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Year: 2016

[2016] 69 taxmann.com 244 (Pune – Trib.) Cooper Corporation (P.) Ltd. vs. DCIT A.Y.: 2008-09 Date of order: 29th April, 2016

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Section 37 – Foreign exchange fluctuation loss on outstanding foreign currency loan, taken with a view Section 37 – Foreign exchange fluctuation loss on outstanding foreign currency loan, taken with a view to save interest costs, is an allowable revenue expenditure.to save interest costs, is an allowable revenue expenditure.

Facts

The assessee company was engaged in foundry business, manufacturing cylinder liners/heads, flywheels and other automobile components, etc. The assessee had in earlier years taken loans from Corporation Bank, IDBI Bank and Bank of Maharashtra in Indian currency for the purposes of acquisition of fixed assets and windmills, etc. which were purchased in India. These loans were bearing interest @ 12% to 14% p.a. In order to save on interest costs, these term loans were converted over a period of years into foreign exchange loans where interest rate was chargeable from 6% to 7% p.a.

In the return of income the assessee had claimed a deduction of Rs. 1,39,98,945 on account of devaluation of Indian currency qua foreign currency on outstanding foreign currency loans u/s. 37(1) of the Act. The Assessing Officer (AO) disallowed this sum of Rs. 1,39,98,945 on the ground that it was merely a notional loss and not an actual loss incurred by the assessee. The AO further observed that even presuming that increased liability for repayment of foreign currency loans have been saddled on the assessee, still the same will be capital in nature since the impugned loans were obtained for acquiring capital assets.

Aggrieved, the assessee preferred an appeal to the CIT(A) who granted partial relief of Rs. 37,92,087 on account of foreign currency fluctuation loss arising on loans found by him to be connected to revenue items like bill discounting, debtors, etc. Foreign exchange fluctuation loss in respect of loan taken for purpose of acquiring capital assets was not allowed as a deduction.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held

The Tribunal noted that – (i) the assessee entered into the agreement with lenders to convert the loan in foreign currency to gain advantage of savings in interest; (ii) there is no dispute that the acquisition of capital assets / expansion of projects, etc from the term loans taken are already complete and the assets so acquired have been put to use; (iii) there is no adverse finding from the Revenue about the correctness of accounts or the assessee on the touchstone of section 145 of the Act – in other words, the profits / gains from the business have admittedly been computed in accordance with the generally accepted accounting practices and guidelines notified; (iv) loss occasioned from foreign currency loans so converted is a post facto event subsequent to capital assets having been put to use. The Tribunal observed that the assessee had applied Accounting Standard-11 which it was mandatorily required to follow. It also noted that the provisions of section 43A would not apply since the assets were not acquired from out of India.

The Tribunal held that in the absence of applicability of section 43A of the Act to the facts of the case and in the absence of any other provision of the Act dealing with the issue, claim of exchange fluctuation loss in revenue account by the assessee in accordance with the generally accepted accounting practices and mandatory accounting standards notified by the ICAI and also in conformity with CBDT notification cannot be faulted. In the light of the fact that conversion in foreign currency loans which led to impugned loss, were dictated by revenue consideration towards saving interest costs, etc., the Tribunal stated that it had no hesitation in coming to the conclusion that loss being on revenue account was an allowable expenditure u/s. 37(1) of the Act.

This ground of appeal filed by the assessee was allowed.

The Commissioner of Income Tax I, Pune vs. Gera Developments Private Limited, Pune. [INCOME TAX APPEAL NO. 2171 OF 2013 dt 29/2/2016 Bombay High court.]

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[Gera Developments Private Limited, Pune vs. CIT -I, Pune . ITA No. 33/PN/2012 ; Bench : A ; dated 08/03/2013 ; A Y: 2007- 2008. Pune ITAT ]

Revision – Erroneous and Prejudicial to the Revenue – Application of mind is important – No discussion in asst order would not ipso facto lead to the conclusion that the Assessing Officer did not apply his mind : Section 263

The assessee filed its return of income declaring total income of Rs.19.97 crore. Amongst the issues which arose for consideration during the assessment proceedings were:

i) whether the consideration of Rs.41 Crore received on transfer of development right is to be taxed in the subject assessment year or not;

ii) whether an amount of Rs.68.24 lakh should be allowed as warranty expenses.

The Assessing Officer on issue of transfer of development right held that the amount of Rs. 41 crore received by the assessee was subject to performance of certain obligation relating to environmental clearance and in the absence of performing the obligation, the amounts had to be returned. On consideration of facts, the Assessing Officer held that an amount of Rs. 5.86 crore could alone be taxed in the subject assessment year and the balance amount of Rs. 35.14 crore were considered as deposit. So far as the warranty expenses are concerned, the Assessing Officer called for various details and justification for claiming warranty expenses. The assessee to this by filing a reply and on satisfaction, the Assessing Officer allowed the warranty expenses as claimed in the assessment order.

The CIT in exercise of his power u/s. 263 of the Act, held that the conclusion of the Assessing Officer on the above 2 issues namely transfer of development right and warranty expenses is erroneous and prejudicial to the interest of the Revenue. Moreover, the Commissioner also held that set off of short term capital loss without taking into account Section 94 of the Act was also erroneous and prejudicial to the interest of the Revenue. The CIT directed the Assessing Officer to complete the assessment proceedings in accordance with law as discussed in his order.

Being aggrieved, the assessee appealed to ITAT . The grievance of the assessee was that the asst order of the Assessing Officer was not erroneous nor prejudicial to the interest of the Revenue on the following three issues.

(a) Consideration received as transfer of Development Right.

(b) Warranty expenses and

(c) Set off of short term capital loss.

So far as issue (a) above is concerned the Assessment Order, on consideration of all facts, records the conclusion that out of an amount of Rs.41 crore received, an amount of Rs.35.14 crore was in the nature of deposit as the receipt was subject to environmental clearance. Only Rs. 5.86 crore could be treated as income for the subject assessment year. In view of above, the ITAT held that asst. order cannot be treated as erroneous. So far as the issue (b) above with regard to warranty expenses is concerned, the ITAT held that the questions were posed during the assessment proceedings to the assessee. The same were responded to by the assessee justifying the warranty expenses claimed. On satisfaction, the Assessing Officer accepted the claim of expenditure made by assessee. Thus a view was taken that it cannot be said to erroneous.

So far as issue (c) above with regard to the set off of the short term capital loss is concerned, the ITAT upheld the order dated 31/10/2011 of the Commissioner of Income Tax holding the same is erroneous and prejudicial to the Revenue. The Revenue being aggrieved by the order of the ITAT insofar as it set aside the order dated 31/10/2011 of the Commissioner of Income Tax i.e. on issues (a) and (b) above viz. taxability of consideration received on transfer of development right and allowing of warranty expenses.

The Hon’ble Court observed with regard to issue (a) i.e. taxability of the transfer of development right, that the ITAT records findings of Assessing Officer in detail from which it is evident that the Assessing Officer applied his mind to the above claim and on the basis of the facts before him, came to the conclusion that an amount of Rs.5.86 crore out of Rs. 41 crore received could alone be subjected to the tax as income during the subject assessment year. The balance amount Rs.35.14 crore has to be treated as deposit as the same is subject to being refunded in the absence of the environmental clearance. Thus, the Assessing Officer has taken a view/formed an opinion on the facts before him and such a opinion cannot be said to be an erroneousas it does not proceed on the incorrect assumption of facts or law and the view taken is a possible view. Therefore, as held by the Apex Court in Malabar Industrial Co. Ltd vs. Commissioner of Income Tax, 243 ITR page 83 where two views are possible and the Income Tax Officer has taken one view with which the Commissioner of the Income Tax does not agree, cannot be treated as an erroneous order prejudicial to the interests of the Revenue, unless the view taken by the Income Tax Officer is itself unsustainable in law.

So far as issue (b) i.e. warranty expenses claimed by the assessee is concerned, the court observed that the ITAT has recorded the fact that a specific query with regard to the same was made by the Assessing Officer during the assessment proceedings. This query was responded to by the assessee justifying the warranty expenses. The Assessing Officer being satisfied with regard to the justification offered, allowed the claim of warranty expenses as made by the assessee. It was thus clear that the Assessing Officer had considered the issue by raising questions during the assessment proceedings. The mere fact that it does not fall for discussion in the assessment order would not ipso facto lead to the conclusion that the Assessing Officer did not apply his mind. It is clear that if the Assessing Officer is satisfied with the response of the assessee on the issue and drops the likely addition, it cannot be said to be non application of mind to the issue arising before the Assessing Officer. In fact this issue was a subject matter of the consideration by the Court in the Commissioner of Income Tax 8 V/s. M/s. Fine Jewellery (India) Ltd., Income Tax Appeal No. 296 of 2013 dt 03rd February, 2015. Thus to hold that if a query is raised during the assessment proceedings and responded to by the assessee, the mere fact that it has not been dealt with in the assessment order would not lead to a conclusion that the Assessing Officer has not applied his mind to the issues.

Thus on the issues (a) and (b) viz. consideration received on transfer of development right and warranty expenses are concerned, the impugned order of the ITAT has applied the principle of law laid down in Malabar Industrial Co. Ltd (supra) and M/s. Fine Jewellery (India) Ltd. (supra). Thus, appeal is dismissed.

D. H. Patkar & Co. vs. ITO ITAT “D” Bench, Mumbai Before B.R.Baskaran (AM) and Ramlal Negi, (JM) I.T.A. No.: 4524/Mum/2013 A.Y.:2009-10. Date of Order: 18th March, 2016. Counsel for Assessee / Revenue: Jignesh R. Shah / B. S. Bist

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Explanation u/s. 37(1) – Payment of speed money to dock workers are not bribes or prohibited under the law hence cannot be disallowed.

Facts
The assessee, a partnership firm, was engaged in clearing and forwarding agency business. During the year it paid the sum of Rs. 34.6 lakh as speed money to the dock workers on behalf of its clients. The AO took the view that these payments are in the nature of bribes and hence the same cannot be allowed as deduction as per the Explanation given u/s. 37(1) of the Act. The CIT(A) also confirmed the order of the AO.

Before the Tribunal, the assessee submitted that these expenses have been incurred on behalf of its clients and in support produced the copies of bills raised upon its clients. It was further submitted that the assessee was constrained to incur these expenses upon the instructions of its clients in order to get their job of loading and unloading done quickly. The payment was also justified on the ground that it was a prevailing practice to incentivise the dock workers by paying some extra charges to get the job done quickly. He submitted that these kinds of payments are not prohibited by law and hence the tax authorities are not justified in invoking the Explanation to section 37(1) of the Act to disallow the claim of the assessee.

Held
According to the Tribunal, the impugned disallowance merits deletion for the following reasons:

these payments have been made by the assessee on behalf of its clients and hence the same does not constitute its own expenditure;

even though the assessee has routed the expenditure and reimbursement received from its clients through the Profit and loss account, yet it is settled principle that the books of accounts of the assessee cannot be the sole determinative factor to decide about the nature of expenditure;

the AO has invoked the provisions of Explanation to section 37(1), but he has not cited the relevant law, which prohibits such kind of payments;

the assessee’s claim that it was paid to the workers has not been disproved.

Therefore, the Tribunal set aside the order of the AO and directed him to delete the disallowance.

Director of Income Tax(IT)-I vs. M/s Credit Lyonnais [Income Tax Appeal No.2120 of 2013 dt 22/2/2016; Bombay High Court.]

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[M/s.Credit Lyonnais (through their successors : Calyon Bank) vs. The Asstt. Director of Income-tax (IT ) – 1(2) Mumbai. ITA no. 9596/Mum/2004 & 214/ Mum/2005: Asst.Year 2001-2002]

TDS – Sub arranger fees and commission paid to non resident – nature of commission / brokerage – Circular No.786 dated 7th February 2000 – Not liable to deduct TDS u/s. 195 :

Amortization of expenditure – Entries in books of account are not determinative or conclusive :

During the A Y: 2001-02, the Assessee was appointed by State Bank of India (SBI) as an arranger for mobilizing deposits in its India Millennium Deposits Scheme (IMDS). In turn, Assessee was entitled to appoint sub-arrangers for mobilizing IMDs both inside and outside India. The assessee explained that it mobilized deposits worth Rs.1235.8 crore and SBI accordingly provided it a long term deposit of Rs.617.9 crore for a period of 5 years. Besides, the assessee received a sum of Rs.22.19 crore from SBI as arranger fees and commission. It in turn paid an amount of Rs.37.07 crore to the sub-arrangers by way of sub-arranger fees and commission. An amount of Rs.26.75 crore out of Rs.37.07 crore was paid by way of sub-arranger fees and commission to non-residents. However, the assessee had failed to deduct tax at source on Rs.26.75 crore paid to non-residents as sub-arranger fees and commission. Therefore, the Assessing Officer invoked section 40(a)(i) of the Act for failing to deduct tax u/s. 195 to disallow the expenditure on the ground that this payment to non-resident sub-arranger was in the nature of fees for technical services u/s. 9(1)(vii) of the Act.

In Appeal, the CIT(A) held that the amount paid to the nonresident sub-arranger was in the nature of commission / brokerage and not fees for technical services in terms of section 9(1)(vii) of the Act.

Being aggrieved by the order of CIT(A), the Revenue filed an appeal to Tribunal. The Tribunal by relying upon the Circular No.786 dated 7th February, 2000 held that the amount paid to the non-resident sub-arrangers is in the nature of commission / brokerage and was not chargeable to tax in their hands. Consequently section 195 of the Act would have no application, thus upheld the deletion of the disallowance u/s. 40(a)(i) of the Act passed by the CIT(A).

The Tribunal further analyzed the nature of services being rendered by the sub-arrangers to the assessee and in the context of section 9(1)(vii) of the Act viz. whether these services are managerial, technical and consultancy services. whether these services are managerial, technical and consultancy services. The services could not be sort technical. So far as the managerial services are concerned, the impugned order relied on the decision of the Apex Court in the case of R. Dalmia vs. CIT, New Delhi, 106 ITR 895 wherein the Apex Court has held that the words “person concerned in the management of the business” would mean a person not only directly participates or engages in the management of the business but also one who indirectly controls its management through the managerial staff, from behind the scenes. Management includes the act of managing by direction, or regulation or administration or control or superintendence of the business. In the present case, the Tribunal, on examination of the services rendered by the sub-arrangers to the assessee concluded that the services rendered in obtaining deposits of IMD Scheme could not be considered to be management services. In the above view, the Tribunal upheld the order of the CIT(A) and held that there could be no application of provisions of section 40(a)(i) read with section 195 of the Act in the present facts

The Revenue filed an appeal before the High Court challenging the order of ITAT . The Hon’ble court observed that section 195 of the Act obliges a person responsible for paying to non-resident any sum chargeable to tax under the Act, to deduct tax at the time of payment or at the time of credit to such non-resident. In terms of section 5 of the Act, a non-resident is chargeable to tax received or deemed to be received in India or accrued or arising in India. Section 9 of the Act describes income which is deemed to accrue or arise in India. The impugned order examined the nature of fees in the context of section 9(1) (vii) of the Act to hold that it is not a technical service as defined therein. This view of the Tribunal in the context of the services being rendered by the sub-arrangers is a factual determination and is a possible view, not shown to be perverse or arbitrary. Moreover, the services are admittedly rendered by the non-resident sub-arrangers outside India. In such a case, there is no occasion for any income accruing or arising to the non-resident in India. The services of the non-resident sub-arrangers of attracting deposit to IMDS Scheme is carried out entirely outside India. As held by the Apex Court in the case of CIT, A.P. vs. Toshoku Ltd., 125 ITR 525, no income can be said to accrue or arise in India where payment is made for service by non-resident outside India. The CBDT had issued a Circular No.786 of 2000 dated 7th February 2000 reiterating the view of the Apex Court in Toshoku Ltd.’s case (supra). In the above view, as no income has accrued or arisen to the non-resident sub-arrangers in India, the question of deduction of tax u/s. 195 of the Act will not arise. Question of law raised on this issue was accordingly dismissed.

The other question of law raised was in regards to amortization of expenditure . Assessee received a sum of Rs.22.19 crore as fees and commission from SBI for services rendered as arranger. The Assessee had in turn paid an amount of Rs.37.07 crore by way of sub-arranger fes and commission to the subarrangers appointed. In the above view, the Assessee claimed as expenditure an amount of Rs.14.87 crore to determine its taxable income for the subject Assessment Year. However, in its books of account, the Assessee amortized the above expenditure of Rs.14.87 crore over a period of five years and for the subject A Y, only debited Rs.99.16 lakh to its profit and loss account. The Assessing Officer did not dispute that expenditure had been incurred for business purposes. However, in his assessment order it was held that the expenditure of Rs.14.87 crore had been amortized over a period of five years in the books of account i.e. in line thereto, a deduction only to the extent of Rs.99.16 lakh was allowable in the subject Assessment Year.

Being aggrieved, the Assessee carried the issue in appeal to the CIT(A). The CIT(A) upheld the order of the Assessing Officer . Being aggrieved, the Assessee carried the issue in Appeal to the Tribunal. The Tribunal, considered the decision of the Apex Court in the case of Madras Industrial Investment Corporation Ltd. v/s. CIT, 225 ITR 802 and earlier decision of the Supreme Court in the case of India Cements Ltd. vs. CIT, 60 ITR 52 to conclude that the expenditure incurred by making payment to sub-arrangers was the amounts spent in collecting deposits under the IMD Scheme and it was deductible in its entirety in the year of expenditure.

The Hon’ble court observed that the issue is no longer res integra in view of the decision of the Apex Court in Taparia Tools Ltd. vs. Joint CIT, 372 ITR 605 (SC). In the aforesaid case, the issue for consideration was whether the liability to pay interest is allowable as deduction in the first year itself or it be spread over for a period of five years. The High Court had on application of the principle of matching concept upheld the view of the Assessing Officer to spread the interest paid in the very first year over a period of five years because the term of the debt was five years and the Assessee therein had itself in its books of account amortized the interest over a period of five years. In Appeal, the Apex Court while reversing the decision of High Court held that normally the ordinary rule is that the Revenue expenditure incurred in a particular year is to be allowed in the year of expenditure and the Revenue cannot deny a claim for entire expenditure as deduction made by the Assessee. However, the apex Court also held that in case the expenditure is shown over a number of years and so claimed while determining its income, then it would open to Revenue only on the principles of matching concept to deal with the submission as the Assessee. It is not so in this case. The Apex Court held that once the return has been filed making a particular claim, then the Assessing Officer was bound to carry out assessment by applying provisions of the Act and he could not go beyond the return. The Apex Court made reference to the decision in the case of Kedarnath Jute Manufacturing Co.Ltd. vs. CIT, 82 ITR 363 to hold that entries in books of account are not determinative or conclusive for the purpose of determining whether or not a particular income is chargeable to tax under the Act. This had to be determined only on the basis of the provisions contained in the Act. In this case, in its return of income the Assessee had claimed the entire expenditure of Rs.14.87 crores in the subject assessment year. The expenditure was to be allowed.

The Commissioner of Income-Tax-3 vs. M/s. Parrys (Eastern) Pvt Ltd [Income Tax Appeal No. 2220 OF 2013; dt 18/2/2016 (Bombay High court )]

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(The IT O 3(2)(4), vs. Parrys (Eastern) P.Ltd. I.T.A. No. 26/Mum/2011; Bench: C ; A Y: 2005-06 ; dt : 13.2.2013)

Capital gain -Deeming fiction u/s 50 is restricted only to the mode of computation of capital gains contained in sections 48 and 49 of the Act.

The assessee had disclosed an amount of Rs.7.12 crore as deemed short term capital gain u/s. 50 of the Act. This deemed short term capital gain arose on account of the sale of depreciable assets. This deemed short term capital gain was set off against brought forward long term capital losses and unabsorbed depreciation. The Assessing Officer passed an order u /s 143(3) of the Act holding that in view of section 74 of the Act, such set off on short term capital gain against the long term capital gain is not permitted. Thus, he disallowed the set off of brought forward long term capital loss and unabsorbed depreciation against the deemed short term capital.

In appeal, the CIT[A] allowed the assessee’s appeal holding that the issue stand concluded by the decision of High Court in the case of CIT vs. ACE Builders(P) Ltd reported in 281 ITR 210(Bom).

On further appeal by the Revenue, the Tribunal by the impugned order upheld the order passed by the CIT(A) by placing reliance upon the decision of this Court in the case of ACE Builders(P) Ltd(supra) and by following its own order in the case of Komac Investments and Finance Pvt Ltd vs. Income Tax Officer 132 ITD 290. On further appeal the Revenue contended that in view of the clear mandate of Section 74 of the Act, no set off of the carry forward long term capital loss against the deemed short term capital gain u/s. 50 of the Act is permissible..

The Hon. High Court, observed that the issue stands concluded by the decision of this Court in ACE Builders(P) Ltd (supra) in favour of the Assessee. The deeming fiction u/s. 50 is restricted only to the mode of computation of capital gains contained in Sections 48 and 49 of the Act. It does not change the character of the capital gain from that of being a long term capital gain into a short term capital gain for purpose other than Section 50 of the Act. Thus, the assessee was entitled to claim set off as the amount of Rs.7.12 Crore arising out of sale of depreciable assets which are admittedly on sale of assets held for a period to which long term capital gain apply. Thus for purposes of Section 74 of the Act, the deemed short term capital gain continues to be long term capital gain. It was also observed that the Revenue has accepted the decision the Tribunal in Komac Investments and Finance Pvt Ltd (supra), as no information was provided as to whether any appeal being filed from that order. Therefore, no substantial questions of law arise for consideration , Appeal was dismissed.

TDS: DTAA- Business expenditure- Disallowance u/s. 40(a)(i)- A. Y. 2001-02- Assessee paid administrative fee to its US-AE- Assessing Officer disallowed same for not deducting TDS- As condition of TDS-deduction was only applicable on payment to non-resident and not applicable on payment to resident for relevant period, it created discrimination- consequently, assessee would get benefit of DTAA and, therefore, action of Assessing Officer was not justified-

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CIT vs. Herbalife International India (P.) Ltd.; [2016] 69 taxmann.com 205 (Delhi)

Assessee paid administrative fee to its US-AE for availing various services like data processing services, accounting, financial and planning services etc. In the A. Y. 2001-02, the Assessing Officer disallowed said payment on ground that said payment was fee for technical service warranting deduction of TDS which assessee did not deduct. 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) A rticle 26(3) of India-USA DTAA states that for the purpose of determining the taxable profits of a resident of a contracting state (India), the payment of interest, royalty and other disbursements paid to resident of other contracting state (USA) shall be deductible under the same conditions that apply to such payment being made to a resident of India. The expression other disbursements occurring in said article 26(3) is wide enough to encompass the administrative fee paid by the assessee to its US-AE.

ii) Section 40(a)(i), as it was during the assessment year in question i.e. 2001-02, did not provide for deduction of TDS where the payment was made in India. The requirement of deduction of TDS on payments made in India to residents was inserted, for the first time by way of clause (ia) to section 40(a) with effect from 1st April 2005.
 
iii) A s far as payment to a non-resident is concerned, section 40(a)(i) as it stood at the relevant time mandated that if no TDS is deducted at the time of making such payment, it will not be allowed as deduction while computing the taxable profits of the payer. No such consequence was envisaged in terms of section 40 (a)(i) as it stood as far as payment to a resident was concerned. This, therefore, attracts the non-discrimination rule under article 26(3). The object of article 26(3) was to ensure non-discrimination in the condition of deductibility of the payment in the hands of the payer where the payee is either a resident or a non-resident. That object would get defeated as a result of the discrimination brought about qua nonresident by requiring the TDS to be deducted while making payment of FTS.

iv) As per section 90(2), the provisions of the DTAA would prevail over the Act unless the Act is more beneficial to the assessee. Therefore, except to the extent a provision of the Act is more beneficial to the Assessee, the DTAA will override the Act. This is irrespective of whether the Act contains a provision that corresponds to the treaty provision.

v) In view of above, it is held that section 40(a)(i) is discriminatory and, therefore, not applicable in terms of article 26(3) of the Indo-US DTAA . Consequently, the administrative fee paid by the assessee to its AE is allowed.”

TDS: Business expenditure- Disallowance u/s. 40(a)(i)- A. Ys. 2007-08 and 2008-09- Payment of commission to non-resident agent- Commission not income deemed to accrue or arise in India- Tax need not be deducted at source- Disallowance of expenditure u/s. 40(a)(i) not justified-

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CIT vs. Gujarat Reclaim and Rubber Products Ltd..; 383 ITR 236 (Bom):

In the A. Ys. 2007-08 and 2008-09, the assessee had made payment of commission to non-resident agents in respect of sales made outside India. The Assessing Officer disallowed the claim for deduction u/s. 40(a)(i) of the Income-tax Act, 1961 for failure to deduct tax at source. The basis of disallowance was that Circular No. 23 of 1969 and 786 of 2000 issued by the CBDT which had clarified that commission paid to non-resident agent for sale does not give rise to income chargeable to tax in India had been withdrawn by Circular No. 7 dated 22/10/2009. The Tribunal allowed the assesee’s claim and held that the provisions of section 40(a)(i) would have no application for the two assessment years under consideration. On appeal filed by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:

“i) The circular of 1969 was admittedly in force during the two assessment years. It was only subsequently i.e. on 22/10/2009 that the circular of 1969 and its reiteration as found in Circular No. 786 of 2000 were withdrawn. However, such subsequent withdrawal of an earlier circular cannot have retrospective operation.

ii) Hence no tax was deductible at source and no disallowance of expenditure could be made u/s. 40(a)(i).”

Housing Project- Deduction u/s. 80-IB(10) – A. Y. 2010-11- Two flats in project exceeding specified dimension- Assessee entitled to deduction in respect of other flats not exceeding specified dimension-

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CIT vs. Elegant Estates; 383 ITR 49 (Mad);

In the A. Y. 2010-11, the assessee had claimed deduction u/s. 80-IB(10) of the Act in respect of the housing project. The Assessing Officer found that the assessee had built two flats measuring 1572 sq. ft. and 1653 sq. ft. respectively. Therefore he disallowed the entire claim for deduction. The Tribunal held that the assessee would be disqualified for the deduction proportionately, only in respect of the two flats of area exceeding 1500 sq. ft. but would be entitled to deduction in respect of the other flats which measured less than 1500 sq. ft.

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

“i) The language used in section 80-IB(10) does not bar a deduction claim altogether if some of the units sold exceed the specified dimensions.

ii) The Tribunal was right in holding that the assessee was entitled to deduction u/s. 80-IB(10) with respect to income from flats measuring less than 1500 sq. ft. limit and would not be entitled to deduction with respect to the income from the two flats exceeding the limit of 1500 sq. ft. when the assessee had considered all the flats as forming part of a single project on interpretation of the provisions of section 80-IB(10)(c).

iii) The order passed by the Appellate Tribunal was correct in the eye of law and the contentions raised on behalf of the Department could not be countenanced.”

Tea Development allowance- Section 33AB- A. Y. 2000-01- Composite income: Deduction to be allowed from total composite income derived from growing and manufacturing tea- Rule 8 shall apply thereafter to apportion resultant income-

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Singlo (India) Tea Ltd. vs. CIT; 382 ITR 537 (Cal):

The assessee company was engaged in the business of growing, manufacturing and selling tea. In the A. Y. 2000-01, the assessee had claimed deduction of tea development allowance u/s. 33AB of the Act at the rate of 20% on the composite income of Rs. 25,54,855/-. The Assessing Officer held that the deduction u/s. 33AB has to be allowed only from the non-agricultural component of the composite income determined under rule 8. The Tribunal upheld the decision of the Assessing Officer.

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

“The deduction u/s. 33AB is to be allowed from the total composite income derived from growing and manufacturing tea and only after such deduction is made, shall rule 8(1) be applied to apportion the resultant income into 60% agricultural income, not taxable under the Act and balance 40% taxable under the Act.”

Charitable purpose- S/s. 2(15), 12A of I. T. Act 1961- A. Y. 2009-10- Premises let for running educational institutions- Auditorium let out to outsiders for commercial purpose- Incidental to principal object of promotion of educational activities- Will not fall in category of “advancement of any other object of general public utility” in section 2(15)- Cancellation of registration not justified-

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DIT vs. Lala Lajpatrai Memorial Trust; 383 ITR 345 (Bom)

The assessee is a charitable trust with the object of “advancement of education” and was registered u/s. 12A of the Income-tax Act, 1961. The main object of the trust was promotion of education. The assessee trust owned a plot of land having a building consisting of an auditorium on the ground floor and class rooms from second to seventh floors. This building was let out to an educational institute which conducts junior college, senior college, law college, etc., and sixth and seventh floors were let out to run a management institute. The assesee claimed exemption of the income received by it from letting out the premises. A show cause notice was issued calling upon the assessee to explain why the rents received should not be treated as falling under the category of “any other object of general public utility” attracting the first proviso to section 2(15) of the Act. The assessee trust claimed that the object of its establishment was “advancement of education” which fell within the definition of charitable purpose as defined u/s. 2(15) of the Act. The assessee relied on Circular No. 11 of 2008 dated 19/12/2008 contending that the first proviso to section 2(15) would not be attracted to its case. The Director of Income-tax withdrew the registration of the assessee. The Appellate Tribunal set aside the order withdrawing the registration.

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

“i) The letting out of the premises was in consonance with the objects of the trust which was to conduct colleges and schools and achieve advancement of education.

ii) Admittedly, the premises were let out on a nominal rent. The Director of Income-tax had overlooked that the principal purpose for which the premises was let out was for conducting educational activity. There was no material before the authority to show that the sixth and seventh floors were used for any other purpose which was not an educational purpose. The service charges received in respect of the sixth and seventh floors were on account of educational purpose.

iii) Letting out of the auditorium was not the dominant object of the assessee and admittedly, the auditorium was incidentally let out to outsiders for commercial purposes. Letting out was incidental and not the principal activity of the assesee. The first proviso to section 2(15) would not be attracted. In the course of letting out, the assessee had incurred expenses for electricity and air conditioners.

iv) Under these circumstances, separate books of account could not be insisted upon as the activity became part and parcel of the educational activities carried out by the assessee and the benefit of exemption u/s. 11(4A) could not be denied. There was no fault with the order passed by the Appellate tribunal.”

Capital gains- Transfer- S/s. 45(1), (4) – A. Y. 1992- 93- Conversion of firm to company- Takeover of business of firm with assets by private limited company with same partners as shareholders in same proportion: Subsequent revaluation of assets- No dissolution of partnership- No consideration accrued or received on transfer of assets: Transaction not transfer giving rise to capital gains-

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CADD Centre vs. ACIT; 383 ITR 258 (Mad)

The assessee was a firm with two partners having equal shares. A private limited company was formed on 21/11/1991 and took over the business of the firm and its assets. The assets were revalued on 30/11/1991. The partners immediately before succession became the shareholders in the same proportion as in the capital account of the firm on the date of succession. For the A. Y. 1992-93, the Assessing Officer concluded that the transfer of the business assets of the firm to the company constituted distribution of assets which gave rise to capital gains taxable u/s. 45(4) of the Income-tax Act, 1961. The Tribunal upheld the decision of the Assessing Officer. On appeal by the assessee, the Madras High Court upheld the decision of the Tribunal and held as under:

“i) When firm is transformed into a company, there is no distribution of assets and no transfer of capital assets as contemplated by section 45(1) of the Income-tax Act, 1961.

ii) There is no authority for the proposition that even in cases where the subsisting partners of a firm transfer assets to a company, there would be a transfer, covered under the expression “or otherwise in section 45(4). When a firm is transformed into a company with no change in the number of partners and the extent of property, there is no transfer of assets involved and hence there is no liability to pay tax on capital gains.

iii) There was no transfer of assets because
(a) no consideration was received or accrued on transfer of assets from the firm to the company,
(b) the firm had only revalued its assets which did not amount to transfer,
(c) the provision of section 45(4) of the Act, was applicable only when the firm was dissolved. The vesting of the property in the company was not consequent or incidental to a transfer.”

Appeal to High Court- Section 260A- Competency of appeal- Decision of Tribunal following earlier decision- No appeal from earlier decision- No affidavit explaining reasons: Appeal not competent-

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CIT vs. Gujarat Reclaim and Rubber Products Ltd..; 383 ITR 236 (Bom):

Dealing with the competency of the Appeal before the High Court u/s. 160A of the Income-tax Act, 1961, the Bombay High Court held as under:

“i) Where the issue in controversy stands settled by decisions of High Courts or the Tribunal in any other case and the Department has accepted that decision the Department ought not to agitate the issue further unless there is some cogent justification such as change in law or some later decision of a higher forum.

ii) In such cases appropriately the appeal memo itself must specify the reason for preferring an appeal failing which at least before admission the officer concerned should file an affidavit pointing out the reasons for filing the appeal. It is only when the court is satisfied with the reasons given, that the merits of the issue need be examined of purposes of admission.”

Appeal to Appellate Tribunal- No appearance by assessee’s counsel on date of hearing due to death in family- Refusal by Tribunal to grant adjournment and matter decided on merits: Violation of principles of natural justice- Order of Tribunal quashed and direction to decide matter on merits after hearing parties-

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Zuari Global Ltd. vs. Princ. CIT; 383 ITR 171(Bom):

In an appeal before the Tribunal filed by the assessee, the assessee’s counsel could not appear on the date of hearing owing to a death in his family. The Tribunal refused to grant an adjournment and proceeded to decide the matter on merits. On appeal by the assessee, the Bombay High Court set aside the decision of the Tribunal and held as under:

“i) Considering that the assessee was not unnecessarily delaying the matter and as on the relevant date there was justifiable reason which prevented counsel for the assessee from being present before the Tribunal, the Tribunal was not justified to refuse an adjournment. Failure to grant a short adjournment has resulted in passing the order in breach of the principle of natural justice.

ii) The order of the Tribunal is quashed and set aside. The tribunal is directed to decide the appeals afresh after hearing the parties in accordance with law.”

Business Expenditure – Provision for interest in terms of compromise agreement with bank is an ascertained liability.

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CIT v. Modern Spinners Ltd. (2016) 382 ITR 472 (SC)

The assessee filed a return for the assessment year 1995- 96 on Novembr 24, 1995, declaring a loss of Rs.57,99,781. During the course of the assessment proceedings, the Assessing Officer specifically required the assessee to show cause why the provision of interest of Rs.49.23 lakh should not be disallowed as the provision amounted to unascertained liability. After granting opportunity to the assessee, the deduction for the said amount of interest was disallowed by the Assessing Officer. Against this order, the assessee preferred an appeal which was also dismissed by the Commissioner of Income Tax (Appeals). The view taken by the Assessing Officer as well as the Commissioner of Income Tax (Appeals), was set aside by the Income-tax Appellate Tribunal upon appeal by the assessee.

The Tribunal held that the assessee had provided interest liability only at the rate of 10 per cent which was as per the compromise agreement with the bank and not as per the original terms and conditions of loan. Therefore, it could not be treated to be a contingent liability, rather it was an ascertained liability. According to the Tribunal the assessee could not be penalized for claiming less interest liability.

The High Court dismissed the appeal of the Revenue holding that it was not an unilateral act on the part of the assessee but was a bilateral consented action on behalf of the parties which was of binding in terms of the agreement and as such it could not be termed as an unascertained liability.

On further appeal by the Revenue to the Supreme Court it was held that the matter was covered against the Revenue by the judgment of the Supreme Court in Taparia Ltd. vs. Joint CIT [2015] 372 ITR 605 (SC).

Export – Special Deduction – Computation of deduction u/s. 80HHC – 90% of the net commission (and not gross) has to be reduced from the profits of the business for determining deduction under section 80HHC.

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Veejay Marketing vs. CIT [2016] 382 ITR 395 (SC)

While completing the assessment for the assessment years 1993-94 and 1994-95 u/s. 143(3) of the Act, the Assessing Officer found that the assessee had reduced 90 per cent of the net commission while working out the profits of business under the Explanation (baa) to section 80HHC of the Act.

The Assessing Officer held that 90 per cent of gross commission receipts had to be deducted from the profits of the business and accordingly, allowed deductions under section 80HHC for the said assessment years on that basis.

Aggrieved against the said orders of the Assessing officer, the assessee filed appeals before the Commissioner of Income Tax (Appeals). The Appellate authority held that only 90 per cent of the net commission had to be deducted from the profit of the business and accordingly, directed the Assessing Officer to redo the exercise.

Against the said orders of the Commissioner of Income Tax (Appeals), the Revenue preferred appeals before the Income-tax Appellate Tribunal.

The Income-tax Appellate Tribunal, by following the decision of the Income-tax Appellate Tribunal, Delhi Bench ‘E’ (Special Bench) in Lalsons Enterprises vs. Deputy CIT [2004] 89 ITD 25 (Delhi) [SB], held that only 90 per cent of the net commission had to be reduced from the profit of the business for determining deduction under section 80HHC of the Act.

Against the said order of the Tribunal, the Revenue filed the appeals before the High Court.

By following the ratio laid down in the CIT vs. Chinnapandi [2006] 282 ITR 389 (Mad), in which it was held that 90% of the gross interest had to be reduced from the profits of the business for determining deduction under section 80HHC, the High Court held that the reasons given by the Tribunal in the impugned order were not sustainable. Accordingly, the order of the Tribunal was set aside.

On appeal to the Supreme Court, it was held that these cases were covered by the decision in ACG Associated Capsules Private Ltd. (Formerly Associated Capsules Private Ltd.) vs. CIT [2012] 343 ITR 89 (SC). Accordingly, the issue arising in the appeal was answered in favour of the assessee and against the Revenue. The Supreme Court allowed the appeals and the order of the High Court was set aside and the matter was remanded to the Assessing Officer for a fresh consideration.,

Refund –When an amount though found refundable to the assessee is utilised by the Department, interest is payable u/s. 244(1A) for the period of such utilization.

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CIT v. Jyotsna Holding P. Ltd. [2016] 382 ITR 451 (SC)

The
Supreme Court took note of the facts in respect of the assessment year 1987-88
(similar fact situation appeared in respects of all three assessment years viz.
1985-86, 1986-87 and 1987-88.) For the assessment year 1987- 88, the respondent
filed its return on the basis of self tax assessment made by it and paid a sum
of Rs.3,23,68,834 on September 12, 1987. The assessment was made u/s. 143(3) by
the assessing authority on March 28, 1988, as per which an amount of
Rs.2,03,29,841 was found refunable to the respondent/assessee. Instead of
immediate refund of this amount, the assessing authority ordered that the same
would be adjusted against the demand for the year 1986-87. It was ultimately
adjusted on July 25, 1991. The question that arose, in these circumstances, was
as to whether the assessee would be entitled to interest on the aforesaid
amount which was kept by the Revenue for the period from March 28, 1988 to July
25, 1991. The assessee claimed the interest, which request was rejected by
Assessing Officer. However, the Commissioner of Income-tax (Appeals) allowed
the appeal of the assessee against the order of the Assessing Officer by
invoking the provisions of section 244(1A) of the Income-tax Act and held that
the interest was payable on the aforesaid amount. This order was upheld by the
Income-tax Appellate Tribunal as well as by the High Court.

On appeal, the
Supreme Court after going through the order of High Court did not find anything
wrong with the same. According to the Supreme Court the amount in question,
though found refundable to the assessee, was utilized by the Department and,
therefore, interest was payable u/s. 244(1A) of the Income-tax Act.

PUBLIC LECTURE MEETING ON DIRECT TAX PROVISIONS ON THE FINANCE BILL, 2016

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Dear Members,

The wait for most awaited economic event of the country, Union Budget 2016 will be over on 29th February, 2016. The entire country is eager to know how the “Ease of doing business” unfolds. Will the Easwar Committee recommendations be accepted? Whether there will be any guidance on the GST applicability? Will this budget bring in more transperancy and accountability? How will the “Guiding Principles” of POEM take shape?. The Indian businesses are looking forward to long term measures on policy front which provides stability on tax front and enables proper planning. They envisage substantial scalable operations with support of qualitative direction from Modi Government to capitalise on opportunities for emerging markets like India. Whether the Modi Government will go that extra mile and deliver some path breaking measures in the forthcoming Budget, is looked upon with eagerness and anxiety. The future is promising and the pace has to be provided by the Finance Minister through his ultimate accelerator, Union Budget, 2016. The country awaits to see its future…..

In its endeavour to spread the knowledge far and wide, Shri S E. Dastur, Senior Advocate, will present his masterly analysis of the Direct Tax provisions of the Finance Bill, 2016. Details are as follows:

DAY & DATE : Friday, 4th March 2016

TIME    : 6.15 p.m.

VENUE    : Yogi Sabhagruha, Shree SwaminarayanMandir, Dadar (East), Mumbai – 400014

SPEAKER    : Shri S. E. Dastur, Senior Advocate

FEES : Free for all and open to anyone interested on the subject. Seats will be available on first come first served basis.

We trust you will attend this lecture meeting along with your Colleagues, Students & Friends.

Infinite Growth in a Finite World? – Hopium Economics has given us deeply-in-debt individuals, businesses and nations

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Economic growth is a central assumption to political and economic systems. It is the mechanism relied upon for improving living standards, reducing poverty to now solving the problems of over indebted individuals, businesses and nations. All brands of politics and economics assume sustainable, strong economic growth, combined with the belief that governments and central bankers can control the economy to bring this about.

But strong growth is not normal, being a recent phenomenon over the last two centuries. Economic activity and the wealth created have increasingly relied on borrowed money and speculation. It was based upon the profligate use of mispriced natural resources such as oil, water and soil. It relied on allowing unsustainable degradation of the environment.

The human race refuses to accept that it is not possible to have infinite growth and improvement in living standards in a finite world. As author Edward Abbey warned, “Growth for the sake of growth is the ideology of a cancer cell.”

Central to the problem is the level of indebtedness. Debt accelerates consumption, as borrowed funds are used to purchase something today against the promise of paying back the money in the future. Spending that would have taken place normally over a period of years is squeezed into a relatively short period because of the availability of cheap borrowing. Business overinvests misreading demand, assuming that the exaggerated growth will continue indefinitely, increasing real asset prices and building significant overcapacity.

Around 85% of the debt incurred over the last 30-35 years funded the purchase of existing assets or consumption rather than being used for creating new businesses or productive purposes which build wealth.

Global debt now stands at around $200 trillion (over 280% of the world annual produce), an increase of $57 trillion since 2008 when high debt levels brought the world to the brink of collapse.

“Hopium” economics cannot mask the problem of excessive leverage forever. The debt will have to be repaid out of future income or proceeds of asset sales, diminishing growth or savaging investment values. If as is likely, this debt cannot be repaid, then it will be written off, resulting in an unprecedented loss of wealth for savers. Compounding the problems of debt, resources and environment are challenges of slowing rates of innovation, lower improvements in productivity, demographics, inequality and exclusion. The amount of global arable land has remained relatively constant for the last decade at 3.4 billion acres. The annual increase in global population requires water flow equivalent to Germany’s Rhine River. The frequency of extreme weather events is increasing. In a Faustian bargain, policy makers sold the future originally for present prosperity and are now reselling it for a precarious and short-lived stability. There is a striking similarity between the problems of the financial system, irreversible climate change and shortages of vital resources like oil, food and water. In each area, society borrowed from and pushed problems into the future. Short term profits were pursued at the expense of risks which were not evident immediately and that would emerge later.

Kicking the can down the road only shifts the responsibility onto others, especially future generations. By postponing the inevitable, the adjustment becomes larger and more painful.

Economic problems feed social and political discontent, opening the way for extremism. In the Great Depression the fear and disaffection of ordinary people who had lost their jobs and savings gave rise to fascism. Writing of the period, historian A. J. P. Taylor noted, “[The] middle class, everywhere the pillar of stability and respectability … was now utterly destroyed … they became resentful … violent and irresponsible … ready to follow the first demagogic saviour.”

Humanity faces this, its greatest crisis, with, in the words of biologist E. O. Wilson, “palaeolithic emotions”, “medieval institutions” and delusions about its “god-like technology”.

But a new industrial revolution is not on the horizon. It is not clear how new smartphones and connectivity that feed cheap narcissism will address the urgent problems of the world. Progress on crucial problems like improving crop yields, cheap clean energy and its storage is slow.

Many new technologies such as robotics reduce living standards as they replace or deskill most workers. Innovation enriches a few people who control or finance the technology at the expense of the vast majority of the population, entrenching and increasing inequality.

The world is remarkably unprepared for the crisis that is unfolding. During the last half-century each successive crisis has increased in severity, requiring progressively larger measures to ameliorate its effects. Over time, the policies have distorted the economy. The effectiveness of instruments has diminished.

With public finances weakened and interest rates at historic lows, there is now little room for manoeuvre. Resource constraints and environmental problems are increasingly pressing. A new crisis will be like a virulent infection attacking a body whose immune system is already compromised.

Factual debate is replaced by what comedian Stephen Colbert calls “truthiness”, things which were not true but rather things one wishes were or actually believes to be true. Any challenge to the consensus of unlimited opportunity is crushed. As Tertullian wrote, “The first reaction to truth is hatred.”

(Source:Article by Shri Satyajit Das in The Times of India dated 08-01-2016)

A. P. (DIR Series) Circular No. 39 dated January 14, 2016

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Export of Goods and Services – Project Exports

This circular provides that: –

i) The ‘OCCI’ will now be known as ‘Project Export Promotion Council’ (PEPC).

ii) Civil construction contracts can include turnkey engineering contracts, process and engineering consultancy services and Project construction items (excluding steel & Cement) along with civil construction contracts.

The Memorandum of Instructions on Project and Service Exports (PEM) containing the above changes is enclosed with this circular.

FED Master Directions dated January 4, 2016

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On January 4, 2016 RBI has issued the following 17 Master Directions (There is no Master Direction 1 & Master Direction 11). Each Master Direction consolidates / complies various instructions issued by RBI, from time to time, with respect to the Regulations covered in the Master Directions.

RBI will continue to issue directions to Authorised Persons through A.P. (DIR Series) Circulars in regard to any change in the Regulations or the manner in which relative transactions are to be conducted and the Master Direction will also be amended suitably.

2. M aster Direction – Opening and Maintenance of Rupee/Foreign Currency Vostro Accounts of Nonresident Exchange Houses 3. M aster Direction – Money Changing Activities

4. Master Direction – Compounding of Contraventions under FEMA, 1999 5. Master Direction – External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers

6. Master Direction – Borrowing and Lending transactions in Indian Rupee between Persons Resident in India and Non-Resident Indians / Persons of Indian Origin

7. M aster Direction – Liberalised Remittance Scheme (LRS)

8. M aster Direction – Other Remittance Facilities

9. M aster Direction – Insurance

10. M aster Direction – Establishment of Liaison / Branch /Project Offices in India by foreign entities

12. M aster Direction – Acquisition and Transfer of Immovable Property under Foreign Exchange Management Act, 1999

13. Master Direction – Remittance of assets

14. Master Direction – Deposits and Accounts

15. Master Direction – Direct Investment by Residents in Joint Venture (JV) / Wholly Owned Subsidiary (WOS) Abroad

16. Master Direction – Export of Goods and Services

17. Master Direction – Import of Goods and Services

18. Master Direction – Reporting under Foreign Exchange Management Act, 1999

19. Master Direction – Miscellaneous

Confidential Information

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Every person, whether a corporation or an individual has his own secrets and/or information which they consider to be confidential in nature. The question that arises is how does one protect such information, which may be of a commercial nature. Of course, a person may choose never to divulge or disclose his secret or confidential information and in a manner of speaking, take the information to his grave, in which case the question of the information ever being misappropriated cannot and does not arise. However, if one had to divulge or disclose the confidential information for its commercial exploitation, then the question of preventing its misappropriation would surely arise.

If the confidential information is patentable in nature then one may choose to apply for a patent and seek protection. The confidential information which makes up the invention in such a case would be published through the patent office, considering the quid pro quo for the grant of a patent is the disclosure of such confidential information/ invention. However, in lieu of the disclosure the person/ corporation would get statutory protection and a monopoly for the term of the patent.

On the other hand, there may be information which is not patentable but which is otherwise not in the public domain and which is proprietary in nature. Such information would be entitled to protection under the law relating to confidential information. The law relating to protecting confidential information is a part of common law and is based on the broad principles that “If a defendant is proved to have used confidential information, directly or indirectly obtained from the plaintiff, without the consent, express or implied, of the plaintiff, he will be guilty of an infringement of the plaintiff’s rights1 ” and that “It depends on the broad principle of equity that he who has received information in confidence shall not take unfair advantage of it. He must not make use of it to the prejudice of him who gave it without obtaining his consent.2”

A classic example of a Company deriving huge benefits out of its confidential information would be the case of Coca-Cola. The formula/recipe to the soft drink is a closely guarded secret known only to the top officials in the Company. A more local and indigenous example could be of the “Tunday Kebabs” in Lucknow. Before the brothers split a few years ago, it was believed that the recipe to their famous kebabs was known only to the male members of the family and not even revealed to the wives or daughters in the family so as to ensure the confidentiality thereof. Evidently, confidential information can be extremely valuable in certain cases. It is this very branch of law, which would in a sense be the broad basis of the non-disclosure and confidentiality agreements that are drawn up regularly, for example between two companies or between an employer and an employee.

This article is addressed towards explaining the basic concepts of the law relating to confidential information. I shall be addressing the basics of the law of confidential information such as when would the law apply, what information can be considered to be confidential, the springboard doctrine and the necessary requisites a Plaintiff must prove in an action for breach of confidence.

Confidential Information
The first and foremost aspect of the law of confidential information is that it is not restricted to cases of contractual obligations of confidentiality3. Hence, even if parties have shared confidential information with one another without entering into a formal agreement for non-disclosure or protecting confidentiality, the law would protect the disclosure of such information subject to the other requirements, explained hereinafter, being met. Hence, even if an employee was not bound by an express term of confidentiality, he would be bound by an implied duty of good faith to his employer not to use or disclose the confidential information.

At this juncture, it may be relevant to note that there is a distinction between preventing disclosure of confidential information and a clause in restraint of trade. As explained by the Bombay High Court in the case of Star India Pvt. Ltd. vs. Laxmiraj Nayak & Anr.5 , a distinction must be drawn between the confidential information imparted and the skill acquired by the employee. It cannot be said that the employee cannot be permitted to exercise his skill merely because it has been acquired by possessing a trade secret of any one. The Bombay High Court, illustrated its point by stating, inter alia, that “No hospital can prevent a heart surgeon from performing heart surgery in some other hospital by saying that the heart surgeon had acquired skill by performing heart surgeries in that hospital. It is a personal skill which the heart surgeon acquired by experience. Same is the case with the salesman who negotiates with the customer for the sale of the product of his employer. He learns from experience how to talk with different people differently and how to canvas for the sale of the product successfully. He knows the selling points of a particular product by experience. He acquires a good and sweet tongue if he is a salesman dealing with the female folks for the products required by them. He learns the art of tackling the illiterate people. He comes to know how to deal with the old and aged people. He knows the quality of his products. He knows the rates. He might perhaps also be knowing the cost of the products and the profit margin of the employer. All these factors cannot be called trade secrets.” Hence, what can be prevented by an employer is the use and disclosure of the confidential information by an employee but not the exercise of a skill by the employee.

The most important aspect, though would be as to what information can be treated as being confidential in nature. Does information become confidential merely because one entitles it as such. Is information to be treated as confidential merely because one party asserts it to be confidential. To illustrate, can Company A in a contract with Company B assert that information pertaining to the composition of its Board of Directors is confidential and cannot be divulged? To my mind, the answer to this question would be in the negative since this information would otherwise be available from a search of the records of the Registrar of Companies and would as such be in the public domain.

Thus, broadly speaking it is information which is not available in the public domain and which therefore, can be treated as being proprietary in nature that could be treated as being information which is confidential in nature. Even, at times information which is otherwise in the public domain may be treated as confidential since the maker of the document has used his brain and thus produced a result which can only be produced by somebody who goes through the same process6 .

The information must have a significant element of originality not already known in the realm of public knowledge. The originality may consist in a significant twist or slant to a well known concept. The originality may also be derived from the application of human ingenuity to well known concepts7. An example of a case where the originality of the information came from an application to a well known concept would be the “Swayamvar” case before the Delhi High Court. In that case, the Plaintiff sought to protect the idea of a TV show based on the concept of a Swayamvar. Even though the concept of a swayamvar was a well known concept and as such in the public domain, the Delhi High Court observed that “The novelty and innovation of the concept of the plaintiff resides in combining of a reality TV show with a subject like match making for the purpose of marriage. The Swayamvar quoted in Indian mythology was not a routine practice. In mythology, we have come across only two Swayamvars, one in Mahabharat where the choice was not left to the bride but on the act of chivalry to be performed by any prince and whosoever succeeded in such performance got the hand of Draupadi. Similarly, in Ramayana choice was not left to the bride but again on performance of chivalrous act by a prince who could break the mighty Dhanusha (Bow). Therefore, originality lies in the concept of plaintiff by conceiving a reality TV programme of match making and spouse selection by transposing mythological Swayamvar to give prerogative to woman to select a groom from a variety of suitors and making it presentable to audience and to explore it for commercial marketing. Therefore the very concept of matchmaking in view of concept of the plaintiff giving choice to the bride was a novel concept in original thought capable of being protected.8 ”

Hence, in each case, the confidential information would have to be identified with a degree of certainty and merely by entitling the information as confidential, the same would not become confidential. The person claiming the information to be confidential must be in a position to identify and assert how the information he claims to be confidential is in fact such information as is not available in the public domain and contains the element of originality as required in such cases.

Another facet of what information may be claimed as confidential pertains to cases where the information is partly public and partly private. In such cases also, the Courts have held that where confidential information is communicated in circumstances of confidence the obligation thus created would endure even after all the information has been published or is ascertainable by the public so as to prevent the recipient from using the communication as a spring-board9 . In Seager vs. Copydex Ltd.10 the Court, observed, inter alia, that “As I understand it, the essence of this branch of the law, whatever the origin of it may be, is that a person who has obtained information in confidence is not allowed to use it as a spring-board for activities detrimental to the person who made the confidential communication, and spring-board it remains even when all the features have been published or can be ascertained by actual inspection by any member of the public …The law does not allow the use of such information even as a spring-board for activities detrimental to the plaintiff.”

The spring board doctrine refers to the fact that the recipient of information which is partly public and partly private cannot take advantage of the private information to spring board the development of his activities. As explained by Lord Denning, when information is mixed as in partly private and partly public, then the recipient must take special care to use only the material which is in the public domain11 .

Hence, the necessity and/or importance of identifying the confidential information would be paramount. Identifying the confidential information, however, is only but one aspect of what a Plaintiff would be required to prove in a case filed for breach of confidence. As held by the Bombay High Court in the recent case of Beyond Dreams Entertainment Private Limited vs. Zee Entertainment Enterprises Limited12, a Plaintiff would be required to prove three elements viz. that firstly, it must be shown that the information itself is of a confidential nature, secondly, it must be shown that it is communicated or imparted to the defendant under circumstances which cast an obligation of confidence on him. and that thirdly, it must be shown that the information shared is actually used or threatened to be used unauthorizedly by the Defendants, that is to say, without the licence of the Plaintiff. The High Court also observed that each one of these three elements had its own peculiarities and sub-elements.

Thus, in every case of breach of confidence, a Plaintiff would be required to plead and prove the aforesaid factors. A plaintiff to succeed in a case for breach of confidence would not only have to identify that the information imparted was confidential but also show that it was imparted under circumstances which implied a relationship of confidence and that there has been a threat to disclose and/or divulge such information.

Conclusion
Whilst the law on the subject is extremely vast, I hope that the above summarisation of the basic concepts of the subject, would make clear the minimum requirements that must be borne in mind whilst dealing with confidential information. The draftsman of a contract or a plaint would have to endeavour to determine whether or not there is any confidential information involved and to identify the same. It must be made clear to the recipient of the information that the information being shared is confidential in nature and cannot be divulged. It may be appreciated that it is very important to understand and identify what information is in the public domain and what information is private. It is essential that parties and/or draftsmen endeavour to identify the information which is not in the public domain and/or which cannot be arrived at without applying one’s mind. Parties must bear in mind that merely by labelling information as confidential it would not become confidential and that certain information even though not labelled confidential if given in circumstances implying confidence may be protected.

An endeavour has been made to codify the subject, by the Department of Science and Technology, by publishing a draft legislation titled the National Innovation Act of 2008, the preamble to which provides that it is, inter alia, “An Act to … codify and consolidate the law of confidentiality in aid of protecting Confidential Information, trade secrets and Innovation.” The draft legislation has however, not yet seen the light of the day and we continue to be governed by the vast amount of case law based on the common law principles of preventing breach of confidence.

WRITE – BACK OF LOANS – SECTIONS 41 (1) & 28 (iv)

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ISSUE FOR CONSIDERATION

On account of the inability to repay a borrower, may write-back a part of the
amount due or the full amount so due, in pursuance of the negotiations with the
lender or otherwise. It is usual to come across cases of write back of
liability towards repayment of loans taken by an assesssee in the course of his
business. The amount so written back is credited to the profit & loss
account of the year of write back or is credited to the reserves.

Important issues arise, under the income-tax law, concerning the treatment and
taxability of the amount written back. Will such a write back attract the
provisions of section 41 (1) of the Act and be taxed in the hands of the
assesssee in the year of write back? Alternatively, will the write back attract
the provisions of section 28 (i) or (iv) of the Act and be taxed in the hands
of the assesssee? Whether the fact that the borrowings were made for the
purposes of acquiring a capital asset, make any difference to liability for
taxation? Whether it can be said that the write back does not represent any
benefit or a perquisite for the assessment and is hence not taxable?

Conflicting decisions are rendered by the courts over a period of years
requiring us to take a fresh view of the issues on hand. Recently, the Madras
High Court has taken a view that the amount of loan written back by the
borrower is taxable in his hands in contrast to its own decision delivered a
few years ago.

Iskraemeco Regent Ltd ‘s case.

The issue arose in the case of Iskraemeco Regent Ltd. vs. CIT, 331 ITR 317
(Mad.). In that case the assessee, engaged in the business of manufacturing
energy meters, obtained a term loan from State Bank Of India for the purchase
of capital assets, both by way of import as well as in the local market. The
company also procured credit facility, through cash credit account, for import
of capital assets as well as for meeting the working capital requirements.

The assessee was declared a sick industrial company by the BIFR, which had
sanctioned a scheme for its revival, and in pursuance thereto, the State Bank
of India waived the outstanding dues of principal amount of about Rs.5 crores
and the interest outstanding for a sum of about Rs. 2 crores under the one time
settlement scheme. The assessee credited the waiver of principal amount to the
“Capital Reserve Account” in the balance sheet treating it as capital
in nature and the waiver of interest was credited to its “Profit and Loss
Account” for the financial year ending 31.03.2001 corresponding to the
assessment year 2001-02.

The assessee filed its return declaring its total income assessable at Rs.
45,160 after setting off the carried forward business losses and unabsorbed
depreciation. The AO in assessing the total income added the amounts of loan
and interest waived under the head business income by applying the provisions
of section 41(1) and section 28(iv) of the Act.

The appeals filed by the
assessee, before the Commissioner of Income Tax (Appeals) and the Tribunal,
were dismissed on the ground that the issue in appeal was no longer res integra
in as much as the same had already been concluded by the judgment in CIT vs.
T.V. Sundaram Iyengar & Sons Ltd., 222 ITR 344(SC). Aggrieved by the order
of the tribunal, the assessee preferred an appeal to the high court by raising
the following substantial questions of law;

  • “Whether the learned
    Tribunal misdirected itself in law, and it adopted a wholly erroneous
    approach, in interpreting the provisions of Section 28(iv) of the
    Income-tax Act, 1961, to hold that the sum of Rs.5,07,78,410/-
    representing the principal loan amount, waived by the bank under the One
    Time Settlement Scheme (OTS), and credited by the appellant assessee to
    its Capital Reserve Account, in its Balance Sheet drawn as at 31st March,
    2001, is assessable to tax as a revenue receipt in the assessment for the
    assessment year 2001-02; and whether the findings of the learned Tribunal
    to this effect were wholly unreasonable, based on irrelevant
    considerations, contrary to the facts and evidence on record and/or
    otherwise perverse?
  • Whether the decision of the
    Hon’ble Supreme Court in CIT vs. T.V.Sundaram Iyengar & Sons Ltd.
    [1996] 222 ITR 344, applied by the learned Tribunal in passing its said
    impugned order dated 26th March, 2010, has any application whatsoever, in
    the facts and circumstances of the instant case, and particularly in
    relation to section 28(iv) of the said Act?
  • Whether on a correct
    interpretation of section 28(iv) of the Income Tax Act, 1961, the Tribunal
    ought to have held that the principal amount of loan waived by the Bank
    under the OTS, not being a trading liability and also not being a
    “benefit or perquisite, whether convertible into money or not”,
    the expression used in the said section, did not constitute revenue
    receipt and/or business income of the appellant assessee assessable to tax
    in its assessment for the assessment year 2001-02?
  • Whether ………….
  • Whether
    …………….. 

On behalf
of the assessee it was submitted that:—

  • it was not in dispute that
    the assessee had obtained loan from the State Bank of India for the purchase
    of fixed assets, both within the country and outside the country, which
    were admittedly capital assets. It was a pure loan transaction and the
    same could never be termed as a trading transaction.
  • the loan was obtained for
    the purchase of capital assets and the waiver amounted to a capital
    receipt and not a revenue receipt.
  • it was not involved in any
    business involving the transaction of money lending .
  • the AO had not gone behind
    the loan arrangement and the loan arrangement in its entirety was not
    obliterated by the waiver, considering the fact that the assessee had paid
    a sum of Rs. 5 crores from the date of receipt of the loan.
  • a grave error was committed
    in mechanically applying the judgment rendered by the apex court in T.V.
    Sundaram Iyengar & Sons Ltd.’s case (supra ) without appreciating the
    factual scenario that the loan had been obtained towards the purchase of
    capital assets and not for a business transaction. The facts involved in
    the judgment referred above disclosed that the transaction therein was a
    trading transaction as against the facts involved in the assessee’s case.
  • reliance was placed on the
    decisions in the cases of Mahindra & Mahindra Ltd. vs. CIT, 261 ITR
    501(Bom.), CIT v. Alchemic (P.) Ltd., 130 ITR 168 and CIT vs. Mafatlal
    Gangabhai & Co. (P.) Ltd.219 ITR 644 (SC).
  • relying on the decision in
    the case of Solid Containers Ltd. vs. Dy. CIT, 308 ITR 417 it was
    submitted that, in a case where a transaction involved a purchase related
    to capital assets, a waiver made of the loan taken for the said purchase
    would not constitute a business receipt.
  • the reasoning of the
    authorities that, section 28(iv) of the Act was applicable to a money
    transaction was totally misconceived and contrary to the provision itself.
    Section 28(iv) provided for chargeability of profits and gains of business
    or profession with relation to the value of any benefit or perquisite
    arising out of business or the exercise of profession and therefore the
    same would not include a money transaction. Since in the present case on
    hand, the transaction involved a loan transaction, being a transaction of
    money, section 28(iv) had no application.
  • Section 41(1) also did not
    apply as it mandated that there had to be an actual allowance or deduction
    made for the purpose of computing under the said section. In as much as
    there was no allowance or deduction in the present case on hand, the
    question of application of section 41(1) also did not arise for
    consideration.
  • in support of the
    contentions, the company placed reliance on the following judgments, CIT
    vs. P. Ganesa Chettiar, 133 ITR 103 (Mad.), CIT vs. A.V.M. Ltd., 146 ITR
    355 , Alchemic Pvt. Ltd.’s case (supra), Mafatlal Gangabhai & Co. (P.)
    Ltd.’s case (supra ) and Dy. CIT v. Garden Silk Mills Ltd., 320 ITR 720
    (Guj.) to submit that section 28(iv) had no application to a money
    transaction. In so far as the scope of section 41(1) was concerned, the
    judgments in Polyflex (India) (P.) Ltd. vs. CIT, 257 ITR 343 (SC) and
    Tirunelveli Motor Bus Service Co. (P.) Ltd. vs. CIT, 78 ITR 55 (SC) were
    relied upon by the company. the combOn behalf of the Revenue it was
    submitted that:—ined reading of section 41(1) and section 28(iv) showed
    that the words “whether in cash or any other manner” as found in
    s. 41(1) had not been incorporated in section 28(iv) which was indicative
    of the fact that section 28(iv) did not cover a cash transaction.

On behalf
of the Revenue it was submitted that:

  • the appellate authorities
    had not rejected the company’s appeal on application of section 28(iv) but
    was on application of section 28(i)of the Act and therefore, the findings
    rendered by the authorities below had to be seen in the context of the
    provisions contained in section 28(i) of the Act.
  • the ratio laid down by the
    apex court in T.V. Sundaram Iyengar & Sons Ltd.’s case (supra), held
    good and had been followed in CIT vs. Rajasthan Golden Transport Co. (P.)
    Ltd., 249 ITR 723, CIT v. Sundaram Industries Ltd., 253 ITR 396, CIT vs.
    Aries Advertising (P.) Ltd., 255 ITR 510 and the authorities below had
    rightly applied the same in rejecting the case of the assessee.
  • it was not in dispute that
    the amount had been borrowed by the assessee for the purpose of his
    business and once the said amount was used for business, the question as
    to whether it had been used for the purchase of capital assets or revenue
    receipts was immaterial. The assessee having become richer by the
    settlement, the said transaction would partake the character of the income
    assessable to tax. Even assuming an amount was utilised towards the
    capital assets, it would take the character of a revenue receipt,
    subsequently. The borrowal and waiver were in the course of business
    during carrying on of which the benefit accrued to the assessee and hence
    was taxable. If the amount was received in pursuance to a business or a
    contractual liability, then it was taxable as income.
  • relying on Jay Engg. Works
    Ltd. v. CIT, 311 ITR 299 it was submitted that the facts involved in the
    cases relied upon by the assessee company were different and that some of
    the judgments had been rendered prior to the decision in the case of T.V.
    Sundaram Iyengar & Sons Ltd.’s (supra). The Madras high court after
    considering the submissions of the parties to the dispute observed and
    held that;-
  •  the assessee was not
    trading in money transactions. A grant of loan by a bank could not be
    termed as a trading transaction and it could not also be construed to be
    in the course of business. Indisputably, the assessee obtained the loan
    for the purpose of investing in its capital assets. The facts involved in
    the present case were totally different than the facts involved in T.V.
    Sundaram Iyengar & Sons Ltd.’s case (supra). What had been done in the
    present case was a mere waiver of loan. There was no change of character
    with regard to the original receipt which was capital in nature into that
    of a trading transaction. There was a marked difference between a loan and
    a security deposit.  
  • every deposit of money would
    not constitute a trading receipt. Even though a receipt might be in
    connection with the business, it could not be said that every such receipt
    was a trading receipt. Therefore, the amount referable to the loans
    obtained by the assessee towards the purchase of its capital asset would
    not constitute a trading receipt. The finding of the court had been
    fortified by the judgment of this Court in A.V.M. Ltd.’s case (supra).
  • the same contention had been
    raised on behalf of the revenue before the Bombay High Court in Solid
    Containers Ltd.’s case (supra), by relying upon the judgment rendered in
    T.V. Sundaram Iyengar & Sons Ltd.’s case (supra), however, in the said
    case, a finding was given that the money was received by the assessee in
    the course of carrying on his business and the agreement was completely
    obliterated and the loan in its entirety was completely waived and the
    loan itself was taken for a trading activity and on waiving it was
    retained in business by the assessee. In the said judgment, the court had
    distinguished its earlier judgment rendered in Mahindra & Mahindra
    Ltd.’s case (supra) by highlighting that in the facts of the Solid
    Container’s case, there was a trading transaction and the money received
    was used towards a business transaction and accordingly the ratio laid
    down in. T.V. Sundaram Iyengar & Sons Ltd.’s case (supra) was
    applicable.
  • therefore, the above said
    facts indicated that the ratio laid down in T.V. Sundaram Iyengar &
    Sons Ltd.’s case (supra) had no application at all to the facts and
    circumstances of the present case on hand. Hence, the authorities below
    had wrongly applied the ratio laid down in T.V. Sundaram Iyengar &
    Sons Ltd.’s case (supra) and the orders passed by them could not be
    sustained. In the matter of applicability or otherwise of section 28(iv)
    and 41(1), the court deemed it fit to give its views even though the
    Revenue had conceded that the said provisions did not apply to the present
    case. It observed that;-
  • Section 28(iv) of the Act
    dealt with the benefit or perquisite received in kind. Such a benefit or
    perquisite received in kind other than in cash would be an income as
    defined u/s. 2(24) of the Act. In other words, to any transaction which
    involved money, section 28(iv) had no application.
  • the transaction in the
    present case being a loan transaction having no application with respect
    to section 28(iv), the same could not be termed as an income within the
    purview of section 2(24) of the said Act. In other words, in as much as
    section 28(iv) was not applicable to the transactions on hand, it could
    not be termed as income which could be made taxable as receipt. A receipt
    which did not have any character of an income being that of a loan could
    not be made eligible to tax. 

Section 41(1) could apply only to
a trading liability. A loan received for the purpose of capital asset would not
constitute a trading liability.

Ramaniyam Homes P Ltd .’s case,

The issue once again arose recently before the Madras High Court, in the Tax
Case (Appeal) No.278 of 2014, in the case of CIT v. Ramaniyam Homes P Ltd., in
an appeal filed u/s 260-A of the Act. In that case, the assessee filed a return
of income for the assessment year 2006-07 admitting a total loss of
Rs.2,42,20,780. It was found by the AO that the assessee was indebted to the
Indian Bank which bank, vide a letter dated 15.2.2006, had mooted a proposal
for a one time settlement requiring the company to pay Rs.10.50 crore on or
before 30.4.2006 against which the company paid only a sum of Rs.93,89,000 by
that date.

The AO appears to have held that the One Time Settlement Scheme was accepted by
the assessee during the year and the interest waived was taxable u/s 41(1) of
the Act and the balance was taxable u/s 28(iv) of the Act. The CIT(Appeals)
held that the mere acceptance of the conditional offer of the bank under the
One Time Settlement Scheme, without complying with the substantive part of the
terms and conditions, would not give a vested right of waiver and therefore,
interest waived to the extent of Rs.1.68 Crores was not exigible to tax u/
s.41(1) and consequently, he deleted the addition of Rs.1,67,74,868. On the
issue of addition u/s 28(iv), he followed the decision in the case of Iskraemeco
Regent Limited vs. CIT, (supra) and held that Section 28(iv) had no application
to cases involving waiver of principal amounts of loans. In the appeal of the
Revenue, on the issue of the deletion of the principal portion of the term loan
waived by the bank, the Tribunal held in para 12 of its order that the term
loan had admittedly been used by the assessee for acquiring capital assets and
following the decision of the jurisdictional Madras high court in the case of
Iskraemeco Regent Limited(supra) it confirmed the order of the first appellate
authority.

In the appeal by the revenue to the high court, the following substantial
questions of law were raised therein:-

• ” Whether on the facts and in the circumstances of the case, the Income
Tax Appellate Tribunal was right in holding that the amount representing the
principal loan amount waived by the bank under the one time settlement scheme
which the assessee received during the course of its business is not exigible
to tax?
• Whether on the facts and in the circumstances of the case, the Income Tax
Appellate Tribunal ought to have seen that the waiver of principal amount would
constitute income falling under Section 28(iv) of the Income Tax Act being the
benefit arising for the business?”

The Revenue invited attention to the definition of the expressions
“income” and “total income” u/s. (24) and (45) of section 2
and the provisions of the charging section 4 as well as the relevant provisions
of sections 28(iv), 41(1) and 59. It was contended that the principal amount of
loan waived by the bank under the one time settlement was a taxable receipt
coming within the definition of the expression “income” by relying
upon the decisions in cases of CIT vs. T.V.Sundaram Iyengar & Sons Ltd. 222
ITR 344(SC), Solid Containers Ltd. vs. DCIT, 308 ITR 417 (Bom.), Logitronics P
Ltd. v. CIT,333 ITR 386 and Rollatainers Ltd. vs. CIT, 339 ITR 54.

In so far as the decision in Iskraemeco Regent Limited was concerned, it was
submitted that the Supreme Court had already granted leave to the Department
and the decision was the subject matter of Civil Appeal No.5751 of 2011, on the
file of the Supreme Court, and the Court was entitled to consider the issue
independently. At the outset, the Madras high court examined the decision in
Iskraemeco Regent Limited, since the appellate authorities had merely followed
the said decision. The court found that in the said decision it was held that a
loan transaction had no application with respect to s.28(iv) of the Act and
that the same could not be termed as an income within the purview of section
2(24).The Madras high court thereafter examined the statutory provisions and
also the decisions relied upon by the contesting parties in support of their
respective submissions. The Madras high court in particular examined the
decisions in the cases of T.V. Sundram Iyengar & Sons Ltd. (SC), Solid
Containers Ltd.(Bom), Mahindra & Mahindra (Bom.) and Logitronics P.
Ltd.(Del.) and Rollatainers Ltd. (Del).

The court noted that the law as expounded by the Delhi High Court appeared to
be that if a loan had been taken for acquiring a capital asset, waiver thereof
would not amount to any income exigible to tax and if the loan was taken for
trading purposes and was also treated as such from the beginning in the books
of account, the waiver thereof might result in the income, more so when it was
transferred to the profit and loss account. Having noted so, the court observed
that;

  • the Delhi High Court, both in
    Logitronics as well as in Rollatainers cases, did not take note of one fallacy
    in the reasoning given in paragraph 27.1 of the decision of the Madras high
    court rendered in Iskraemeco Regent Limited’s case.
  • in paragraph 27.1 of the
    decision in Iskraemeco Regent Limited’s case, it was held that s.28(iv)
    spoke only about a benefit or perquisite received in kind and that
    therefore, it had no application to any transaction involving money which
    was actually based upon the decision of the Bombay High Court in Mahindra
    & Mahindra Ltd.(supra), which, in turn, had relied upon the decision
    of the Delhi High Court in the case of Ravinder Singh vs. C.I.T.205 I.T.R.
    353.
  • with great respect, the
    above reasoning did not appear to be correct in the light of the express
    language of section 28(iv). What was treated as income chargeable to
    income tax under the head ‘profits and gains of business or profession’
    u/s 28(iv), was “the value of any benefit or perquisite, whether
    convertible into money or not, arising from business or the exercise of a
    profession.”
  • therefore, it was not the
    actual receipt of money, but the receipt of a benefit or perquisite, which
    had a monetary value, whether such benefit or perquisite was convertible
    into money or not, which was what was covered by section 28(iv). For
    instance, if a gift voucher was issued, enabling the holder of the voucher
    to have a dinner in a restaurant, it was a benefit or perquisite, which
    had a monetary value. If the holder of the voucher was entitled to
    transfer it to someone else for a monetary consideration, it became a
    perquisite, convertible in to money. Irrespective of whether it was
    convertible into money or not, to attract section 28(iv) it was sufficient
    that it had a monetary value.
  • a monetary transaction, in
    the true sense of the term, can also have a value.
  • we do not know why it should
    not happen in the case of waiver of a part of the loan. Therefore, the
    finding recorded in paragraph 27.1 of the decision in Iskraemeco Regent
    Limited that Section 28(iv) had no application to any transaction, which
    involved money, was a sweeping statement and might not stand in the light
    of the express language of section 28(iv).
  • in our considered view, the
    waiver of a portion of the loan would certainly tantamount to the value of
    a benefit. The benefit might not arise from “the business” of
    the assessee. But, it certainly arose from “business”.
  • the absence of the prefix
    “the” to the word “business” made a world of
    difference. The Madras high court thereafter dealt with the issue of the
    distinction, sought to be made, between the waiver of a portion of the
    loan taken for the purpose of acquiring capital assets on the one hand and
    the waiver of a portion of the loan taken for the purpose of trading
    activities on the other hand. In the context, it held that;-
  • in so far as accounting
    practices were concerned, no such distinction existed. Irrespective of the
    purpose for which, a loan was availed by an assessee, the amount of loan
    was always treated as a liability and it got reflected in the balance
    sheet as such. When a repayment was made in monthly, quarterly, half
    yearly or yearly installments, the payment was divided into two
    components, one relating to interest and another relating to a portion of
    the principal. To the extent of the principal repaid, the liability as
    reflected in the balance sheet got reduced. The interest paid on the
    principal amount of loan, would be allowed as deduction, in computing the
    income under the head “profits and gains of business or
    profession”, as per the provisions of the Act.
  • Section 36(1)(iii) made a
    distinction where under the amount of interest paid in respect of capital
    borrowed for the purpose of business or profession was allowed as
    deduction, in computing the income referred to in section 28. But, the
    proviso there under stated that any amount of interest paid in respect of
    capital borrowed for acquisition of an asset for extension of existing
    business or profession, whether capitalised in the books of account or not
    for any period beginning from the date on which the capital was borrowed
    for the acquisition of the asset, till the date on which such asset was
    put to use, should not be allowed as deduction.
  • therefore, it was clear that
    the moment the asset was put to use, then the interest paid in respect of
    the capital borrowed for acquiring the asset, could be allowed as
    deduction. When the loan amount borrowed for acquiring an asset got wiped
    off by repayment, two entries were made in the books of account, one in
    the profit and loss account where payments were entered and another in the
    balance sheet where the amount of un repaid loan was reflected on the side
    of the liability.
  • when a portion of the loan
    was reduced, not by repayment, but by the lender writing it off (either
    under a one time settlement scheme or otherwise), only one entry got into
    the books, as a natural entry. A double entry system of accounting would
    not permit of one entry. Therefore, when a portion of the loan was waived,
    the total amount of loan shown on the liabilities side of the balance
    sheet was reduced and the amount shown as capital reserves, was increased
    to the extent of waiver. Alternatively, the amount representing the waived
    portion of the loan was shown as a capital receipt in the profit and loss
    account itself.
  • these aspects had not been
    taken note of in Iskraemeco Regent Ltd.
  •  
  • In view of the above, the
    Madras High court decided the issue in favour of the Revenue and the
    appeal filed by the Revenue was allowed without any costs.

Observations

The issue
under consideration, of the write back of loans, has over the years turned
rotten and worse, has produced many off shoots. The sheer size of the quantum
involving this issue is another reason for addressing it at the earliest.
Settlement between the lenders and the borrowers is an everyday phenomenon and
the issues arising there from require to be handled with care importantly, due
to the fact that the borrower involved is admittedly in a precarious financial
health that can be worsened by the additional tax borrowings that may not have
been intended by the legislature.

It is time proper that a clear guideline is provided by the CBDT as regards the
Revenue’s understanding of the subject and its desired tax treatment. This
clarification is necessary in view of the fact that varied stands have been
taken by the Revenue before the courts in different cases. It is also most
desired that the apex court addresses the issue, at the earliest, in view of
the conflicting stands of the high courts, sometimes of the same high court, as
is seen by the conflicting decision of the Madras High Court and to an extent
of the Bombay High Court.

A classic case is the case of a company which has
been declared sick, under a statue, by the Board of Industrial & Financial
Reconstruction. The Board on one side mandates the lenders to compromise their
dues, in the interest of the financial health of the company, but, on the other
side, rests on the fringe when it comes to saving a sick company from
consequences of tax, directly arising out of the reliefs granted by it. We are
of the firm view that the relief from taxation should be granted in respect of
a sick company as has been done by some courts even where the CBDT has resisted
the tax relief before the BIFR.

Section 41(1) of the Act brings to tax the value of a benefit in respect of a
trading liability accruing to an assesssee by way of remission or cessation
thereof. The said section also seeks to tax the amount obtained by an
assesssee, in cash or otherwise in respect of a loss or an expenditure. In both
the cases, the charge of tax is attracted provided an allowance or deduction
has been granted to the assesssee. A charge once attracted, is placed in the
year of relief. By and large, the issues about the applicability of section
41(1) are settled. An understanding seems to have been reached that no
liability to tax arises unless an allowance or deduction has been granted to an
assesssee and subsequent thereto a relief has been obtained by him or a benefit
has accrued to him. Obviously in a case of a loan taken, the provisions of
s.41(1) should not be attracted unless the issue involves the settlement of an
interest, on the loan taken, for which a deduction was allowed.

Section 28(i) provides that the profits or gains of any business or profession
which was carried on during the year shall be chargeable to income tax under
the head “profits and gains of business or profession”. Section
28(iv) brings to tax the value of any benefit or perquisite, whether
convertible into money or not arising from business or the exercise of a
profession. The issue of taxation of a write back of a loan mainly revolves
around application of section 28. The questions that arise, in addressing the
issue are;

  •  Whether a relief from
    repayment of loan taken can be held to be profits or gains of business
    carried on during the year? In other words, can a loan be said to have
    been taken by the person in the ordinary course of his business where he
    is not engaged in the business of granting of loans and advances? Will
    such a transaction be treated as a trading transaction?
  • Will it make any difference
    whether the loan was taken for the purpose of acquiring a capital asset or
    was taken for meeting the working capital requirements of the business?
  • Will the relief, if any,
    resulting on settlement be construed as a benefit or a perquisite arising
    from the business?
  • Has the apex court in the
    case of T.V.Sundaram Iyengar & Sons Ltd (supra) held that a write back
    of loan shall be liable to be taxed as business income and that too only
    where it was taken for the purposes of meeting a trading liability?

For the sake of brevity, we place our views on each of the above issues,
so identified, instead of referring and analyzing the entire case law on the
subject including the facts of the said T.V.Sundaram Iyengar & Sons Ltd
(supra)’s case . A reader however is advised to do so.

Section 28(i) brings to tax profits or gains from business carried on during
the year. Unless the profits arise from the business that was carried on during
the year, a charge under section 28(i) fails. An ordinary businessman, not
engaged in the business of money lending, etc, cannot be said to be engaged in
the business of receiving or granting loans and therefore no profits can be
said to have arisen from such a business. The Act makes a clear distinction
between an ordinary business and the business of granting any loans or advances
for the purposes of section 36(2) and section 73, for example. Accordingly, a
waiver of loan and it’s consequential write back cannot be said to be
representing any profits and gains arising from the business carried on during
the year. This finding should hold true in respect of all businessmen other
than the one engaged in the business of receiving and granting loans. The
transactions of loans are on capital account only and holding it otherwise will
lead to a situation where under a write off of an irrecoverable loan, advanced
in the past, will have to be allowed as a deduction in all cases. A loan taken
is a thing with which a person does his business; he carries on his business
with the funds borrowed. He does not deal in them; his business is that of
dealing in things other than the funds borrowed. He is a user of funds and not
a dealer of funds. He does not derive any profits from such funds nor is he
expected to derive any and rather derives profits from optimum use of such
funds in his business.

Once it is accepted that an ordinary businessman obtains a loan for the purpose
of carrying on his business, it is natural to accept that the purpose of loan
would not make any difference. Unless a loan is inextricably linked to the
regular business and its customers, it is not possible to hold that a purpose
for which a loan was taken will have any material bearing on its eventual
transaction. With great respect, we beg to differ with the view which seeks to
make a distinction, for the purposes of taxation, on the basis of the purpose
for which a loan is taken. In our opinion, the purpose for which a loan is
taken is immaterial unless the assesssee is in the business of dealing in loans
or the loan taken is inextricably linked to his business deal. The Madras high
court is spot on in the case of Ramaniyam Homes P.Ltd. (supra) when it
concludes on this aspect of the issue by holding that there is no difference
between a loan taken for the purpose of a capital asset or for meeting working
capital requirements.

Section 28(iv) reads as: “the value of any benefit or perquisite, whether
convertible into money or not, arising from business or the exercise of a
profession.” From a reading, it is noticed that a benefit or a perquisite
should arise from business and if so it would be taxable whether its value can
be converted into money or not. The twin conditions are cumulative in nature
and both of them require satisfaction before a charge of taxation is attracted.
The use of the expression “whether convertible into money or not”
clearly indicate that the benefit or perquisite is the one which is capable of
being converted into cash but is certainly not the cash itself. Had it been so
then the expression would have been “whether received in cash or in
kind”. Section 41(1) explicitly uses the expression ‘whether in cash or in
any other manner”. The intention of the legislature is adequately
communicated by the use of appropriate expression; the intention being to bring
to tax such benefit or perquisite i.e. received in kind irrespective of its
possibility to convert in money or not. Again, the use of the term ‘value’,
supports such an interpretation in as much as cash carries the same value and
therefore does not require any prefix. Even otherwise can a remission in a loan
liability ever be construed as a benefit or perquisite and be considered to
have arisen from a business are the questions that remain open for being
addressed before a charge u/s 28(iv) is completed.

An interesting aspect of section 28(iv) is brought out by the Madras High Court
in paragraph 39 of the decision in the case of Ramaniyam Homes P Ltd.’s
(supra). The Madras High Court, in the context of applicability of section
28(iv), held that a benefit might not arise from “the business” of
the assesssee but it certainly arose from “business” and the absence
of the prefix “the” to the word “business” made a world of
difference. It seems that the court would have taken a different view had the
prefix “the” before the word “business” been placed in
section 28(iv). Had that been so the court would have concluded that the waiver
of loan did not attract the provisions of section 28(iv)!! In our very
respectful opinion, the logic supplied requires a reconsideration. The court
has failed to appreciate that the benefit or perquisite, for application of
section 28(iv), has to be from a business even though not from the specific business.
In the absence of any other business, the question of attracting section 28(iv)
does not arise at all. Even otherwise the legislative intent does not seem to
support such an interpretation which is evident from a bare reading of section
28(i) and section 28(va) which has consciously used the prefix “any’
before the term expression “business” to convey the wider scope of
the provisions.

 The apex court in the case of T.V.Sundaram Iyengar & Sons Ltd (supra)
has neither, explicitly nor implicitly, stated that a loan on being written
back would attain the character of income. It was a case wherein the assessee
had received deposits from it’s customers for the purposes of the trading
transactions carried on with the customers . The said deposits or a part of it
got adjusted against regular trading transactions and the excess balance
remaining with the assessee was carried in the balance sheet as the liability
to creditors. On a later day it was found that the said excess balance so
obtained from the customers was not repayable and the company wrote back the
said liability by crediting the same to the profit & loss account. It is in
such facts that the Supreme Court held that a write back of such non-repayable
deposits were to be treated as business income.

It is a settled position of law that every receipt need not be an income even
though the amount may be received as a part of the business activity of the
assesssee. It is also a settled position in law that a receipt, originally of a
capital nature, will not change its character merely by a lapse of time subject
to an exception in respect of an amount received in the course of a trading
activity, for example, advances received from a customer or a deposit received
from a contractor or a customer or a supplier or margin money received for
security of performance by the customer. An act of borrowing a loan is not a
trading transaction in that manner.

In exceptional cases a receipt originally of a capital nature would, with lapse
of time, attain the character of an income. It is this principle of law which
was propounded in the case of Jay’s- The Jewellers Ltd, 1947 (29 TC 274) (KB)
that was followed by the Supreme Court in the case of Karamchand Thapar Sons
222 ITR 112 (SC) and was reconfirmed in the case of T.V.Sundaram Iyengar &
Sons Ltd (supra). The Supreme Court in the said case of T.V.Sundaram Iyengar
& Sons Ltd (supra) had clearly restricted the application of the exception
to the case of an amount received as a part of the trading operations where a trading
liability was incurred out of an ordinary trading transaction. In our opinion,
a transaction of a loan borrowed for the purposes of funding a trading activity
can never be considered as a transaction that could be covered by the above
mentioned tests laid down by the Supreme Court. An ordinary loan, at its
inception, is of a capital character and retains its character even with the
flux of time it does not change even where it was later on waived.

Another important part of the facts in the case of T.V.Sundaram Iyengar &
Sons Ltd (supra) was that in the said case the unclaimed deposit representing
excess balance was credited to the profit & loss account of the company and
it is this fact which had influenced the Supreme Court when it observed that
“when the assessee itself had treated the money as its own money and taken
the amount to its profit & loss account then the amounts were assessable in
the hands of the assessee”. It appears that all those decisions of the
courts require a reconsideration wherein the courts relying on the ratio of the
decision in the case of T.V.Sundaram Iyengar & Sons Ltd (supra) held that a
waiver of an ordinary loan was to be treated as income. The high courts had
failed to notice that in all such cases before them the amount received did not
have any trading character which was so in the case of T.V.Sundaram Iyengar
& Sons Ltd (supra).

 Attention of the reader is invited to the following pertinent
observations of the author on page 1095 of the 10th edition of Kanga &
Palkhivala’s The Law and Practice of Income Tax in the context of the ratio of
the decision in the case of T.V. Sundaram Iyengar & Sons Ltd (supra).

“The Supreme Court erroneously held that crediting deposits that had been
given by the parties to a profit and loss account after they had reminded
unclaimed for a long period of time, would definitely be trade surplus and part
of assessee’s taxable income. Surprisingly, the court did not even refer to the
statutory provisions of section 41(1). It failed to note that unless the
assesssee had claimed an allowance or deduction in respect of a loss of
expenditure or trading liability, the subsequent cessation of liability would
not attract section 41(1)”. Also see the later decision of the Supreme
Court in the case of Kesaria Tea, 254 ITR 434.

The Supreme Court in a later decision in the case of Travancore Rubber, 243 ITR
158 has reconciled the legal position and reemphasised that unless a different
quality is imprinted on the receipt by a subsequent event, a receipt which is
not in the first instance a trading receipt cannot become a trading receipt by
any subsequent process. Under the circumstances it is very respectfully
observed that the decisions delivered by different high courts simply relying
on the ratio of the decision in the case of T.V.Sundaram Iyengar & Sons Ltd
(supra) require a fresh application of mind.

RULES FOR INTERPRETATION OF TAX STATUTES – PAR T – III

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Introduction
In the April and May issues of the BCAJ I had discussed the basic rules of interpretation of tax statutes and have tried to explain some rules with binding precedents. Other rules / concepts are dealt with hereunder and hereafter.

1. Rules of Consistency, Resjudicata & Estoppel :

The principle of consistency is a principle of equity and would not override
the clear provisions of law. It is well accepted that each assessment year is
separate and if a particular aspect was not objected to in one year, it would
not fetter the Assessing Officer from correcting the same in a subsequent year
as the principles of res judicata are not applicable to tax proceedings. In Radhasaomi
Satsang the Supreme Court held that (page 329 of 193-ITR) : “where a
fundamental aspect permeating through the different assessment years has been
found as a fact one way or the other and parties have allowed that position to
be sustained by not challenging the order, it would not be at all appropriate
to allow the position to be changed in a subsequent year”. As is apparent
from the said decision, the rule of consistency has limited application – where
a fundamental aspect permeates through several assessment years; the said
aspect has been found as a fact one way or the other; and the parties have not
challenged the said finding and allowed the position to sustain over the years.
Clearly, the said principle will have no application where the position
canvassed militates against an express provision of law as held by Delhi High
Court in Honey Enterprises vs. C.I.T. (2016) 381-ITR-258 at 278.

 1.1. In Radhasaomi itself, the Supreme Court acknowledged that there is
no res judicata, as regards assessment orders, and assessments for one year may
not bind the officer for the next year. This is consistent with the view of the
Supreme Court that there is no such thing as res judicata in income-tax
matters’ (Raja Bahadur Visheshwara Singh vs. CIT (1961) 41-ITR- 685 (SC); AIR
1961 SC 1062). Similarly, erroneous or mistaken views cannot fetter the
authorities into repeating them, by application of a rule such as estoppel, for
the reason that being an equitable principle, it has to yield to the mandate of
law. A deeper reflection would show that blind adherence to the rule of
consistency would lead to anomalous results, for the reason that it would
endanger the unequal application of laws, and direct the tax authorities to
adopt varied interpretations, to suit individual assessees, subjective to their
convenience – a result at once debilitating and destructive of the rule of law.
The rule of consistency cannot be of inflexible application.

1.2. Res judicata does not apply in matters pertaining to tax for different
assessment years because res judicata applies to debar courts from entertaining
issues on the same cause of action whereas the cause of action for each
assessment year is distinct. The courts will generally adopt an earlier
pronouncement of the law or a conclusion of fact unless there is a new ground
urged or a material change in the factual position. The reason why courts have
held parties to the opinion expressed in a decision in one assessment year to
the same opinion in a subsequent year is not because of any principle of res
judicata but because of the theory of precedent or precedential value of the
earlier pronouncement. Where the facts and law in a subsequent assessment year
are the same, no authority whether quasi-judicial or judicial can generally be
permitted to take a different view. This mandate is subject only to the usual
gateways of distinguishing the earlier decision or where the earlier decision
is per incuriam. However, these are fetters only on a co-ordinate Bench, which,
failing the possibility of availing of either of these gateways, may yet differ
with the view expressed and refer the matter to a Bench of superior
jurisdiction. In tax cases relating to a subsequent year involving the same
issues as in the earlier year, the court can differ from the view expressed if
the case is distinguishable as per incuriam, as held by the Apex Court in
Bharat Sanchar Nigam Ltd. vs. Union of India (2006) 282-ITR-273 (SC) at
276-277.

1.3. Estoppel normally means estopped from re agitating same issue. However,
it is settled position in law that there cannot be an estoppel against a
statute. There is no provision in the statute which permits a compromise
assessment. The above position was indicated by the apex court in Union of
India vs. Banwari Lal Agarwal (1999) 238-ITR-461 (S.C.).

2. Actus Curiae Neminem gravabit :

An act of the Court should not prejudice anyone and the maxim actus curiae
neminem gravabit is squarely applicable. It is the duty of the Court to see
that the process of the court is not abused and if the court’s process has been
abused by making a statement and the same court is made aware of it, especially
a writ court, it can always recall its own order, for the concession which
forms the base is erroneous. It is a well settled proposition of law that no
tax payer should suffer on account of inadvertent omission or mistake of an
authority, because to do justice is inherent and dispensation of justice should
not suffer. It is equally well settled that any order on concession has no binding
effect and there is no waiver or estoppel against statue.

3. Same word in different statues :

In interpreting a taxing statute, the doctrine of “aspect”
legislation must be kept in mind. It is a basic canon of interpretation that
each statute defines the expressions used in it and that definition should not
be used for interpreting any other statute unless in any other cognate statute
there is no definition, and the extrapolation would be justified as held by
Kerala High Court in All Kerala Chartered Accountants’ Association vs. Union of
India & Others (2002) 258-ITR-679 at 680. “A particular word occurring
in one section of the Act having a particular object, cannot carry the same
meaning when used in a different section of the same Act, which is enacted for
a different purpose. In other words, one word occurring in different sections
of the same Act can have different meanings, if the objects of the two sections
are different and they operate in different fields as held by the Supreme Court
in J.C.I.T. vs. Saheli Leasing and Industries Ltd. (2010) 324-ITR-170 at 171.

 “The words and expressions defined in one statute as judicially
interpreted do not afford a guide to the construction of the same words or
expressions in another statute unless both the statutes are pari materia
legislations or it is specifically provided in one statute to give the same
meaning to the words as defined in another satute as held in Jagatram Ahuja vs.
C.I.T. (2000) 246-ITR-609 at 610 (SC).

4. Rules to yield to the Act :

Rules are made by the prescribed authority, while Act is enacted by the
Legislature, hence rules are subservient to the Act and cannot override the
Act. If there is conflict the Act would prevail over the rules. Rules are
subordinate legislation. Subordinate legislation does not carry the same degree
of immunity as enjoyed by a statute passed by a competent Legislature.
Subordinate legislation may be questioned on any of the grounds on which
plenary legislation is questioned; in addition, it may also be questioned on
the ground that it does not conform to the statute under which it is made. It
may further be questioned in the ground that it is inconsistent with the
provisions of the Act, or that it is contrary to some other statute applicable
in the same subject-matter. It may be struck down as arbitrary or contrary to
the statute if it fails to take into account vital facts which expressly or by
necessary implication are required to be taken into account by the statute or
the Constitution. Subordinate legislation can also be questioned on the ground
that it is manifestly arbitrary and unjust. It can also be questioned on the
ground that it violates article 14 of the Constitution of India as held in J.
K. Industries Ltd. and Another vs. Union of India (2008) 297-ITR-176 at
178-179.

5. Literal Interpretation & Casus Omissus :

The principles of interpretation are well-settled :
(i) a statute has to be read as a whole and the effort should be to give full
effect to all the provisions;
(ii) interpretation should not render any provision redundant or nugatory;
(iii) the provisions should be read harmoniously so as to give effect to all
the provisions;
(iv) if some provision specifically deals with a subject-matter, the general
provision or a residual provision cannot be invoked for that subject as held in
C.I.T. vs. Roadmaster Industries of India (P) Ltd. (2009) 315-ITR-66 (P&H).
Except where there is a specific provision of the Income-tax Act which
derogates from any other statutory law or personal law, the provision will have
to be considered in the light of the relevant branches of law as held in C.I.T.
vs. Bagyalakshmi & Co. (1965) 55-ITR-660 (SC).

5.1. When the language of a statute is clear and unambiguous, the courts are to
interpret the same in its literal sense and not to give a meaning which would
cause violence to the provisions of the statute, as held in Britania Industries
Ltd. vs. C.I.T. (2005) 278-ITR-546 at 547 (SC). It is a well settled principle
of law that the court cannot read anything into a statutory provision or a
stipulated condition which is plain and unambiguous. A statute is an edict of
the Legislature. The language employed in a statute is the determinative factor
of legislative intention. While interpreting a provision the court only
interprets the law and cannot legislate it. If a provision of law is misused
and subjected to the abuse of process of law, it is for the Legislature to
amend, modify or repeal it, if deemed necessary. Legislative casus omissus
cannot be supplied by judicial interpretative process.

A casus omissus ought not to be created by interpretation, save in some case of
strong necessity” as held in Union of India vs. Dharmendra Textiles
Processors and Others (2008) 306-ITR-277 at page 278 (SC).

5.2. I f the construction of a statutory provision on its plain reading leads
to a clear meaning, such a construction has to be adopted without any external
aid as held in C.I.T. vs. Rajasthan Financial Corporation (2007) 295-ITR-195
(Raj F.B.). A taxing statute is to be construed strictly : in a taxing statute
one has to look merely at what is said in the relevant provision. There is no
presumption as to a tax. Nothing is to be read in, nothing is to be implied.
There is no room for any intendment. There is no equity about a tax. In
interpreting a taxing statute the court must look squarely at the words of the
statute and interpret them. Considerations of hardship, injustice and equity
are entirely out of place in interpreting a taxing statute as held in Ajmera
Housing Corporation and Another vs. C.I.T. (2010) 326-ITR-642 (SC).

5.3. In construing a contract, the terms and conditions thereof are to be read
as a whole. A contract must be construed keeping in view the intention of the
parties. No doubt, the applicability of the tax laws would depend upon the
nature of the contract, but the same should not be construed keeping in view
the taxing provisions as held in Ishikawajima – Harima Heavy Industries Ltd.
vs. Director of Income-tax (2007) 288-ITR-408 (SC). The provisions of a section
have to be interpreted on their plain language and not on the basis of
apprehension of the Department. A statute is normally not construed to provide
for a double benefit unless it is specifically so stipulated or is clear from
the scheme of the Act as held in Catholic Syrian Bank Ltd. vs. C.I.T. (2012)
343-ITR-270 (SC). Where any deduction is admissible under two Sections and
there is no specific provision of denial of double deduction, deduction under
both the sections can be claimed and deserves to be allowed.

5.4. It is cardinal principle of interpretation that a construction resulting
in unreasonably harsh and absurd results must be avoided. The cardinal
principle of tax law that the law to be applied has to be the law in force in
the assessment year is qualified by an exception when it is provided expressly
or by necessary implication. That the law which is in force in the assessment
year would prevail is not an absolute principle and exception can be either
express or implied by necessary implication as held in C.I.T. vs. Sarkar
Builders (2015) 375-ITR-392 (SC)

5.5. The cardinal rule of construction of statutes is to read the statute
literally that is, by giving to the words used by legislature their ordinary
natural and grammatical meaning. If, however, such a reading leads to absurdity
and the words are susceptible of another meaning the Court may adopt the same.
But if no such alternative construction is possible, the Court must adopt the
ordinary rule of literal interpretation. It is well known rule of
interpretation of statutes that the text and the context of the entire Act must
be looked into while interpreting any of the expressions used in a statute The
Courts must look to the object, which the statute seeks to achieve while interpreting
any of the provisions of the Act. A purposive approach for interpreting the Act
is necessary.

5.6. It is a settled principle of rule of interpretation that the Court cannot
read any words which are not mentioned in the Section nor can substitute any
words in place of those mentioned in the section and at the same time cannot
ignore the words mentioned in the section. Equally well settled rule of
interpretation is that if the language of statute is plain, simple, clear and
unambiguous then the words of statute have to be interpreted by giving them
their natural meaning as observed in Smita Subhash Sawant vs. Jagdeshwari
Jagdish Amin AIR 2016 S.C. 1409 at 1416.

6. Interpretations – favourable to the tax payer to be adopted.

It is
well settled, if two interpretations are possible, then invariably the court
would adopt that interpretation which is in favour of the taxpayer and against
the Revenue as held in Pradip J. Mehta vs. C.I.T. (2008) 300-ITR-231 (SC).
While dealing with a taxing provision, the principle of ‘strict interpretation’
should be applied. The court shall not interpret the statutory provision in
such a manner which would create an additional fiscal burden on a person. It
would never be done by invoking the provisions of another Act, which are not
attracted. It is also trite that while two interpretations are possible, the
court ordinarily would interpret the provisions in favour of a taxpayer and
against the Revenue as held in Sneh Enterprises vs. Commissioner of Customs
(2006) 7-SCC-714.

7. Doctrine of Ejusdem generis :

Birds of the same feather fly to-gether. The rule of ejusdem generis is applied
where the words or language of which in a section is in continuation and where
the general words are followed by specific words that relates to a specific
class or category. The Supreme Court in the case of C.I.T. vs. Mcdowel and
Company Ltd. (2010 AIR SCW 2634) held : “The principle of statutory
interpretation is well known and well settled that when particular words
pertaining to a class, category or genus are followed by general words are
construed as limited to things of the same kind as those specified. This rule
is known as the rule of ejusdem generis. It applies when :

(1) the statute contains an enumeration of specific words;
(2) the subjects of enumeration constitute a class or category;
(3) that class or category is not exhausted by the enumeration;
(4) the general terms follow the enumeration; and
(5) there is no indication of a different legislative intent. The maxim ejusdem
generis is attracted where the words preceding the general words pertain to
class genus and not a heterogeneous collection of items as held in the case of
Housing Board, Haryana (AIR 1996 SC 434). Same view has been iterated in Union
of India vs. Alok Kumar AIR 2010 S.C. 2735.

7.1. General words in a statute must receive general construction. This is,
however, subject to the exception that if the subject-matter of the statute or
the context in which the words are used, so requires a restrictive meaning is
in permissible to the words to know the intention of the Legislature. When a
restrictive meaning is given to general words, the two rules often applied are
noscitur a sociis and ejusdem generis. Noscitur a sociis literally means that
the meaning of the word is to be judged by the company it keeps. When two or
more words which are susceptible of analogous meaning are coupled together,
they are understood to be used in their cognate sense. The expression ejusdem
generis – “of the same kind or nature” – signifies a principle of
construction whereby words in a statute which are otherwise wide but are
associated in the text with more limited words are, by implication given a
restricted operation and are limited to matters of the same class of genus as preceding
them.

8. “Mutatis Mutandis” & “As if” :

Earl Jowitt’s ‘The Dictionary of English Law 1959) defines ‘mutatis mutandis’
as ‘with the necessary changes in points of detail’. Black’s Law Dictionary
(Revised 4th Edn, 1968) defines ‘mutatis mutandis’ as ‘with the necessary
changes in points of detail, meaning that matters or things are generally the
same, but to be altered when necessary, as to names, offices, and the like…..
‘Extension of an earlier Act mutatis mutandis to a later Act, brings in the idea
of adaptation, but so far only as it is necessary for the purpose, making a
change without altering the essential nature of the things changed, subject of
course to express provisions made in the later Act. It is necessary to read and
to construe the two Acts together as if the two Acts are one and while doing so
to give effect to the provisions of the Act which is a later one in preference
to the provisions of the Principal Act wherever the Act has manifested an
intention to modify the Principal Act.

8.1. “The expression “mutatis mutandis” itself implies
applicability of any provision with necessary changes in points of detail. The
phrase “mutatis mutandis” implies that a provision contained in other
part of the statute or other statutes would have application as it is with
certain changes in points of detail as held in R.S.I.D.I. Corpn. vs. Diamond
and Gen Development Corporation Ltd. AIR 2013 SC 1241.

8.2. The expression “as if”, is used to make one applicable in
respect of the other. The words “as if” create a legal fiction. By
it, when a person is “deemed to be” something, the only meaning
possible is that, while in reality he is not that something, but for the
purposes of the Act of legislature he is required to be treated that something,
and not otherwise. It is a well settled rule of interpretation that, in
construing the scope of a legal fiction, it would be proper and even necessary,
to assume all those facts on the basis of which alone, such fiction can
operate. The words “as if”, in fact show the distinction between two
things and, such words must be used only for a limited purpose. They further
show that a legal fiction must be limited to the purpose for which it was
created. “The statute says that you must imagine a certain state of affairs;
it does not say that having done so, you must cause or permit your imagination
to boggle when it comes to the inevitable corollaries of that state of
affairs”. “It is now axiomatic that when a legal fiction is
incorporated in a statute, the court has to ascertain for what purpose the
fiction is created. After ascertaining the purpose, full effect must be given
to the statutory fiction and it should be carried to its logical conclusion.
The court has to assume all the facts and consequences which are incidental or
inevitable corollaries to giving effect to the fiction. The legal effect of the
words ‘as if he were’ in the definition of owner in section 3(n) of the
Nationalisation Act read with section 2(1) of the Mines Act is that although
the petitioners were not the owners, they being the contractors for the working
of the mine in question, were to be treated as such though, in fact, they were
not so”, as held in Rajasthan State Industrial Development and Investment
Corporation vs. Diamond and Gem Development Corporation Ltd. AIR-2013-1241 at
1251.

9. Approbate and Reprobate :

A party cannot be permitted to “blow hot-blow cold”, “fast and
loose” or “approbate and reprobate”. Where one knowingly accepts
the benefits of a contract, or conveyance, or of an order, he is estopped from
denying the validity of, or the binding effect of such contract, or conveyance,
or order upon himself. This rule is applied to ensure equity, however, it must
not be applied in such a manner, so as to violate the principles of, what is
right and, of good conscience. It is evident that the doctrine of election is
based on the rule of estoppel the principle that one cannot approbate and
reprobate is inherent in it. The doctrine of estoppel by election is one among
the species of estoppels in pais (or equitable estoppel), which is a rule of
equity. By this law, a person may be precluded, by way of his actions, or
conduct, or silence when it is his duty to speak, from asserting a right which
he would have otherwise had.

10. Legal Fiction – Deeming Provision :

Legislature is competent to create a legal fiction, for the purpose of assuming
existence of a fact which does not really exist. In interpreting the provision
creating a legal fiction, the Court is to ascertain for what purpose the
fiction is created and after ascertaining this, the Court is to assume all
those facts and consequences which are incidental or inevitable corollaries to
the giving effect to the fiction. This Court in Delhi Cloth and General Mills
Company Limited vs. State of Rajasthan : (AIR 1996 SC 2930) held that what can
be deemed to exist under a legal fiction are facts and not legal consequences
which do not flow from the law as it stands. When a statute enacts that
something shall be deemed to have been done, which in fact and in truth was not
done, the Court is entitled and bound to ascertain for what purposes and
between what persons the statutory fiction is to be resorted to.

10.1. It would be quite wrong to carry this fiction beyond its originally
intended purpose so as to deem a person in fact lawfully here not to be here at
all. The intention of a deeming provision, in laying down a hypothesis shall be
carried so far as necessary to achieve the legislative purpose but no further.
“When a Statute enacts that something shall be deemed to have been done,
which, in fact and truth was not done, the Court is entitled and bound to
ascertain for what purposes and between what persons the statutory fiction is
to be resorted to”. “If you are bidden to treat an imaginary state of
affairs as real, you must surely, unless prohibited from doing so, also imagine
as real the consequences and incidents, which, if the putative state of affairs
had in fact existed, must inevitably have flowed from or accompanied it…. The Statute
says that you must imagine a certain state of affairs; it does not say that
having done so, you must cause or permit your imagination to boggle when it
comes to the inevitable corollaries of that state of affairs”. In The
Bengal immunity Co.Ltd. vs. State of Bihar and Others AIR 1955 SC 661, the
majority in the Constitution Bench have opined that legal fictions are created
only for some definite purpose.

10.2. In State of Tamil Nadu vs. Arooran Sugars Ltd. AIR 1997 SC 1815 : the
Constitution Bench, while dealing with the deeming provision in a statute,
ruled that the role of a provision in a statute creating legal fiction is well
settled, and eventually, it was held that when a statute creates a legal
fiction saying that something shall be deemed to have been done which in fact
and truth has not been done, the Court has to examine and ascertain as to for
what purpose and between which persons such a statutory fiction is to be
resorted to and thereafter, the courts have to give full effect to such a statutory
fiction and it has to be carried to its logical conclusion. The principle that
can be culled out is that it is the bounden duty of the court to ascertain for
what purpose the legal fiction has been created. It is also the duty of the
court to imagine the fiction with all real consequences and instances unless
prohibited from doing so. That apart, the use of the term ‘deemed’ has to be
read in its context and further the fullest logical purpose and import are to
be understood. It is because in modern legislation, the term ‘deemed’ has been
used for manifold purposes. The object of the legislature has to be kept in
mind.

Need to show urgency and build consensus

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The GST Bill, India’s biggest indirect tax reform since independence is awaiting a nod, from the Rajya Sabha. The Bill which seeks to replace a slew of Central and State levies, will really transform a country of 1.3 billion people into an Indian union at least as far as trade and commerce is concerned.

This government came to power on the promise of substantial economic reforms. It has completed two years in office and while there is intent not much has been achieved in terms of “ease of doing business” on the ground. The Finance Act, 2016, which received the assent of the President on 14th May, is a mixed bag.There are quite a few amendments in the said Act which will increase problems for the taxpayer as well as litigation, both of which the Prime Minister had vowed, to reduce if not eliminate. In regard to its promise to curb the menace of black money, the record of this government is not very encouraging. Its effort at bringing black money stashed abroad into India by way of the Black Money Act did not succeed, and the Income Declaration Scheme, contained in the Finance Act, 2016 might meet the same fate.

The disappointment of trade and industry caused by the failure to meet expectations in regard to direct taxes can totally be obliterated by the Rajya Sabha passing the GST Bill. The Lok Sabha passed this Bill in May 2015, and it is absolutely imperative that the upper house of the Parliament gives its assent to this Bill as well as the Constitution Amendment Bill. For GST to become a reality, it needs to be ratified by half of the 29 states, which in itself will be a huge task.

 It is widely accepted that GST will reduce costs of production, logistics costs, and transaction costs and thereby make Indian goods far more competitive. On account of the complex structure of indirect taxes where the power to legislate is with the states, it results in huge bottlenecks affecting movement of goods. This can change to a great extent with GST.

Initially, the States opposed the Bill on account of possible loss of revenue. The government has already agreed to compensate the states and this issue would no longer be a hindrance. Many of the issues raised were only with an object to stall the passage of the bill. Primarily, there were three issues raised by the major opposition Party in the Rajya Sabha. These were abolition of the 1% tax on the interstate movement of goods, the constitution of the dispute resolution body, and setting a cap in the Constitution on the tax rate.

These appear now to have been largely met. The standard rate of 18% which would apply to a majority of goods and the concessional rate of 12% would meet the principal objections of the Congress. An absolute cap on rate of GST is not very easy to accept. Except for profession tax, the Constitution does not fix a limit on any other tax, including the large number of taxes that the GST will replace. Other objections, if any, are not insurmountable.

With everyone in agreement with the fact that the GST Bill will benefit the consumer, it is time that political parties rose above political posturing, attempts to score brownie points over each other and put national interest to the forefront. It is obvious that a bill with the magnitude of implications that the GST Bill has, is bound to face some teething problems. The wrinkles can certainly be ironed out as the GST Act gets implemented.

On its part, the government must make a very sincere attempt to bring all political parties on board. It must strive to build consensus. The recent assembly results would probably serve as a shot in the arm for the ruling Party.

The regional parties, while they would always strive to protect their regional interest, will also probably realise that it is advisable for them to do business with the ruling combine. It is likely that with deft political management,the regional parties will support the passing of the Bill. Even if their support comes with a political price the government must endeavour to pass the GST Bill in the Rajya Sabha. According to experts, a simplified single tax regime will improve compliance and can certainly improve revenue collections over a period of time. This Bill is the litmus tests for the Modi government. Its passage will make the Indian citizen believe that the government means business and will also send a signal to investors all over the globe that this government has the will to convert intent into reality. “Acche din” may then truly be here.

Awareness

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In every person, there is an inherently present ‘awareness’. In fact an
element of ‘awareness’ is there in everything in this universe. However,
in every one, the degree of ‘awareness’ differs widely. Awareness at
its very basic level is crude and gross. As we go higher on the
evolution graph, the level of awareness increases. A tree is more aware
than a stone and an animal is more aware than a tree. In the human
being, who is at the top of the evolution graph, this awareness is the
highest. However, between one human being and another human being, there
is always a difference in the degree of awareness. In every individual
also, his or her level of awareness is different at different age and
time. As the level of awareness increases, an individual becomes
sensitive towards finer aspects of life. At the lower level, the
awareness is mostly physical like that of hunger, thirst, sex impulse
etc. As awareness increases, and becomes more subtle an individual
becomes :

  • more sensitive and perceptive
  • leans more towards finer aspects of life like music, art and natural beauty, etc.
  • Compassionate and practices empathy and
  • Perceives and experiences sublime emotions of love, surrender and oneness.

When
an individual reaches a higher level of awareness which is possible
only for a human being, he or she actually touches the shores of
Divinity. The greatness of men like Swami Vivekananda, Mahatma Gandhi
and Albert Einstein was due to their higher level of awareness compared
to that of a normal human being.

This Divine Awareness is the
power that protects us, shows us the way, and lights our path. It is our
best friend, philosopher guide and well wisher. Being ‘aware’ of this
‘awareness’ is the key to a happy life.

One experiences this
awareness only when the mind that is pure, calm and stable. Only in such
a state of mind, one can intensely feel the presence of that Supreme
Power we call `Divinity’. The degree or the intensity of the experience
of this Divine Awareness varies according to the state of one’s mind
which changes all the time. However, having felt it’s presence, one
should then try not to ever lose or let it dim. Whenever, one feels that
this Awareness is dimming, one needs to contemplate and seek reason for
the change and take conscious steps to restore the experienced
awareness. We need to give the experience of Divine Awareness, the
utmost importance and create a conducive environment for Awareness to
continuously improve its intensity. The means of doing this may differ
from person to person. Some may find swadhyaya, satsang etc. helpful,
for others music or meditation may be useful. Whatever the means be, our
purpose should be to increase our level of awareness in our life.

For
professionals like us, this awareness is of utmost importance. It
prevents us from making mistakes, it shows us the way to avoid pitfalls
and achieve success and happiness in every walk of life.

Awareness gives meaning to our life and yields liberation. Salutations to ‘Awareness’ residing in every being.

THE FINANCE ACT, 2016

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1. Back ground:

The Finance Minister, Shri Arun Jaitley, presented his third Budget with the Finance Bill, 2016, in the Lok Sabha on 29th February, 2016. After some discussions, the Parliament has passed the Budget with some amendments. The President has given his assent to the Finance Act, 2016, on 14th May, 2016. There are in all 241 Sections in the Finance Act, 2016, which include 115 sections which deal with amendments in the Income tax Act, 1961. The Finance Minister has divided his tax proposals in nine categories such as (i) Relief to small tax payers (ii) Measures to boost growth and employment generation (iii) Incentivising domestic value addition to help Make in India (iv) Measures for moving towards a pensioned society (v) Measures for promoting affordable housing (vi) Additional resource mobilization for agriculture, rural economy and clean environment (vii) Reducing litigation and providing certainty in taxation (viii) Simplification and rationalization of taxation and (ix) Use of Technology for creating accountability.

1.1 It will be noticed that one of the objectives stated above is “Reducing Litigation and providing certainty in taxation.” In this context, Paragraphs 163 to 165 of the Budget Speech outline his “Dispute Resolution Scheme”.

1.2 One of the important features of this year’s Budget is that a “Income Declaration Scheme, 2016,” has been announced in Sections 181 to 199 of the Finance Act, 2016. .

1.3 In Para 187 of the Budget Speech he has stated that the Direct Tax Proposals will result in revenue loss of Rs.1,060 Cr., and Indirect Tax Proposals will yield additional revenue of Rs.20,670 Cr. Thus the net revenue gain from this year’s proposals will be of Rs.19,610 Cr.

1.4 In this article some of the important amendments made in the Income tax Act by the Finance Act, 2016, have been discussed. These amendments have only prospective effect.

2. Rates of taxes:

2.1 There are no changes in the tax slabs, rates of Income tax or rates of education cess for all categories of assesses, other than companies. As per the announcement made earlier, in this Budget a beginning to reduce the corporate rates in a phased manner has been made. In the case of an Individual, HUF, AOP and BOI whose total income is more than Rs. 1 crore, the surcharge has been increased from 12% to 15%. This has been done to tax the super rich Individuals, HUF etc. There is no change in rate of surcharge in other cases.

In the case of a Resident Individual having total income not exceeding Rs. 5 Lakh Rebate Upto Rs. 2,000/- or tax payable whichever is less is allowable upto A.Y. 2016- 17. This Rebate in now increased upto Rs. 5,000/- or tax payable, whichever is less, for A.Y. 2017-18.

2.2 The surcharge on income tax will be as under in A.Y. 2016-17 and 2017-18:

Note: The rate of surcharge on Dividend Distribution Tax u/s 115- 0, Tax payable on Buy back of Shares u/s 115-QA and Income Distribution tax payable by M.F u/s 115R is 12% as in earlier years.

The existing rate of 3% of Education Cess (including Secondary and Higher Secondary Education Cess) on Income tax and Surcharge will continue in A.Y. 2017-18.

2.3 In view of the above, the effective maximum marginal rate of tax
(including Surcharge and Education Cess) will be as under in A.Y. 2017 – 18:




2.4 I n the case of a Domestic Company, which is newly set up on or after 1.3.2016, engaged in the business of Manufacture or Production and Research in relation to, or distribution of articles manufactured or produced by it, the rate of Income tax for A.Y. 2017-18 will be 25% plus applicable surcharge and education cess. This will be subject to following conditions stated in new section 115 BA

(i) Such company shall not be entitled to claim deduction u/s 10AA, 32(1)(iia), 32 AC, 32AD, 33AB, 33ABA, 35(1)(ii), (iia), (iii), (2AA), 2(AB), 35AC, 35AD, 35CCC, 35CCD as well as under Chapter VIA Part C i.e. sections 80H, to 80RRB (excluding section 80 JJAA).

(ii) Such company will not be entitled to claim set off of loss carried forward from earlier years if the same is attributed to the above deductions. Such carried forward loss shall be deemed to have been allowed and will not be allowed in any subsequent year.

(iii) Depreciation u/s 32 {other than u/s 32(1)(iia)} shall be deducted in the manner as may be prescribed.

(iv) The above concessional rate u/s 115 BA will be available at the option of the assessee company. Such option is to be exercised before the due date for filing Return of Income for the first year after incorporation of the company. Further, such option once exercised, cannot be withdrawn by the company in any subsequent year.

2.5 A new section 115 BBDA has been inserted w.e.f. A.Y. 2017-18 (F.Y 2016-17). This section provides that in the case of any resident individual, HUF or a Firm (including LLP) if the total income for A.Y. 2017-18 and onwards includes Dividend from domestic company or companies, in excess of Rs. 10 Lakh, the dividend upto Rs 10 Lakh will be exempt u/s 10(34) but the excess over Rs 10 Lakh will be chargeable to tax at the rate of 10% plus applicable surcharge and education cess. It is also provided that no deduction in respect of any expenditure or allowance or set off of loss shall be allowed under any provision of the Income tax Act against such dividend.

2.6 Section 115JB is amended from A.Y:2017-18 to provide that in the case of a Company located in International Financial Services Centre and deriving its income solely in convertible Foreign Exchange, the MAT u/s 115JB shall be chargeable at the rate of 9% instead of 18.5%.

3. Tax deduction at source:

3.1 The Income tax Simplification Committee, under the Chairmanship of Justice R.V. Easwar, has suggested in its Interim Report that the provisions relating to tax deduction at source (TDS) should be simplified.

The committee has suggested higher threshold limits and lower rates for TDS in respect of payment u/s 193 to 194 LD. The Finance Minister has accepted this recommendation only partially and amended various sections of the Income tax Act for TDS w.e.f. 1.6.2016 as under:

(i) Revision in Threshold Limit for tds unde r variou s sections.

(ii) Revision in Rates of tds under various Sections

(iii) Provision for TDS under Section 194 K (Income in respect of Units) and section 194L (Payment of compensation on acquisition of capital Asset) deleted w.e.f. 1.6.2016.

3.2 The provisions for issue of certificates for lower or non-deduction of tax at source by an assessing officer u/s 197 have been extended with effect from 1st June, 2016, to cover income payable to a unit holder in respect of units of alternate investment funds (AIFs Category I or II), which is subject to TDS u/s 194LBB, and income payable to a resident investor in respect of investment in a securitization trust, which is subject to TDS u/s 194LBC.

3.3 The provision for non- deduction of TDS on issue of a declaration u/s 197A, has been extended to cover payments of rent, on which tax is deductible u/s 194-I, with effect from 1st June, 2016.

3.4 Section 206AA provides for higher rate of TDS at either the prescribed rate or at the rate of 20%, whichever is higher, if the payee does not furnish his Permanent Account Number to the payer. There has been litigation as to whether this provision applies to foreign companies and non-residents. With effect from 1st June, 2016, the provisions of this section will not apply to a foreign company or to a non-resident in respect of payment of interest on long-term bonds referred to in Section 194 LC or any other payment subject to prescribed conditions. The Finance Minister has announced that any payment to Non-Resident will not attract the higher rate of TDS (i.e 20%) u/s 206AA if any alternate document, as may be prescribed, is furnished.

3.5 TAX COLLECTION AT SOURCE (TCS ): Section 206C has been amended w.e.f. 1.6.2016 to provide as under:

(i) u/s 206C (1D), at present, tax is to be collected by seller of bullion or jewellery at 1% if the payment is made by the purchaser of bullion (exceeding Rs 2 Lakh) or Jewellery (exceeding Rs. 5 Lakh).

(ii) The above requirement of TCS is now enlarged from 1.6.2016 to the effect that the seller will have to collect tax @ 1% if purchase of any other goods or services for amount exceeding Rs 2,00,000/- is made and the purchaser / service receiver makes payment for the same in cash. It may be noted that this provision will not apply to payments by such class of buyers who comply with the conditions as may be prescribed. It is also provided that the above requirement of TCS will not apply where tax is required to be deducted at source by the payer under chapter XVII-B of the Income tax Act.

(iii) New clause (IF) added in this section provides that w.e.f. 1.6.2016 seller of a Motor Vehicle of the value exceeding 10 Lacs will have to collect from the buyer tax @ 1% of the sale consideration. This provision for TCS will apply even if payment for purchase of Motor vehicle is made by cheque.

(iv) The above provisions have been made to enable the Government to bring high value transactions in the tax net.

4. Exemptions and Deductions:

In order to give benefit to assessees certain amendments are made in the Income tax Act as under:

4.1 Section 10 – Income not included in total income: This section is amended from A.Y. 2017-18 (F.Y. 2016-17) as under:

(i) SECTION 10(12A) – This is a new provision. At present deduction is available for contribution made to National Pension Scheme (NPS) u/s 80 CCD. Withdrawal of such contribution along with the accumulated income from the NPS on account of closure or opting out of NPS is taxable in the year of withdrawal if deduction was claimed in the earlier years.

It is now provided that out of any such withdrawal from NPS, 40% of the amount will be exempt u/s 10(12A). However, the whole amount received by the nominee on death of the assessee under the circumstances referred to in section 80CCD (3) (a) shall be exempt from tax. Section 80CCD (3) is also amended for this purpose.

(ii) SECTION 10(13) – At present, any payment from an approved superannuation fund to an employee on his retirement is exempt from tax. The scope of this exemption is now extended by new subclause (v) to transfer of an amount to the account of the assessee under NPS as referred to in section 80CCD and notified by the Government.

(iii) SECTION 10(15) – At present, interest on Gold Deposit Bonds issued under Gold Deposit Scheme 1999 is exempt. It is now provides that interest on Deposit Certificates issued under the Gold Monetization Scheme, 2015, will also be exempt from tax.

A consequential amendment is made in section 2(14) that such Deposit Certificates issued under the above scheme will not be considered as a Capital Asset. Therefore, any gain on transfer of such Deposit Certificates will also be exempt from Capital Gains tax.

(iv) SECTION 10(23FC) – At present interest received by a Business Trust from a Special Purpose Vehicle is exempt from tax. It is now provided that Dividend received by such Trust from a Specified Domestic Company as referred to in the newly inserted clause (7) of section 115-0 will also be exempt from tax.

(v) SECTION 10(38) – This section grants exemption from tax in respect of long – term capital gain from transfer of equity share where STT is paid. It is now provided that in respect of long term capital gain arising from transfer of equity shares through a recognized Stock Exchange Located in International Financial Service Centre (IFSC), where consideration is received in Foreign Currency, the condition for payment of STT will not apply.

(vi) SECTION 10(48A) – This is a new provision. It is now provided that income of a Foreign Company on account of storage of Crude Oil in India and sale of such Crude Oil to any person resident in India will not be taxable. This is subject to terms and conditions of the agreement entered into with the Central Government.

(vii) SECTION 10(50) – This is a new provision. It provides that income arising from specified services as stated in chapter VIII (Sections 160 to 177) of the Finance Act, 2016, shall be exempt from tax. Chapter VIII deals with “Equalization Levy”. This provision will be applicable after the above Chapter VIII of the Finance Act, 2016 comes into force.

4.2 SECTION 10AA – DEDUCTION TO SEZ UNITS : This section grants 100% deduction to income of newly established units in SEZ (i.e eligible business) which begin activity of manufacture, production or rendering services on or after 1.4.2006. This is subject to conditions provided in section 10AA. Now a sun-set clause is added in this section whereby such Units which commence such eligible business on or after 1.4.2021 will not be able to claim deduction under section 10AA.

4.3 SECTION 17 – PERQUISITES: At present, u/s 17(2)(vii) contribution to approved Superannuation Fund by the employee upto Rs. 1 Lakh is exempt from tax. This limit is now increased to Rs.1.5 Lakh from A.Y. 2017 – 18.

4.4 SECTION 80EE – DEDUCTION FOR INTEREST ON LOAN FOR RESIDENTIAL HOUSE: The existing section 80EE granted deduction for interest on housing loan to a limited extent. This section is replaced w.e.f. A.Y. 2017-18 to provide for deduction upto Rs. 50,000/- in respect of interest on Housing Loan taken by an individual from the Financial Institution or Housing Finance Company if the following conditions are complied with.

(i) Loan should be sanctioned during 1.4.2016 to 31.3.2017.

(ii) Loan amount should not exceed Rs.35 Lakh and the value of the Residential House should not exceed Rs 50 Lakh.

(iii) The assessee should not own any other Residential House on the date of sanction of the Loan.

(iv) The above deduction can be claimed in A.Y. 2017- 18 and in subsequent years.

It may be noted that the above deduction can be claimed even if the Residential House is not for self occupation and is let out. Further, the above deduction can be claimed in addition to deduction of interest upto Rs. 30,000/- (Rs 2 Lakh in specified cases) allowable for interest on housing loan for self-occupied residential house property.

4.5 SECTION 80GG – DEDUCTION FOR RENT : At present, an assessee can claim deduction for expenditure incurred on Rent for Residential House occupied by himself if he is not in receipt of House Rent Allowance from his employer subject to certain conditions. This deduction is limited to Rs 2,000/- P.M. or 25% of total income or actual rent paid in excess of 10% of total income whichever is less. The above limit of Rs 2,000/- P.M. is now increased to Rs 5,000/- P.M. effective from A.Y. 2017-18.

4.6 SECTION 80-IA – DEDUCTION TO INFRASTRUCTURE UNDERTAKINGS: Section 80 – 1A(4) grants exemption to infrastructure undertakings subject to certain conditions. It is now provided that this exemption will not be available to an undertaking which starts the development or operation and maintenance of the infrastructure facility on or after 1.4.2017.

4.7 SECTION 80 – IA B – DEDUCTION TO INDUSTRIAL UNDERTAKING: By amendment of this section it is provided that the provisions of Section 80-IAB shall not apply to an assessee, being a Developer, where the development of SEZ begins on or after 1.4.2017.

4.8 SECTION 80 – IAC – THE INCENTIVES FOR START UPS:

(i) With a view to providing an impetus to start-ups and facilitate their growth in the initial phase of their business, this new section is inserted w.e.f. A.Y. 2017-18. It provides for 100% deduction of the profits and gains derived by an Eligible Start-UP (Company or LLP) from a business involving Innovation, Development, Deployment or Commercialization of new products, processes or services driven by technology or intellectual property. This deduction is available at the option of the assessee for any three consecutive assessment years out of five years starting from the date of incorporation.

(ii) Eligible start-up means a company or LLP incorporated between 1.4.2016 to 31.3.2019. The turnover of the business should be less than Rs 25 Crores in any of the years between 1.4.2016 to 31.3.2021. Further, such company / LLP should hold a certificate for eligible business from the Inter Ministerial Board of Certification.

(iii) It is necessary to ensure that such start-up is not formed by splitting up or reconstruction of a business already in existence or by transfer of machinery or plant previously used for any other purpose, subject to certain exceptions provided in the section.

(iv) With a view to encourage an Individual or HUF to invest in such a start-up company or LLP, section 50 GB has been amended to grant exemption from Capital Gain Tax if the capital gain on sale of Residential House is invested in such a company or LLP. Similarly, a new section 54 EE has been inserted to grant deduction upto Rs. 50 Lacs if investment is made in such a company or LLP out of capital gain arising on transfer of long term specified asset.

4.9 SECTION 80 – IB – DEDUCTION TO CERTAIN INDUSTRIAL UNDERTAKINGS:
The deduction granted to certain specified Industrial Undertakings stated in Section 80 – 1B(9)(ii),(iv) and (v) will be discontinued in respect of Industrial undertakings started on or after 1.4.2017.

4.10 SECTION 80 – IBA – DEDUCTION TO CERTAIN HOUSING PROJECTS

This is a new section which provides for 100% deduction in respect of profits and gains of eligible Housing Projects of Affordable Residential Units from A.Y. 2017-18. The section applies to assessees engaged in developing and building Housing Projects approved by the competent Authority after 1.6. 2016 but before 1.4.2019. This deduction is subject to following conditions:

(i) The project is completed within a period of three years from the date on which the building plan of such project is first approved and it shall be deemed to have been completed only when certificate of completion of project is obtained from the Competent Authority.

(ii) The built-up area of the shops and commercial establishments does not exceed 3% of the aggregate built up area.

(iii) If the project is located in Delhi, Mumbai, Chennai or Kolkata or within 25 km from the municipal limits of these cities:

(a) It is on a plot of land measuring not less than 1000 sq. meters

(b) The residential unit does not exceed 30 square meters and

(c) The project utilizes not less than 90% of the floor area ratio permissible in respect of the plot of land.

(iv) If the project is located in any other area:

(a) It is on a plot of land measuring not less than 2,000 sq. meters

(b) The residential unit does not exceed 60 square meters and

(c) The project utilizes not less than 80% of the floor area ratio permissible in respect of the plot of land.

(v) In both above cases the project is the only project on the land specified above.

(vi) The assessee maintains separate books of account.

(vii) If the housing project is not completed within the specified period of three years, deduction availed in the earlier years will be taxed in the year in which the period of completion expires. The definitions, of certain terms such as ‘housing project’, ’ built-up area’ etc. are also given in section 80-IBA(6)

(viii) The benefit under this section is not available to a person who executes the Housing Project as a works contract awarded by any other person (including any state or Central Government)

4.11 SECTION 80JJAA – INCENTIVE FOR EMPLOYMENT GENERATION:

At present, an assessee engaged in manufacture of goods in a factory can claim deduction of 30% of additional wages paid to new regular workmen for 3 assessment years. This deduction can be claimed in respect of additional wages paid to a workman employed for 300 days or more in the relevant year. Further, there should be an increase of at least 10% in the existing workforce employed on the last date of the preceding year. The existing section will apply in A.Y. 2016-17 and earlier years. New Section 80JJAA has been inserted w.e.f. AY 2017-18.

This new section applies to all assesses who are required to get their accounts audited u/s 44AB. The deduction allowable is 30% of additional employee cost for a period of 3 assessment years from the year in which such additional employment is provided. This deduction is subject to the following conditions:

(i) The business should not be formed by splitting up, or the reconstruction of an existing business.

(ii) The business should not be acquired by the assessee by way of transfer from any other business or as a result of any business reorganization.

(iii) Additional employee cost means total emoluments paid to additional employees employed during the year. However, in the first year of a new business, emoluments paid or payable to employees employed during the previous year shall be deemed to be the additional employee cost. Accordingly, deduction will be allowed on that basis in such a case.

(iv) No deduction will be available in case of existing business, if there is no increase in number of employees during the year as compared to number of employees employed on the last day of the preceding year or the emoluments are paid otherwise than by an account payee cheque or account payee bank draft or by use of electronic clearing system.

(v) Additional employee would not include employee whose total emoluments are more than Rs. 25,000 per month or an employee whose entire contribution under Employees’ Pension Scheme notified in accordance with Employees’ Provident Fund and Miscellaneous Provisions Act, 1952, is paid by the Government or if an employee has been employed for less than 240 days in a year or the employee does not participate in recognized provident fund.

(vi) Emoluments means all payments made to the regular employees. This does not include contribution to P.F., Pension Fund or other statutory funds. Similarly, it does not include lump-sum payable to employee on termination of service, Superannuation, Voluntary Retirement etc.

(vii) The assessee will have to furnish Audit Report from a Chartered Accountant in the prescribed form.

4.12 FOURTH SCHEDULE – PART A: Rule 8 of this Schedule is amended from A.Y:2017-18 to grant exemption to the employee if the entire balance standing to the credit of the employee in a recognized Provident Fund is transferred to his account in the National Pension Scheme referred to in Section 80CCD.

5. CHARITABLE TRUSTS:

5.1 A new chapter XII – EB (Sections 115 TD, 115 TE and 115TF) has been inserted in the Income tax Act effective from 1.6.2016. The provisions of these sections are very harsh and are likely to create great hardship to trustees of charitable trusts. In the Explanatory Memorandum to Finance Bill, 2016, it is explained that “there is no provision in the Income tax Act which ensure that the corpus and asset base of a trust accreted over a period of time, with promise of it being used for charitable purpose, continues to be utilized for charitable purposes. In the absence of a clear provision, it is always possible for charitable trusts to transfer assets to a non-charitable trust. In order to ensure that the intended purpose of exemption availed by the trust or institution is achieved, a specific provision in the Act is required for imposing a levy in the nature of an Exist Tax which is attracted when the charitable organization is converted into a non-charitable organization”. It appears that the stringent provisions in section 115TD to 115 TF have been inserted to achieve this objective. This is another blow to charitable trusts. Since these sections apply to all trusts and institutions registered u/s 12A/12AA which claim exemption u/s 10(23C) or 11, they will apply to all charitable or religious trusts claiming exemption u/s 11 and education institutions, hospitals etc., claiming exemption u/s 10(23C).

5.2 Broadly stated these sections provide as under:

(i) A trust or an institution shall be deemed to have been converted into any form not eligible for registration u/s 12AA in a previous year, if,

(a) The registration granted to it u/s 12AA has been cancelled; or

(b) It has adopted or undertaken modification of its objects which do not conform to the conditions of registration and it has not applied for fresh registration u/s 12AA in the said previous year; or has filed application for fresh registration u/s 12AA but the said application has been rejected.

(ii) Under the Section 115TD, it has been provided that the accretion in income (accreted income) of the trust or institution will be taxable on

(a) Conversion of trust or institution into a form not eligible for registration u/s 12 AA, or

(b) On merger into an entity not having similar objects and registered u/s 12AA, or

(c) On non-distribution of assets on dissolution to any charitable institution registered u/s 12AA or approved u/s 10(23C) within a period of twelve months from end of month of dissolution. The accreted income will be the amount of aggregate of total assets as reduced by the liability as on the specified date.

(iii) The assets and the liability of the charitable organization which has been transferred to another charitable organization within specified time would be excluded while calculating the accreted income. Similarly, any asset which is directly acquired out of Agricultural Income of the Trust or institution will be excluded while computing accreted income. It is not clear whether Agricultural Land Settled in Trust or received by the Trust by way of Donation will be excluded from such computation.

(iv) Any asset acquired by the Trust or Institution during the period before registration is granted u/s 12A / 12AA and no benefit u/s 11 has been enjoyed during this period, will be excluded from the above computation of accreted income.

(v) The method of valuation of such assets / liability will be prescribed by Rules.

(vi) The accreted income will be taxable at the maximum marginal rate (i.e. 30% plus applicable surcharge and education cess) in addition to any income chargeable to tax in the hands of the entity. This tax will be the final tax for which no credit can be taken by the trust or institution or any other person, and like any other additional tax, it will be leviable even if the trust or institution does not have any other income chargeable to tax in the relevant previous year.

(vii) The principal officer or trustee of the trust has to deposit the above tax within 14 days of the due date as under:

(a) Date on which the time limit to file appeal to the Tribunal u/s 253 against order cancelling Registration u/s 12AA expires if no appeal is filed.

(b) If such appeal is filed but the Tribunal confirms such cancellation, the date on which Tribunal order is received.

(c) Date of merger of the trust with an entity which is not registered u/s 12A / 12 AA

(d) When the period of 12 months end from the date of dissolution of trust if the assets are not transferred to an entity registered u/s 12A / 12AA.

(viii) Section 115 TE provides that if there is delay in payment of the above Exist Tax, the person responsible for payment of such tax will have to pay interest at the rate of 1% P.M. or part of the month.

5.3 Section 115TF provides that the principal officer or any trustee of the trust will considered as assessee in default if the above tax and interest is not paid before the due date. In other words, they can be made personally responsible for payment of such tax and interest. It is also provided that the non-charitable entity with which the trust has merged or to whom the assets of the trust are transferred will also be liable to pay the above exist tax and interest. However, the liability of such an entity will be limited to the value of the assets of the trust transferred to such entity.

6. INCOME FROM HOUSE PROPERTY:

6.1 Under Section 24 (b) interest paid on loan taken on or after 1-4-1999 for acquiring or constructing a residential house for self occupation is allowed as deduction subject to the limit of Rs.2 Lakh. This deduction is available provided the acquisition or construction is completed within 3 years from the end of the financial year in which loan was taken. By amendment of this section this period is now extended to 5 years from A.Y. 2017-18.

6.2 Existing Sections 25A, 25AA and 25B dealing with taxation of unrealised rent are now consolidated into a new section 25A from A.Y. 2017-18. The new section provides that arrears of rent or amount of unrealised rent which is received by the assessee in subsequent years shall be chargeable to tax as income of the financial year in which such rent is received. This amount will be taxable in the year of receipt whether the assessee is owner of the property or not. The assessee will be entitled to claim deduction of 30% of such arrears of rent which is taxable on receipt basis.

7. INCOME FROM BUSINESS OR PROFESSION:

7.1 INCOME-SECTION 2(24)(XVIII ): The definition of “income” u/s 2(24) was widened by insertion of clause (xviii) last year. Under this definition any receipt from the Government or any authority, body or agency in the form of subsidy, grant etc., is considered as income. However, if any subsidy, grant etc., is required to be deducted from the cost of any asset under Explanation (10) of section 43(1) is not considered as income. Amendment in the section, effective from A.Y.2017-18, now provides that any subsidy or grant by the Central Government for the purpose of the corpus of a trust or institution established by the Central Government or the State Government will not be considered as income. It may be noted that u/s 2(24) (xviii) no destinction is made between Government Grants of a capital nature and revenue grants. From the wording of the section it is not clear as to whether subsidy or grant received to set up any business or to complete a project will be exempt as held by the Supreme Court in the case of Sahney Steel and Press Works Ltd vs. CIT (228 ITR 253). Further, from the amendment made this year, it is not clear whether subsidy or grant by a State Government for the purpose of corpus of a trust or Institution established by the Government will be exempt.

7.2 NON-COMPETE FEES RECEIVABLE BY A PROFESSIONAL – SECTION 28(VA): At present a Noncompete Fees receivable in cash or kind is chargeable to tax in the case of a person carrying on a Business u/s 28(va). This section is amended w.e.f. A.Y. 2017-18 to extend this provision to a person carrying on a profession. Consequential amendment is also made in section 55 to treat cost of acquisition or cost of improvement as ‘NIL’ in the case of right to carry on any profession. In view of this, any amount received on account of transfer of right to carry on any profession will be taxable as capital gains.

7.3 ADDITIONAL DEPRECIATION – SECTION 32(1)(IIA ) : At present benefit of Additional Depreciation at 20% of actual cost of new plant and machinery is available to the assessee engaged in generation or generation and distribution of power. It is now provided that from A.Y. 2017-18 the benefit can be claimed also by an assessee engaged in Generation, Transmission or Distribution of power.

7.4 INVESTMENT ALLOWANCE – SECTION 32 AC : This section was amended by the Finance (No.2) Act, 2014 w.e.f. A.Y 2015-16. At present it provides for deduction of 15% of cost of new plant and machinery acquired and installed during the year if the total cost of such plant & machinery is more than Rs.25 crore. From reading the section it was not clear whether the benefit of the section can be claimed only if the plant or machinery is purchased and installed in the same year. By amendment of this section, effective from A.Y. 2016-17, it is now provided that even if the plant or machinery is acquired in one yare but installed in a subsequent year, the benefit of deduction can be claimed in the year of installation. Therefore, if the new plant or machinery is acquired in an earlier year but installed on or before 31.3.2017, deduction can be claimed in the year of installation.

7.5 WEIGHTED DEDUCTION FOR SPECIFIED PURPOSES:

In line with the Government policy for reduction of rates of taxes in a phased manner and reduction of incentives provided in the Income tax Act, section 35,35AC, 35AD, 35CCC and 35CCD have been amended w.e.f. A.Y 2018- 19 as under:

7.6 EXPENDITURE FOR OBTAINING RIGHT TO USE SPECTRUM – SECTION 35ABA: (i) This is a new section inserted w.e.f. A.Y. 2017-18. It provides for deduction for capital expenditure incurred for acquiring any right to use spectrum for telecommunication services. The actual amount paid will be allowed to be spread over the period of right to use the license and allowed as a deduction in each year. This deduction will be allowed starting from the year in which the spectrum fee is paid. If such fee is paid before the business to operate telecommunication services is started, deduction will be allowed from the year in which business commences. It is also provided that provisions of section 35ABB(2) to (8) relating to transfer of licence, amalgamation and demerger will apply to spectrum also.

(ii) It is also provided that if deduction is claimed and granted for part of the capital expenditure, as stated above, in any year, the same will be withdrawn in any subsequent year if there is failure to comply with any of the provisions of this section. Such withdrawal can be made by rectification of the earlier assessments u/s 154.

7.7 DEDUCTION FOR EXPENDITURE ON SPECIFIED BUSINESS – SECTION 35AD: (i) At present, deduction of 100% of capital expenditure is allowed in the case of an assessee engaged in certain

specified business listed in section 35AD(8). In respect of business listed in section 35AD (i),(ii),(v), (vii) and (viii) such deduction is allowed at 150% of the capital expenditure. From A.Y. 2018-19 such expenditure will be allowed at 100% only.

(ii) Further, the list of specified business in section 35AD(8) has been expanded. By this amendment, effective from A.Y. 2018-19, capital expenditure in the business of “Developing or Maintaining and Operating or Developing, Maintaining and Operating a new Infrastructure facility” which commences operation on or after 1.4.2017 will be entitled to the benefit u/s 35AD. This is subject to the condition that such business is owned by (i) an Indian Company or a consortium of such companies or by an authority or a board or corporation or any other body established or constituted under any Central or State Act and (ii) such entity has entered into an agreement with the Central or State Government or Local authority or any Statutory body Developing, Maintaining etc., of the new Infrastructure facility.

7.8 NBFC – DEDUCTION FOR PROVISION FOR DOUBTFUL DEBTS – SECTION 36(1),(VIIIA )
Deduction for provision for Bad and Doubtful Debts is allowed at present to Banks u/s 36(1)(viiia) subject to certain conditions. This benefit is now extended to a NBFC also. This amendment is effective from A.Y. 2017- 18. This deduction cannot exceed 5% of the total income computed before making deduction under this section and deduction under Chapter VI A.

7.9 DISALLOWANCE OF EQUALISATION LEVY – SECTION 40(a): This is a new provision which is effective from 1.6.2016. Chapter VIII of the Finance Act, 2016, provides for payment of Equalisation Levy on certain payments to Non-Residents for specified services. Now, section 40(a)(ib) provides that if this Levy is not deposited with the Government before the due date for filing Return of Income u/s 139(1), deduction for the payment to Non- Resident will not be allowed to the assessee. If the above Levy is deposited after the such due date for filing Return of Income, the deduction for the payment to Non-Resident will be allowed in the year of deposit of this Levy with the Government.

7.10 DEDUCTION ON ACTUAL PAYMENT – SECTION 43B: This section is amended w.e.f. A.Y. 2017- 18 to provide that any amount payable to Indian Railways for use of Railway Assets will be allowed only in the year in which actual payment is made. However, if such actual payment is made before the due date for filing the Return of Income u/s 139(1), for the year in which it was payable, deduction will be allowed in the year in which the amount was payable. This provision will apply to rent payable in premises of Indian Railways taken on rent or such similar transactions.

7.11 TAX AUDIT – SECTION 44AB: At present a person carrying a profession is required to get his accounts audited if his gross receipts exceed Rs.25 Lakh in any Financial Year. This limit is increased to Rs.50 Lakh from A.Y. 2017-18. In a case where the profits are not declared in accordance with provisions of section 44AD (Business) or 44ADA (Profession) the assessee will have to get the accounts audited u/s 44AB irrespective of the amount of turnover or gross receipts.

7.12 PRESUMPTIVE BASIS OF COMPUTING BUSINESS INCOME – SECTION 44AD:

(i) This section provides for computation of Business Income in the case of an eligible assessee engaged in eligible business at 8% of total turnover or gross receipts in any financial year. For this purpose the limit for turnover or gross receipts was Rs. 1 Cr. This has now been increased to Rs. 2 Cr., from A.Y. 2017-18.

(ii) Section 44AD (2) provides that in the case of a Firm / LLP declaring profit on presumptive basis, deduction for salary and interest paid by the Firm / LLP to its partners is allowable. This provision is deleted w.e.f. AY. 2017-18. Hence no such deduction will be allowed. It may be noted that the partner will have to pay tax on such salary or interest received from the Firm/LLP.

(iii) Section 44AD(4) is replaced by another section 44AD(4) from A.Y. 2017-18. It is now provided that any eligible person who carries on eligible business and declares profit at 8% or more of total turnover or gross receipts for any year in accordance with this section, but does not declare profit on such presumptive basis in any of the five subsequent years, shall not be eligible to claim the benefit of taxation on presumptive basis under this section for 5 subsequent assessment years. In view of this, such assessee will be required to maintain books as provided in section 44AA and get the accounts audited u/s 44AB.

7.13 PRESUMPTIVE BASIS OF COMPUTING INCOME FROM PROFESSION – SECTION 44ADA:

(i) This is a new provision which will come into force from A.Y. 2017-18. This provision will benefit resident professionals who carry on the profession on a small scale and the yearly gross receipts are less than Rs. 50 Lacs. Broadly stated the provisions of the new section 44ADA are as under:

a) The section is applicable to every resident assessee who is engaged in any profession covered by section 44AA(1) i.e. legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration or any other profession as is notified by the Board in the Official Gazette. The Explanatory Memorandum states that this section is applicable only to individuals, HUF and partnership firms (excluding LLPs). However the wording of the Section makes it clear that it applies to all resident assesses.

b) Presumptive profit shall be 50% of the total gross receipts or sum claimed to have been earned from such profession, whichever is higher.

c) Deductions under sections 30 to 38 shall be deemed to have been allowed and no further deduction under these sections will be allowed.

d) The written down value of any asset used for the purpose of profession shall be deemed to have been calculated as if the depreciation is claimed and allowed as a deduction.

e) The assessee is required to maintain books of account and also get them audited if he declares profit below 50% of the gross receipts.

(ii) It may be noted from the above that there is no provision in Section 44ADA for deduction of salary and interest paid by a Firm or LLP to its partners. Therefore, if a professional Firm/LLP offers 50% of its gross receipts for tax under this section, the partners will have to pay tax on salary and interest received by the partners.

(iii) It may be noted that Justice Easwar Committee has suggested in its report that taxation of income on presumptive basis is popular with small business entities as they are not required to maintain books or get their accounts audited. The committee has, therefore, suggested that this scheme should be extended to persons engaged in the profession. In para 5.1 of their report it is stated that “the committee recommends the introduction of a presumptive income scheme whereby income from profession will be estimated to be thirty three and one-third (33 1/3%) of the total receipts in the previous year. The benefit of this scheme will be restricted to professionals whose total receipts do not exceed one crore rupees during the financial year”. From the provisions of new section 44ADA it will be noticed that the above recommendation has been partly implemented.

(iv) A question for consideration is whether remuneration and interest on capital received by a partner of a firm or LLP engaged in any profession can be considered as income from the profession within the meaning of section 44 ADA. It is possible to take a view that this is income from profession as section 28(v) provides that “any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm” shall be chargeable under the head “Profits and gains of Business or Profession”. Even in the Income tax Return Form such Interest and Remuneration received by a partner from the firm is to be shown under the head profits and gains from business or profession. Therefore, if a professional has received total interest and remuneration of Rs.25 Lakh and Rs.15 lakh as share of profit from the professional firm in which he is a partner and he has no other income under the head profits and gains from business or profession, he can offer Rs.12.5 Lakh for tax u/s 44ADA.

7.14 INCOME FROM PATENTS – SECTION 115BBF:

This is a new section which provides for taxation of Royalty from Patents at a concessional rate of 10% from A.Y. 2017-18. The new section provides as under:

(i) If the total income of the eligible assessee includes any income by way of Royalty in respect of Patent developed and registered in India, tax on such Royalty shall be payable at the Rate of 10% plus applicable surcharge and education cess.

(ii) Such tax will be payable on the gross amount of Royalty. No expenditure incurred for this purpose shall be allowed against the Royalty Income or any other income.

(iii) For this purpose the Eligible assessee is defined to mean a person resident in India who is the true and first Inventor of the invention and whose name is entered on the Patent Register as a Patentee in accordance with the Patents Act. Further, a person being the true and first Inventor of the invention will be considered as an eligible assessee, where more than one persons are registered as Patentees under the Patents Act in respect of the Patent.

(iv) Explanation to the section defines the expressions Developed, Patent, Patentee, Patented Article, Royalty etc.

(v) The eligible assessee has to exercise option, if he wants to take benefit of this section, in the prescribed manner before the due date for filing Return of Income u/s 139(1) for the relevant year.

(vi) If the eligible assessee who has opted to claim the benefit of this section does not offer for taxation such Royalty income in accordance with this section, he will not be able to take benefit of this section in subsequent 5 assessment years.

(vii) The above Royalty Income shall not be included in the “Book Profit” computation u/s 115JB. Similarly, any expenditure relatable to Royalty income will not be deductible from such “Book Profit”.

7.15 CARRY FORWARD OF LOSS – SECTIONS 73A(2) AND 80: At present Section 73A (2) provides that carry forward of Loss incurred in any business specified in section 35AD(8)(C) is allowable for set-off against income of any specified business in subsequent year. Section 80 is amended w.e.f. A.Y. 2016-17 to provide that such carry forward of Loss u/s 73A(2) will be allowed only if the Return of Income for the year in which loss is incurred is filed before the due date u/s 139(1).

8. INCOME FROM OTHER SOURCES – SECTION 56(2)(vii):
Section 56(2)(vii) provides for levy of tax an Individual or HUF in respect of any asset received without consideration or for inadequate consideration. Second Proviso to this section provides for certain exceptions whereby the said section does not apply to certain transactions. The scope of this proviso is now extended w.e.f. A.Y. 2017-18 to receipt by individual or HUF of shares of-

(i) A successor Co-op. Bank in a business reorganization in lieu of shares of a predecessor co-op. Bank (Section 47(vicb).

(ii) A resulting company pursuant to a scheme of Demerger (Section 47(vid).

(iii) An amalgamated company pursuant to a scheme of amalgamation (Section 47 (vii).

9 CAPITAL GAINS:

9.1 DEFINITIONS – SECTION 2 (14) AND 2(42A):

(i) Section 2(14) defining “Capital Asset” is amended from A.Y. 2016-17 to state that Deposit Certificates issued under Gold Monetization Scheme, 2015, will not be considered as Capital Asset for fax purposes.

(ii) Section 2(42A) defines the term “Short-term Capital Asset”. This definition is amended from A.Y. 2017-18 to provided that shares (equity or preference) of a non-listed company will be treated as short-term capital asset if they are held for less than 24 Months. It may be noted that prior to 10.7.2014, this period was 12 months. It was increased to 36 months by the Finance (No.2) Act, 2014 w.e.f. 11.7.2014. Now, this period is reduced to 24 Months from 1.4.2016.

9.2 SOVEREIGN GOLD BONDS – SECTION 47 (VIIC ):
It is now provided from A.Y. 2017-18 that any gain made by an Individual on redemption of Sovereign Gold Bonds issued by RBI shall not be chargeable as capital gains.

9.3 CONVERSION OF A COMPANY INTO LLP – SECTION 47(XIII B):
The exemption from capital gains given to a private or a public unlisted company u/s 47 (xiiib) is subject to several conditions. One of the conditions, at present, is that the total sales, turnover or gross receipts in a business of the company in any of the three preceding years does not exceed Rs. 60 Lacs.

Instead of removing this condition or increasing the limit of turnover, a new condition is now added from A.Y. 2017- 18. It is now provided that total value of the assets, as appearing in the books of account of the company, in any of the three preceding years, does not exceed `5 Crores. This will prevent many small investment or property companies from converting themselves into LLP.

9.4 UNITS OF MUTUAL FUNDS – SECTION 47(XIX): Capital Gain arising on transfer of units in a consolidated plan of a M.F. Scheme in consideration of allotment of units in consolidated plan of that scheme will not be chargeable to tax from A.Y. 2017-18.

9.5 MODE OF COMPUTATION OF CAPITAL GAIN – SECTION 48: This section which deals with computation of capital gain is amended from A-Y 2017-18 as under:

(i) For computing long term capital gain on transfer of Sovereign Gold Bonds issued by RBI it will now be possible to consider indexed cost as cost of acquisition.

(ii) In the case of a non-resident assessee, for computing capital gain on redemption of Rupee Denominated Bond of an Indian company subscribed by him, the gain arising on account of appreciation of Rupee against a Foreign Currency shall be ignored.

9.6 COST OF CERTAIN ASSETS – SECTION 49: Section 49 provides for determination of cost of acquisition of certain Assets. By amendment of this section it is provided, from A.Y. 2017-18, that in respect of any asset declared under the “Income Declaration Scheme, 2016” Under Chapter IX of the Finance Act, 2016, the fair market value of the Asset as on 1.6.2016 shall be deemed to be the cost of acquisition for the purpose of computing capital gain on transfer of that asset.

9.7 FULL VALUE OF CONSIDERATION – SECTION 50C: This section is amended from A.Y.2017-18 to bring it in line with the provisions of section 43CA. This amendment is based on the recommendation of Justice R. Easwar Committee Report (Para 6.2). At present, Stamp Duty valuation as on the date of transfer of immovable property is compared with the consideration recorded in the transfer document. It is now provided that if the date of the agreement for sale and the date of actual transfer of the property is different, the stamp duty valuation on the date of Agreement for sale will be considered for the purpose of section. This is subject to the condition that the amount of the consideration or a part there of has been received by the seller by way of an account payee cheque or draft or by use of electronic clearing system through a bank on or before the date of the Agreement for sale.

9.8 EXEMPTION ON REINVESTMENT OF CAPITAL GAIN – SECTION 54 EE AND 54 GB: As discussed in Para 4.8 above, new section 54EE and amendment in section 54GB provides for exemption upto `50 Lacs if the capital gain on transfer of specified assets are invested in startup company or LLP. These provisions come into force from A.Y. 2017-18. Broadly stated these provisions are as under:

(i) Section 54EE Provides that if whole or part of capital gain arising from transfer of a long term capital asset (original asset) is invested within 6 months, from the date of such transfer, in a longterm Specified Asset, the assessee can claim exemption in respect of such capital gain. For this purpose the “Specified Asset” is defined to mean unit or units issued before 1.4.2109 by such Fund as may be notified by the Central Government. The Explanatory Memorandum to Finance Bill, 2016, states that it is proposed to establish a Fund of Funds to finance the start-ups. The following are certain conditions for claiming this exemption.

(a) Investment in long term specified asset should not exceed `50 lakh during a financial year. In case where the investment is made in two financial years, for the capital gains of the same year, the aggregate investment which qualifies for exemption from capital gain will not exceed Rs. 50 lakh.

(b) The long term specified asset is not transferred by the assessee for a period of three years from the date of its acquisition. The assessee does not take any loan or advance against the security of such long term specified asset. In a case where the assessee takes a loan or an advance against security of long term specified asset, it shall be deemed that the assessee has transferred the long term specified asset on the date of taking the loan or an advance.

(e) If the assessee, within a period of three years from the date of its acquisition, transfers that long term specified asset or takes a loan or an advance against security of such long term specified asset, the amount of capital gain which is allowed as exempt u/s 54EE will be charged to tax under the head “Capital Gains” as gain relating to long term capital asset of the previous year in which the long term capital asset was transferred.

(ii) Section 54GB, at present, grants exemption to an Individual or HUF in respect of long term capital gain arising on transfer of a Residential property (House or a Plot of Land) if the net consideration is utilized for subscription in equity shares of an eligible company. This provision will not apply to transfer of a residential property after 31.3.2017. By amendment of this section it is now provided that this exemption will be available to an Individual or HUF if net consideration on transfer of Residential property (Land, Building or both) is invested in an “Eligible Start Up” company or LLP. The term “Eligible Start-up” has been given the same meaning as in Explanation below section 80-IAC(4). (Refer Para 4.8 above). The above investment is to be made before the due date for filing the Return of Income. The above concession is not available if the transfer of Residential property is made after 31.3.2019. It may be noted that other conditions in existing section 54GB will apply to the above Investment also.

(iii) It may be noted that an Individual or HUF who is claiming exemption u/s 54 or 54F on transfer of a long term Capital Asset (including a Residential House) can claim deduction u/s 54EC (Investment in Bonds upto Rs. 50 Lakh) as well as u/s 54EE Investment in specified units (upto Rs. 50 Lakh) and u/s 54GB (Investment in eligible start up without any limit). If we read sections 54EC, 54EE and 54GB it will be noticed that no restriction is put in any of these sections that claim for deduction on reinvestment can be made under any one section only. Therefore, if an individual / HUF sells his Residential House, he can claim deduction u/s 54EC (upto Rs. 50 Lakh), u/s 54EE (up to Rs. 50 Lakh), u/s 54GB (without limit) as well as u/s 54 for purchase of another Residential House.

9.9 TAX ON SHORT -TERM CAPITAL GAIN – SECTION 111A: At present, this section provides for levy of tax on short-term Capital Gain at 15% from transfer of equity shares where STT is paid. By amendment of this section from A.Y. 2017-18 it is provided that in respect of short-term capital gain arising from transfer of equity shares through a Recognized Stock Exchange located in International Financial Service Centre (IFSC) where consideration is received in Foreign Currency, the condition for payment of STT will not apply.

9.10 TAX ON LONG – TERM CAPITA L GAIN – SECTION 112: At present, the tax on long – term capital gain on transfer of unlisted securities in the case of nonresident u/s 112 (1)(a) (iii) is chargeable at the rate of 10% if benefit of first and second proviso to section 48 is not taken. There was a doubt whether the word “Securities” include shares in a company. In order to clarify the position this section is amended from A.Y. 2017-18 to provide that long term Capital Gain from transfer of shares of a closely held company (whether public or private) shall be chargeable to tax at 10% if benefit of first and second proviso to section 48 is not claimed.

10. MINIMUM ALTERNATE TAX (MAT) – SECTION 115JB:

Applicability of MAT to foreign companies has been a burning issue. In line with the recommendations of the Justice A.P. Shah Committee, section 115JB is amended to provide that the provisions of section 115JB shall not be applicable to a foreign company if

(i) The assessee is a resident of a country or a specified territory with which India has an agreement referred to in section 90(1) or an agreement u/s 90A(1) and the assessee does not have a permanent establishment in India in accordance with the provisions of the relevant Agreement; or

(ii) The assessee is a resident of a country with which India does not have an agreement under the above referred sections and is not required to seek registration under any law for the time being in force relating to companies.

This amendment is made effective retrospectively from A.Y. 2001-02.

11. DIVIDEND DISTRIBUTION TAX (DDT) – SECTION 115-O:

(i) At present, under the specific taxation regime for business trusts, a tax pass through status is given to Real Estate Investment Trust (REITs) and Infrastructure Investment Trust (INVITS). However, a Special Purpose Vehicle, being a company, which is held by these business trusts, pays normal corporate tax and also suffers dividend distribution tax (DDT) while distributing the income to the business trusts being a shareholder.

(ii) It is now provided by amendment of section 115-0 w.e.f. 1.6.2016 that no DDT will be levied in respect of distribution of dividend by an SPV to the business trust. The exemption from levy of DDT will only be in the cases where the business trust holds 100% of the share capital of the SPV excluding the share capital other than that which is required to be held by any other person as part of any direction of the Government or any regulatory authority or specific requirement of any law to this effect or which is held by Government or Government bodies. The exemption from the levy of DDT will only be in respect of dividends paid out of current income after the date when the business trust acquires the shareholding of the SPV as referred to above. Such dividend received by the business trust and its investor will not be taxable in the hands of trust or investors as provided in the amended sections 10(23FC) & 10(23FD). The dividends paid out of accumulated and current profits upto this date will be liable for levy of DDT as and when any dividend out of these profits is distributed by the company either to the business trust or any other shareholder.

(iii) It is further provided in section 115-0(8) that no DDT will be levied on a company, being a unit located in an International Financial Services Centre, deriving income solely in convertible foreign exchange, for any assessment year on any amount of dividend declared, or paid by such company on or after 1 April, 2017 out of its current income, either in the hands of the company or the person receiving such dividend.

12. TAX ON BUY BACK OF SHARES:

(i) At present section 115QA of the Act provides that income distributed on account of buy back of unlisted shares by a company is subject to the levy of additional Income-tax at 20%. The distributed income has been defined in the section to mean the consideration paid by the company on buy back of shares as reduced by the amount which was received by the company, for issue of such shares. Buy-back has been defined to mean the purchase by a company of its own shares in accordance with the provisions of section 77A of the Companies Act, 1956.

(ii) It is now provided w.e.f. 1.6.2016 that section 115QA will apply to any buy back of unlisted shares undertaken by the company in accordance with the law in force relating to companies. Accordingly, it will also cover buy-back of shares under any of the provisions of the Companies Act, 1956 and the Companies Act, 2013. It is further provided that for the purpose of computing distributed income, the amount received by a company in respect of the shares being bought back shall be determined in the prescribed manner. These Rules may provide the manner of determination of the amount in various circumstances including shares being issued under tax neutral reorganizations and in different tranches as stated in the Explanatory Memorandum.

13. SECURITIZATION TRUSTS – CHAPTER XII EA :

(i) Chapter XII EA was added by the Finance Act, 2013, effective from A.Y. 2014-15. Under these provisions it was provided that: (a) A ny income of Securitisation Trust will be exempt u/s 10 (23DA), (b) Income received by the Investor any securitized debt instrument or securities issed by such trust will be exempt u/s 10(35A), and (c) The Trust was required to pay additional Income tax on distributed income u/s 115TA (25% in the case of Individual / HUF and 30% in case of others). There were other procedural provisions in sections 115TA to 115TC.

(ii) Section 115 TA is amended w.e.f 1.6.2016. New Section 115TCA has been inserted from A.Y. 2017-18. It is now provided that the current tax regime for Securitization Trust and its investors, will be discontinued for the distribution made by Securitisation Trust with effect from 1 June, 2016, and will be substituted by a new regime with effective from A.Y 2017-18. This effectively grants pass through status to the Securitisation Trust. The new regime will apply to a Securitisation Trust being an SPV defined under SEBI (Public Offer and Listing of Securitised Debt Instrument) Regulations, 2008 or SPV as defined in the guidelines on securitization of standard assets issued by RBI or a trust setup by a securitization company or a reconstruction company in accordance with the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 or guidelines or directions issued by the RBI (SARFAE SI Act).

(iii) The income of Securitisation Trust will continue to be exempt section under 10(23DA) which is also amended to effectively define the term securitization. The income accrued or received from the Securitisation Trust will be taxable in the hands of investor in the same manner and to the same extent as it would have happened had the investor made investment directly in the underlying assets and not through the trust. Consequential amendment is made in section 10(35A). The payment made by Securitisation Trust will be subject to tax deduction at source u/s 194LBC at the rate of 25% in case of payment to resident investors who are individual or HUF and @ 30% in case of others. In case of payments to non-resident investors, the deduction of tax will be at rates in force. The facility for the investors to obtain lower or nil deduction of tax certificate will be available. The trust will also provide breakup regarding nature and proportion of its income to the investors and also to the prescribed income-tax authority.

14. TAXATION OF NON-RESIDENTS:

(i) PLACE OF EFFECTIVE MANAGEMENT (POEM) – SECTION 6:

(a) The concept of treating a foreign company as resident in India if its place of effective management is in India was introduced by the Finance Act, 2015 and was to become effective from Assessment Year 2016-17. Under this concept, foreign companies will be considered as resident in India if its POEM is in India. The Finance Minister has now recognized that before introducing this concept, its ramifications need to be analyzed in detail. Accordingly, the implementation of concept of POEM has been deferred by one year and the same will now be applicable from Assessment year 2017-18.

(b) A new section115JH is inserted to empower the Government to issue notification to provide detailed transition mechanism for companies incorporated outside India, which due to implementation of POEM, will be assessed for the first time as resident in India. The notification will be issued to bring clarity on issues relating to computation of income, treatment of unabsorbed depreciation, set off or carry forward of losses, applicability of transfer pricing provisions, etc., applicable to such foreign companies considered to be resident in India.

(ii) INCOME DEEMED TO ACCRUE OR ARISE IN INDIA – SECTION 9(1)(I)

A new clause has been inserted in Explanation 1, providing that no income shall be deemed to accrue or arise in India to a foreign company engaged in mining of diamonds, through or from activities confined to display of uncut and unassorted diamonds in any notified special zone. This amendment is effective from Assessment Year 2016-17.

(iii) FUND MANAGER’S ACTIVITIES – SECTION 9A:

(a) This section lays down the conditions under which a fund manager based in India does not constitute a business connection of the foreign investment fund. One of the conditions is that the fund is a resident of a country or a specified territory with which India has entered into a double taxation avoidance agreement. This condition is now modified effective from A.Y. 2017-18 by extending it to funds established, incorporated or registered in a notified specified territory.

(b) Another condition is that the fund should not carry on or control and manage, directly or indirectly, any business in India or from India. This condition is now modified to apply only to a fund carrying on, or controlling and managing, any business in India.

(iv) REFERENCE TO TRANSFER PRICING OFFICER (TPO) – SECTION 92CA : At present where a reference has been made by the A.O. to a TPO, the TPO has to pass the order at least 60 days prior to the date of limitation u/s 153/153 B for passing the assessment or reassessment order. Section 92CA has been amended w.e.f. 1.6.2016 to extend this period in cases where the period of limitation available to the TPO for passing the order is less than 60 days, to a period of 60 days, if the assessment proceedings were stayed by an order or injunction of any court, or a reference was made for exchange of information by the Competent Authority under a double taxation avoidance agreement.

(v) MAINTENANCE OF RECORDS – SECTION 92D: This section requires every person who has entered into an international transaction to keep and maintain such information and documents in respect thereof as may be prescribed. A requirement is now introduced for a constituent entity of an International Group to keep and maintain such information and documents in respect of an international group as may be prescribed, and to furnish such information and documents in such a manner, on or before the date, as may be prescribed. Failure to furnish such information and documents will attract a penalty of Rs. 5,00,000 u/s 271AA unless reasonable cause is shown u/s 273B.

15. REPORT RELATING TO INTERNATIONAL GROUP :

(i) Section 286 is a new section inserted from A.Y. 2017-18. The OECD in Action Plan 13 of the BEPS Project has recommended a standardized approach to transfer pricing documentation to be adopted by various Countries. Pursuant to this recommendation, this section is inserted to provide for a specific reporting system in respect of country- by country (CbC) reporting. This system is a three-tier structure with (i) a master file containing standardized information relevant for all members of an International Group; (ii) a local file referring specifically to material transactions of the local taxpayer; and (iii) a CbC report containing certain information relating to the global allocation of the International Group’s income and taxes paid together with certain indicators of the location of economic activity within the group.

(ii) This section provides that every Constituent Entity, resident in India if it is constituent of an International Group and every parent entity or the alternate reporting entity, resident in India, has to furnish report in the prescribed form to the prescribed authority before the due date for filing return of Income u/s 139(1). The manner in which report is to be submitted is provided in the section.

(iii) Penalties are prescribed in section 271GB for nonfurnishing of the information by an entity which is obligated to furnish as also for knowingly providing inaccurate information in the report.

16. EQUALIZATION LEVY:

Chapter VIII (Sections 163 to 180) of the Finance Act, 2016, provides for Equalization Levy on Non-Residents. This Chapter will come into force on the date to be notified by the Central Government. In order to overcome the challenges of typical direct tax issues relating to e-commerce i.e characterization of nature of payments, establishing a nexus between a taxable transaction, activity and a taxing jurisdiction and keeping in view the recommendations of OECD in respect of Action 1 – Addressing the Tax Challenges of Digital Economy, of the BEPS Project, this new chapter is inserted. The chapter is a complete code for charge of Equalisation Levy, its collection, recovery, furnishing statements, processing Statements, Rectification of Mistakes, charge of interest for delayed payment, penalty for non-compliance with the provisions, Appeals to CIT(A) and ITA Tribunal, Prosecution, Power of Government to frame Rules etc. The provisions for Equalisation Levy can be briefly stated as under:

(i) The Equalisation Levy is at 6% of the amount of consideration for specified services received or receivable b y a non-resident (not having a PE in India) from a resident carrying on a business or profession or from a non-resident having a PE in India (Payer).

(ii) The specified services are (a) Online advertisement; (b) Any provision for digital advertising space; (c) Any other facility or service for the purpose of online advertisement; and (d) Any other services as may be notified.

(iii) Simultaneously with the introduction of this chapter for Equalisation levy, section 10(50) has been inserted to provide exemption to income arising from the above-mentioned specified services chargeable to Equalisation Levy.

(iv) The payer is obliged to deduct the Equalisation Levy from the amount paid or payable to a nonresident in respect of such specified services at 6% if the aggregate amount of consideration for the same in a previous year exceeds Rs.1 lakh.

(v) In addition, section 40(a)(ib) is inserted to provide that the expenses incurred by a payer towards specified services chargeable to Equalisation Levy shall not be allowed as deduction in case of failure to deduct and deposit the same to the credit of Central Government before the due date as explained in Para 7.9 above.

(vi) This Chapter extends to the whole of India except the State of Jammu and Kashmir.

17. ASSESSMENTS AND REASSESSMENTS:

(i) JURISDICTION OF ASSESSING OFFICER – SECTION 124: This section is amended from 1.6.2016. It is now provided that u/s 124(3) no person will be entitled to call into question the jurisdiction of A.O. after the expiry of one month from the date on which notice u/s 153A(1) or 153C(2) is served or after completion of assessment whichever is earlier. This provision is in line with the existing provision in section 124(3) which applies to objection to jurisdiction of A.O. when return u/s 139 is filed or notice u/s 142(1) or 143(2) is issued.

(ii) POWER TO CALL FOR INFORMATION – SECTION 133C: This section is amended from 1.6.2016. It is now provided that when information or document is received in response to any notice u/s 133C(1) the prescribed authority can process the same and available outcome will be forwarded to A.O.

(iii) HEARING BY A.O. – SECTION 2 (23C): This clause is inserted from 1.6.2016 to provide that notices for hearing can be given by electronic mode and communication of data and Documents can be made by electronic mode.

(iv) FILING INCOME TAX RETURN – SECTION 139: At present an Individual, HUF, AOP and BOI is required to file return of income before the due date if the total income, without considering deductions under Chapter VI-A, exceeds the maximum amount which is not chargeable to tax. It is now provided in the sixth proviso to section 139 (1) that income from long term capital gains exempt u/s 10(38) shall also be added to the total income for determining the threshold limit for determining whether the assessee is required to file the return of income.

(v) BELATED FILING OF RETURN OF INCOME – SECTION 139(4): The existing section 139(4) is replaced by new section 139(4) from A.Y. 2017- 18. It is now provided that if an assessee has not furnished his Return of Income before due date u/s 139(1), he can file the same at any time before the end of the relevant assessment year or before completion of assessment whichever is earlier.

(vi) REVISED RETURN – SECTION 139(5): The existing Section 139(5) is replaced by new section 139(5) from A.Y. 2017-18. At present a revised return can be filed u/s 139(5), only if the return originally filed is before the due date u/s 139(1). Such a revised return can be filed before the expiry of one year from the end of the relevant assessment year or completion of assessment, whichever is earlier. It is now provided that a belated return filed pursuant to section 139(4), can also be similarly revised within the time limit given above.

(vii) DEFECTIVE RETURN – SECTION 139(9): This section is amended from A.Y. 2017 – 18. At present a return of income will be treated as defective if self-assessment tax and interest payable u/s 140A is not paid before the date of furnishing the return. Now clause (aa) of the Explanation to section 139(9) has been deleted and hence a return will now not be treated as defective merely because self-assessment tax and interest thereon is not paid before the date of furnishing the return.

(viii) ADJUSTMENT TO RETURNED INCOME – SECTION 143(1): This section is now amended from A.Y. 2017-18. The scope of adjustments that can be made at the time of processing the Return of Income u/s 143(1) has been expanded to cover the following items:

(a) Disallowance of loss claimed, if return for the year for which loss has been claimed was furnished beyond the due date specified in section 139(1).

(b) Disallowance of expenditure indicated in tax audit report but not considered in the Return of Income

(c) Disallowance of deduction claimed u/s 10AA, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID or 80-IE, if the return has been filed beyond the due date specified in section 139(1).

(d) Addition of income due to mismatch in income as reflected in the return of income and as appearing in Form 26AS or Form 16A or Form 16.

The above adjustments will be made based on information available on the record of the tax department either physically or electronically. However, no adjustment will be made without intimating the assessee about such adjustment in writing or in electronic mode and giving him a time of 30 days to respond. The adjustment will be made only after considering the response received or after the lapse of 30 days in case no response is received.

(ix) PROCESSING OF RETURN OF INCOME – SECTION 143(ID): This section is amended w.e.f. A.Y. 2017-18. It is now provided that the processing of the Return of Income u/s 143(1) will not be necessary within one year if notice u/s 143(2) is issued. However, such Return of Income shall be processed u/s 143(1) before assessment order u/s 143(3) is passed.

(x) INCOME ESCAPING ASSESSMENT – SECTION 147: This section has been amended from 1.6.2016. New clause (ca) has been added in Explanation 2 to section 147. The amendment provides that income shall be deemed to have escaped assessment if, on the basis of the information received u/s 133C(2), it is noticed by the A.O that the income exceeds the maximum amount not chargeable to tax or where the assessee had understated the income or has claimed excessive loss, deduction, allowance or relief in the return.

(xi) LIMITATION FOR COMPLETING ASSESSMENT OR REASSESSMENT – SECTION 153
The existing section 153 has been replaced by a new section 153 from 1.6.2016. This new section provides as under:

(a) The time limit for completion of assessment has now been reduced as under:
• For order u/s 143 and section 144 – from the existing two years to twenty one months from the end of the assessment year in which the income was first assessable.
• For order u/s 147 – from the existing one year to nine months from the end of the financial year in which the notice u/s 148 was served.
• For giving effect to order passed u/s 254, 263, 264, setting aside or cancelling an assessment – from the existing one year to nine months from the end of the financial year in which the order is received or passed by the designated Commissioner.

(b) The period for completing the assessment shall be extended by one year where reference has been made to the Transfer pricing Officer u/s 92CA,

(c) At present, there is no time limit for giving effect to an order passed u/s 250 or 254 or 260 or 262 or 263 or 264. Now it is provided that action under the above section shall be completed within three months from the end of the month in which order is received or passed by the designated Commissioner. Additional time of six months may be granted to the Assessing Officer by the Principal Commissioner or the Commissioner, based on reasons submitted in writing, if the Commissioner is satisfied that the delay is for reasons beyond the control of the Assessing Officer.

(d) At present there is no time limit for completion of assessment, reassessment or re-computation in consequence of or to give effect to any finding or direction contained in an order under the above mentioned sections or in an order of any court in a proceeding otherwise than by way of appeal or reference under the Act. Now such order giving effect should be passed on or before the expiry of twelve months from the end of the month in which such order is received by the designated Commissioner.

(e) Similarly, in case of assessment made on a partner of a firm in consequence of an assessment made on the firm u/s 147, the time limit is now introduced. Accordingly, the assessment of the partner shall be completed within twelve months from the end of the month in which the assessment order in case of the firm is passed.

In calculating the above time limit, the time or the period referred to in Explanation 1 of section 153(9) shall be excluded.

(f) For cases pending on 1st June, 2016, the time limit for taking requisite action (in case of (c), (d) and (e) above will be 31st March, 2017 or twelve months from the end of the month in which such order is received, whichever is later.

(g) The existing Section 153 shall aply to any order of assessment, reassessment or recomputation made before 1/6/2016.

(xii) LIMITATION FOR COMPLETION OF ASSESSMENT IN SEARCH CASES – SECTION 153B:

The existing Section 153B is replaced by new Section 153B w.e.f. 1.6.2016. The old section 153B shall apply in relation to any order of assessment, reassessment or re-computation is made on or before 31.5.2016. The new section 153B provides for reduction in time limit for completion of assessment, reassessment etc., in case of a search u/s 153 A or 153C as under:

(a) In each assessment year falling within the six years referred to in section 153A(1)(b) or assessment year in which search is conducted u/s 132 or requisition is made u/s 132A – from two years to twenty one months from the end of the financial year in which the last of the authorization for search or requisition was executed:

(b) In case of other persons referred to in section 153C, to twenty one months (from the existing two years) from the end of the financial year in which the last of the authorization for search or requisition was executed or nine months (from the existing one year) from the end of the financial year in which the books of account or documents or assets seized or requisitioned are handed over u/s 153C to the Assessing Office having jurisdiction over such person, whichever is later.

(c) In case where reference is made to the Transfer Pricing Officer u/s 92CA, the period of limitation as given above will be extended by a period of twelve months.

(d) In calculating the above time limit, the time or the period referred to in Explanation 1 of section 153B(3) shall be excluded.

18. PAYMENT OF TAXES AND INTEREST:

18.1 ADVANCE TAX PAYMENT – SECTION 211: (i) The provisions of Section 211 have been amended from 1.6.2016. Now, all non-corporate assesses, who are liable to pay advance tax, will have to pay such tax in 4 installments as applicable to corporate assesses instead of 3 installments. The installments for advance tax payment are as follows:

(i) Eligible assesses referred to in section 44AD opting for computation of profits and gains of business on presumptive basis are required to pay the entire advance tax in one installment on or before 15th March of the financial year. No similar exception has been given for eligible professionals covered under presumptive taxation u/s 44ADA.

(ii) The provisions of section 234C in respect of interest payable for deferment of advance tax have been amended to bring them in line with the provisions of section 211 of the Act. Interest u/s 234C will be levied at 1% p.m. for 3 months on shortfall of advance tax paid as compared with the amount payable as per the above installments in case of all assesses (except the eligible assesses u/s 44AD). However, no interest will be levied if the advance tax paid is more than 12% (For 15th June instalment) and more than 36% (For 15th September instalment).

(iii) A new exception is now provided that interest u/s 234C will not be levied in case of assesses having income chargeable under the head ‘profits and Gains of business or Profession’ for the first time. These assesses will be required to pay the whole amount of tax payable in the remaining installments of advance tax which are due after they commence business or by 31st March of the financial year if no installments are due.

18.2 INTEREST ON REFUNDS – SECTION 244A:

(i) Section 244A granting interest on refunds to assesses has been amended w.e.f. 1.6.2016 to provide that in case where the return of income is filed after the due date as per section 139(1), then interest on refund out of TDS, TCS and advancetax will be granted only from the date of filing the return and not from 1st April of the assessment year.

(ii) It is further provided that an assessee will be entitled to interest on refund of self-assessment tax paid u/s 140A of the Act from the date of payment to tax or date of filing the return, whichever is later up to the date on which the refund is granted.

(iii) It is also provided that an assessee will be entitled to additional interest on refund arising on giving effect to an appellate / revisionary order which has been passed beyond a time limit of 3 months from the end of the month of receipt of the appellate / revisionary order by the Commissioner. It is further clarified that if an extension is granted by the Principal Commissioner / Commissioner for giving effect to the appellate/ revisionary order, then the additional interest will be granted from the expiry of the extended period. The Principal Commissioner / Commissioner may extend the period for giving effect to the appellate / revisionary order up to 6 months. The additional interest on such refunds will be calculated at the rate of 3% p.a. from the date following the date of expiry of the specified time limit upto the date of granting the refund. Effectively, the assessee will be entitled to interest in such cases at the rate of 9% p.a. against the normal rate of 6% p.a for delay in giving effect to an appellate order beyond the specified time limit.

18.3 RECOMMENDATION OF JUSTICE R. EASHWAR COMMITTEE: It may be noted that this committee had made two recommendations as under

(i) The tax payer should be allowed automatic stay on payment of 7.5% of disputed taxes till the first appeal is decided. In cases of High-Pitched assessments, it may be difficult for the assessee to pay even 7.5% of the disputed demand. In such cases he can approach the CIT(A) and request stay of the entire demand. No such amendment is made in the Act. However, CBDT has modified the Instruction No. 1914 of 21.3.1996 on 29.2.2016 directing assessing officers to grant stay till the disposed of first appeal on payment of 15% of disputed tax subject to certain conditions.

(ii) As regards interest on delayed refunds the committee has suggested that section 244A may be amended to provide that interest of 1% P.M. should be paid if the refund is delayed up to 3 months and interest at 1.5% P.M. should be paid if the delay is more than 3 months. It will be noticed that this recommendation is only partly accepted while amending section 244A.

19. APPEALS AND REVISION:

19.1 APPEAL BY DEPARTMENT – SECTION 253(2A): Section 253(2A) has been amended from 1.6.2016. Now, it will not be possible for the Department to file appeal before ITA Tribunal against the order passed pursuant to the directions of Dispute Resolution panel (DRP).

19.2 RECTIFICATION OF ORDER OF ITA TRIBUNA L – SECTION 254: At present the ITA Tribunal can rectify any mistake in its order which is apparent from the records within 4 years of the date of the order. This period is now reduced to 6 months from the end of the month in which the order is passed. This amendment is effective from 1.6.2016. Although it is not clarified in the Finance Act, 2016, it is presumed that this amendment will apply to orders passed on or after 1.6.2016.

19.3 SINGLE MEMBER CASES – SECTION 255(3): This section is amended from 1.6.2016 to provide that a Single Member Bench of ITA Tribunal may dispose of any case where assessed income does not exceed Rs. 50 Lacs. At present, this limit is Rs. 15 Lakh which has now been increased to Rs. 50 Lakh.

20. DISPUTED TAX SETTLEMENT SCHEME – SECTIONS 197 TO 208 OF THE FINANCE ACT, 2016:

20.1 The Finance Minister has, in his Budget speech on 29th February 2016, stated that the tax litigation in our country is a scourge for a tax friendly regime and creates an environment of distrust in addition to increasing the compliance cost of the tax payer and administrative cost of the Government. He has also stated that there are over 3 Lac tax cases pending with the commissioner of Income tax (Appeals) with disputed amount of tax of about 5.5 Lac Crores. In order to reduce these appeals before the first appellate authority he has announced a new scheme called “ Dispute Resolution Scheme -2016” Two separate Schemes are announced in this Budget, one for settlement of disputed taxes under Income tax and wealth tax Act and the other for disputed taxes under Indirect Tax Laws.

20.2 In chapter X of the Finance Act, 2016, (Act), Sections 201 to 211 Provide for “The Direct Tax Dispute Resolution Scheme – 2016”. Similarly, Chapter XI (Sections 212 to 218) of the Act provides for “The Indirect Tax Dispute Resolution Scheme – 2016”.

20.3 THE SCHEME:

(i) The Direct Tax Dispute Resolution Scheme 2016 (Scheme) will come into force on 1st June, 2016. This scheme will enable all assesses whose assessments under the Income tax Act or the wealth tax have been completed for any assessment year and whose appeals are pending before the Commissioners of Income tax (Appeals) as on 29.2.2016 to settle the tax dispute. The scheme also applies to those assesses in whose case any disputed additions are made as a result of retrospective amendments made in the Income tax or wealth tax Act and whose appeals are pending before the CIT(A), ITA Tribunal, High Court, Supreme Court or before any other authority.

(ii) Section 202 of the Finance Act provides that the assessee who wants to settle the tax dispute pending before the concerned appellate authority as on 29.02.2016, can make a declaration in the prescribed Form on or after 01.06.2016 but before the date to be notified by the Central Government. In the case of an assessee in whose case the assessment or reassessment is made in the normal course and not due to any retrospective amendment, and the appeal is pending before CIT (A) as on 29.02.2016, the tax dispute can be settled as under:-

(a) If the disputed tax does not exceed `10 Lacs for the relevant assessment year, the assessee can settle the same on payment of such tax and interest due upto the date of assessment or reassessment.

(b) If the disputed tax exceeds ` 10 Lacs for the relevant assessment year, the dispute can be settled on payment of such tax with 25% of minimum penalty leviable and interest upto the date of assessment or reassessment. It is difficult to understand why minimum penalty is required to be paid when the disputed addition may not be for concealment or inaccurate furnishing of particulars of income.

(c) In the case of appeal against the levy of penalty, the assessee can settle the dispute by payment of 25% of minimum penalty leviable on the income as finally determined.

(iii) In a case where the disputed tax demand relates to addition made in the assessment or reassessment order made as a result of any retrospective amendment in the Income tax or wealth tax Act, the dispute can be settled at the level of any appellate proceedings (i.e. CIT(A), ITA Tribunal, High Court etc.) by payment of disputed tax. No interest or penalty will be payable in such a case.

20.4 PROCEDURE FOR DECLARATION:

(i) The declaration for settlement of disputed tax for which appeal is pending before CIT(A) is to be filed in the prescribed form with the particulars as may be prescribed to the Designated Authority. The Principal Commissioner will notify the Designated Authority who shall not be below the rank of commissioner of Income tax. Once this declaration is filed for settlement of a tax dispute for a particular year, the appeal pending before the CIT (A) for that year will be treated as withdrawn.

(ii) In the case where the tax dispute is in respect of any addition made as a result of retrospective amendment, the assessee can file the declaration in the prescribed form with the designated authority. The assessee will have to withdraw the pending appeal for that year before CIT (A), ITA Tribunal, High Court, Supreme Court or other Authority after obtaining leave of the Court or Authority whereever required. If any proceedings for the disputed tax are initiated for arbitration, conciliation or mediation or under an agreement entered into by India with any other country for protection of Investment or otherwise, the assessee will have to withdraw the same. Proof of withdrawal of such appeal or such other proceedings will have to be furnished by the assessee with the declaration. Further, the declarant will have to furnish an undertaking in the prescribed form waiving his right to seek or pursue any remedy or any claim for the disputed tax under any agreement.

(iii) It is also provided that if (a) any material particulars furnished by the declarant are found to be false at any stage, (b) the declarant violates any of the conditions of the scheme or (c) the declarant acts in a manner which is not in accordance with the undertaking given by him as stated above, the declaration made under the scheme will be considered as void. In this event all proceedings including appeals, will be deemed to be revived.

20.5 PAYMENT OF DISPUTED TAX:

(i) On receipt of the declaration from the assessee the Designated Authority will determine the amount payable by the declarant under the scheme within 60 days. He will have to issue a certificate in the prescribed form giving particulars of tax, interest, penalty etc., payable by the Declarant.

(ii) The Declarant will have to pay the amount determined by the Designated Authority within 30 days of the receipt of the Certificate. He will have to send the intimation about the payment and produce proof of payment of the above amount. Upon receipt of this intimation and proof of payment, the Designated Authority will have to pass an order that the declarant has paid the disputed tax under the scheme. Once this order is passed it will be conclusive about the settlement of disputed tax and such matter cannot be re-opened in any proceedings under the Income tax or Wealth tax Act or under any other law or agreement.

(iii) Once this order is passed, the Designated Authority shall grant immunity to the declarant as under:

(a) Immunity from instituting any proceedings for offence under the Income tax or Wealth tax Act.

(b) Immunity from imposition or waiver of any penalty or interest under the income tax or wealth tax Act. In other words, the difference between interest or penalty chargeable under the normal provisions of the Income tax or wealth tax Act and the interest or penalty charged under the scheme cannot be recovered from the declarant.

It is also provided that any amount of tax, interest or penalty paid under the Scheme will not be refundable under any circumstances.

20.6 WHO CAN MAKE A DECLARATION:

(i) Section 208 of the Finance Act provides that in the following cases declaration under the Scheme for settlement of disputed taxes cannot be made.

(a) In relation to assessment year for which assessment or reassessment under Section 153A or 153C of the Income tax Act or Section 37A or 37B of the Wealth tax Act is made.

(b) In relation to assessment year for which assessment or reassessment has been made after a survey has been conducted under section 133A of the Income tax Act or 38A of the Wealth tax Act and the disputed tax has a bearing on findings in such survey.

(c) In relation to assessment year in respect of which prosecution has been instituted on or before the date of making the declaration under the scheme.

(d) If the disputed tax relates to undisclosed income from any source located outside India or undisclosed asset located outside India.

(e) In relation to assessment year where assessment or reassessment is made on the basis of information received by the Government under the Agreements under section 90 or 90A of the Income tax Act.

(f) Declaration cannot be made by following persons.

• If an order of detention has been made under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974.

• If prosecution has been initiated under the Indian Penal Code, The Unlawful Activities (Prevention) Act, 1967, the Narcotic Drugs and Psychotropic Substances Act, 1985. The Prevention of Corruption Act, 1988 or for purposes of enforcement of any civil liability.

(g) Declaration cannot be made by a person who is notified u/s. 3 of the Special Court (Trial or Offences Relating to Transactions in Securities) Act, 1992.

20.7 GENERAL:

(i) The Act authorizes the Central Government to issue directions or orders to the authorities for the proper administration of the scheme. The Act also provides that if any difficulty arises in giving effect to any of the provisions of the scheme, the Central Government can pass an order to remove such difficulty. Such order cannot be passed after expiry of 2 years i.e after 31.5.2018. Central Government is also authorized to notify the Rules for carrying out the provisions of the scheme and also prescribe the Forms for making Declaration, for certificate to be granted by the Designated Authority and for such other matters for which the rules are required to be made under the scheme.

(ii) In 1998 similar attempt was made to reduce tax litigation through “Kar Vivad Samadhan Scheme” which was introduced by the Finance (No:2) Act, 1998. This year, similar attempt is made to reduce tax litigation through this Scheme. One objection that can be raised is with regard to levy of penalty when the disputed tax is more than Rs.10 Lakh. There is no logic in levying such a penalty. Even if the assessee is not successful in the appeal before CIT(A), his liability will be for payment of disputed tax and interest. Penalty is not automatic. The disputed addition or disallowance may be due to interpretation of some provision in the tax law for which no penalty is leviable. Therefore, in case where disputed tax is more than Rs.10 Lakh, the assessee will not like to take benefit of the scheme and to that extent litigation will not be reduced.

(iii) As stated earlier, section 202 of the Finance Act provides that declaration can be filed for settlement of disputed taxes only in respect of an appeal pending before CIT (A). There is no reason for restricting this benefit to appeal pending before the first appellate authority. This scheme should have been made applicable to appeals filed by the assessee before ITA Tribunal, High Court or the Supreme Court which are pending on 29.02.2016. If this provision had been extended to all such appeals, pending litigation before all such judicial authorities would have been reduced.

(iv) The provision in section 202 of the Finance Act relating to settlement of disputed taxes levied due to retrospective amendment in the Income tax and Wealth tax Act is very fair and reasonable. In such cases only tax is payable and no interest or penalty is payable. This provision is made with a view to settle the disputed taxes levied due to retrospective amendment made in section 9 by the Finance Act, 2012. This related to taxation as a result of acquisition of interest by a Non-Resident in a company owning assets in India. (Cases like VODAFONE, CAIRN and others). However, there are some other sections such as sections 14A, 37, 40 etc., where retrospective amendments have been made. It appears that it will be possible to take advantage of the scheme if appeals on these issues are pending before any Appellate Authority or Court as on 29.2.2016.

(v) It may be noted that last year the CBDT had made one attempt to reduce the tax litigation by issue of Circular No. 21/2015 dated 10/12/2015 whereby appeals filed by the Income tax Department where disputed taxes were below certain level were withdrawn with retrospective effect. This year the Government has issued this scheme whereby assesses can settle the demand for disputed taxes and thus reduce the tax litigation.

21. PENALTIES AND PROSECUTION:

21.1 Sections 98 to 110 of the Finance Act, 2016, make major amendments in Penalty provisions under the Income tax Act. In Para 166 of his Budget Speech the Finance Minister has explained the new Scheme for levy of penalty.

21.2 EXISTING PENALTY PROVISIONS FOR CONCEALMENT .

(i) At present, Section 271 of the Income tax Act (Act) provides for levy of penalty for concealment of income or for furnishing inaccurate particulars of income at the rate of 100% of tax which may extend to 300%. The Assessing Officer (AO) has discretion in the matter of levy of penalty. There are 8 Explanations in the Section to explain the circumstances under which a particular income will be considered as concealment of income or when the assessee will be deemed to have furnished inaccurate particulars of Income. Various clauses of this section have been considered and interpreted by the various High Courts and the Supreme Court in various judgements. The law relating to levy of penalty appeared to be more or less settled by now. How far these judgements will apply to the new Scheme for levy of penalty will depend on the manner in which officers administer the new provisions.

(ii) Recently, Income tax Simplification Committee (Justice Eashwar Committee) has submitted its Report. In para 26.1 of its Report the committee has considered the provisions of sections 271 and 273B and made certain suggestions. These suggestions have been made with a view to reduce tax litigation. If we consider the amendments made by the Finance Act, 2016, it will become evident that these suggestions are only partly implemented.

21.3 NEW SECTION 270A (UNDER REPORTING OF INCOME)

(i) It is now provided that existing Section 271 shall apply upto Assessment Year 2016-17. For A.Y. 2017-18 and onwards new sections 270A and 270AA have been added. The provisions of these sections are as under.

(ii) Section 270A authorizes an Assessing Officer, CIT (A), Commissioner or Principal Commissioner to levy penalty at the rate of 50% of tax in case where the assessee has “Under Reported” his income. In cases where the assessee has “Misreported” his income the penalty of 200% of tax will be levied. It may be noted that u/s 271, although the minimum penalty was 100% of tax and maximum penalty was 300% of tax, in most of the cases only minimum penalty of 100% was levied.

(iii) Section 270A(2) provides that the assessee will be considered to have “Under Reported” his income (a) If Income assessed is greater than income determined under section 143(1) (a) i.e Income as per Return of Income, or if Income assessed is greater than the maximum amount not chargeable to tax, if Return of Income is not filed by the assessee, (b) If Income assessed or deemed book profit u/s 115JB/115JC is greater than the income assessed or reassessed immediately before such assessment, (c) If Book Profit assessed u/s 115JB / 115 JC is greater than Book Profit determined u/s 143(1)(a) or Book Profit assessed u/s 115JB/115JC, if no return of income is filed by the assessee or (d) If Income assessed or reassessed has the effect of reducing loss declared or such loss is converted into income.

(iv) In all the above cases the difference between the income assessed or reassessed and the income computed u/s 143(1)(a) will be considered as Under Reported income and penalty at 50% of tax will be levied. If the loss declared by the assessee is reduced or converted into income the difference will be liable to penalty @ 50% of tax. The concept of income concealed or furnishing of inaccurate particulars of income, which existed u/s 271, is now given up under the new section 270A.

(v) In a case where Section 115JB / 115JC is applicable the amount of Under Reported income will be worked out by applying the formula given in the section. This can be explained by the following illustration.

In the above case Under Reported Income u/s 270A will be Rs. 3,00,000/- (Rs. 2,00,000+ Rs.1,00,000/-)

(vi) Section 270A(4) provides that where any addition was made in the computation of total income in any earlier year and no penalty was levied on such addition in that year, and the assessee contends that any receipt, deposit or investment made in a subsequent year has come out of such addition made in earlier year, the assessing officer can consider such receipt, deposit or investment as under reported income. This provision is on the same lines as existing Explanation (2) of Section 271.

(vii) Section 270A (6) provides that no penalty will be levied in respect of any Under Reported Income where (a) the assessee offers an explanation and the Income tax Authority is satisfied that the explanation is bona fide and all material facts have been disclosed, (b) Such Under Reported income is determined on the basis of an estimate, if the accounts are correct and complete but the method employed is such that the income cannot be properly deduced there from (c) The addition is on the basis of estimate and the assessee has, on his own, estimated a lower amount of addition or disallowance on the same issue and has included such amount in the computation of his income and disclosed all the facts material to the addition or disallowance, (d) Addition is made under Transfer pricing provisions but the assessee had maintained information and documents as prescribed under section 92D, declared the international transaction under Chapter X and disclosed all material facts relating to the transaction or (e) The undisclosed income is on account of a search operation and penalty is leviable under section 271 AAB.

21.4 NEW SECTION 270A (MISREPORTIN G OF INCOME):

(i) A s stated earlier, the penalty on Unreported Income in consequence of Misreporting of Income will be 200% of the tax on such Misreported Income. Section 270A (9) provides that the assessee will be considered to have Misreported his income due to (a) Misrepresentation or suppression of facts (b) Failure to record investments in the books of account (c) Claim of expenditure not substantiated by any evidence (d) Recording of any false entry in the books of account, (e) Failure to record any receipt in books of account having a bearing on total income or (f) Failure to report any International transaction or any transaction deemed to be an International transaction or any specified domestic transaction, to which provisions of Chapter X apply.

(ii) It may be noted that disputes may arise due to the wording of the above clauses in Section 270A(9). Clause (b) refers to Investments not recorded in books of account. In the case of an Individual or HUF it may so happen that certain genuine Investments may have been debited to personal Capital Account and may not appear separately in the books of account. If the assessee is declaring income from such Investments regularly, there is no reason to consider cost of Investments not recorded in books as Misreporting of Income. If the income from such Investment is declared, there is no Under Reporting much less Misreporting of Income. Moreover, when the Investment is debited to Capital Account it cannot be said that the same is not recorded in the books.

(iii) Similarly, clause (c) above states that expenditure claimed for which there is no evidence will be treated as Misreporting of Income. It is not clear as to what will be considered as an adequate evidence for this purpose. Disputes will arise on the question about adequacy of the evidence for this purpose.

(iv) Section 270A (10) provides that for the purpose of levy of penalty as a result of Under Reporting or Misreporting of income amount of tax on such income will be calculated on notional basis according to the Formula given in that Section.

(v) It is pertinent to note that there is no provision similar to Section 270A(6), as discussed in Para 21.3 (vii) above, whereby the assessee can offer an explanation about his bona fides for omission to disclose any amount of income which the tax authority wants to consider as Misreporting of Income . In other words, before the A.O. comes to the conclusion that there is misreporting of income on any of the grounds stated in Para (i) above, there is no provision to give an opportunity to the assessee to offer explanation as provided in section 270A(6). The assesses will have to litigate on such matters as absence of such a provision is against principles of the natural justice.

21.5 IMMUNITY FROM PENALTY AND PROSECUTION (SECTION 270AA ):

(i) New Section 270AA has been inserted in the Income tax Act w.e.f. assessment year 2017-18 to grant immunity from imposition of penalty and initiation of prosecution in certain circumstances. Under this section an assessee can make an application to the A.O. to grant immunity from imposition of penalty under Section 270A and initiation of prosecution proceedings under Section 276C. or 276CC. For this purpose the following conditions will have to be complied with by the assessee:-

(a) Tax and Interest payable as per the assessment order u/s 143(3) or reassessment order u/s 147 should be paid before the period specified in the Notice of Demand.

(b) No Appeal against the above order should be filed before CIT(A).

(c) The application for immunity should be filed within one month of the end of the month in which the above assessment order is received. This application is to be made in the prescribed form.

(ii) It may be noted that the power to grant immunity under this section is given to the AO only with reference to penalty leviable u/s 270A (7) @ 50% of Tax for Under Reporting of Income. If the addition or disallowance is made in the assessment or reassessment order on the ground of Misreporting of Income as explained u/s 270A(9) and where penalty is @ 200% of Tax, no such immunity u/s 270AA can be granted. To this extent this provision in section 270AA is very unfair.

(iii) After the A.O. receives the application for grant of immunity, he will have to pass an order accepting or rejecting the application within one month from the end of the month when such application is received. If he accepts the application, no penalty u/s 270A will be levied and no prosecution u/s 276C or 276CC will be initiated. If the A.O. wants to reject the application he will have to give an opportunity to the assessee of being heard. If the A.O. rejects the application, the assessee can file an appeal before CIT(A) against the assessment / reassessment order. For this purpose the time taken for making the application to the AO and the time taken by A.O. in passing the order for rejection of the application will be excluded in computing the period of limitation u/s 249 for filing appeal to CIT(A).

(iv) The order passed by the A.O. accepting or rejecting the application shall be treated as final. If the A.O. has accepted the application by his order u/s 270AA(4), no appeal before CIT(A) or revision application before CIT can be filed against the assessment or reassessment order.

(v) It may be noted that the A.O. is given discretion to accept or reject the application. This appears to be an absolute power given to the same officer who has passed the assessment order. There are no guidelines as to when the application can be rejected. There is no provision for appeal against the order rejecting the application for immunity. To this extent this provision is unfair.

(vi) As stated in (ii) above the above application for immunity can be filed only in respect of additions / disallowances made due to Under Reporting of Income where penalty is of 50% of Tax. No such application can be made if the additions/ disallowances are for Misreporting of Income where penalty is of 200% of Tax. There is no clarity in Section 270AA about a situation where in any assessment / reassessment order some additions / disallowances are for Under Reporting of Income and some additions / disallowances are for Misreporting of Income. Question arises whether the application for immunity u/s 270AA can be made in such a case for getting immunity. If so, whether such application will be for items added/ disallowed for Under Reported Income only and whether the assessee can file appeal to CIT(A) only with reference to items added / disallowed on the ground of Misreporting of Income. If this is the position, then a question will arise whether the assessee will have to revise the appeal petition later on in respect of addition / disallowance made for items of Under Reported Income if the application for immunity is rejected. If the intention of the Government is to reduce litigation and grant immunity from penalty and prosecution the benefit of Section 270 AA should have been given to all assessee where additions / disallowances are made for Under Reporting or Misreporting of Income.

21.6 PENALTY FOR FAILURE TO MAINTAIN INFORMATION AND DOCUMENTS (SECTION 271 AA ): This section has been amended w.e.f. A/Y: 2017-18 to provide that if the assessee fails to furnish the information and documents as required under Section 92D(4), the prescribed authority can levy penalty of Rs.5 Lakh. It may be noted that Under Section 92D(4) a constituent entity of an International Group is required to maintain certain information and documents in the prescribed manner and furnish the same to the prescribed authority before the due date as provided in that section.

21.7 PENALTY WHERE SEARCH HAS BEEN INITIATED (SECTION 271AA B):

Section 271AAB provides for levy of penalty in which search has been conducted on or after 1.7.2012. Specific rates are provided u/s 271AAB(1) (a),(b) and (c). Amendment made in this section, effective from A.Y. 2017-18, is in clause (c). Here the rate of minimum penalty is 30% and maximum penalty is 90% of the Undisclosed Income. This will now be a flat rate of 60% of Undisclosed Income from A.Y. 2017-18. Further, it is also provided that no penalty u/s 270 A shall be levied on undisclosed income where penalty u/s 271 AAB (1) is leviable.

21.8 PENALTY FOR FAILURE TO FURNISH REPORT U/S. 286 (NEW SECTION 271 GB): A new Section 286 has been added from A.Y 2017-18 providing for furnishing of report in respect of International Group. New 271 GB has been added effective from A.Y. 2017-18 to provide for penalty for non compliance of Section 286 as under.

(i) If any Reporting Entity referred to in section 286 fails to furnish report referred to in Section 286(2) before the due date, the Prescribed Authority can levy penalty at Rs.5,000/- per day if the delay in upto one month and at Rs.15,000/- per day if the failure continues beyond one month.

(ii) If any Reporting Entity fails to produce the information or documents within the period allowed u/s 286(6), the prescribed authority can levy penalty at Rs.5,000/- per every day when the default continues. If this default continues even after the above order levying penalty is passed, the prescribed authority can levy penalty at the rate of Rs.50,000/- per day if the default continues even after service of the first penalty orders.

(iii) If any Reporting Entity Knowingly furnishes inaccurate information in the Report required to be furnished u/s 286(2) the prescribed authority can levy penalty of Rs.5 Lakh.

21.9 PENALTY FOR FAILURE TO FURNISH INFORMATION, STATEMENTS ETC (SECTION 272A): Section 272 A provides for levy of penalty of Rs. 10,000/- for each failure or default to answer the questions raised by an Income tax Authority, refusal to sign any statement or failure to attend and give evidence or produce books or documents as required u/s 131(1). The scope of this section is now extended by amendment of the section from A.Y. 2017-18. It is now provided that penalty of Rs. 10,000/- for each default or failure to comply with a notice issued u/s 142(1), 143(2) or 142(2A) can be levied by the Income tax Authority.

21.10 POWER TO REDUCE OR WAIVE PENALTY IN CERTAIN CASES (SECTION 273A):

This section empowers the Principal Commissioner or the commissioner of Income tax to reduce or waive penalty levied u/s 271 of the Income tax Act. This power is extended to penalty levied u/s 270A also w.e.f. A.Y. 2017-18. Further, new subsection (4A) has been added in this section from 1/6/2016 to provide that the Principal Commissioner or Commissioner shall pass the order accepting or rejecting the application for waiver or reduction of penalty within a period of one year from the end of the month when application is made by the assessee. As regards all applications for waiver or reduction of penalty pending as on 1.6.2016, the Principal Commissioner or Commissioner shall pass the order accepting or rejecting the application on or before 31.5.2017. The Principal Commissioner or the Commissioner shall have to give hearing to the assessee before passing the above order.

21.11 POWER TO GRANT IMMUNITY FROM PENALTY BY PRINCIPAL COMMISSIONER OR COMMISSIONER (SECTION 273 AA ): This section has been amended w.e.f. 1.6.2016. As in section 273A, the Principal Commissioner or the Commissioner is now required to pass the order accepting or rejecting the application for grant of immunity from levy of penalty within one year from the end of the month in which the assessee has made the application for such immunity. As regards pending applications as on 1.6.2016, the Principal Commissioner or the Commissioner has to pass orders accepting or rejecting the application on or before 31.5.2017.

21.12 GENERAL:
(i) From the above discussion it is evident that the existing concept of levying penalty u/s 271 for concealment of income or furnishing of inaccurate particulars of income is now given up. New Section 270A, which will replace Section 271 from 1.4.2016, introduces a new concept of “Under Reporting of Income” and “Misreporting of Income”. Considering the way these two terms are explained in the new Section 270A, it appears that there will be a thin line of distinction between the two in respect some of the items of additions and disallowances. Since the penalty with respect to Under Reporting of Income is 50% and the penalty with respect of Misreporting of income is 200%, the A.O. will try to bring as many items of additions / disallowances under the head Misreporting of Income. Questions of interpretation will arise and tax litigation on this issue may increase.

(ii) As stated earlier, the recommendation of Justice Eshwar Committee has not been fully implemented while drafting the new Section 270A. The committee has specifically stated that no penalty should be levied where the A.O. takes a view which is different from the bona fide view adopted by the assessee on any issue involving the interpretation of any provision and is supported by any judicial ruling. It is unfortunate that this concept is not introduced in the new section 270A.

22. OTHER PROVISONS :

22.1 TAX ON DEEMED INCOME U/S 68 – SEC 115 BBE

Section 115 BBE is amended w.e.f. A.Y 2017-18. At present this section provides that deemed income u/s 68, 69, 69A, 69B, 69C and 69D is taxable at the rate of 30%. Further, no deduction for any expenditure or allowance relatable to such income is allowed. It is now provided that no set off of any loss shall be allowable from such deemed income u/s 68, 69, 69A to 69D.

22.2 ASSESSEE DEEMED TO BE IN DEFAULT – SECTION 220: Section 220 provides that an assessee shall be deemed to be in default if the taxes due are not paid. Interest is payable u/s 220(2) for the delay in payment of tax. If the assessee applies for waiver or reduction of interest to the Commissioner u/s 220(2A), the same can be waived or reduced. Section 220(2A) is now amended, effective from 1.6.2016, to provide that the commissioner should pass the order accepting or rejecting such application within a period of 12 months of the end of the month when application for waiver or reduction of interest is made. In respect of all pending applications, the order will have to be passed by the commissioner on or before 31.5.2017.

22.3 PROVISION TO GIVE BANK GUARANTEE – SECTION 281B:

(i) At present, the AO may provisionally attach an assessee’s property if he considers it necessary for protecting revenue’s interest during the pendency of assessment or reassessment proceedings. Section 281B is amended w.e.f. 1.6.2016.

(ii) Based on Justice Easwar Committee’s recommendation, this amendment provides that the assessee may provide bank guarantee of sufficient amount. In such a case the AO has to revoke the provisional attachment if the guarantee is for more than the fair market value of the property attached or it is sufficient to meet the revenue’s interest. The AO may refer to the Valuation Officer for valuing the property. The AO should pass an order revoking provisional attachment within 15 days from the date of receipt of the bank guarantee or within 45 days if reference is made to Valuation Officer. The AO may invoke the bank guarantee if the assessee fails to pay tax demand or if he fails to renew or furnish new bank guarantee at least 15 days prior to the expiry of the bank guarantee.

22.4 AUTHENTICATION OF NOTICE – SECTION 282A: To facilitate e-assessment, it has now been provided from 1.6.2016 that the notice and other documents issued by the department can be either in paper form or in electronic form. The detailed procedures for this purpose will be prescribed.

22.5 SECURITIES TRANSACTION TAX (STT ): Section 98 of the Finance (No.2) Act, 2004 has been amended w.e.f. 1.6.2016. The present rate of 0.017% STT on sale of option on securities, where option is not exercised, is increased to 0.05%. It is also provided that STT will not be payable on securities transactions entered into on a recognized Stock Exchange located in International Financial Service Centre.

23. THE INCOME DECLARATION SCHEME – 2016:

23.1 As stated by the Finance Minister in Para 159 to 161 of his Budget Speech, in Chapter IX (Sections 178 to 196) of the Finance Act, 2016, “The Income Declaration Scheme, 2016”, has been announced. This scheme is akin to a Voluntary Disclosure Scheme. The scheme will come into force on 1st June, 2016. The declaration for undisclosed domestic income or assets can be made in the prescribed form within 4 months i.e on or before 30th September, 2016. The tax at the rate of 30% of the disclosed income will be payable with surcharge called Krishi Kalyan Surcharge at 7.5% and penalty at 7.5%. Hence, total amount payable will be 45% of the income declared by the assessee under the scheme. This tax, surcharge and penalty will be payable within two months (i.e. on or before 30th November, 2016)

23.2 WHO CAN MAKE DECLARATION UNDER THE SCHEME:

Any Individual, HUF, AOP, BOI, Firm, LLP or company can make a declaration of undisclosed income or assets during the specified period (1.6.2016 to 30.09.2016). However, Section 193 of the Finance Act, Provides that the provisions of the Scheme shall not apply to following persons.

(i) Any person in respect of whom an order of detention has been made under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974.

(ii) Any person in respect of whom prosecution has been launched for an offence punishable under Chapter IX or Chapter XVII of the Indian Penal Code, the Narcotic Drugs and Psychotropic Substances Act, 1985, the Unlawful Activities (Prevention) Act 1967 and the Prevention of Corruption Act, 1988.

(iii) Any person who is notified u/s 3 of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992.

(iv) The scheme is not applicable in relation to any undisclosed foreign income and asset which is chargeable to tax under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.

(v) Any undisclosed income chargeable to tax under the Income tax Act for any previous year relevant to Assessment Year A. Y. 2016-17 or earlier years where (a) N otice u/s 142, 143(2), 148, 153A or 153C of the Income tax Act has been issued and the assessment for that year is pending (b) Search u/s 132 or requisition u/s 132A or survey u/s 133A of the Income tax Act has been made in the previous year and notices u/s 143(2), 153A or 153 C have not been issued and the time limit for issue of such notices has not expired and (c) Information has been received by the competent authority under an agreement entered into by the Government u/s 90 or 90A of the Income tax Act in respect of such undisclosed asset.

23.3 WHICH INCOME OR ASSETS CAN BE DECLARED:

Section 180 of the Act provides that every eligible person can make declaration under the Scheme in respect of the undisclosed income earned in any year prior to 1.4.2016. For this purpose income which can be disclosed will be as under.

(i) Income for which the person has failed to furnish return of income u/s 139 of the Income tax Act.

(ii) Income which the person has failed to disclose in the return filed before 1.6.2016.

(iii) Income which has escaped assessment by reason of the failure on the part of the person to furnish return of income or to disclose fully and truly all material facts.

(iv) Where such undisclosed income is held in the form of investment in any asset, the fair market value of such asset as at 1.6.2016 shall be deemed to be the undisclosed income. For the purpose of determination of Fair Market Value of such assets, CBDT has been authorized to prescribe the Rules.

(v) No deduction for any expenditure or allowance shall be allowed against the income which is disclosed under the Scheme.

23.4 MANNER OF DECLARATION:

(i) The declaration under the Scheme is to be made in the prescribed Form. The same is to be submitted to the Principal Commissioner of Income tax or the Commissioner of Income tax who is authorized to receive the same. The declaration is to be signed by the authorized person as provided in Section 183 of the Finance Act. A person who has made a declaration under the scheme cannot make another declaration of his income or income of any other person. If such second declaration is made it will be considered as void. It is also provided that if a declaration under the scheme has been made by misrepresentation or suppression of facts, such declaration shall be treated a void.

(ii) As stated earlier, the tax (including Surcharge and penalty) of 45% of the income declared is to be paid on or before 30.11.2016. The proof of such payment will have to be filed before the due date. If this payment is not made, the declaration will be considered as void. In this case, if any tax is deposited, the same will not be refunded. If the declaration is considered as void, the amount declared by the person will be deemed to be income of the declarant and will be added to the other income of the declarant and assessed under the Income tax Act. If the declarant has paid the tax, Surcharge and penalty due as per the declaration before the due date, the income so disclosed will not be added to the income of any year. There will be no scrutiny or enquiry regarding such income under the Income tax or the Wealth tax Act.

(iii) The declarant shall not be entitled to reopen any assessment or reassessment made under the Income tax or Wealth tax Act or claim any set off or relief in any appeal, reference or other proceedings in relation to such assessment or reassessment. In other words, declaration under the scheme shall not affect the finality of completed assessments.

23.5 IMMUNITY:

(i) The scheme provides for immunity from proceedings under other Acts as under:

(a) Provisions of Benami Transactions (Prohibition) Act, 1988, shall not apply in respect of the assets declared even if such assets exist in the name of ‘Binamidar’.

(b) No Wealth tax shall be payable under the Wealth tax Act in respect of any undisclosed cash, Bank Deposits, bullion, jewellery, investments or any other asset declared under the scheme.

(c) No prosecution will be launched against the declarant under the Scheme in respect of any income/asset declared under the Income tax or Wealth tax Act.

(iii) It is also provided that nothing contained in the declaration made under the Scheme shall be admissible as evidence against the declarant under any other law for the purpose of any proceedings relating to imposition of penalty or for the purposes of prosecution under the Income tax or Wealth tax Act.

(iv) It may be noted that no immunity is provided in the scheme from proceedings under the Foreign Exchange Management Act, Money Laundering Act, Indian Penal Code or any other Act.

23.6 GENERAL:

(i) Section 195 of the Finance Act provides that if any difficulty arises in giving effect to the provisions of the Scheme, the Central Government can pass an order to remove such difficulty. Such order cannot be passed after the expiry of 2 years i.e. after 31.5.2018. Section 196 of the Finance Act authorizes the Government to notify the Rules for carrying out the provisions of the scheme and also prescribe the Form for making the declaration under the scheme.

(ii) Last year an Amnesty Scheme under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, was announced. Under this Scheme it is reported that 644 persons declared income of about Rs.4,164 crore, and paid tax of about Rs.2,428.40 crore.

(iii) In the Finance Act, 2016 in order to give one time opportunity to persons to declare undisclosed domestic income and assets this disclosure scheme has been announced. It appears that under this Scheme the declarant will have to disclose income and specify the year in which it was earned. Further, there is a provision in the scheme that any person in whose case notice u/s 142(1), 143(2), 148, 153A or 153C is issued for any year, and assessment is pending, such person cannot declare undisclosed income of that year. This will be a great impediment in the success of the scheme. It appears that the scheme is announced by the Government with all good intentions. It will be advisable for the persons who have not complied with the provisions of the Income tax Act or the Wealth tax Act to come forward and take advantage of the scheme and buy peace.

24. TO SUM UP:

24.1 The Finance Minister has taken some steps towards his declared objective of granting relief to small tax payers, granting incentives for promotion of affordable housing, reducing tax litigation, affording onetime opportunity to declare undisclosed domestic income and assets etc. In some of the areas the efforts are half hearted and the assessees may not get full advantage from the provisions made in the Financial Act.

24.2 Justice Easwar Committee appointed to make recommendations for simplification of Income tax provisions has submitted its report. Some of the amendments made in the Income tax Act are based on these recommendations. It is rather unfortunate that these recommendations are only partly implemented in this Budget.

24.3 Last year the Government made an attempt to address the issue relating to undisclosed income and assets in Foreign Countries. A “Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015” was passed. This year the Finance Act contains “The Income Declaration Scheme, 2016”. Under this Scheme one time opportunity is given to those persons who have not declared their domestic income or assets in the past. 45% tax (including surcharge and penalty) is payable on such undisclosed income. There are some conditions in the scheme which may be difficult to comply with. CBDT has issued some clarifications on various issues. It is reported that the last year’s scheme for declaration of undisclosed Foreign Income and Assets did not get adequate response. Let us hope that the scheme announced this year for declaration of undisclosed domestic income and assets gets adequate response.

24.4 Another step taken by the Finance Minister relates to reduction in tax litigation. For this purpose “Dispute Resolution Scheme – 2016” has been announced. This scheme is similar to “Kar Vivad Samadhen Scheme”, which was introduced in 1998. This scheme is limited to settlement of tax disputes pending on 29.2.2016 before CIT (A). It does not cover tax disputes before ITA Tribunal, High Court or the Supreme Court. Here also the provision for payment of notional penalty @ 25% where disputed tax exceeds Rs. 10 Lakh will be an impediment in the success of the scheme. This Scheme covers Settlement of tax disputes due to retrospective amendments made in the Income tax Act. For such cases tax disputes pending before any appellate authority can be settled on payment of only disputed tax. Interest and penalty will be waived. It will be possible for assessees to settle tax disputes relating to retrospective amendments made in section 9, 14A, 37, 40, etc.

24.5 The introduction of a new chapter XII – EB (Section 115 TD to 115 TF) effective from 1.6.2016 to levy ‘Exit Tax’ on Charitable Trusts is a big blow on Charitable Trusts. In our country Charitable Trusts are working to supplement the work of the Government in the field of education, medical relief, eradication of poverty, relief during calamities such as drought, earthquake etc. For this reason, exemption is given to such charitable trusts: In recent years it is noticed that the provisions relating to the exemption to such trusts are being made more complicated. The attempt of the tax administration is to see how best this benefit to charitable trusts is denied. By levy of “Exit Tax” on cancellation of registration u/s 12AA is one such step. It is the general experience of such trusts that section 12AA Registration is being cancelled on some technical grounds and the trusts have to litigate on this issue. If, ‘Exit Tax’ is levied on cancellation of Registration u/s 12AA, the trustees of such trusts will be put to great hardship.

24.6 Another major amendment made this year is about change in the concept for levy of penalty. The concept of concealment of Income or furnishing of inaccurate particulars of income for levy of penalty is now given up. Now, penalty will be leviable if there is a difference between the assessed income and declared income. Such difference will be divided into two parts viz. “Under Reporting” and “Misreporting” of income. There is a thin line of distinction between the two. This new concept will invite litigation about interpretation whether there is “Under Reporting” where penalty is 50% of tax or “Misreporting” where penalty is 200% of tax. The old concept of concealment or furnishing of inaccurate particulars of income for levy of penalty has been interpreted in several judgments of the High Courts and the Supreme Court in last more than 6 decades. The law on the subject was well settled. This new concept of “Under Reporting” and “Misreporting” introduced this year will unsettle the settled law and assessees will have to face fresh litigation.

24.7 Welcome provision introduced this year on the recommendation of Justice Easwar Committee relates to extension of concept of presumptive taxation in cases of small professionals earning gross receipts not exceeding Rs. 50 Lakh. They will not be required to maintain accounts if they offer 50% of Gross Receipts as their income. Justice Easwar Committee had suggested limit of gross receipts at Rs. 1 Crore and presumptive income at 33 1/3%. This suggestion is only partly implemented. This provision will go a long way in resolving tax disputes in cases of small professionals.

24.8 Taking an overall view of the amendments made this year in the Income tax Act, one can compliment the Finance Minister for his sympathetic approach to the tax payers. Some of the amendments are really tax payer friendly as they grant relief to small tax payers. He has taken measures to promote affordable housing and to boost growth and employment generation.

24.9 While concluding his Budget Speech he has observed in Para 188 and 189 as under:

“188. This Budget is being presented amidst global and domestic headwinds. There are several challenges. We see them as opportunities. I have outlined the agenda of our Government to “Transform India” for the benefit of the farmers, the poor and the vulnerable.

“189. It is said that “Champions are made from something they have deep inside of them – a desire, a dream, a vision. We have a desire to provide socio-economic security to every Indian, especially the farmers, the poor, and the vulnerable; we have a dream to see a more prosperous India, and vision to “Transform India”.

Let us hope he is able to achieve his goal with the cooperation of all citizens of the country.

Re: Deduction of Tax (TDS) u/s 195 from Property Purchase Price payable to an NRI

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7th April, 2016

The Editor,
Bombay Chartered Accountants Journal
Mumbai.

Dear Sir,

Re: Deduction of Tax (TDS) u/s 195 from Property Purchase Price payable to an NRI

When purchasing an immovable property, usually a residential flat, from an NRI, in the absence of any clear rules or guidelines or a Circular / Instruction from CBDT, the buyer faces an unenviable situation: How much TDS to be deducted from the Purchase price payable to the NRI? Whether to deduct TDS @ 20% plus applicable Cess and Surcharge from the Gross Purchase Price, which is usually not acceptable to the Seller, many times resulting in cancellation of the deal? Whether to deduct TDS amount from the Capital Gains taxable in the hands of the NRI? If yes, who should calculate and certify the amount of Capital Gains Tax deductible ? Whether a certificate issued by a Chartered Accountant would be acceptable to the Authorities? Whether it is okay to take into account deduction available to the seller u/s 54 or u/s 54EC of the Act while calculating the amount of Capital Gains Tax liability?

In this connection, it is worth recalling that the Supreme Court as well as various High Courts has held, time and again, that TDS u/s 195 is deductible only from the “Sum Chargeable under the provisions of this Act.”

In view of the uncertainties involved and lack of authoritative guidance from the Tax Authorities, the buyers usually insist upon deducting the tax from the gross purchase price payable or require the seller to obtain and furnish a certificate u/s 197, which is usually a very time consuming and costly process and which is not easily manageable for a Non Resident Indian who has either no helpful relatives in India or has parents who are very Senior Citizens. Thus, obtaining a Certificate u/s 197 of the Act is not a very convenient and hassle free way of doing things for an NRI, particularly when the rules for computing Capital Gains arising from transfer of an immovable property such as a Residential Flat are fairly clear and well settled under the Act and the same can be easily computed and certified by a Chartered Accountant.

In view of the above, I would request the CBDT to issue necessary clarifications and authorise Chartered Accountants to issue the requisite Certificate in the Form to be prescribed by the CBDT.

Alternatively, in case, payment is made by a Buyer to an NRI in INR, provisions of section 194-IA which are presently applicable to a resident transferor, may be made applicable to a Non Resident Transferor with suitable modifications. In such an event, the NRI will have to comply with the procedure laid down u/s 195(6) while remitting the funds outside India. It will greatly facilitate real estate transactions by NRIs and go a long way in realizing the Government’s objective of Ease of Doing Business / Investment in India.

Regards,
Tarun Singhal.

INTERNAL FINANCIAL CONTROLS – COMMON MISCONCEPTIONS

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Introduction
In a paradigm shift, Section 143(3)(i) of the Companies Act, 2013 (“the Act”), has for the first time introduced the requirement of reporting by the statutory auditors on, whether the Company has an adequate internal financial controls system in place and the operating effectiveness of such controls. This requirement, which was optional for the financial years beginning 1st April, 2014, is mandatory for the financial years beginning 1st April, 2015.

The reporting requirements are modelled on the lines of the SOX requirements for US listed entities, which were notified by the Securities and Exchange Commission of the USA in June 2003. The trigger for the introduction of the same were various corporate scandals like Enron, Worldcom, Parmalat etc. Similarly in June 2006, the Financial Instruments and Exchange Act (J-SOX) was passed by Diet, which is the Japanese Parliament/ National Legislature. In the United Kingdom, the UK Corporate Governance Code specified the matters which the Boards of listed companies have to comply with, which inter alia includes matters relating to oversight and review of internal controls in the Company. Just as the various corporate scandals like Enron prompted the introduction of the SOX requirements, the Satyam saga which unfolded in January 2009 has been the prime driver for the introduction of the reporting requirements on Internal Controls over Financial Reporting in India.

The reporting by auditors on internal controls is not entirely new for auditors in India. As all of you would be aware, the auditors in the course of their reporting under CARO 2003 and CARO 2015 were required to report on whether the Company has an adequate internal control system which is commensurate with the size of the Company and the nature of its activities in respect of purchase of inventory and fixed assets and sale of goods and services and whether there is a continuing failure to correct major weaknesses in respect thereof. Thus, the scope of reporting which is envisaged under the Act ,is substantially larger than what was required under CARO 2003 and 2015, which is limited to reporting on the adequacy of internal controls on specific matters. Further, Clause 49 of the Equity Listing Agreement, which has now been substituted by the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 requires an evaluation by listed companies of the internal financial controls and risk management systems by the Board and also a specific assertion by the CEO and CFO that they accept responsibility for establishing and maintaining internal controls for financial reporting and the operating effectiveness thereof. Accordingly, the scope and objectives of Internal Financial Control and the reporting thereof has increased substantially for all classes of companies, which brings along with it various misconceptions and myths in the minds of both the management and the auditors.

Before discussing certain common misconceptions with regard to the reporting on Internal Financial Controls, both from the point of view of both the Management and the Auditors, it would be pertinent to examine the statutory provisions dealing with Internal Financial Controls and Internal Financial Control System from the point of view of the management and the auditors.

Statutory Provisions
The statutory provisions emanate from the Act, and place separate responsibilities on the Management and Statutory Auditors, which are discussed hereunder.

Management’s Responsibility
The Management’s responsibility towards Internal Financial Controls can be examined separately with respect to the following stakeholders:

• Board of Directors
• Audit Committee
• Independent Directors

The statutory provisions in the context of each of the above are analysed hereunder:

Board of Directors
Section 134(5)(e) of the Act requires the Director’s Responsibility Statement in case of a Listed Company, to state whether the Company has laid down internal financial controls[IFC] and whether the same are adequate and operating effectively. It may be noted that listed companies would also cover those where only the debt securities are listed.

Further, explanation to Section134(5)(e) defines IFC as the policies and procedures adopted by the Company for ensuring orderly and efficient conduct of its business including adherence to company’s policies, the safeguarding of assets, the prevention and detection of frauds and errors, accuracy and completeness of the accounting records and timely preparation of reliable financial information.The aforesaid definition encompasses both operational and financial reporting controls, and is much broader in scope than internal financial control systems.

Further, Rule 8(5)(viii) of the Companies (Accounts) Rules, 2014 requires the Board Report of all companies to state the details in respect of the adequacy of internal financial controls with reference to the financial statements.This requirement is much more restricted as compared to that for listed companies since it covers only the controls impacting financial statements and also does not cover the operating adequacy thereof.

Audit Committee
Section177(4) requires that the terms of reference of every Audit Committee shall include an evaluation of the Internal Financial Controls and Risk Management Systems.

Independent Directors
The Code of Independent Directors under Schedule IV emphasises that Independent Directors have to satisfy themselves about the integrity of the financial reporting system and on the strength of financial controls and risk management systems

Misconceptions on the part of Management

There is a common misconception on the part of the Management in many cases, as to whether there is anything new which has cropped up as a result of the aforesaid reporting responsibilities which are specified under the Act and whether anything has really changed?

In this context, two common questions are normally asked, as under:

a) The first question which top managements including CEOs ask is, whether anything has changed and are we saying that the entity did not have controls earlier?

b) Further, as an off shoot of the above, the second question which is asked is, were not the auditors checking and reporting on controls earlier?

More often than not, these questions need to be answered by the auditors (both internal and external) and/or other external consultants.

The answer to the first question is not very direct or simple, and depends upon a variety of factors including the size and complexity of the entity, the nature and extent of existing documentation which is available, the management philosophy and operating style etc., since the fundamental foundation of an Internal Financial Control system is the existence of a documented framework. For the purpose of explaining to the top management including the CEO, an assessment needs to be done in respect of the following matters or should we say ground realities!), amongst others, as deemed necessary:

Is the Code of Conduct documented and even if so, whether the same is communicated.

Are Board meetings actually held or are minutes written just to cover the required agenda matters.

Is quality time spent by the Board on important/critical matters having a material impact on the risk.

The Audit Committee does not allot sufficient time to discuss the interim results or Internal Audit Reports.

The Company has a turnover of over Rs. 500 crore, but does not have a qualified CA in its Accounts/Finance Department.

The Organisational structure is not formalised even though the Company has 500 employees and the job profiles are not documented/reviewed periodically.

Though there is a documented Risk Management Framework and SOPs, the same operate on a standalone basis and the actual activities are conducted based on neither of them. Further, the control points/ activities may not be specifically documented therein. Also, policies and procedures and/or authority levels/ matrices remain undocumented for many key areas/ operations/processes.

The ERP/IT system is changed/modified regularly without proper justification/UATs and no IT system audit has been undertaken for the past several years. Also, the Company uses a Tally package, even though it has multi-locational activities which involve processing of numerous transactions at various points of data entry, which are also modified/changed without proper oversight.

The process of generating MIS is not robust and is based on incomplete data.

Policies and procedures for period end closure of financial statements are not adequately documented, especially in case of multi-location/multiple activity entities and for preparation of consolidated financial statements. Also, unusual events/transactions are not captured, escalated or approved appropriately.

The information/communication system is not adequate /deficient resulting in non-escalation of problems from the lower levels to the middle/top management, lack of open communication, ineffective whistle blower mechanism etc.

Lack of documented controls over preparation and generation of spreadsheets.

An adverse answer to any one or more of the above matters, based on either a Self-Assessment / introspection by the top management or by an external party, would prima-facie indicate lack of or absence of internal controls depending upon the nature, severity, criticality and materiality of the deficiency/deviation which in turn would need to be factored in whilst discharging the statutory reporting responsibilities in the Board Report under the Act as discussed earlier, and could also result in an adverse opinion on ICFR by the statutory auditors under the Act. Accordingly, there should be a comprehensive introspection on the part of the Management with regard to the existence and documentation of Internal Financial controls.

With regard to the second question regarding the change in the responsibility of the statutory auditors vis-à-vis controls, as discussed earlier, the reporting responsibility has broadened/widened. Further, upto last year, the auditors could adopt a non-reliance on controls strategy, by performing more extensive and focussed substantive testing and accordingly opine on the truth and fairness of the financial statements, even if adequate internal controls were not prevelant or documented.

To conclude in one sentence, what the top Management requires is a cultural change rather than a compliance change!

Auditors’ Responsibilities
As discussed above, the auditors responsibility to report in terms of section 143(3)(i) covers all companies. Further, consistent with global practices and based on the Guidance Note issued by the ICAI, internal financial controls as referred to above only relates to Internal Financial Controls over Financial Reporting (‘ICFR’) and thus auditors reporting on Internal Financial Controls is only in the context of the audit of the financial statements.

The following are certain matters which are relevant in this regard:

The definition IFC as per explanation to section 134(5)(e) above is relevant only on the context of the reporting under the same and is not relevant for the reporting u/s. 143(3(i) by the auditor.

Unlisted companies are not required to affirm the operating effectiveness of controls, whereas the auditor is required to report on the adequacy and operating effectiveness of all companies. This would present greater challenges to the auditor in respect of unlisted companies.

Misconceptions/Myths in the Minds of auditors
Whilst discharging their attest responsibilities with regard to reporting on ICFR, the auditors should be aware of certain common and practical misconceptions, which are discussed hereunder.

Concept of Control and Process
Wikipedia defines Control, or controlling, “is one of the managerial functions like planning, organizing, staffing and directing. It is an important function because it helps to check the errors and to take the corrective action so that deviation from standards are minimized and stated goals of the organisation are achieved in a desired manner.

According to modern concepts, control is a foreseeing action whereas earlier concept of control was used only when errors were detected. Control in management means setting standards, measuring actual performance and taking corrective actions.”

Henri Fayol, a French Mining Engineer who had developed a general theory of business administration which was popularly referred to as Fayolism, formulated one of the first definitions of control as it pertains to management as under:

“Control of an undertaking consists of seeing that everything is being carried out in accordance with the plan which has been adopted, the orders which have been given, and the principles which have been laid down. Its object is to point out mistakes in order that they may be rectified and prevented from recurring”.

According to E. F. L. Brech, who was a British Management consultant and an author of several management books, “control is checking current performance against predetermined standards contained in the plans, with a view to ensure adequate progress and satisfactory performance”.

According to Harold Koontz, an American organisational theorist, professor of business management at the University of California, Los Angeles and a consultant for many of America’s largest business organisations, “Controlling is the measurement and correction of performance in order to make sure that enterprise objectives and the plans devised to attain them are accomplished”.

Some of the common characteristics which emerge from the above definitions are summarised hereunder:

Control is a continuous process
Control is a management process
Control is embedded in each level of organisational hierarchy
Control is closely linked with planning
Control is a tool for achieving organisational activities
Control is an end process
Control compares actual performance with planned performance
Control points out errors in the execution process
Control helps in achieving standards of performance.

From the point of view of ICFR, the term control is often used synonymously with the term process, which is a misconception. Both these terms are different even though they may be inter-connected, since one of the characteristics of controls is evaluating the adequacy of or monitoring of the processes within an entity. Process describes the action of taking a transaction or event through an established and usually routine set of procedures, whereas a control is an action or an activity taken to prevent or detect misstatements within the process.

It would be relevant at this stage to understand the difference between process and control, with the help of a few examples.

Some of the important points which are relevant based on the above examples, are discussed hereunder:

a) The distinction between a process or a control is more important in case of predominantly manual activities.

b) In case of activities/processes performed in a predominantly IT environment, a lot of the controls are automated and may not always be visible but get evidenced by exception reports/logs/audit trails. Whilst in such cases the review of IT general and application controls by an IT specialist would give an assurance on the operating effectiveness, these by itself may not always be adequate and may need to be supplemented by high level review controls.

c) In many entities, the control activities indicated above may be actually performed but not specifically documented in the SOPS, flow charts, policy manuals, authority matrix etc. This could be one of the common misconceptions on the part of the top management, who already assume that controls are prevalent and nothing has changed. In such cases, it is important for the auditors and/or other external consultants to advise the Management to document the existing controls as well identify controls for processes or activities where none

Key Factors for Identifying Controls (5WH analysis)

The key factors to assist in identifying controls and differentiating the same from a process can be summarised as the 5WH analysis, which can be explained by considering the following questions, all of which should normally be present for an activity/process to be considered as a control.

Information Produced by the Entity (IPE)
Though the term IPE is referred to in the auditing standards (primarily SA-315 dealing with Risk Assessment and SA- 500 dealing with Audit Evidence), there is no precise definition given therein.

IPE is primarily used by auditors as a source of evidence both for control testing, which includes ICFR as well as substantive testing. Hence, it is important to understand the nature thereof.

IPE is basically in the form of various reports which are generated either through the system or manually or in combination. They may take different forms as under:

Used by the entity – These are used by the entity in performing the relevant controls. These normally take one or more of the following forms:

– Standard “out of the box” or default reports or templates with or without configuration e.g. debtors ageing report

– Custom developed reports which are not a part of the standard application but which are defined and generated by user operated tools like scripts, report writers, query tools etc. e.g. sales by region

– Outputs from end user applications

– Analysis, schedules, spreadsheets etc. which are manually prepared from system generated information or from other internal or external sources.

A lot of information/IPEs may be generated by the Management for its own use all of which may not be relevant and used as audit evidence.

Used by/relevant for the auditor – The IPE which can be used by/relevant for the auditors can be in either of the following forms:

– used by the entity when performing relevant controls

– used by the auditor when testing operating effectiveness of ICFR and substantive testing

It is of utmost importance to test of the accuracy and completeness of the data generated through the IPE. This is a common short coming which needs to be remedied.

The elements of IPE which are relevant from the auditor’s point of view are as follows:

– Source Data which represents information from which the IPE is generated and which can be system generated or manual.

– Report Logic which represents the computer code, algorithms, formulae, query parameters etc.

– Report Parameters which define the report structure, filtering of data, connecting of related reports.

The following considerations govern the testing of the accuracy and completeness of the data generated by IPEs:

– Not all data is captured
– Data is incorrectly input
– Report logic is incorrect
– Inappropriate or unauthorised change of the report logic or source data
– Use of incorrect parameters

The above may involve the help of IT specialists.

Testing of IPE
The testing of IPEs can be undertaken in one or more of the following ways:

Direct Testing – This method can be adopted only in respect of standard parameter driven reports, which are generated directly from the system. It primarily involves the testing of the completeness and logic of the reports and benchmarking may be adopted.

Testing of controls that address the accuracy and completeness of the IPE – This method involves performing the tests on certain specific aspects such as system setting like access, passwords etc. as well as on the parameter settings like interest rates, prices etc.

More often than not, the entity generates various spread sheets which represent IPE to be used by the auditors, which are normally not specifically tested for accuracy and completeness. Hence, it is important to understand the considerations governing the same.

Testing of Spreadsheets
As indicated above, spreadsheets are an important component of IPEs in many enterprises and hence, it is imperative to test the accuracy and completeness thereof. The following are certain controls which can be adopted in respect of spreadsheets:

Change Controls – These involve controls over tracking of version changes and testing and approval of updates prior to deployment.

Access Controls – The spreadsheets should be stored in files or directories whose access is restricted. Further, formula fields should use cell protection measures, to restrict the possibilities of making changes in formulae.

Input Controls – Inputs to the spreadsheets should be validated for accuracy and completeness, when manually entering the data or importing the same. Control totals should be reconciled during data extraction with the source data/system prior to uploading to the spreadsheet

Calculation Controls –Automated algorithms should be used with access and change controls discussed earlier. Important formulae should be periodically reviewed to evaluate their continued relevance.

Testing of controls over spreadsheets would be an important consideration in assessing the effectiveness of ICFR and would involve interaction with the management at an early stage, since there is generally a lack of awareness of assessing and documenting formalised controls in this area as discussed earlier, whilst identifying certain common myths on the part of the top management/CEOs.

Spreadsheets could be used either to generate information to enable monitoring by the Management of various activities/processes as well as for preparation of financial statements. Accordingly, the documentation of the controls therein should be done as a part of the RCM for the individual processes or the financial closing and reporting process as discussed subsequently.

Documentation of the Internal Control Framework
To enable the auditors to report on ICFR, it is necessary for them to base their report on a specific framework, which needs to be documented by the Management. A question which is often raised is, whether there is any standard format for documenting the framework and whether the same needs to be captured in a single document.

In this context, it may be noted that since companies are free to adopt any framework, it would be difficult to lay down a standard format for documenting the same nor is it possible to have the same in one document, since the individual components of the framework would be different for each entity and may involve various documents.

From a practical perspective, it would be advisable to have a Summarised Master Policy Framework document, especially for the smaller and less complex entities, which captures the essence of the framework proposed to be adopted together with the various components and get the same adopted by the Board and/or Those Charged with Governance, if the same is not already done.The Master document may in turn refer to the various other documents/policies at the appropriate place, which would then constitute the comprehensive framework on which the auditors can base their report. These documents can comprise of the following, amongst others depending upon the size of the entity and the nature of its activities:

a) Risk Management Policy
b) Vision and Mission Statement / Ethics Policy
c) Code of Conduct
d) Whistle Blower Policy
e) Internal Audit Charter
f) Audit Committee Charter
g) Anti-Fraud Programme/Policy
h) Budgeting Policy/Process
i) Legal Compliance Framework
j) IT Security Policy
k) Business Continuity Plan
l) Disaster Recovery Plan
m) Outsourcing Policy
n) Succession Policy
o) Authority Matrix
p) SOPs for various processes
q) Process Flow Diagrams
r) Risk Control Matrix (RCM) for each business cycle / process

The following are some of the points which need to be kept in mind:

a) Some of the documents indicated above have to be mandatorily prepared by companies in terms of the Act or the Listing Agreement with the Stock Exchanges e.g. code of conduct, risk management policy, succession policy etc.

b) Whilst the above is a comprehensive list which addresses Internal Financial Controls from the point of view of the Board Reporting responsibilities indicated earlier, the auditors need to consider the same only to the extent relevant for ICFR reporting.

Conclusion:
Whilst every attempt has been made to decode some of the common myths/misconceptions of this new kid on the block, like all kids, this kid would in time become a grown up and responsible adult and have many more of its own challenges!

Incorrect levy of interest resulting in non granting of refunds to taxpayers

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18th April, 2016

To
Mr. Hasmukh Adhia
Revenue Secretary
Ministry of Finance
New Delhi

Respected Mr. Adhia,

Sub : Incorrect levy of interest resulting in non granting of refunds to taxpayers

For the past 2 years, many of our members have brought to our notice a trend set by the various assessing officers in the country – particularly in Mumbai – of wrongfully charging incorrect amounts of interest u/s. 234B in the tax computation sheet that accompanies the assessment order passed u/s. 143(3). In several cases, the tax payable on the assessed income is lower than the taxes paid by the tax payer. Accordingly, in such cases, in the normal course, a refund would be due to the assessee alongwith interest u/s. 244A. However, much to the shock of such tax payers, instead of a refund being received by them (or at least determined to be payable to them by the government), the notice of demand received by them u/s. 156 of the Act says that the amount payable to/by them is “NIL”. This Nil amount has been arrived at after charging interest u/s. 234B which is exactly equal to the amount of refund due to the tax payer. In some cases, instead of a refund being determined as due to the assessee, a demand has been determined as payable by overcharging interest u/s. 234B.

It would be appreciated that in cases where the tax paid is more than the tax payable, the question of levy of interest u/s. 234B does not arise. In fact, in many cases, there is no advance tax payable and yet interest has been levied for default in payment of advance tax!

It appears that this is a deliberate action being done manually in the system with the sole objective to deprive the taxpayers of the rightful refund and interest due to them.

There are a number of such cases that have come to light. A few examples from the city of Mumbai are given in the Annexure. It will be appreciated that even though this is a serious grievance, many taxpayers only apply for rectification and refrain from raising a grievance on account of the apprehension that such an action may not be perceived in the right spirit by the concerned tax officers

On behalf of the thousands of our members and their tax paying clients, we appeal to your good self to take up this issue with the seriousness that it deserves and to direct the CBDT to issue instructions to all field officers to desist from resorting to such tactics and to immediately issue the refunds to the tax payers without the tax payers having to apply for rectifications. It will be appreciated that in most such cases, the officers are aware that the interest has been wrongly charged and have verbally “advised” the tax payers / their representatives to apply for rectification in April 2016.

The point that we wish to highlight here is the blatant and deliberate error committed by the field officers and unfairness of this situation.

We would be more than willing to meet you or anybody else to take up this matter on a priority basis so that tax payers get their rightful refunds at the earliest.

Thanking in you in anticipation

For Bombay Chartered Accountants ‘ Society

Sanjeev R. Pandit, Chairman
A meet Patel, Co-Chairman Taxation Committee

Incorrect levy of interest resulting in non granting of refunds to taxpayers.

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Dear Members,

Subject:- Incorrect levy of interest resulting in non granting of refunds to taxpayers.

Several members had brought to our notice the issue of wrongful charging of incorrect amounts of interest u/s. 234B in the tax computation sheet that accompanies the income-tax assessment orders passed u/s. 143(3) by Assessing Officers, thereby depriving the taxpayers of the rightful refund and interest due to them. This is a serious issue and needs to be highlighted to the higher authorities. In this connection, based on the data received from a few members, we have made a representation to the Revenue Secretary, Ministry of Finance. A copy of the said representation will be published in the BCA Journal for May 2016.

Please click on link below to read the full representation:

Incorrect levy of interest resulting in non granting of refunds to taxpayers.

Please note that the annexure to the representation is not made public since it contains information about a few tax payers.

We also thank the members who have shared with us the information about their clients who have suffered on account of this action on the part of certain assessing officers. We hope that in future when such matters arise, more members will come forward and share with us information which can, in turn, be made the basis for representations to the higher authorities.

For Bombay Chartered Accountants ‘ Society

Sanjeev R. Pandit,Chairman
Ameet Patel, Co-Chairman Taxation Committee

Hyper-nationalism threatens the idea of liberal democracy in both India and the US

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With the end of the Cold War a quarter century ago, Francis Fukuyama wrote an intellectually exciting book announcing The End of History. He meant that the 19th and 20th century ideological disputes over how to structure society politically had ended; liberal democracy had won a decisive victory. He later wrote several books modifying his early enthusiasm. Today, serious challenges once again threaten the idea of liberal democracy.

Donald Trump’s spectacular advance towards securing the nomination of the Republican Party for the US presidency is a symptom of what’s happening around the world. A growing swell of extreme nationalism, or hyper- nationalism, has become a challenge to core democratic values. The largest two democracies, the United States and India, are witnessing surges of nationalist passion; one is the world’s most influential, while the other is the most populous and arguably the most diverse. The quality, perhaps fate, of democracy in these two nations is of consequence to the future course of political progress. As global society evolves at a time of immense technological and economic change, nativism and identity politics are inevitable reactions. But they pose serious threats to the liberal values that underpin democracy.

‘Liberal’ here is not a synonym for ‘leftist’ as commonly used in the US. Liberalism in the classical sense is the spine of any democratic body politic. It means openness in society and the economy, acceptance of difference and diversity within a frame of tolerance and free speech, public civility and other mores that define democracy. Left extremists have their own peculiar hatreds for liberalism. Today, however, hyper-nationalism is a far-right phenomenon.

Authoritarians of the right and the left have long spouted hyper-nationalistic slogans to coerce people into submission. What is worrying today is that far-right political parties and movements have sprouted across the entire democratic world.

In Europe, where liberalism was reborn in the modern era, right-wing forces are using nativism to corner significant popular support. The trend is evident in not only former Soviet bloc countries like Poland, Hungary and Slovakia, which have relatively recent experience of democracy; it has sprouted across western Europe’s established democracies, including France and Germany.

In India, a hyper-nationalist government led by Prime Minister Narendra Modi has either stayed indifferent or quietly encouraged activists of the Hindutva brigade to carry out numerous instances of cultural-nationalist identity confrontations, often violent, in a country that has a unique range of linguistic, ethnic and religious diversity. Fanning flames of hyper-nationalism is easy in a post-colonial environment; both the right and the left have done it the past. But the Hindu right has added the fuel of an exclusivist religious-cultural identity to a volatile mix to redefine the idea of India.

In the US, the campaign rhetoric of conservatives, especially Trump, is poisonous. Nativist dog whistles have been around for long and two terms of Barack Obama as president have stirred latent identity anxieties in sections of the country’s white population. Now nativist or racist talk is openly voiced by candidates as a nationalist virtue to make America great again.

Does a correlation exist between support for extreme nationalist or nativist views and a desire for authoritarianism? Recent research at the University of Massachusetts, Vanderbilt University and the University of North Carolina clearly suggests there is, writes Amanda Taub at vox.com. But even without scholarly research common sense suggests that hatred or fear of the Other, which is the siren song of nativists, works to undermine democracy. These are values like tolerance of differences in ethnicity, religion, appearance and speech among citizens of a secular democracy; acceptance of a framework of civilised discourse of disagreement; adjusting to a changing sociocultural environment within each democratic nation and in the world.

Moderate conservatives and progressives may differ on the speed and intensity of that inexorably changing reality and on how to deal with it. But they agree to disagree in a democratic manner eventually to elect their preferences to public office. Hyper-nationalists and nativists, on the other hand, challenge the basic norms of democracy. India and the US, at starkly different ends of the global development spectrum, are the world’s prominent examples showing how unifying nationalism can coexist within a liberal framework. The worry is, might either or both succumb to a hyper-nationalism that strangles democracy?

(Source: Article by Shri Gautam Adhikari in The Times of India dated 19-03-2016.)

Nehru-Gandhis and poverty – Dynastic politics is largely responsible for India lagging East Asia

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Has dynastic politics kept India poor? There’s more than a kernel of truth to the idea that the Nehru-Gandhis are responsible for India lagging much of East Asia. The continued hold of the dynasty prevents Congress from fully owning the reform programme that it authored in 1991, and inclines the party towards political postures that hinder development. As long as Sonia Gandhi or Rahul Gandhi remain at the helm, the odds of Congress emerging as a champion of reforms remain exceedingly slim.

In the fever swamps of the far right, many people believe that the Nehru-Gandhis deliberately kept India backward in order to nurture a poor and ignorant vote bank. But you need not buy crackpot conspiracy theories to make a more prosaic point. Between them, Jawaharlal Nehru, Indira Gandhi and Rajiv Gandhi, who ruled India for 37 of its first 42 years of Independence, presided over one of Asia’s great economic flops.

In contrast, neither of post-1991India’s reform heroes – P V Narasimha Rao and Atal Bihari Vajpayee – belonged to the dynasty. Indeed, in practice, if not always in rhetoric, both Rao and Vajpayee generated prosperity by dismantling the economic pillars of the Nehruvian project: mistrust of trade, contempt for the profit motive, and faith in state planning rather than in the invisible hand of the market. Nehru’s flawed ideas – in particular his infatuation with Soviet-style planning – ended up doing India grave harm. But though a few prescient gadflies, most famously the classical liberal B R Shenoy and future Nobel laureate Milton Friedman, raised early alarms about India’s chosen path, for the most part Nehru was simply following the conventional wisdom of his time.

As New York University professor William Easterly details in ‘The Tyranny of Experts’, it took decades to discredit the statist development model touted by such luminaries as Gunnar Myrdal and Arthur Lewis. Indians were not alone in suffering. Millions of Africans, Latin Americans and fellow Asians kept us company. The true villain of modern Indian history, dooming millions of Indians to poverty, was Indira Gandhi. Instead of acknowledging a flood of evidence that state planning was not working, Gandhi doubled down on her father’s dubious legacy. In 1966, the year Gandhi took power, the average Indian earned about fourfifths as much as the average Indonesian and about half as much as the average South Korean. By 1990, on the eve of the balance of payments crisis that forced India to reform, the average Indian earned only half as much as an Indonesian and less than one-sixth as much as a South Korean. More than half of India’s then 870 million people lived on less than the World Bank’s current estimate for extreme poverty of $1.90 a day.

Why does this potted history still matter? After all, since 1991India has gone from being seen as a black hole of despair to a bright spot in the global economy. Thanks to the growth spurred by reforms, only about one-fifth of Indians live in extreme poverty today. Soon enough, that figure will likely be reduced to zero.

In a normal political system, Congress would have elevated Rao to sainthood and quietly banished the discredited ghosts of the Nehru-Gandhis. Instead, party leaders twist themselves into pretzels to retroactively give the dynasty credit for reforms, or pretend that the economic disaster they presided over was in fact a great launch pad for what followed. To be fair, the current crop of Nehru-Gandhis no longer quotes Lenin, as Nehru did when he famously declared that the public sector would occupy the “commanding heights” of the economy. But in general the family’s impact on economic policy remains negative. Contrast, for instance, Manmohan Singh’s record under Rao with his record under Sonia Gandhi. As Rao’s finance minister, Singh boldly unshackled the Indian elephant. As Gandhi’s prime minister, he burdened it with too many wasteful welfare programmes and too few growth-inducing policies.

Meanwhile, Rahul Gandhi’s somewhat forgettable political career has been marked by consistently anti-business rhetoric. In 2010, he scuttled Vedanta’s $1.7 billion bauxite mining project in Odisha. The young Gandhi’s rhetoric about “two Indias” and bizarre animus towards people who “drive big-big cars” suggest a dilettantish preoccupation with inequality rather than a serious focus on eradicating poverty. Though the Modi government is responsible for its own tepid reform effort, there’s no question that Rahul’s jibe about the prime minister heading a “suit-boot ki sarkar” has helped vitiate the policy-making atmosphere.So yes, the critics are right about dynastic politics helping keep India poor.

A. P. (DIR Series) Circular No. 62 dated April 13, 2016

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Overseas Direct Investment (ODI) – Rationalization and reporting of ODI Forms

This
circular contains the changes made to information that needs to be
submitted with respect to Overseas Investment. Form ODI with respect to
Overseas Direct Investment. The new Form ODI is given in Annex 1 to this
circular.

1. The revised Form ODI will contain the following: –

Part I – Application for allotment of Unique Identification Number (UIN) and reporting of Remittances / Transactions:

Section A – Details of the IP / RI.

Section B – Capital Structure and other details of JV/ WOS/ SDS.

Section C – Details of Transaction/ Remittance/ Financial Commitment of IP/ RI.

Section D – Declaration by the IP/ RI.

Section E – Certificate by the statutory auditors of the IP/ self-certification by RI.

Part II – Annual Performance Report (APR)

Part III – Report on Disinvestment by way of

a) Closure / Voluntary Liquidation / Winding up/ Merger/ Amalgamation of overseas JV / WOS;

b) Sale/ Transfer of the shares of the overseas JV/ WOS to another eligible resident or non-resident;

c)
Closure / Voluntary Liquidation / Winding up/ Merger/ Amalgamation of
IP; and d) Buy back of shares by the overseas JV/ WOS of the IP / RI.

2.
New reporting formats, Annex II and Annex III, have been introduced for
Venture Capital Fund (VCF) / Alternate Investment Fund (AIF), Portfolio
Investment and overseas investment by Mutual Funds.

3. Post investment changes, subsequent to the allotment of UIN, are to be reported in Form ODI Part I.

4.
Form ODI Part I must be obtained bank before executing any ODI
transaction and the bank must report the relevant Form ODI in the online
OID application and obtain UIN at the time of executing the remittance.

5. A RI undertaking ODI can self-certify Form ODI Part I and
certification by Statutory Auditor or Chartered Accountant must not be
insisted upon.

6. A concept of AD Maker, AD Checker and AD Authorizer has been introduced in the online application process.

7.
Any non-compliance with the guidelines / instructions will be viewed
seriously penal action as considered necessary may be initiated.

A. P. (DIR Series) Circular No. 61 dated April 13, 2016

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Overseas Direct Investment – Submission of Annual Performance Report

Presently, an Indian Party (IP) which / Resident Individual (RI) who has made an Overseas Direct Investment under ODI / LRS is required to file an Annual Performance Report (APR) in Form ODI Part III with RBI by June 30, every year in respect of each Joint Venture (JV) / Wholly Owned Subsidiary (WOS) outside India set up or acquired by the IP / RI. However, in violation of the provisions of FEMA: –

a) IP / RI are either not regular in submitting the APR or are submitting it with delay.

b) Banks facilitate Remittance(s) and other forms of financial commitments under the automatic route even though APR in respect of all overseas JV / WOS of the IP / RI have not been submitted.

To avoid these problems, this circular states that: –

a) The online OID application has been suitably modified to enable the nodal office of the bank to view the outstanding position of all the APR pertaining to an applicant including for those JV / WOS for which it is not the designated bank. Henceforth the bank, before undertaking / facilitating any ODI related transaction on behalf of the eligible applicant, must necessarily check with its nodal office and confirm that all APR in respect of all the JV / WOS of the applicant have been submitted.

b) Certification of APR by the Statutory Auditor or Chartered Accountant must not be insisted upon in the case of Resident Individuals. Self-certification can be accepted.

c) In case multiple IP / RI have invested in the same overseas JV / WOS, the obligation to submit APR will lie with the IP / RI having maximum stake in the JV / WOS. Alternatively, the IP / RI holding stake in the overseas JV / WOS can mutually agree to assign the responsibility for APR submission to a designated entity which must acknowledge its obligation to submit the APR by furnishing an appropriate undertaking to the bank.

d) An IP / RI, which has set up / acquired a JV / WOS overseas has to submit, to the bank every year, an APR in Form ODI Part II in respect of each JV / WOS outside India and other reports or documents by 31st of December each year or as may be specified by RBI from time to time. The APR, so required to be submitted, must be based on the latest audited annual accounts of the JV / WOS unless specifically exempted by RBI.

Any non-compliance with the instruction relating to submission of APR will be treated as contravention of Regulation 15 of the Notification No. FEMA 120/RB-2004 dated July 07, 2004 as amended and viewed seriously.

A. P. (DIR Series) Circular No. 60 dated April 13, 2016

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Issuance of Rupee denominated bonds overseas

This circular has made the following changes with respect to issuance of Rupees Denominated Bonds overseas: –

a)
The maximum amount that can be borrowed by an entity in a financial
year under the automatic route by issuance of these bonds will be Rs. 50
billion and not US $ 750 million. Borrowing beyond Rs. 50 billion in a
financial year will require prior approval of RBI.

b) These
bonds can only be issued / transferred / offered as security overseas in
a country and can only be subscribed by a resident of a country:

a. That is a member of Financial Action Task Force (FATF ) or a member of a FATF – Style Regional Body; and

b.
Whose securities market regulator is a signatory to the International
Organization of Securities Commission’s (IOSCO’s) Multilateral
Memorandum of Understanding (Appendix A Signatories) or a signatory to
bilateral Memorandum of Understanding with the Securities and Exchange
Board of India (SEBI) for information sharing arrangements; and

c. Should not be a country identified in the public statement of the FATF as:

i.
A jurisdiction having a strategic Anti-Money Laundering or Combating
the Financing of Terrorism deficiencies to which counter measures apply;
or

ii. A jurisdiction that has not made sufficient progress in
addressing the deficiencies or has not committed to an action plan
developed with the Financial Action Task Force to address the
deficiencies.

c) The minimum maturity period for these bonds
will be three years in order to align them with the maturity
prescription regarding foreign investment in corporate bonds through the
Foreign Portfolio Investment (FPI) route.

d) Borrowers have to
obtain the list of primary bond holders and so that the same can be
provided to Regulatory Authorities in India as and when required.

e)
Banks are required to report to the Foreign Exchange Department,
External Commercial Borrowings Division, Central Office, Shahid Bhagat
Singh Road, Fort, Mumbai – 400 001, the figures of actual drawdown(s) /
repayment(s) by their constituent borrowers quoting the related loan
registration number. However, reporting by email shall be made on the
date of transaction itself.

A. P. (DIR Series) Circular No. 59 dated April 13, 2016

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Acceptance of deposits by Indian companies from a person resident outside India for nomination as Director

This
circular clarifies that making a deposit, u/s. 160 of the Companies
Act, 2013, by a person who intends to nominate either himself or any
other person as a director in an Indian company is a Current Account
Transaction and does not require any approval from RBI.

Similarly,
refund of such deposit upon selection of the person as director or his /
her getting more than 25% votes is also a Current Account Transaction
and does not require any approval from RBI.

Notification No. FEMA 13 (R)/2016-RB dated April 01, 2016

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Foreign Exchange Management (Remittance of Assets) Regulations, 2016

This Notification repeals and replaces the earlier Notification No. FEMA 13/2000-RB dated May 3, 2000 pertaining to Foreign Exchange Management (Remittance of Assets) Regulations, 2000.

Notification No. FEMA 5(R)/2016-RB dated April 01, 2016

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Foreign Exchange Management (Deposit) Regulations, 2016

This Notification repeals and replaces the earlier Notification No. FEMA 5/2000-RB dated May 3, 2000 pertaining to Foreign Exchange Management (Deposit) Regulations, 2000.

Notification No. FEMA 22(R) /RB-2016 dated March 31, 2016

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Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016

This Notification repeals and replaces the earlier Notification No. FEMA 22/2000-RB dated May 3, 2000 pertaining to Foreign Exchange Management (Establishment in India of branch or office or other place of business) Regulations, 2000.

A. P. (DIR Series) Circular No. 58 dated March 31, 2016

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Notification No.FEMA.366/ 2016-RB dated March 30, 2016
Foreign Direct Investment (FDI) in India – Review of FDI policy –Insurance sector

This circular makes the following changes in Annex B to Schedule 1 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 – Notification No. FEMA 20/2000-RB dated 3rd May 2000: -The existing entry F.7, F.7.1 and F.7.2 shall be substituted by the following:

A. P. (DIR Series) Circular No. 57 dated March 31, 2016

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Import of Rough, Cut and Polished Diamonds

Presently, banks can approve Clean Credit i.e. credit given by a foreign supplier to its Indian customer / buyer, without any Letter of Credit (Suppliers’ Credit) / Letter of Undertaking (Buyers’ Credit) / Fixed Deposits from any Indian financial institution for import of Rough, Cut and Polished Diamonds, for a period not exceeding 180 days from the date of shipment.

This circular permits banks, with immediate effect, to approve clean credit for a period exceeding 180 days from the date of shipment, subject to the following conditions: –

i) Banks must be satisfied about the genuineness of the reason and bonafides of the transaction and also that no payment of interest is involved for the additional period.

ii) The extension must be due to financial difficulties and / or quality disputes, as in the case of normal imports (for which such extension of time period for delayed payments has already been delegated to the AD banks).

iii) The importer requesting for such extension must not be under investigation / no investigation must be pending against the importer.

iv) The importer seeking extension must not be a frequent offender. Since there is a possibility that the importer may have dealings with more than one bank, the bank allowing extension must devise a mechanism based on their commercial judgement, to ensure this.

v) Banks can allow such extension of time up to a maximum period of 180 days beyond the prescribed period / due date, beyond which they must refer the case to respective Regional Office of RBI.

Banks must submit, customer-wise, a half yearly report of such extensions allowed, to the respective Regional Office of RBI.

A. P. (DIR Series) Circular No. 56 dated March 30, 2016

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External Commercial Borrowings (ECB) – Revised framework

This circular makes the following changes: –

1. ECB framework

i. Companies in infrastructure sector, Non-Banking Financial Companies -Infrastructure Finance Companies (NBFC-IFC), NBFC-Asset Finance Companies (NBFC-AFC), Holding Companies and Core Investment Companies (CICs) are also eligible to raise ECB under Track I of the framework with minimum average maturity period of 5 years, subject to 100% hedging.

ii. For the purpose of ECB, “Exploration, Mining and Refinery” sectors that are not presently included in the Harmonized list of infrastructure sector but which were eligible to take ECB under the previous ECB framework (c.f. A.P. (DIR Series) Circular No. 48 dated September 18, 2013) will be deemed to be in the infrastructure sector, and can access ECB as applicable to infrastructure sector under (i) above.

iii. Companies in the infrastructure sector must utilize the ECB proceeds raised under Track I for the end uses permitted for that Track. NBFC-IFC and NBFC-AFC are, however, allowed to raise ECB only for financing infrastructure.

iv. Holding Companies and CIC must use ECB proceeds only for on-lending to infrastructure Special Purpose Vehicles (SPV).

v. Individual limit of borrowing under the automatic route for aforesaid companies will be as applicable to the companies in the infrastructure sector (currently USD 750 million).

vi. Companies in infrastructure sector, Holding Companies and CIC will continue to have the facility of raising ECB under Track II of the ECB framework subject to the conditions prescribed therefore.

Companies added under Track I must have a Board approved risk management policy. Further, the bank has to verify that 100% hedging requirement is complied with during the currency of ECB and report the position to RBI through ECB 2 returns.

2. Clarification on Circular dated November 30, 2015

i. Banks can, under the powers delegated to them, allow refinancing of ECB raised under the previous ECB framework, provided the refinancing is at lower all-incost, the borrower is eligible to raise ECB under the extant ECB framework and residual maturity is not reduced (i.e. it is either maintained or elongated).

ii. ECB framework is not applicable in respect of the investment in Non-Convertible Debentures (NCD) in India made by Registered Foreign Portfolio Investors (RFPI).

iii. Minimum average maturity of Foreign Currency Convertible Bonds (FCCB) / Foreign Currency Exchangeable Bonds (FCEB) must be 5 years irrespective of the amount of borrowing. Further, the call and put option, if any, for FCCB must not be exercisable prior to 5 years.

iv. Only those NBFC which are coming under the regulatory purview of the Reserve Bank can raise ECB. Further, under Track III, the NBFC can raise ECB for on-lending for any activities including infrastructure as permitted by the concerned regulatory department of RBI.

v. The provisions regarding delegation of powers to banks are not applicable to FCCB / FCEB.

vi. In the forms of ECB, the term “Bank loans” shall be read as “loans” as foreign equity holders / institutions other than banks, also provide ECB as recognised lenders.

[2016-TIOL-26-SC-ST] Commissioner of Central Excise, Customs & Service Tax vs. Federal Bank Ltd.

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I. Supreme Court

When a service is specifically excluded from the purview of service tax, the authorities cannot levy service tax indirectly under general charging head “business auxiliary service”

Facts
The Respondent Bank provided services such as collection of telephone bills, collection of insurance premium on behalf of the client companies etc. The High Court and the Tribunal dismissed the appeal of the department and held that section 65(12) of the Finance Act, 1994 viz. banking and financial services covered all charging services rendered by the Banks. It was further held that services rendered essentially of cash management were excluded from the definition during the relevant period and therefore were not liable to be charged under any other general charging head. Aggrieved by the same, the present appeal was filed.

Held
The Supreme Court agreed with the views expressed by the High Court, for the reason that the same were in consonance with section 65A of the Finance Act, 1994.

Situs of sale vis-à-vis Motor Vehicle

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Introduction
Under sales tax laws, one
of the contentious issues is about determination of ‘Appropriate State’
for levy of tax on sale /purchase transactions. In earlier days there
was much more confusion due to the nexus theory. Due to the said theory
more than one State tried to levy tax on the same transaction, however
the issue was resolved by introducing section 4(2) in the Central Sales
Tax Act, 1956 (CST ACT). It provides necessary guidelines for
determining a particular State which will be authorized to levy tax on
sale/purchase transactions.

Section 4(2) of the CST Act

Section 4(2) of the CST Act reads as under;
“Section 4. When is a sale or purchase of goods said to take place outside a State.

(1)….

(2) A sale or purchase of goods shall be deemed to take place inside a State, if the goods are within the State,
(a)
in the case of specific or ascertained goods, at the time of the
contract of sale is made; and (b) in the case of unascertained or future
goods, at the time of their appropriation to contract of sale by the
seller or by the buyer, whether assent of the other party is prior or
subsequent to such appropriation.

Explanation- Where there is a
single contract of sale or purchase of goods situated at more places
than one, the provisions of this sub-section shall apply as if there
were separate contracts in respect of the goods at each place.”

It
can be seen, from the above, that the sale is deemed to have taken
place in that state, where the ascertainment of the goods is done to a
particular sale contract. This is called ‘situs of sale’. Once it is
determined to be in a particular State, the sale remains outside the
taxation scope of all other States. Thus, only one State is entitled to
levy tax on a particular sale/purchase transaction based on
ascertainment of goods to the contract of sale. And in that State, the
transaction may be liable to local tax or CST as per the movement of the
goods. This had brought a very good relief to the dealer community as
it avoided multiple claims by different states.

Still determination of ‘situs of sale’ is not free from debate
In
spite of enactment of section 4(2) of the CST Act, still the issue
cannot be said to be free from litigation. There are situations where
one State tries to hold that ‘situs’ is in their state, though the
dealer might have paid tax in other State, considering the same as
proper State as per ‘situs of sale’.

Recently, Hon’ble Supreme Court had an occasion to deal with such an issue in case of Commissioner
of Commercial Taxes, Thiruvananthapuram, Kerala v/s M/s K.T.C.
Automobiles (Civil Appeal No. 2446 of 2007 dated 29th January, 2016.) The relevant facts noted by Hon’ble Supreme Court are reproduced below for ready reference:

“2.
The undisputed facts disclose that the respondent is in the business of
purchase and sale of Hyundai cars manufactured by Hyundai Motors
Limited, Chennai. As a dealer of said cars, both at Kozhikode (Calicut),
Kerala where their head office is located and also at Mahe within the
Union Territory of Pondicherry where they have a branch office, they are
registered dealer and an assessee under the KGST Act, the Pondicherry
Sales Tax Act as well as the Central Sales Tax Act. The dispute relates
to assessment year 1999-2000. Its genesis is ingrained in the inspection
of head office of the respondent on 1-6-2000 by the Intelligence
Officer, IB, Kozhikode. After obtaining office copies of the sale
invoices of M/s K.T.C. Automobiles, Mahe (branch office) for the
relevant period as well as some additional period and also cash receipt
books, cash book etc. maintained in the head office, he issued a show
cause notice dated 10-8-2000 proposing to levy Rs.1 crore by way of
penalty u/s. 45A by the KGST Act on the alleged premise that the
respondent had wrongly shown 263 number of cars as sold from its Mahe
Branch, wrongly arranged for registration under the Motor Vehicles Act
at Mahe and wrongly collected and remitted tax for those transactions
under the provisions of Pondicherry Sales Tax Act. According to the
Intelligence Officer, the sales were concluded at Kozhikode and hence
the vehicles should have been registered within the State of Kerala.
Therefore, by showing the sales at Mahe the respondent had failed to
maintain true and complete accounts as an assessee under the KGST Act
and had evaded payment of tax to the tune of Rs.86 lakh and odd during
the relevant period. The respondent submitted a detailed reply and
denied the allegations and raised various objections to the proposed
levy of penalty. The Intelligence Officer by his order dated 30-3-2001
stuck to his views in the show cause notice but instead of Rs.1 crore,
he imposed a penalty of Rs.86 lakh only.”

Thus, the issue before
Hon’ble Supreme Court was about determination of ‘situs’ for sale of
cars. The fact considered by the Hon’ble Supreme Court is about
ascertainment of car to a particular sale, so as to determine ‘situs of
sale’.

In this respect, the Hon’ble Supreme Court has observed and decided as under;
“15.
Article 286(2) of the Constitution of India empowers the Parliament to
formulate by making law, the principles for determining when a sale or
purchase of goods takes place in the context of clause (1). As per
section 4(2) of the Central Sales Tax Act, in the case of specific or
ascertained goods the sale or purchase is deemed to have taken place
inside the State where the goods happened to be at the time of making a
contract of sale. However, in the case of unascertained or future goods,
the sale or purchase shall be deemed to have taken place in a State
where the goods happened to be at the time of their appropriation by the
seller or buyer, as the case may be. Although on behalf of the
respondent, it has been vehemently urged that motor vehicles remain
unascertained goods till their engine number or chassis number is
entered in the certificate of registration, this proposition does not
merit acceptance because the sale invoice itself must disclose such
particulars as engine number and chassis number so that as an owner, the
purchaser may apply for registration of a specific vehicle in his name.
But as discussed earlier, on account of statutory provisions governing
motor vehicles, the intending owner or buyer of a motor vehicle cannot
ascertain the particulars of the vehicle for appropriating it to the
contract of sale till its possession is handed over to him after
observing the requirement of Motor Vehicles Act and Rules. Such
possession can be given only at the registering office immediately
preceding the registration. Thereafter only the goods can stand
ascertained when the owner can actually verify the engine number and
chassis number of the vehicle of which he gets possession. Then he can
fill up those particulars claiming them to be true to his knowledge and
seek registration of the vehicle in his name in accordance with law.

Because
of such legal position, prior to getting possession of a motor vehicle,
the intending purchaser/owner does not have claim over any ascertained
motor vehicle. Apropos the above, there can be no difficulty in holding
that a motor vehicle remains in the category of unascertained or future
goods till its appropriation to the contact of sale by the seller is
occasioned by handing over its possession at or near the office of
registration authority in a deliverable and registrable state. Only
after getting certificate of registration the owner becomes entitled to
enjoy the benefits of possession and can obtain required certificate of
insurance in his name and meet other requirements of law to use the
motor vehicle at any public place.

16. In the light of
legal formulations discussed and noticed above, we find that in law, the
motor vehicles in question could come into the category of ascertained
goods and could get appropriated to the contract of sale at the
registration office at Mahe where admittedly all were registered in
accordance with Motor Vehicles Act and Rules. The aforesaid view, in the
context of motor vehicles gets support from sub-section (4) of section 4
of the Sale of Goods Act. It contemplates that an agreement to sell
fructifies and becomes a sale when the conditions are fulfilled subject
to which the properties of the goods is to be transferred. In case of
motor vehicles the possession can be handed over, as noticed earlier,
only at or near the office of registering authority, normally at the
time of registration. In case there is a major accident when the dealer
is taking the motor vehicle to the registration office and vehicle can
no longer be ascertained or declared fit for registration, clearly the
conditions for transfer of property in the goods do not get satisfied or
fulfilled. Section 18 of the Sale of Goods Act postulates that when a
contract for sale is in respect of unascertained goods no property in
the goods is transferred to the buyer unless and until the goods are
ascertained. Even when the contract for sale is in respect of specific
or ascertained goods, the property in such goods is transferred to the
buyer only at such time as the parties intend. The intention of the
parties in this regard is to be gathered from the terms of the contract,
the conduct of the parties and the circumstances of the case. Even if
the motor vehicles were to be treated as specific and ascertained goods
at the time when the sale invoice with all the specific particulars may
be issued, according to section 21 of the Sale of Goods Act, in case of
such a contract for sale also, when the seller is bound to do something
to the goods for the purpose of putting them into a deliverable state,
the property does not pass until such thing is done and the buyer has
notice thereof. In the light of circumstances governing motor vehicles
which may safely be gathered even from the Motor Vehicles Act and the
Rules, it is obvious that the seller or the manufacturer/ dealer is
bound to transport the motor vehicle to the office of registering
authority and only when it reaches there safe and sound, in accordance
with the statutory provisions governing motor vehicles it can be said to
be in a deliverable state and only then the property in such a motor
vehicle can pass to the buyer once he has been given notice that the
motor vehicle is fit and ready for his lawful possession and
registration.”

Thus, there are number of intricate issues before
coming to decision about ‘situs of sale’. The judgment though relates
to sale of cars can also be a good guidance for other goods also.

Conclusion
In
above judgment, Hon. Supreme Court has discussed about the principles
of ascertainment of vehicle to a particular sale to a buyer. Hon.
Supreme Court has arrived at the conclusion that in case of motor
vehicle, the vehicle gets ascertained to the contract of sale only when
it is approved by the Registration Authority under Motor Vehicles Act
and that happens at the office of the registration authority. Therefore,
Hon. Supreme Court has held that the place of sale of motor vehicle is
such State of registration of vehicle.

This may have effect upon
inter-state nature of motor vehicle. Due to above interpretation that
the ascertainment towards sale of motor vehicle takes place at the place
of registration authority, it is possible to say that when the vehicle
is sold to an individual customer, which is liable for registration in
his name, there will not be inter-state sale even if such vehicle is
dispatched from another State. The sale will be local sale in the State
of registration of vehicle in the name of the buyer.

ADMISSIBILITY OF CENVAT ON TELECOM TOWERS

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Background
The issue as regards whether or not CENVAT credit of excise duty paid on inputs is available to the service providers of active infrastructure under telecommunication service and “passive infrastructure” under business auxiliary service or business support service has been a matter of extensive debate. Earlier, in Bharti Airtel Ltd. vs. CCE, Pune-III 2014 (35) STR 865 (Bom), the Hon. Bombay High Court ruled that towers or prefabricated buildings with antenna, Base Trans receiver Station (BTS) and parts thereof for providing cell phone services are not goods. They are immovable property non-marketable and non-excisable. They do not qualify as inputs and are not used directly for providing output services of telecommunication. Following judicial discipline, this ruling was affirmed by the Bombay High Court in Vodafone India Ltd. 2015 (40) STR 422 (Bom) as well. However, in case of persons providing passive telecom infrastructure to cellular telecom operators and liable for service tax under business auxiliary service, in GTL Infrastructure Ltd. vs. CST Mumbai 2015 (37) STR 577 (Tri.-Mum), the decision of Bharti Airtel (supra) was distinguished. The Tribunal noted that towers/ BTS cabins were undisputedly used for providing services of provision of passive infrastructure and therefore in view of Rule 2(k)(ii) of CENVAT Credit Rules, 2004 (CCR), credit cannot be denied. Soon thereafter, in Reliance Infrastructure Ltd. vs. CST Mumbai 2015 (38) STR 984 (Tri.-Mum) also CESTAT – Mumbai held that the assessee providing passive telecom infrastructure by way of telecom towers to various cellular telecom operators discharging service tax liability under business support services were entitled to CENVAT credit under Rule 2(a)(A)(i) of CCR of central excise duty paid on inputs such as brackets, mounting pole, cable, prefabricated buildings/shelter/panel used in erection of telecom towers, noting that these goods were procured under central excise invoices and there were no restrictions on coverage of inputs except for oil and petrol in Rule 2(c) (ii) (CCR). It was further observed that merely because the same were assembled together, it was unreasonable to suggest that CENVAT credit was not admissible. In this case also, inter alia, Bharti Airtel (supra) was distinguished and GTL Infrastructure Ltd. (supra) was relied upon.

Tower Vision India P. Ltd,. vs. CCE (Adj) Delhi 2016 (42) STR 249 (Tri.-LB).

In the above background, a Division Bench recorded a difference of opinion in a bunch of 13 appeals in Idea Mobile Communication Ltd. vs. Commissioner 2016 (41) STR J48 (Tri.Del) as to whether post 2006, when assessees paid service tax under business auxiliary service or business support service for providing passive infrastructure services, CENVAT credit on towers, shelters/prefabricated parts etc. should be allowed in the light of decisions in GTL Infrastructure Ltd. (supra) and Reliance Infrastructure Ltd. (supra) or they should not be entitled to CENVAT credit on shelters/parts as capital goods wherein the supplier paid excise duty on these items by classifying under chapter 85 of the Central Excise Tariff Act, 1985 in the light of decision of Bharti Airtel Ltd. (supra). This was decided to be referred to the Larger Bench of three members. Along with this, on substantially similar issues another set of 8 appeals were directed to be tagged with the said 13 appeals. Hence the Larger Bench, headed by Hon. President CESTAT was constituted. Prior to the formation of the Larger Bench, the division bench had agreed on the view that appellants before them were not eligible for credit of duty on towers and cabins if they are providing telecommunication service as output service following Bharti Airtel Ltd. (supra). However, since the appellants are providing output services of business auxiliary service or business support service to the telecommunication companies, the Member (Judicial) held them as eligible whereas Member (Technical) held it as ineligible in view of the Bombay High Court’s judgment in Bharti Airtel’s case (supra).

Reference Points
Two points provided below were referred to the Larger Bench:

Whether it was correct to hold that post 2006, wherever service providers paid service tax under business auxiliary service or business support service for providing passive infrastructure, they are entitled to take CENVAT credit on towers, prefabricated shelters, parts thereof etc. in view of GTL Infrastructure (supra) and Reliance Infrastructure Ltd. (supra) or the appellants-service providers are not entitled to take the said credit in the light of decision in Bharti Airtel Ltd. (supra).

Eligibility of the appellants-service providers to the credit on shelters and parts as capital goods.

Contentions in brief
Contentions made for the appellants are summarised as follows:

Towers/shelters and tower material was part of the Base Transmission System (BTS) classifiable under Tariff Heading 8517 and hence all components, spares and accessories would qualify as capital goods, whether or not such components etc. fall under Chapter 85.

The above credit cannot be denied on the ground of immovability. In terms of Rule 3 of the CCR, credit is admissible on all inputs and capital goods which are received in the premises of the service provider. Later, the fact of embedding them in the earth would not affect their eligibility.

Credit on input services also would not be denied on the ground of immovability.

Prefabricated buildings/shelters classified under Chapter 85 would qualify as capital goods. Since the duty paid documents indicated classification, it cannot be denied at the end of recipients.

As an alternate submission, shelters and towers qualified as ‘inputs’ themselves. There is no bar to indicate that goods which are not considered “capital goods” would also not quality as inputs.

Towers and shelters would qualify as accessories. Without tower, the active infrastructure namely antenna cannot be placed on that altitude to general uninterrupted frequency.

CENVAT chain was not broken. These are installed on foundations by contractors. These contractors issued invoices for payment of service tax. There is no loss of identity of goods during erection process.

On the other hand, the revenue’s contentions are summarised as follows:

The issue relating to eligibility of towers and shelters is settled categorically by the Hon. Bombay High Court in Bharti Airtel Ltd. (supra) and has not been deviated by any other High Court or overruled by Hon. Supreme Court.

The excise duty paid on M.S angles, channels and prefabricated buildings have no direct nexus whether with telecom service or with business support service. It is an immovable tower which is used for providing both the above services and immovable property being neither goods nor a service, no credit can be taken.

Analysis in brief
The Larger Bench analysed rivals contentions keeping following aspects as the focal point.

Towers and shelters claimed as accessories of other capital goods.

The question of immovability of tower and its relevance and the nature of ‘tower’ being goods.

Tower parts (MS channels, angles etc.) as inputs for availing credit.

Nexus and CENVAT credit flow

Applicability of ratio followed for telecom companies to infrastructure companies.

The scope of CENVAT credit scheme and credit on capital goods.

Appellant’s case was strenuously argued, relying on several Court rulings which interalia included:
• Commissioner vs. Solid & Correct Engineering Works 2010 (252) ELT 481 (SC)
• Commissioner vs. Sai Sahmita Storages P. Ltd. 2011 (23) STR 341 (AP)
• Commissioner vs. Hyundai Unitech Electrical Transmission Ltd. 2015 (323) ELT 220 220 (SC)

The Bench observed that a distinction was sought to be made by the Tribunal in GTL Infrastructure Ltd. (supra) that the decision by the Bombay High Court in Bharti Airtel was applicable to active telecom service providers and not to providers of passive infrastructure. On finding that since appellants allowed the operators right to install antenna and BTS equipment and rendered output service under business auxiliary service, they were entitled to credit. According to the Larger Bench, the ratio of the Bombay High Court was not appropriately appreciated by the Tribunal while deciding GTL Infrastructure as the High Court order in Bharti Airtel Ltd, (supra) was not available at such time. Since these items are immovable property, they cannot be considered inputs. The inputs like MS angles and prefabricated shelters which suffered duty were not used for providing output service. It was further noted that in Sai Samhita Storage P. Ltd. (supra) relied upon by the appellant, creation of immovable asset and implication of CENVAT credit flow in such a situation was not examined in detail in the order whereas in Bharti Airtel Ltd. (supra) the same matters covered are discussed elaborately by the Hon. Bombay High Court. The findings therein were further reiterated in Vodafone India Ltd.’s case. In such situation, and in absence of any material to distinguish the said ratio vis-à-vis the facts of the present case, it was found that Bharti Airtel Ltd. supra) and Vodafone India Ltd. (supra) should be followed.

Lastly, as regards eligibility of credit on shelters and parts as capital goods, it was found that a particular classification of duty paid items by itself does not make the items eligible for CENVAT credit. The eligibility is decided as per provisions of CCR. Since the Bombay High Court categorically held that towers and PFB are in the nature of immovable goods, the supplier by classifying the product under Chapter 85 does not make them eligible for credit either as capital goods or as inputs.

All the decisions relied upon were distinguished. It was also contended for the appellant that decisions of the A.P. High Court in BSNL’s case [2012 (25) STR 321] relied upon by the revenue along with the Bombay High Court’s decision in Bharti Airtel Ltd. (supra) and Vodafone India Limited (supra) were incorrectly appreciated and applied the ratio regarding the character of towers and shelters deducible from the judgment in Solid & Correct Engineering Works (supra). The appellant contended, “as in the case of Solid and Correct Engineering Works, there is no permanent affixation of towers and the prefabricated shelters to the earth permanently. These are fixed by nuts and bolts to the foundations not with the intention to permanently attach them to the earth or for the beneficial enjoyment thereof but only since securing these to a foundation is necessary to provide stability and wobble/vibration free operation and to ensure stability…..these continue to be movables and goods and do not normatively undergo transformation as immovable property is the core contention.” (emphasis supplied)

The extract of conclusion drawn by the Larger Bench in para-41 of the judgment are reproduced below:

“In our respectful view however the challenge to the ratio and conclusions of the High Court’s decisions in Bharti Airtel Limited and Vodafone India Limited on the ground that these are predicated on an incorrect and impermissible interpretation of the rationes in Solid & Concrete Engineering Works, must await an appellate consideration, when and if challenged, by the Hon’ble Supreme Court. It is outside the province and jurisdiction of this Tribunal to analyze and record a ruling on a superior Court’s analyses and elucidation of other binding precedents.

If the Hon’ble High Court was not persuaded to reconciler, while adjudicating the lis in Vodafone India Limited, its earlier decision in Bharti Airtel Limited on a premise that its earlier decision might have been incongruous with the ratio of the Apex Court’s decision in Solid & Correct Engineering Works, it is clearly beyond the province of this Tribunal to embark upon such an exercise, on any grounds, including the per incuriam principle.”

Thus, considering the law laid down in Bharti Airtel Limited (supra) and Vodafone India Limited (supra) to be binding law on the constituted Larger Bench, it was held that provision of towers and shelters as infrastructure used in the rendition of an output service is common to both passive and active infrastructure providers, application of the High Court’s rulings would not be different. The Larger Bench thus resolved the issue in favour of revenue and disallowed CENVAT credit.

(Note: Readers may note that the decision in Bharti Airtel’s case is challenged before the Supreme Court. Further, the Supreme Court has ordered that this be tagged with Civil Appeal arising out of SLP in CCE Vishakhapatnam vs. M/s. Sai Samhita Storage P. Ltd.)

Conclusion
An important question that arises is when provision of active or passive infrastructure for use is treated as a taxable service for the purpose of levy of service tax, the means or the medium though which the said service is provided or yet better, without which the service cannot be provided is neither considered ‘input’ nor capital goods in a larger chain of value addition and also considering high cost of infrastructure that has gone into for providing telecommunication services. While many professionals are skeptical about considering the law laid down by Bharti Airtel (supra) to be good law, the finality on the issue is awaited till the Apex Court hears the matter.

Post Budget Memorandum 2016

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1. Place Of Effective Management [Poem] – Section 6 – Clause 4
2. Deduction u/s 32AC – Clause 14
3. Maintenance of Books of Account by a person carrying on a Profession – Section 44AA – Clause 24
4. Limit for Tax Audit – Section 44AB – Clause 25
5. Presumptive Taxation – Section 44AD – Clause 26
6. Presumptive Taxation – Section 44ADA – Clause 27
7. Conversion of Company into Limited Liability Partnership [LLP] – Section 47(xiiib) – Clause 28
8. Consolidating Plans of a Mutual Fund Scheme – Section 47(Xix) – Clause 28
9. Special provision for full value of consideration – Section 50C – Clause 30
10.
Receipt by an Individual or HUF of sum of money or property without
consideration or for inadequate consideration – Section 56 (2)(Vii) –
Clause 34
11. Deduction of Interest – Section 80EE – Clause 37
12. Deduction for an eligible Start-Up – Section 80-IAC – Clause 41
13. Deduction of profits from housing projects of Affordable Residential Units – Section 80-IBA – Clause 43
14. Deduction for Additional Employee Cost – Section 80JJAA – Clause 44
15. T ax on Income of Certain Domestic Companies – Section 115BA – Clause 49
16. Additional Tax on Dividends from Companies u/s 115BBDA – Clause 50
17. Provisions relating to Minimum Alternate Tax – Section 115JB – Clause 53
18. T ax on Distribution of Income by domestic company on buy-back of shares – Section 115QA – Clause 56
19. Special provisions relating to Tax on Accreted Income
of Certain Trusts and Institutions – Chapter XII-EB – Sections 115 TD To 115 TF – Clause 60
20. Persons having income Exempt u/s. 10 (38) required to file Return u/s 139 – Clause 65
21. Adjustments to Returned Income – Section 143 – Clause 66
22. Advance-Tax – Section 211 – Clause 87
23. Penalty – Section 270A – Clause 97
24. Equalisation levy – Chapter VIII – Clauses 160 to 177
25. Income Declaration Scheme, 2016 – Clauses 178 To 196
26. Shares Of Unlisted Companies – Period Of Holding For Becoming Long-Term Asset – Para 127 Of Budget Speech

1 Place of Effective Management [POEM] – section 6 – clause 4

Section
6(3) is proposed to be amended to bring in the concept of ‘Place of
Effective Management’ (POEM) in case of companies, w.e.f. 1-4-2017.

Section
6(3), as amended by the Finance Act, 2015 provides that a company shall
be resident in India in any previous year if it is an Indian company or
its place of effective management, in that year, is in India. The term
‘Place of Effective Management’ has been defined to mean a place where
key management and commercial decisions that are necessary for the
conduct of the business of an entity as a whole are, in substance made.

It
is submitted that the concept of POEM is a subjective one, and has
different meanings from country to country, as clarified by the OECD
itself. The OECD has, in its Report on BEPS Action Plan 6 – `Preventing
the Granting of Treaty Benefits in Inappropriate Circumstances’,
recognised that the concept of POEM is not an effective test of
residence, by stating that the use of POEM as tie-breaker test was
creating difficulties, and that dual residency should be solved on case
to case basis rather than by use of POEM.

It would also hamper
the efforts of Indian companies to become multinationals, by subjecting
their overseas subsidiaries to be potentially taxed in India, merely
because the holding company is involved in approving decisions of the
overseas subsidiaries.

Further, section 2(10) of the Black Money
(Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015
defines ‘resident’ to mean a person who is resident in India within the
meaning of section 6 of the Income-tax Act. This could result into very
harsh and unintended consequences in cases where POEM of company is
subsequently held to be in India.

Suggestions:
a) The earlier provision of ‘management and control being wholly located in India’ should be restored.

b)
The CBDT had on 23rd December, 2015, issued the Draft Guiding
Principles for determination of POEM of a company, for public comments
and suggestions. The said guiding principles have not been finalised so
far.

Hence, it is alternatively suggested that the
applicability of POEM for determination of residential status of
companies should be deferred for 1 more year and should be considered
along with introduction of GAAR provisions.

c) In
the alternate, considering the object of preventing misuse, appropriate
provision should be added in the current section providing that the
criteria of POEM shall apply only in case of shell companies.

d)
Suitable amendments should be made in the Black Money (Undisclosed
Foreign Income and Assets) and Imposition of tax Act, 2015, to obviate
any unintended consequences.

2 Deduction u/s. 32AC – clause 14

The
amendment proposed by the Finance Bill, 2016 effectively provides that
where the acquisition and installation of the plant and machinery is not
in the same year, the deduction under this section shall be allowed in
the year of installation. This amendment is proposed to become effective
from 1st April 2016.

Suggestion:

In
order to settle the controversy and avoid unnecessary litigation on the
issue, the proposed amendment be made effective from 1st April 2014 i.e.
from the date when section 32AC became effective.

3 Maintenance of books of account by a person carrying on a profession – section 44AA – clause 24

Although
it is proposed to introduce section 44ADA providing for presumptive
taxation for professionals referred in section 44AA(1), provision
contained in section 44AA regarding maintenance of books of account has
not been proposed to be amended. Consequentially, such professionals
will continue to be required to maintain books of account.

Suggestion:

Section
44AA be amended to exempt professionals covered by the presumptive
taxation scheme u/s 44ADA from mandatory requirement of maintenance of
books of account.

4 Limit for Tax Audit – section 44ab – Clause 25

(a)
It is proposed to amend section 44AD increasing the limit of being
‘eligible business’ as defined in clause (b) of the Explanation from Rs.
1 crore to Rs. 2 crore. This is welcome. However, the limit for
carrying out Tax Audit u/s. 44AB in case of business continues to be Rs.
1 crore.

Suggestion:

Simultaneously
with the amendment to increase the limit for applicability of
presumptive taxation u/s 44AD, the limit of Rs. 1 crore in clause (a) of
section 44AB be increased to Rs. 2 crore.

(b) A
professional who does not declare 50% of the gross receipts as income
from profession will be required to get his accounts audited u/s 44AB
irrespective of his gross receipts. A small professional needs to be
exempted from the requirement of Tax Audit even if he does not declare
income in accordance with the scheme of presumptive taxation u/s 44ADA.

Suggestion:

A
professional having gross receipts not exceeding Rs. 25 lakh should not
be required to get his accounts audited u/s. 44AB even if he has not
declared his professional income in accordance with the presumptive
taxation scheme u/s 44ADA. The existing limit of Rs. 25 lakh be
continued and where the gross receipts exceed Rs. 25 lakh, the higher
limit of Rs. 50 lakh should apply where the income from profession has
not been declared in accordance with the presumptive taxation scheme u/s
44ADA. Simultaneously, appropriate amendment may also be made in the
sub-section (4) of the proposed new section 44ADA.

5 Presumptive Taxation – Section 44AD – Clause 26

(a)
T he Finance Bill, 2016 proposes to delete the proviso to sub-section
(2) which provides for deduction of salary and interest paid to partners
of a partnership firm from the presumptive income computed under
sub-section (1). The reason given in the Memorandum explaining the
provisions of the Finance Bill is hyper technical. The provision has
been working well without any difficulty. A beneficial provision should
not be deleted for technical reasons.

Suggestion:

The proviso to sub-section (2) should not be deleted.

(b)
The Finance Bill, 2016 proposes to substitute subsection (4) by new
sub-section (4) which effectively provides that where an assessee does
not declare profit in accordance with the provisions of subsection (1)
in an assessment year, he shall not be eligible to claim the benefit of
section 44AD for the next five assessment years.

It is next to
impossible for a person to misuse the provisions of section 44AD by
manipulating the profits for five years. The proposed provision only
complicates the section. There is no reason to show lack of trust in
assessees.

Suggestion:

The proposed subsection (4) should not be introduced.

6 Presumptive Taxation – Section 44ada – Clause 27

(a)
The proposed new section 44ADA provides for presumptive taxation for
assessees carrying on a profession referred to in section 44(1) and
whose total gross receipts do not exceed Rs. 50 lakh. The Memorandum
explaining the provisions of the Finance Bill states that this provision
shall not apply to Limited Liability Partnership although the section
does not indicate so.

Suggestion:

There
is no reason why the presumptive taxation scheme u/s 44ADA should not
apply to a Limited Liability Partnership. The proposed section should
also apply to a Limited Liability Partnership.

In fact,
clause (a) of the Explanation to section 44AD should also be amended
making a Limited Liability Partnership an eligible assessee for the
presumptive taxation u/s 44AD.

(b) In the proposed section
44ADA, there seems to be no bar of deduction of salary and interest paid
to partner’s u/s 40(b) for firms rendering professional services. At
the same time, proviso similar to the existing proviso to sub-section
(2) of section 44AD is absent.

Suggestion:

A proviso similar to the proviso to sub-section (2) of section 44AD be introduced in the proposed new section 44ADA.

7 Conversion of company into limited liability partnership [LLP] – section 47(xiiib) – clause 28

For
conversion of a private company or an unlisted public company into an
LLP to be tax neutral the conditions mentioned in section 47(xiiib) of
the Act are to be satisfied.

The Finance Bill has proposed to
add one more condition viz., that the total value of the assets, as
appearing in the books of account of the company, in any of the three
previous years preceding the previous year in which the conversion takes
place does not exceed Rs. 5 crore.

The limit of Rs. 60 lakh on
the turnover of the company to be eligible for tax neutrality has made
the provisions of section 47(xiiib) a non-starter. Now, the insertion of
the proposed condition regarding total value of the assets, in the name
of rationalisation, will act as further dampener and would defeat the
very purpose of insertion of the section.

Suggestion:

It
is therefore suggested that in order to encourage conversion of
companies into LLPs by making the same tax neutral, the condition that
the company’s gross receipts, turnover or total sales in any of the
preceding three years did not exceed Rs. 60 lakh, should be withdrawn.

Further
the proposed amendment inserting the condition that the total value of
the assets, as appearing in the books of account of the company, in any
of the three previous years preceding the previous year in which the
conversion takes place does not exceed Rs. 5 crore, should be omitted.

8 Consolidating plans of a Mutual Fund Scheme – Section 47(xix) – Clause 28

Clause
(xix) in section 47 is proposed to be inserted to provide that capital
gain arising on transfer of a capital asset being unit or units in a
consolidating plan of a mutual fund scheme (Original Units) in
consideration of allotment of unit or units in the consolidated plan of
that scheme of the mutual fund (New Units) will not be chargeable to
tax.

Corresponding provision in section 2(42A) providing that in
the case of New Units, there shall be included the period for which the
Original Units were held by the assessee, has remained to be inserted.

Similarly,
corresponding provision in section 49 providing that in the case of New
Units, the cost of acquisition of the asset shall be deemed to be the
cost of acquisition to him of the Original Units, has remained to be
inserted.

Suggestion:

Corresponding amendments in section 2(42A) and section 49, as mentioned above, should be carried out.

9 Special provision for full value of consideration –

Section
50C – Clause 30 Section 50C is proposed to be amended to provide that
where the date of the agreement fixing the amount of consideration for
the transfer of immovable property and the date of registration are not
the same, the stamp duty value on the date of the agreement may be taken
for the purposes of computing the full value of consideration. The
proposed amendment is effective from 1-4-2017.

Suggestion:

Since
this is a clarificatory beneficial amendment, the same should be made
applicable from the date of the insertion of the section i.e. 1-4-2003.

10
Receipt by an individual or huf of sum of money or property without
consideration or for inadequate consideration – Section 56 (2) (vii) –
Clause 34

Section 56(2)(vii) charges to tax receipt by an
individual or an HUF of any sum of money or property without
consideration or for inadequate consideration. Second Proviso to section
56(2)(vii)(c) states that the clause does not apply to receipt of
property from persons mentioned therein or in circumstances mentioned
therein.

Second proviso is proposed to be amended to expand the
scope of non-applicability of the section and accordingly, this section
will also not apply to the receipt of shares of by way of transaction
not regarded as transfer under clause (vicb) or clause (vid) or clause
(vii) of section 47.

Suggestion:

Since
this is a clarificatory beneficial amendment, the same should be made
applicable from the date of the insertion of the section i.e. w.e.f.
1-10-2009.

11 Deduction of interest – section 80EE – clause 37

(a)
A new section 80-EE is proposed to be inserted providing for deduction
of Rs. 50,000 in respect of interest payable on loan borrowed from a
financial institution by an individual assessee for acquiring a
residential house.

One of the conditions for this deduction is that the value of the residential house property should not exceed Rs. 50 lakh.

Suggestion:

In
case of cities of Chennai, Delhi, Kolkata and Mumbai or within the area
of 25 km from the municipal limits of these cities, the limit on the
value of property should be Rs. 1 crore instead of Rs. 50 lakh. Further,
with a view to avoid possible dispute, in clause (iii) of sub-section
(3), instead of using the term ‘value of residential house property’ the
term ‘consideration for the residential house property’ may be used.

(b)
The proposed section provides that the amount of loan sanctioned should
not exceed Rs. 35 lakh. There is no reason for having this condition
for availing the deduction under this section. The financial
institutions have their own well set norms for sanctioning of the loans.

Suggestion:

The condition that the sanctioned loan should not exceed Rs. 35 lakh should be omitted from the proposed section.

12 Deduction for an eligible start-up – section 80-iac – Clause 41

A
new section 80-IAC is being introduced providing tax holiday to
eligible start-ups. The deduction is available only to companies. One of
the conditions for being an eligible start-up is that the total
turnover of its business does not exceed Rs. 25 crore in any of the
previous years beginning on or after 1st April 2016 and ending on the
31st March, 2021.

Suggestions:

(a) The
condition that the turnover of the assessee company should not exceed
Rs. 25 crore in any of the previous years specified in this section
should be omitted.

(b) If at all this condition is
to be retained, the assessee company should only become disentitled to
the deduction from the previous year commencing after the previous year
in which its turnover for the first time exceeds Rs. 25 crore. The
assessee company should get the deduction for all the previous years
including the previous year in which its turnover for the first time
exceeds Rs. 25 crore.

(c) The deduction should not
be restricted only to company assessees but should also be allowed to
partnership firms including a Limited Liability Partnership.

13 Deduction of profits from housing projects of affordable residential units – Section 80-iba – Clause 43

Section
80-IBA is proposed to be inserted to provide for hundred per cent
deduction of the profits of an assessee engaged in developing and
building housing projects approved by the Competent Authority after 1st
June, 2016 but on or before 31st March, 2019 subject to fulfilment of
prescribed conditions.

One of the proposed condition is that the area of the residential unit does not exceed the specified limit.

Suggestion:

a)
The desirability of the proposed deduction to the developers engaged in
building affordable residential units, should be reconsidered in the
light of the objective of the government to reduce the deductions and
exemptions, as the same will benefit the developers and the benefit may
not be passed on to the home buyers.

b) Necessary
clarificatory amendment regarding the sizes of the residential units of
30 square meters or 60 square meters, that the same are based on the
carpet area, should be made.

14 Deduction for additional employee cost – Section 80jjaa – Clause 44

(a)
Section 80JJAA is being substituted providing for deduction in respect
of additional employee cost. Second proviso to clause (i) to Explanation
in sub-section (2) provides that in the first year of a new business,
emoluments paid or payable to employees employed during the previous
year shall be deemed to be the `additional employee cost’. Accordingly,
while determining the additional employee cost total emoluments paid or
payable to all employees including those drawing more than Rs. 25,000
shall be considered.

Suggestion:

If the
above provision is unintended, then to avoid future litigation
appropriate modification may be made providing that in the first year of
a new business while computing emoluments paid or payable to employees
employed during the previous year, emoluments of employees referred to
in sub-clauses (a) to (d) of clause (ii) of the Explanation, shall not
be considered.

(b) Clause (a) of sub-section (2) provides
that no deduction shall be allowed if the business is formed by
splitting up, or the reconstruction, of an existing business or to the
business has been acquired by the assessee by way of transfer from any
other person or as a result of any business reorganisation (collectively
referred to as reorganisation or reorganised business). This indicates
that if a business has been split up or reconstructed or acquired or
reorganised in the past, (even distant past), the assessee will not be
entitled to deduction under this section. This seems to be unintended
and is unjustified.

Suggestion:

In case
of reorganisation of business, the assessee whose business comes into
existence due to the reorganisation should not be entitled to deduction
under this section for the year in which the reorganisation takes place.
In the subsequent years the assessee should be entitled to the
deduction based on additional employee cost as contemplated in the
Explanation to sub-section (2).

15 Tax on income of certain domestic companies – section 115BA – clause 49

The
proposed section 115BA provides for a concessional rate of tax of 25%,
only in case of a newly setup and registered domestic company on or
after 1st March, 2016, subject to fulfilment of prescribed conditions.

Suggestion:

a.
The concessional rate should be extended to all the companies whether
set up and registered before or after 1st March, 2016, which fulfil the
conditions laid down.

b. Further, the provision should be extended to all non-corporate entities which fulfil these conditions as well.

16 Additional tax on dividends from companies u/s 115bbda – Clause 50

New
section 115BBDA is proposed to be introduced levying 10% tax on
dividends in excess of Rs. 10 lakh received from `a domestic company’ by
certain assessees. Sub-section (1) uses the term ‘a domestic company’.

Suggestion:

If
it is intended that tax u/s 115BBDA is to be levied if the aggregate
dividends received from various domestic companies exceed Rs. 10 lakh,
then the proposed section should be appropriately modified in order to
avoid disputes and potential litigation.

17 Provisions relating to minimum alternate tax – Section 115jb – Clause 53

The Finance Bill 2016 has proposed to insert Explanation 4 to section 115JB.

As
per clause (ii) of the proposed Explanation 4, the provisions of
section 115JB would be applicable to foreign company that require to
seek registration under any law if it is resident of a non-treaty
country.

Section 386 of Companies Act, 2013 defines “place of
business” very broadly to mean a place which includes share transfer or
registration office. Therefore, as per provisions of Companies Act, 2013
any foreign company having any place of business shall have to register
with ROC. Thus, in case of non-treaty countries, any company having any
type of business presence in India would result in applicability of
provision of section 115JB.

Foreign companies now require
registration and need to comply with other requirements under the
Companies Act, 2013 even if they operate in India through agents. In
such cases, they would also get covered by clause (ii) of Explanation 4
to section 115JB above.

Suggestions:

A
clarification should be inserted that unless the assessee has a
permanent establishment in India, the provisions of section 115JB will
not be applicable. Simultaneously, `permanent establishment’ should be
exhaustively defined for this purpose.

In
addition, an exception can be made in cases of airlines, shipping
companies, etc. where even if there is a PE in India but if the income
of such assessee is exempt pursuant to the provisions of respective DTAA
, the provisions of section 115JB will not be applicable.

18 Tax on distribution of income by domestic company on buy-back of shares – Section 115qa – Clause 56

Section
115QA is proposed to be amended to provide that the provisions of this
section shall apply to any buy back of unlisted share undertaken by the
company in accordance with the provisions of the law relating to the
Companies and not necessarily restricted to section 77A of the Companies
Act, 1956. It is further proposed to provide that for the purpose of
computing distributed income, the amount received by the company in
respect of the shares being bought back shall be determined in the
prescribed manner.

Suggestion:

Suitable
amendments should be made for nonapplicability of the section in cases
where buyback of a company’s shares is financed out of share premium or
an issue of shares of a different category.

Provisions
of Chapter XII-DA should be made applicable only to non-resident
shareholders, as resident shareholders would, in any case, be subjected
to tax u/s 46A.

19 Special provisions relating to tax on
accreted income of certain trusts and institutions – chapter xii-eb –
Sections 115 td to 115 tf – Clause 60

The new Chapter XII-EB
proposed to be inserted by the Finance Bill, 2016 provides for levy of
tax on market value of assets of a charitable trust or institution under
certain circumstances.

While appreciating the need for making
provision for an `exit tax’ when a charitable entity ceases to be so,
the provisions of the new Chapter are draconian and will cause extreme
hardship in many cases, particularly those falling under the deeming
fiction of sub-section (3) of the new section 115TD. These are
enumerated below along with our suggestions.

(a) Section 2(15)
defines ‘charitable purpose’. This definition has been undergoing
changes repeatedly. There are a large number of entities which due to
the operation of the provisos to section 2(15), may not be eligible for
exemption u/s 11. These entities have not changed their activities and
they continue to be charitable under the general law. It is not fair and
justified that such entities are levied tax on the market value of
their assets.

Suggestion:

It is
therefore suggested that the deeming fictions of sub-section (3) should
be deleted. Alternatively, mere cancellation of registration u/s 12AA of
the Act should not trigger the provisions of Chapter XII-EB. If an
entity ceases to be a charitable entity for the purposes of the Act due
to the operation of proviso to section 2(15), such an entity should not
be charged tax on the market value of its assets as contemplated by
Chapter XII-EB, so long as it continues to apply its corpus and income
for charitable purposes as defined u/s. 2(15) without having regard to
the provisos to the said section.

(b) The new Chapter
XII-EB proposes that the charitable entity will have to pay tax on the
accreted income within 15 days from the date of cancellation of
registration u/s 12AA of the Act.

Cancellation of registration
u/s 12AA of the Act has become common in recent times. Invariably the
charitable entity prefers an appeal and often the order cancelling the
registration of the charitable entity is set aside and the registration
is restored. In such circumstances, the proposed provision requiring
such entity to pay tax under Chapter XII-EB within 15 days of the date
of cancellation of registration will put the entity to extreme hardship
and cause irreversible damage.

Suggestion

The
levy of tax under Chapter XII-EB should be postponed till the order
cancelling the registration becomes final, where such cancellation is
the subject matter of an appeal.

(c) Even in a case where tax on the accreted income is to be levied, a more reasonable period should be provided for.

Suggestion:

A period of six months may be permitted for payment of the tax on the accreted income.

(d)
Section 115TD(3) provides that when there is modification of objects of
a charitable entity, and the modified objects do not confirm to the
conditions of registration, and the entity has not applied for fresh
registration u/s 12AA within the previous year or the application for
the registration has been rejected, the entity will be deemed to have
been converted into any form not eligible for registration u/s 12AA.

Suggestions:

A reasonable period of one year should be permitted for the entity to make an application for registration u/s 12A/12AA .

Further,
if the entity has filed an appeal against the order rejecting its
application for registration u/s 12AA , the levy of tax should be
postponed till the order rejecting the application for registration
becomes final.

Presently, there is no provision in
the Act for seeking fresh registration u/s 12A/12AA on modification of
objects of the trust. In order to bring clarity, appropriate provisions
may be made for seeking fresh registration u/s 12A/12AA on modification
of objects of the trust.

(e) The new Chapter
provides that the principal officer, the trustee and the
trust/institution shall be liable to pay the tax on the accreted income.

Suggestion:

It should be clarified that the liability is only in the representative capacity and not in the personal capacity.

(f) It is not clear how the provisions of the new Chapter will be implemented.

Suggestion

Appropriate provisions should be made for assessment, appeal and stay in the new Chapter.

20 Persons having income exempt u/s 10 (38) required to file return u/s 139 – clause 65

Sixth
proviso to section 139(1) is proposed to be amended making it mandatory
for a person to file return of income if his total income without
giving effect to the provisions of section 10(38) exceeds the maximum
amount not chargeable to income tax.

Suggestion:

In
order to avoid potential litigation and unintended default by assessees
in filing the return, appropriate explanation should be inserted under
the proviso being amended to clarify that for this purpose, the capital
gains should be computed based on indexed cost of acquisition.

21 Adjustments to returned income – section 143 – clause 66

The
proposal to increase the scope of adjustments that can be made to the
returned income while processing the same u/s 143(1) is fraught with
difficulties. The insertion of sub-clauses (iv) and (vi) in particular
are highly objectionable as these would lead to unprecedented litigation
and hardship to assessees.

In the Form No. 3CD of the tax audit
report, the assessee reports several matters where there could be a
difference of opinion between the assessee and the tax auditor. Many
times due to early completion of tax audit and payment of various
section 43B dues or TDS payable before the due date of filing the
returns u/s 139(1), may also lead to differences. In addition, in some
cases, the issues may remain debatable and the tax auditor out of
abundant caution mentions the same in the tax audit report. However,
this cannot be made a subject matter of automatic adjustment to the
income u/s 143(1). The very objective of section 143(1) is to permit the
income-tax department to make adjustments on account of prima facie
incorrect claims and of arithmetical mistakes in the return.

When
a tax payer takes a particular stand based on judicial decisions or
interpretation of law or a legal opinion, the same cannot by any stretch
of imagination be placed in the same basket as prima facie
mistakes/incorrect claims.

Similarly, the proposal to add income
appearing in Form 26AS / 16 / 16A to the returned income if that income
has not been reported in the return, is also extremely unfair and
unwarranted. The issue of comparing the returned figures with the Form
26AS has already resulted in massive problems across the country for a
large number of tax payers. Now, if the income is also sought to be
adjusted in line with the Form 26AS then it will create unprecedented
chaos.

At present, once the CPC processes the returns, if there
is an issue of granting credit for TDS and such issue arises on account
of differences in the method of accounting followed by the deductor and
the deductee, the CPC transfers the file to the jurisdictional assessing
officer. In such cases, the tax payer is caught between the CPC and the
jurisdictional assessing officer. Despite running from pillar to post,
rectification of wrong demands takes months to get rectified and that
too after a lot of stress and tension for the concerned tax payer.

In
this back ground, adding to the tax payer’s problems would not be the
right thing to do and would create mistrust in the whole system.

Suggestion:

The proposed sub clauses (iv) and (vi) be deleted.

22 Advance-tax – Section 211 – clause 87

The
due dates of payment of advance tax by a noncorporate assessee are
proposed to be brought in alignment with the due dates applicable to
corporate tax assessees i.e. non-corporate assessees are also required
to pay advance tax, 4 times in a year.

Suggestion:

The due dates for advance tax payments should be kept as per the original provisions for the noncorporate assessees.

23 Penalty – Section 270A – clause 97

Section
270A is proposed to be inserted w.e.f. A.Y. 2017-18 in order to
rationalise and bring objectivity, certainty and clarity in the penalty
provisions.

It is submitted that the present penalty provisions
u/s. 271 have been on the statute book for a fairly long time and the
law on penalty has by and large been settled with significant certainty.

The new concepts of “under-reporting” and “misreporting” for
levy of penalty are going to be matters of serious debate and
litigation.

Suggestions:

Instead of changing the
entire scheme of levy of penalty, suitable amendments could be made to
existing provisions, retaining the concepts of “furnishing of inaccurate
particulars of income” and “concealment of income”.

Alternatively, if the proposed provisions of section 270A are retained, the following points may be noted:

i.
There is no specific amendment in section 246A of the Act, providing
for right of appeal against any penalty order u/s 270A. In all fairness
and in the interest of justice, penalty order should be appealable.

ii.
Section 270A(3)(i)(b) provides that in a case where no return is
furnished, the amount of under reported income shall be (a) in case of a
company, firm or local authority, the entire amount of income assessed
and (b) in other cases, the difference between amount of income assessed
and the maximum amount not chargeable to tax. The provisions are too
harsh and drastic.

Suggestions:

a) Specific right of appeal in section 246A of the Act should be provided by suitable amendment; and

b)
necessary amendments should be made in section 270A(3)(i)(b) to provide
for relief in cases having bonafide reasons for non-filing of returns
of income, where full / substantial portion of the taxes have been
deducted / paid.

c) For the sake of clarity, an Explanation may
be added to define, as to what would constitute a bona fide explanation
for the purposes of clause (b) of sub-section (6) of section 270A.

For
this purpose, ‘bona fide explanation’ should include claim under wrong
section(s), facts disclosed prior to issue of notice u/s. 143(2), agreed
addition to buy peace and / or end litigation and reliance on judicial
decisions/interpretation in case of conflicting decisions.

24 Equalisation Levy – Chapter viii – Clauses 160 to 177

Based
on the reading of Chapter VIII, it is understood that the Equalisation
levy is not a “tax” on income but a “levy”, therefore all other normal
provision of the Act will not apply, unless specifically mentioned in
Chapter VIII.

It is necessary to have specific mechanism for the purpose of collection of the Equalisation levy.

Further,
it also needs to be clarified whether section 147/ 263 can be invoked
for purpose of levy, as the provisions of clause 175 of the Finance
Bill, 2016, do not mention anything in this regard.

Suggestions:

A
clarification needs to be issued as to whether the Equalisation levy is
to be paid on the payments made for advertisement at combined cost in
both electronic media and print media, and on what amount.

Further,
clarification needs to be issued that levy is not applicable to
payments made for advertisement on international radio and television
networks.

An appeal also needs to be provided for, where an
Assessing officer takes a view that equalisation levy is chargeable,
while the assessee is of the view that he is not liable for such levy.

25 Income Declaration Scheme, 2016 – Clauses 178 to 196

The
Finance Bill, 2016 proposes to introduce The Income Declaration Scheme,
2016 (Declaration Scheme). We believe that notwithstanding the name,
the Declaration Scheme, in substance, is an Amnesty Scheme. One may
recall that the previous government had given assurances in the Supreme
Court of India that in future no scheme providing amnesty to tax evaders
shall be introduced.

Various provisions make the Declaration Scheme an Amnesty Scheme.

Therefore, in principle, we oppose the Income Declaration Scheme.

Presuming that the Declaration Scheme will be enacted along with the Finance Bill, 2016 our suggestions are as under:

(a)
Clause 194(c) provides for taxation of any income or an asset acquired
prior to the commencement of the Declaration Scheme (and in respect of
which no declaration has been made under the Declaration Scheme) in the
year in which a notice u/s 142 or 143(2) or 148 or 152A or 153C is
issued. By deeming provision, time of accrual of such income is
modified.

In effect, any undisclosed income of any past year
will be chargeable to tax in future year without any limitation as to
the time. Such a provision completely overrides the time-limit specified
in section 149.

Suggestion:

Clause 194(c) should be omitted.

(b)
Appropriate clarifications by way of circulars and instructions be
issued well in time so that there is clarity about its implementation.

26 Shares of unlisted companies – period of holding for becoming long-term asset – para 127 of budget speech

The
Finance Minister in paragraph 127 of the Budget Speech had stated that
the period for getting an effect of long-term capital gain regime in
case of unlisted companies is proposed to be reduced from three years to
two years. However, the necessary amendment to this effect does not
appear in the Finance Bill, 2016.

Suggestion:

Section 2(42A) be amended to give effect to the proposal in the speech of the Honourable Finance Minister

Oxford Softech P. Ltd. vs. ITO ITAT Delhi `E’ Bench Before J. Sudhakar Reddy (AM) and Beena A. Pillai (JM) ITA No. 5100/Del/2011 A.Y.: 2004-05. Date of Order: 7th April, 2016. Counsel for assessee / revenue: Salil Kapoor, Vinay Chawla & Ananya Kapoor / P. Damkanunjna

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Section 271(1)(c) – Making a claim for deduction under the provisions of section 80 IA of the Act which has numerous conditions attached, is a complicated affair. Since the assessee claimed deduction u/s. 80IA, based on legal advice, and filed the report of Chartered Accountant in Form No. 10CCB along with return of income and all details were also filed along with the return of income, it cannot be said that this is a case of furnishing of inaccurate particulars of income.

Facts
The assessee company, engaged in providing certain services including air conditioning, generator backup, interiors, electric, wooden fixtures and fittings etc., claimed deduction of 100% of its gross total income of Rs. 36,80,723 u/s. 80IA of the Act. The report of the Chartered Accountant in Form No. 10CCB was filed along with return of income.

The Assessing Officer denied claim of deduction u/s. 80IA of the Act. on the ground that the assessee was merely providing certain interiors, furniture, fixtures and generator back up power services etc., for BPO/Software companies which were lessees of the building owned by its director and that the assessee was not engaged in business of developing, operating and maintaining the infrastructure facilities as was specified in section 80IA of the Act.

Aggrieved by the denial of deduction u/s. 80IA of the Act, the assessee preferred an appeal to CIT(A) but when the appeal came up for hearing it withdrew the appeal filed.

The AO levied penalty u/s 271(1)(c) on the ground that the assessee had furnished inaccurate particulars.

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

Aggrieved by the order passed by CIT(A), the assessee preferred an appeal to the Tribunal.

Held
The Tribunal observed that a perusal of audit report filed by the assessee along with his return of income, to support the claim of deduction u/s. 80IA(7), demonstrates that the auditors of the assessee also believed that the assessee was eligible for deduction u/s. 80 IA of the Act. It was a conscious claim made by the assessee supported by an audit report. It also noted that the assessee had also made an application to STPI for setting up the infrastructure facilities under the STPI Scheme. All details of the claim made u/s. 80 IA were filed by the assessee, along with the return of income. The Tribunal held the assessee was under a bonafide belief that it is entitled to the claim for deduction under provisions of section80 IA of the Act.

The provisions under the Income-tax Act are highly complicated and its different (sic, it is difficult) for a layman to understand the same. Even seasoned tax professionals have difficulty in comprehending these provisions. Making a claim for deduction under the provisions of section 80 IA of the Act which has numerous conditions attached, is a complicated affair. It is another matter that the assessing authorities have found that the claim is not admissible. Under these circumstances, the Tribunal held that it cannot be said that this is a case of furnishing of inaccurate particulars of income.

Applying the propositions laid down by the Delhi High Court in the case of CIT vs. Shyama A. Bijapurkar (ITA No. 842/2010; order dated 13.7.2010) and CIT vs. Smt. Rita Malhotra 154 ITR 550 (Del), the Tribunal cancelled the penalty levied u/s 271(1)(c) of the Act.

The Tribunal allowed the appeal filed by the assessee

Capital gain vs. Business income – A. Y. 2006-07 – Profit from purchase and sale of shares – Assessee not registered with any authority or body to trade in shares – Entire investment made out of assessee’s own funds – Purchase and sale of shares were for investment accepted by Department for earlier years – Gain from purchase and sale of shares cannot be taxed as business income

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CIT vs. SMAA Enterprises P. Ltd.; 382 ITR 175 (J&K):

The
assessee company was incorporated in the year 1996 and the assessments
for the A. Ys. 2001-02 to 2005-06 had attained finality with the
Department, accepting the declaration made by the assessee, that it was
engaged in purchase and sale of shares as an investment. For the A. Y.
2006-07, the assessing Authority treated the short term capital gains
from purchase and sale of shares as income from business, and levied tax
at 30% instead of 10%, on the ground that the assessee was engaged in
the business of general trading in shares. The Tribunal allowed the
assessee’s claim that it is short term capital gain.

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

“i)
The assessee was not registered with any authority or body, such as
the Securities and Exchange Board of India to carry on trading in
shares. The entire investments were made out of the assessee’s own funds
and no material was placed on record by the Department to come to a
different conclusion.

ii) The factual finding by the Tribunal
was on a proper appreciation of facts. The Department could not change
its stand in subsequent years without change in material. The order was
passed by the Tribunal based on appreciation of documents and recording
reasons, which were not considered by the Assessing Authority as well as
the first Appellate Authority. The contention of the Department that
the assessee was dealing in stockin- trade and not investment, could not
be accepted and no substantial question of law arose for
consideration.”

Business expenditure – Section 37(1) – A. Y. 2001- 02 – Payment to Port Trust by way of compensation for encroachment of land by assessee – Is business expenditure allowable u/s. 37(1)

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Mundial Export Import Finance (P) Ltd. vs. CIT; 284 CTR 87(Cal):

The assessee had acquired a plot of land by way of lease from CPT. By a letter dated 28/06/2000, CPT informed the assessee that about 855.7 sq. mtrs. of land belonging to the trust adjacent to the demised plot had been encroached by the assessee, in violation of the terms and conditions of the lease agreement. The assessee paid an amount of Rs. 6,67,266/- by way of damages to the CPT, in respect of such additional land. The assessee claimed this amount as business expenditure. The Assessing Officer disallowed the claim relying on Explanation to section 37(1). The Tribunal upheld the disallowance.

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

“i) Payment was made by assessee, to compensate the loss suffered by port trust due to occupation of land in excess of what was demised to the assessee. Therefore, the payment did not partake the character of penalty.

ii) The payment could not partake the character of a capital expenditure, because the contention of the port trust was that the prayer for lease of the land unauthorisedly occupied could not be examined before payment of the compensation. Therefore, the payment was altogether compensatory for the benefit already received by the assessee by user of the land.

iii) Payment was an expenditure incurred wholly and exclusively for the purposes of the business and therefore, allowable as deduction u/s. 37(1). Explanation to section 37(1) was not applicable.”

Additional depreciation – Section 32(1)(iia) – A. Y. 2008-09 – Manufacture – Broadcasting amounts to manufacture of things – Plant and machinery used in broadcasting entitled to additional depreciation

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CIT vs. Radio Today Broadcasting Ltd.; 382 ITR 42 (Del):

The assessee was engaged in the business of FM radio broadcasting. In the A. Y. 2008-09, the assessee claimed additional depreciation on the plant and machinery used for broadcasting, claiming that broadcasting of radio programmes amounted to manufacture or production of articles or things. The Assessing Officer rejected the claim. 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) “Manufacture” could include a combination of processes and broadcasting amounts to manufacture. In the context of “broadcasting”, manufacture could encompass the process of producing, recording, editing and making copies of the radio programme followed by its broadcasting. The activity of broadcasting, in this context, would necessarily envisage all these incidental activities, which are nevertheless integral to the business of broadcasting.

ii) The assessee was entitled to additional depreciation for the machinery used by it to broadcast radio programmes in the FM channel.”

Business expenditure – Disallowance u/s. 40A(3) – A. Y. 2008-09 – Payments in cash – Agents appointed by assessee for locations to enable dealers of petrol pumps to buy diesel and petrol – No cash payment made directly to agents but cash deposited in respective bank accounts of agents – Rule 6DD(k) applicable – Amount not disallowable u/s. 40A(3)

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CIT vs. The Solution; 382 ITR 337 (Raj);
The assessee was engaged in supplying diesel at various sites. The Assessing Officer noticed that the assesee had debited huge expenses on account of purchase of diesel and had made payment in cash exceeding Rs.20,000. The Assessing Officer disallowed the expenditure relying on section 40A(3). The Commissioner (Appeals) and the Tribunal deleted the addition.

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

“i) The findings of the Commissioner (Appeals) and the Tribunal are findings of fact. The assessee had appointed various representatives and agents for 110 locations, wherein diesel and petrol were purchased by dealers of the petrol pumps. No cash payment was made directly to the agents, but was deposited in their respective bank accounts. The case of the assessee fell under exception clause of Rule 6DD(k), as the assessee had made payment to the bank account of the agents, who were required to make payment in cash for buying petrol and diesel at different location.

ii) The assessing Officer did not find any discrepancy in copies of the ledger accounts produced, and no unaccounted transaction had been reported or noticed by him.

iii) The finding arrived at by the Tribunal based on the material, was essentially a finding of fact. No substantial question of law arose for consideration. Appeal is dismissed.”

Income – Sums collected towards contingent sales tax liability not income especially when it was demonstrated that the same were refunded to the persons from whom the same was collected

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CIT vs. Khoday Breweries Ltd. (2016) 382 ITR 1 (SC)

Agreement – The fact that the agreement is with a retrospective effect, would not make it a sham transaction

The assessee, a manufacturer of liquor, in course of business used to sell liquor to dealers in sealed bottles with proper packing. The question whether the assessee was liable to pay sales tax towards bottles and packing material supplied to the dealers was a debatable question. Therefore, in order to safeguard the business interest, the assessee had collected certain amounts towards the doubtful tax liability. The assessing authority for the assessment years 1988-89 and 1989-90 had found that the amounts received from the dealers towards doubtful liability was a disguised collection of additional sale price and that the books of account of the dealers showed that payment of this additional amount was a part of the sales price. Therefore, the assessing authority held that the amount received towards anticipated tax liability was subject to assessment for tax.

The assessee had taken the premises of its sister concern along with machinery, i.e., the boiler (furnace) for manufacture of liquor. The warranty of life span of the boiler was said to be 6 to 7 years. In the term of lease, the rent was agreed at Rs.52,50,000 per annum for the above assessment year. The boiler went out of order. The lessor revamped the equipment and machinery. Accordingly, the assessee entered into a fresh agreement with lessor to enhance the rental to Rs.90,00,000 per annum. The assessing authority found that the enhanced agreement was a sham agreement and rejected the claim for deductions.

In appeal, the Commissioner of Income-tax (Appeals) upheld the order of the assessing authority and held that the amount received towards doubtful tax liability were liable for assessment of tax. With regard to enhancement of lease rent, the Commissioner of Income-tax held that towards part of cost of revamp of equipment, the assessee was entitled for deduction of Rs.12,50,000. The balance of enhanced amount of lease was held as sham and was liable for tax.

The Tribunal in appeal held that on both the questions, the assessee was not liable to tax since the amount received towards doubtful tax liability was refundable to the dealers. Therefore, it was not in the nature of income for tax. So also in respect of enhanced rent, it was found that in view of revamp of the machinery, fresh rent agreement was entered into warranting the payment of higher rent and the said agreement is not a sham transaction. The appeal filed by the assessee was allowed accordingly. The appeal filed by the Revenue before the Tribunal regarding grant of partial deduction in the rental amount was dismissed.

At the hearing of the reference/appeal filed by the Revenue before the High Court, it was a categorical contention of the assessee that the amount in dispute was received from the dealers towards the doubtful tax liability. The asessee had also let in evidence of the dealers before the assessing authority that the advance amounts received had been refunded to them.

The High Court held that the liability to pay sales tax towards bottle and packing material was a doubtful question open for debate. Later on the assessee had refunded the amount to the dealers. In that view, the findings of the Tribunal that the said amount did not attract tax liability was sound and proper. Further, the documentary evidence disclosed that during the assessment year in question, the machinery was revamped. In that view, a fresh agreement was entered into to pay higher rent of Rs.90,00,000 instead of Rs.52,50,000. The fact that the agreement was with retrospective effect, would not make it a sham transaction. The lessor was also an assessee. The amount paid has been accounted by the lessor in installments. Therefore, the assessee was entitled to legitimate deduction towards the enhanced rent.

On a SLP being filed by the Revenue, the Supreme Court held that in view of the factual determination made by the High Court that the amounts realised to meet the contingent sales tax liability of the assessee had since been refunded to the persons from whom the same was collected and also a finding had been reached that the agreement enhancing the lease rent was not a sham document, it found no ground to continue to entertain the present special leave petition

Deduction of tax at source – Interest paid to the owners of the land acquired – Whether deduction to be made u/s. 194A – Matter remitted to the High Court as no reasons had been given by the High Court in the impugned order

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Commissioner, Development Belgaum Urban Authority vs. CIT (2016) 382 ITR 8 (SC)

On gathering information about the payment of interest by the assessee to the owners of the land for delayed payment of compensation consequent upon the acquisition of land, enquiry was conducted and information was obtained by the Income Tax Department and it was found that no deduction has been made u/s. 194A of the Act in respect of the interest paid to the owners of the land acquired and accordingly, after due procedure order was passed by the Tax Recovery Officer, Belgaum u/s. 201(1) and 201(1A) of the Act, holding that the assessee had contravened the provisions of section 194A in not deduction the tax at source in respect of payment of interest for belated payment of compensation for the land acquired. Tax was levied amounting to Rs.1,96,780 and interest of Rs.59,260 was demanded and total demand of Rs.2,56,040 was made. Being aggrieved by the said order, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals), Belgaum and the appellate authority, allowed the appeal. Being aggrieved by the same, the Revenue preferred appeal before the Tribunal. The Tribunal confirmed the order passed by the appellate authority holding that there was no liability and that section 194A was not applicable in respect of payment of interest for belated payment of compensation for the land acquired and accordingly dismissed the appeal of the Revenue.

On further appeal by the Revenue, the High Court reframed the following substantial question of law:

“Whether the finding of the Tribunal confirming the order of the appellate authority holding that there was no liability on the respondent to deduct tax on the interest payable for belated payment of compensation for the land acquired and in holding that section 194A was not applicable for such payment is perverse and arbitrary and contrary to law?”

The High Court allowed the appeal of the Revenue by following the judgment of the Hon’ble Supreme Court in Bikram Singh v Land Acquisition Collector (1997) 224 ITR 551 (SC).

The said judgment read as follows (page 557 of 224 ITR):

“But the question is: whether the interest on delayed payment on the acquisition of the immovable property under the Acquisition Act would not be exigible to income-tax? It is seen that this court has consistently taken the view that it is a revenue receipt. The amended definition of “interest” was not intended to exclude the revenue receipt of interest on delayed payment of compensation from taxability. Once it is construed to be a revenue receipt, necessarily, unless there is an exemption under the appropriate provisions of the Act, the revenue receipt is exigible to tax. The amendment is only to bring within its tax net, income received from the transaction covered under the definition of interest. It would mean that the interest received as income on the delayed payment of the compensation determined u/s. 28 or 31 of the Acquisition Act is a taxable event. Therefore, we hold that it is a revenue receipt exigible to tax under section 4 of the Income-tax Act. Section 194A of the Act has no application for the purpose of this case as it encompasses deduction of the incometax at source. However, the appellants are entitled to spread over the income for the period for which payment came to be made so as to compute the income for assessing tax for the relevant accounting year.”

Being aggrieved, the assessee approached the Supreme Court.

The Supreme Court while issuing notice in these appeals passed the following order:

“Issue notice as to why the matters should not be remitted. In the Impugned order, no reasons have been given by the High Court. Hence, matters need to be sent back. This is prima facie opinion.”

The learned Counsel for the Revenue when confronted with the said position reflected in the order submitted that he had no objection if the matter was remitted to the High Court for fresh consideration.

The impugned order passed by the High Court was, accordingly, set aside and the case are remitted back to the High Court for deciding the issue afresh by giving detailed reasons after hearing the counsel for the parties.

Charitable Trust – Registration of Trust – Once an application is made u/s. 12A and in case the same is not responded to within six months, it would be taken that the application is registered on the expiry of the period of six months from the date of the application

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CIT vs. Society for the Promotion of Education, Adventure Sport and Conversation of Environment (2016) 382 ITR 6 (SC)

The assessee, a society running a school, claimed that up to the assessment years 1998-99, it was exempted u/s. 10(22) of the Income-tax Act, 1961, therefore, it did not seek separate registration u/s. 12A of the Act so as to claim exemption u/s. 11.

Section 10(22), being omitted by the Finance Act, 1998, the assessee applied for registration u/s. 12A of the Act with retrospective effect, that is, since the inception of the assessee-society, i.e., January 11, 1993. An application for the purpose was duly made on February 24, 2003. Inasmuch as u/s. 12A(1)(a) (as it stood at the time of making the application), the application was required to be made within one year from the date of creation of establishment of the trust or institution, therefore, condonation of delay was sought in terms of section 12A(1)(a), proviso (i).

Section 12AA(2) provides that every order granting or refusing registration under clause (b) of s/s. (1) shall be passed before the expiry of six months from the end of the month in which the application was received u/s. 12A(1) (a) or 12A(1)(aa).

No decision was taken on the assessee’s application within the time of six months fixed by the aforesaid provision.

For want of a decision by the Commissioner, the Assessing Officer continued to make assessment denying the benefit u/s. 11.

On a writ being filed to the High Court, the High Court examined the consequence of such a long delay of almost five years on the part of the income-tax authorities in not deciding the assessee’s application dated February 24, 2003.

According to the High Court, after the statutory limitation the Commissioner would become functuous officio and could not therafter pass any order either allowing or rejecting the registration.

The High Court took the view that once an application is made under the said provision and in case the same is not responded to within six months, it would be taken that the application is registered under the provision.

The Revenue appealed to the Supreme Court against the aforesaid order of the high Court. However, when the matter came up for hearing, the learned Additional Solicitor General appearing for the Revenue, raised an apprehension that in the case of the assessee, since the date of application was of February, 24, 2003, at the worst, the same would operate only after six months from the date of the application.

According to the Supreme Court there was no basis for such an apprehension since that was the only logical sense in which the judgment could be understood. Therefore, in order to disabuse any apprehension, it was made clear that the registration of the application u/s. 12AA of the Income-tax Act in the case of the assessee would take effect from August 24, 2003.

Purchase of immovable property by Central Government – Development Agreement/ Collaboration Agreement and in any case an arrangement which has the effect of transferring or enabling the enjoyment of property falls within the definition of “Transfer” in section 269UA – Order of pre-emptive purchase gets vitiated where the authority fails to record a finding on the relevance of comparable sale instance

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Unitech Ltd. vs. Union of India (2016) 381 ITR 456 (SC)

Vidarbha Engineering Industries – appellant No.2 held on lease, three plots of land admeasuring 2595.152 sq. mtrs., i.e., 27934 sq. ft. at Dahipura and Untkhana, Nagpur. This land was comprised of three plots of land, i.e., Plot Nos. 34, 35 and 36 obtained by Vidarbha Engineering from the Nagpur Improvement Trust. Vidarbha Engineering decided to develop the subject land and entered into an agreement for the purpose with Unitech Ltd. The memorandum of understanding between them was formalised into a collaboration agreement dated March 17, 1994. Under this agreement the land holder agreed to allow Unitech to develop and construct a commercial project on subject land admeasuring 2595.152 sq. mtrs. at the technical and financial cost of the latter. The parties to the agreement agreed, upon construction of the multi storied shopping cum commercial complex, that Unitech will retain 78% of the total constructed area and transfer 22% to the share of Vidarbha Engineering Unitech agreed to create an interest-free security deposit of Rs.10 lakhs. 50% of the deposit was made refundable on completion of the RCC structure and the other 50 per cent. on completion of the project. The parties were entitled to dispose of the saleable area of their share. It was specifically agreed that this agreement was not to be construed as a partnership between the parties. In particular, this agreement was not to be construed as a demise or assignment or conveyance of the subject land.

The appellant submitted a statement in form 37-I u/s. 269UC of the Act annexing the agreement dated March 17, 1994.

This form contained only the nomenclatures of the transferor and transferee and contemplated only the transaction of a transfer and not an arrangement of collaboration. Therefore, the appellants were to described themselves as transferor and a transferee. Accordingly, they mentioned that the consideration for the transfer of the subject property was Rs. 100.40 lakhs towards the cost of share of 22% of Vidarbha Engineering, which was to be constructed by Unitech-builder at its own cost.

Upon the submission of the statement under section 269UA of the Act, the Appropriate authority issued a showcause dated July 8, 1994, stating that the consideration for the transaction appeared to be too low and appeared to be understated be more than 15%, having regard to the sale instance of a land in Hanuman Nagar, an adjoining locality, the rates per sq. ft. of FSI of which worked out to Rs 283, whereas the such a rate in case of the appellants worked out to Rs. 184 (1,00,40,000 – 56,473).

In reply to the show-cause notice the appellants raised several objections to the alleged undervaluation including the existence of encumbrances and other aspects. In particular, the appellants pointed out a sale instance of a comparable case approved by the authorities where the FSI cost on the basis of apparent consideration came to Rs. 90 per sq. ft. This was in respect of a property in the very same locality in which the subject land is located.

The appropriate authority considered the objections filed by the appellants and rejected them by an order dated July 29, 1994, passed u/s. 269UD of the Income-tax Act. The authority rejected all the objections taken by the appellants. The authority validated the sale instance relied on in the show-cause notice without giving any finding on the specific objections raised. It rejected the sale instance relied on by the appellants of a property in the same locality on the ground that that property does not have road on the three sides like the property under consideration there is a nallah carrying waste water near that property and it has a frontage of only 12.5 mtrs. It took into account the consideration of Rs.1,00,40,000 and deducted from it an amount of Rs. 24,09,600 being discount calculated at the rate of 8% per annum since the consideration had been deferred for a period of three years. It, therefore, determined the consideration for purchase of the subject property at Rs.76,30,400.

By a writ petition before the High Court challenging the compulsory pre-emptive purchase, the appellants raised several contentions. They maintained that the impugned order did not contain any finding that the consideration for the transaction was undervalued by the parties in order to evade taxes, which is the mischief sought to be prevented. The High Court, however, dismissed the petition of the appellants. Being aggrieved, the appellants approached the Supreme Court.

The Supreme Court noted that Vidarbha Engineering itself is a lessee holding the land on lease of 30 years from Nagpur Improvement Trust. It has no authority to transfer the land. Further, no clause in the agreement purported to transfer the subject land to Unitech. On the other hand, clause 4.6 specifically provided that nothing in the agreement shall be construed to be a demise, assignment or a conveyance. The agreement thus created a licence in favour of Unitech under which the latter may enter upon the land and at its own cost build on it and thereupon handover 22% of the built-up area to the share of Vidarbha Engineering as consideration and retain 78% of the built up area. The Supreme Court observed that it may appear at first blush that the collaboration agreement involved an exchange of property in the sense that the land holder transferred his property to the developer and the developer transferred 22% of the constructed area to the land holder but on a closer look this impression was quickly dispelled.

The Supreme Court noted that the word “Exchange” was defined vide section 118 of the Transfer of Property Act, 1882 as a mutual transfer of the ownership of one thing for the ownership of another. But it was not possible to construe the license created by Vidarbha Engineering in favour of Unitech as a transfer or acquisition of 22% share of the constructed building as a transfer in exchange. Vidarbha Engineering was not an owner but only a lessee of the land. As such, it could not convey a title which it did not possess itself. In fact, no clause in the agreement purported to effect a transfer. Also in consideration of the license Unitech had agreed that the Vidarbha Engineering will have a share of 22% in the constructed area. Thus it appeared that what was contemplated was that upon construction Unitech would retain 78% and the share of Vidarbha Engineering would be 22% of the built-up area vide clause 4.6 of the agreement . Thus the transaction could not be construed as a sale, lease or a licence.

The Supreme Court noted that in terms of section 269UA(d) of the Act “Immovable property” consisted of : (a) not only land or building vide sub-clause (i) but also (b) any rights in or with respect to any land or building Including building which is to be constructed.

“Transfer” of such right in or with respect to any land or building was defined in clause (f) of section 269UA of Act as the doing of anything which had the effect of transferring, or enabling the enjoyment of, such property. According to the Supreme Court, the question whether the collaboration agreement constituted transfer of property, therefore, should be answered with reference to clauses (d) and (f) which defined immovable property and transfer. The Supreme Court held that it was clear from the agreement that the transfer of rights of Vidarbha Engineering in its land did not amount to any sale, exchange or lease of such land, since only possessory rights had been granted to Unitech to construct the building on the land. Nor was there any clause in the agreement expressly transferring 22 per cent. of the building to Vidarbha after it is constructed by Unitech. Clause 4.6 only mentioned that as a consideration for Unitech agreeing to develop the property it shall retain 78 per cent. and the share of Vidarbha Engineering would be 22 per cent .

The Supreme Court observed that in fact Parliament had defined “transfer” deliberately wide enough to include within its scope such agreements or arrangement which have the effect of transferring all the important rights in land for future considerations such as part acquisition of shares in buildings to be constructed, vide sub-clause (ii) of clause (f) of section 269UA. There was no doubt that the collaboration agreement could be construed as an agreement and in any case an arrangement which has the effect of transferring and in any case enabling the enjoyment, of such property. Undoubtedly, the collaboration agreement enabled United to enjoy the property of Vidarbha Engineering for the purpose of construction. There was also no doubt that an agreement was an arrangement. The Supreme Court therefore held that the collaboration agreement effectuated a transfer of the subject land from Vidarbha Engineering to Unitech within the meaning of the term in section 269UA of the Act. It appeared tocover all such transactions by which valuable rights in property are in fact transferred by one party to another for consideration, under the word “transfer”, for fulfilling the purpose of pre-emptive purchase, i.e. prevention of tax evasion. The supreme Court approved the judgment of the Patna High Court in Ashis Mukerji vs. Union of India (1996) 222 ITR 168 (Pat) which took the view that a development agreement was covered by the definition of transfer in section 269UA.

The Supreme Court however further noted that the authority took the consideration for the land to be Rs. 1,00,40,000 which was the consideration stated by the appellant in the statement as a consideration for the transfer of subject property, i.e. plot Nos. 34, 35 and 36 admeasuring 2595.152 sq. mtrs. = 27,934 sq ft. According to the Supreme Court, it was however, difficult to imagine how or why the authority had considered the consideration to be for 56,473 sq. ft. (of available FSI). This had obviously resulted in showing a lower price of Rs. 184 per sq. ft. of FSI and enabling the authority to draw a prima facie conclusion that the consideration was understated by more than 15% in comparison to the sale instance for which the price appears to be Rs.283 per sq. ft. of FSI. If the authority had to take into a account the consideration of Rs.1,00,40,000 for 27,934 sq.ft. to a piece of land as stated by the appellants the rate would have been Rs. 359.41 per sq. and the rate of the sale instance would have been Rs. 246.14 per. sq. ft. According to the Supreme Court, the authorities had thus committed a serious error in taking the consideration quoted by the appellants for the entire subject land, i.e. 27,934 sq. ft. as consideration for the transfer of the available FSI i.e., 56,473 sq ft. thus showing an unwarranted undervaluation. The Supreme Court further noted that the authorities had treated the consideration for subject land, which was an industrial plot, as understated by more than 15% on the basis of a sale instance of a land which is in a residential locality and also that the area of the sale instance was of much smaller plot of 736 sq mtrs whereas the subject land was 2,024 sq. mtrs.

According to the Supreme Court, the authority fell into a gross and an obvious error while conducting this entire exercise of holding that the consideration for the subject property was understated in holding that Vidabha Engineering had transferred property to the extent of 78% to Unitech. There was no warrant for this finding since Vidabha Engineering was never to be the owner of the entire built-up area. It only had a share of 22% in it. Unitech., which had built from its own funds, was to retain 78% share in the built-up area. And in any case the appellants had never stated that the consideration for Rs. 1,00,40,000 was in respect of the built-up area but on the other hand had clearly stated that it was for transfer of the subject land.

The Supreme Court held that the High Court had failed to render a finding on the relevance of comparable sale instances, particularly, why a sale instance in an adjoining locality had been considered to be valid instead of a sale instance in the same locality. Also, it had missed the other aspects referred hereinbefore.

The Supreme Court therefore, allowed the appeal of the appellants and set aside the orders of the High Court and that of the appropriate authority.

Date & Cost of Acquisition of Capital Asset Converted from Stock in Trade

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For the purpose of computation of capital gains under the Income-tax Act, 1961, the period of holding of a capital asset is important. The manner of computation of long term capital gains and the rate at which it is taxed differs from that of short term capital gains, and it is the period of holding of the capital assets which determines whether the capital gains is long term or short term. For determination of the period of holding, the date of acquisition of a capital asset and the date of transfer thereof are relevant.

Explanation 1 to section 2(42A), vide its various clauses, provides for inclusion and exclusion of certain period, in determining the period for which any capital asset is held, under the specified circumstances. There is however, in the Explanation 1, no specific provision to determine the period of holding of the capital asset in a case where the asset is first held as stock in trade, and is subsequently converted into a capital asset.

Similarly, qua cost of acquisition, section 55(2)(b) permits substitution of the fair market value as on 1 April 1981 for the cost of acquisition, where the capital asset became the property of the assessee before 1st April, 1981. Where an asset is held as stock in trade as on 1st April, 1981 and subsequently converted into a capital asset before its transfer, is substitution of the fair market value as on 1st April, 1981 permissible? In cases where the asset in question is acquired on or after 01.04.1981, difficulties arise for determining the cost thereof. Should it be the cost on the date of acquiring the stock or should it be the market value prevailing on the date of conversion?

There have been differing views of the tribunal on the subject. While the Calcutta, Delhi and Chennai benches of the tribunal have taken the view that only the period of holding of an asset held as a capital asset has to be considered for the purposes of determination of the period of holding and that the asset has to have been held as a capital asset as on 1st April, 1981 in order to get the benefit of substitution of fair market value as on that date, the Pune bench of the tribunal has taken the view that the period of holding commences from the date of acquisition of the asset as stock in trade, and that even if the asset is held as stock in trade as on 1st April, 1981, the benefit of substitution of fair market value as on the date is available. Yet again, the Mumbai bench has held that the adoption of the suitable cost is at the option of the assessee.

B. K. A. V. Birla’s case
The issue first came up before the Calcutta bench of the tribunal in the case of ACIT vs. B K A V Birla (1990) 35 ITD 136.

In this case, the assessee was an HUF, which acquired certain shares of a company, Zenith Steel, in 1961, and held them as investments till 1972, when the shares were converted into stock in trade. While the shares were held as stock in trade, the assessee received further bonus shares on these shares. The shares were again converted into investments on 9th September 1982, and all the shares were sold in August 1984.

The assessee claimed that the capital gains on sale of the shares was long term capital gains, and claimed deductions u/ss. 80T and 54E. The assessing officer treated the shares as short term capital assets, since they were sold within 2 years of conversion into capital assets, and therefore denied the benefit of deductions u/ss. 80T and 54E. The Commissioner (Appeals) held that since the shares were held since 1961, they were long-term capital assets.

On behalf of the revenue, it was argued that the definition of “capital asset” in section 2(14) excluded any stock in trade, held for the purposes of business or profession. It was claimed that to qualify as a long-term capital asset, the asset must be held as a capital asset for a period of more than 36 months. In calculating that period, the period during which the asset was held as stock in trade could not be considered, since the asset was not held as a capital asset during that period.

On behalf of the assessee, while it was agreed that so long as the shares were held as stock in trade, they were not capital assets, it was argued that while it was necessary as per section 2(42A) that the asset should be held as capital asset at the time of sale, it was not necessary that it should be held as a capital asset for a period exceeding 36 months to qualify as a long-term capital asset. According to the assessee, the only thing necessary was that the assessee should hold the assets for a period exceeding 36 months. Therefore, according to the assessee, the period for which the assets were held as stock in trade was also to be taken into account for determining whether the assets sold were short term or long term capital assets.

The Tribunal was of the view that the definition of the term “short term capital asset” as per section 2(42A) made it clear that it was a capital asset, which be held for a period of less than 36 months, and not any asset. The use the words “capital asset”, in the definition, and the word “capital” in it could not be ignored. According to the tribunal, the scale of time for determining the period of holding was to be applied to a capital asset, and not to an ordinary asset. The Tribunal noted that the word ”asset” was not defined, and the term “short term capital asset” was defined only for computing income relating to capital gains. Capital gains arose on transfer of a capital asset, and therefore, according to the tribunal, period during which an asset was held as a stock was not relevant for the purposes of computation of capital gains. For the Tribunal, the clear scheme of the Act required moving backward in time from the date of transfer of the “capital asset” to the date when it was first held as a capital asset, to determine whether the gain or loss arising was long term or short term.

If the capital asset was held for less than 36 months, it was short term, otherwise it was long term. The Tribunal therefore did not see any justification for including the period for which the shares were held as stock in trade for determining whether those were held as long term capital assets or not. The Tribunal therefore held that the shares had been held for a period of less than 36 months as capital assets, and were therefore short term capital assets.

Recently, the Delhi bench of the tribunal in the case of Splendour Constructions, 122 TTJ 34 held, on similar lines, that the period of holding of a capital asset, converted from stock-in-trade, should be reckoned from the date when the asset was converted into a capital asset and not from the date of acquisition of the asset. The Chennai bench of the tribunal in the case of Lohia Metals (P) Ltd., 131 TTJ 472 held on similar lines that the period of holding would be reckoned from the date of conversion of stock-in-trade into a capital asset.

Kalyani Exports & Investments (P) Ltd .’s case
The issue again came up before the Pune bench of the Tribunal in the case of Kalyani Exports & Investments (P) Ltd/Jannhavi Investments (P) Ltd/Raigad Trading (P) Ltd vs. DCIT 78 ITD 95 (Pune)(TM).

In this case, the assessee acquired certain shares of Bharat Forge Ltd. in March 1977, in respect of which it received bonus shares in June 1981 and October 1989. The shares were initially held by it as stock in trade. On 1st July 1988, the shares were converted into capital assets at the rate of Rs.17 per share, which was the original purchase price in 1977. The assessee sold the shares in the previous year relevant to assessment year 1995- 96. It showed the gains as long term capital gains, taking the fair market value of the shares as at 1st April, 1981 in substitution of the cost of acquisition u/s 55(2)(b)(i).

The assessing officer took the view that the asset should have been a capital asset within the meaning of section 2(14), both at the point of purchase and at the point of sale. Though the assessee had sold a capital asset, when it was purchased it was stock in trade, and since it was converted into a capital asset only in 1988, the assessing officer was of the view that the option of substituting the fair market value of the shares as on 1st April, 1981 was not available to the assessee. According to the assessing officer, since the shares had been converted into capital assets at the rate of Rs. 17 per share, the cost of acquisition would be Rs. 17 per share, with the date of acquisition being 1988. So far as the bonus shares were concerned, according to the assessing officer, the cost (and not the indexed cost) of the original shares was to be spread over both the original and the bonus shares. The Commissioner (Appeals) upheld the view taken by the assessing officer.

Before the tribunal, it was argued on behalf of the assessee that what was deductible from the consideration for computation of the capital gain was the cost of acquisition of the capital asset. It was submitted that an assessee could acquire an asset only once; it could not acquire an asset as a non-capital asset at one time, and later on acquire the same as a capital asset. As per section 55(2)(b), the option for adopting the fair market value as on 1st April, 1981 was available if the capital asset in question became the property of the assessee before 1st April, 1981. It was claimed that since the assessee held the shares as stock in trade before that date, they did constitute the property of the assessee before 1st April 1981.

It was pointed out that even under section 49, when the capital asset became the property of the assessee through any of the mode specified therein such as gift, will, inheritance, etc, the cost of acquisition was deemed to be the cost for which the previous owner acquired it. Even if the previous owner held it as stock in trade, it would amount to a capital asset in the case of the recipient, and the cost to the previous owner would have to be taken as the cost of acquisition. Reliance was placed on the decisions of the Gujarat High Court in the case of Ranchhodbhai Bahijibhai Patel vs. CIT 81 ITR 446 and of the Bombay High Court in the case of Keshavji Karsondas vs. CIT 207 ITR 737. It was further argued that the benefit of indexation was to account for inflation over a period of years. That being so, there was no reason as to why the assessee should be denied that benefit from 1st April, 1981, because whether he held it as stock in trade or as a capital asset, the rise in price because of inflation was the same. It was therefore argued that indexation should be allowed from 1st April, 1981 onwards and not from July 1988.

As regards the bonus shares, on behalf of the assessee, it was argued that the cost of acquisition, being the fair market value as on 1st April, 1981, did not undergo any change on account of subsequent issue of bonus shares. Therefore, the cost of acquisition could not be spread over the original and the bonus shares.

On behalf of the revenue, it was argued that the term “for the first year in which the asset was held by the assessee” found in explanation (iii) to section 48, which defined index cost of acquisition, referred to asset, which meant capital asset. It was argued that the assessee itself had taken the cost of shares at the time of conversion at Rs. 17 in its books of accounts. In fact, the market value of shares on the date of conversion was about Rs. 50 per share, and if the conversion had been at market price, the difference of Rs. 33 on account of appreciation in the value of the shares would have been taxable as business income. However, since the assessee chose to convert the stock in trade into capital asset at the price of Rs. 17, this was the cost of acquisition to the assessee.

There was a conflict of views between the Accountant Member and the Judicial Member. While the Accountant Member agreed with the view taken by the assessing officer, the Judicial Member was of the view that the decisions cited by the assessee applied to the facts of the case before the tribunal, and that the assessee was entitled to substitute the fair market value of the shares as on 1st April, 1981 for the cost of acquisition, since the shares were acquired by the assessee (though as stock in trade) prior to 1st April, 1981.

On a reference to the Third Member, the Third Member was of the view that the issue was covered by the decision of the Bombay High Court in the case of Keshavji Karsondas (supra) in which case, it was held that an asset could not be acquired first as a non-capital asset at one point of time and again as a capital asset at a different point of time. In the said case, according to the Bombay High Court, there could be only one acquisition of an asset, and that was when the assessee acquired it for the first time, irrespective of its character at that point of time and therefore, what was relevant for the purposes of capital gains was the date of acquisition and not the date on which the asset became a capital asset. The Bombay High Court in that case, had followed the decision of the Gujarat High Court in the case of Ranchhodbhai Bhaijibhai Patel (supra), where the Gujarat High Court had held that the only condition to be satisfied for attracting section 45 was that the property transferred must be a capital asset on the date of transfer, and it was not necessary that it should also have been a capital asset on the date of acquisition. According to the Bombay High Court, in the said case, the words “the capital asset” in section 48(ii) were identificatory and demonstrative of the asset, and intended only to refer to the property that was the subject of capital gains levy, and not indicative of the character of the property at the time of acquisition.

The Third Member therefore held in favour of the assessee, holding that the option of substituting the fair market value as on 1st April 1981 was available to the assessee, since the shares had been acquired in March 1977. The Third Member agreed with the Judicial Member that explanation (iii) to section 48 came into play only after the cost of acquisition has been ascertained. Once the cost of acquisition in 1977 was allowed to be substituted by the fair market value as on 1st April, 1981, it followed that the statutory cost had to be increased in the same proportion in which cost inflation index had increased up to the year in which the shares were sold.

The Third Member also agreed with the view of the Judicial Member that there was no double benefit to the assessee if it was permitted the option of adopting the fair market value of the shares as on 1st April, 1981. According to him, the difference between the market value and the conversion price could not have been brought to tax in any case, in view of the law laid down by the Supreme Court in the case of Sir Kikabhai Premchand vs. CIT 24 ITR 506, to the effect that no man could make a profit out of himself. If the assessee was not liable to be taxed in respect of such amount according to the law of the land as declared by the Supreme Court, no benefit or concession could be said to have been extended to him. If he could not have been taxed at the point of conversion, tax authorities could not claim that he got another benefit when he was given the option to substitute the market value as on 1st April, 1981, amounting to a double benefit. The right to claim the fair market value as on 1st April 1981, was a statutory right which could be exercised when the prescribed conditions were fulfilled.

The Tribunal therefore held that the shares would be regarded as having been acquired on the date when they were purchased as stock in trade, and that the assessee therefore had the right to substitute the fair market value as on 1st April, 1981 for the cost of acquisition.

A similar, though slightly different, view was taken by the Mumbai bench of the Tribunal in another case, ACIT vs. Bright Star Investment (P) Ltd 120 TTJ 498, in the context of the cost of acquisition. In that case, the assessing officer sought to bifurcate the gains into 2 parts – business income till the date of conversion of shares from stock in trade to investment, by taking the fair market value of the shares as on the date of conversion, and capital gains from the date of conversion till the date of sale. The assessee claimed the difference between the sale price of the shares and the book value of shares on the date of conversion, with indexation from the date of conversion, as capital gains. The Tribunal took the view that where 2 formulae were possible, the formula favourable to the assessee should be accepted, and accepted the assessee’s claim that the entire income was capital gains, with indexation of cost from the date of conversion.

Observations
The important parameters in computing capital gains are the cost of acquisition and the date of acquisition besides the date of transfer and the value of consideration. They together decide the nature of capital gains; long term or short term vide section 2(42A), the benefit of indexation u/s 48, the benefit of exemption u/s 10 or 54,etc. and the benefit of concessional rate of tax u/s 112,etc.

Whether a capital gains on transfer of a capital asset is a short term gain or a long term gain is determined w.r.t its period of holding. Usually, this period is identified w.r.t the actual date of acquisition of an asset and the date of its transfer. This simple calculation gets twisted in cases where the asset under transfer is acquired in lieu of or on the strength of another asset. For example, liquidation, merger, demerger, bonus, rights, etc. These situations are taken care of by fictions introduced through various clauses of Explanation 1 to section 2(42A). Similar difficulties arising in the context of cost of acquisition are taken care of either by section 49 or 55 of the Act by providing for the substitution of the cost of acquisition in such cases.

The provisions of section 2(42A) and of section 55 or 49 do not however help in directly addressing the situation that arise in computation of capital gains on transfer of a capital asset that had been originally acquired as a stockin- trade but has later been converted in to a capital asset. All the above referred issues pose serious questions, in computation of capital gains of a converted capital asset.

It is logical to concede that an asset in whatever form acquired can have only one cost of acquisition and one date of acquisition. This date and cost cannot change on account of conversion or otherwise, unless otherwise provided for in the Act. No specific provisions are found in the Act to deem it otherwise to disturb this sound logic. This simple derivation however is disturbed due to the language of section 2(42A), which had in turn helped some of the benches of tribunal to hold that the period should be reckoned from the date of conversion and not the date of acquisition.

An asset cannot be acquired at two different points of time and that too for one cost alone. A change in its character, at any point of time, thereafter cannot change its date and cost of acquisition. Again, for the purposes of computation of capital gains it is this date and cost that are relevant, not the date of conversion. For attracting the charge of capital gains tax, what is essential is that the asset under transfer should have been a capital asset on the date of transfer; that is the only condition to be satisfied for attracting section 45 and whether the property transferred had been a capital asset on the date of acquisition or not is not material at all as has been held by the Gujarat high court in Ranchhodbhai Bhaijibhai Patel (supra)’s case.

It is true that a lot of confusion could have been avoided had the legislature, in section 2(42A), used the words “ ‘short term capital asset’ means an asset held by an assessee……” instead of “ ‘short term capital asset’ means a capital asset held by an assessee……” . While it could have avoided serious differences, in our considered opinion, the only way of reconciling the difference is to read the wordings in harmony with the overall scheme of taxation of capital gains which envisages one and only one date of acquisition and one cost of acquisition. Reading it differently will not only be unjust but will give absurd results in computation of gains. Any different interpretation might lead to situations wherein a part of the gains arising on conversion of stock would go untaxed. If the idea is to tax the whole of the surplus i.e the difference between the sale consideration and the cost, the only way of reading the provisions is to read them harmoniously in a manner that a meaning which is just, is given to them.

The view taken by the Pune bench of the tribunal in Kalyani Exports case (supra) is supported by the view taken by the Gujarat and Bombay High Courts, in cases of Ranchhodbhai Bhaijibhai Patel (supra) and Keshavji Karsondas (supra) as to when a capital asset can be held to have been acquired, when it was not a capital asset at the time of acquisition. As observed by the Third Member, those decisions cannot be distinguished on the grounds that they related to agricultural land, which was not a capital asset at the time of its acquisition, but became a capital asset subsequently, on account of a statutory amendment. The ratio of the said decisions apply even to the case of conversion of stock in trade into capital asset though it is on account of an act of volition on the part of the assessee. The issue is the same, that the asset was not a capital asset on the date of acquisition, but becomes a capital asset subsequently before its transfer.

The Mumbai bench of the Tribunal in Bright Star Investments case proceeded on the fact that the assessee itself did not claim indexation from the date of acquisition of the asset as stock in trade, but claimed it only from the date of conversion into capital asset. Therefore, the issue of claiming indexation from the earlier date of acquisition as stock in trade was not really the subject matter of the dispute before the tribunal.

Section 55(2)(b), uses both the terms “capital asset” and “property”. Section 55(2)(b) does not require that the capital asset should have been held as the capital asset of the assessee as at 1st April. 1981; it simply requires that the capital asset should have become the property of the assessee prior to that date. This conscious use of different words indicates that so long as the asset was acquired before that date, the benefit of substitution of fair market value for cost is available.

The decision of the Pune bench of the Tribunal in Kalyani Exports’ case has also subsequently been approved of by the Bombay High Court, reported as CIT vs. Jannhavi Investments (P) Ltd 304 ITR 276. In that case, the Bombay High Court reaffirmed its finding in Keshavji Karsondas’ case that cost of acquisition could only be the cost on the date of the actual acquisition, and that there was no acquisition of the shares when they were converted from stock in trade to capital assets and clarified that the amendment in section 48 for introducing the benefit of indexation did not in any way nullify or dilute the ratio laid down in Keshavji Karsondas’ case.

Therefore, clearly, the view taken by the Pune and Mumbai benches of the Tribunal and approved by the Bombay high court seems to be the correct view of the matter, and the date of conversion is irrelevant for the purpose of computing the period of holding, or substitution of the fair market value as on 1st April 1981 for the cost of acquisition.

RULES FOR INTERPRETATION OF TAX STATUTES – PART – II

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Introduction
In the April issue of the BCAJ, I had discussed the basic rules of interpretation of tax statutes.This article continues to explain each rule extensively and elaborately, supported by binding precedents.

1. Interpretation of Double Taxation Avoidance Agreements :

The principles set out in Vienna Convention as agreed on 23rd May, 1969 are recognised as applicable to tax treaties. Rules embodied in Articles 31, 32 and 33 of the Convention are often referred to in interpretation of tax treaties.S Some aspects of those Articles are good faith; objects and purpose and intent to enter into the treaty. Discussion papers are referred to resolve ambiguity or obscurity. These basic principles need to be kept in mind while construing DTAA .

1.1. Maxwell on the Interpretation of Statutes mentions the following rule, under the title ‘presumption against violation of international law’: “Under the general presumption that the legislature does not intend to exceed its jurisdiction, every statute is interpreted, so far as its language permits, so as not to be inconsistent with the comity of nations or the established rules of international law, and the court will avoid a construction which would give rise to such inconsistency, unless compelled to adopt it by plain and unambiguous language. But if the language of the statute is clear, it must be followed notwithstanding the conflict between municipal and international law which results”.

2.2. In John N. Gladden vs. Her Majesty the Queen, the Federal Court observed:”Contrary to an ordinary taxing statute, a tax treaty or convention must be given a liberal interpretation with a view to implementing the true intentions of the parties. A literal or legalistic interpretation must be avoided when the basic object of the treaty might be defeated or frustrated insofar as the particular item under consideration is concerned.” The Federal Court in N. Gladden vs. Her Majesty the Queen 85 D.T.C. 5188 said : “”The non-resident can benefit from the exemption regardless of whether or not he is taxable on that capital gain in his own country. If Canada or the U.S. were to abolish capital gains completely, while the other country did not, a resident of the country which had abolished capital gains would still be exempt from capital gains in the other country.”

1.3. An important principle which needs to be kept in mind in the interpretation of the provisions of an international treaty, including one for double taxation relief, is that treaties are negotiated and entered into at a political level and have several considerations as their bases. Commenting on this aspect of the matter, David R. Davis in Principles of International Double Taxation Relief, points out that the main function of a Double Taxation Avoidance Treaty should be seen in the context of aiding commercial relations between treaty partners and as being essentially a bargain between two treaty countries as to the division of tax revenues between them in respect of income falling to be taxed in both jurisdictions.

1.4. The benefits and detriments of a double tax treaty will probably only be truly reciprocal where the flow of trade and investment between treaty partners is generally in balance. Where this is not the case, the benefits of the treaty may be weighted more in favour of one treaty partner than the other, even though the provisions of the treaty are expressed in reciprocal terms. This has been identified as occurring in relation to tax treaties between developed and developing countries, where the flow of trade and investment is largely one way. Because treaty negotiations are largely a bargaining process with each side seeking concessions from the other, the final agreement will often represent a number of compromises, and it may be uncertain as to whether a full and sufficient quid pro quo is obtained by both sides.” And, finally, “Apart from the allocation of tax between the treaty partners, tax treaties can also help to resolve problems and can obtain benefits which cannot be achieved unilaterally.

1.5. The Supreme Court in Vodafone International Holdings B.V. vs. Union of India (2012) 341-ITR-1 (SC) observed: “The court has to give effect to the language of the section when it is unambiguous and admits of no doubt regarding its interpretation, particularly when a legal fiction is embedded in that section. A legal fiction has a limited scope and cannot be expanded by giving purposive interpretation particularly if the result of such interpretation is to transform the concept of chargeability. It also reiterated and declared “All tax planning is not illegal or illegitimate or impermissible”. McDowell ‘s case has been explained and watered down.

1.6. Tax treaties are intended to grant tax relief and not to put residents of a contracting country at a disadvantage vis-a-vis other taxpayers. Section 90(2) of the Income-tax Act lays down that in relation to the assessee to whom an agreement u/s. 90(1) applies, the provisions of the Act shall apply to the extent they are more beneficial to that assessee. Circular No. 789 dated April 13, 2000 (2000) 243-ITR-(St.) 57 has been declared as valid in Vodafone International Holdings B.V. vs. UOI (2012) 341 ITR 1 ) SC) at 101. The Supreme Court in C.I.T. vs. P.V.A.L. Lulandagan Chettiar (2004) 267-ITR-657 (SC) has held : “In the case of a conflict between the provisions of this Act and an Agreement for Avoidance of Double Taxation between the Government and a foreign State, the provisions of the Agreement would prevail over those of the Act.

1.7. The Jaipur Bench of I.T.A.T. (TM) in Modern Threads Case 69-ITD-115 (TM) relying on the Circular dated 2.4.1982 held that the terms of DTAA prevail. It also observed: “The tax benefits are provided in the DTAA as an incentive for mutual benefits. The provisions of the DTAA are, therefore, required to be construed so as to advance its objectives and not to frustrate them. This view finds ample support from the decision of the Hon’ble Supreme Court in the case Bajaj Tempo Ltd. vs. CIT 196-ITR-188 and CIT vs. Shan Finance Pvt. Ltd. 231-ITR-308”. The Bangalore Bench in IBM World Trade Corp. vs. DIT (2012) 148 TTJ 496 held that the provisions of the Act or treaty whichever is beneficial are applicable to the assessee.

2. Explanation :

The normal principle in construing an Explanation is to understand it as explaining the meaning of the provision to which it is added The Explanation does not enlarge or limit the provision, unless the Explanation purports to be a definition or a deeming clause. If the intention of the Legislature is not fully conveyed earlier or there has been a misconception about the scope of a provision, the Legislature steps in to explain the purport of the provision; such an Explanation has to be given effect to, as pointing out the real meaning of the provision all along. If there is conflict in opinion on the construction of a provision, the Legislature steps in by inserting the Explanation, to clarify its intent. Explanation is normally clarificatory and retrospective in operation. However, the rule governing the construction of the provisions imposing penal liability upon the subject is that such provisions should be strictly construed. When a provision creates some penal liability against the subject, such provision should ordinarily be interpreted strictly.

2.1. The orthodox function of an Explanation is to explain the meaning and effect of the main provision. It is different in nature from a proviso, as the latter excepts, excludes or restricts, while the former explains or clarifies and does not restrict the operation of the main provision. An Explanation is also different from rules framed under an Act. Rules are for effective implementation of the Act whereas an Explanation only explains the provisions of the section. Rules cannot go beyond or against the provisions of the Act as they are framed under the Act and if there is any contradiction, the Act will prevail over the Rules. This is not the position vis-à-vis the section and its Explanation. The latter, by its very name, is intended to explain the provisions of the section, hence, there can be no contradiction. A section has to be understood and read hand in hand with the Explanation, which is only to support the main provision, like an example does not explain any situation, held in N. Govindaraju vs. I.T.O. (2015) 377-ITR-243 (Karnataka).

2.2. Ordinarily, an Explanation is introduced by the Legislature for clarifying some doubts or removing confusion which may possibly arise from the existing provisions. Normally, therefore, an Explanation would not expand the scope of the main provision and the purpose of the Explanation would be to fill a gap left in the statute, to suppress a mischief, to clear a doubt or as is often said to make explicit what was implicit as held in Katira Construction Ltd. vs. Union of India (2013) 352-ITR-513 (Gujarat).

3. Proviso :

A proviso qualifies the generality of the main enactment by providing an exception and taking out from the main provision, a portion, which, but for the proviso would be part of the main provision. A proviso, must, therefore, be considered in relation to the principal matter to which it stands as a proviso. A proviso should not be read as if providing by way of an addition to the main provision which is foreign to the principal provision itself. Indeed, in some cases, a proviso may be an exception to the main provision though it cannot be inconsistent with what is expressed thereinand, if it is, it would be ultra vires the main provision and liable to be struck down. As a general rule, in construing an enactment containing a proviso, it is proper to construe the provisions together without making either of them redundant or otiose. Even where the enacting part is clear, it is desirable to make an effort to give meaning to the proviso with a view to justifying its necessity.

3.1. A proviso to a provision in a statute has several functions and while interpreting a provision of the statue, the court is required to carefully scrutinise and find out the real object of the proviso appended to that provision. It is not a proper rule of interpretation of a proviso that the enacting part or the main part of the section be construed first without the proviso and if the same is found to be ambiguous only then recourse maybe had to examine the proviso. On the other hand, an accepted rule of interpretation is that a section and the proviso thereto must be construed as a whole, each portion throwing light, if need be, on the rest. A proviso is normally used to remove special cases from the general enactment and provide for them specially.

3.2. A proviso must be limited to the subject-matter of the enacting clause. It is a settled rule of construction that a proviso must prima facie be read and considered in relation to the principal matter to which it is a proviso. It is not a separate or independent enactment. “Words are dependent on the principal enacting words to which they are tacked as a proviso. They cannot be read as divorced from their context” (Thompson vs. Dibdin, 1912 AC 533). The rule of construction is that prima facie a proviso should be limited in its operation to the subject-matter of the enacting clause. To expand the enacting clause, inflated by the proviso, is a sin against the fundamental rule of construction that a proviso must be considered in relation to the principal matter to which it stands as a proviso. A proviso ordinarily is but a proviso, although the golden rule is to read the whole section, inclusive of the proviso, in such manner that they mutually throw light on each other and result in a harmonious construction” as observed in: Union of India & Others vs. Dileep Kumar Singh (2015) AIR 1421 at 1426-27.

4. Retrospective or Prospective or Retroactive :
It is a well-settled rule of interpretation hallowed by time and sanctified by judicial decisions that, unless the terms of a statute expressly so provide or necessarily require it, retrospective operation should not be given to a statute, so as to take away or impair an existing right, or create a new obligation or impose a new liability otherwise than as regards matters of procedure. The general rule as stated by Halsbury in volume 36 of the Laws of England (third edition) and reiterated in several decisions of the Supreme Court as well as English courts is that “all statutes other than those which are merely declaratory or which relate only to matters of procedure or of evidence are prima facie prospective” and retrospective operation should not be given to a statute so as to effect, alter or destroy an existing right or create a new liability or obligation unless that effect cannot be avoided without doing violence to the language of the enactment. If the enactment is expressed in language which is fairly capable of either interpretation, it ought to be construed as prospective only.

4.1. In Hitendra Vishnu Thakur vs. State of Maharashtra, AIR 1994 S.C. 2623, the Supreme Court held: (i) A statute which affects substantive rights is presumed to be prospective in operation, unless made retrospective, either expressly or by necessary intendment, whereas a statute which merely affects procedure, unless such a construction is textually impossible is presumed to be retrospective in its application, should not be given an extended meaning, and should be strictly confined to its clearly defined limits. (ii) Law relating to forum and limitation is procedural in nature, whereas law relating to right of action and right of appeal, even though remedial, is substantive in nature; (iii) Every litigant has a vested right in substantive law, but no such right exists in procedural law. (iv) A procedural statute should not generally speaking be applied retrospectively, where the result would be to create new disabilities or obligations, or to impose new duties in respect of transactions already accomplished. (v) A statute which not only changes the procedure but also creates new rights and liabilities, shall be construed to be prospective in operation, unless otherwise provided, either expressly or by necessary implication. This principle stands approved by the Constitution Bench in the case of Shyam Sunder vs. Ram Kumar AIR 2001 S.C. 2472.

4.2. It has been consistently held by the Supreme Court in CIT vs. Varas International P. Ltd. (2006) 283-ITR-484 (SC) and recently, that for an amendment of a statute to be construed as being retrospective, the amended provision itself should indicate either in terms or by necessary implication that it is to operate retrospectively. Of the various rules providing guidance as to how a legislation has to be interpreted, one established rule is that unless a contrary intention appears, a legislation is presumed not to be intended to have a retrospective operation. The idea behind the rule is that a current law should govern current activities. Law passed today cannot apply to the events of the past. If we do something today, we do it keeping in view the law of today and in force and not tomorrow’s backward adjustment of it. Our belief in the nature of the law is founded on the bedrock, that every human being is entitled to arrange his affairs by relying on the existing law and should not find that his plans have been retrospectively upset. This principle of law is known as lex prospicit non respicit : law looks forward not backward. As was observed in Phillips vs. Eyre3, a retrospective legislation is contrary to the general principle that legislation by which the conduct of mankind is to be regulated, when introduced for the first time to deal with future acts, ought not to change the character of past transactions carried on upon the faith of the then existing laws as observed in CIT vs. Township P. Ltd. (2014) 367-ITR-466 at 486.

4.3. If a legislation confers a benefit on some persons, but without inflicting a corresponding detriment on some other person or on the public generally, and where to confer such benefit appears to have been the legislators’ object, then the presumption would be that such a legislation, giving it a purposive construction, would warrant it to be given a retrospective effect. This exactly is the justification to treat procedural provisions as retrospective. In the Government of India & Ors. vs. Indian Tobacco Association, (2005) 7-SCC-396, the doctrine of fairness was held to be a relevant factor to construe a statute conferring a benefit, in the context of it to be given a retrospective operation. The same doctrine of fairness, to hold that a statute was retrospective in nature, was applied in the case of Vijay vs. State of Maharashtra (2006) 6-SCC-289. It was held that where a law is enacted for the benefit of community as a whole, even in the absence of a provision the statute may be held to be retrospective in nature. Refer CIT vs. Township P. Ltd. (2014) 367-ITR-466 at 487. In my view, in such circumstances, it would have a retroactive effect.

4.4. In the case of CIT vs. Scindia Steam Navigation Co. Ltd. (1961) 42-ITR-589 (SC), the court held that as the liability to pay tax is computed according to the law in force at the beginning of the assessment year, i.e., the first day of April, any change in law affecting tax liability after that date though made during the currency of the assessment year, unless specifically made retrospective, does not apply to the assessment for that year. Tax laws are clearly in derogation of personal rights and property interests and are, therefore, subject to strict construction, and any ambiguity must be resolved against imposition of the tax.

4.5. There are three concepts: (i) prospective amendment with effect from a fixed date; (ii) retrospective amendment with effect from a fixed anterior date; (iii) clarificatory amendments which are retrospective in nature; and (iv) an amendment made to a taxing statute can be said to be intended to remove “hardships” only of the assessee, not of the Department. In ultimate analysis in CIT vs. Township P. Ltd. (2014) 367-ITR-466 at 496-497 (SC), surcharge was held to be prospective and not retrospective.

4.6. The presumption against retrospective operation is not applicable to declaratory statutes. In determining, the nature of the Act, regard must be had to the substance rather than to the form. If a new Act is ‘to explain’ an earlier Act, it would be without object unless construed retrospectively. An explanatory Act is generally passed to supply an obvious omission or to clear up doubt as the meaning of the previous Act. It is well settled that if a statute is curative or merely declaratory of the previous law, retrospective operation is generally intended. An amending Act may be purely declaratory to clear a meaning of a provision of the principal Act, which was already implicit. A clarificatory amendment of this nature will have retrospective effect. It is called as retroactive.

5 May or Shall :
The use of the word “shall” in a statutory provision, though generally taken in a mandsssatory sense, does not necessarily mean that in every case it shall have that effect, that is to say, unless the words of the statute are punctiliously followed, the proceeding or the outcome of the proceeding would be invalid. On the other hand, it is not always correct to say that where the word “may” has been used, the statute is only permissive or directory in the sense that non-compliance with those provisions will not render the proceedings invalid. The user of the word “may” by the legislature may be out of reverence. The setting in which the word “may” has been used needs consideration, and has to be given due weightage.

5.1. When a statute invests a public officer with authority to do an act in a specified set of circumstances, it is imperative upon him to exercise his authority in a manner appropriate to the case, when a party interested and having a right to apply moves in that behalf and circumstances for exercise of authority are shown to exist. Even if the words used in the Statute are prima facie enabling, the courts will readily infer a duty to exercise power which is invested in aid of enforcement of a right – public or private – of a citizen. When a duty is cast on the authority, that power to ensure that injustice to the assessee or to the revenue may be avoided must be exercised. It is implicit in the nature of the power and its entrustment to the authority invested with quasi-judicial functions. That power is not discretionary and the Officer cannot, if the conditions for its exercise were shown to exist, decline to exercise power conferred as held by the Supreme Court in L. Hirday Narain vs. I.T.O. (1970) 78 I.T.R. 26.

5.2. Use of the word “shall” in a statute ordinarily speaking means that the statutory provision is mandatory. It is construed as such, unless there is something in the context in which the word is used which would justify a departure from this meaning. Where an assessee seeks to claim the benefit under a statutory scheme, he is bound to comply strictly with the conditions under which the benefit is granted. There is no scope for the application of any equitable consideration when the statutory provisions are stated in plain language. The courts have no power to act beyond the terms of the statutory provision under which benefits have been granted to a tax payer. The provisions contained in an Act are required to be interpreted, keeping in view the well recognised rule of construction that procedural prescriptions are meant for doing substantial justice. If violation of the procedural provision does not result in denial of fair hearing or causes prejudice to the parties, the same has to be treated as directory notwithstanding the use of word ‘shall’, as observed in Shivjee Singh vs. Nagendra Tiwary AIR 2010 S.C. 2261 at 2263.

5.3. In certain circumstances, the word ‘may’ has to be read as ‘shall’ because an authority charged with the task of enforcing the statute needs to decide the consequences that the Legislature intended to follow from failure to implement the requirement. Hence, the interpretation of the two words would always depend on the context and setting in which they are used.

6. Mandatory or Directory :

It is beyond any cavil that the question as to whether the provision is directory or mandatory would depend upon the language employed therein. (See Union of India and others vs. Filip Tiago De Gama of Vedem Vasco De Gama, (AIR 1990 SC 981 : (1989) Suppl. 2 SCR 336). In a case where the statutory provision is plain and unambiguous, the Court shall not interpret the same in a different manner, only because of harsh consequences arising therefrom. In E. Palanisamy vs. Palanisamy (Dead) by Lrs. And others, (2003) 1 SCC 122), a Division Bench of the Supreme Court observed: “The rent legislation is normally intended for the benefit of the tenants. At the same time, it is well settled that the benefits conferred on the tenants through the relevant statutes can be enjoyed only on the basis of strict compliance with the statutory provisions. Equitable consideration has no place in such matter.”

6.1. The Court’s jurisdiction to interpret a statute can be invoked when the same is ambiguous. It is well known that in a given case, the Court can iron out the fabric but it cannot change the texture of the fabric. It cannot enlarge the scope of legislation or intention when the language of provision is plain and unambiguous. It cannot add or subtract words to a statue or read something into it which is not there. It cannot rewrite or recast legislation. It is also necessary to determine that there exists a presumption that the Legislature has not used any superfluous words. It is well settled that the real intention of the legislation must be gathered from the language used. It may be true that use of the expression ‘shall or may’ is not decisive for arriving at a finding as to whether statute is directory or mandatory. But the intention of the Legislature must be found out from the scheme of the Act. It is also equally well settled that when negative words are used, the courts will presume that the intention of the Legislature was that the provisions are mandatory in character.

7. Stare Decisis :

To give law a finality and to maintain consistency, the principle of stare decisis is applied. It is a sound principle of law to follow a view which is operating for a long time. Interpretation of a provision rendered years back and accepted and acted upon should not be easily departed from. While reconsidering decisions rendered a long time back, the courts cannot ignore the harm that is likely to happen by unsettling the law that has been settled. Interpretation given to a provision by several High Courts without dissent and uniformly followed; several transactions entered into based upon the said exposition of the law; the doctrine of stare decisis should apply or else it will result in chaos and open up a Pandora’s box of uncertainty.

7.1. The Supreme Court referring to Muktul vs. Manbhari, AIR 1958 SC 918; and relying upon the observations of the Apex Court in Mishri Lal vs. Dhirendra Nath (1999) 4 SCC 11, observed in Union of India vs. Azadi Bachao Andolan (2003) 263 ITR at 726: “A decision which has been followed for a long period of time, and has been acted upon by persons in the formation of contracts or in the disposition of their property, or in the general conduct of affairs, or in legal procedure or in other ways, will generally be followed by courts of higher authority other than the court establishing the rule, even though the court before whom the matter arises afterwards might be of a different view.”

8. Subject to and Non-obstante :
It is fairly common in tax laws to use the expression ‘Notwithstanding anything contained in this Act or Other Acts” or “Subject to other provisions of this Act or Other Acts”. The principles governing any non obstante clause are well established. Ordinarily, it is a legislative device to give such a clause an overriding effect over the law or provision that qualifies such clause. When a clause begins with “Notwithstanding anything contained in the Act or in some particular provision/provisions in the Act”, it is with a view to give the enacting part of the section, in case of conflict, an overriding effect over the Act or provision mentioned in the non obstante clause. It conveys that in spite of the provisions or the Act mentioned in the non-obstante clause, the enactment following such expression shall have full operation. It is used to override the mentioned law/provision in specified circumstances.

8.1 The Apex court in Union of India vs. Kokil (G.M.) AIR 1984 SC 1022 stated : “It is well known that a non -obstante clause is a legislative device which is usually employed to give overriding effect to certain provisions over some contrary provisions that may be found either in the same enactment or some other enactment, that is to say, to avoid the operation and effect of all contrary provisions.” In Chandavarkar Sita Ratna Rao vs. Ashalata S. Guram, AIR 1987 SC 117, it observed : “A clause beginning with the expression ‘notwithstanding anything contained in this Act or in some particular provision in the Act or in some particular Act or in any law for the time being in force, or in any contract’ is more often than not appended to a section in the beginning with a view to give the enacting part of the section, in case of conflict an overriding effect over the provision of the Act or the contract mentioned in the non obstante clause. It is equivalent to saying that in spite of the provision of the Act or any other Act mentioned in the non-obstante clause or any contract or document mentioned in the enactment following it will have its full operation, or that the provisions embraced in the non-obstante clause would not be an impediment for an operation of the enactment. The above principles were again reiterated in Parayankandiyal Eravath Kanapravan Kalliani amma vs. K. Devi AIR 1996 SC 1963 and are well settled.

8.2 The distinction between the expression “subject to other provisions’ and the expression “notwithstanding anything contained in other provisions of the Act” was explained by a Constitution Bench of the Supreme Court in South India Corporation (P.) Ltd. vs. Secretary, Board of Revenue (1964) 15 STC 74. About the former expression, the court said while considering article 372: “The expression ‘subject to’ conveys the idea of a provision yielding place to another provision or other provisions to which it is made subject.” About the non obstante clause with which article 278 began, the court said : “The phrase ‘notwithstanding anything in the Constitution’ is equivalent to saying that in spite of the other articles of the Constitution, or that the other articles shall not be an impediment to the operation of article 278.”

To be continued in the next issue.

INTEREST RATES – AN INSIGHT

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Introduction
Interest can be described as the price demanded by the lender from a borrower for the use of the lender’s money. Though, in exceptional circumstances, interest can be agreed as a fixed amount, irrespective of the principal invested and the period for which it is invested; generally interest is agreed at a particular rate for an agreed period. Interest is mostly expressed in terms of annualized percentage, which is called as rate of interest. Interest can be termed as fees paid by a borrower to a lender on borrowed amount as compensation for foregoing the opportunity of earning income or utilizing it otherwise. In simple terms, interest for a lender is a kind of rent for money. For a commercial borrower, it is a cost of capital for his business. For a personal borrower, it is a cost of preponing consumption.

Generally, Interest is paid at the agreed rate and it is payable periodically, by the lender to the borrower. Unless otherwise agreed upon, interest accrues to the borrower on a daily basis. If the interest amount is not paid to the lender, it can also be compounded at the agreed rate. Though interest can accrue on a time proportionate basis, the lenders and borrowers can agree to settle the same after a particular period, on compounded basis. Compounding of interest envisages not only paying interest on principal borrowed but also paying interest on unpaid accrued interest, which remains with the borrower for the contracted time. When interest is not compounded, it is called simple interest.

Major factors affecting interest rates
The major factors having an impact on the interest rates in an economy are as follows.

Monetary policy
A central bank in the country controls money supply in its economy through its monetary policy. If it loosens the policy, it expands money supply, thereby increasing liquidity. Higher liquidity results in a higher supply of credit. If the demand for credit is not matching with the supply, the interest rates tend to fall. The policy measure of increase in money supply can push economic growth but can result in higher inflation. When the central bank tightens the money policy, interest rates tend to rise in the economy due to reduced supply of credit. Such a move may help in reducing inflation. The central bank has to do a balancing act. The change in repo rates can influence the rate of interest in an economy and they have positive co-relation.

The growth rate
High growth rate in an economy may increase the demand for credit thereby causing an upward pressure on interest rates. On the contrary, slowing growth rate reduces the need for credit, thereby having a negative pressure on the interest rate. When an economy is growing at a normal pace, the long term interest rates can remain stable, unless intervened by the Central bank. Generally, the Central bank does not allow pure economic forces to play and while the economy is growing, it may try to control the interest rate by measures such as adjustment of CRR, SLR etc.

Liquidity
The global liquidity levels at a given time as well as the local liquidity in the economy of a country can impact interest rates therein. When liquidity is high, the interest rate can remain low unless there is some other pressure of factors such as slow economic growth, high inflation, civil unrest etc. Lower liquidity will tend to increase the cost of capital, which is given in the form of interest. Excess liquidity can give impetus to carry trade based on currency movements, if the interest rates are low. In such a transaction, money is borrowed in a currency in which interest rates are low and it is lent at high interest rate in some other currency, mostly in some other country. In an economy, in which money is flowing in due to carry trade, the interest rates tend to soften. If they soften beyond a limit so as not to remain attractive, it may result in reversal of carry trade. Likewise, if the interest rates in the currency of the country from where the carry trade has originated goes up, the funds may flow back to the country of that currency, unwinding the carry trade.

Uncertainty in Environment
When there is economic or political uncertainty in a country, the risk of investment increases resulting in hardening of interest rates in its economy. More the risk the lender needs to take, he demands higher rate of interest on the capital lent. When a country is going through an economic turmoil, the interest rates tend to harden substantially, not only due to risk of capital but increase in risk of doing business, which may result in reduced probability of getting the principal back, as per the agreed terms. Similarly, due to political crisis or situations of war or civil unrest, the interest rates may harden due to uncertainty, higher risks, risk to the security etc. Lenders are risk averse. More the risk, they seek more returns and so higher rate of interest.

Inflation
Interest rates in a currency have a positive correlation with the inflation of the home economy of the currency. If inflation is high in a country, it tends to increase interest rates in that economy. In an economy with high inflation, the reward required for capital borrowed also has to compensate the lender adequately for reducing the purchasing power of the money lent over the term of the loan. In an economy wherein inflation is low, interest rates tend to seek lower levels. Generally in an economy, over a long period, interest rates are higher than the inflation. The interest rates, net of taxes, tend to be atleast equal to inflation. Otherwise, person parting with money and taking risks of lending is not benefitted at all as his purchasing power may go down over a period even after receiving interest.

Other factors
Other than the economic factors mentioned above, the following factors specific to the transaction of lending can affect interest rates.

Type, cover and quality of security
Better the quality of security; lower can be the rate of interest. Security, which can be easily encashed makes lender more comfortable and he can offer better terms. If the structure of security is complex and it is not easily encashable or if the lender may have to incur substantial cost to encash the security, he may claim a more aggressive rate of interest from the borrower. Further, if the security cover of the loan is higher, the rate of interest can be lower. Security cover is the value of security as compared to the amount lent and it is expressed in terms of number of times of a loan. Higher the security cover, more the safety of the lender and therefore he may soften the interest rate. Quality of security can also affect the interest rate. A security with stable valuation is preferred by the lenders. The security which fluctuates substantially in value may result in lender asking for a larger cover as well as higher rate of interest due to risk of the security.

Tenure of loan
Longer the loan period, lower could be the rate of interest. A lender takes full risk of the capital lent as soon as he parts with the money. If tenure of loan is very short, the total interest earned by the lender is quite small as compared to the money risked by him. In such a case the lender has to take the full risk of the money lent, till the money is repaid and the reward remains disproportionately meagre. Therefore, for short term loans, higher rate of interest is charged. However, in case of very long term loans, interest rates can be higher than the medium term loans. In such loans, the risk increases beyond the immediately foreseeable future and therefore the lender may charge a higher rate of interest. Such loans are also subject to the vagaries of market rate of interest. In fixed interest rate transactions, the yield to maturity of a loan remains constant but its market value may change. If the interest rates in an economy go up, its market value comes down and vice-versa. This happens more so in the case of loans issued in the form of bonds and debentures, which are listed for trading or otherwise tradable.

End use of the funds
If the end use of the fund is acquisition of a risky asset, then interest rates tend to be higher. A lender will lend to a business investing in manufacturing at lower rates than the business investing in research of technology as the risk of the latter is higher. If the end use is purchase of fixed assets which can be an additional security for the loan, the borrower may get softer terms. Therefore working capital loans generally carry a tad higher rate of interest than term loans given for acquisition of fixed assets.

Credit worthiness of the borrower
The credit worthiness of a borrower is based on his reputation, his net worth as well as his liquidity. The industry in which the borrower operates also makes an effect on his creditworthiness at a particular time.

A borrower operating in an industry which is not doing well has higher risk and therefore interest rate charged to him may be higher. The overall creditworthiness of a party can be expressed in its credit rating as certified by a reputed rating organisation. Better the credit rating of a borrower, lower the interest rate charged to him. Low credit rating can result in higher rate of interest being demanded and in some cases; the borrower may decide against lending or may recall the loan, if the terms so permit. The rating indicates the ability of the business to pay to creditors at a given time and it does not reflect integrity or other finer virtues of a borrower. In case of small borrowers where the credit ratings are not available, various ratios of the financial position of the borrower can be considered by the lender to determine the creditworthiness and therefore the rate of interest to be charged.

Industry of the borrower
A lender can charge differential rate of interest based on the trade or industry to which the borrower belongs to. The industry with longer gestation periods may be charged higher rate of interest as compared to shorter gestation periods. The industry which has seasonal demand only in a particular part of the year may be lent at a higher rate by a lender as compared to the business in an industry which is not seasonal.

Negative interest
–
Interest being a type of fee paid by a borrower to the lender, it always used to be an income of the lender and an expense for the borrower. However, modern economy has been posing newer challenges to the world, which are dislocating the old beliefs and destroying the old theories. After the recent recession of 2009, the world has been finding it very difficult to bring economies of many developed countries out of low growth / stagnation. To give impetus to investment as well as expenditure, the developed economies encouraged borrowing. The interest rate is the main hurdle which reduces demand for credit and the Central Banks of many developed countries kept on reducing the benchmark interest rates in their respective economies to encourage the borrowers. The interest rates in developed economies like the US, Euro Zone, UK etc., were gradually reduced to near zero levels a few years back. Though some economies like the US could recover due to the cheap credit doled out, the economies of Euro Zone and Japan have continued their stagnation. A few months back, to give push to growth, the European Central Bank reduced its policy rate of interest below zero percent, which means the lender will have to pay interest to the borrower for keeping his deposits. Since January 2016, even Japan adopted this policy of negative interest rate. Some countries like Sweden, Denmark and Switzerland have also adopted negative interest rates. Though this phenomenon does not appear logical, as central banks could dictate their terms in their respective economies, this policy has been adopted. This policy punishes the banks which hold cash instead of extending loans to businesses or to other weaker lenders to lend further. As an effect of negative rates, trillions of Dollars worth Government Bonds worldwide are now offering yields below zero meaning that the investors buying the bonds and holding them to maturity will not get their full money back. As of now, many banks are reluctant to pass negative rate of interest to their customers, due to fear of losing them; although it is applicable for inter-bank borrowings. However, sooner than later, they will have to fall in line and start charging their customers.

Major effects of low interest rates –

1. A lender gets less income thereby affecting his/its income and his/its purchasing power to that extent.

2. Lower interest rates reduce the income in hands of many investors investing in deposits and fixed income earning securities, thereby reducing their taxable income and as an effect, it reduces the tax payment by the subjects. Lower interest rates can create a shortfall in tax collection, unless budgets are accordingly adjusted.

3. Citizens and especially senior citizens living on the interest of their investments have lesser interest income, which reduces their purchasing power. Low interest rates can affect their ability to buy necessities and medicines, which can hamper their welfare.

4. Charities which run their operations out of the income earned from the deposits received from the donors have less income in their hands to use for the purpose of their object and administration. They will have to rely more on the donations which are in nature of current income for their operations.

5. Low interest rates can boost the economy as the entrepreneurs can borrow at cheaper cost for their businesses. It also increases the profit of businesses as interest is one of the major costs.

6. Very low interest rates can spur consumption by way of increased spending as the consumers have less incentive for saving. Increased consumption can boost the economy to an extent but it can hurt a developing economy which is in need of fresh capital.

7. The low interest rates can result in cheaper credit to consumers for buying consumer durables. It may lead to increase in sale of consumer durables such as cars, televisions, electronic gadgets etc., as well as expenditure on holidays and entertainment.

8. Low interest rates may generate a higher demand in an economy thereby increasing economic activity and correspondingly pushing up the growth rate.

9. Lowering interest rates may result in cheaper credit and lesser option for investors to invest their capital, which may result in a rise in stock and property prices in that economy and continuation thereof can create a bubble like situation.

10. When interest rates are low, investors get more desperate to increase their earnings and therefore may patronise riskier class of assets. Over exposure to risky assets is against the interest of investors, as well as the economy.

11. Cheaper credit may push up capital intensive investment replacing labour which over a long period may create less job opportunities and therefore unemployment in an economy.

12. Low interest rates may increase consumerism in a society, which may result in excess personal borrowing by the subjects. If the economy slows down or goes into recession that may hamper the ability of the borrowers to repay the loans, resulting in substantial bad loans thereby derailing the banking system as well as economies. Excessive credit defaults or bankruptcies may result in low morale and low consumer confidence, which may affect the overall health of an economy.

13. Lowering of interest rates can give a boost to corporate profits due to lower expenses, thereby increasing the share prices of the companies, especially those which have large outstanding debt and may trigger a stock market rally. However, the sustenance of the rally is dependent upon the growth of the economy.

14. Lower interest rates give a fillip to the housing sector as a borrower can borrow more amounts with the commitment of the same equated monthly installment (EMI).

15. The fixed deposits and the bond/debenture holders are generally the sufferers in the low interest regime. They can reduce their allocation to this asset class in such a phase. However, lowering interest rates generally result in lowering yield on debt securities which results in increase of bond/debenture prices carrying fixed coupon, which may give some respite to the bond/debenture holders.

16. Low interest rates trigger an increase in appetite of investors for precious metals and precious stones, as low deposit rates can make investors partly shift their asset allocation to this asset class.

17. Reduction of interest rates can cause pressure on the currency of the country as capital may flow out to other countries, where interest rates are higher. However, if the currency of the home country is basically strong and inflation therein is low, then the outflow of currency can get restricted, giving stability to the economy as well as the currency.

On one hand, lower interest rates may generate growth by increasing consumption and investment but on the other hand dampen the growth due to reduction in purchasing power in hands of certain sections of society and institutions, which are dependent on interest income. The final effect depends on the weightage of the respective factors prevailing in that economy.

The Indian scene
India has been struggling to cope with high interest rates prevailing in its economy for many years. One of the major reasons for the same is high inflation prevailing in its economy. In the current global scenario of very low interest rates prevailing in developed economies, this high cost of capital has been hurting Indian businesses. It has slowed down investment activity. Cost of capital being high, it has also affected the cost of production thereby eroding the cost efficiency of the Indian businesses; as compared to many developed economies, in which borrowing costs are negligible. The Government has been very much in favour of reduction of interest rates but the Reserve Bank of India (RBI) had been very cautious as it feared that the reduction may fuel demand push inflation in the economy, already suffering from inflation due to supply side constraints. Over the last few years, systematic efforts have been made to reduce the inflation in the country, especially by strengthening of the supply side, by domestic production as well as imports. The efforts have started yielding results and consumer price inflation (CPI) index has come down from 9.70% in 2008 to 5.72% in 2016 and it is expected to ease further. During the period, the RBI has reduced the benchmark interest rates in the form of Repo rates from 9% in 2008 to 6.50% now; and this is not the end of the reduction process. If the inflation remains in control, as is expected in the near future, the interest rates can further come down. Investors need to align their investment strategies to falling interest rates in the days to come.

India has recently started its journey towards low interest rates and it is likely that on the back of sustained economic growth, the country may continue its journey towards further lowering of the rates, albeit gradually. Many of the developed economies in the world have low interest rates which are sustained for long periods of time. If India continues its growth at the current rate and can control inflation, the interest rates in the economy may gradually reduce. Indian investors as well as consumers are not accustomed to low interest rates. Investors will have to adjust their investment strategies to fit in to the new environment. Senior citizens as well as institutions relying more on interest income for their sustenance will have to realign their consumption / spending patterns. Lowering of interest rates may hit hard this particular section of the society. On the flip side, the businesses will have reasons to cheer due to low interest cost and EMI paying consumers will get delighted.

Conclusion
Interest rate is one of the major tools in the monetary policy of a Central bank. In the recent years, the RBI has made a calibrated use of the same inspite of pressures from various quarters. This has resulted in lowering of inflation in the economy without affecting the growth much. Lowering of interest rates over a period will give great advantage to the Indian economy as costs can go down and become more competitive. This will also support the ‘Make in India’ movement.

M/s. Sakthi Masala (P) Ltd. vs. Assistant Commissioner (CT), [2013] 64 VST 385 (Mad)

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Value Added Tax – Change in Law – By Substitution to Earlier Entry – Takes Effect From the Date of Earlier Entry, section 3 of The Tamil Nadu Value Added Tax ( Amendment) Act 2008.

FACTS
Under the provisions of the Tamil Nadu General Sales Tax Act, 1959 chilly, coriander and turmeric were exempted goods, falling under serial No. 16 of Part B of the Third Schedule to the Tamil Nadu General Sales Tax Act with effect from July 17, 1996. By G. O. (D) No. 383, dated October 22, 1998, the Government granted exemption to chilly powder, pepper powder and coriander powder. And the matter was further clarified by the Department by way of a clarification issued on December 9, 2002 in exercise of power u/s. 28A of the Tamil Nadu General Sales Tax Act. The Tamil Nadu Value Added Tax Act, 2006 was brought in by the Government with effect from January 1, 2007 under which what was serial No. 16 of Part B of the Third Schedule to the Tamil Nadu General Sales Tax Act was incorporated as serial No. 18 of Part B of the Fourth Schedule to the 2006 Act and the word “powder” in relation to the goods in question was not specifically mentioned therein. In the year 2008, Fourth Schedule to the 2006 Act was amended by section 3 of the 2008 Act which came into force on April 1, 2008 by substituting serial No. 18 of Part B of the Fourth Schedule to the 2006 Act to restore the position as it was prior to January 1, 2007. The petitioners engaged in the business of manufacture and sale of masala powder, turmeric powder, chilli powder and coriander powder and of buying and selling thereof from the manufacturers, sold chilly powder, coriander powder and turmeric powder as exempted goods and filed returns claiming exemption from payment of tax for the turnover of sale of such goods before the assessing officer and the returns so filed were accepted u/s. 22(2) of the VAT Act. The department issued notice for reassessment and levied tax on sale of chilli powder disallowing the claim of exemption from payment of tax for the period prior to the date of substitution of the said entry from April 1, 2008. The dealer filed Writ petition before the Madras High Court against the said re assessment orders.

HELD
The plea arising for consideration is, whether the substitution in serial No. 18 of Part B of the Fourth Schedule by Act 32/2008 will be with effect from April 1, 2008 as pleaded by the respondent/Department or it will have effect from January 1, 2007 as pleaded by the petitioners. In Government of India vs. Indian Tobacco Association [2005] 5 RC 379; [2005] 7 SCC 396, by referring to the decision in Zile Singh vs. State of Haryana [2004] 8 SCC 1, it has been clearly held that substitution would have the effect of amending the operation of law during the period in which it was in force. In this case, substitution in serial No. 18 of Part B of the Fourth Schedule has been made by the Government apparently to bring into force amended serial No. 18 of Part B of the Fourth Schedule by Act 32/2008 from the time of operation of the law, namely, serial No. 18 of Part B of the Fourth Schedule to the Act 32/2006. If the intention of the State prior to coming into force of Act 32/2006 is to grant exemption to powder form of chilly, turmeric and coriander and that is confirmed by the substitution made in serial No. 18 of Part B of the Fourth Schedule to the Act 32/2008, it is evident that the substitution made is only to state the obvious, namely, to fill up the lacunae for the period from January 1, 2007 to March 31, 2008. The old entry has been substituted by the new entry into Act 32/2006. It is not a case of insertion or addition of a new entry. What is substituted would stand substituted from inception, (i.e.), with effect from January 1, 2007 whereas insertion or addition will be relevant to the date of amendment, (i.e.), April 1, 2008. By substitution, the amended serial No. 18 of Part B of the Fourth Schedule replaces old serial No. 18 of Part B of the Fourth Schedule to the Act 32/2006. The old serial No. 18 of Part B of the Fourth Schedule becomes dead letter for all purposes. “Substitution” means put one in the place of another. This is exactly what has been done in the present case. The amendment serves the cause of exemption granted under Act 32/2006. The contention of the learned Additional Advocate-General that substitution effected will be operative from April 1, 2008 and not with effect from January 1, 2007 cannot be the intention of the Legislature and in any event, if there was an omission or a specific statement to that effect, the court, is empowered to give a constructive meaning to the intention of the Legislature and give it the force of life. The Court, from the facts of the present case, held that there is justification for this court to iron out the creases by interpreting the word “substitution” to mean that the intention of the Legislature was to replace the old serial No. 18 of Part B of the Fourth Schedule with new serial No. 18 to have effect for the period from January 1, 2007 and March 31, 2008. The understanding of the Department prior to coming into force of Act 32/2006 and from April 1, 2008, the date of coming into force of Act 32/2008, to state the obvious, is that the powder form of chilly, turmeric and coriander continues to be exempted goods for all purposes. If during the interregnum period, namely from January 1, 2007 to March 31, 2008, there appears to be an omission, that omission is sought to be corrected by way of substitution. The court clearly held that substitution has the effect of replacing the old serial No. 18 of Part B of the Fourth Schedule to the Act 32/2006 and the substitution will therefore entail goods described in serial No. 18 of Part B of the Fourth Schedule of Amending Act 32/2008 the benefit of exemption as is applicable from the inception of Act 32/2006. The new replaces the old and that is substitution and as a consequence, exemption becomes inevitable. The Department’s plea that the exemption will not apply to the period from January 1, 2007 to March 31, 2008 cannot be accepted, as substitution in this case will have to relate back to January 1, 2007 itself when Act 32/2006 came into force.

Further, the court held that that the goods, namely, powder form of chilly, turmeric and coriander, continue to enjoy the benefit of exemption despite their being a specific omission of the powder form from January 1, 2007 to March 31, 2008. The benefit of exemption granted based on returns filed is in order. Accordingly, the High Court allowed writ petition filed by the dealer and the reassessment orders passed by the authority were set aside.

M/s. Mahatma Gandhi Kashi Vidyapeeth vs. State of U.P. [2013] 64 VST 271 (All)

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Value Added Tax – Dealer – Business – Activity of Publishing
Brochures/Admission Forms etc. – By University – Not a Dealer- Not
Carrying any Business – Not Liable for Registration and Pay Tax, section
2(e) and (h) of The U.P. Value Added Tax Act, 2008.

FACTS
The
petitioner, a university, established under the provisions of the U.P.
State Universities Act, 1973 with aim and object to impart education in
various disciplines of higher education and research and also, what its
name suggests, imparting education from its campus at Varanasi and
affiliated colleges, had filed writ petition before the Allahabad High
Court to challenge the notice issued by the Deputy Commissioner of
Commercial Tax, Sector 11, Varanasi, asking it to produce the account
books as information available with him was that the petitioner had sold
forms worth Rs. 8,05,400, but has not paid VAT under the provisions of
the U.P. Value Added Tax Act, 2008, as the action of the respondents
calling upon the petitioner to produce account books with regard to the
printing and sale of test forms or initiation of proceedings under the
said Act, is wholly without jurisdiction and uncalled for.

HELD
Whether
the main activity of the petitioner was business or not, was the
decisive factor to answer the questionwhether the person was dealer for
incidental or ancillary activity. If the main activity of a person is
not business activity, then, such person would not be a dealer for
incidental or ancillary transaction/s. Imparting of education was a
mission. Right to education, in the context of article 45, 41 meant (a)
every child/citizen of this country had a right to free education, until
he completes the age of fourteen years; and (b) if a child or citizen
completes the age of 14 years, the State shall make effective provision
for securing the right to work and education within the limits of its
economic capacity and development. In ancient time, there were Gurukul
Ashrams to impart education. The importance of education has been
recognised by the Indian Courts from time to time. Education is perhaps
most important function of State and Local Self Governments. It is
unthinkable and beyond imagination to treat the imparting of education
as business. The relationship in between teacher and one taught is not a
business relation. The idea and purpose of imparting education is to
develop personality of the students to carry the nation forward and in
right direction. Accordingly, the High Court held that the petitioner is
not a dealer within the meaning of section 2(h) of the Act, therefore,
its activity of printing and selling of admission forms to the students
does not amount to business within the meaning of section 2(e) of the
Act. The petitioner, being beyond the purview of the U.P. VAT Act, could
not be compelled to obtain registration under the said Act or to
produce its account books before the respondents. The impugned notice
and orders passed by the authorities under the U.P. VAT Act are palpably
illegal and without jurisdiction and cannot be allowed to stand. In the
result, the writ petition filed by the petitioner was allowed.

[2016] 67 taxmann.com 90 (AAR-New Delhi) – GSPL India Transco Ltd.

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CENVAT credit of input services received for
laying of pipes for transport of gas would be available when such
services are not for laying of foundation or making of structures for
support of capital goods, but for laying of pipeline for transport of
gas and hence are eligible input services.

Facts
Output
services provided by applicant are in the nature of transport of gas
through pipelines. For the same, applicant would be required to lay
pipelines under earth for which applicant proposes to engage
contractors. Applicant proposes to grant turnkey contracts to
contractors for supply of pipes as well as installation and
commissioning. The composite price in respect of such contracts would be
made of two components, i.e. price for supply of goods and that for
supply of services and separate invoices would be raised accordingly.
Further, it is mentioned that these contractors would be liable for
service tax as “works contract services” as defined u/s. 65B (54) of the
Finance Act, 1994 and would discharge service tax liability as per Rule
2A of Service Tax (Determination of Value) Rules, 2006. Apart from
construction services, applicant would also obtain other services like
third party inspection and testing, consulting engineering, etc. which
would be required to bring into existence a pipeline. The advance ruling
was sought for ascertaining eligibility for CENVAT credit of service
tax paid to contractors and other service providers.

Revenue
contended that services used for erection and commissioning of such
plant do not take part directly on providing output taxable service of
transportation of gas and also the same cannot be considered to be
integrally connected in providing output service in view of restrictive
definition of “input service”. In other words, exclusion clause (A)(b)
of definition of input service given under Rule 2(l) of CCR, 2004 would
be applicable in this case, CENVAT credit should not be allowed.

Held:
AAR
held that pipeline is used for output service of transport of goods
through pipe and “input service” means any service used by provider of
output service for providing an output service. As regards exclusion
clause, AAR observed that exclusion clause is for service portion in
execution of works contract and construction services, however,
considering erstwhile section 65(25b) of the Finance Act, service of
laying of pipeline is different from construction of building or civil
structure and therefore would not come in Rule part (a) of Rule 2(l)(A).
For the purposes of analysing applicability of part (b), AAR took note
of detailed process followed in laying pipelines and accordingly held
that input services availed by applicant are not for support of pipes or
valves but for laying of pipeline for transport of gas and therefore
such services would also not fall within part (b) of exclusion clause.
AAR thus held that applicant shall be entitled to CENVAT credit of
service tax that would be paid to EPC contractor/other construction
contractors and other service providers against the applicant’s output
service tax liability under the taxable output service in the nature of
transport of gas through pipelines.

[2016] 67 taxmann.com 142 (AAR-New Delhi) – SIPCA India (P) Ltd.

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IV Authority of Advance Ruling

Activity of making available system to customer would qualify to be “transfer of right to use goods” and would not be liable to service tax provided possession and effective control is transferred to customers.

Facts
Applicant entered into “system delivery agreements” with liquor companies, distilleries, breweries, wineries (customers) for providing a system comprising of various machines/equipments, installed and commissioned by applicant for provision of automated, online bar code printing system, label application system, aggregation system, dispatch system etc. Additionally, applicant also provided training to customers for handling systems, undertook preventive & corrective maintenance activities and supplied consumables to customers on the basis of orders placed by them. However, routine and operative maintenance of system was responsibility of customers. Applicant submitted that said activity would not be chargeable to service tax as it involves a transfer of right to use goods wherein effective control and possession of system stands transferred to customers. However, revenue contended that perusal of agreement indicates that applicant is providing non-exclusive licenses to customers and hence, effective control of system remains with applicant only and thus the said activity would get covered in definition of ‘service’ given in section 65B(44) of Finance Act, 1994 and accordingly, would be chargeable to service tax.

Held
AAR observed that the phrase “right to use” and “license to use” have been interchangeably used by applicant. Phrase “grant of license to use the system on nonexclusive basis” was used by applicant to indicate that intellectual property in the system was utilized by applicant in similar transactions with other customers and that it is not exclusively used for one particular customer. A reference was made to judgment of Hon’ble Karnataka High Court in case of Indus Towers Ltd. wherein it was held that whether the transaction amounts to transfer of right or not, cannot be determined with reference to particular word or clause in the agreement and agreement has to be read as a whole to determine the nature of the transfer.

Further, AAR observed that training to customer was provided only to make the customers ready to take control of system, also scope of agreement involved supply of consumables by applicant to customer which would constitute a part of value/consideration and it was clearly mentioned in the agreement that overall operations and maintenance was responsibility of customer. Accordingly, it was ruled that activity involved transfer of right to use goods and would be out of purview of service tax.

[2016] 67 taxmann.com 49 (Mumbai CESTAT) – Dinesh M. Kotian vs. Commissioner of Central Excise & Service Tax-I, Mumbai

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When service tax liability in one transaction leads to availability of CENVAT credit in subsequent transaction resulting in a revenue neutral exercise, demand of tax was dropped.

Facts
The assessee was appointed as Outsourcing Agent by postal authorities for promotion of postal services carried out by postal department. The postal department discharged the service tax on the entire value of services being collected from the customers of postal department. During the said business, the assessee is acting as intermediary for collection of letters, affixing postal stamps for which he is getting commission from postal department on the turnover. In the adjudication, demand was confirmed holding that the assessee is independent service provider and the postal department is a service recipient and for the said services, the assessee is receiving service charges in the form of commission, therefore, their independent activity is liable for service tax.

Held
The Tribunal observed that it was not under dispute that the services provided by the assessee would be considered as input services for the postal department. The postal department is admittedly paying the service tax on the total value of the services which obviously includes service value of the assessee. In this situation, if service tax is paid by the assessee, the assessee’s services is an input service for the postal department and postal department is entitled for CENVAT credit, thus in our view the present case is Revenue neutral as the postal department is entitled for CENVAT credit of the service tax if at all payable by the assessee. In view of revenue neutrality, the demand does not exist. The demand was dropped accordingly without addressing the issues of taxability of service limitation.

[2016] 67 taxmann.com 367 (Mumbai CESTAT) – Commissioner of Central Excise vs. Mishra Engg. Works

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Undertaking job work contract in principal manufacturer’s premises would not constitute providing services of manpower supply and recruitment services.

Facts
Respondent was awarded a contract of carrying out job of cutting, drilling, punching, bending and notching of material on job work basis in the factory premises of manufacturer for galvanised material from production line, for which lump sum amount was paid to respondent. Department demanded service tax from respondent under the category of “Manpower Supply Recruitment Services”.

Held
The Tribunal referred to its own final order given in case of M/s. Yogesh Fabricators on identical issue wherein it was held that service tax cannot be demanded on the amount on which excise duty has been paid. The assessee had undertaken a job, consideration for which is paid on the basis of lump sum amount. Once the activity of appellants is over, the principal manufacturer entered the production in its Daily Stock Register (RG-1) and cleared the goods at appropriate rate of duty. The entire job is carried out within the factory premises before RG-1 stage. Thus, the activity undertaken by the assessee was production line of principal manufacturer. In view of Notification No. 8/2005-ST dated 01-03-2005, activity would not attract service tax.

The Tribunal also referred to the decision in the case of Ritesh Enterprises vs. Commr. of C.Ex, Bangalore ‘ 2010 (18) S.T.R. 17 (Tri.-Bang.) where after going through contracts between the parties, the Tribunal held that the tenor of agreement between the parties has to be understood and interpreted in its entirety and when the contract was given for execution of job work and there is no whisper of supply of manpower, such contract cannot be said to be for supplying manpower.

[2016] 67 taxmann.com 315 (Chennai CESTAT) – Tab India Granites (P.) Ltd. vs. Commissioner of Central Excise & Service Tax, Chennai-III

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The first date on which refund claim is filed shall be considered as date of filing of refund claim and date of subsequent re-filing/ submission of documents shall be ignored for calculating stipulated time limit.

Facts
Appellant, an exporter, filed a refund claim in January 2011 in respect of service tax paid on input services utilised for exports during the period January 2010 to March 2010. The refund claim was returned to the appellant in March 2011 with a request to submit certain additional documents. Appellant resubmitted refund claim in May 2011. Department again called for certain original documents which were submitted in November 2011. Department rejected refund claim by contending that appellant failed to file claim within stipulated time limit of one year from export.

Held
Relying upon decisions in the case of Peria Karamalai Tea and Produce Co. Ltd. vs. 1985 taxmannn.com 178 (CEGAT – New Delhi) (SB) and Rubberwood India (P) Ltd. vs. Commissioner of Customs (Appeals) 2006 taxmann. com 1688 (Bang. – CESTAT), the Tribunal held that refund application was filed within stipulated period of one year as date of limitation should be taken from the original date of filing of refund claim.

[2016-TIOL-702-CESTAT-MUM] M/s Dwarkadas Mantri Nagri Sahakari Bank Ltd vs. Commissioner of Central Excise & Customs, Aurangabad

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There are options available under Rule 6(3) of the CENVAT credit Rules, 2004 to reverse CENVAT credit. The department cannot determine the option to be followed by the Appellant on its own.

Facts
Appellant was engaged in providing taxable and exempted output services and had availed CENVAT credit of common input services. A show cause notice was issued to recover 6%/8% on the value of exempted services in terms of Rule 6(3)(i) of the CENVAT credit Rules, 2004 along with interest and penalties. It was argued that under Rule 6(3) there are options available to either reverse proportionate credit attributable to exempted services as per clause 6(3)(ii) or follow the aforesaid clause 6(3) (i) and thus the adjudicating authority cannot on their own determine the method to be followed. It was further submitted that entire CENVAT credit availed on common input services was paid along with interest and thus the demand is not sustainable.

Held
The Tribunal noted that entire credit on common input services was reversed along with interest under Rule 6(3) (ii) and therefore the demand of 6%/8% of the value of exempted goods shall not sustain. Further, it was held that the adjudicating authority may verify the quantum of CENVAT credit reversed.

[2016-TIOL-709-CESTAT-MUM] Tech Mahindra Ltd vs. Commissioner of Central Excise

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Transfer of funds from the Head Office to the Overseas Branch are in the nature of reimbursements and therefore taxing such transfers is not contemplated by the Finance Act, 1994.

Facts
The Appellant was an exporter of information technology and software services had established network of branches outside the country. These branches acted as salary disbursers of staff deputed from India to client locations and carried out other assigned activities. The funds were transferred by the Head Office to the Branch for undertaking the aforesaid activities. Proceedings were initiated by revenue to tax these payments as a consideration for “business auxiliary services” considering the head office and the branch as different persons.

Held
The Tribunal noted that the branch and head office are distinct entities for the purpose of taxation. However, whether the branch renders any service in India within the meaning of the statutory provisions is required to be examined and a forced disaggregation merely for the purpose of tax is not the intention of the law. It was observed that any service rendered to the other contracting party by branch as a branch of the service provider would not be within the scope of section 66A of the Finance Act, 1994. Consequently, mere existence as a branch for the overall promotion of the objectives of the primary establishment in India which is essentially an exporter of services, does not render the transfer of financial resources to the branch taxable u/s. 66A. Accordingly, it was held that there is no independent existence of the overseas branch as a business and its economic survival is entirely contingent upon the will of the head office and therefore taxing of transfer of funds viz. reimbursements is not contemplated by the Act.

[2016-TIOL-661-CESTAT-MUM] Gondwana Club vs. Commissioner of Customs & Central Excise, Nagpur’

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Without ascertainment of the receipts from the members as a quid pro quo for an identified service, the transaction does not meet the test of having rendered a taxable service.

Facts
The Appellant received entrance fees and periodical subscriptions from its members. Further, a contract fee was received from the caterers contracted for delivery of food and beverages to members on which service tax was discharged under “club and association” service. The Appellant also recovered amounts from its staff towards accommodation provided by them. A show cause notice was issued for demanding service tax on the entrance fees/ periodical subscriptions, contract fee and accommodation charges under club and association service, business support service and renting of immovable property service respectively.

Held
In respect of entrance fee/subscription charges, the Tribunal observed that a member’s club is a group of individuals who have chosen to be a member for fulfillment of certain human needs. Access to such aggregation is on payment of an entrance fee which does not assure any service but merely allows the individual to claim affiliation to the aggregate. Such aggregates acquire ownership of assets which devolve on them on disaggregation. Accordingly, the entrance fee represents merely the present value of such assets and is not a consideration for any service that a member may obtain from the club. Thus without ascertainment of the receipts as quid pro quo for an identified service the transaction does not meet the test of having rendered a taxable service. Further relying on the decision of Sports Club of Gujarat vs. Union of India [2013 (31) STR 645 (Guj.)] the demand was set aside. In respect of catering fee considering that service tax was paid it was held that payment under an incorrect accounting code is a mere technical flaw and the demand was set aside. Further, in respect of the accommodation charges, it was held that contractual privileges of an employer-employee are outside the purview of service tax.

Note: Readers may note a similar decision of the Mumbai CESTAT in the case of Cricket Club of India Ltd vs. Commissioner of Service Tax [2015 (62) taxmann.com 2] reported in the December 2015 issue of BCAJ. Further, reference can be made to the decision of the High Court of Gujarat in the case of Federation of Surat Textile Traders Association vs. Union of India [2016-TIOL-459-HC-AHM-ST] wherein the Court relying on the decision of Sports Club of Gujarat (supra) held that since the provisions of “club and association” service have been declared ultra vires the Show Cause Notice (SCN) is without authority of law and cannot be sustained.

[2016-TIOL-869-CESTAT-MUM] Greenwich Meridian Logistics (I) Pvt. Ltd. vs. CST Mumbai

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III. Tribunal

Service tax not payable under business auxiliary service on surplus arising from purchase and sale of space in a principalto- principal transaction of multi-modal transporters.

Facts
Appellant engaged in handling logistics of exporters for delivery to consignee is a registered multimodal transport operator assumes responsibility for safe custody of cargo as “common carrier”. The difference earned by way of profit margin by the appellant on ocean freight charged to the shipper and the amount of freight paid to the steamer agent / shipping line was the subject matter of dispute as Revenue held it as commission liable as business auxiliary service inferring that appellant promoted and marketed services of client – shipping lines. Appellant contended that they do not act as agent either for shippers or the carrier. Whenever the appellant earned commission, due service tax was paid.

Held:
The manner or mode of booking profit in the accounts of a commercial organisation has no bearing on the application of section 65(105) to a taxable activity. The term freight is used as consideration for space provided onto the vessel. Appellant contracts for space/slots with carriers by land, sea or vessel and issues a document of title, a bill of lading and commits delivery to a consignee. This activity carried out as principal-to-principal transaction one with the shipper and the other with a carrier are two independent transactions. The surplus arises therefrom and not by acting for a client. Therefore, section 65(19) (business auxiliary service) of the Finance Act, 1994 does not cover such principal-to-principal transactions. Shipping line fails the description of client. The demand of service tax, interest and penalties therefore fail.

[2016] 67 taxmann.com 92 (Madhya Pradesh HC) – M. P. Audhyogik Kendra Vikas Nigam vs. Chief Commissioner of Customs, Central Excise & Service Tax

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In spite of alternate remedies provided in the Act, writ petition can be entertained if imposition of duty is per se unsustainable and illegal

Facts
The Petitioner was granted contract for construction and maintenance of various roads whereunder it undertook repairs and maintenance of roads. The Department raised service tax demand contending that petitioner provided services of management, maintenance and repairs of roads falling under erstwhile section 65(64) of the Act. Aggrieved by the same, the petitioner filed writ petition on the ground that department has ignored exemption applicable to petitioner in terms of Notification No. 24/2009-ST dated 27.07.2009 and retrospective exemption granted u/s. 97(1). The Department challenged this writ petition both on merits as well as maintainability.

Held
The Hon’ble High Court held that when imposition of tax or duty is challenged and when order of assessment is impugned in a petition under Article 226, they are reluctant to interfere into the matter on account of availability of alternate remedy of appeals. However, it further held that there is an exception to this rule and the Court can interfere if the imposition of duty is per se unsustainable and illegal. As regards the merits, the High Court observed that from the facts of the case it was clear that service in question was exempt, however, revenue had raised demand by disregarding exemption notification and amended provisions of law. Hence, allowing the writ the demand was held unsustainable and illegal.

[2016-TIOL-323-HC-MAD-ST] M/s. United Cargo Transport Services vs. The Commissioner of Service Tax.

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When CENVAT credit is available to safeguard the interest of revenue, insistence upon further pre-deposit would cause undue hardship.

Facts
A Show Cause Notice was issued and the demand was confirmed by the adjudicating authority. An appeal was filed before the CESTAT which ordered pre-deposit and directed that the amount already paid should be adjusted against such pre-deposit amount. At the time of verification of the amount already paid, a request was made by the Appellant to adjust the CENVAT credit against the order of pre-deposit.

The revenue did not consider this request and also issued a verification report that payments already made pertained to their regular liability and thus could not be adjusted against the pre-deposit. The Tribunal dismissed the appeal for non-compliance of the order of stay.

Held
The High Court observed that the Tribunal was required to consider the prima facie case, balance of convenience, irreparable loss and injury and financial hardship and thus the order passed without taking into account all the parameters, was arbitrary and unsustainable. Accordingly it was held that when the CENVAT credit was available, which would safeguard the interest of Revenue, insistence upon further deposit would cause undue hardship and further prima facie case was also established for waiver of pre-deposit. Thus, the Court reduced the amount of further deposit having regard to the availability of CENVAT credit and directed the Tribunal to restore the appeal.

[2016] 67 taxmann.com 173 (Madras HC) – Classic Builders (Madras) (P) Ltd. vs. Customs, Excise & Service Tax Appellate Tribunal

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Appeal filed prior to 06/08/2014, but dismissed merely for default in pre-deposit and not on merits, can be restored by Tribunal in case sufficient compliance is made later.

Facts
By making payment of Rs.28 lakh towards total pre-deposit of Rs.65 lakh, appellant filed miscellaneous application seeking permission for payment of balance pre-deposit of Rs. 37 lakh in installments which was dismissed by Tribunal. Subsequent application for restoration of appeal after making payment of balance pre-deposit on various dates was also dismissed by the Tribunal by stating that Tribunal had become functus offficio after passing final order. Substantial questions raised before the Hon’ble High Court were (i) whether the Tribunal is correct in dismissing appeal and petition seeking payment of predeposit in installments (as pre-deposit was not mandatory prior to 06/08/2014) and (ii) whether the Tribunal has erred by dismissing application for restoration of appeal in spite of full payment of pre-deposit.

Held
The Hon’ble High Court observed that appellant had an arguable case on merits, which is one of the main factors to be considered while considering the application for restoration. It held that it cannot be said that the Tribunal has become functus officio once the Tribunal has passed an order, not on merits, not while finally determining the issue and not an order which has merged with the Appellate Court order.

The High Court distinguished the decision in the case of Lindit Exports vs. Commissioner, 2013 297 ELT A15 (SC), that in the instant case, there is no merger of the Tribunal order with the order of the High Court, as challenge as to dismissal of the restoration application is under consideration. The High Court also observed that Tribunal has power and jurisdiction under Rules 20 and 41 of CESTAT (Procedure) Rules, 1982 so as to recall its orders in ends of justice and further held that when the Act or Rules in question do not specifically prohibit restoration of appeal dismissed on grounds of nondeposit of amount, the Tribunal certainly has power and jurisdiction to recall its earlier order, if the ends of justice require such a course of action. Accordingly, the Tribunal’s orders for dismissing the restoration application and the appeal were set aside.

Change, but with a little more care

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“Change is the only constant thing in life“ is a popular quote. It is
true that without change there can be no progress. However, if it is
brought about with a little more thought about the consequences, it
would be welcomed by all those for whom it is made. Otherwise, it causes
unnecessary confusion, heartburn and creates resistance in the minds of
those who are affected by it.

The most recent example is the
notification of the changes in accounting standards notified by the
Ministry of Corporate Affairs (MCA) on 30th March 2016. The notification
was to be effective on the date of its issue. Therefore, there was
confusion as to whether the said changes would apply to the accounting
year ended 31st March 2016 or accounting periods/year commencing after
the date of the notification. In terms of logic and rationale, the said
changes should have applied in regard to the accounting year 2016-17 as
they were notified on 30th March 2016, just a day before the end of
accounting year 2015-16. Many leaders in the accounting profession,
however, felt that it would apply to the year ended 31st March 2016 and
there was a mad rush for compliance, causing employees of companies and
their auditors to spend sleepless nights. Some sources feel that the MCA
was of the view that the changes would obviously apply to financial
year 2016-17. A single line in the notification stating that it would
apply to accounting periods commencing after the date of the
notification would have avoided the rigmarole. However, those in the
accounting profession were left to make their own interpretation.
Assuming that there was clarity in the minds of those in the ministry as
regards the effect of the notification, once it came to light that
there was confusion, an immediate response would have mitigated the
problem. This however did not happen, till the air was cleared a few
days ago.

While this was the case of a change in the accounting
standards, in the urge to reduce the reliance on paper, and make tax
compliances online, changes are being made which are causing substantial
problems to the users, both taxpayers and professionals. The new form
15CB, which is to be issued by Chartered Accountants for remittance to
non-residents with or without a withholding tax obligation is a case in
point. The forms have to be submitted online with effect from 1st April
2016. While structuring the form, the drop down boxes are devised in
such a way that it becomes extremely difficult for the proper category
of the remittance to be chosen. It must be appreciated that, whether the
remittance to the nonresident is chargeable to tax in India, requires a
proper analysis of the domestic law, the relevant double taxation
avoidance treaty (DTAA ), and after interpreting these, one forms his
opinion. While the online filing is certainly welcome, the form could
have been devised in a way enabling the issuing Chartered Accountant, to
disclose the basis of his opinion.

The online filing of Income
tax appeals is another example. The form is devised in a manner that it
requires drafting of the grounds of appeal and the statement of facts
with restriction on number of words. Further, the additional evidence if
any is to be disclosed at the stage of filing the appeal as well as the
details of the documents relied on is to be submitted. While there can
be no quarrel with the need for brevity and precision as well as a
reform in appellate procedures, it must be remembered that this is the
first appellate forum to which a litigant comes after having been
aggrieved by earlier assessment or other order. Therefore, it is
necessary to strike a right balance between the streamlining of online
process and the principles of justice, which not only must be done but
must be seen to be done.

In all the illustrations which I have
referred to in the foregoing paragraphs, the issues that have arisen
could have been avoided if there was a prior dialogue between the
authorities making the changes and those affected by it. If the
authorities had reached out to professionals, and placed the changes in
the public domain much of the problems could have been avoided. One
entirely appreciates that when changes are brought about there are bound
to be some problems and glitches and some resistance. But most of these
creases could have been ironed out. The hallmark of true leadership is
the ability to take everyone along. This is what both the politicians
and bureaucrats must do, and I am sure that the profession will respond.
On its part, the ICAI should keep open all the channels of
communications with the authorities. All of us who belong to the
profession must also do our mite to help our alma mater discharge this
responsibility.

At the time that this issue reaches you, the
Finance Bill will have been discussed in Parliament and in all
probability would have been passed. Let us hope that many of the
suggestions and representations made by our Society, and other bodies
are duly considered, and necessary amendments incorporated in the
Finance Bill. That will be a really welcome change!

ATTITUDE

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‘Attitude is a little thing that makes a big difference’
 —Winston Churchill

1. Life is a do-it-yourself project. Your attitude and the choices you make today have an impact on your tomorrow – what we call future. So be sanguine in making your choices – opting from the available options. Your attitude not only impacts your tomorrow, but also what you are doing today. A positive attitude based on thanksgiving yields happiness and success, and a negative attitude yields unhappiness. Success is the result of hard work with a positive attitude and happiness is the result of attitude of acceptance. It is not that the environment will always be positive – the result of one’s action could be opposite of what one expected but one’s attitude of accepting and improving the next action will result in `what one seeks’. Failure is a part of life – what is relevant is how we treat it. Does the result hold us back or we treat it as a stepping stone. President Harry Truman said `it is amazing what you can accomplish if you do not care who gets the credit’.

2. Life is never smooth. It has its ups and downs. The law of Nature is pleasure followed by pain. It is our attitude to pain which increases or decreases our capacity to bear it. If we accept the law of Nature and train our mind so that pain is a part of living, then its impact on our health and happiness is considerably reduced. Our capacity to bear pain of failure increases multifold.

3. The irony of life is that we are unaware of the fact that we are victims of our attitude. We suffer from our attitude of revenge, rivalry, hate, jealousy, envy and above all compare and contrast. It is also true that we survive by our attitude of compassion, forgiveness, gratitude and love. It is for us to choose our attitude. The issue is : what is attitude! I believe attitude is nothing but our reaction or response to our own thoughts and actions of others. Let us remember that all actions are based on thought – there is nothing like a thoughtless action. Hence, our thoughts determine our attitude. So, let us always remember that good thoughts produce the right attitude and result in happiness. It has been rightly said: ‘write your hurts in sand and carve in stone the benefits you receive’. This sentence is based on the concepts of forgiveness and gratitude – elements of attitude that make life happy. Attitude to accomplish is not only the basis of success, but also happiness.

4. It is me and my mind that determines my attitude to what I think and I do. My reaction to an action or statement made by my spouse, child, friend or foe determines my attitude and my relationship.

5. Our attitude, I repeat, is what determines on how we feel, live and act. Dalai Lama advises that we develop an attitude of acceptance based on gratefulness when he says : `when you practice gratefulness, there is a sense of respect towards others.’

P. P. Wanqchuk says, ‘you smile or you frown or you cry’. How you react to a particular situation is all because of your attitude’. He goes on to add: `Nature has an unfailing habit of siding with the determined and the positive minded. Nature works like a mother’s womb to nurture and give birth to a beautiful life’.

6. Questions one should ask oneself are:
Can I help a person who has been back-biting me?
Can I extend a hand of friendship to my foe?
Can I smile at a person who snares at me?
Can I forgive a person who has harmed me?

The answer to these questions determines my attitude towards life.

7. To conclude, I am reproducing what I lately read : T he 92-year old, petite, well-poised and proud lady, who is fully dressed each morning by eight o’clock, with her hair fashionably coiffed and makeup perfectly applied, even though she is legally blind, moved to a nursing home today.

Her husband of 70 years recently passed away, making the move necessary.

After many hours of waiting patiently in the lobby of the nursing home, she smiled sweetly when told that her room was ready.

As she manoeuvred her walker to the elevator, I provided a visual description of her tiny room, including the eyelet sheets that had been hung on her window. “I love it,” she stated with the enthusiasm of an eight-year-old having just been presented with a new puppy.

“Mrs. Jones, you haven’t seen the room…Just wait.”

“That doesn’t have anything to do with it,” she replied. “Happiness is something you decide on ahead of time. Whether I like my room or not doesn’t depend on how the furniture is arranged, it’s how I arrange my mind. I already decided to love it. It’s a decision I make every morning when I wake up. I have a choice: I can spend the day in bed recounting the difficulty I have with the parts of my body that no longer work, or get out of bed and be thankful for the ones that do. Each day is a gift, and as long as my eyes open I’ll focus on the new day and all the happy memories I’ve stored away, just for this time in my life.”

She went on to explain, “Old age is like a bank account, you withdraw from what you’ve put in. So, my advice to you would be to deposit a lot of happiness in the bank account of memories. Thank you for your part in filling my Memory bank. I am still depositing.”

And with a smile, she said:

“Remember the five simple rules to be happy:
1. Free your heart from hatred.
2. Free your mind from worries.
3. Live simply.
4. Give more.
5. Expect less.”

PSU Banks’ Bad Loans – Lax legal system – Swift action in the Vijay Mallya case is important

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A day after a consortium of 13 banks approached the Supreme Court to prevent controversial industrialist Vijay Mallya from leaving the country, the court was told on Wednesday that the former chairman of United Spirits Limited had been in London since March 2. While he may not be able to escape the legal process for long, as the Supreme Court has issued notices to him, the entire saga is an example of how crony capitalism has grown deep roots in the country and how banks have dragged their feet when big names are involved. Several of his lenders have a lot to answer for, if they have to counter the growing perception about their cosy relationship with an errant promoter. Why, for example, did they take four years to move the apex court? How could they lend crores of rupees to Kingfisher when pledged assets were only one-tenth of the value of the loan? Or, as the apex court asked, why were loans given to Mr. Mallya when he was a defaulter and was facing legal proceedings? It’s also not clear how banks attached such a high value to the Kingfisher Airlines brand and used it as collateral for giving huge loans. The government’s promises apart, public sector banks still await an institutional mechanism and an operational environment that can insulate their lending from political and other influences.

The country’s legal framework has also added to the problem; for example, after United Bank of India declared Mr. Mallya a wilful defaulter, a court struck it down on technical grounds. There are countless other examples of promoters delaying the loan recovery process on some legal grounds or the other, thereby allowing wilful defaulters to become “freeloaders” – to borrow a term used by Reserve Bank of India Governor Raghuram Rajan. As the Kingfisher example shows, an inordinately long time in taking action against defaulters only helps in erosion of the value of the underlying assets, leaving nothing much to banks. In that context, the bankruptcy code now in Parliament is of critical importance. Like in the West, a modern law with a focus on speedy closure will help firms on the brink to be either restructured or sold off with limited pain for all involved. In some cases, if this is done swiftly, assets can be put to good use and the firm can be revived. Fast-track courts too are needed in India to take these cases to closure fast.

India does have some laws – including one on securitisation and reconstruction of financial assets and enforcement of security interest or the SARFAE SI Act – and other mechanisms, like Strategic Debt Restructuring, to address the problem of corporate insolvency. But many of these laws or guidelines have not worked because of inefficient enforcement. For example, banks rely on debt recovery tribunals that were created under a 1993 law to help financial institutions reclaim loans. But the tribunals have been swamped with so many cases that it may take at least another four years to clear them. Mr. Mallya is right when he said on Sunday in a grandiose statement that while he has been declared a wilful defaulter, many large borrowers who owe much more have got away. But swift action on the Mallya case is important, as it will set a strong example for the rest of the large defaulters who have taken the banking system for a ride.

(Source: Editorial in the Business Standard dated 10-03- 2016.)

Quota Blackmail – Roots of Jat agitation lie in lack of jobs which needs fixing, but giving in sets a bad precedent

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Nine days into Haryana’s Jat reservation stir 19 lives have already been lost, almost 200 have been injured and economic damage is estimated at a staggering Rs 20,000 crore. The government of chief minister Manohar Lal Khattar, who was heckled in the epicentre of the agitation in Rohtak, has unfortunately agreed to bring a bill for quotas to Jats in the state assembly’s next session.

The government’s willingness to capitulate before agitators who used violent means sets a bad precedent. Not only did the rioters bring the state to a standstill, they also damaged Delhi’s water supply network, which will take another two weeks to bring back on par.Giving in to such street tactics by those who are essentially pursuing a political demand can only harm the polity . Attempts to finalise the Jat quota will create further trouble.

The Supreme Court has set a 50% cap on quotas, exceeding this is illegal.

But to stay within the quota will have to be carved out of someone’s else share. It will then be the turn of that community to agitate. The results will also be keenly watched by dominant castes elsewhere such as Patels in Gujarat, Kapus in Andhra Pradesh and Marathas in Maharashtra all of whom want reservation. We could soon see eruptions elsewhere, if not in Haryana.

In the short term, governments need to hold their ground. They cannot sidestep this issue by conceding more quotas. And in the long term all political parties need to question some axioms of populist politics today . Firstly, caste quotas should not monopolise our notions of social justice. We need subtle rather than sledgehammer forms of affirmative action, for example, a points-based system that gives most weightage to economic deprivation.

Secondly, creation of jobs is falling radically short of India’s demographic demand. Economic policy must be indexed to job growth rather than GDP growth, reforms that grow jobs must be pushed through. These include radical labour reforms which incentivise the creation of more jobs, facilitation of land acquisition by industry , as well as educational reforms which radically improve the quality of public sector institutions while uninhibitedly inviting the private sector to play a greater role. If we fail to undertake these and similar job-creating reforms the Jat stir will not be the last reservation agitation we will see, damaging though it might have been.

(Source: Editorial in The Times of India dated 24-02-2016.)

How we must Redraft Education Policy

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The legal and regulatory environment of our education system is in a sorry state. A statement from IIT Bombay faculty has spoken of the pitfalls of government overregulation of higher education. But the problem exists across the spectrum: pre-primary, K-12, colleges, universities et al.

I am sure no one would disagree that we need more innovation in our education system. But where do we really stand in recognising that our education system is weighed down by decades of inefficiency and red tape? Students, parents, schools and colleges are victims of this daily malaise. Governments have been unable to support government schools, but they are more eager to meddle with the private school system. This calls for a radical change in mindset.

Private unaided education should not be looked at through the same prism as government run or even private aided education. Alas, that is exactly what is happening. Take the example of the recent spate of Fee Regulation Acts across states such as Maharashtra, Tamil Nadu and Rajasthan. Private unaided schools now need the approval of the respective state governments and in the case of Maharashtra, the parents, through an executive committee, before they can increase their fees!

No one forces anyone to attend these schools and they are in any case prohibited from profiteering and charging any sort of capitation fee. They need to comply with RTE as well. So why then interfere in their fee setting process? If parents have a grievance they can always approach the state’s education department.

This is nothing but blatant interference in what is essentially a fundamental right under our Constitution that allows schools to practise their occupation without unreasonable restrictions. This is what an 11 judge bench of the Supreme Court held in the TMA Pai case. Fee regulation also leads to corruption, favouritism and an overall adversarial atmosphere.

Kids are the biggest losers. Schools have to justify each penny they wish to charge and that will invariably lead to financial pressure on the schools, which in turn will have a domino effect on the quality of education and availability and cost of finance.

It’s also ironical that 100% FDI is permitted under the automatic route in education in India, but that investment has to be in a not for profit entity subject to all these restrictive regulations! Yes, there was a time and place for a more socialist approach to education. India was newly independent and needed a number of safety nets. But fast forward to 2016, and a lot has changed.

We need less government in the private sector, more entrepreneurship, higher quality of education and freedom for private schools to make their own decisions. The government instead of interfering with private schools should focus on improving the government school network. This too will require participation from the private sector. Governments are strapped for cash and need this support. PPP in various forms can prove to be highly successful. We have seen successes in Africa and Latin America in the low income private school sector and we need to replicate that in India. This requires governments to free their minds and not look at private education with suspicion.

There are six things that state governments and regulators can do. First, focus on improving government schools with the help of reputed private players in the low income private school sector.

Governments can let the private sector adopt schools and run them as low cost schools. This has been successful in Latin America and Africa. Research has shown that even those with lower incomes would prefer to pay a little for quality education rather than sending their kids to free government schools where nothing is taught or learnt.

Second, repeal fee regulation and other regressive rules that interfere with the management and functioning of private unaided schools. Instead, retain the power to grant approvals for setting up schools, ensure quality control through a self-regulation mechanism and prevent capitation fees being charged.

Third, boards of affiliation need to be more pragmatic in their oversight. Procedures and other rules and regulations should recognise the role played by technology and be amended to reflect our times. Fourth, allow private unaided schools to choose a legal structure of their choice rather than restricting them to “not for profit” structures. This will enable schools to raise more funds and improve the quality of education without having to create “innovative” structures to do so. Haryana permits schools to be set up by companies. Companies have far more regulatory obligations and reporting requirements compared to trusts and societies! This therefore should not be a concern to governments.

Fifth, distance education programmes should be liberalised and not shackled by territorial jurisdiction limits. The new distance education guidelines should be drafted in a manner that allows cross border access and must do away with the concept of state boundaries.

Sixth, the government has been very proactive in liberalising FDI, preparing a startup policy and an IP policy. They should draft the new national education policy with the same zeal and ensure it’s a forward looking policy, which takes into account the role of technology and also modern and progressive systems of learning.

The sooner the government realises that over regulation kills innovation, the better for education, students and the government’s own development goals.

(Source: Article by Vivek Kathpalia in The Times of India dated 23-02-2016.)

Budgets – the long view

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The flood of commentary that follows the presentation of a Union Budget focuses quite naturally on the immediate numbers. However, it is the long view that often proves more educative. Taking the perspective of the last decade, budgetary numbers present some clear trends.

To start with, central tax revenue and GDP will have remained in lock step: GDP (at current prices) is expected to have grown 3.4 times over the decade to 2016-17; so is budgeted tax revenue for next year. However, the states’ share of this revenue will have multiplied 4.7 times, leaving net central tax revenue to grow barely three-fold — and therefore slower than GDP. That the fiscal deficit has been controlled, regardless, is because of the spectrum bonanza that the government has engineered.

The contribution of different taxes to the total tax kitty has seen changes. Income-tax revenue is budgeted to have grown significantly faster than GDP, multiplying 4.3 times over the decade. Since GDP has grown only 3.4 times, people are now paying a greater share of their income as tax. Companies have not been as generous — corporation tax revenue is budgeted to have grown at nearly the same speed as GDP. Don’t blame the companies, though. The stress in the corporate sector has caused the share of profits in GDP to drop to a low point. If companies start doing better and reporting profit growth, corporation tax revenue will see a boost, not just in absolute terms, but also in relation to GDP.

Among indirect taxes, the star performer is service tax, whose revenue next year is budgeted to be a massive six times greater than a decade earlier. This is not just because service tax rates have been raised, but also because the coverage of the tax has been expanded. However, the other indirect taxes have disappointed. Customs duties, for instance, are budgeted to grow next year to just 2.8 times the level a decade earlier. This could indicate that duty rates have been dropped, making the economy more open than before, or that there has been a change in the import mix, towards items that attract lower duty. Alternatively, more imports are duty-free because they feed exports. Whatever the reason, the collection rate for Customs duty has dropped to barely 8 per cent of total imports in the last full year, compared to about 9 per cent of imports a decade earlier.

Finally, there is the other underperformer, excise duty. Revenue from this is budgeted to grow next year to just 2.7 times the level a decade earlier — making it the slowest-growing tax item, and growing slower than GDP, although the share of manufacturing in GDP has not fallen. The primary reason for the slippage is probably the fact that excise duties were lowered in the wake of the financial crisis of 2008, and are yet to be taken back up to the level that prevailed earlier. Perhaps finance ministers have stayed their hand because imposing higher excise duties might affect already depressed demand for a range of goods.

What conclusions should one draw from these numbers? First, the faster growth of revenue from direct taxes (on income and corporate profits) is to be welcomed as it makes the tax system more progressive. That customs duties are growing slower than both GDP as well as imports is also to be welcomed, if it can be confirmed that this is because duty rates have dropped and made the economy more open. However, the fact that taxes on manufacturing are growing slower than GDP should cause concern. Overall, the government’s total expenditure in relation to GDP is the same as it was a decade earlier. This tells us that, for all the excitement over annual budgets, finance ministers have little leeway for introducing change until the share of taxes in GDP grows. That will happen when the economy recovers momentum — corporate profits will grow and yield more taxes, and excise duty rates can be taken back to where they were before the 2008 crisis.

(Source: Weekend Ruminations by T. N. Ninan in Business Standard dated 12-03-2016.)

The real threat to India is not Kanhaiya, it’s lack of jobs

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Indian political life is rich in ironies. A leftist student leader, Kanhaiya Kumar, is arrested for sedition and anti-national conduct. The arrest turns him into a hero and a symbol of the freedom to dissent. The home minister defends the arrest by wrongly citing the United States as an exemplary democracy that doesn’t tolerate anti-national dissent.

Continuing strident protests crowd out a fine annual Budget of the government. In a magnificent speech, the ‘symbol of freedom’ reveals his true colours, espousing a statist ideology that does not allow economic freedom and has a record of killing millions for dissenting.

Prime Minister Modi’s great achievement was to broaden the appeal of the BJP in 2014 to a vast number of aspiring Indians who were swept by his rhetoric of jobs, growth and vikas. He thus created a genuine Indian conservative party made up of an ‘economic right’ and a ‘cultural right’, resembling the Republicans in America and the Conservatives in England.

Many on the economic right had little sympathy for Hindutva but they took a calculated risk, hoping that Modi would keep the cultural right under control, as Ronald Reagan did in the US and Margaret Thatcher in the UK.

Two weeks ago the government presented a prudent, jobcreating Budget that rightly offered a ‘new deal’ to rural India. Particularly inspiring was the announcement of a mission to finally liberate millions of women in the villages from smoke-filled chullahs in their kitchens by giving them access to cooking gas, and removing at one go the most pernicious form of pollution that blights the lives of Indian women. It also sent a powerful message to Bharat — rural India too could aspire to the lifestyle of urban India!

Grabbing eyeballs: The sedition row crowded out the Union Budget and its new deal for rural India.

The second nugget in the Budget was to give statutory authority to Aadhaar, which paves the way to deliver cash transfers into the bank accounts of the poor via mobile banking (including the women who will shift to cooking gas from cow dung). It is extraordinary that 98 crore Indians already have Aadhaar numbers, almost the same number as mobile phones, and 20 crore families now have bank accounts.

There will always be concerns related to privacy in a national identity program but I believe the Aadhaar bill addresses these fears. Plenty of countries have also solved this problem. The dramatic gains in the public delivery of subsidies and benefits to the poor via Aadhaar far outweigh the potential risks to privacy.

The Aadhaar bill is as transformative as any legislation introduced in India’s parliament. There were other gems in Jaitley’s Budget but all these were quickly forgotten, crowded out by the massive coverage of Kanhaiya, the new darling of the Indian media. Meanwhile, the future of the aspiring millions is in serious jeopardy.

The economy needs to accelerate by two full percentage points to deliver the required jobs. The Budget does offer the potential to do so but it will need single-minded attention to execution. The Prime Minister cannot afford more distractions like the sedition controversy, and he must control the cultural right if he wants to deliver his election promise.

The BJP government made the mistake of making a martyr of Kanhaiya. He is not a threat to India. The real threat lies in the failure to create jobs. If Modi wants to deliver vikas and restore credibility with the economic right of his party, he must control the cultural right and focus single-mindedly on executing his Budget.

(Source: Extracts from an article by Shri Gurcharan Das, & former CEO of Procter & Gamble India, in The Times of India dated 13-03-2016.)

A. P. (DIR Series) Circular No. 46 [(1)/9(R)] dated February 4, 2016

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Notification No. FEMA.9(R)/2015-RB dated December 29, 2015

Foreign Exchange Management (Realisation, repatriation and surrender of foreign exchange) Regulations, 2015

This Notification repeals and replaces the earlier Notification No. FEMA 9/2000-RB dated May 3, 2000 pertaining to Foreign Exchange Management (Realisation, repatriation and surrender of foreign exchange) Regulations, 2000.

A. P. (DIR Series) Circular No. 45 [(1)/6(R)] dated February 4, 2016

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Notification No. FEMA.6(R)/2015-RB dated December 29, 2015

Foreign Exchange Management (Export and Import of Currency) Regulations, 2015

This Notification repeals and replaces the earlier Notification No. FEMA 6/2000-RB dated May 3, 2000 pertaining to Foreign Exchange Management (Export and Import of Currency) Regulations, 2000.

A. P. (DIR Series) Circular No. 44 [(1)/10(R)] dated February 4, 2016

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Notification No. FEMA 10(R)/2015-RB dated January 21, 2016

Foreign Exchange Management (Foreign currency accounts by a person resident in India) Regulations, 2015

This Notification repeals and replaces the earlier Notification No. FEMA 10/2000-RB dated May 3, 2000 pertaining to Foreign Exchange Management (Foreign currency accounts by a person resident in India) Regulations, 2000.

A. P. (DIR Series) Circular No. 43 [(1)/7(R)] dated February 4, 2016

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Notification No. FEMA 7(R)/2015-RB dated January 21, 2016 Foreign Exchange Management (Acquisition and Transfer of Immovable Property outside India) Regulations, 2015

This Notification repeals and replaces the earlier Notification No. FEMA 7/2000-RB dated May 3, 2000 pertaining to Foreign Exchange Management (Acquisition and Transfer of Immovable Property outside India) Regulations, 2000.

A. P. (DIR Series) Circular No. 42 dated February 4, 2016

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Settlement of Export/Import transactions in currencies not having a direct exchange rate

This circular provides that in respect of export and import transactions where the invoicing is in a freely convertible currency and the settlement takes place in the currency of the beneficiary which does not have a direct exchange rate, banks can permit settlement of such export and import transactions (excluding those put through the ACU mechanism), subject to the following: –

a) Exporter / Importer must be a customer of the Bank.
b) Signed contract / invoice must be in a freely convertible currency.
c) The beneficiary is willing to receive the payment in the currency of beneficiary instead of the original (freely convertible) currency of the invoice / contract / Letter of Credit as full and final settlement.
d) Bank is satisfied about the bonafide of the transactions.
e) The counterparty to the exporter / importer of the bank is not from a country or jurisdiction in the updated FATF Public Statement on High Risk & Non Cooperative Jurisdictions on which FATF has called for counter measures.

A. P. (DIR Series) Circular No. 40 dated February 1, 2016

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Foreign Direct Investment – Reporting under FDI Scheme, Mandatory filing of form AR F, FCGPR and FCTRS on e-Biz platform and discontinuation of physical filing from February 8, 2016

Presently, there is an option given to the investee entity / transferors / transferees to submit Advance Remittance Form, Form FCGPR and Form FCTRS either online or by way of physical filing.

This circular provides that on and from February 8, 2016 it will be mandatory for all concerned to submit Advance Remittance Form, Form FCGPR and Form FCTRS online through the e-Biz portal as physical filing of these forms will no longer be accepted.

Insider Trading – Impact of a Recent Decision

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Background
A recent SEBI order on insider trading is worth considering for certain reasons. It is a case concerning Promoters of a listed company and persons connected with them who have allegedly engaged in insider trading. The case is a good case study on how SEBI investigates into and determines the connections between the parties. Interestingly, for one of the persons, the fact that he was connected with another through Facebook, even if indirectly, was considered a relevant factor to establish connection between them. Further, the manner in which the pattern of investments and their funding were scrutinized, even if fairly basic, is also illuminating. Finally, the recent trend of how SEBI takes quick interim action in this regard is also noteworthy. SEBI is increasingly into passing interim orders whereby the illegal profits made, along with interest till date of order, are impounded and required to be deposited till final orders are passed. Till they deposit such amounts, their bank and demat accounts are effectively frozen.

This case is under the regulations relating to insider trading of 1992, which have since been replaced by the Regulations of 2015. However, the case has full relevance since the findings and conclusion would not have been different under the new law.

Brief summary of the case
The case concerns a software company (Palred Technologies Limited or “Palred”) that had run into financial difficulties from which it recovered and achieved some stability. Thereafter, it decided to sell its business on a slump sale basis to another party. The price of the shares of the Company was low following the period of recovery. However, the proposed restructuring would enable the Company to raise substantial cash and value. The Company had, following such a deal, decided to declare a hefty special dividend and/or also carry out a buyback of shares. The dividend itself would have resulted in the shareholders receiving an amount far higher than the then ruling market price. The price of the shares thus rose substantially.

It later came to light that insiders consisting of the Promoters and certain persons allegedly connected with them had purchased the shares of the Palred at the earlier low ruling price. While they held on to most of the shares so purchased, obviously they benefitted from the very significant appreciation in the market price.

SEBI investigated the matter, examined the direct and indirect connections between such parties and Palred and the nature of their transactions in the shares of Palred. SEBI listed the transactions of such persons and the notional profits made by them considering the appreciation in the price of the shares of the Company. It then passed an interim order impounding such notional profits with interest. SEBI also issued orders effectively freezing the bank and demat account of such parties till they deposited such amount.

In the following paragraphs, some interesting features of this Order have been discussed in detail.

Date from which unpublished price sensitive information can be said to have arisen
A core component of any case of profiting from insider trading is that there should be unpublished price sensitive information (UPSI). UPSI, simply stated, is that information which is not yet made public by the Company but which, if published, would materially affect the ruling market price of the shares of the Company. In the present case, the UPSI obviously related to (i) the slump sale of the business of the Company and (ii) proposal to distribute, thereafter, substantial special dividend/return of money through buyback.

It was noted that the first board meeting of Palred held to formally approve the slump sale of business and consider declaration of special dividend was on 10th August 2013, which was reported to the stock exchanges two days later. However, the discussions relating to the slump sale of business with the proposed buyer was initiated almost a year earlier on 5th September 2012. The Nondisclosure Agreement with the buyers was signed on 18th September 2012. Thus, SEBI considered this date of 18th September 2012 as the date on which the UPSI had come into being. As will be seen later, transactions of the parties on and from this date till the date when the UPSI was made public were held to be insider trading in violation of the law.

SEBI observed:-

“The PSI regarding the ‘slump sale of software solutions business to Kewill group’ came into existence on September 18, 2012, i.e. when the non-disclosure agreement was executed between Kewill group and PTL. The non-disclosure agreement (having a confidentiality clause) was a binding contract on both the sides. Disclosure of the agreement would certainly have an impact on the deal. Therefore, the same can be considered to be an ‘unpublished price sensitive information’ (hereinafter referred to as ‘UPSI’) which had definitely originated on September 18, 2012 and the same had remained unpublished till August 10, 2013 at 13:01 hrs., in terms of the Regulation 2(ha)(vi) of the PIT Regulations. The period of such UPSI was from September 18, 2012 to August 10, 2013.”

It is noteworthy that the price of the shares of the Company on 5th November 2012, from which date an insider was found to have acquired shares, was Rs. 10.71. The price thereafter rose to Rs. 39.20 on the day when the UPSI was made public.

Similarly, the date when the UPSI relating to declaration of special dividend/buyback was also determined and transactions from that date were considered.

Determination of parties found connected for purposes of insider trading
The connections between the parties who had traded from the time when the UPSI came into being were considered.

Mr. Palem Srikanth Reddy, the Chairman and Managing Director of Palred, was a connected person under the Regulations and the Company accepted that he, along with two other persons, were privy to the UPSI relating to slump sale. Mr. Reddy was also accepted to be privy to the UPSI relating to special dividend.

Connections with the other parties were found on various grounds. One person – Ameen Khwaja – was found to be common director/promoter with the Chairman on another company which incidentally had also provided services to the Palred. This company was also proposed to be merged with Palred. It was found that while Ameen himself did not deal in the shares of Palred during the relevant period, several of his family members did and thus such dealing was held to have carried out insider trading.

Common friends on Facebook as basis of determination of “connection”
Perhaps for the first time in my recollection, SEBI considered connections on social media on internet between the parties and in this case, the social media was Facebook. SEBI observed that, “Mr. Pirani Amyn Abdul Aziz is also found to be connected to Mr. Ameen Khwaja through mutual friends on ‘Facebook’”. While this was not the only basis for alleging connection, it is still noteworthy.

It is strange though that having “mutual friends” on Facebook is treated as a relevant factor. Facebook is a relatively open social media network and “friends” are often made (and removed) without knowing in detail the background of parties. Such “friends” are often strangers with whom there are no other connection and sometimes not even offline contact. Having common mutual friends (which is what seems to be meant from the slightly unclear sentence in the Order) makes the connection even less strong. Nevertheless, it is safe to say that SEBI would resort in the future to examine social media connections of parties in its investigation for insider trading and even other purposes. Prominent social media networks include Facebook, Linkedin, Twitter, etc.

Consideration for determining whether the dealing was insider trading
An argument is often put forth by a person alleged to have committed insider trading that his dealing was in ordinary course of business. SEBI examined the background of trading by the parties in the shares of Palred and other scrips and generally other relevant factors to determine whether the dealings were in the ordinary course of business. It was found, for example, that some of the parties had dealings in the shares of Palred either as their only trading or the main one. In some cases, the parties had opened trading accounts just prior to dealing in shares of Palred. In another case, it was found that cash deposits were made in the bank account to make payments for purchase of the shares of Palred during the relevant period. These factors were held by SEBI to be sufficiently indicative of the trading in shares of Palred being in nature of insider trading and not regular trading by the parties.

Interim order of impounding
Such orders impounding profits are of course not wholly new. But they seem to have been used in a particular way in recent times by SEBI and hence some aspects of such orders need emphasis. Such orders are interim orders, in the sense that they are made in the interim pending further investigation. More importantly, they are made not only without giving any hearing to parties but even without giving them any notice. Thus, they often come as a bolt from the blue. The parties wake up one morning to find that their bank and demat accounts are frozen and they cannot operate them. They are of course given postorder opportunity to present their case, including, if they so desire, by way of a personal hearing. The objective is that certain preventive action is taken so that parties are not forewarned and thus they do not take any steps such as diversion of funds.

Manner of determination of profits made in the interim order
The Interim Order makes a finding, which is provisional pending final order, of the amount of profits from insider trading said to have made. In this case, SEBI has determined the purchase price of the shares during the relevant period. Since most of the shares were continued to be held till the date when the UPSI was made public, the price of the shares at the end of such relevant period is noted. The notional profits were then calculated which is the difference between such closing price and the purchase price. To that, simple interest @12% per annum has been added. The total amount is thus held to be the profits form insider trading.

Order of impounding of unlawful gains from insider trading
SEBI thus made this interim order impounding the unlawful profits made along with interest. For this purpose, it froze the bank and demat accounts of the parties whereby no debits to such accounts were permitted. The parties were also ordered not to alienate any of their assets till the amount impounded was duly deposited in an escrow account.

Conclusion
Such decisions over a period have displayed not just the development of the law and the improved detection and investigation of acts of insider trading by SEBI, but also the effective measures to ensure disgorgement of unlawful profits, and also the deterrent punishment being meted out.

The End of Male Exclusivity as HUF kartas

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Introduction
Quick quiz – when you hear the word ‘karta’, signifying a manager of a Hindu Undivided Family (“HUF”) what is the first thing which comes to mind? In most cases, the answer would be that it signifies a male descendant of the joint family who is the manager of the joint family business or estate. This has been the norm for several hundreds of years, i.e., only a male relative can be a karta. This is because under the Hindu Law, only men could be coparceners of an HUF. Women could be members but not coparceners. However, an epic amendment in September 2005 to the Hindu Succession Act, 1956 (“the Act”) changed all of that. The repercussions of that amendment are being felt even today and are the subject matter of various novel legal issues.

The 2005 amendment provided that a daughter has an equal right as that of a son in an HUF. One of the questions which has arisen as a result of this amendment is that can a daughter also be a karta of an HUF? While there has been a strong opinion in favour of this view, it is only now that this issue was tested before a judicial forum and the Delhi High Court has given its favourable view. Let us analyse this interesting question and some more questions emanating from the same.

Concept of an HUF
The Act governs the law relating to intestate succession among Hindus. The Act applies to Hindus, Jains, Sikhs, Buddhists and to any person who is not a Muslim, Christian, Parsi or a Jew.

Traditionally speaking, an HUF was a joint family belonging to a male ancestor, e.g., a grandfather, father, etc., and consisted of male coparceners and other members. Thus, the sons and grandsons of the person who was the first head of the HUF would automatically become coparceners by virtue of being born in that family. A unique feature of an HUF is that the share of a member is fluctuating and ambulatory which increases on the death of a member and reduces on the birth of a member. A coparcener is a person who acquires an interest in the joint family property by virtue of being born in the family. Earlier, only men could be coparceners. A wife and a mother of a person also could not become a coparcener in an HUF.

The Watershed Amendment which started the Revolution
Under section 6 of the Act, on the death of a Hindu, his interest in an HUF devolves by Will or by intestate succession and not by survivorship. This is contrary to the position prior to 2005 when the interest devolved by survivorship. Thus, under survivorship, if a father died, his interest in the HUF devolved upon the other surviving HUF members. Now the position is that his interest would go either as per his Will or in cases where he has not made a Will, then as per the intestate succession pattern laid down under the Act.

To neutralise gender biases existing prior to 2005, the Central Government amended the Hindu Succession Act, 1956 by the 2005 Amendment Act which was made operative from 9th September 2005. This marked a watershed in the Hindu Law History because covenants laid down by Manusmriti where done away with. The amendment not only altered the succession pattern, but also changed the way HUFs were hitherto managed.

Section 6 of the amended Hindu Succession Act, 1956 provides that a daughter of a coparcener shall:
a) by birth become a coparcener in her own right in the same manner as the son;
b) have the same rights in the coparcenary property as she would have had if she had been a son; and
c) be subject to the same liabilities in respect of the said coparcenary property as that of a son.

Thus, the amendment, by one stroke, put all daughters at par with sons and they could now become a coparcener in their father’s HUF by virtue of being born in that family. In Ram Belas Singh vs. Uttamraj Singh, AIR 2008 Patna 8, the High Court held that the daughter of a coparcener shall by birth become a coparcener in her own right in the same manner as the son and will have the same rights in the coparcenary property as she would have if she had been a son and shall also be subject to the same liabilities in respect of the said coparcenary property as that of a son and any reference to a Hindu Mitakshara coparcener shall be deemed to include a reference to a daughter of a coparcener. It held that the Act makes it very clear that the term “Hindu Mitakshara coparcener” used in the Act now includes daughter of a coparcener, also giving her the same rights and liabilities by birth as those of the son.

In Ganduri Koteshwaramma vs. Chakiri Yanadi, (2011) 9 SCC 788, the Court held that the effect of the amendment was that the daughter of a coparcener had the same rights and liabilities in the coparcenary property as she would have been a son and this position was unambiguous and unequivocal. Thus, on and from September 9, 2005, the daughter was entitled to a share in the ancestral property and was a coparcener as if she had been a son.

A daughter, thus, has all rights and obligations in respect of the coparcenary property, including testamentary disposition. Importantly, this position continues even after her marriage. Hence, all though she can only be a member in her husband’s HUF, she can continue to remain a coparcener in her father’s HUF.

Meaning of a Karta
A karta of an HUF is the manager of the joint family property. Normally, the father and in his absence the senior most member acts as the karta of the HUF. It is the karta who takes all decisions and actions on behalf of the family. He is vested with several powers for the operation and management of the HUF.

In the case of CIT vs. Seth Govindram Sugar Mills, 57 ITR 510 (SC), the Supreme Court held that the managership of a joint Hindu family is a creature of law and in certain circumstances, could be created by an agreement among the copartner of the joint family.

The Supreme Court in Tribhovandas Haribhai Tamboli vs. Gujarat Revenue Tribunal, 1991 SCR (2) 802 held that the managership of the Joint Family Property went to a person by birth and was regulated by seniority and the Karta or the Manager occupied a position superior to that of the other members. It further held that the father’s right to be the manager of the family was a survival of the patria potastas (Latin for power of the father) and he was in all cases, naturally, and in the case of minor sons, necessarily, the manager of the joint family property. In the absence of the father, or if he resigned, the management of the family property devolved upon the eldest male member of the family provided he is not wanting in the necessary capacity to manage it.

In Varada Bhaktavatsaludu vs. Damojipurapu Venkatanarasimha (1940) 1 MLJ 195, the Madras High Court held that when there was an eldest member of an HUF, the presumption was that under the Hindu Law he was the manager of the family.

Can a Female be a Karta – Position till 2005
Till 2005, the unanimous opinion was that only a male descendant of an HUF could become a karta. Let alone a karta, a female could not even become a coparcener. In CIT vs. Seth Govindram Sugar Mills, 57 ITR 510 (SC), the Supreme Court held that coparcenership is a necessary qualification for managership of a joint Hindu family. The Court further held that even the senior most female member of an HUF could not be a karta. She would be a guardian of her minor sons till they become major but never the karta because of the fact that she was not a coparcener. Similarly, various decisions have held that a wife cannot be a karta of her husband’s HUF.

Delhi High Court’s Decision
In Mrs. Sujata Sharma vs. Shri Manu Gupta, CS(OS) 2011/2006, Order dated 22nd December, 2015, the Delhi High Court was faced with the crucial decision of whether a lady who was the eldest child of all the coparceners of the HUF could be a karta or would the eldest son instead be the karta? It was contended by the son that the amendment to the Act only dealt with succession issues and did not expressly deal with the managership of an HUF.

However, the daughter countered this argument by relying on the Supreme Court’s observations in the case of Seth Govindram Sugar Mills (supra). According to the Supreme Court, being a coparcener was a necessary qualification for becoming a karta and since a female was not a coparcener she could not become a karta. She further contended that after the 2005 amendment, this impediment has been removed and a daughter is now statutorily recognised as a coparcener. Hence, reading the aforesaid Supreme Court judgment and the 2005 amendment together, she could become a karta. The 174th Report of the Law Commission of the India, dated 5th May 2000 was also relied upon which recommended that the eldest daughter can become a karta. The Delhi High Court found favour with the arguments raised on behalf of the daughter and held that it would indeed be odd if a daughter had equal rights of inheritance in an HUF property but could not become a karta of the same HUF. It further held that the Act was a socially beneficial legislation which gave equal rights of inheritance to both males and females. It held that the Act recognised the rights of females to be coparceners and provided for gender equality. In such a scenario, there was no reason why a daughter could not be a karta. It even added that this would be the case even after her marriage. Thus, the High Court declared the eldest daughter to be the karta of her father’s HUF.

Some More Questions
Is it not paradoxical that a married daughter can be a karta of the HUF of her father but not of the HUF of her husband? Is that not a classic case of there yet being a gender bias? There is a lady who is good enough to be a coparcener in her father’s HUF but not fit enough to be a coparcener of her own husband’s HUF? Indeed, this is an area which needs immediate rectification. Unfortunately, in this case, the remedy cannot be judicial since it would have to be through an amendment to the Act.

Further, since a daughter can now become a coparcener in her father’s HUF, do her children automatically become coparceners in their maternal grandfather’s HUF? The answer seems to be yes since the amendment Act clearly provides that the daughter would have the same rights as a coparcener as those of a son! Thus, if the daughter’s son or daughter is the eldest amongst the cousins, would he /she become the coparcener in their maternal grandfather’s HUF, in precedence to the son’s children? The answer, again, seems to be yes! So there could be a scenario where the daughter’s daughter is a karta of an HUF?

Inspite of the 2005 amendment, several HUFs have yet continued with the son as the karta even in cases where his sister is elder to him. What happens in such cases? Does the karta get automatically replaced or does the sister in all cases need to move Court? What happens to the transactions carried out by the son post September 2005 as karta of the HUF? Can the other members of the HUF /the sister challenge them for want of authority? These are some of the interesting questions which come to mind. One wishes that the amendment was more holistic and far sighted in nature.

Conclusion
With this judgment, another male bastion falls… and it’s about time. One wishes that the Legislature had expressly clarified this issue of managership when it carried out the 2005 amendment. Maybe it is time for an altogether new Hindu Succession Act, instead of carrying out another ad-hoc amendment to the present Act which is already celebrating its 60th anniversary. HUFs yet constitute entity for owning properties and businesses in India and hence, the Act urgently needs a Version 2.0. On a lighter vein, one wonders, whether, in case of a female manager, the term karta should now be joined by the term ‘Karti’?

Precedent – Judgement delivered earlier in point of time – Must be respected and followed – Constitution of India, Article 141.

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New India Assurance Co. Ltd. vs. Hill Multi purpose Cold Storage P. Ltd. AIR 2016 SC 86

While considering the interpretation of section 13(2)(a) OF The Consumer Protection Act, 1986 the Court observed that in Central Board of Dawoodi Bohra Community and Anr. vs. State of Maharashtra and Anr. [(2005) 2 SCC 673], wherein a question had arisen whether the law laid down by a Bench of a larger strength is binding on a subsequent Bench of lesser or equal strength. After considering a number of judgments, a five-Judge Bench of the Supreme Court, opined as under:

“12. Having carefully considered the submissions made by the learned senior Counsel for the parties and having examined the law laid down by the Constitution Benches in the above said decisions, we would like to sum up the legal position in the following terms:

(1) The law laid down by this Court in a decision delivered by a Bench of larger strength is binding on any subsequent Bench of lesser or co-equal strength.

(2) A Bench of lesser quorum cannot disagree or dissent from the view of the law taken by a Bench of larger quorum. In case of doubt all that the Bench of lesser quorum can do is to invite the attention of the Chief Justice and request for the matter being placed for hearing before a Bench of larger quorum than the Bench whose decision has come up for consideration. It will be open only for a Bench of coequal strength to express an opinion doubting the correctness of the view taken by the earlier Bench of coequal strength, whereupon the matter may be placed for hearing before a Bench consisting of a quorum larger than the one which pronounced the decision laying down the law the correctness of which is doubted.

(3) The above rules are subject to two exceptions: (i) The above rules do not bind the discretion of the Chief Justice in whom vests the power of framing the roster and who can direct any particular matter to be placed for hearing before any particular Bench of any strength; and

(ii) In spite of the rules laid down here in above, if the matter has already come up for hearing before a Bench of larger quorum and that Bench itself feels that the view of the law taken by a Bench of lesser quorum, which view is in doubt, needs correction or reconsideration then by way of exception (and not as a rule) and for reasons given by it, it may proceed to hear the case and examine the correctness of the previous decision in question dispensing with the need of a specific reference or the order of Chief Justice constituting the Bench and such listing. Such was the situation in Raghubir Singh and Hansoli Devi.”

In view of the aforestated clear legal position depicted by a five-Judge Bench, the subject is no more res integra. Not only this three-Judge Bench, but even a Bench of coordinate strength of this Court, which had decided the case of Kailash (supra), was bound by the view taken by a three-Judge Bench in the case of Dr. J.J. Merchant(supra)

Precedent – Binding precedent – Judicial propriety – Single Judge is bound by opinion of Division Bench: Constitution of India, Article 226

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Farooq Mohammad vs. State of M.P. & Others AIR 2016 AIR MP 10 (FB)

The petitioner filed writ petition before the High Court challenging the entire action of election on the ground that the notice period for convening the first meeting after general election was not in conformity with section 56 (3) of the Act. The sole ground was that the notice was dated 1.1.2015 and was dispatched to the Councillors only on 2.1.2015 for convening meeting on 6.1.2015. As a result, the entire action including election of Vice President and two members of Appeal Committee be declared as vitiated in law. The writ petitioner had relied on the decision of the Division Bench of our High Court in the case of Awadh Behari Pandey vs. State of Madhya Pradesh and others 1968 MPLJ 638. The learned Single Judge, however, doubted the correctness of the view taken by the Division Bench that requirement of dispatching the notice to convene first meeting after general election of the Council as per section 56 (3) of the Act, of seven (7) clear days before the first meeting is mandatory.

The Court observed that it was also not open to be doubted on the principles of stare decisis, in particular by the Single Judge. The Constitution Bench of the Supreme Court in the case of Central Board of Dawoodi Bohra Community and another vs. State of Maharashtra and another, (2005) 2 SCC 673 had laid down the law that a decision delivered by a Bench of larger strength is binding on any subsequent Bench of lesser or co-equal strength. A Bench of lesser quorum cannot disagree or dissent from the view of the law taken by a Bench of larger quorum. In case of doubt all that the Bench of lesser quorum can do is to invite the attention of the Chief Justice and request for the matter being placed for hearing before a Bench of larger quorum than the Bench whose decision has come up for consideration. It will be open only for a Bench of co-equal strength to express an opinion doubting the correctness of the view taken by the earlier Bench of coequal strength, whereupon the matter may be placed for hearing before a Bench consisting of a quorum larger than the one which pronounced the decision laying down the law the correctness of which is doubted.

By now it is well established position that the Single Judge is bound by the opinion of the Division Bench and more so, on legal position which has been in vogue for such a long time if not time immemorial. Merely because some other view may also be possible, cannot be the basis to question the settled legal position. Such approach is not only counterproductive but has been held to be against the public policy.

Partition – Only partition effected by way of registered deed prior to 20/12/2004 debars daughter from staking an equal share with son in co-parcenary property : Hindu Succession Act 1956, section 6.

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Smt. Lokamani & Ors vs. Smt. Mahadevamma & Ors. AIR 2016 Karnataka 4

The Suit was in respect of four landed properties and one house property. The case of the plaintiffs was that they along with defendants 1 to 4 constituted undivided Hindu Joint Family owning ancestral agricultural lands and house property.

The Trial Court held that the plaintiffs had proved that the suit properties were joint family properties; the suit was maintainable and that it was not a suit for partial partition as contended by the defendants; the plaintiffs and Mahadevappa being Class-I heirs of the deceased Sannamadiah, were entitled to equal share in the suit properties as per section 8 of the Hindu Succession Act, 1956 (the Succession Act).

On appeal, the Hon’ble Court observed that the Explanation to sub-section (5) of section 6 of the Succession Act categorically declares that nothing contained in section 6 applies to a partition, which has been effected before 20th day of December 2004. In other words, if a partition had taken place in the family before 20th December 2004, a daughter cannot claim share in the co-parcenary property by virtue of the amendment to the Succession Act.

Further Explanation to sub-section (5) explains the meaning of partition for the purpose of section 6 as below: “Explanation: For the purposes of section 6, “partition” means any partition made by execution of a deed of partition duly registered under the Registration Act, 1908 or partition effected by a decree of a Court.”

Thus, oral partition, palu-patti, unregistered Partition Deed are excluded from the purview of the word “partition” used in section 6. It is only the partition effected by way of a registered Deed prior to 20th December 2004, which debars a daughter from staking an equal share with a son in a co-parcenary property.

The High Court held that in the case on hand, admittedly there was no registered Partition Deed between Sannamadaiah and Mahadevappa, evidencing the alleged partition that took place in the year 2000. Even if there was a partition, oral or by an unregistered Partition Deed of the year 2000 as contended by the defendants, it could not be treated as a partition for the purpose of Section 6 and the rights of the daughters to claim an equal share as coparceners along with Sannamadaih’s son Mahadevappa remained unaffected. The trial Court was fully justified in rejecting the contention of the defendants and holding that the plaintiffs were entitled to equal share with the son of Sannamadaiah in the suit properties, which were admittedly co-parcenary properties.

The court further observed that the Repealing and Amending Act, 2015 does not disclose any intention on part of Parliament to take away status of a co-percener conferred on a daughter giving equal rights with the son in co-parcenary property. Similarly, no such intention can be gathered with regard to restoration of sections 23 and 24 of Principal Act which were repealed by Hindu Succession (Amendment) Act, 2005. On the contrary, by virtue of Repealing and amending Act, 2015, the amendments made to the Succession Act in the year 2005, became part of the Act and the same is given retrospective effect from the day the Principal Act came into force in the year 1956, as if the said amended provision was in operation at that time. Thus, equal rights conferred on the daughter by the Amending Act have not been taken away by the Repealing Act. The main object of the Repealing and Amending Act is not to bring in any change in law, but to remove enactments which have become unnecessary.

Mortgage debts – Priority of charge recovery certificate in favour of bank cannot effect prior charge of mortgage : Transfer of Property Act – Section 48.

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Punjab & Sind Bank vs. MMTC Ltd & Ors. AIR 2016 Del. 15

The Debt Recovery Appellate Tribunal vide order dated 23.03.2011 accepted the First Respondent’s Minerals and Metals Trading Corpn’s. (MMTC) plea that the mortgage inuring in its favour had to prevail over the PSB’s claim in execution of a money decree and directing that proceeds from the sale of a property by the Recovery Officer be used first to satisfy MMTC claim. The Punjab and Sind Bank aggrieved by the order approached the Hon’ble Court.

The Hon’ble High Court observed that if the mortgage exists, it will create a prior charge over the property, being prior in time vide section 48 of Transfer of Property Act, 1982 (the TP Act). In the instant case, prior mortgage was created by deposit of title deeds in favour of MTC) Subsequently, the mortgagor also obtained cash credit facilities from Bank and defaulted in payment. MMTC invoked arbitration clause and procured award in its favour. The Bank initiated recovery proceedings under The Recovery of Debts Due to banks and Financial Institutions Act, 1993 (the RDDBFI Act). The award of arbitrator was sought to be executed as decree of Civil Court. The fight was between the two lenders over the priority of claims.

The Court held that the non obstante clause in section 34 of the RDDBFI Act would not override the prior charge. The non obstante clause would operate only where there is a conflict. The applicable rules themselves envision a situation where the Recovery officer is confronted with a property that is already charged. If an earlier mortgage existed it would take prior claim by virtue of section 48 of the TP Act.

The fact that the mortgage debt must be enforced by sale through a separate civil suit does not obviate the mortgage itself. So far as the Debt Recovery Officer concerned, Rule 11 merely requires him to investigate if evidence of a prior charge on the property exists, and then proceed accordingly. His task is not to finally give effect to the mortgage debt, nor is to deny its existence in law. His determination is not final and is subject to a civil suit that may be filed in that regard.

Nominee-Right of Nominee–Existence of Joint Family-Hindu widow is not coparcener in HUF of her husband: Hindu law Prior to amendment of the Hindu Succession Act, 2005.

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Shreya Vidyarthi vs. Ashok Vidyarthi and Ors. AIR 2016 SC 139

In the year 1937, one Hari Shankar Vidyarthi married Savitri Vidyarthi, the mother of the Respondent – Plaintiff. Subsequently, in the year 1942, Hari Shankar Vidyarthi was married for the second time to one Rama Vidyarthi. Out of the aforesaid second wedlock, two daughters, namely, Srilekha Vidyarthi and Madhulekha Vidyarthi (Defendants 1 and 2) were born.

The dispute in the present case revolves around the question whether the suit property, purchased by sale deed dated 27.9.1961 by Rama Vidyarthi was acquired from the joint family funds or out of her own personal funds.

The Hon. Court held that though the claim of absolute ownership of the suit property had been made by Rama Vidyarthi in the affidavit, she had also stated that she received the insurance money following the death of Hari Shankar Vidyarthi and the same was used for the purchase of the suit property along with other funds. The claim of absolute ownership is belied by the true legal position with regard to the claims/entitlement of the other legal heirs to the insurance amount. Such amounts constitute the entitlement of all the legal heirs of the deceased though the same may have been received by Rama Vidyarthi as the nominee of her husband. The above would seem to follow from the view expressed by this Court in Smt. Sarbati Devi and Anr. vs. Smt. Usha Devi : 1984 (1) SCC 424.

The facts that the family was peacefully living together at the time of the demise of Hari Shankar Vidyarthi; the continuance of such common residence for almost 7 years after purchase of the suit property in the year 1961; that there was no discord between the parties and there was peace and tranquility in the whole family were also rightly taken note of by the High Court as evidence of existence of a joint family. The execution of sale deed dated 27.9.1961 in the name of Rama Vidyarthi and the absence of any mention that she was acting on behalf of the joint family has also been rightly construed by the High Court with reference to the young age of the Plaintiff -Respondent (21 years) which may have inhibited any objection to the dominant position of Rama Vidyarthi in the joint family, a fact also evident from the other materials on record. The Court, therefore, held that there can be no justification to cause any interference with the conclusion reached by the High Court on the issue of existence of a joint family.

Issue also arose as to how could Rama Vidyarthi act as the Karta of the HUF in view of the decision of this Court in Commissioner of Income Tax vs. Seth Govindram Sugar Mills Ltd. : AIR 1966 SC 24 holding that a Hindu widow cannot act as the Karta of a HUF which role the law had assigned only to males who alone could be coparceners (prior to the amendment of the Hindu Succession Act in 2005).

While there can be no doubt that a Hindu widow is not a coparcener in the HUF of her husband and, therefore, cannot act as Karta of the HUF after the death of her husband, the two expressions i.e. Karta and Manager may be understood to be not synonymous and the expression “Manager” may be understood as denoting a role distinct from that of the Karta. Hypothetically, we may take the case of HUF where the male adult coparcener has died and there is no male coparcener surviving or as in the facts of the present case, where the sole male coparcener (Respondent – Plaintiff Ashok Vidyarthi) was a minor. In such a situation obviously the HUF does not come to an end. The mother of the male coparcener can act as the legal guardian of the minor and also look after his role as the Karta in her capacity as his (minor’s) legal guardian. Such a situation has been found, and rightly, to be consistent with the law by the Calcutta High Court in Sushila Devi Rampuria vs. Income Tax Officer and Anr.: AIR 1959 Cal 697 rendered in the context of the provisions of the Income Tax Act while determining the liability of such a HUF to assessment under that Act. Coincidently the aforesaid decision of the Calcutta High Court was noticed in Commissioner of Income Tax vs. Seth Govindram Sugar Mills Ltd.

Net Neutrality

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A lot has been written and spoken about Net Neutrality in the recent
past. We have also seen full page advertisements in our newspapers by
FaceBook exhorting Indians to support Free Basics which is Mark
Zuckerberg’s version of Face Book for the poor. So, what is Net
Neutrality? And what is the big controversy around it that has suddenly
made it the centre of such a roaring debate?

Net neutrality is
the concept of treating the Internet Services as a Public Utility
similar to electricity, water or gas supply.

Net neutrality is
endorsing a view to treat all data on the Internet at par without
discriminating or charging differentially irrespective of user, content,
site, platform, application or instrument

The term “Net
Neutrality” was coined way back in 2003 by Timothy Wu, a professor at
Columbia Law School in his paper “Network Neutrality, Broadband
Discrimination”. The Paper by Tim Wu rooted for neutrality among
applications, data, quality of service and also proposed some sort of
legislation to deal with these issues.

Though this concept was
coined in 2003 and has become part of legislation in many countries
since 2010. In India, the hue and cry began only in December 2014, when
one of the telecom operators announced additional charges for making
voice calls on its network using apps like WhatsApp, Skype, etc.

To
clear the prevailing confusion, in March 2015, TRAI released a
consultation paper on Regulatory Framework for Over-the-Top (OTT)
Services. The consultation paper was heavily criticised in all quarters
for being one sided and not having clarity in many areas.

Let’s
understand what this hue and cry is and how it is affecting content
companies like YouTube, Facebook, Skype etc., Vis network providers,
telecom operators, etc.

Though this concept was discussed all
these years, there was no pressure on either internet service providers
or telecom operators. However, with the advance of YouTube and other
video content companies, load on the network increased tremendously.
Similarly, photos and video on Facebook and other popular social media
sites too became all pervasive and miilions of MBs of content is now
being uploaded every day onto these sites. As a result, the internet
network started feeling the heat of overburden of content over
internet/telecom highway.

Most of the telecom companies argue
that they are investing heavily in internet highway and hence those
using this highway should either pay charges or share their revenue with
telecom/internet companies.

A major factor that has raised this
storm is the fact that social media companies with low investment draw
huge traffic and huge revenue from advertisements, etc., and as compared
to that, telecom/internet companies who invest heavily into
infrastructure and enable all those users to reach particular content
site get hardly anything.

One more factor which led to a dent in
telecom companies’ margins was the heavy fall in the number of sms
messages after evolvement of many free messenger apps. This was further
worsened by voice over internet protocol (VOIP) calls provided by
various apps, which has directly impacted the telecom companies earning
revenues from STD / ISD calls. This stream of revenue has literally
vanished after evolvement of these messenger apps.

Video content
sharing on almost all the social media platforms has put tremendous
pressure on all the carriage providers who are now reluctant to upgrade
their network capacity unless cost for the same shared by such content
companies.

In some quarters, arguments in favour of Net
Neutrality are cracking down as attempt to differentiate content from
network is not able to sail through.

Let’s understand this
problem from another angle. What if concept of Net Neutrality is not
there? Let us assume a life without Net Neutrality. In that scenario,
telecom companies will start charging content companies and will in turn
offer Sponsored Data or Free Data for such content companies over its
network.

Real trouble will start here when those content
companies with very little start up who are not able to share either
cost or revenue with internet/telecom companies will see lesser traffic
as these infrastructure companies will be partial to content companies
sharing cost/revenue as against those who are using their information
highway free of cost.

Recently, we are seeing free Facebook
plans by various telecom companies which are nothing but some type of
similar arrangement wherein telecom companies will be compensated by
content companies.

Now let’s analyse the entire scenario to understand as to who will gain and who will lose from this concept of Net Neutrality.

Presently,
without Net Neutrality, those content companies which don’t have to
share cost or revenue with infrastructure companies (which are heavily
burdened) are benefitted as compared to the infrastructure companies
which have to provide hassle free info highway which in turn pushes them
to invest more and more into towers and related infrastructure without
any corresponding increase in the revenue.

With Net Neutrality,
telecom companies will be further burdened to provide better information
highway which will require them to invest more and this concept won’t
allow telecom companies to enter into any arrangement of sharing cost
with or revenue from content companies for any sponsored data type
packages.

Now in last limb, let us understand how things will
worsen without this concept. In absence of any regulation of internet
highway, most telecom companies will enter into arrangement with content
companies for sponsored data and will not charge end users any fees for
usage of visit to such content companies. E.g., Reliance offering free
internet for Facebook or Airtel offering free internet for Flipkart.

Any
such arrangement will simply push users towards content companies which
are providing free access at the cost of new or low funded start-up
companies which many not be able to share cost or revenue with telecom
companies.

This can lead to a very big negative impact affecting
the whole internet revolution which started with free world wide web.
With all such sponsored data packages, telecom companies and content
companies can drive and decide as to what end user should read, watch or
listen.

To conclude, we can summarize that this subject is not
that easy to tackle. Implementing Net Neutrality can either kill
efficiency of telecom operators or their financial /economic viability.
With regulators and consumer forum just focussing on better quality and
better network and not addressing fallacy in revenue models of telecom
operator will hurt economy in long term.

On the other hand, the
risk of not implementing or regulating Net Neutrality may leave business
in the hands of large content companies and telecom operators, who will
mould, drive and drag users in the way they want. Such laissez faire in
the long term will choke the growth of any small content company whose
financial health cannot allow it to bear the cost or share the revenue
with telecom operators. Without Net Neutrality, users will lose the real
benefit of information technology revolution as they will be at mercy
of partial or biased approach of internet highway operators, i. e.
internet/telecom companies.

The whole world is exploring various
options for striking a balance between the two extremes. Most of the
western or developed countries which have implemented Net Neutrality are
facing tremors as veneer of this concept is cracking in the tussle of
carriage and content.

In long term, government, regulators and
industry bodies will have to come together and work for balance between
Net Neutrality along with reasonable compensation for telecom companies
who will keep pumping money into establishing and improving better and
better information highway. The next few months will prove very
interesting as the debate continues and the haze begins to clear.

The Indian classics belong to the world, and no one has exclusive rights – Rohan Murty

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Ancient India represents more than 3,000 years of extraordinary literature, science, history, and culture. Yet, the world is fast losing and not sufficiently replenishing scholars who can access, digest, and share these treasures with the modern world.

In recent times, the Bhandarkar Institute, Sanskrit College (Chennai), Deccan College, and Bharatiya Vidya Bhavan have been among the plethora of institutions that hosted generations of great classical scholars, and my family has had the honour of supporting them philanthropically. Yet, economic pressures and a change in societal priorities, among other issues, have resulted in very few people in my generation studying the classics as their first choice. This trend is worrying and begs the question: who will continue to study, intelligently debate, and widely share the extraordinary knowledge that we have gathered over several millennia?

To turn this tide we must work together to ensure that the knowledge of ancient India lives on for generations to come. This requires several efforts that will collectively work towards a future where the study of ancient Indian history, mathematics, classics, literature, etc will proliferate across the world and be as vaunted as the study of ancient Greece or Rome. One where the citizens of the world will marvel at what the ancients here did.

It is for this reason that I support the Murty Classical Library of India (MCLI), a non-profit whose aim is to assemble the best scholar-translators worldwide to edit, translate, and annotate the greatest works in classical Indian literary and intellectual history. Our hope is not only to bring to readers everywhere pleasure and instruction, but also pride to the people of India at the luminous achievements of our poets and thinkers. At the same time, we are actively working to encourage young people to familiarise themselves with classical texts, to learn the original scripts, to seek help from our annotations, and actually begin to read not only the English translations but also the original Indic works on their own.

MCLI is perhaps the most ambitious translation project, spanning over two millennia and 14 classical Indian languages. Our expert translators range from Vanamala Viswanatha (Kannada) in Bengaluru to Christopher Shackle (medieval Punjabi) in London to David Shulman (Telugu and Tamil) in Jerusalem to Velcheru Narayana Rao (Telugu) in Atlanta. These are just a few of the many world-class scholars translating for MCLI, each of whom reflects our mission to find the best scholars for each text and language, wherever they might reside. Translation is an art form and our editors and scholars work together to ensure that the translations remain faithful to the source. Sheldon Pollock, our general editor, is an extraordinary scholar who, along with the rest of our staff, works tirelessly to create the most exacting scholarship possible. Sheldon himself was fortunate to train under India’s brilliant academics, such as M. V. Patwardhan and Srinivas Sastry (Pune); P. N. Pattabhirama Sastry (Varanasi); Balasubrahmanya Sastry (Mantralayam); and Venkatachala Sastry and Vidwan Nagaraja Rao (Mysore). His dedication and passion for producing high-quality and faithful translations that will outlive us all is evident to anyone who actually reads an MCLI book.

Recently, there have been suggestions that political alignment should inform participation in MCLI. On the contrary, politics has absolutely no place in the work we do at MCLI and thus is not a factor in determining who collaborates with us. This is an enterprise of pure scholarship and genuine love, period. That said, participation in MCLI does not preclude people from holding or expressing their political views on matters outside the purview of MCLI. That is a fundamental right that we will not abridge.

I am proud to have such a diverse mix of scholars contributing to MCLI, as ancient Indian classics ought to have universal appeal. They are as much a part of world heritage as Greek, Latin, or Chinese classics. Hence I do not agree with the view that classical Indian scholarship is the sole purview of Indians, no more than I believe that the study of Shakespeare ought to be exclusively left to the English. In fact, some of the best-known scholars on English literature are Indians! On this note, I am inspired by what the Mahatma said: “I do not want my house to be walled in on all sides and my windows to be stuffed. I want the cultures of all the lands to be blown about my house as freely as possible. But I refuse to be blown off my feet by any.” Sadly, as a society today we have let our institutions, manuscripts, and scholarship in these areas fall into a state of disrepair. And this I am going to help rebuild.

Notwithstanding its early momentum, however, MCLI alone cannot be the panacea for the challenges ahead. At best, MCLI will produce some 2,500 volumes over the next 500 years, yet there are possibly millions awaiting translation. Given all that’s to be done, I hope we can spend less time pitting Indian against Indian and instead think earnestly about how to best preserve our cultural heritage for generations to come.

There is far too much to be done in far too little time. MCLI is just one of many initiatives I hope to support in my lifetime to ensure that the institutions, manuscripts, and scholarship in the areas of the classic endure. I look forward to working constructively with anybody — be they ethnically Indian or otherwise — as long as they are honest scholars of the highest calibre interested in advancing the same visions articulated here.

(Source: Article by Shri Rohan Murty, sponsor of Murty Classical Library of India , in The Times of India dated 06.03.2016)

Bad loans – Reform banking beyond naming & shaming – India’s political economy has to change, too

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The Supreme Court (SC) has asked India’s central bank, the Reserve Bank of India (RBI), to hand over a list of all companies that owe more than Rs 500 crore to (mainly) state-owned banks, but whose promoters continue to live, well, in some comfort. The second criterion is dicey, since what constitutes high living tends to be subjective, but it should be an easy matter for the RBI to hand over a list of the major defaulters. Since taking over in 2013, RBI governor Raghuram Rajan has been fighting a lonely battle to get banks to clean up their books, seize assets of habitual defaulters and impose some discipline in the country’s moth-eaten lending system. The SC order strengthens his hand in the fight to break the cronyism between bankers and promoters. This is welcome.

The court can reveal the names handed over by the RBI. Naming and shaming might achieve results that gentle nudges have failed to deliver. However, such a list of names would contain the names of both those who wilfully borrowed too much to achieve too little and defaulted in desultory impunity and those who fell to unanticipated political risk that compounded normal business risk in the period of policy paralysis after a former telecom secretary was sent to jail in 2011. The point, really, is to reform banking as practised in the public sector, redeem banking decisions from political/bureaucratic interference. That, in turn, calls for overhauling political funding to make it transparent and free of the proceeds of corruption, besides overhaul of ownership and control. The malaise in banking has its roots in our political economy.

Rajan’s job would have been simpler had he been armed with a modern bankruptcy law similar to the US’. Yet, parliamentary logjam has thwarted India’s new bankruptcy code, which could permit swift resolution of bad loans. The government must prioritise this as the number one item on its legislative agenda and get it passed in the Budget session. Of course, for this, it would need to engage the Opposition, instead of calling it antinational and other names. (Source: Editorial in The Economic Times dated 19-02-2016.)

Narendra Modi, Mark II

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Has Narendra Modi re-set his political sights? He talks now of the poor,
not the neo-middle class that featured in his campaign manifesto and in
Arun Jaitley’s first Budget. When railway finances are in poor shape,
he decides to not raise railway fares – though fares cover barely
twothirds of cost. He has done a dramatic about-turn on the rural
employment guarantee programme, which he no longer damns as a monument
to Congress failures. The promise of minimum government has gone out the
window. And he sounded defensive, even beleaguered, when he spoke the
other day of conspiracies to “finish” him – conspiracies by civil
society activists, if you please, while he (i.e. Mr. Modi) was busy
working for the people.

To many observers, that sounded like
Indira Gandhi who campaigned in 1971 by saying: “They say ‘Indira
hatao’, I say ‘Garibi hatao’.” Though her economic policies did little
to remove poverty, she is remembered by the poor as someone who stood
for and by them. It is beginning to look like Mr Modi thinks that is not
a bad place to be. Typically, the arrival of “Modi Mark II” is to be
marked by a kisan maha sammelan in Delhi, with 100,000 farmers to
attend. So the nervous question in business circles is: will Mr Modi,
less than two years into office and wounded by Rahul Gandhi’s
“suit-boot” jibe, use the Budget to announce his new political
positioning?

If he does, there will be parallels with P. V.
Narasimha Rao, who turned his back on economic reforms in 1993, two
years after launching them, because of electoral reverses in two
southern states. Soon Rao was to announce freebies on Independence Day,
while Manmohan Singh as finance minister grumbled in an interview that
you could not spend your way to prosperity. The record of other prime
ministers too shows how much can change when a prime minister is faced
with the two-year challenge. Elected to the Lok Sabha in 1967, Indira
Gandhi faced a political challenge in 1969 and wrested the initiative
only by splitting the Congress and launching on a reckless string of
nationalisations and ruinous tax measures. Reelected in 1971, she was
faced with JP’s anti-corruption movement by 1973, and eventually imposed
Emergency rule. Elected a third time in 1980, she had to confront
Bhindranwale’s “Dharam Yudh Morcha” in 1982, leading to the Punjab
insurgency that eventually cost her her life.

When it came to
Rajiv Gandhi, the Bofors scandal hit him shortly after he completed two
years, in 1987; he would never recover the political initiative. As for
Mr. Vajpayee, re-elected in 1999, the challenge came midway into his
term, from the Rashtriya Swayamsevak Sangh boss K. S. Sudarshan. Their
power play was on the swadeshi issue; Mr. Vajpayee stood his ground. And
Manmohan Singh, two years into his second term, was hit in the solar
plexus by the government’s auditor; his government remained paralysed
till its term ran out.

Mr. Modi faces no real political challenge
or crisis, least of all because of civil society activists. But he
recognises that some of those whom he enthused in 2014 are now a
disappointed lot, even as successive droughts have caused severe
distress in the countryside. While it is entirely right that he should
address that urgently, the danger with “Modi Mark II” is that he will
focus on giveaways rather than the tougher task of boosting productivity
(and therefore farm incomes). In a search for a more secure political
constituency, Mr. Modi might even be tempted to revert to the failed
policies of Indira’s time: trade protectionism, redistributive taxes
that encourage evasion, and policies that favour government-funded
investments rather than private sector recovery. One hopes not.

(Source: Weekend Ruminations by Shri T. N. Ninan in Business Standard dated 27-02-2016.)

A. P. (DIR Series) Circular No. 53 dated March 03, 2016

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Grant of EDF Waiver for Export of Goods Free of Cost

Presently, Status Holder exporters can export, free of coat, freely exportable items for export promotion annually up to Rs 10 lakh or 2% of average annual export realization during preceding three licensing years, whichever is higher.

This circular now provides that Status Holder exporters can export, free of coat, freely exportable items for export promotion annually up to Rs 10 lakh or 2% of average annual export realization during preceding three licensing years, whichever is lower.

Notification No.FEMA.362/2016-RB dated February 15, 2016

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Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Second Amendment) Regulations, 2016

This Notification has amended Notification No. FEMA. 20/2000-RB dated 3rd May 2000 as under: –

A. In Regulation 2 – new clause (viiAA) has been inserted as under: –

“(vii AA) “Manufacture”, with its grammatical variations, means a change in a non-living physical object or article or thing- (a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or (b) bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure.”

B. In Regulation 14 the following amendments have been made
a. In sub-regulation 1, existing clause (i) and clause (ia) have been amended.
b. In sub-regulation 3, existing sub-clause (D) in clause (iv) has been amended.
c. Sub-regulation 5 – Guidelines for establishment of Indian companies/ transfer of ownership or control of Indian companies, from resident Indian citizens to non-resident entities, in sectors under government approval route – has been amended.

d. In sub-regulation 6, the existing clause (ii) has been amended.

C. In Schedule 1 the following amendments have been made: –

a. In paragraph 2, paragraph beginning with “Provided further that the shares or convertible debentures…..” and ending with “…………permitted to the extent specified in Regulation 14.” has be deleted.

b. In paragraph 2, new clause (v), has been inserted as under: –

“(v) by way of swap of shares, provided the company in which the investment is made is engaged in an automatic route sector, subject to the condition that irrespective of the amount, valuation of the shares involved in the swap arrangement will have to be made by a Merchant Banker registered with SEBI or an Investment Banker outside India registered with the appropriate regulatory authority in the host country.
c. Note: A company engaged in a sector where foreign investment requires Government approval may issue shares to a non-resident through swap of shares only with approval of the Government”
d. In paragraph 3, the existing sub-paragraph (c) has been deleted.
e. In ‘Annex B’, the existing table – Foreign Investments caps and entry route in various sectors – has been substituted.

D. In Schedule 9 the following amendments have been made: –
a. Existing paragraph 4 – Entry Route – has been amended.
b. Existing paragraph 8 – Downstream Investment – has been deleted.

E. E xisting Schedule 11 – Investment by a person resident outside India in an Investment Vehicle – has been substituted.

Notification No.FEMA.361/2016-RB dated February 15, 2016

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Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Amendment) Regulations, 2016

This Notification has amended Notification No. FEMA. 20/2000-RB dated 3rd May 2000 as under: –

A. Substituted clause (viia) in Regulation 2 as follows: – “(viia) Non-Resident Indian (NRI) means an individual resident outside India who is citizen of India or is an ‘Overseas Citizen of India’ cardholder within the meaning of section 7 (A) of the Citizenship Act, 1955.”

B. Substituted Regulation 5(3) as follows: – “(i) A Non- Resident Indian (NRI) may acquire securities or units on a Stock Exchange in India on repatriation basis under the Portfolio Investment Scheme, subject to the terms and conditions specified in Schedule 3. (ii) A Non- Resident Indian (NRI) may acquire securities or units on a non-repatriation basis, subject to the terms and conditions specified in Schedule 4.”

C. Substituted Schedule 3.

D. Substituted Schedule 4.

SEBI debars Auditor for one year – a precedent for other professionals too?

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SEBI has, probably for the first time, barred a Chartered Accountant and auditor of a listed company from issuing certificates for a wide range of entities and purposes. The bar, though not a total one, is fairly wide both in respect of the services he can render and the entities to which he can render such services.

The order of SEBI (“the Order”) is in the case of Shri Shashi Bhushan, Proprietor of M/s. Bhushan Aggarwal & Co., in the matter of Ritesh Properties and Industries Limited (Order No. WTM/RKA/EFD/23/2016 dated 17th February 2016).

Summary of THE Order
The matter concerned a listed company (“the Company”) that was alleged to have carried out several accounting irregularities such as inflated revenues/profits, incorrect classification of assets, etc. The report of the Auditors did not point out these irregularities. In a subsequent year, the Company actually reversed by way of restatement the whole of such inflated revenues of the two years under consideration. The price of the shares of the Company had moved from Rs. 3.52 to Rs. 123.50 during the period that the order covered. An earlier order of the SEBI on the Company gives more details of other alleged violations by the Company.

The Company, as per the order, was engaged in real estate/ land related activities. The Company had recognized substantial revenues that were shown to have resulted in significant profits. SEBI appointed an independent Chartered Accountant to conduct special examination of the accounts of the Company. SEBI recorded a finding that there were serious accounting irregularities that had resulted in overstatement of revenues/profits. SEBI considered this not only to be a fraud by the Company but also alleged that the auditors abetted the company in doing so. Consequently, SEBI passed prohibitory directions to such Chartered Accountant.

Violations of Accounting Standard/Guidance Notes
SEBI considered the relevant requirements of Accounting Standard 9 on Revenue Recognition and the Guidance Note on Recognition of Revenue by Real Estate Developers issued by the Institute of Chartered Accountants of India. It examined the detailed facts of the case and contrasted the requirements of such Accounting Standard/ Guidance Note with the actual accounting practices followed by the Company. According to SEBI, “correct accounting procedures and practices had not been followed in preparation of financial statements of the Company”.

Allegations/findings of SEBI against the Auditors
SEBI stated that, “It was observed from the analysis of the report that the auditor had fraudulently certified the annual report, which it did not believe to be true and had fraudulently caused the annual reports of the relevant period to be published with untrue information, in spite of the presence of unusual features in the accounts of the Company”. SEBI made certain further observations such as:-

“… the Auditor had fraudulently omitted to disclose…”

“It was alleged that as a statutory auditor of the Company, the Auditor failed to notice that the Company had not followed the accounting standards for recognising revenue.”

– “The Auditor had certified the overstated revenue and profits recognised by the Company in violation of the applicable Accounting Standards for recognising revenue from real estate business.”

– “In spite of the presence of unusual features in the accounts which prima facie gave reason to believe that the revenue recognised by the Company was not in order, the Auditor had willfully/ fraudulently failed to take note of the same while certifying the accounts of the Company. The aforementioned commissions and omission by the Auditor prima facie indicated the intention to benefit the Company in disseminating the false financial position and to defraud the investors by not giving the true and fair picture of the Company’s financial position.”

– “…it was observed that knowing very well that what was being certified was not true and fair report of the Company, the Auditor had certified its Annual Reports, suppressing Related Party Transactions and showing inflated and false financial position of the Company only to defraud the general investors.”

SEBI alleged that the Auditors had contravened several provisions of the SEBI Act and PFUTP Regulations relating to fraudulent and other practices. After reviewing the submissions of the Auditors, SEBI concluded that:-

“…it has been established that correct accounting procedures and practices had not been followed in preparation of financial statements of the Company and the Noticee had falsely certified misleading Annual Accounts of the Company, containing distorted information, which he did not believe to be true but certified knowing that the same when published would be relied upon by the investors to be true and fair and such certification was intended for the benefit of the Company and its promoters/ directors in their alleged manipulation of price in the scrip of the Company. I, therefore, find that by the aforesaid acts and omissions the Noticee aided and abetted the Company in disseminating the false financial position and to defraud the investors by not giving the true and fair picture of the Company’s financial position and, thus, its acts and omissions amount to aiding and abetting in the fraudulent, unfair and manipulative acts in connection with dealing in the shares of Ritesh Properties and are covered within the definition of “fraud” and “fraudulent” under regulation 2(1)(c) of the PFUTP Regulations…” (emphasis supplied)

Direction of debarment against the Auditors
In view of this, SEBI passed prohibitory directions debarring the Auditors. The wording of the debarment are interesting (emphasis supplied):-

“… hereby prohibit Shri Shashi Bhushan, Proprietor of M/s. Bhushan Aggarwal & Co. from, directly or indirectly, issuing any certificate required under securities laws namely Securities Board of India Act, 1992 (sic), the Securities Contract (Regulations) Act, 1956, the Depositories Act, 1996, Rules, Regulations, Guidelines made thereunder, the Listing Agreement and the applicable provision of the Companies Act, 2013, the Rules, Regulations, Guidelines made thereunder which are administered by SEBI, with respect to listed companies and the intermediaries registered with SEBI for a period of one year.”

Some aspects need attention:-
– the prohibition is on issue of certificates and not reports.
– The certificate may be under any of the specified securities laws, viz., SEBI Act, SCRA and Depositories Act and the rules, regulations and guidelines issued thereunder. The laws specified, particularly the rules, regulations and guidelines are numerous.
– The certificate may be even under the the applicable provision of the Companies Act, 2013, the Rules, Regulations, Guidelines made thereunder which are administered by the Securities and Exchange Board of India.
– The certificate must be required under the said specified laws.
– The certificates may relate to listed companies as well as intermediaries registered with SEBI. The term intermediaries covers a wide range of entities active in the securities market.

Applicability to other professionals
It is not uncommon for SEBI to find such entities engaging in accounting irregularities. Clearly, while SEBI would take actions against such persons for such matters, the role of the Auditors would also now increasingly come into focus. This order may become thus one of the first of many such orders in the future.

While passing the order, SEBI stated, “This is also a fit case where SEBI needs to send a stern message to professionals who associate themselves with securities market so as to prevent them from indulging in such acts of omissions and commissions as found in this case.” (emphasis supplied). While these words do show SEBI’s desire to act strictly, the use of the word “professionals” needs attention. Other professionals such as Company Secretaries, lawyers, etc. too associate themselves with and advise entities in the securities markets. It can thus be expected that, in appropriate and similar cases, such orders may also be passed against other professionals such as Company Secretaries, lawyers, etc.

Locus standi of SEBI to pass such orders
It will be interesting to watch the progress of such orders and how appellate authorities/courts act in that regard. In Price Waterhouse vs. SEBI ((2010) 103 SCL 96), the Bombay High Court had observed that, “isst cannot be said that in a given case if there is material against any Chartered Accountant to the effect that he was instrumental in preparing false and fabricated accounts, the SEBI has absolutely no power to take any remedial or preventive measures in such a case. It cannot be said that SEBI cannot give appropriate directions in safeguarding the interest of the investors of a listed Company….. If it is unearthed during inquiry before SEBI that a particular Chartered Accountant in connivance and in collusion with the Officers/Directors of the Company has concocted false accounts, in our view, there is no reason as to why to protect the interests of investors and regulate the securities market, such a person cannot be prevented from dealing with the auditing of such a public listed Company.” (emphasis supplied). Thus, the Court endorsed the power of SEBI to take action against auditors who engage in such acts.

Whether SEBI has exclusive, parallel or overlapping jurisdiction over auditors?

In the present case, SEBI held the Chartered Accountant to have acted in a manner aiding and abetting in the fraudulent, unfair and manipulative acts, etc. as prohibited under the SEBI PFUTP Regulations. However, this obviously does not rule out actions by other authorities including ICAI depending on facts of each case. The auditor may also face action for non-reporting of fraud u/s. 143(12) of the Companies Act, 2013. Thus, Auditors (and other professionals) may see multiple actions under different provisions and from different authorities/ persons. And it is possible that the parties who can take action may only increase. For example, if and when the provisions relating to class actions u/s. 245 of the Companies Act, 2013, are brought into effect, there may be claims for damages/compensation too. Similarly, when brought into effect, NAFRA may also have a role. Concerns may also arise whether such actions can be exclusive or overlapping/multiple for essentially the same default.

The Bombay High Court in Price Waterhouse’s case cited earlier did make some distinction between the role of ICAI and SEBI. For example, it stated that, “It is true, as argued by the learned counsel for the petitioners, that SEBI cannot regulate the profession of Chartered Accountant. This proposition cannot be disputed in any manner”. However, it also held if SEBI takes “remedial and preventive measures in the interest of investors and for regulating the securities market, if any steps are taken by SEBI, it can never be said that it is regulating the profession of the Chartered Accountant”. Importantly, it also observed, “In a given case, if ultimately it is found that there was only some omission without any mens rea or connivance with anyone in any manner, naturally on the basis of such evidence, SEBI cannot give any further directions.”

These words do give broad guidance of what role SEBI has and where it can and cannot act. They affirm SEBI’s powers but at the same time limit them. Having said that, several concerns and issues still remain as to where the lines of demarcation, if any exist, are to be drawn, whether the role will be overlapping, whether the defense of double jeopardy for multiple punishments would be available, etc. Discussion of this would be beyond the scope of this article and competence of this author.

Conclusion
SEBI has powers to take action against a wide range of persons who are associated with the securities markets. Such persons are not merely those who are registered with SEBI as intermediaries or are listed companies whose securities are listed on stock exchange. Auditors and other professionals, independent directors, key managerial personnel, etc. are also persons who have been over the years been acted against by SEBI. The law is clearly developing and there are grey areas and concerns that hopefully will see more light on as time passes.