07/2015 on the ground that the cash could be released only when its source was explained to the satisfaction of the Assessing Officer and release of seized assets could be considered only after the final assessment of the tax and penalty proceedings. The contention of the petitioner that this decision should have been taken within the time envisaged under further proviso to clause (i) of sub-section (10) of section 132B of the Income-tax Act, 1961 was rejected by the Assessing Officer.

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

“i) The second proviso to clause (i) of sub-section (1) of section 132B puts a time limit within which a seized asset must be released. The question of not releasing the asset would arise only upon the decision on an application that may have been made by the person concerned being taken by the Assessing Officer. If no decision is taken, necessarily, the option of the Assessing Officer to adjust such seized assets would be confined to the existing liabilities.

ii) It is in this context the legislature requires the Assessing Officer to follow the time limit scrupulously. In other words if the person concerned has made an application for release of the assets within the prescribed time, the authority can refuse such request on the ground of not being satisfied about the source of acquisition. But if no such decision is taken within the time envisaged in the further proviso, releasing of the asset becomes imminent.

iii) The action of the Assessing Officer was not sustainable. The impugned order dated July 20,2015 is set aside. The seized cash shall be released in favour of the petitioner with interest as per the statute.”

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Before Saktijit Dey (J. M.) and Ramit Kochar (A. M.) ITA no.7297/Mum./2013 A.Y.: 2010–11. Date of order: 27.05.2016 Counsel for Revenue / Assessee: K. Mohan Das / Jignesh R. Shah

Section 40(a)(ia) – Assessee not liable to deduct tax at source when the payment made is on behalf of the client.

FACTS
The assessee, a partnership firm, is engaged in the business of providing logistic services relating to export/ import viz. transportation, warehousing, packaging, custom clearance, organizing of container with the shipping lines, arrangement of labour for unloading cargo, etc. During the assessment proceedings the AO noticed that during the year, the assessee had paid an amount of Rs. 3.29 crore to Container Freight Station (CFS) and Inland Container depots (ICD) for/on behalf of importer/ exporter. The AO was of the view that as the assessee was dealing with the CFS for and on behalf of its client, it was the liability of the assessee to deduct tax u/s 194C while making payments to CFS. On account of its failure to deduct tax at source, the AO disallowed the sum of Rs. 3.29 crore by invoking the provisions of section 40(a)(ia).

On appeal, the CIT(A) deleted the addition as the assessee had made payments on behalf of the importer/ exporter. According to him, the payments so made were deemed to be the expenditure of the importer/exporter and not an expenditure by the assessee. Since the assessee had never claimed these payments as expenditure in the Profit & Loss account, the provisions of section 40(a)(ia) cannot be invoked to disallow the same.

HELD
According to the Tribunal, when the AO himself admitted the fact that the assessee had made payments to CFS/ ICD on behalf of importer as a custom house agent and the documentary evidence produced by the assessee also proved such fact, the AO cannot disallow the payments under section 40(a)(ia) alleging non–deduction of tax by the assessee, especially when the expenditure / payment does not relate to the assessee. Merely because the assessee made payments on behalf of its client the liability of deduction of tax on the assessee would not get attracted. More so, when the assessee has not claimed such payments as expenditure by debiting to its Profit & Loss account. In coming to the conclusion, the Tribunal also found support from the Mumbai Tribunal decisions in the case of DCIT v/s Rank Shipping Agency Pvt. Ltd. (ITA no. 5946/Mum./2008 dated 21.11.2012) and in the case of ITO v/s M/s. Universal Traffic Co. (ITA no.1426 to 1429/Mum./2013 dated 17.12.2014). With the result, the Tribunal dismissed the appeal filed by the revenue.

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Mutual benefit company – Principle of mutuality – Income from sale of shares and the occupancy rights – cannot be assessed in the hands of the assessee – Land continues to be owned by the assessee – No transfer of any FSI attached to the land – Tax under the head ‘capital gain’ in the hands of the shareholder not company:

CIT- 6 vs. M/s. Calico Dyeing and Printing Mills Pvt. Ltd. [ Income tax Appeal no 14 of 2014 dt – 04/07/2016 (Bombay High Court)].

[The ITO 6(2)(1) vs. M/s. Calico Dyeing and Printing Mills Pvt.Ltd . [ITA No. 4297/MUM/2009 ; Bench : C ; dated 05/06/2013 ; A Y: 2006- 2007. Mum. ITAT]

The assessee was engaged in the business of construction and started construction of 15 storied building consisting of 85 dwellings units in the year 2002-03. The assessee had finished major construction activity in early 2005 and had received the “Occupation Certificate” from BMC authorities upto the 13th floor on 31st May, 2005. As per the details, totally 67 flats weresold 67.

It was the claim of the assessee that it was a mutual benefit company therefore it had not made any profit from the construction activity as it had only collected the construction cost from the flat owner. The company has entered into a tripartite agreement with the flat owners. The parties to the sale agreement being the flat purchaser, the assessee company and a partnership firm Viz., M/s. Calico Associates who held 12,100 shares of the assessee company.

After considering these facts, the AO issued show cause asking the assessee why the activity of construction and sale of residential units should not be considered as a business of the assessee company and the profits arising out of the same not be taxed in its hands as business income. The assessee explained to the AO that the activity of construction and allotment of residential flat cannot be treated as business venture because it was a Non Trading Company doing activities of construction of residential buildings for the benefit of its members. Therefore, there was no motive of earning any profits or gains from the activity. It was explained that the assessee was working solely for the benefit of its members/share holders. The AO did not accept the contention of the assessee and was of the firm belief that the flat owners at the time of booking of the premises were not share holders of the company. The AO further observed that the flat owners had no right other than the flats occupied by them. The AO further observed that principle of mutuality did not apply on the facts of the case because there is no reciprocity or mutual dependence which are necessary conditions in the case of mutuality. The AO was of the view that the claim of the assessee is nothing but a sham and a colourable device used by it to divert and avoid taxable income in its own hands.

Being aggrieved by this finding of the AO, the assessee carried the matter before the Ld. CIT(A). Before the Ld. CIT(A), the assessee explained the entire nature of transaction and contended that only the share holders are liable to tax on the income arising from such transfer and the share holders have already offered the income to tax. If the income was taxed in the hands of the assessee, it would amount to double taxation. The Ld. CIT(A) was convinced that what was attached to the shares and subject matter of transfer were the occupancy rights of the constructed flats in the building Kamal Darshan and not the land. Such rights did not belong to the assessee since before rights came into existence, they were attached to the shares of the company.

CIT(A) held that in terms of Section 27(iii) of the Act, the shareholder was the owner of the flat. It found that in fact what had been sold were its shares held by its shareholder one M/s.Calico Associates. The sale of shares by its shareholder – M/s. Calico Associates was brought to tax under the head ‘capital gain’ in the hands of the shareholder for the subject Assessment Year. It also held that there was no sale of the land by the asseseee nor any sale of FSI available on the land which continued to be owned by the asseseee. In these circumstances, it allowed the asseseee’s appeal.

Aggrieved by the above finding of the Ld. CIT(A), Revenue carried the matter before ITAT . This ground of appeal was dismissed by the ITAT .

The Revenue filed an appeal before the High court challenging the order of ITAT . The High Court held that the question as raised was in respect of impairment of land (use of FSI) was not canvassed before the Tribunal. Therefore, the question raised does not arise out of the Tribunal’s order. In any case, the finding of fact rendered by the CIT(A) that land continued to be owned by the assessee and there was no transfer of any FSI attached to the land was not shown to be perverse and/or arbitrary. In the above view, the Appeal was dismissed.

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A. P. (DIR Series) Circular No. 63 dated April 21, 2016

Foreign Investment in units issued by Real Estate Investment Trusts, Infrastructure Investment Trusts and Alternative Investment Funds governed by SEBI regulations

This circular now permits foreign investment (acquire, purchase, sell, transfer) in units of Investment Vehicles registered and regulated by SEBI or any other competent authority, subject to compliance with the applicable terms and conditions. For the purpose of investment under these Regulations: –

1. foreign investment in units of REITs registered and regulated under the SEBI (REITs) Regulations, 2014 will not be included in “real estate business”

2. Presently, an Investment Vehicle will mean: –

a. Real Estate Investment Trusts (REITs) registered and regulated under the SEBI (REITs) Regulations 2014;

b. Infrastructure Investment Trusts (InvITs) registered and regulated under the SEBI (InvITs) Regulations, 2014;

c. Alternative Investment Funds (AIFs) registered and regulated under the SEBI (AIFs) Regulations 2012.

3. Unit will mean beneficial interest of an investor in the Investment Vehicle and will include shares or partnership interests.

4. A person resident outside India will include a Registered Foreign Portfolio Investor (RFPI) and a Non-Resident Indian (NRI).

5. Payment for the units must be by way inward remittance or by debit to an NRE or an FCNR account.

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SEBI Order Now Enables Investors To Recover Losses From Fraudsters In The Securities Markets

Can the Securities and Exchange Board of India make a fraudster or other wrong doer in the securities markets compensate the wronged persons? The answer, generally, is that SEBI cannot do so. This question is important because the parties are normally required to approach other forums which could include courts, Consumer Protection Forums, etc. However, a recent order of SEBI, following an order by the Securities Appellate Tribunal, has opened the door to this aspect to a little extent. This order is significant for several reasons. SEBI is an expert body in the securities markets with fairly broad powers. It has a huge infrastructure at its command to investigate, adjudicate and punish. The groundwork for determining whether a person has committed such a fraud, etc. would be laid down by SEBI through such orders. SEBI also has, as we will see later, the powers to disgorge gains made by wrongdoers. In some cases, such as in the alleged scams in initial public offerings, SEBI even went the extra mile and made arrangements for distribution of these illegal gains to those at whose cost such gains were made. The next logical step ought be to allow such things on a general basis and perhaps even allow persons who have suffered losses to approach SEBI.

However, this has not happened mainly because of certain inherent limitations on SEBI under the law. SEBI is not an adjudicator of disputes. It would surely punish fraudsters. It may debar them from markets. It may make them pay penalty, though such penalty goes in government coffers and not to help those who lost monies. It may prosecute such persons too. It also orders parties who have illegally collected monies to refund them , with interest. However, an aggrieved person could not approach SEBI and require it to make a wrongdoer compensate the loss he had suffered. Indeed, till recently, it was a little uncertain whether SEBI had powers even to disgorge illegitimate gains. A clarificatory amendment was however made in 2014 to explicitly give such powers to SEBI.

However, compensating loss caused by fraudsters continued to remain out of SEBI’s legal powers. The investors were thus forced to approach the long drawn procedures in courts. An investor may get some satisfaction when such fraudsters are punished, but he still would remain short of his hard earned monies. However, thanks to persistent efforts of an investor who lost money to a company and its Promoters through fraud, there is a glimmer of hope that SEBI may be required to do broader justice in such matters. By a recent decision of SEBI, which indeed was following the directions of the Securities Appellate Tribunal (“SAT “), SEBI has acknowledged such responsibility. A final order is awaited, since calculation of ill-gotten monies is in progress. While it would be interesting to see the legal reasoning SEBI provides for passing such final order and also see its fate in appeals, if any, it would be worth to consider this decision.

SEBI’s decision

The decision was in case of the applicants Harishchandra and Ramkishori Gupta (“the Applicants”) in the matter of Vital Communications Limited (“Vital”)(SEBI Order dated 1st April 2016).

To summarise from the facts as narrated in the Order, Vital, a listed company, had made a preferential issue of equity shares to certain parties. SEBI found that a significant portion of the funding for such preferential issue was made by Vital itself. Many of the preferential allottees were also found to be connected to Vital/its Promoters. Thereafter, a spate of catchy advertisements were issued of proposed buyback of shares at a high price, preferential issue at even higher price, and for issue bonus shares. None of this actually took place in the manner described in the advertisements.However, along with such advertisements, certain preferential allottees sold a substantial quantity of shares. Effectively thus, the advertisements helped the parties to sell equity shares at a high price to unsuspecting investors. Since the ruling price then was much lower than the price that could be expected if the promises as per the advertisements had actually been carried out, investors rushed in and bought the shares. SEBI investigated and uncovered the facts and took action against the parties by debarring them, etc.

However, this left the investors with losses. The Applicants approached SEBI praying that their losses should be compensated. SEBI refused to do claiming that it had no powers under SEBI Act to order the company and/or its directors to compensate the Applicants. The Applicants filed an appeal to the SAT. SAT ordered that if SEBI found Vital guilty of fraud, “…it may consider directing the concerned entity or Vital to refund the actual amount spent by the applicants on purchasing the shares in question and with appropriate interest”.

SEBI undertook final investigation and did find wrongdoing and fraud. SEBI passed various directions against the parties. However, still, it did not pass orders providing for compensation to the investors who were duped into making investments. The Applicants once again appealed to SAT . SAT once again passed an order asking SEBI to do the needful. SEBI then passed an order that it will look into quantification of ill gotten gains and thereafter pass orders for disgorgement and restitution. It then thus finally gave a proper hearing to the Applicants on the issue of compensation. However, on review, SEBI found that its own orders/investigation had not made a proper calculation of the ill gotten gains by the Company/ Promoters. Accordingly, finally SEBI undertook vide this recent and latest order to determine the amount of ill gotten gains to take the matter to its next and final step of ordering such parties to return (i.e., effectively compensate) the gains made to the Applicants, who suffered losses. Interestingly, while the original fraudulent advertisement & sale of shares took place in 2002, it is only in 2016, after several petitions and appeals by the Applicants that SEBI has initiated action. It will still be some time before the amount of ill gotten gains would be calculated, then hopefully recovered from the parties and paid to the Applicants who have suffered losses.

Disgorgement – a history of uncertainties

Disgorgement, simply stated, is taking away ill-gotten gains from the wrong doer. A person may, for example, make gains from insider trading in violation of the applicable Regulations. SEBI may order such person to disgorge such gains and pay them over to SEBI. Till very recently, whether SEBI could, in law, order disgorgement was debated. However, the SEBI Act was amended vide the SEBI (Amendment) Act, 2014, with effect from 18th July 2013, specifically giving it power to disgorge gains made in violation of specified provisions of law. However, even these amendments expressly permit only disgorgement. The objective is only to ensure that the wrong doers do not keep their ill gotten gains. They do not specifically expressly provide for payment of these disgorged amounts to those who were at the losing end (though SEBI has passed some orders of such type). Further, it was still unclear law whether an investor can initiate such action. Now, this order creates a precedent that SEBI can undertake such exercise of disgorging such ill-gotten gains and then reimburse them to those whom they belonged.

Limitations

An important distinction to be made here is that this case is no precedent for investors being able to approach SEBI to get general disputes resolved and get the whole of their losses recovered. It only means that SEBI will disgorge gains made from acts/omissions in violation of specified securities laws. And that only such gains will go back to the hands of investors. The investors may have suffered a higher loss, but if its flow cannot be traced to the pockets of such wrong doers, then there may be nothing to recover to that extent. Thus, the investor may not get the whole of their losses compensated.

In any case, if SEBI cannot recover such monies as for example when the fraudsters do not have sufficient assets, the investors would still have lesser amounts to receive.

However, SEBI/SAT has ordered that interest shall also be disgorged and paid, irrespective of whether the fraudster had earned such interest or not. This, though an extension of the power of disgorgement, does give relief for the time element.

There is another type of situation where there may be fraud but the amount of gains made by the fraudster may not match with the losses of the investor. For example, a broker/adviser may give wrongful/fraudulent advice to gain commission fees. The investor may invest monies and then end up losing a large sum of money. However, disgorgement permits forfeiture of ill-gotten gains. In such a case would include only the brokerage/fees, which would be a small fraction of the loss. A purely contractual or similar dispute will not be covered. These continue to remain within the domain of civil courts, stock exchanges, etc.

Scope of disgorgement

As the amended Section 11B makes it clear, disgorgement is of all gains made from violations of SEBI Act and Regulations. Thus, gains made not just from fraud but from any violation of specified securities laws. Thus, even though the decision in this case related to a fraud, the principle would clearly extend to gains from any other violation of Securities Laws. And thus, those who suffer on account of violation of Securities Laws may get compensated.

Conclusion

A fresh, even if hesitant and incomplete, chapter has opened in the history of Securities Laws. While it is too early to draw final conclusions, investors now do have a better measure to recover their losses that is formal, speedier and effective. However, much depends on the final order, the manner in which losses are determined and recovered and also the legal reasoning SEBI adopts for such order. It will also have to be seen whether such orders are appealed against and what appellate Tribunal/ courts decide. The fact that the orders of SAT and SEBI both talk of restitution to be “considered in accordance with the provisions of the SEBI Act, 1992 …and the regulations framed thereunder” is also interesting since there could still be some legal uncertainties about the whole process

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ETHICS, GOVERNANCE & ACCOUNTABILITY

ACCOUNTABILITY

In ethics and governance, accountability is answerability, blameworthiness, liability and the expectation of accountgiving. As an aspect of governance, it has been central to discussions related to problems in the public sector, non-profit and private (corporate) and individual contexts Political accountability is the accountability of the government, civil servants and politicians to the public and to legislative bodies such as a congress or a parliament.

Within an organization, the principles and practices of ethical accountability aim to improve both the internal standard of individual and group conduct as well as external factors, such as sustainable economic and ecologic strategies. Also, ethical accountability plays a progressively important role in academic fields, such as laboratory experiments and field research.

Internal rules and norms as well as some independent commission are mechanisms to hold civil servants within the administration of government accountable. Within department or ministry, firstly, behavior is bound by rules and regulations; secondly, civil servants are subordinates in a hierarchy and accountable to superiors. Nonetheless, there are independent “watchdog” units to scrutinize and hold departments accountable; legitimacy of these commissions is built upon their independence, as it avoids any conflicts of interests. The accountability is defined as an element which is part of a unique responsibility and which represents an obligation of an actor to achieve the goal, or to perform the procedure of a task, and the justification that it is done to someone else, under threat of sanction.

RTI Clinic in June 2016: 2nd, 3rd, 4th Saturday, i.e. 11th, 18th and 25th, 11.00 to 13.00 at BCAS premises.

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2 States: The Story of Mergers and Stamp Duty

Introduction

Just when one thought that the burning issue of stamp duty on merger schemes has been settled once and for all, a Bombay High Court decision has stoked the fire some more! To refresh, the Supreme Court and several High Court decisions have held that the order of High Court u/s.394 of the Companies Act sanctioning an amalgamation was a conveyance within the meaning of the term conveyance and was liable to stamp duty. A Transfer under a merger is a voluntary act of parties and it has all the trappings of a Sale. The Scheme sanctioned by Court is an instrument and the State has power to levy duty on a merger. Even in States where there is no express provision levying duty as on a merger, Courts have held that stamp duty is payable as on a conveyance.

Recently, the Full Bench of the Bombay High Court in the case of The Chief Controlling Revenue Authority vs. M/s. Reliance Industries Ltd, Civil Reference No. 1/2007 was faced with an interesting issue of stamp duty payable on an inter-state merger. In a case where a company registered in Gujarat merged with a company registered in Maharashtra would stamp duty be payable once or twice was the moot question?

Background to the Case

Reliance Petroleum Ltd, a Gujarat based company had merged into Reliance Industries Ltd, a Mumbai based company. The Stamp Acts of both Maharashtra and Gujarat had a specific provision levying duty on a Court Order sanctioning a Scheme of merger. In Maharashtra, the maximum duty on a Scheme of merger is Rs. 25 crore. Pursuant to the merger, Reliance Industries Ltd had paid a stamp duty of Rs. 10 crores in Gujarat and hence, paid only the balance of Rs. 15 crore in Maharashtra. Thus, it claimed that it was eligible for a set off of the duty paid in one State against the duty payable in another State. For this, it relied upon section 19 of the Maharashtra Stamp Act, 1958 (“the Act”) which provides that where any instrument described in Schedule-I to the Act and relating to any property situate or to any matter or thing done or to be done in Maharashtra is executed out of Maharashtra subsequently such an instrument / its copy is received in Maharashtra the amount of duty chargeable on such instrument / its copy shall be the amount of duty chargeable under Schedule-I less the duty, if any, already paid in any other State. Thus, similar to a double tax avoidance agreement, a credit is available for the duty already paid. It may be recalled that under the Act, stamp duty is leviable on an every instrument(not a transaction) mentioned in Schedule I to the Maharashtra Stamp Act, 1958 at rates mentioned in that Schedule – LIC vs. Dinannath mahade Tembhekar AIR 1976 Bom 395. If there is no instrument then there is no duty is the golden rule one must always keep in mind. An English decision in the case of The Commissioner of Inland Revenue vs. G. Anous & Co. (1891) Vol. XXIII Queen’s Bench Division 579 has held that held that the thing, which is made liable to stamp duty is the “instrument”. It is the “instrument” whereby any property upon the sale thereof is legally or equitably transferred and the taxation is confined only to the instrument whereby the property is transferred. This decision was cited by the Supreme Court in the case of Hindustan Lever Ltd vs. State of Maharashtra, (2004) 9 SCC 438. Hence, if no instrument is executed, there would not be any liability to stamp duty.

In Reliance’s case, the Revenue Department argued that it was the Court Order and not the Scheme which was liable for duty. Since there were two separate Court Orders, the duty paid on the Gujarat High Court’s Order was not eligible for set off against the duty payable on the Bombay High Court’s Order. These two Orders were not the same instrument and hence, no credit was available. On the other hand, the Company argued that it was the Scheme which was the instrument and not the Court Orders. Accordingly, since there was only one Scheme, a credit was available. Since both the transferor and the transferee company were required to secure sanctions separately, the Scheme and the Order of the Bombay High Court sanctioning the Scheme would not constitute an instrument or a conveyance, unless and until the Gujarat High Court had sanctioned the Scheme. This is because the Scheme would become effective and operative and the property would stand transferred and vested from the transferor to the transferee, only on the Gujarat High Court making the second order sanctioning the Scheme. In fact if the Gujarat High Court had not sanctioned the Scheme, the same would not have become operative and there would be no transfer or vesting of property in the transferee company. Accordingly on such sanction being granted by the Gujarat High Court, the parties were liable to pay stamp duty on the sanctioned scheme in Gujarat and then to pay stamp duty in Maharashtra subject to a rebate u/s. 19 for the duty already paid in Gujarat.

Court’s Order

The Bombay High Court upheld the stand of the Department and negated Reliance’s plea. It held that the duty is payable on a Court Order and not a Scheme. The Court relied upon the decision of the Supreme Court in Hindustan Lever vs. State of Maharashtra (2004) 9 SCC 438 which held that the transfer is effected by an order of the Court and the order of the Court sanctioning the scheme of amalgamation is an instrument which transfers the properties and would fall within the definition of section 2(l) of the Act, which includes every document by which any right or liability is transferred. In Hindustan Lever’s case, it was held that the point as to whether the stamp duty was leviable on the Court order sanctioning the scheme of amalgamation was considered at length in Sun Alliance Insurance Ltd. vs. Inland Revenue Commissioners 1971 (1) All England Law Reports 135. There it was observed that the order of the court was liable to stamp duty as it resulted in transferring the property and that the order of the court which results in transfer of the property would be an instrument liable to be stamped. The Bombay High Court further held that it was the settled position of law that in terms of the Act, stamp duty is charged on ‘the instrument’ and not on ‘the transaction’ effected by ‘the instrument’.

The Bombay High Court Order dated 7.6.2002 which sanctioned the merger would be the instrument and that was executed in Mumbai, i.e., in Maharashtra. The instrument was chargeable to duty and not the transaction and therefore even if the Scheme may be the same, i.e., transaction being the same, if the Scheme was given effect by a document signed in the State of Maharashtra it was chargeable to duty as per the Act. As per the Act, the taxable event was the execution of the instrument and not the transaction. If a transaction was not supported by execution of an instrument, there could not be a liability to pay duty. Therefore, essentially the duty was leviable on the instrument and not the transaction. Although the Scheme may be same, the Order dated 7.6.2002 being a conveyance and it being an instrument signed in State of Maharashtra, the same was chargeable to duty so far as State of Maharashtra was concerned. It further held that although there were two orders of two different High Courts pertaining to the same Scheme they were independently different instruments and could not be said to be same document especially when the two orders of different High Courts were upon two different Petitions by two different companies. When the scheme of the Act was based on chargeability on an instrument and not on transaction, it was immaterial whether it was pertaining to one and the same transaction. The instrument, which effected the transfer, was the Order of the Court issued u/s. 394(1) that sanctioned the Scheme and not the Scheme of amalgamation itself. It accordingly held that the transfer would take effect from the date the Gujarat High Court passed an order sanctioning the Scheme. In other words, after the Gujarat High Court passed an order sanctioning the Scheme on account of the order of the Bombay Hon’ble Court, the transfer in issue took place. It negated the contention that only a document, which ‘created right or obligation’ alone constituted an ‘instrument’ since the definition of the term ‘instrument’ was an inclusive and not an exhaustive definition. Thus, the term ‘instrument’ also included a document, which merely recorded any right or liability.

It thus concluded that section 19 of the Act providing double-duty relief was not applicable. The Order of the Bombay High Court related to property situated within Maharashtra and was also passed in Maharashtra and hence, a fundamental requirement of section 19, i.e., the instrument must be executed outside the State, was not fulfilled. While paying duty on the Bombay High Court Order dated 7.6.2002 rebate cannot be claimed for the duty paid on Gujarat High Court’s Order by invoking section 19 of the Act.

Repercussions of the judgment

This judgment of the Bombay High Court will have several far reaching consequences on the spate of cross-country business restructuring. Emboldened by this decision, other States would also start demanding stamp duty on mergers involving companies from more than one state Companies would now have to factor an additional cost while considering mergers. The same would be the position in the case of a demerger. An interesting scenario arises if instead of a merger, one considers a slump sale of a business involving companies located in two states. In such an event if a conveyance is executed for any property, then there would only be one instrument. Here it is very clear that section 19 would apply and the duty paid in one state would be allowed as a set off in the other. Thus, depending upon the mode of restructuring the duty would vary. Is that a fair proposition? Also, while companies located in the same state would get away with a single point taxation, those in two or more states suffer an additional burden. Does this not throw up an arbitrage opportunity of having the registered offices of all companies party to the merger in the same state as opposed to having separate registered offices? Would that not lead to a larger loss of revenue for the state from which the office is shifted out as compared to the small gains it would have made from the stamp duty on merger. One wishes that the law is implemented and interpreted in a manner that does not encourage such manoeuvring.

Conclusion

One can only submit that the decision of the Bombay High Court needs a reconsideration otherwise the entire pace of mergers and demergers would be retarded in the Country. With mergers being neutral from an income tax as well as indirect tax perspective, stamp duty is the single biggest transaction cost. This decision would see a huge increase in the duty costs.

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Writ – Power of attorney – A writ petition under Article 226 of the Constitution can be filed by a power of attorney holder subject to certain safeguards [Constitution Of India – Art. 226]

Syed Wasif Husain Rizvi vs. Hasan Raza Khan AIR2016All52 (HC)

The issue before the Full Bench of the Allahabad High Court was “Whether a writ petition under Article 226 of the Constitution can be filed by a power of attorney holder.” The High Court held that when a writ petition under Article 226 of the Constitution is instituted through a power of attorney holder, the holder of the power of attorney does not espouse a right or claim personal to him but acts as an agent of the donor of the instrument. The petition which is instituted, is always instituted in the name of the principal who is the donor of the power of attorney and through whom the donee acts as his agent. In other words, the petition which is instituted under Article, 226 of the Constitution is not by the power of attorney holder independently for himself but as an agent acting for and on behalf of the principal in whose name the writ proceedings are instituted before the Court. Hence, the issue was decided in the affirmative.

The High Court further emphasised the necessity of observing adequate safeguards where a writ petition is filed through the holder of a power of attorney. These safeguards should necessarily include the following:

(1) The power of attorney by which the donor authorises the donee, must be brought on the record and must be filed together with the petition/application;

(2) The affidavit which is executed by the holder of a power of attorney must contain a statement that the donor is alive and specify the reasons for the inability of the donor to remain present before the Court to swear the affidavit; and

(3) The donee must be confined to those acts which he is 15 authorised by the power of attorney to discharge.

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Mohammedan Law – Will – Challenge – Limitation of three years starts from date author of Will expires – Bequest to heir is not valid unless consent of all other legal heirs is obtained. [Limitation Act Art 137 and Mohammedan Law – Rule 192].

Smt Munawar Begum vs. Asif Ali and Ors. AIR 2016 (NOC) 259 (Cal)(HC).

Saira Begum, the mother of the appellant had executed Will in the year 1995. She expired on 18th January, 2003. The appellant filed the suit on 12th November, 2003 for cancellation of the Will. The short point was from which date limitation is to be counted i.e. from 1995 or from 18th January, 2003. There is no dispute that a Will is a legal declaration of the intention of the testatrix with respect to her property and takes effect after her death. A Will is a voluntary posthumous disposition of property. Since a Will takes effect after death, the argument that the appellant was aware of the same in the year 1995 is of no significance. In the instant case, the author of the Will, the mother, expired on 18th January, 2003. The right to sue begins to run from 18th January, 2003 and the period of limitation is three years. The suit was filed on 12th November, 2003. Therefore, it was held that the suit was filed within the period of limitation.

The other issue was regarding the validity of the Will, submission was though a Will under the Mohammedan Law, in order to be valid and enforceable in law, it has to fulfill certain conditions under Rule 192. In the instant case, however, the Will of Saira Begum, the mother of the appellant falls short of the requirements stipulated therein since the Appellant had not given consent. It was held that as far as the consent of the appellant is concerned, under Rule 192, a bequest to an heir is not valid unless the other heirs consent. It appears from the Will dated 28th September, 1995, which was registered subsequently in 1998, that the signature of the appellant, an heir, is absent. Therefore, as the consent of the appellant is missing, the Will or the testamentary disposition is invalid. Though it was emphasised on behalf of the respondent that the Will in question speaks that “I further declare voluntarily that I do not wish to give any part of my said property to my any other children or relatives and I make this Will with the consent of all my other children and without any objection from any of them”, the same is of little significance as though the Will contains the signature of other heirs, it does not bear the signature of the appellant. The said sentence in the Will, as noted, could have been of some significance if other heirs had not put their signature. Since the signature of the appellant was absent, it was held that the Will was not valid under Rule 192 and not binding on the appellant.

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FIRM – Appointment of Arbitrator – Unregistered firm cannot enforce arbitration clause in a partnership deed. [Indian Partnership Act, 9132 – Section 69(3)].

C.M. Makhija vs. Chairman South Eastern Coalfields Ltd. AIR 2016 CHHATTISGARH 63 (HC).

An application was filed in the High Court under section 11(6) of the Arbitration & Conciliation Act, 1996 whereby the applicant sought to enforce an arbitral agreement and prayed for appointment of an Arbitrator. The application was objected to on the ground that the applicant was not a registered partnership firm having registration number from the Register of Firms & Societies and section 69 of the Indian Partnership Act, 1932, prohibits filing of a proceeding by an unregistered firm.

The High Court held that section 69, speaking generally, bars certain suits and proceedings as a consequence of non-registration of firms. Sub-section (1) prohibits the institution of a suit between partners inter se or between partners and the firm for the purpose of enforcing a right arising from a contract or right conferred by the Partnership Act unless the firm is registered and the person suing is or has been shown in the Register of Firms as a partner in the firm. Sub-section (2) similarly prohibits a suit by or on behalf of the firm against a third party for the purpose of enforcing rights arising from a contract unless the firm is registered and the person suing is or has been shown in the Register of Firms as a partner in the firm. In the third sub-section a claim of set-off which is in the nature of a counter-claim is barred as also the s/s. (3) takes within its sweep the word “other proceedings”. The words “other proceedings” in sub-section (3) whether should be construed as ejusdem generis with “a claim of set-off”, was subject of conflicting decisions. Finally, the conflict was resolved by the Supreme Court in the case of Jagdish Chandra Gupta vs. Kajaria Traders (India) Ltd. AIR 1964 SC 1882 wherein the Court held the rule ejusdem generis did not apply to an unregistered firm and unregistered firm could not enforce an arbitration clause in the partnership deed. Hence, the application for appointment of Arbitrator cannot be gone into for the bar created u/s. 69(3) of the Indian Partnership Act, 1932.

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Fixed Deposits – Renewal of fixed deposits cannot be made in the name of different constituent other than original depositor. [Banking Regulation Act – Section 45ZB].

The Canara Bank vs. Sheo Prakash Maskara AIR 2016 PATNA 58 (HC).

Father, mother and son had different Kamdhenu Deposits made in the year 1996. These deposits were cumulative deposits i.e. the interest accruing is ploughed back and upon maturity, the entire cumulative amount is paid. They were to mature for payment at the end of one year i.e. in 1997. None of the three parties approached the Bank for either renewal or encashment of the said deposit certificates, it lay with the Bank. In other words, the money remained with the Bank. For the first time in the year 2002, the parties approached the Bank for renewal of the deposit receipts. This time the Bank refused to renew the receipts with effect from the date of its original maturity, though they were agreeable to renew the same for the matured amount from the date when they applied for renewal in 2002. However, the head office of the Bank examined the matter and directed the Bank to renew the certificates in relation to the son with effect from the date of its maturity on rate of interest prevailing in that period, but when it came to father and mother the Bank took a stand that it will not give the same treatment.

The Division bench of the High Court held that there is no plausible explanation why in case of the son the Bank agreed to renew for five years retrospectively and grant interest at the then prevailing rates, but when it came to his father and mother why the Bank took a different stand. Therefore, the Court held that the direction of the learned single Judge which is virtually directing that same treatment has to be given to the parents cannot be faulted with, but there was a problem i.e. due to subsequent events. It is not in dispute that during pendency of the writ petition, mother had died on 13-10-2010. Thus, renewal could only be up to that period and not beyond that. There cannot be a renewal in name of a different constituent, than the original applicant, as that would be a fresh deposit. To accept or not to accept fresh deposit is Bank’s discretion and that would also depend upon the claimants upon death, establishing their rights in absence of nomination. Father died on 17-9-1998, and it is for the first time in 2002 that renewal was sought by one of the sons. There could be no renewal in his name. To that extent, we are of the view that after the death of father, the K.D.R. receipt could not be renewed as there is no proof of the fact that renewal or maturity claim was led by all the heirs completing all formalities. The Court further held that if all the heirs claim payment consequent to encashment, Bank would pay the same as per their joint claim in the shares they desire.

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Daughters – Daughters in tribal areas in the State of Himachal Pradesh will inherit property in accordance with Hindu Succession Act 1956 and not as per custom and usage. [Hindu Succession Act, 1956 – Section 2(2), 4]

Bahadur vs. Bratiya and ors AIR 2016 HIMACHAL PRADESH 58 (HC).

A suit for declaration to the effect that father of plaintiff Rasalu was Gaddi, therefore, belonged to Scheduled Tribe community. The parties were governed by custom, according to which, the daughters do not inherit the property of their father

Sub-section (2) of section 2 of the Hindu Succession Act (the Act) reads as under:-

“(2) Notwithstanding anything contained in s/s. (1), nothing contained in this Act shall apply to the members of any Scheduled Tribe within the meaning of clause (255) of Article 366 of the Constitution unless the Central Government, by notification in the official Gazette, otherwise directs.”

The High Court held that in few of the judgments of the Senior Sub Judge and District Judge, it is held that in the community of Gaddi, property devolves only upon the sons and it does not devolve upon the daughters, but in few of the judgments, it is held that property amongst Gaddi community would devolve upon sons and daughters equally. There is no consistency in the judgments cited to prove the custom amongst the Gaddies that sons alone would inherit the property. The plaintiff had not even placed on record copy of Riwaj-i-aam to prove that there is a custom prevalent in the Gaddi community that after the death of male collateral, the property devolves upon sons only and not upon daughters. In the copy of Pariwar register produced by the plaintiff, expression “Rajput Gaddi” has been mentioned. It further strengthens the case of the defendants that parties were Rajput and not Gaddi.

Even if it is hypothetically held that the parties were Gaddi, still the plaintiff has failed to prove that there was any custom whereby the girls were excluded from succeeding to the property of their father. According to the plain language of section 4 of the Hindu Succession Act, 1956, any text, rule or interpretation of Hindu Law or any custom or usage as part of that law in force immediately before the commencement of the Act shall cease to have effect with respect to any matter for which provision is made in the Act. In view of this, though there is no conclusive evidence that the custom is prevailing in the Gaddi community that the daughters would have no rights in the property but even if it is hypothetically assumed that this custom does exist, the same would be in derogation of section 4 of the Hindu Succession Act, 1956.

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Adjustment of Debenture Premium against Securities Premium in Ind AS

Background

On April 1, 2011 a company issued zero coupon Nonconvertible debentures (NCDs) of INR 100 payable on 31 March, 2021 at a premium amount of INR 116 which provides an 8% IRR to the holder of the instrument. At the time of issuance of the NCDs, Companies Act, 1956 (1956 Act) applied. At current date, the provisions of the Companies Act, 2013 (2013 Act) have become applicable to the company.

The Company is covered under phase 1 of Ind AS roadmap notified under the Companies (Indian Accounting Standards) Rules, 2015 (as amended) and needs to start applying Ind AS from financial year beginning on or after 1 April 2016 with comparatives for the year ended 31 March 2016. Its date of transition to Ind AS will be 1 April 2015.

Section 78 of the 1956 Act ‘Application of premiums received on issue of securities’ states as below: “

(2) The securities premium account may, notwithstanding anything in s/s. (1), be applied by the company:

(a) In paying up unissued securities of the company to be issued to members of the company as fully paid bonus securities;

(b) In writing off the preliminary expenses of the company;

(c) In writing off the expenses of, or commission paid or discount allowed on, any issue of securities or debentures of the company; or

(d) In providing for the premium payable on the redemption of any redeemable preference securities or of any debentures of the company.”

Position taken by the Company under Indian GAAP For all periods including upto financial year ended 31 March 2016, the company is preparing its financial statements in accordance with Indian GAAP. With regard to Indian GAAP, the Companies (Accounting Standards) Rules, 2006, state as below:

“Accounting Standards, which are prescribed, are intended to be in conformity with the provisions of applicable laws. However, if due to subsequent amendments in the law, a particular accounting standard is found to be not in conformity with such law, the provisions of the said law will prevail and the financial statements shall be prepared in conformity with such law.”

The Company adjusted the entire premium payable on redemption i.e. INR 116 against the securities premium, in the year of issuance of NCDs, i.e. in year ended 31 March 2012. A corresponding premium liability of INR 116 was created.

From 1 April 2014, section 78 of the 1956 Act has been replaced by section 52 of the 2013 Act. Section 52 states as below: “

(2) Notwithstanding anything contained in s/s. (1), the securities premium account may be applied by the company—

(a) Towards the issue of unissued shares of the company to the members of the company as fully paid bonus shares;

(b) In writing off the preliminary expenses of the company;

(c) In writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company

(d) In providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company; or

(e) For the purchase of its own shares or other securities u/s. 68.

(3) The securities premium account may, notwithstanding anything contained in subsections (1) and (2), be applied by such class of companies, as may be prescribed and whose financial statement comply with the accounting standards prescribed for such class of companies u/s. 133,—

(a) In paying up unissued equity shares of the company to be issued to members of the company as fully paid bonus shares; or

(b) In writing off the expenses of or the commission paid or discount allowed on any issue of equity shares of the company; or

Based on the above, under the 2013 Act, on a go forward basis, Ind AS companies cannot charge debenture redemption premium against securities premium account. However, the word ‘and’ in section 52(3) also highlighted above lends itself to another technical argument. One could read the provision as restricting the use of securities premium only when two conditions are fulfilled, ie, (a) the class of companies are prescribed and (b) that class of companies are those that comply with accounting standards under section 133. Since no class of companies are yet notified u/s. 52(3), the restriction on use of securities premium will not apply.

Query under Ind AS

Under Ind AS 109 Financial Instruments, NCD liability is measured at amortised cost. The application of this principle implies that premium liability is accrued over the life of NCDs using the amortized cost method under effective interest method and debiting profit and Loss (P&L). In accordance with Ind AS 101 First Time Adoption of Ind AS, an entity is required to apply Ind AS retrospectively while preparing its first Ind AS financial statements except for cases where Ind AS 101 provides specific exemptions/ exceptions. Ind AS 101 does not contain any exemption/ exception with regard to the application of effective interest rate accounting for financial assets or liabilities.

The amortized cost under Ind AS on transition date at 1 April 2015 will be INR 136 (original cost of INR 100 and premium accrued of INR 36). On a go forward basis also premium will be accrued at an IRR of 8% and the same will be charged to the P&L a/c.

Whether the Company needs to reverse premium payable on redemption of NC Ds previously charged to the securities premium INR 80 (INR 116 – INR 36). Consequently, will the debenture premium of INR 80 be charged to future Ind AS P&L using the effective interest method?

Author’s Response

The author makes the following key arguments to support non-reversal of premium payable on redemption of NCDs previously charged to securities premium:

1. With regard to Ind AS, the Companies (Indian Accounting Standards) Rules, 2015 states as follow: “Indian Accounting Standards, which are specified, are intended to be in conformity with the provisions of applicable laws. However, if due to subsequent amendments in the law, a particular Indian Accounting Standard is found to be not in conformity with such law, the provisions of the said law shall prevail and the financial statements shall be prepared in conformity with such law.”

In light of the underlined wordings, the intention of Ind AS rules should not be construed as requiring reversals of actions done in accordance with the applicable laws.

2. Ind ASs have been notified under the Companies (Indian Accounting Standards) Rules, 2015, which is a subordinate legislation. It cannot override provisions of the main legislation. The action of the company in debiting its securities premium account in the relevant financial year was in accordance with the provision of section 78 of the 1956 Act. As per section 6 of the General Clause (GC) Act, the repeal of an enactment will not affect anything validly done under the repealed enactment. Hence, to the extent that any acts are validly done under any repealed provision of the 1956 Act, such action will not be affected upon corresponding provision of the 2013 Act becoming applicable. Therefore the application of the 2013 Act does not impact position taken in the past.

3. While section 78 of the 1956 Act allows premium on redemption to be adjusted against the Securities Premium, it does not prescribe the timing of such adjustment. Hence, it is permissible to make upfront adjustment for the premium at any time during the tenure of the debentures. The Company adjusted the entire debenture premium of INR 116 against the securities premium account in year ended 31 March 2012 is in accordance with the law and completely justified.

4. The financial statements for the year ended 31 March 2012 were approved by the shareholders. On the basis of the shareholders’ approval and the extant law, the securities premium was utilised. Section 78 of the 1956 Act/ section 52 of the 2013 Act contain specific requirement concerning creation as well as utilisation of the securities premium. Once the company has charged premium payable on redemption, it effectively tantamount to utilisation of the securities premium. One may argue that once utilised, in accordance with the extant provisions of the main law the premium cannot be brought back to life merely because of an accounting requirement contained in a subordinate legislation.

5. The 2013 Act only recognizes premium received on shares as balances that may be credited to securities premium account. In the present case the securities premium account has already been reduced by the full debenture premium amount. Therefore credit back to the securities premium account pursuant to any reversal is not permitted under the 2013 Act.

6. As discussed earlier in the article one view is that debenture redemption premium can be adjusted against securities premium account in accordance with section 52(3) because no notification as required u/s. 52(3) has yet been issued. If this interpretation is taken, then Ind AS companies will be allowed to use securities premium account to adjust debenture premium till such time a notification is issued by the MCA.

Conclusion

The transition from Indian GAAP to Ind AS will not impact actions previously taken by the company under other provisions of the Act (section 78 of the 1956 Act in this case). The Company can carry forward the Indian GAAP accounting (done in accordance with a law) in Ind AS financial statements. The Company need not reverse premium payable on redemption of NCDs previously charged to the securities premium INR 80 (INR 116 – INR 36). Consequently, the debenture premium of INR 80 will not be charged to future Ind AS P&L. The Company should make appropriate disclosures as required by the applicable Ind AS and governing laws in the financial statements.

It may be noted that the author’s view in this article is not consistent with the clarifications provided by the Ind AS Transition Facilitation Group (ITFG). However, it may be noted that the views of the ITFG are not those of the ICAI and are not binding on the members of ICAI.

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ITA NO.4028/Mum/2002 ADIT vs. J Ray Mc Dermott Eastern Hemisphere Ltd A.Y.: 1998-99, Date of Order: 6th May, 2016

Article 5(2)(i), 5(2)(c) of India-Mauritius DTAA – no construction PE in India as duration of each project in India was less than 9 months; Activities of LO being solely of a preparatory or auxiliary character, falls within the exclusion in Article 5(3)(e).

Facts
The Taxpayer, a Mauritius company was a member of a global group of companies, was engaged in transportation, installation and construction of offshore platforms for mineral oil exploration in India. During the relevant year, the Taxpayer carried out only one project the duration of which was only three months.

The AO considered the work executed by the Taxpayer at different locations in terms of different contracts represented one project. Accordingly, the AO aggregated number of days for execution of all the contracts and held that it exceeded period of 9 months. The AO also included the number of days estimated to have been spent for supervisory activities before the actual commencement of construction work. Thus, the AO held that the Taxpayer had a PE in India under Article 5(2)(i) (Construction PE) of India-Mauritius DTAA . Further, relying on the report of a survey carried out u/s. 133A of the Income-tax Act, 1961 (the Act), concluded that the LO premises of group company of the Taxpayer were used exclusively for the Taxpayer’s business and therefore the LO was a Fixed Place PE under Article 5(2)(c). Accordingly, the AO determined the taxable income of the PE and taxed it u/s. 44BB of the Act.

In appeal, CIT(A) held that while the Taxpayer did not have construction PE under Article 5(2)(i), it had Fixed Place PE since the LO was exclusively used for the projects of the Taxpayer in India.

The issues before the Tribunal were:

a) Whether independent activities of the Taxpayer under different contracts were to be aggregated for determining the 9-month threshold period under Article 5(2)(i) of India-Mauritius DTAA ?

b) Whether LO of group company of the Taxpayer constitute PE of the Taxpayer under Article 5(2)(c) of India-Mauritius DTAA ?

Held

As regards Construction PE

(i) In earlier year, the Tribunal after considering the language in Article 5(2)(i) had held that the permanence test for existence of a PE stands substituted by a duration test for building construction, construction or assembly project, or supervisory activity connected therewith. There is also a valid, and more holistic view of the matter, that this duration test does not really substitute permanence test but only limits the application of general principle of permanence test in as much as unless the activities of the specified nature cross the threshold time limit of nine months, even if there exists a PE under the general rule of Article 5(1), it will be outside the ambit of definition of PE by virtue of Article 5(2)(i).Plain reading of Article 5(2) (i) would show that, for the purpose of computing the threshold time limit, what is to be taken into account is activities of a foreign enterprise on a particular site or a particular project, or supervisory activity connected therewith on an independent and standalone basis.

(ii) As there is no specific mention about aggregating the number of days spent on various sites, projects, etc. each of the sites, projects, etc. is to be viewed on standalone basis. Thus the contention that all projects need to be aggregated for computing the threshold of 9 months is not valid.

(iii) In the relevant year Taxpayer carried on only one project and the duration of which did not exceed 9 months. Thus, the Taxpayer did not have a construction PE in India.

As regards LO as PE

(i) There was no material on record that the employees of the LO had reviewed engineering documents or had participated in discussions or approval of the designs. LO merely provided back office support in relation to projects in India. None of the documents showed that the employees of the LO negotiated or concluded contracts for the Taxpayer, or that substantive business was carried out from the LO. In absence of such material, the claim of the Taxpayer that its Project Office was merely a communication channel had to be accepted.

(ii) Since the main business of the Taxpayer was fabrication and installation of platforms, PE trigger can be examined only under Article 5(1)(i) Thus, the issue of determination of its ‘PE’ through any other clause does not arise unless and until any other activity is taken up by the Taxpayer which is having an independent identity or economic substance and yielding separate business profits

(iii) Thus, since the project of the Taxpayer did not have work duration of more than 9 months during the year, an activity of the maintenance of back-up cum support office ‘simpliciter’ will not constitute ‘PE’ in India.

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[2016] 69 taxmann.com 106 (Mumbai – Trib.) DDIT vs. Savvis Communication Corporation A.Y. 2009-10, Date of order: 31st March, 2016

Section 9 of the Act, Article 12 of India-USA DTAA – the payment for providing web hosting services (though involving use of scientific equipment) does not qualify as “consideration for the use of or right to use of, scientific equipment”; hence, not taxable either u/s. 9(1) (vi) or Article 12 of India-USA DTAA .

Facts
The Taxpayer, an American company, was engaged in providing information technology solutions, including web hosting services. During the relevant year, the Taxpayer had earned income from provision of managed hosting services to entities in India. The Taxpayer claimed that the income was not taxable in India in terms of Articles 12 and 7 of India-USA DTAA .

According to the AO, web hosting company provides space on a server (whether owned or leased) for use by client. The server is not owned by the client. The hosting contract is for limited period. Hence, the AO concluded that the payment received by the Taxpayer was for granting right to use scientific equipment and therefore, it was royalty in terms of Explanation 2(iva) to section 9(1) (vi) of the Act.

Held

The AO proceeded on the fallacy that when scientific equipment is used by the Taxpayer for rendering service, the receipt should be construed as receipt for use of scientific equipment.

If the Taxpayer receives income by allowing customer to use scientific equipment, it is taxable as royalty. However, use of scientific equipment by the Taxpayer, in the course of giving a service to the customer, is distinct from allowing the customer to use a scientific equipment.

The true test is: whether the consideration is for rendition of service (though involving use of scientific equipment), or whether the consideration is for use of equipment simplicitor by the Taxpayer. If it is former, consideration is not taxable and if it is latter, consideration is taxable as royalty for use of equipment.

If the person making payment does not have independent right to use equipment or have physical access to it, the payment cannot be said to be consideration for use of scientific equipment.

Accordingly, the receipt was not “consideration for the use of or right to use of, scientific equipment” which is a sine qua non for taxability under section 9(1)(vi) read with Explanation 2(iva) thereto.

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[2016] 68 taxmann.com 305 (Mumbai – Trib.) DCIT vs. VJM Media (P) Ltd A.Y.: 2007-08, Date of Order: 13th April, 2016

Article 12 of India-Singapore DTAA , Article 13 of India-UK DTAA – payment made to nonresidents for limited, restricted and one time use of photograph, not being for “use of copyright”, was not royalty in terms of DTAA .

Facts
The Taxpayer, an Indian company, was engaged in the business of publishing magazines. During the relevant year, the Taxpayer had made payments to non-residents (one located in Singapore and another located in UK) for procuring images and figures for publication in its magazines. The Taxpayer was downloading the images from the websites of the two non-residents and was required to make payment for each of such downloads. The Taxpayer had the right of one time use of the image in its own magazines.

Since the Taxpayer did not withhold tax from the payments, the AO invoked the provisions of section 40(a)(i) of the Act and disallowed the payment. In appeal, CIT(A) upheld the order of the AO.

Held

In terms of Article 12 of India-Singapore DTAA and Article 13 of India-UK DTAA, only payments made for use of copyright can be characterised as royalty. Further, the copyright should be only of any of the items mentioned therein.

Even if it is presumed that a photograph falls in one or more of the items mentioned, the tax authority is required to establish that the payment was for use of ‘copyright’ and not for ‘copyrighted article’.

In several judgments, it has been held that ‘copyright’ and ‘copyrighted article’ are two different things.

The Taxpayer was permitted only one time use of the photograph in the magazine but not permitted to edit the photograph, make copies for sale or to permit someone else to use the photograph. Thus, the Taxpayer was permitted to use the ‘Article’ and not the ‘copyright’. In absence of “use of copyright”, the payment cannot be regarded as royalty so as to trigger obligation to deduct tax at source.

shailesh.kwebmaker

Article 12 of India-Singapore DTAA , Article 13 of India-UK DTAA – payment made to nonresidents for limited, restricted and one time use of photograph, not being for “use of copyright”, was not royalty in terms of DTAA .

Facts

The Taxpayer, an Indian company, was engaged in the business of publishing magazines. During the relevant year, the Taxpayer had made payments to non-residents (one located in Singapore and another located in UK) for procuring images and figures for publication in its magazines. The Taxpayer was downloading the images from the websites of the two non-residents and was required to make payment for each of such downloads. The Taxpayer had the right of one time use of the image in its own magazines. Since the Taxpayer did not withhold tax from the payments, the AO invoked the provisions of section 40(a)(i) of the Act and disallowed the payment. In appeal, CIT(A) upheld the order of the AO.

Held

In terms of Article 12 of India-Singapore DTAA and Article 13 of India-UK DTAA, only payments made for use of copyright can be characterised as royalty. Further, the copyright should be only of any of the items mentioned therein. ? E ven if it is presumed that a photograph falls in one or more of the items mentioned, the tax authority is required to establish that the payment was for use of ‘copyright’ and not for ‘copyrighted article’. ? I n several judgments, it has been held that ‘copyright’ and ‘copyrighted article’ are two different things. ? T he Taxpayer was permitted only one time use of the photograph in the magazine but not permitted to edit the photograph, make copies for sale or to permit someone else to use the photograph. Thus, the Taxpayer was permitted to use the ‘Article’ and not the ‘copyright’. In absence of “use of copyright”, the payment cannot be regarded as royalty so as to trigger obligation to deduct tax at source.

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[2016] 69 taxmann.com 199 (Mumbai-CESTAT) – Indago vs. Commissioner of Service Tax

Appellate authority cannot reject refund claim on grounds/issues which are not arising out of adjudication order. Time limit of one year for filing a refund claim shall be calculated from end of quarter.

Facts
Appellant filed a refund claim under Rule 5 of CENVAT Credit Rules for the period April 2012 to June 2012 on 08/05/2013. The sanctioning authority rejected a part of the refund claim on the grounds of (i) certain invoices mentioned incorrect address and (ii) FIRC was received by Appellant on 13/04/2012 and hence refund claim filed on 08/05/2013 was time barred. On appeal to Commissioner (Appeals), the claim was rejected on altogether different ground i.e. FIRC was issued in March 2012 and hence there being no export during April to June 2012, Appellant is not entitled to refund.

Held
Tribunal observed that the Commissioner (Appeals) categorically held that since the refund has to be filed quarterly the period of 1 year should be computed from the end of the quarter and held that the refund is not time-barred. In other words, reason given by adjudicating authority for denial of refund was rejected by the Commissioner (Appeals). However, he rejected the refund on some other ground i.e. by interpreting the amended provision as per Notification No. 18/2012-CE(NT) dated 17/03/2012 according to which, though the FIRC was received in the month of April 2012, the export had to be considered made in the month of March 2012 and hence there being no export during the quarter from April 2012 to June 2012, refund was rejected. In such a situation, Tribunal held that it was not open for the Commissioner (Appeals) to go into the issues, which do not arise out of the adjudication order. Since refund was rejected only on time-bar, the Commissioner (Appeals) was supposed to decide the issue only on time-bar. It further held that as the refund of the Appellant was filed within 1 year from the quarter ending was within time-limit, the refund was not time-barred and assessee was entitled to refund.

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[2016] 69 taxmann.com 198 (Mumbai-CESTAT) – Franco Indian Pharmaceutical (P) Ltd. vs. Commissioner of Service Tax, Mumbai

Tribunal explains the concept of joint employment and held that the activity of deputation of employees between group companies in the course of “joint employment” arrangement and cost of employees borne by such companies on actual basis would not constitute service.

Facts
Appellant’s three sister concerns entered into an agreement for utilizing marketing network of Appellant for their businesses and paid certain percentage of sales towards recovery of expenses. It is also mentioned in the agreement that cost attributable to salary, wages, bonus, incidental expenses etc. for employees who were deputed to the group companies was also recovered. The revenue contended that the Appellant being specialist in marketing of Pharma products was rendering “business auxiliary services” and if not “business auxiliary services”, at least “manpower recruitment and supply services” and charged a consideration in the form of pre-decided percentage of sales.

Held
Tribunal found that agreement is suggestive of the fact that when employees were deputed to group companies, they are governed by rules and regulations of such group companies; such group companies were required to address and solve any complaint regarding sales (of products manufactured by them) made by deputed employees; Further, after completion of jobs, employees were re-deputed to any of the group companies or retained by the Appellant. Hence, Tribunal found that there was no indication of Appellant rendering promotion/ marketing services to group companies. It was further held that legislative intent of keeping services in the course of employment outside the purview of service tax is also applicable to cases of joint employment where employee renders services to more than one employer. Such joint arrangements are entered into on account of reasons such as unwillingness of employees for entering into several contracts, convenience in accounting and contracting etc. and as a result, contract of joint employment is signed by one employer and not all. Tribunal concurred with Draft Circular dated 27/07/2012 (which was never released), to the extent it provided that where one entity pays the salary and other expenses of the staff on behalf of other joint employers which are later recouped from the other employers on an agreed basis on actual, such recoveries will not be liable to service tax as it is merely a case of cost reimbursement. It was explained that mere fact that the employee’s appointment letter is signed by just one employer and not by others would not mean that it’s not a case of collective employment. If an employee consents to his deputation or secondment to another company and willingly works for other employercompanies for long periods of time, knowing fully well that his emoluments are being paid by such other companies, his contract of employment with a single employer will, by virtue of the parties conduct, transform itself into a contract of joint employment with several employers. In this case, employees have been working for many years with several group companies who have, in terms of a pre-existing understanding amongst themselves, been sharing the actual cost of employment on an agreed basis. It was held that the collective conduct of employees and employer companies for a long period of time has effect of establishing that contract of employment as one of the joint employment. In the absence of such a mark-up/ margin, the payments received against debit notes by one employer-company upon the other employer-companies, will not partake the character of consideration for any service, but will represent only reimbursement of shared costs.

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[2016-TIOL-1300-CESTAT-MUM] M/s Red Hat India P. Ltd vs. Principal Commissioner, Service Tax, Pune

Works Contract service is excluded from the definition of input service only when it is used for construction service. Further the department is liable to pay interest if there is delay in sanctioning refund beyond three months of filing of the claim.

Facts
The Appellant filed a refund claim of service tax charged on the works contract service for monthly maintenance of photocopier, computer and building premises availed by them under Rule 5 of the CENVAT Credit Rules, 2004. The refund was denied on the ground that works contract service was excluded from the definition of input service under Rule 2(l) of the CENVAT Credit Rules, 2004. Therefore the present appeal is filed.

Held
The Tribunal noted that Works Contract Service is excluded only when it is used for construction service, whereas in the present case service was used for maintenance of office equipment and building therefore, this particular works contract service does not fall under the exclusion category and is eligible for refund under Rule 5. Further it was also held that irrespective of any circumstances whatsoever, if there is delay in granting refund beyond three months from the filing thereof, the department is duty bound to grant the interest for the delayed period in sanctioning the refund under section 11BB of the Central Excise Act, 1944.

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Expectations

‘We get caught by not what we give,
but what we expect’.
Swami Vivekanand

1.1 We don’t realise but we are prisoners of expectations. We expect from our colleagues, clients, parents, children, spouse, friends, even acquaintances and above all from ourselves. We are conscious that all expectations are reciprocal therefore our actions are nothing but a trade or a barter.

1.2 As expectations are rarely met we feel life is muddy and messy, resulting in conflict, confusion, stress and anger. Let us realise that suffering is the result of having expectations of how things should be. Expectations make life imperfect and unhappy though happiness is what we seek in expectations. Stephen Hawking has rightly said `when one’s expectations are reduced to zero, one appreciates everything. The issue, is : Is this possible !

2. The danger of living upto other people’s expectations is: one puts on a mask and conceals the real person – result – our lives become artificial. In such an environment one develops a strong ego which results in or is the beginning of what one may say : `is the end of happiness’.

3.1 Expectations make us slaves of our emotions. We react instead of responding – result – impacting relationship and at times even destroying relationship. The outstanding example is the increase in divorce cases. Have we ever reflected as to why some ‘love marriages’ fail and result in divorce despite the fact that the two human beings have known each other and have chosen each other. This is because of expectations – expectation of utopia – which doesn’t exist in any relationship. As opposed to this in an arranged marriage there are virtually no expectations as persons involved virtually don’t know each other. They enter into a relationship with a few expectations and desire to make the marriage work. Let me clarify that there are divorces even in arranged marriages and the same are increasing because of the current environment of expectations, individuality and intolerance. We little realise that relationship is based on appreciating each others strengths and accepting faults for no human is without faults.

3.2 Expectations are normally based on emotions – let expectations be devoid of emotions. The issue is: is this possible! The answer is yes for if no emotions are involved there would be no disappointment –result is: if expectations are not met our relationships will not be impacted. The irony of life is we expect from those whom we love little realising that love is based on giving and not receiving. Love is unconditional.

3.3 Swami Sukhabodhanand referring to emotions advises: `One should be emotionally fit, and that emotion should be directed by intellect. Intellect without emotion and emotion without intellect, both are incomplete’.

4. Our beliefs and behaviour reflect our expectations – for example – in India parents expect to be looked after by children whereas in the West the expectations from children are much less. India is also changing and we now have an increasing number of old age homes.

5. Expectations from oneself should be based on awareness of one’s limitations. Awareness of limitations is not failure but makes life happy. This awareness also gives one confidence.

6.1 The issue is : How does one manage ‘expectations’. The answer is simple but difficult to practice. It is ‘being realistic’. Being realistic with oneself and others: Practice of this will lead to ‘happiness’.

6.2 It is rightly said: Let go of expectations. The issue is: what do you do when expectations are not met because this leads to frustration and disappointment. The fact is that expectations are nothing else but a dream we dreamt but dreams rarely come true. We need to realise that we can never live life without expectations. The answer is: Analyse whether expectation was realistic as there is always a gap between dream and reality – accept what one gets and move on.

6.3 Another way to manage expectations, is : to understand the difference between `giving’ and ‘sharing’ because in ‘giving’ one expects whereas whilst ‘sharing’ one enjoys. So let us ‘share’.

6.4 Whilst dealing with expectations from oneself – we need to use expectations as a tool of motivation to achieve our goals and nothing more.

6.5 I would conclude by quoting Eli Khamarov :

?The best things in life are unexpected – because there were no expectations’.

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[2016] 68 taxmann.com 142 (Kolkata – Trib.) Gifford & Partners Ltd. vs. DDIT A.Ys.: 2005-06 and 2007-08, Date of Order: 6th April, 2016

Section 9 of the Act; Article 13, 5 of India-UK DTAA – (i) as per amended section 9 of the Act, the payment made was FTS under section 9(1)(vii); (ii) since the exclusive ownership of the work prepared by Taxpayer was of I Co, technical knowledge, etc. were made available and hence, payment was taxable as FTS ; (iii) place provided to Taxpayer for limited and restrictive purpose could not constitute PE.

Facts
The Taxpayer, a UK company, was engaged in the business of providing consultancy services for execution of projects. An Indian company (“I Co”) engaged the Taxpayer for providing consultancy services for modernisation of its shipyard. The representatives of the Taxpayer visited the shipyard in India to study the existing design, plan and facilities. The collected data was sent to UK and the experts of the Taxpayer at UK prepared the project report containing plans, design, structural design, cost estimate, manner of implementation, etc.

While filing its return of income, the Taxpayer showed the profit from execution of contract as attributable to its PE in India. However, in course of assessment proceedings, the Taxpayer claimed that it did not have PE in India and also that amount received was not FTS as the services provided did not fulfil ‘make available’ condition in Article 13 of the India-UK DTAA. The AO, however, concluded that the Taxpayer had PE in India; the amount received was FTS in terms of Article 13. ;Further as the services were ‘effectively connected’ with the PE in India, the consideration for such services was taxable in India in terms of Article 7 read with article 13(6).

Held

As regards the Act

(i) The services provided by the Taxpayer being in nature of technical or consultancy services, the payment was in the nature of FTS and is deemed to accrue or arise in India in terms of section 9(1)(vii)(b)of the Act.

(ii) Having regard to the retrospective amendment to section 9, since the services were utilized in a business or profession carried on by payer in India, the payment was deemed to accrue or arise in India, irrespective of whether the non-resident had PE in India or whether the non-resident rendered services in India.

As regards India-UK DTAA

(ii) The agreement provided that all plans, drawings, specifications, designs, reports, etc. prepared by the Taxpayer shall become and remain the exclusive property of I Co. therefore technical knowledge, etc. were made available. Accordingly, payment was taxable as FTS even in terms of the treaty.

(iii) Further as the payer is a resident of India, such FTS arises in India and is taxable in India by virtue of Article 13 of the DTAA .

As regards constitution of PE

(i) It was noted that, I Co was contractually required to provide office space to the Taxpayer. However such space was used only for limited purpose of providing services under the contract and its usage was also subject to various restrictions. The Taxpayer did not carry on any other business in India.

(ii) Article 5(1) requires that to constitute a PE, business should be carried on through the fixed place. Carrying on of business would involve carrying on of any activity related to the business of the enterprise.

(iii) Since the Taxpayer could not carry on any other activity, the place provided by I Co for limited and restrictive use could not be said to be PE in India of the Taxpayer. Reliance in this regard was placed on the Special bench decision in the case of Motorola Inc [(2005) 95 ITD 269 (Delhi)] and Tribunal decision in the case of Airline Rotables Ltd [(2011)(44 SOT 368)(Mum)].

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Non-resident: Fees for technical services- Section 9(1)(vii) Expl. 2 and 44BB(1)- A. Y. 2008-09- Geophysical services- Activity of two dimensional and three dimensional seismic survey carried on in connection with exploration of oil on land and off-shore- Consideration for services rendered cannot be construed as ”fees for technical services” Assessee was assessable u/s. 44BB(1) of the Act-

PGS Exploration (Norway)AS; 383 ITR 178 (Del):

The assessee a company incorporated under the laws of Norway, was principally engaged in the business of providing geophysical services world wide. These services included the services of acquiring and processing two dimensional and three dimensional seismic data both on land and offshore. In the A. Y. 2008-09, the assessee opted to be taxed on presumptive basis u/s. 44BB(1) of the Act at the rate of 10% of the gross revenue. The Assessing Officer rejected the contention of the assessee that its income was liable to be taxed u/s. 44BB(1) of the Act and held that the services provided by the assessee were technical in nature and the consideration payable to the assessee for rendering services in terms of the contract was ”fees for technical services” within the scope of section 9(1)(vii) of the Act and that the tax on such income was to be computed u/s. 115A of the Act and not u/s. 44BB(1). The Tribunal upheld the decision of the Assessing Officer.

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

“i) The Tribunal was not justified in holding that the activity of two dimensional and three dimensional seismic survey carried on by the assessee in connection with the exploration of oil was in the nature of “fees for technical services” in terms of Explanation 2 to section 9(1)(vii) of the Act.

ii) Since the A. Y. 2008-09 fell within the period from April 1, 2004 to April 1, 2011, the Income of the assessee to the extent it fell within the scope of section 44DA(1) of the Act and excluded from section 115A(1)(b) of the Act, would be computed in accordance with section 44BB(1) of the Act.”

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Jobs not quotas: Expanding quotas will not address frustrations arising from jobless growth

Gujarat’s announcement of a 10% quota for economically backward classes in education and government jobs represents a misdiagnosis of a pressing problem. The proposal is bound to be challenged legally as aggregate quotas will overshoot the permitted 50% mark. Moreover the agitating Patels, who the announcement sought to pacify, have dismissed it as “another lollipop from the BJP factory”.

The reality is that government cannot expand jobs fast enough to address contemporary society’s malaise: joblessness. Myriad agitations are only symptoms of the frustration among young Indians. If our demographic transition, where there is an ongoing surge in the working age population, is to translate into a dividend and not a nightmare, governments must address the challenge of joblessness. Over the last 15 years millions have moved out of agriculture, with only construction expanding noticeably to absorb the influx. Worryingly, manufacturing and services have not pulled their weight in job creation. For this, governments’ counterproductive policies must take the blame.

The nature of government intervention needs to be radically transformed. Right now, at both central and state levels, we are witnessing more government and less governance. In a complex world characterised by rapid changes in technology and trends, governments are not in a position to pick winners. Entrepreneurs are best placed to make these choices and governments need to get out of their way by removing barriers to economic activity. Simplification of regulations needs to be complemented by smarter regulation.

Enhancing the quality of public education, dismantling the licence raj shackling private education, skilling and physical infrastructure will help India grab opportunities. As wages in China increase, it opens the door for India’s export-led apparel industry and other labour-intensive industries, which can generate millions of jobs. A World Bank report, entitled “Stitches to Riches?” estimates that even a 10% increase in Chinese apparel prices can be leveraged to create at least 1.2 million jobs in the Indian apparel industry. This would be particularly good for women who are prolifically employed by the apparel industry, addressing India’s appalling gender inequities. But the government’s approach must be tailored to capitalise on available opportunities.

For example India’s ruinous labour laws, which create a new caste system whose Brahmins are organised labour and whose quasi-untouchables are roughly 93% of the labour force consigned to the informal sector, must be reformed to give a better chance to the rest. (Source: The Times of India dated 02.05.2016)

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War for Ambedkar: Parties who celebrate his birth anniversary would do well to learn from his legacy

The UN observed Bhim Rao ‘Babasaheb’ Ambedkar’s 125th birth anniversary on 13.04.2016 – showcasing the universal appeal of the principal architect of India’s Constitution, who fought caste injustice. Indeed, from being an icon solely of Dalit parties in yesteryear, Ambedkar’s legacy is enjoying a revival with political parties across India’s ideological spectrum fighting to appropriate it. And now, with inequality a rising concern and cause for political turmoil in Western countries, Ambedkar’s appeal has reached Western shores as well.

The continuing re-imagination of Ambedkar reflects as much on his immense contributions in defining the Indian republic as it does on the contemporary relevance of themes he became synonymous with: equality, social justice and rule of law. Prime Minister Narendra Modi is scheduled to travel to Ambedkar’s birthplace in Mhow, MP tomorrow to observe Social Harmony Day. In a bid to steal Modi’s thunder Congress organised a big rally on Monday in Nagpur, the headquarters of RSS.

Ambedkar was a crusader against untouchability and the caste system, eventually embracing Buddhism in 1956. By putting up banners and posters of Ambedkar, BJP hopes to portray itself not only as a champion of social engineering, but also take advantage of the fading of Nehru’s lustre in post-liberalisation India. However, BJP’s Hindu-first agenda is contradicted by Ambedkar’s belief that caste hierarchies are an intrinsic part of Hinduism (that is why he converted to Buddhism). Likewise, Ambedkar resists appropriation by contemporary leftist causes as well. He disagreed with Mahatma Gandhi’s philosophy of self-governing villages as India’s foundation, viewing them instead as dens of inequality. He opposed insertion of the terms ‘socialist’ and ‘secular’ in the preamble to the Constitution. He opposed Article 370 and was an ardent supporter of the Uniform Civil Code.

It’s welcome that political parties are debating Ambedkar today. What’s less welcome, however, is their attempt to project their own beliefs on to Ambedkar. He stood, for example, for the total annihilation of caste. Were he to witness today’s permanent and expanding regime of caste quotas, which all political parties appear to be agreed on, he could well be turning over in his grave. He was, above all, a modern thinker, a practitioner of pragmatic politics who refused to be bogged down by any particular ideology or religion. Leaders who invoke him today would do well to learn from that legacy.

(Source: Times of India dated 13.04.2016)

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How to view success

With a broad theme like six lenses that shape our perception of the leadership challenges encountered in work and family Six Lenses: Vignettes of Success, Career and Relationships ends up being a gripping narrative of life’s many shades, which can encourage readers to look at their lives and careers in a different light.

There are three reasons for this: one, the author’s mastery of the art of story-telling and his intellectual rigour that helps connects the dots. R Gopalakrishnan is a prolific writer but this one is clearly his best. Two, he has carefully avoided the predictability of countless management books that offer instant, pre-packaged wisdom on how to succeed in one’s career. And three, the book subtly revolves around management and philosophy with multiple references from religious texts and binds them all with several interesting anecdotes – the extraordinary lessons the author learnt from everyday experiences of people to which readers can relate. In the process, the author shows how, by altering our perceptions, people can better overcome the challenges they face at work and in family matters.

Mr Gopalakrishnan also draws from the Vedantic idea of myth and reality to conclude that the idea of reality does not exist and that all man sees is through his perception of the world around him. It’s like a visit to the optician for an eye test – on the support frame, there are lenses that can be rotated to improve vision during testing. The rotation of each lens changes the clarity and the view. There are many perspectives that the viewer can get and he or she has to select the view that best suits him or her. Like an optician who keeps turning the lenses till the patient can see clearly, people need to keep shifting the proverbial six lenses until they find and arrive at an awareness of their life’s purpose and fulfilment.

The six lenses (the book has a chapter each that corresponds to each of these lenses) are: Purpose (the deep-seated belief about life’s aim); Authenticity ( who you are, at the core); Courage (overcoming obstacles and inequity); Trust (encompasses virtues such as reliability, never letting anyone down, etc); Luck (people pretend they don’t believe in it except when it suits them) and Fulfilment (it is about enjoying what exists rather than cry about what might have been missed).

Universally, people define success in terms of what other people think of it. But the important lesson the book provides is that there is no universally accepted measure of success. But the paradox is that while all success doesn’t lead to fulfilment, all fulfilment leads to success. The delightful stories about “people like us” tell us how each of them sought success and fulfilment and are great examples of what happiness means – it’s a complex phenomenon called emotional well-being. Young readers may scoff at the author’s prognosis that happiness is tied to giving rather than taking, to volunteering and to donating, but they could gain some deep insights.

Though its inclusion as a lens may be considered unusual by many, Mr Gopalakrishnan is at his best in the chapter on “Luck”. Through countless examples, he has shown how good outcomes are dressed up by the corporate types as strategic strokes of genius while catastrophes are attributed to bad luck.

Overall, Six Lenses… is a great read, made richer by an author who has enough experience and knowledge to offer readers views on the choices and assumptions that people make, as also their outcomes.

(Source: Extracts from Book Review by Shyamal Majumdar of Six Lenses – Vignettes of Success, Career and Relationships by R. Gopalkrishnan in Business Standard dated 06.04.2016)

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India cannot get carried away by current growth superiority : RBI Governor Raghuram Rajan

Reserve Bank of India (RBI) governor Raghuram Rajan clarified his remark that India was like a “one-eyed king in the land of the blind” and defended the thought process behind the remark that has attracted controversy.

Rajan, 53, also spoke of how “words are hung out to dry, as in a newspaper headline,” robbing them of context and opening them up to misinterpretation.

India cannot get carried away by its “current superiority in growth,” Rajan told an audience of students and bankers at the convocation of the National Institute of Bank Management in Pune.

“My intent in saying this (and it was an off-hand comment in an interview) was to signal that our outperformance was accentuated because world growth was weak,” said the RBI governor, whose choice of words had evoked the displeasure of some government ministers.

“But we in India are still hungry for more growth. I then explained that we are not yet at our potential but that we are at the cusp of a substantial pick-up in growth because of the reforms that are underway,” said Rajan.

He added that in a “news hungry” nation like India, the remarks had been seen as denigrating India’s success.

Finance minister Arun Jaitley had responded to Rajan’s “one-eyed king” remark by saying a growth rate of 7.5% would be a cause of celebration in any other country.

In an interview to financial news website Marketwatch on 17 April, Rajan, when asked about the popular notion that India was the “bright spot” in an otherwise gloomy global economy, said the country still has some way to go.

“Well, I think we’ve still to get to a place where we feel satisfied. We have this saying, ‘in the land of the blind, the one-eyed man is king’. We’re a little bit that way,” Rajan told the website.

On Wednesday, Rajan struck a note of caution.

“We cannot get carried away by our current superiority in growth for as soon as we start distributing future wealth as though we already have it, we stop doing what we are supposed to do to keep growing,” he said. “This movie has played too many times in the past for us not to know how it ends.”

Rajan noted that while India is compared to China in reference to economic growth rates, the Chinese economy is five times larger than India’s and the average Chinese citizen is four times richer than the average Indian.

The Indian economy is expected to grow 7.5% in 2016 compared to China’s 6.5%, according to forecasts released by the International Monetary Fund earlier this month.

“As a central banker who has to be pragmatic, I cannot get euphoric if India is the fastest growing large economy. Our current growth certainly reflects the hard work of the government and the people of the country, but we have to repeat this performance for the next 20 years before we can give every Indian a decent livelihood,” said Rajan. He said his remarks were not meant to disparage was has been done and is being done by governments.

“The central and state governments have been creating a platform for strong and sustainable growth, and I am confident the payoffs are on their way, but until we have stayed on this path for some time, I remain cautious.”

The media’s scrutiny of what Rajan called an off-the-cuffremark was a “teachable moment”, said the RBI governor, who is on leave from his teaching post at the University of Chicago.

The RBI governor questioned the manner in which every word spoken by public figures is “wrung out” for meaning. “When words are hung out to dry, as in a newspaper headline, it then becomes fair game for anyone who wants to fill in meaning to create mischief,” said Rajan, adding that if India is to have a reasonable public dialogue, words must be seen in context and not stripped of it. “That may, however, be a forlorn hope,” he said.

Rajan, in his speech titled ‘Words matter but so does intent,’ didn’t stop there. “This leads to the question—how much of our language is liable for misinterpretation? How forgiving should we be of a bad choice of words when the intent is clearly different?”

Rajan chose to make this point through examples.

He cited the famous words of Mahatma Gandhi who once said “an eye for an eye will make the whole world go blind.”One might take umbrage because the comment suggests that blindness is an inferior state of being, said Rajan. “Yet, Gandhiji’s comment was on the absurdity of the event and not a comment on blindness,” he noted.

“If we spend all our time watching our words and using inoffensive language…we will be dull and will not be able to communicate because no one will listen,” said Rajan. “For instance, an eye for an eye will only make the whole world go blind, could be replaced by—revenge reduces collective welfare,” quipped Rajan. “The latter is short and inoffensive but meaningless for most listeners who haven’t taken economics classes.”

Rajan concluded that all constituents have work to do to improve communication. Speakers have to be more careful with words and listeners should not look for insults where none may exist. (Source: Mint Newspaper dated 21.04.2016)

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Three box strategy for success: Effective business leaders who see change when it’s coming tick all these three boxes

Effective leadership is the high point in today’s competitive environment. It is imperative for leaders to have a sound plan for the future, a firm grip on the present and an understanding of the past. Without these, it is almost impossible to achieve and sustain success.

I have incorporated these elements within my framework for strategic innovation. I call it the Three Box Solution. This framework commences with an appreciation of time as a continuum.

Managing the present (Box 1) is the prime focus for most leaders today. With no revenue; without Box 1, business comes to a standstill. Therefore, the emphasis on the performance engine that generates revenue, is crucial. At the same time, attention to what one hopes to achieve tomorrow for the organisation (Box 3) is equally vital.

Without Box 3, there is no future. To implement Box 3, one has to discard some of the mindsets, practices, policies, and perhaps products or services that enabled both the leader and the company reach where they are today. Leaving behind the past (Box 2) completes the circle.

Among the three boxes, Box 2 is the most challenging. Good leaders are able to envisage an obsolete trend and implement changes to script a success story.

Following a particular trend or rationalising to keep elements that helped the organisation succeed in its journey, can take it only so far. Therefore, it is important to gauge futuristic goals, pick up the “weak signals” and act upon them to make the business and the organisation future ready.

Weak signals are emergent changes that appear on the horizon, sometimes so dim and distant as to be almost imperceptible. They could be changes in behaviour or demographics, technology, the economy—almost any activity related to humanity. Within the Three Box framework, they are the raw materials leaders can use to develop assumptions about what may happen in the future.

Weak signals are ubiquitous but, as mentioned above, sometimes are difficult to detect. Where do you find them? You can mine for signals by using a free-for-all approach, soliciting ideas from the public, for example. Or, you may choose to create a task force within your organisation, dedicated to identifying up-and-coming trends.

Another option is to look for individuals within your company who seem to have their eyes on the horizon. Often, these are younger individuals or people who have a reputation among co-workers for nonconformity. These mavericks see the world differently, tuning in to signals that others miss.

Effective leaders understand, however, that weak signals must be tested to determine whether they truly do foretell coming changes or are just noise. This is the third leadership behavior in which the Three Box framework is rooted. Experimentation resolves uncertainties and increases learning even as it reduces risk. Following is an example of how a humble candy became a global success story by picking up weak signals.

Innovative leaders realise the Three Box framework is an ongoing process, not a one-time project. They are always searching for and testing weak signals. They never cease building the future even as they ensure their organisations function at peak performance today. They are constantly vigilant for traps of the past. As a result, their companies are able to operate successfully and simultaneously within all three boxes. (Source: Extracts from Article written by Vijay Govindarajan in the Times of India dated 18.04.2016)

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EMPTY HANDED

It is said we come into this world `empty handed’ and will leave `empty handed’. Alexander – the Great – believed in this and that is the reason he directed that when he is carried to his grave both his hands should be out of the coffin for people to see that the conqueror is leaving the world `empty handed’. However, the issue is : Is this true – Is this a fact ! The answer is No.

However, those who believe in the concept of `free will’ – that is – karma – do not / will not accept that a person comes into or goes out of this world empty handed. The believers of `free will’ believe that they are masters of their actions and are doers. They accept responsibility for their actions. In other words, they enjoy the fruits of their actions and also suffer the consequences of their mistakes.

Hence, they are born to live the consequences of deeds of their present and past life or lives. In short, they are once again given the opportunity to do good deeds so that in their next birth they enjoy the result of their good actions alongwith suffering for their mistakes. There is no quid pro quo. It also affords an opportunity through good deeds and prayer to merge with the Lord and get out of this cycle of birth-death-birth.

Every religion preaches this concept and that is why we have the concept of the? day of judgement’. Guru Nanak advised ‘Do good deeds’ – `share what you have’ and above all? remember the Giver – the Lord’. Hence, it can be said guru advocated ‘free will’. It is upto the individual to choose his path and to write his destiny. Fethullah Gulen writes : `God does not look at your body or your physical appearance. He looks at your heart and the sincerity of your deeds – and deeds determine misery or happiness in the next world’. Barnet Bain, express the same thought when he writes : ‘know that each one of us is the writer and director of our own unforgettable life story’. Further one of the Ten Commandments is ‘Do unto others what you wish them do unto you’ is based on the concept that every action has a reaction. What a dynamic philosophy – nay – concept of life – which gives one the liberty to choose the way one wants to live.

The issue is : what is the impact of this concept. The impact is that it makes us conscious – aware – of our actions and believe me if one is conscious of what one is doing one will desist – nay – never do anything that is wrong or hurts someone. ‘Free will‘ makes us conscious – aware – of the good old saying that ‘every action has a reaction’. It brings awareness in our life. William Penn advises us to do good without waiting when he says :

‘I expect to pass through life but once. If, therefore, there be any kindness I can show, or any good thing I can do to any fellow being, let me do it now, and not defer or neglect it, as I will not pass this way again’.

Hence, – it is wrong to say we come `empty handed’ and go `empty handed’. The reality is we come with full hands and go with full hands. It is upto us : what we fill in our hands.

So to have a contended and happy life and a happy life thereafter let us be conscious of our thoughts and actions. Let us not forget that `thought is also an action’. I would conclude by quoting an often quoted saying :

‘we reap what we sow’.

NB :The author believes that to the aim of life in accounting jargon is to have a zero balance sheet – a balance sheet with no debits and with nil credits. The issue is this possible ! The answer is yes based on the belief that one is not the doer – In other words, one has to give up ownership of both – one’s thoughts and actions.

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No Service Tax on Goods Transportation by by Vessel upto 31 05 2016

Notification No. 36/2016 dated 23 05 2016

CBEC vide this Notification has exempted the taxable services by way of transportation of goods by a vessel from outside India upto the customs station in India with respect to which the invoice for the service has been issued on or before the 31st May, 2016, from the whole of service tax leviable thereon, subject to the condition that the import manifest or import report required to be delivered under section 30 of the the Customs Act, 1962 has been delivered on or before the 31st May, 2016 and the service provider or recipient produces Customs certified copy of such import manifest or import report.

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Krishi Kalyan Cess not leviable if POT of service fall on or before 31 05 2016

SERVICE TAX UPDATES

Notification No. 35/2016 dated 23 06 2016

CBEC vide this notification has clarified that Krishi Kalyan Cess shall not leviable if the invoice with respect to taxable services has been issued on or before 31st May, 2016 and the provision of service has also been completed before 31st May, 2016.

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FAQs on Settlement of Arrears in Dispute Act, 2016.

VAT Updates

Trade Circular No.19T of 2016 dated 30.6.2016 & 20T of 2016 dated 19.7.2016

To clarify the points raised through representation from Trade & Associations regarding the Maharashtra Settlement of Arrears in Disputes Act, 2016, Commissioner of Sales Tax has issued this Circular in the form of questions and answers.

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67th Annual General Meeting on 7th july 2016

The 67th Annual General Meeting of the Society was
held at the Walchand Hirachand Hall, Indian Merchant Chambers,
Churchgate, Mumbai on Thursday, 7th July 2016.

Mr. Raman H
Jokhakar, President of the Society, took the Chair. Since the required
quorum was present, he called the meeting in order. All businesses as
per the agenda given in the notice were conducted, including adoption of
accounts and appointment of auditors.

Mr. Sunil B Gabhawalla,
Hon. Joint Secretary, announced the results of the election of the
President, Vice President, two Secretaries, Treasurer and eight members
of the Managing Committee for the year 2016-17. The names of members as
elected unopposed for the year 2016-17 were announced.

The
“Jal Erach Dastur Awards” for best feature and best article appearing
in BCAS Journal during 2015-16 were announced. The winners were: Keshav
Bhujle, Advocate and Aditya Thakkar, Advocate. The Special issue of the
Journal of July 2016 on “Expectations” was released by the hands of Mr
Arvind H. Dalal, Past President and Mr Anil J. Sathe, Editor.

New
Publications Internal Audit-Practical Case Studies and Non-Banking
Financial Companies-A Treatise were released at the Foundation Day by
the hands of Mr Harsh Mariwala, Chairman-Marico Limited.

At the
end, guests including Past Presidents of BCAS were invited on the dais
to share their views and experiences about the Society.

Outgoing President Speech

Good Evening members!

Welcome!

As
I stand on the last day of my term, a very familiar Hall and a familiar
podium, I extend very warm greetings to you and thank you for being
present today.

All throughout the last year, I had to start off
numerous events. Generally one had to start by addressing those on the
dais first and give an impression that things flowed from this direction
to that, and often rightly so. This final program, the AGM however is
different – everyone here is a member, everyone here is a fellow member and everyone here counts equally, bringing meaning and significance to the Society.

So once again WELCOME EVERYONE to this 67th Annual General Meeting.

In the schedule, this speech is titled as OUTGOING PRESIDENT’S Speech.
Although the AGM is meant to be serious business and ending of
someone’s term should normally add to that seriousness. Yet, I do feel,
that although the title of the talk is functionally accurate, it falls
short on the creative count. So maybe this year we rather give it a more
contemporary title – PREXIT.

You will appreciate
that someone, whose title will get the Prefix – PAST – after about 7
hours from now, would tend to be reflective and sentimental on his last
day as the President.

Well, it is a long program, and Chetan (in
lighter vain) has told me that his talk is going to be really LOOOONG,
so I will be SHORT and LIGHT.

Friends, the year began with the theme LEARN SHARE GROW. Let me share a few highlights of the year that went by.

Last
year we noticed that if we wanted to give better member service, we
will have to do a bunch of things. One of them was to align our
infrastructure to our activities and future plans. So today after nearly
2 years, we have a fine-looking and functional LEARNING CENTRE at Jolly
Bhavan, and moved non member facing BACKEND STAFF out to another larger
office space – a space that is roomier and more functional.

With
this, we have a 100 seater hall with a pre event area outside so that
our committees can have in house events that are more comfortable, cost
effective and smooth.

This idea was extended further, by
adding to our Digital capability, to reach members WHERE THEY ARE – so
we have set up a web cast Facility. With this, BCAS events can reach a
member where he is, and he will be able to partake of an event from his
desk top or mobile device. We did the first live webcast 2 weeks back,
of course with some glitches and we hope to do many more.

Another
dream that we had, was to make the premises available to members for
their EDUCATIONA L TRAINING PURPOSES at a small cost. This should help
the startups, medium and smaller practice units to arrange their in
house trainings at BCAS premises. I am glad to inform you all that today
members can book BCAS Hall along with all its facilities for this
purpose and make the most of their membership.

At times READING
takes too long for the POINT TO COME ACROSS. In this DIGITA L AGE, we
need the POINT to come through sooner and in shorter capsules. So we
placed before committees the idea of making SHORT VIDEOS of about 2
minutes, covering a topic within a subject, in a manner that makes the
content easier to grasp. We did make a start and I hope we do more of
those.

Last year on 6th July, I had mentioned about making
available BCAS events to outstation members. We could do a few events
this year on a STAND ALONE BASIS in Chennai and Coimbatore, which
were house full. Although there were more offers, we couldn’t spend
more time as one would have liked, but I hope the committees will
explore it further.

BCAS Publications – Although there is
a feeling that markets are flooded with Publications, I believe that
BCAS books are special in both content and context. BCAS books are low
on reproduction and trivia and deep and hard hitting on the main topic.
They give a balanced view and have practical utility. After the AGM we
will we have two AMAZING PUBLICATIONS released – one of them after a
long wait of 18 years. Few more are in the pipeline and they will come
out in next few months.

Since LEARN SHARE GROW was the theme, I wish to SHARE a few things I learnt.

First
– about the YOKE of TRADITION. It is pandemic in our country. Not that
tradition is not useful, but they have a place and TRADITIONS as
CONCLUSIONS should not fill the entire space by themselves. In various
meetings one would hear – We have always done it this way, we have
debated this before and concluded it thus, this cannot be done because
we did it in the past and it did not work. Since conclusions are
only PAST, and the PRESENT has obviously changed since then – we tried
to look at some of them afresh and question the issues all over again.
Like Thomas Jefferson said “IN MATTERS OF STYLE, SWIM WITH THE CURRENT,
IN MATTERS OF PRINCIPLE, STAND LIKE A ROCK” I am sure the OB on the dais
will carry, the spirit in those words, further.

On a LIGHTER NOTE, there is something interesting about being a PRESIDENT.

While
a lot of people wonder – being a President of an organisation must be
such fun, to open events, to write every month in the Journal, to be
welcoming speakers and guests and being under the spot light. I want to
tell you that there are two presidents – the one you SEE and one that
works behind the scenes in addition to his practice and family life.
President is an intertwined mixture of numerous functions – Let me share
a few:

Secretary and draftsman – He has to correct,
correct and correct – from the Spelling of Walchand Hall to making sure
the person’s name should have the salutation Mr or Mrs before it.

Benign Bulldozer – following
up, pushing – did that announcement go? Did you make sure he received
the email? The event you talked about – have you got a YES from the
speakers?

Creative director – He is designing. He has to
think, does that announcement seem aesthetically in line with the
Society’s image OR responding to someone who tells you – we have been
making the announcement like this since last 10-20 years – well Sir for
that very reason can we think of a different way.

Driver – Drive change. Change although CONSTANT, one learns that change is also the least ACCEPTABLE.

Traffic POLICE –
In the meetings, there are always some people who are VOCAL to the
extent all other voices JUST STOP coming out from every other throat in
the room. And then people look at you – WILL YOU PLEASE STOP the flow of
traffic from THAT SIDE and have other side’s traffic start.

EXECUTIVE ASSISTANT –
I remember people calling – Sir Today’s LM is at IMC, can you tell us
the address. Well some member really making sure that only the President
can give the CORRECT Address;

Friends, there are so many
wonderful stories and anecdotes that adorn this ride, but let me stop
here as a short video is waiting for you all. HIGHLIGHTS of what
happened through the year, a few glimpse out of the 100,000 hours of
education in 7 minutes.

VIDEO

From what I saw in 5 years
as being an office bearer – BCAS is still being imitated – people from
outstation come to understand the format of events – organizations do
look up to BCAS for ideas and benchmark of quality. We had the largest
ITF till date with 260 participants, we had the largest Ind AS RSC till
date, the largest Service Tax RSC till date, the largest annual student
day event till date, crossing 500 for the first time.

But
numbers are really NOT that big a deal, it has never been HOW MANY but
HOW WE DO THINGS and WHY WE DO what we do. I can say with confidence
that the WHY and HOW of everything we do is clear and solid and you only
learn that fully when you stand here on the last day of your term.

Here
are two Testaments to that – A first time participant at the RSC on
Service Tax in Lavasa, shared this. He worked as a partner in one of the
largest professional services firms. He said even at 9.30 pm, as Mr A R
Krishnan was giving his presentation, not a single person got up to
leave although everyone had reached the venue that same afternoon after
travelling between 5-8 hours. He said when I went to the room, my
roommate wanted to discuss the next day’s paper till past mid night with
few others. The next morning everyone was in their groups by 8.30 am
after eating breakfast. He said in our firm we tried numerous ways, and
they haven’t worked – if instead of ending a fully sponsored offsite
event at 6 pm ended half hour late people would complain to HR that the
event finished late. Whereas here people pay to come and still are so
deeply involved in learning.

The next day I was talking to the
Chairman Govind ji, who has been running the committee for 6 years now
and one of the things he said was – since last 6 years, he had done all
he could to keep the fees for the RSC at the SAME LEVEL.

When I put these two stories together, I realized that till we have these two ATTRIBUTES in our ORGANISATIONAL DNA –

CULTURE and PASSION to LEARN and

TO SHARE with GENEROSITY,

WE ARE GOOD.

THANK YOUs
In
a divided world, where POLITICAL UNION split, states split (Telangana),
firms split, the Society’s 9 committees worked cohesively and with
common purpose. I want to thank every committee member, every convenor,
every coordinator of events every Chairman and anyone I missed?

In this list, I also wish to include those who could easily fit the category of NPA – NON PERFORMING ASSETS,
those committee members who’s INTEREST did not come for the entire
year. Well unlike the Reserve Bank of India, one would like to see this
only as a temporary phenomena and wish that their INTEREST will flow in and they will make up next year.

I am grateful to the Past Presidents,
the pillars of the Society and light houses for the OBs. Although all
of them were 5-10-20-30-40 years senior than I, they were friendly,
approachable, helpful, and generous with their time.

A special
bow to Late Narayan Varma, who would have MADE ALL EFFORTS TO BE here at
the AGM – we miss his radiant presence today. Although we don’t see
him, I am sure he must be watching the BCAS AGM from wherever he is.

Of course a big Thank you to the Office Bearers team. Well meaning and hard working individuals who have BCAS inscribed on their hearts.

Chetan – for being a great team mate, he ran the renovation part with Deepak and Pranaybhai with speed and precision.

Narayan – a very hard working man, a super go getter, you tell him something and it will be done.

Sunil – a silent worker, he lead the implementation of the new ERP at the Society in spite of running his practice single handedly.

And Manish, the youngest OB who picked up the accounts and helped in our deep cleaning effort and in turn lost all his blacks.

I wish the team on the dais a rich and rewarding year. They all deserve a big round of applause.

The
BCAS Team led by GM Jyoti Malkani, and the HODs Amit Singh, Shreya,
Javed, Upendra ….. and all the rest. Special mention of Rajaram – like
we have lalbaug cha Raja – he is BCAS cha Raja – he completed 25 years
earlier – and we did honor him earlier, but since some of you may have
known him for years and may not be present at that event please give him
a round of applause.

I want to thank my late Grandfather who
was a founding member of BCAS and introduced the whole family to BCAS,
my Father and Mother – Haren and Asha, both part of BCAS family for more
nearly 40 years, my wife Rashmi for taking care of me and taking care
of herself in my absence, and little Sangeeta with whom I can’t wait to
spend more time.

Friends – What unites us is far bigger and
compelling than what separates us. I want to thank all the volunteers –
contributors, writers, speakers, donors, well-wishers for their
self-less work for making a contribution to a larger good.

In
the end, I wish I had more time, I wish I had few more hands, I wish I
could be at more than one place at the same time. Perhaps the best
journeys remain unfinished, because they have no destination. And a
journey to LEARN SHARE GROW is certainly one of a lifetime.

Thank you

Incoming President’s Speech

Good Evening everyone.

My
colleagues on the dais Raman, Incoming Vice President Narayan,
Treasurer Manish, Joint Secretary Sunil & Incoming Joint Secretary
Suhas. My Managing Committee Members, Chairmen and Co-chairmen of
various subcommittees, the galaxy of past presidents present here,
Office bearers of sister organisations, Seniors in the Profession,
Ladies & Gentlemen. May I thank the Members for electing me as the
68th President of this elite Bombay Chartered Accountants’ Society. I’m
incredibly conscious of the duties and tasks ahead and the honour you’ve
bestowed upon me. It’s with anxiety mingled with an excitement that I
look ahead to the coming year. Mahatma Gandhi once said, “Live as if you
were to die tomorrow. Learn as if you were to live forever.” I welcome
you all to this AGM of BCAS, an organisation which has been an ocean of
learning for me.

But first, I simply must thank Raman Jokhakar
for his service as President over the last 12 months. It’s been a
pleasure to support Raman with his official engagements, and the
experience has been truly amazing. Under your dynamic leadership, we all
had the opportunity to be innovative. I am sure my colleagues will
agree that the motto for the year of learn-share-grow, geared the
Society to enhance its pace of imparting learning and acquiring
knowledge, sharing the same with its members and society at large,
thereby enabling growth of the professional colleagues.

The
theme Learn-Share-Grow was very well implemented. We did many different
things this year. The innovativeness was visible in novel ways of
applying technology to our events, especially during the budget season
when short videos of renowned professionals were made to capture views
of the budget both pre and post. The year was also marked with various
representations being made to the Central Government and also before
other regulatory bodies. The highlight for representation was BCAS being
invited for Samvad with Hon’ble Minister Smt. Sushma Swaraj, which
enabled us to be a part of the change agents by providing our views on
the tax structure of the country.

Raman, the journey along with
you has been a learning curve. As you once said that one term and one
year is too short to accomplish what one desires, but I assure you to
take your unfinished agenda further and shall strive to achieve the set
benchmarks of excellence and try to take the BCAS flag to newer heights.

Thanks, Raman, and I am sure you shall continue to provide your valuable inputs in the years to come as well.

As
I take the baton from Raman, my mind takes me to the days when I began
my journey with BCAS almost 22 years ago. The journey has been very
exciting, challenging and rewarding. BCAS as an organisation has also
transformed itself and grew substantially under various leaders’ year
after year, all leaving a mark of their functioning which has made BCAS
much more vibrant that too without compromising on its ethos, vision and
ideals which had been set by the founding torch bearers of the society.
I do pledge that the progress of BCAS shall gather more pace under our
new team and shall strive to achieve the objectives laid through the
Annual Plan for the year. We have circulated the proposed Annual Plan
for the year, and I would like to deal with the same briefly during my
address.

My father Mahendra Shah, also a CA, mentored me during
my articleship days, and he introduced me to BCAS on my qualifying as
Chartered Accountant. BCAS membership in the year 1994 opened up new
vistas of professional opportunities and the concept of learning and
knowledge sharing, which I feel were stepping stones of my professional
advancement. My father used to be regular with the RRCs till his health
permitted and used to travel to the then- exotic locations of Goa,
Mahabaleshwar, Matheran. I often wondered what they were actually doing
at the RRCs. My wife and children still doubt whether we seriously study
at the RRCs or just chill out??

When we are on the topic of
RRC, well, I had never dreamt that I would be at the helm of BCAS when
50th RRC of the Society is being announced. What better locale to
celebrate the Golden Jubilee of the prime event of BCAS than at Jaipur!
Memories of Golden Jubilee to be held in January 2017, I am sure would
be cherished much more amidst the Royal city of Maharajas. Amazing isn’t
it? I invite you all to come and be part of the celebration and great
learning. The International Tax Conference further doubles my joy by
spreading its wings beyond Indian waters. As you all are aware that this
year the ITF – Conference planned in August 2016 is in Sri Lanka, and
the bookings are already closed due to overwhelming response. So this
year we shall have a round of knowledge sharing beyond Indian
boundaries.

My honing of skills of learning and administrative
capabilities got a shot in the arm on my admission to the Core Group in
the year 2004, by my selection in the International Taxation Committee.
This is when I realised the importance of sharing and imparting
knowledge. During the years in Core Group I had occasions to closely
observe the functioning of illustrious Past Presidents as well as other
senior professionals. They were working selflessly for the profession
and always had the passion for taking knowledge sharing to a level where
it becomes part of their daily routine. They were bubbling with ideas
and had great clarity and dedication to execute their ideas for the
benefit of the Profession and Society at large.

If anybody wants
to learn and understand, how to run a voluntary organisation, create
effective leadership, develop and mentor professional with cutting edge
knowledge and partner in Nation Building, BCAS is the prefect role model
to follow. The Goodwill that this organisation commands is truly
incredible. BCAS has been a pioneer of many ideas which have been
emulated by other professional bodies including our parent organisation.
It is a matter of great pride when someone compliments you regarding
the quality and contents of various seminars and workshops and the
Journal, especially when that someone is none other than the President
of the Institute of Chartered Accountants of India.

Before I
continue, I will like to offer my homage to the indomitable spirit of
Narayanbhai. Who is not amongst us today! He was a pillar of not only
BCAS but of the profession, society at large and in particular of the
RTI Movement. Passion at work was something one can imbibe from him. We
will miss him forever. On 19th Aug in memory of his birthday, three
organisations namely PCGT, DBM & BCAS have come together for a
lecture by Ms Aruna Roy, a co-creator of the RTI Act and a wellknown
Social worker.

Since RTI Act was formed, Narayanbhai has been
the key supporter to this and made the BCAS well known in the field of
RTI. The RTI Clinic still actively operates through its activists on
Saturdays at the BCAS Office.

The Society will continue to support and work for the RTI clinic.

In
the past few years we have observed that the professional opportunities
have grown many fold especially with the growing economy and
globalisation and the vision of the Government. With opportunities comes
challenges. Challenges to keep pace with new regulations, new laws and
technology. The pace has picked up so much that it may no longer be
possible to function as a proprietary concern or a 2/3-member
partnership firm. It is no longer possible for one CA to know so much,
and do effective compliance. It is time for collective wisdom. The
visionaries at BCAS saw this coming and started programmes on networking
and practice management and making their seminars more relevant. The
technology has also got shot in the arm with projects like live
streaming and online payment facility.

Still a great institution like BCAS faces greater challenges for it to become even greater.

Mahatma
Gandhi correctly said “The future depends on what we do in the
present”. The Society is not short of visionaries and time has come for
taking a quantum leap. Time is just ripe to reach out far and wide
throughout India to the professionals, in practise and in industry. To
take BCAS at their door steps, if not physically then through
technology. To be more effective and relevant as the voice of the
professionals in the policy making. To be thought leaders and active
collaborators to the cause of Professional Excellence and Good
Governance. To collaborate with sister organisations, commerce
associations and Government. Accentuating ‘out of the box’ thinking and
taking a path yet untapped. Let’s all join in this movement of:

“Today’s VISION, Tomorrows’ REALITY”.

As articulated in the words of Khalil Gibran: “we are limited not by our abilities, but by our Vision.”

Let me share a short story:

Once
upon a time there lived 3 fishes in a pond. One was named “Plan Ahead”,
another was “Think Fast”, and the third was named “Wait and See”. One
day they heard a fisherman say that he was going to cast his net in the
pond the next day. Plan ahead said, “I’m swimming down the river
tonight!” and so he did. Think Fast said, “I’m sure I’ll come up with a
plan.” Wait and See lazily said, “I just can’t think about it now!’ When
the fisherman cast his nets, Plan Ahead was long gone and safe. But
“Think Fast” and “Wait and See” were caught! Think Fast quickly rolled
his belly up and pretended to be dead. “Oh, this fish is no good!” said
the fisherman, and threw him safely back into the water. But, Wait and
See ended up in the fish market. That is why they say, “In times of
danger, when the net is cast, plan ahead or plan to think fast!”

It
is perfectly said that “Ideas are a dime a dozen; Execution is the
key”. For any VISION to be set into motion, there has to be the
development of Executional Capabilities.

These capabilities come from the 3 C approach of developing Competence, Commitment, and Character.

When
we talk about VISION and working towards making it a reality it’s not
about oneself; it’s a part of a team at BCAS. At one hand, I can say the
office bearers and managing committee are the heart of this function.
However, the core group acts as the backbone to achieving all this. As I
start my term, I look forward to immense focused support from my entire
team in making things possible.

The brief of our VISION for the year can be summarized as follows:

Imparting Values thereby creating Value of Brand BCAS;

Inspire Professionals to excel as Professionals and to contribute towards Citizens’ Empowerment;

Enabler of Sharing Knowledge through engaging CAs in Profession & Industry as well as Young CAs and Students;

Innovate the ways of imparting knowledge and its dissemination to masses;

Organizational
capabilities of BCAS to be enhanced through efficient and robust
processes & controls for events and meetings thereby improving
members’ experience; and

Nurturing & building confidence
amongst Young Professionals through improved learning methodologies and
thereby creating talent pool of Future Leaders.

At this
juncture, I would like to mention that a lot of effort has been put in
by the BCAS Office Staff in implementing the processes and controls as
per the suggestions of the Internal Auditors and Office Bearers.

We
know the Society well; now it’s time to share with the rest of the
world and involve them too in the process of knowledge sharing. Get
engaging and reaching out to as many corporates and members, influencing
them in becoming a Complete CA is what I visualize.

When we look
at the upcoming generation, we realise today that they know so much
more. Technology has given the students and youth so vast exposure to
knowledge that it’s great to learn and know from them. Last month the
9th Jal Erach Dastur Student’s Annual Day was one such great event. The
pool of talent was so large and each one so outstanding. Then there are
the youth, the younger generation who have so much potential to do
things and contribute to the Society.

This year I will also like to look into “Empowering the younger generation for future leadership”.

We
have seen the Modi Government bring about various changes in the
economy. We must continue to participate in reaching out to the
Government through various representations and meetings to bring about a
clean and democratic structure. Already the Model GST law is out, and
suggestions are in the process of being sent to the government. In this
area, I expect more dynamism and more presence at BCAS. As rightly put
by the Institute President Devaraja Reddy that BCAS is the younger
brother, thus we must encourage more support in nation building just
like the ICAI -our elder brother.

The Technological drive
started by my peers Ameetbhai, Naushad, Nitin, and Raman will continue
to be as dynamic as it is with the ever changing environment. My Vision
is to look for automation and digitization in every delivery be it
membership related, events or any publications. The Society has already
started with the Live Streaming of events from BCAS conference hall and I
intend to use this technology to its optimum.

The journal also
now carries an article on Twitter which has received a great response.
The Referencer this time is also available on the app. The online
payment is in the pipeline and gradually all services will be available
online on the BCAS portal. The Society is now having tremendous Social
media presence, and I look forward to making it more interactive and
live. The E-journal is being revamped and gradually will be more
user-friendly.

The Society is all about people and as I move
ahead this year I wish to continue taking people along, both young and
experienced. Looking for more people joining the VISION by becoming
members contributing to the society and making a difference in their
lives. I am also confident that the Managing Committee as well as the
various Sub-committees will contribute to fulfil the goals and targets
set for the year by giving constructive and innovative suggestions.

The pitch is ready, and so are the players, the match needs to be won…And the Victory is for all.

Brian Herbert said that:
The Capacity to learn is a Gift
The Ability to learn is a Skill
But the willingness to learn is a Choice.

I have made my choice, and as I conclude, I wish to say “I have learnt, but have still lots to Learn.”

I
welcome your suggestions and look forward to your interaction with the
Office Bearers. Your engagement, participation and involvement is
critical. I Thank you all and look forward to working together in
turning the VISION into REALITY.

THANK YOU…

shailesh.kwebmaker

Payments Bank – A reality check

The sudden decision by several companies to give up their licences to set up specialist payments banks is puzzling. There was a lot of bullish talk in recent months about how payments banks would offer a pot of gold at the unbanked bottom of the pyramid. It is safe to assume that the companies do not find the prospect to be as profitable as they thought. But it also makes us wonder what sort of strategic planning is done by Indian companies when they identify a new venture for capital allocation.

It would also be peevish of the Reserve Bank of India to impose fines on companies that are giving up their licences. Gatekeepers should not fine people who turn away at the last minute. They should ask why this is so. It is thus more important to understand whether the licensing procedure can be improved so that similar withdrawals are avoided in the future.

Meanwhile, see this as a setback to the ambitious race towards a cashless society

(Source: Quick Edit in Mint newspaper dated 25.05.2016)

shailesh.kwebmaker

Europe’s dog days

The Austrian presidential election has ended with both mainstream centrist parties knocked out and the far right candidate losing by just 0.6% of the vote. Greece’s creditors have reached a deal—but only by kicking the can on a decision about a debt write-off further down the road. The International Monetary Fund, for all its bluster about the existing debt situation being unsustainable, has had to back down. Across the English Channel, the Brexit vote looms next month.

Since the European debt crisis kicked in at the tail end of 2009, the European Union has remained stuck in a quagmire. Every hopeful prognosis has proved fleeting. Its economic situation remains precarious, Russia is flexing its muscles to the east and terrorism and the refugee crisis have made for a combustible mix. Little wonder the far right is in ascendance across the union. The question is: Is this perpetual state of semi-crisis the EU’s new normal?

(Source: Quick Edit in Mint Newspaper dated 26.05.2016)

shailesh.kwebmaker

Ending tax terrorism

Tax terrorism has been a potent issue in India for many years. It even made its way into the 2014 election manifesto of the Bharatiya Janata Party. Prime Minister Narendra Modi has done well to tell tax officials this week that they should remove the fear of harassment most Indian taxpayers live with. This is useful, but the true answer to the problem lies elsewhere.

The Indian tax code is numbingly complex. It came to be so because of the high tax rates that India lived with before the 1991 reforms, with powerful interest groups seeking an escape through a web of exemptions. High tax rates, too many exemptions and a deeply ingrained culture of suspicion has victimized honest taxpayers even while millions sit outside the tax net.

The solution is a simple one. Modi must push ahead with the direct taxes code as it was originally designed. A simple tax system, with stable rates and minimal exemptions, is the best long-term antidote to tax terrorism.

(Source: Quick Edit in Mint Newspaper dated 17.06.2016)

shailesh.kwebmaker

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Expenses – Liability Disputed – Once the assessee stopped contesting the claim of SEBI, the liability was crystallized during the year: Sec 37

Cost of Acquisition of Shares –Vendor not disclosing the receipt in their return – Assessee cannot be held responsible – for default made by the vendors – Consideration for the sale of shares by account payee cheques is also significant:

Expenses
– Liability Disputed – Once
the assessee stopped contesting the claim of SEBI, the liability was crystallized
during the year: Sec 37

Cost of Acquisition of Shares –Vendor not disclosing the
receipt in their return – Assessee cannot be held responsible – for default
made by the vendors – Consideration for
the sale of shares by account payee cheques is also significant: