2020 Archives

As per provisions of section 194C(6), the only requirement for non-deduction of tax at source is that the transport contractors have to furnish their PAN details – The Tribunal restored the issue to the file of the A.O. for de novo adjudication

7. M.S. Hipack v. ACIT (Mumbai) C.N. Prasad (J.M.) and Rajesh Kumar
(A.M.) ITA No.: 1032/Mum/2019 A.Y.: 2011-12 Date of order: 29^th
September, 2020 Counsel for Assessee / Revenue: D.J.
Shukla / R. Bhoopathi

As per provisions
of section 194C(6), the only requirement for non-deduction of tax at source is
that the transport contractors have to furnish their PAN details – The Tribunal
restored the issue to the file of the A.O. for de novo adjudication

FACTS

The A.O. while completing the assessment noticed
that the assessee had incurred transportation charges and had not deducted tax
at source. The assessee having not complied with the requirement of filing
Form–26Q, accordingly, disallowance was made by the A.O.

Aggrieved,
the assessee preferred an appeal to the CIT(A) who sustained the disallowance
as he was not convinced with the submissions made by the assessee.

Aggrieved,
the assessee preferred an appeal to the Tribunal where it was contended that
the assessee has complied with the provisions of section 194C(6) as it has
filed revised and corrected Form-26Q giving the details of PAN of transport
contractors and not deducted TDS complying with the provisions of section 194C(6).
It was submitted that as per the provisions of section 194C(6) the only
requirement for non-deduction of tax at source is that the transport
contractors have to furnish their PAN details. The assessee has duly obtained
PAN details of the contractors and incorporated the same in corrected Form-26Q.

HELD

In view of
the submissions of the assessee that it had corrected Form-26Q by furnishing
the PAN details of the transport contractors and complied with the provisions
of section 196C(6), the Tribunal held that this matter has to be examined by
the A.O. in the light of the submissions of the assessee and in the interest of
justice, it restored the issue to the file of the A.O. for de novo
adjudication with a direction that the A.O. shall take note of the fact of the
assessee filing the corrected Form-26Q and also that the assessee is at liberty
to file all necessary information before the A.O.

shailesh.kwebmaker

Section 153C – The date of initiation of search u/s 132 or requisition u/s 132A in the case of other person shall be the date of receiving the books of accounts or documents or assets seized or requisitioned by the A.O. having jurisdiction over such other person. Where the A.O. of the searched person and the other person (the assessee) was the same, the date on which satisfaction is recorded by the A.O. for invoking the provisions of section 153C would be deemed to be the date of receiving documents by the A.O. of the other person

6. Diwakar N. Shetty vs. DCIT (Mumbai) Vikas Awasthy (J.M.) and Rajesh Kumar
(A.M.) ITA No.: 5618/Mum/2016 A.Y.: 2010-11 Date of order: 30^th
September, 2020 Counsel for Assessee / Revenue: Vasudev Ginde / Purushottam Tripure

Section 153C – The date of initiation of search
u/s 132 or requisition u/s 132A in the case of other person shall be the date
of receiving the books of accounts or documents or assets seized or
requisitioned by the A.O. having jurisdiction over such other person. Where the
A.O. of the searched person and the other person (the assessee) was the same,
the date on which satisfaction is recorded by the A.O. for invoking the
provisions of section 153C would be deemed to be the date of receiving documents by the A.O.
of the other person

FACTS

A search and
seizure action u/s 132 was carried out in the case of M/s Om Sai Motors Pvt.
Ltd., a company belonging to the Gangadhar Shetty group on 20^th
August, 2009. In the search action certain documents pertaining to the assessee
were also seized.

The A.O. of
the person searched and the assessee was the same. The satisfaction for
initiating proceedings u/s 153C was recorded on 21^st December, 2010,
i.e., in the financial year 2010-11, relevant to the assessment year 2011-12.

Notice u/s
153C was issued to the assessee on 21^stDecember, 2010. The A.O.
made block assessment for A.Ys. 2004-05 to 2009-10 and for the impugned A.Y.,
i.e., 2010-11, the A.O. considered it as the year of search and made the assessment
under regular provisions.

The A.O.
completed the assessment of the impugned assessment year as a regular
assessment u/s 144.

Aggrieved by
the assessment made, the assessee preferred an appeal to the CIT(A).

Further
aggrieved by the order passed by the CIT(A), the assessee preferred an appeal
to the Tribunal where it raised an additional ground challenging the validity
of the assessment order passed u/s 144 by contending that the ‘relevant date’
for assuming jurisdiction u/s 153A r/w/s 153C in case of the person other than
the searched person (in this case the appellant / assessee) would not be the
date of search, but the date of handing over of the material, etc., belonging
to that other person to his A.O. by the A.O. having jurisdiction over the searched person.

In the
present case, the A.O. of the searched person and the other person (i.e., the
assessee) is the same. Since satisfaction for initiating proceedings u/s 153C
was recorded on 21^st December, 2010, i.e., in financial year
2010-11, relevant to assessment year 2011-12, the year of search would be
assessment year 2011-12 and not 2010-11. Accordingly, the A.Y. 2010-11 under
consideration falls within the block of six assessment years referred to in
section 153C of the Act, therefore, assessment ought to have been made only u/s
153C and not as regular assessment u/s 143(3)/144.

HELD

The Tribunal
observed that the only issue for its consideration is whether the assessment
for A.Y. 2010-11 was required to be framed u/s 153C being part of block
assessment period or the assessment has been rightly made under regular
provisions considering impugned assessment year relevant to the year of search.
The assessment order for the aforesaid block period of six years was passed u/s
144 r/w/s 153C on 30^th December, 2011.

The Tribunal
noted that the assessee challenged the invoking of section 153C jurisdiction
for A.Y. 2004-05 before the Tribunal in ITA No. 7309/Mum/2014 (Supra).
After examining the facts, the Tribunal held that A.Y. 2004-05 is outside the
purview of the block assessment period as the documents relatable to the
assessee found at the place of the searched person were handed over to the A.O.
of the assessee in financial year 2010-11 relevant to A.Y. 2011-12. If that be
so, the A.O. would have no jurisdiction for issuing notice u/s 153A r/w/s 153C
for A.Y. 2004-05. However, for the limited purpose of verification of facts,
the Tribunal restored the issue back to the A.O. Thereafter, the A.O. passed an
order giving effect to the order of the Tribunal wherein the A.O. admitted that
A.Y. 2004-05 does not fall within the block assessment period as the relevant
material was handed over in the period relevant to A.Y. 2011-12.

The Tribunal
observed that since the Revenue has itself admitted the fact that the year of
search would be financial year 2010-11 relevant to A.Y. 2011-12, the block
period of six years for search assessment u/s153C would comprise of assessment
years 2005-06 to 2010-11. Under these facts, the assessment for A.Y. 2010-11
being part of block assessment period should have been u/s 153A r/w/s 153C.

The Tribunal
having noted the ratio of the decision of the Delhi High Court in the
case of CIT vs. Jasjit Singh, Income Tax Appeal No. 337 of 2015 for A.Y.
2009-10, decided on 2^ndJanuary, 2018 by the Delhi High
Court has held that the date of initiation of search u/s 132 or requisition
u/s132A in the case of other person shall be the date of receiving the books of
accounts or documents or assets seized or requisitioned by the A.O. having
jurisdiction over such other person. In the instant case, although the A.O. of
the searched person and the other person (the assessee) was the same,
satisfaction was recorded by the A.O. for invoking the provisions of section
153C on 21^st December, 2010, the said date would be deemed to be the
date of receiving documents by the A.O. Thus, the year of search would be F.Y.
2010-11 relevant to A.Y. 2011-12.

Taking note
of the decision of the Delhi Bench of the Tribunal in the case of EON
Auto Industries Pvt. Ltd. vs. DCIT, ITA No. 3179/Del/2013, A.Y. 2008-09, decided on 28^th
November, 2017, the Tribunal held that for the purpose of determining six
assessment years prior to the date of search, the relevant date for the purpose
of invoking provisions of section 153C in the case of a person other than the
person searched would be the date of recording satisfaction u/s 153C.

The Tribunal
held that since the impugned assessment year forms part of the block of six
assessment years prior to the date of search, the assessment should have been
made u/s 153C and not under the regular provisions as has been done by the A.O.
Therefore, the assessment order for the impugned year suffers from legal
infirmity and hence is liable to be quashed.

The Tribunal
quashed the assessment order and allowed the additional ground of appeal filed
by the assessee.

shailesh.kwebmaker

Sections 14A, 253 – In cross-objections, assessee can raise a ground for the first time, which was not taken up by him even in an appeal before the CIT(A)

5. ITO vs. Centrum Capital Limited
(Mumbai) Shamim Yahya (A.M.) and Pavan Kumar
Gadale (J.M.) ITA No. 497/Mum/2019 and CO arising
out of ITA No. 497/Mum/2019 A.Y.: 2013-14 Date of order: 5^th October,
2020 Counsel for Revenue / Assessee: Lalit Dehiya / Jitendra Jain

Sections
14A, 253 – In cross-objections, assessee can raise a ground for the first time,
which was not taken up by him even in an appeal before the CIT(A)

FACTS

The assessee
in his return of income considered a sum of Rs. 22,82,187 to be disallowable
u/s 14A. The amount of exempt income earned by the assessee was Rs. 44,250. The
A.O., while assessing the total income of the assessee, disallowed a sum of Rs.
10,91,61,614 u/s 14A.

Aggrieved,
the assessee preferred an appeal to the CIT(A) who referred to the decision of
the Delhi High Court in the case of Joint Investment P. Ltd. vs. CIT (59
taxmann.com 295) for the proposition that disallowance u/s 14A cannot
exceed the exempt income. He held that the disallowance in this case will not
exceed the suo motu disallowance done by the assessee which was more
than the exempt income. He held that since the total exempt income earned by
the appellant was only Rs. 44,250, therefore, respectfully following the
judgment of the Mumbai Bench of the Tribunal in
the case of Future Corporate Resources Ltd. (Supra), the
disallowance u/s 14A r/w/r 8D is restricted to Rs. 44,250 only. He, however, held that because while filing the return of
income the appellant had itself disallowed a sum of Rs. 22,82,187 which is more
than the tax-free income earned by the appellant, therefore no further
disallowance can be made. Hence, disallowance of Rs. 10,91,61,614 made by the
A.O. u/s 14A r/w/r 8D is deleted and the appeal of the assessee on this ground
is allowed.

Aggrieved by
the decision of the CIT(A), Revenue preferred an appeal contending that the
CIT(A) erred in restricting the disallowance u/s 14A to Rs. 22,82,187 being the
amount suo motu disallowed by the assessee.

The assessee
filed a cross-objection contending that the CIT(A) ought to have restricted the
disallowance to the exempt income of Rs. 44,250 instead of observing that the
disallowance should be restricted to Rs. 22,82,187 being the suo motu
disallowance done by the assessee.

HELD

The Tribunal held
that there is no infirmity in the order of the CIT appeals which is duly
supported by the order of the Delhi High Court referred above. It observed that
the jurisdictional High Court in the case of CIT vs. Delight Enterprises
(in ITA No. 110/2009) has expounded a similar proposition. The Tribunal
dismissed the appeal filed by the Revenue.

As regards
the CO filed by the assessee, the DR by referring to order 9 rule 13 of the CPC
objected to the ground being taken in the cross-objection which was not even
before the CIT appeals. The Tribunal noted that order 9 rule 13 of the CPC
deals with setting aside decree ex parte and held that such a reference
does not help the case of the Revenue.

The Tribunal
noted that as rightly observed by the ITAT bench in the aforesaid case of Tata
Industries Ltd. vs. ITO (2016) 181 TTJ 600 (Mum.), no tax can be
collected except as per the mandate of the law. If the assessee has erroneously
offered more income for taxation, the same cannot be a bar to the assessee in
seeking remedy before the appellate forum.

The Tribunal
observed that the Supreme Court in the case of

i) Goetze (India) Ltd. vs. CIT (2006) 284
ITR 323 (SC) has held that nothing in that order would prevent the ITAT
in admitting an additional claim which was raised for the first time without a
revised return;

ii) CIT vs. V. MR. P. Firm [1965] 56 ITR
67(SC) has held that if a particular income is not taxable under the
Act, it cannot be taxed on the basis of estoppel or any other equitable
doctrine;

iii) Shelly Products 129 taxman 271 (SC)
supports the proposition that if the assessee has erroneously paid more tax
than he was legally required to do, he is entitled to claim the refund, as
otherwise it would be violative of Article 265 of the Constitution.

The Tribunal
mentioned that the CBDT Circular 14 (XL-35) of 1953 dated 11^th
April, 1955 states that officers of the Department must not take advantage of
the ignorance of the assessee as to his rights.

The Tribunal
held that

i) in the background of the aforesaid Supreme
Court decisions, it does not find any merit whatsoever in the objection of CIT DR in accepting and adjudicating the ground raised by a
cross-objection by the assessee.

ii) as regards the merits of the issue raised in
the cross-objection, the Tribunal held that the same stands covered by the very
decisions relied upon by the CIT (Appeals) himself as referred above, that the
disallowance u/s 14A cannot exceed the exempt income;

iii) the disallowance in this case should not
exceed the exempt income earned as referred above;

iv) in view of the CBDT Circular No. 14 as
referred above, the ground raised by the assessee is cogent.

The Tribunal
directed the A.O. to grant the necessary relief to the assessee and the
cross-objections filed by the assessee were allowed.

shailesh.kwebmaker

Section 144C inserted in the statute by the Finance (No. 2) Act, 2009 with retrospective effect from 1st April, 2009 is prospective in nature and would not apply to A.Y. 2009-10 or earlier assessment years

4. Truetzschler India Pvt. Ltd. vs.
DCIT (Mumbai) Members: Vikas Awasthy (J.M.) and
Manoj Kumar Aggarwal (A.M.) ITA No. 1949/Mum/2015 A.Y.: 2009-10 Date of order: 30^th
September, 2020 Counsel for Assessee / Revenue: Nitesh Joshi / A. Mohan

Section 144C
inserted in the statute by the Finance (No. 2) Act, 2009 with retrospective
effect from 1st April, 2009 is prospective in nature and would not apply to
A.Y. 2009-10 or earlier assessment years

FACTS

In the
present appeal preferred against the order of the CIT(A), the assessee raised
an additional ground challenging the validity of the assessment order dated 13^th
May, 2013 passed u/s 143(3) r/w/s 144C(13). In the additional ground, the assessee
contended that the assessment order ought to be quashed as it has been passed
after the expiry of the time limit prescribed u/s 153.

The Tribunal
noted that the Transfer Pricing Officer (TPO) passed the order u/s 92CA(3) on 9^th
January, 2013. The A.O. passed the draft assessment order on 27^th
March, 2013. Thereafter, the A.O. was required to pass the final assessment
order within the limitation period provided u/s 153(1), i.e., by 31^st
March, 2013, whereas, actually the final assessment order was passed on 13^th
May, 2013, i.e., after the expiry of the limitation period.

On behalf of
the assessee, and relying on the decision of the Madras High Court in the case
of Vedanta Limited vs. ACIT in Writ Petition No. 1729 of 2011 decided on
22^nd October, 2019, it was contended that the time limit for
passing the assessment order in the impugned assessment year does not get
extended by application of section 144C mandating reference to the dispute
resolution panel as the provisions of the said section do not apply to the
impugned assessment year. On the other hand, the Departmental Representative placed reliance on CBDT Circular
No. 5 of 2010 dated 3^rd June, 2010 to counter the argument made on
behalf of the assessee.

HELD

The
additional ground being purely legal in nature and requiring no fresh evidence
was admitted by the Tribunal.

The Tribunal
noted that the Madras High Court has held that where there is a change in the
form of assessment itself, such change is not a mere deviation in procedure but
a substantive shift in the manner of framing an assessment. A substantive right
has enured to the parties by virtue of the introduction of section 144C.
Bearing in mind the settled position that the law applicable on the first day
of the assessment year be reckoned as the applicable law for assessment for
that year, leads one to the inescapable conclusion that the provisions of
section 144C can be held to be applicable only prospectively, that is, from
A.Y. 2011-12. The High Court also made it clear that the Circular issued in
2013 to bring the assessment year 2009-10 in the fold of the newly-inserted
provisions of section 144C would have no application.

The Tribunal
held that

i) the provisions of section 144C would not
apply in the impugned assessment year, and hence the time period for passing
the assessment order would not get enlarged;

ii) the A.O. was under obligation to pass the
assessment order within the time specified under the third proviso to
section 153(1), i.e., on or before 31^st March, 2013;

iii) since the order has been passed beyond the
period of limitation, the same is null and void. The assessee succeeds on the
legal ground raised as additional ground of appeal;

iv) the assessment order is quashed and the appeal
of the assessee is allowed.

shailesh.kwebmaker

Section 37 – Expenditure incurred on cost of adhesive stamps for obtaining conveyance deed for assignment of receivables is allowable as the same is in connection with facilitating recovery of receivables which is a part of current asset and has been incurred for facilitating the business of the assessee

9. [2020] 120 taxmann.com 33 (Mum.)(Trib.) Demag
Delaval Industries Turbomachinery (P) Ltd. A.Y.: 2004-05 Date of order: 16^th September,
2020

Section 37 – Expenditure incurred on cost
of adhesive stamps for obtaining conveyance deed for assignment of receivables
is allowable as the same is in connection with facilitating recovery of
receivables which is a part of current asset and has been incurred for
facilitating the business of the assessee

FACTS

The assessee
acquired an industrial turbine unit of Alstom Project India Limited for a lump
sum consideration. The assessee incurred expenditure of Rs. 59,17,000 being
cost of adhesive stamp affixed on the conveyance deed for assignment of
receivables and claimed it as a deduction on the ground that it was an
expenditure in connection with the acquisition of business and is a revenue
expenditure.

The A.O. and the
CIT(A) denied the claim of the assessee on the ground that it is for
acquisition of industrial turbine unit from Alstom Project India Limited. He
held that the stamp duty is nothing but an expenditure incurred in order to
cure or complete the title to capital. Hence, it is capital expenditure.

Aggrieved, the
assessee preferred an appeal to the Tribunal and contended that the expenditure
in this regard has been incurred in connection with the conveyance deed of
receivables which are part of the current assets, therefore the expenditure
cannot be treated as expenditure for the purpose of acquisition of capital
assets. Expenditure was very much incurred for the purpose of the business of
the assessee and the same should be allowed as such. In this regard, reliance
was placed on the case of CIT vs. Bombay Dyeing and Manufacturing Co.
(219 ITR 521) and India Cement Ltd. vs. CIT (60 ITR 52).

HELD

The Tribunal, after going through the conveyance deed, held that the
deed involving duty of Rs. 59,17,000 was for the purpose of assignment of
receivables and that the CIT(A)’s conclusion that the expenditure is to cure
and complete the title to capital is without appreciating the facts of the
case.

The Tribunal held that this assignment is admittedly for facilitating
the business of the assessee by assigning receivables. The expenditure is in
connection with facilitating recovery of receivables which is a part of the
current assets. Hence, the expenditure in this regard cannot be said to be in
the capital field of acquiring the business. It is in fact for facilitating the
business of the assessee and in this view of the matter expenditure is
allowable as business expenditure. The ratio of the decisions in the
case of Bombay Dyeing Mfg. (Supra) and India Cements Ltd.
(Supra), relied upon on behalf of the assessee, are accordingly germane
and support the case of the assessee. The CIT(A) has been in error in holding
that the case laws are not applicable here.

The Tribunal decided this ground of appeal in favour of the assessee.

shailesh.kwebmaker

Section 115JB – When income which is exempt u/s 10 is credited to Profit & Loss Account, the Book Profit u/s 115JB is to be computed by reducing the amount of such income to which section 10 applies

8. [2020] 120 taxmann.com 31 (Del.)(Trib.) ITO vs. Buniyad Developers (P) Ltd. A.Y.: 2009-10 Date of order: 21^st September,
2020

Section 115JB – When income which is exempt
u/s 10 is credited to Profit & Loss Account, the Book Profit u/s 115JB is to be computed by
reducing the amount of such income to which section 10 applies

FACTS

For the assessment
year 2009-10, the assessee company filed its return of income on 30^th
September, 2009 declaring Nil income but paid tax on book profits u/s 115JB at
Rs. 5,73,70,009. The return was processed u/s 143(1). The A.O., in the course
of assessment proceedings for A.Y. 2010-11, having noticed that the lands were
sold in part and that there has been no income declared in respect of its profits
of Rs. 5,58,61,180 earned on sale of land, issued notice u/s 148 and, after
hearing the assessee, made an addition of Rs. 5,41,38,217 with interest income
of Rs. 21,90,212.

Aggrieved, the
assessee preferred an appeal to the CIT(A) who, taking note of the remand
assessment in A.Y. 2010-11, found that since the village where the land sold
was located was eight km. away from the municipal limits, the very basis of the
A.O. reopening the assessment proceedings for A.Y. 2009-10 has no locus
standi as the A.O. has himself in the remand assessment for A.Y. 2010-11
admitted the said fact. He, therefore, allowed the contention of the assessee
on that ground. He also accepted the contention of the assessee that under the
provisions of section 115JB(2)(k)(ii), the profits derived from sale of
agricultural land, which is exempt u/s 10, has to be reduced from the book
profits and, therefore, the assessee is entitled to relief even in respect of
the amount that was offered to tax. He directed the A.O. to compute the tax in
accordance with law by reducing the amount of income to which provisions of
section 10 of the Act apply, if the said amount is credited to the profit and
loss account.

Aggrieved, the
Revenue preferred an appeal to the Tribunal.

HELD

The Tribunal observed that it is an admitted fact that the land that
was sold was located in village Kishora, which is more than eight km. away from
the municipal limits and the profits earned on the sale of such land are exempt
u/s 10. It noted that in view of the provisions of section 115JB(2)(k)(ii),
the assessee committed a mistake when it computed the book profits including
the sale consideration of agricultural land, which was credited to the profit
and loss account and offered the same to tax.

The Tribunal held that

i) in view of the decision of
the Supreme Court in the case of CIT vs. Shelly Products (2003) 129
Taxman 271, such a mistake has to be rectified by the Revenue
authorities when it is brought to their notice and they are satisfied with the
genuineness of the claim;

ii) when the CIT(A) is satisfied
that the income which is exempt u/s 10 is included in the book profit u/s
115JB, which should not be done, the CIT(A) is justified in directing the A.O.
to follow the law and to compute the tax in accordance with the provisions of
section 115JB by reducing the amount of income to which section 10 applies, if
such amount is credited to the profit and loss account.

iii) the action of the CIT(A) is
perfectly legal and does not suffer any infirmity.

The Tribunal declined to interfere with the findings of the CIT(A) and
found the appeal of the Revenue to be devoid of merit.

shailesh.kwebmaker

I. Section 194H r/w/s 201(1) – Discount on sale of set-top boxes and recharge coupons including festival discount and bonus points to customers cannot be considered as commission and therefore not liable for deduction of tax II. Section 36(1)(iii) – Assessee had filed necessary evidence to prove availability of owned funds to cover investment made in capital WIP. Thus, interest paid on borrowed funds was to be allowed u/s 36(1)(iii)

7. [2020] 119 taxmann.com 424 (Mum.)(Trib.) Tata Sky Ltd. vs. ACIT, Circle 7(3) A.Ys.: 2009-10 and 2010-11 Date of order: 10^th September,
2020

I. Section 194H
r/w/s 201(1) – Discount on sale of set-top boxes and recharge coupons including
festival discount and bonus points to customers cannot be considered as
commission and therefore not liable for deduction of tax

II. Section 36(1)(iii) – Assessee had filed
necessary evidence to prove availability of owned funds to cover investment
made in capital WIP. Thus, interest paid on borrowed funds was to be allowed
u/s 36(1)(iii)

FACTS

I. The assessee was engaged in the business of
providing Direct to Home (DTH) services. The set-top box (STB) installed at the
premises of the subscribers receives television signals through the
broadcasters which are uplinked to the satellite. The main source of income for
the assessee was from the sale of STB’s and sale of recharge coupons to
subscribers. The assessee claimed deduction of discounts offered on sale of
STB’s and recharge coupons. The A.O. contended that the very nature of discount
given by the assessee to distributors is in the nature of commission and
disallowed the expenditure as no tax deduction was made by the assessee. The
CIT(A) upheld the decision of the A.O.

Aggrieved, the
assessee preferred an appeal with the Tribunal.

II. The assessee had certain capital WIP and the
A.O. had observed that no interest expenditure was allocated against it. The
assessee had incurred huge interest expenditure on various loans and the A.O.
disallowed proportionate interest expenditure u/s 36(1)(iii). The CIT(A)
confirmed the disallowance. The assessee preferred an appeal with the Tribunal..

HELD

I. The transactions
between the assessee and its distributors were on principal-to-principal basis
and all the risk, loss and damages are transferred to the distributor on
delivery. Further, the distributors were free to sell the STB’s at any price below
the maximum retail price. The assessee had filed the sample copy of invoices
for sale of STB’s and other recharge coupons to prove that it was a sale and
not services to be covered u/s 194H. Therefore, the assessee was not required
to deduct TDS on discount allowed on the sale of STB’s and hardware, recharge
coupon vouchers and disallowance of bonus or credit provided to subscribers,
including sales promotion expenses. The A.O. was directed to delete the
addition made on account of the disallowances.

II. Based on the facts in the case, it was clear
that the assessee had not borrowed specific loan for acquiring capital assets.
The A.O. had disallowed proportionate interest paid on other loans including
loans borrowed for working capital purpose on the ground that the assessee had
used interest-bearing funds for acquisition of capital asset. The A.O. did not
bring on record any evidence to prove that borrowed funds were used for
acquisition of capital work in progress. The assessee filed evidence to the
effect that capital work in progress had been acquired out of the share capital
raised which was sufficient to cover investment in the capital work in
progress. Therefore, the A.O. erred in disallowing proportionate interest
expenses u/s 36(1)(iii).

shailesh.kwebmaker

Section 54F: Where the genuineness of the transactions is established, to avail exemption u/s 54F it is not mandatory that the agreement must be registered or possession must be obtained

6. [2020] 77 ITR (Trib.) 394 (Pune)(Trib.) Lalitkumar Kesarimal Jain vs. DCIT ITA No. 1345-1347/Pune/2017 A.Y.: 2012-13 Date of order: 24^th September,
2019

Section 54F: Where the genuineness of the
transactions is established, to avail exemption u/s 54F it is not mandatory
that the agreement must be registered or possession must be obtained

FACTS

The assessee earned
long-term capital gains on sale of certain assets and in his return of income
claimed exemption u/s 54F to the tune of Rs. 18.96 crores for purchase of new
residential property. The A.O. rejected the said claim citing the following
reasons: (1) The agreements for purchase were unregistered; (2) The seller had
not given possession of the property; and (3) The assessee was an interested party
in the seller’s concern. The assessee substantiated that he had already paid
Rs. 22.10 crores to the seller before the due date of filing return of income
for the relevant assessment year and the same was not returned. In an
affidavit, the assessee explained the reason for not getting possession from
the seller. However, the CIT(A) upheld the order of the A.O., rejecting the
exemption u/s 54F.

The assessee
therefore filed an appeal before the ITAT.

HELD

(i) Section 54F is incorporated to promote housing
projects and development activities and according to it once a person sells
some assets and earns capital gains, that money should be utilised for
procuring some new assets. The assessee should part with that money or a
substantial amount of it, for procuring a new residential house. What
essentially is looked into in this regard is the bona fide nature of the
assessee and the genuineness of the transaction/s.

(ii) It was an undisputed fact that the assessee
had paid a sum of Rs. 22.10 crores to the seller and the Department had not
brought on record any evidence to prove that the said money came back to the
assessee.

(iii) The entire ambit of the Income-tax Act is based
within the larger framework of welfare legislation. The object of each
provision is ultimately the development of the society as well as the
individual and at the same time taking care of the interests of taxpayers.

(iv) Merely because the assessee had an interest in
the seller concern by itself cannot be reason to deny the benefit of deduction
when the genuineness of the transactions was established and there were several
other persons who were purchasing flats from the same seller and who had
already paid advance amounts.

(v) It was further found that the delay in
completion of the project was absolutely circumstantial and neither the
assessee nor the seller had any mala fide intention for delay of the
project.

(vi) Referring to the decision of the Supreme Court
in the case of Fibre Boards (P) Ltd. vs. CIT [2015] 376 ITR 596 (SC)
and several other decisions of Tribunals, it was held that it is not mandatory
that the agreement must be registered or possession must be obtained. If it is
substantiated that the transaction is genuine, then benefit of deduction u/s
54F should be given to the assessee.

Accordingly, the
assessee was granted the benefit of deduction u/s 54F.

shailesh.kwebmaker

DEEMED GRANT OF REGISTRATION U/S 12A

ISSUE FOR CONSIDERATION

In order
for the income of a charitable or religious institution to be eligible for
exemption u/s 11 of the Income-tax Act, the institution has to be registered
with the Commissioner of Income Tax u/s 12A read with section 12AA. For this
purpose, the institution has to file an application for registration u/s
12A(1)(aa) and the Commissioner on receipt of the application is required to
then follow the procedure laid down in section 12AA by passing an appropriate
order. Section 12AA(2) provides that every such order of the Commissioner
granting or refusing registration has to be passed before the expiry of six months
from the end of the month in which the application was received by him.

But often
it is seen that the Commissioner fails to act on the application within the
prescribed time, leaving the institution without registration. An issue arises
in such cases before the Courts about the status of the institution where the
Commissioner does not pass any order u/s 12AA within the time limit. Is the
institution to be treated as unregistered, which it is, or is it to be deemed
to be registered on failure of the Commissioner to act within the prescribed
time? While the Kerala and the Rajasthan High Courts, following an earlier
decision of the Allahabad High Court upheld on an appeal decided by the Supreme
Court, have held that in such a situation the registration u/s 12AA is deemed
to have been granted on the expiry of the period of six months, the Gujarat
High Court, following a subsequent Full Bench decision of the Allahabad High
Court, has held that the expiry of the period of six months does not result in
a deemed registration of the institution. In deciding the issue, the Gujarat
High Court held that the Supreme Court in the above referred appeal had left
the issue of deemed registration open while the other High Courts followed the
decision of the Apex Court on the understanding that it had held that the
institution was deemed to be registered once the time for rejecting the
application and refusing the registration was over. The added controversy,
therefore, moves in a narrow compass whereunder it is to be examined whether
the Supreme Court really adjudicated the issue as understood by the Kerala and
Rajasthan High Courts or whether the Court had kept the same open as held by
the Gujarat High Court.

TWO INTRICATELY LINKED CASES

The issue
had first come up before the Allahabad High Court in the case of Society for the Promotion of Education, Adventure Sport &
Conservation of Environment vs. CIT 372 ITR 222 and a
little later before the Full Bench of the same High Court in the case of CIT vs. Muzafar Nagar Development Authority 372 ITR 209.
Both these cases are intricately linked and therefore it is thought fit to
consider them at one place.

In the
Society’s case, the assessee was running a school. Till A.Y. 1998-99 it was
claiming exemption u/s 10(22). It had, therefore, not registered itself u/s 12A
to claim exemption u/s 11. Since section 10(22) was omitted by the Finance Act,
1998, the Society applied for registration u/s 12A with retrospective effect,
since the inception of the Society. But because the application was not made
within one year from the date of its establishment as required by the law at
that point of time, the Society sought for condonation of delay in making an
application.

No
decision was taken by the Commissioner on the Society’s application within the
time of six months prescribed u/s 12AA(2) and, in fact, the decision was
pending even after almost five years. Therefore, the Society was treated by the
A.O. as unregistered and was not allowed exemption from tax and was assessed on
its income that resulted in large tax demands. The Society filed a writ
petition before the Allahabad High Court seeking relief, including on the
ground that it was deemed to be registered u/s 12AA and was eligible for
exemption u/s 11.

The
Allahabad High Court observed that what was to be examined in the petition was
the consequence of such a long delay on the part of the Commissioner in not
deciding the Society’s application for registration. It noted that admittedly,
after the statutory limitation, the Commissioner would become functus officio, and could not thereafter pass
any order either allowing or rejecting the registration; it was obvious that
the application could not be allowed to be treated as perpetually undecided,
and under the circumstances, the key question was whether, upon lapse of the
six-month period without any decision, the application for registration should
be treated as rejected or to be treated as allowed.

It was
vehemently argued on behalf of the Society before the High Court that
registration shall be deemed to have been granted after the expiry of the
period prescribed u/s 12AA(2) if no decision had been taken on the application
for registration. Reliance was placed on the decision of the Bangalore bench of
the Tribunal in the case of Karnataka Golf
Association vs. DIT 91 ITD 1, where such a view had
been taken. Reliance was also placed on the decisions of the Allahabad High
Court in the cases of Jan Daood & Co. vs. ITO
113 ITR 772 and CIT
vs. Rohit Organics (P) Ltd. 281 ITR 194, both of
which laid down that when an application for extension of time was moved and
was not decided, it would be deemed to have been allowed. Further reliance was
placed on the decisions of the Allahabad High Court in the case of K.N. Agarwal vs. CIT 189 ITR 769 and of
the Bombay High Court in the case of Bank
of Baroda vs. H.C. Shrivastava 256 ITR 385 for the
proposition that the discipline of quasi-judicial functioning
demanded that the decision of the Tribunal or the High Court must be followed
by all Departmental authorities because not following the same could lead to a
chaotic situation.

The
Society further argued that the absence of any order of the Commissioner should
be taken to mean that he has not found any reason for refusing registration,
notice of which could have been given to the Society by way of an opportunity
of hearing. It was also argued that latches and lapses on the part of the
Department could not be to its own advantage by treating the application for
registration as rejected.

On behalf
of the Revenue reliance was placed on a decision of the Supreme Court in the
case of Chet Ram Vashisht vs. Municipal Corporation of Delhi, 1981 SC 653.
In that case, the Supreme Court, while examining the effect of the failure on
the part of the Delhi Municipal Corporation to decide an application u/s 313(3)
of the Delhi Municipal Corporation Act, 1957 for sanctioning a layout plan
within the specified period, had held that non-consideration of the application
would not amount to a deemed sanction.

The
Allahabad High Court, in the context of the Chet
Ram decision (Supra),
observed that the Supreme Court decision dealt with a different statute. It
further noted that one of the important aspects pointed out by the Supreme
Court for taking the view was the purpose of the provision requiring sanction
to layout plans. There was an element of public interest involved, namely, to
prevent unplanned and haphazard development of construction to the detriment of
the public. Besides, sanction or deemed sanction to a layout plan would entail
constructions being carried out, thereby creating an irreversible situation.
According to the Allahabad High Court, in the case before it there was no such
public element or public interest. Taking a view that non-consideration of the
registration application within the stipulated time would result in a deemed
registration might, at the worst, cause loss of some revenue or income tax
payable by that particular assessee, similar to a situation where an assessment
or reassessment was not completed within the prescribed limitation and the
inaction of the authorities resulted in deemed acceptance of the returned
income.

On the
other hand, according to the Allahabad High Court, taking the contrary view and
holding that not taking a decision within the time fixed by the law was of no
consequence, would leave the assessee totally at the mercy of the income tax
authorities, inasmuch as the assessee had not been provided any remedy under
the Act against such non-decision. Besides, according to the Court, their view
did not create any irreversible situation because the Commissioner had the
power to cancel registration u/s 12AA(3) if he was satisfied that the objects
of such trust were not genuine or the activities were not being carried out in
accordance with its objects. The only adverse consequence likely to flow from
the Court’s view would be that the cancellation would operate only
prospectively, resulting in some loss of revenue from the date of expiry of the
limitation u/s 12AA(3) till the date of cancellation of the registration. In
the view of the Allahabad High Court, the purposive construction adopted by the
Court furthered the object and purpose of the statutory provisions.

By far the
better interpretation according to the Court was to hold that the effect of
non-consideration of the registration application within the stipulated time
was a deemed grant of registration. It accordingly held that the institution
was a registered one and was eligible for the benefit of exemption u/s 11.

The
Income-tax Department challenged the decision of the Allahabad High Court
before the Supreme Court and in a decision reported as CIT vs. Society for the Promotion of Education, Adventure Sports
& Conservation of Environment, 382 ITR 6, the
Supreme Court, confirming the deemed registration, inter
alia addressed the apprehension raised on behalf of the Revenue by
holding that the deemed registration would, however, operate only after six
months from the date of the application, stating that this was the only logical
sense in which the judgment could be understood. In other words, the deemed
registration would not operate from the date of application or before the date
of application, but would operate on and from the date of expiry of six months
from the date of application. The Supreme Court disposed of the appeal by
noting that all other questions of law were kept open. It is not possible to
gather what those other questions of law were before the Court in the appeal as
the order did not record such questions. It is best to believe that the
observations of the Court were for the limited purpose of restricting the
decision to the issue expressly decided by it, which was to confirm the deemed
registration as was held by the Allahabad High Court and, inter alia, clarify that what the Allahabad
High Court meant was that the registration was to be effective from the date of
expiry of six months from the date of application.

The above ratio of the Allahabad High Court’s
decision in the case of the Society for the
Promotion of Education, Adventure Sport & Conservation of Environment vs.
CIT 372 ITR 222 was doubted by another Division
Bench in the case of CIT vs. Muzafar Nagar
Development Authority and the Bench referred the case
before it to a Full Bench of the Allahabad High Court reported in CIT vs. Muzafar Nagar Development Authority 372 ITR 209.
The doubts expressed by the Division Bench were as follows:

1. There was nothing in section 12AA(2) which
provided for a deemed grant of registration if the application was not decided
within six months;

2. In the absence of a statutory provision
stipulating that the consequence of non-consideration would be a deemed grant
of permission, the Court could not hold that the application would be deemed to
be granted after the expiry of the period; and

3. The Legislature had not contemplated that the
authority would not be entitled to pass an order beyond the period of six
months.

4. The decision of the Court in the case of the Society for the Promotion of Education, Adventure Sport &
Conservation of Environment (Supra) did not
lay down a good law.

On behalf
of the assessee, it was argued before the Full Bench of the Allahabad High
Court that the intention of the Legislature was that the decision of the
Commissioner within the period of six months was mandatory and must be strictly
observed. The Legislature had used both expressions ‘may’ and ‘shall’ in
section 12AA(1), which was indicative of the fact that the expression ‘shall’
was regarded as mandatory wherever it had been used. Therefore, the period
prescribed in section 12AA(2) must be regarded as mandatory. If it was not
treated as mandatory, the assessee would be subjected to great prejudice by an
inordinate delay on the part of the Commissioner in disposing of his
application and the period, which had been prescribed otherwise, would be
rendered redundant.

It was
submitted on behalf of the Revenue that the period of six months was clearly
directory and the Legislature had not provided any consequence, such as a
deeming fiction that the application would be treated as being granted if it
was not disposed of within six months. Even if this was regarded as a casus omissis,
it was a well-settled principle of law that the Court had no jurisdiction to supplant
it and it must adopt a plain and literal meaning of the statute.

The Full
Bench of the Allahabad High Court examined the provisions of sections 12A and
12AA. It noted that the Legislature had not imposed a stipulation to the effect
that after the expiry of the period of six months the Commissioner would be
rendered functus officio or that he would be disabled
from exercising his powers. It had also not made any provision to the effect
that the application for registration should be deemed to have been granted if
it was not disposed of within a period of six months with an order either
allowing registration or refusing to grant it. According to the Full Bench,
providing that the application should be disposed of within a period of six
months was distinct from stipulating the consequence of a failure to do so.

The Court
observed that laying down the consequence that the application would be deemed
to be granted upon the expiry of six months could only be by way of reading a
legislative fiction or a deeming definition into the law which the Court, in
its interpretive capacity, could not create. That would amount to rewriting the
law and introduction of a provision which, advisedly, the Legislature had not
adopted. The Full Bench also held that a legislative provision could not be
rewritten by referring to the notes on clauses which, at the highest, would
constitute background material to amplify the meaning and purport of a
legislative provision.

The Full
Bench of the Allahabad High Court placed reliance on two decisions of the
Madras High Court in the cases of CIT
vs. Sheela Christian Charitable Trust 354 ITR 478
and CIT vs. Karimangalam Omriya Pangal Semipur Amaipur Ltd. 354 ITR
483 where it had held that failure to pass an order on an application
u/s 12AA within the stipulated period of six months would not automatically
result in granting registration to the trust.

According
to the Full Bench of the Allahabad High Court, the assessee was not without a
remedy on expiry of the period of six months, as this could be remedied by
recourse to the jurisdiction under Article 226 of the Constitution. Therefore,
the Court held that the judgment of the Division Bench in Society for the Promotion of Education (Supra)
did not lay down the correct position of law and that non-disposal of an
application for registration within the period of six months would not result
in a deemed grant of registration.

THE TBI EDUCATION TRUST CASE

The issue
came up again before the Kerala High Court in the case of CIT vs. TBI Education Trust 257 Taxman 355.

In this
case the assessee trust was constituted on 27^thMay, 2002 and filed
an application for registration u/s 12A on 10^th October, 2006. The
Commissioner called for a report from the Income-tax Officer (ITO) on 12^th
January, 2007 and this report was submitted only on 24^th July, 2007.
Vide this report, the ITO recommended
registration u/s 12AA(2). However, the Joint Commissioner of Income-tax sent an
adverse report dated 31^st July, 2007 to the Commissioner. There were
some adjournments later, and finally the Commissioner passed an order dated 29^thNovember, 2007 rejecting the application for registration.

The
Tribunal allowed the assessee’s appeal, relying on the decision of the Special
Bench of the Tribunal in the case of Bhagwad
Swarup Shri Shri Devraha Baba Memorial Shri Hari Parmarth Dham Trust vs. CIT
111 ITD 175 (Del.)(SB), holding that since the
application was not disposed of within the period of six months, registration
would be deemed to have been granted.

In the appeal filed by the Commissioner against the Tribunal order
before the Kerala High Court, on behalf of the Revenue, attention of the Court
was drawn to the detailed consideration by the Commissioner of the assessee not
being a charitable trust, especially with reference to the clause in the trust
deed which enabled collection of free deposits, contributions, etc., from
students and their parents. It was argued that there was a specific finding
that though the trust was essentially for setting up of an educational institution,
there was no charity involved. There was also considerable delay in filing the
application for registration by the assessee, and sufficient reasons were not
stated for condoning such delay.

It was
further argued that though a period of six months was provided under the
statute, there was no deeming provision as such and under such circumstances
there could not be a deemed registration u/s 12AA. Reliance was also placed by
the Revenue on the decision of the Full Bench of the Allahabad High Court in
the Muzafar Nagar Development Authority case (Supra), for the proposition that there
could be no deemed registration. It was argued that there was no declaration of
law in the decision of the Supreme Court in the case of Society for the Promotion of Education (Supra),
as it was only a concession made by the counsel appearing for the Department.
It was urged that the High Court should be concerned with the interpretation of
the provision to advance the course of law and not a concession by a counsel before
the Supreme Court in a solitary instance.

On behalf
of the assessee, it was submitted that the same Commissioner who had filed the
appeal before the Court had given effect to the order of the Tribunal, and
therefore the appeal was infructuous. Reliance was also placed on the decision
of the special bench of the Tribunal in the case of Bhagwad Swarup Shri Shri Devraha Baba Memorial Shri Hari Parmarth
Dham Trust (Supra) which held the limitation to be
a mandatory provision, failure to comply with which would result in deemed
registration. Attention of the Court was drawn to the CBDT Instruction No.
16/2015 (F No 197/38/2015-ITA-1) dated 6^th November, 2015 which
mandated that the application should be considered and either allowed or
rejected within the period of six months as provided under the section.
Reliance was also placed on the decision of the Supreme Court in the case of Society for the Promotion of Education (Supra).

The Kerala
High Court initially observed that the Full Bench decision of the Allahabad
High Court had a persuasive power and they were inclined to follow the
decision, holding that without a specific deeming provision there could be no
grant of deemed registration u/s 12AA. According to the Kerala High Court,
there could be no fiction created by mere inference in the absence of a specific
exclusion deeming something to be other than what it actually was. The Kerala
High Court therefore observed that the fact assumed significance as to the view
of the Department insofar as the mandatory provision of consideration of
application and an order being issued within a period of six months.

Further,
the Kerala High Court noticed that there was unreasonable delay in complying
with the mandatory provision u/s 12AA(2). It also took note of the CBDT
Instruction Number 16/2015 (F No 197/38/2015-ITA-1) dated 6^th
November, 2015 where the CBDT had noted that the time limit of six months was
not being observed in some cases by the Commissioner. Instructions were
therefore issued that the time limit of six months was to be strictly followed
by the Commissioner of Income-tax (Exemptions) while passing orders u/s 12AA
and the Chief Commissioner (Exemptions) was instructed to monitor adherence to
the prescribed time limit and initiate suitable administrative action in case
any laxity in such adherence was noticed.

The Kerala
High Court observed that the CBDT had thought it fit, obviously from experience
of dealing with delayed applications, that the mandatory provision had to be
complied with in letter and spirit. These directions were binding on the officers
of the Department and were a reiteration of the statutorily prescribed mandate.
According to the Kerala High Court, the CBDT instruction gave a clear picture
of how the CBDT expected the officers to treat the mandatory provision as being
scrupulously relevant and significant.

The Kerala
High Court then considered the decision of the Supreme Court in the case of Society for the Promotion of Education (Supra).
It stated that it was not convinced with the contention of the Revenue that
there was any concession made by the Additional Solicitor-General who appeared
in the matter for the Income-tax Department. It noted that the appeal before
the Supreme Court arose from the judgment of the Allahabad High Court. When the
matter was considered by the Supreme Court, the Full Bench decision of the
Allahabad High Court had already been passed and the said decision had not been
placed before the Supreme Court. According to the Kerala High Court, rather
than a concession, the Additional Solicitor-General specifically informed the
Supreme Court that the only apprehension of the Department was regarding the
date on which the deemed registration would be effected; whether it was on the
date of application or on the expiry of six months.

The Civil
Appeal before the Supreme Court was disposed of expressing the apprehension to
be unfounded, but all the same, clarifying that the registration of the
application u/s 12AA would only take effect from the date of expiry of six
months from the date of application. Considering the effect of disposal of a
Civil Appeal as laid down by the Supreme Court in the case of Kunhayammed vs. State of Kerala 245 ITR 360,
the Kerala High Court was of the view that the judgment of the High Court
merged in the judgment of the Supreme Court, since the Supreme Court approved
the judgment of the Allahabad High Court allowing deemed registration u/s 12AA,
though applicable only from the date of expiry of the six-month period as
mandated in section 12AA(2). According to the Kerala High Court, since the
verdict delivered by the Allahabad High Court regarding deemed registration u/s
12AA for reason of non-consideration of the application within a period of six
months from the date of filing was not differed from by the Supreme Court in
the Civil Appeal, the declaration by the High Court assumed the authority of a
precedent by the Supreme Court on the principles of the doctrine of merger.

Therefore,
the Kerala High Court rejected the appeal of the Department, following the
decision of the Supreme Court in the case of Society
for the Promotion of Education (Supra) holding
that the failure of the Commissioner to deal with the application within the
prescribed time led to the deemed registration.

A similar
view was also taken by the Rajasthan High Court in the case of CIT vs. Sahitya Sadawart Samiti Jaipur 396 ITR 46.

ADDOR FOUNDATION CASE

The issue
again came up before the Gujarat High Court in the case of CIT vs. Addor Foundation 425 ITR 516.

In this
case, the assessee trust made an online application for registration u/s 12AA
on 23^rd January, 2017. The Commissioner called for details of the
various activities actually carried out by the trust vide his letter dated 5^th February,
2018. After considering the details submitted by the trust, the Commissioner rejected
the application for registration.

In the
appeal, the Tribunal noted the fact that while passing the order rejecting the
registration application, the Commissioner wrongly mentioned the date of
receipt of the application for registration as 23^rd January, 2018,
instead of 23^rd January, 2017. Placing reliance on the decision of
the Supreme Court in the case of Society
for the Promotion of Education (Supra), the
Tribunal held the registration as deemed to have been granted and allowed the
appeal of the assessee.

On behalf
of the Revenue it was submitted before the Gujarat High Court that the dictum of law as laid down by the
Supreme Court in the case of Society for the
Promotion of Education (Supra) was of no avail to the
assessee in the facts and circumstances of the case before the Gujarat High
Court. Though the issues were quite similar, the Supreme Court had decided the
issue in favour of the assessee and against the Revenue only on the basis of the
statement made by the Additional Solicitor-General, keeping all the questions
of law open. It was submitted that on a plain reading of the section it could
not be said that merely by the Commissioner not deciding the application within
the stipulated period of six months, deemed registration was to be granted.

On behalf
of the assessee, reliance was placed on the decisions of the Kerala High Court
in the case of TBI Education Trust (Supra)
and of the Rajasthan High Court in the case of Sahitya
Sadawart Samiti Jaipur (Supra). It was argued that
although the Legislature had thought fit not to incorporate the word ‘deemed’
in section 12AA(2), yet, having regard to the language and the intention, it
could be said that a legal fiction had been created.

The Gujarat
High Court observed that the decision of the Division Bench of the Allahabad
High Court in the case of Society for the Promotion of
Education (Supra) was of no avail as the
correctness of that decision had been questioned before the Full Bench of the
Allahabad High Court in the case of Muzafar
Nagar Development Authority (Supra) to hold
that there was no automatic deemed registration on failure of the Commissioner
to deal with the application within the stipulated six months. The Gujarat High
Court was not inclined to accept the line of reasoning which had found favour
with the Division Bench of the Allahabad High Court in the case of Society for the Promotion of Education (Supra).

The
Gujarat High Court reproduced with approval extracts from the Full Bench
decision of the Allahabad High Court in the case of Muzafar Nagar Development Authority (Supra).
The Court analysed various decisions of the Supreme Court, which had examined
the issue whether a legal fiction had been created by use of the word ‘deemed’,
and observed that the principle discernible was that it was the bounden duty of
the Court to ascertain for what purpose the legal fiction had been created. It
was also the duty of the Court to imagine the fiction with all real
consequences and instances unless prohibited from doing so.

The
Gujarat High Court did not agree with the views expressed by the Kerala High
Court in the case of TBI Education Trust (Supra),
stating that the Supreme Court decision in the case of Society for the Promotion of Education (Supra)
did not lay down any principle of law and, on the contrary, kept the questions
of law open to be considered. The Gujarat High Court therefore expressed its
complete agreement with the view taken by the Full Bench of the Allahabad High
Court in the Muzafar Nagar Development Authority
case and held that deemed registration could not be granted on the ground that
the application filed for registration u/s 12AA was not decided within a period
of six months from the date of filing.

OBSERVATIONS

The issue
of deemed registration u/s 12AA in the event of failure to dispose of the
application within the specified time limit of six months has continued to
remain a highly debatable issue, even after the matter had reached the Supreme
Court. The additional and avoidable debate on the issue could have been avoided
had the attention of the Supreme Court been drawn by the Revenue to the fact
that the Full Bench of the Allahabad High Court in a later decision had
disapproved of the Division Bench judgment of the Allahabad High Court, which
was being considered in appeal by the Supreme Court. It could have also been
avoided had the Apex Court not stated in the order that the other issues were
kept open, where perhaps there were none that were involved in the appeal.

The issue
which arises now is whether the issue has been concluded by the Supreme Court
or whether it has been left open! While the Kerala High Court has taken the
view that the issue has been concluded, the Gujarat High Court is of the view
that the issue has not been decided by the Supreme Court.

If one
examines the decision of the Supreme Court, it clearly states that the short
issue was with regard to the deemed registration of an application u/s 12AA and
that the High Court had taken the view that once an application was made under
the said provision and in case the same was not responded to within six months,
it would be taken that the application was registered under the provision. This
was the only issue before the Supreme Court. Thereafter, the Supreme Court
clarified the apprehension raised by the Additional Solicitor-General, which
was addressed by the Supreme Court by holding that the deemed registration
would take effect from the expiry of the six-month period. Then, the Supreme
Court stated that subject to the clarification and leaving all other questions
of law open, the appeal was disposed of.

From this
it is evident that the appeal has been disposed of and not returned unanswered
or sent back to the lower court or appellate authorities. The appeal was on
only one ground – whether registration would be deemed to have taken place when
there was no disposal of the application within six months. The very fact that
the Supreme Court held that deemed registration would take effect on the expiry
of the six-month period clearly showed that it approved the concept of deemed
registration under such circumstances. Had the Supreme Court not approved the
concept of deemed registration, there was no question of clarifying that deemed
registration would take effect on the expiry of the six-month period.
Therefore, in our view, the Supreme Court approved of the decision of the
Division Bench of the Allahabad High Court.

The Kerala
High Court rightly appreciated this aspect of disposal of a Civil Appeal, which
implies approval of the judgment against which the appeal was preferred. In Kunhayammed vs. State of Kerala 245 ITR 360,
the Supreme Court considered the effect of disposal of a Civil Appeal as under:

‘If
leave to appeal is granted, the appellate jurisdiction of the Court stands
invoked; the gate for entry in appellate arena is opened. The petitioner is in
and the respondent may also be called upon to face him, though in an
appropriate case, in spite of having granted leave to appeal, the Court may
dismiss the appeal without noticing the respondent.

……..

The
doctrine of merger and the right of review are concepts which are closely
inter-linked. If the judgment of the High Court has come up to the Supreme
Court by way of a special leave, and special leave is granted and the appeal is
disposed of with or without reasons, by affirmance or otherwise, the judgment
of the High Court merges with that of the Supreme Court. In that event, it is
not permissible to move the High Court for review because the judgment of the
High Court has merged with the judgment of the Supreme Court.

……………………

Once a
special leave petition has been granted, the doors for the exercise of
appellate jurisdiction of the Supreme Court have been let open. The order
impugned before the Supreme Court becomes an order appealed against. Any order
passed thereafter would be an appellate order and would attract the
applicability of the doctrine of merger. It would not make a difference whether
the order is one of reversal or of modification or of dismissal affirming the
order appealed against. It would also not make any difference if the order is a
speaking or non-speaking one. Whenever the Supreme Court has felt inclined to
apply its mind to the merits of the order put in issue before it, though it may
be inclined to affirm the same, it is customary with the Supreme Court to grant
leave to appeal and thereafter dismiss the appeal itself (and not merely the
petition for special leave) though at times the orders granting leave to appeal
and dismissing the appeal are contained in the same order and at times the
orders are quite brief. Nevertheless, the order shows the exercise of appellate
jurisdiction and therein the merits of the order impugned having been subjected
to judicial scrutiny of the Supreme Court.

……..

Once
leave to appeal has been granted and appellate jurisdiction of the Supreme
Court has been invoked, the order passed in appeal would attract the doctrine
of merger; the order may be of reversal, modification or merely affirmation’.

In case
one accepts that the Supreme Court in the case of Society for the Promotion of Education (Supra)
had comprehensively decided the main issue of deemed registration, then in that
case no debate survives on that issue at least. It is only where one holds that
the Court had left the issue open and had delivered the decision on the basis
of a concession by the Revenue that an issue arises. In our considered opinion,
the Court had clearly concluded, though it had not expressed it in so many written
words, that the non-decision by the Commissioner within the stipulated time led
to the deemed registration of the society. It seems that this fact of law and
the finding of the Court were rather accepted by the Revenue which had raised
an apprehension for the first time about the effective date of deemed
registration inasmuch as the order of the High Court was silent on the aspect
of the effective date. In meeting this apprehension of the Revenue, the Court
clarified that there was no case for such an apprehension as in the Court’s
view the effective date was the date of expiry of six months, and again in the
Court’s view such a view was in concurrence with the High Court’s view on such
date. The Kerala and Rajasthan High Courts are right in holding that the Court
had concluded the issue of registration in favour of the deemed registration
and had not left the said issue open and were right in interpreting the
decision of the Apex Court in a manner that confirmed the view expressed.

There was
no concession by the Revenue in the said case before the Apex Court as made out
by the Revenue. The fact is that an apprehension was independently raised for
the first time by the Revenue about the effective date of registration, which
was dismissed by the Court by holding that there was every reason to hold that
the High Court in the decision had held that the registration was effective
only from the date of expiry of six months from the date of the application and
not before the said date. It is this part which has been expressly recorded in
the judgment. What requires to be appreciated is that the clarification was
sought because once the main issue of deemed registration was settled by the
Court, there could not have been a clarification on an effective date of the deemed
registration had the issue of deemed registration been decided against the
assessee or was undecided and, as claimed, kept open.

The issue
in appeal before the Supreme Court was never about the effective date of
registration but was about the registration itself; it could not have been for
the date of registration for the simple reason that the Allahabad High Court
had nowhere in its decision dealt with the issue of the effective date of
registration.

In the
case of the Society for the Promotion of Education
(Supra), the Supreme Court had therefore modified the
order of the Division Bench of the Allahabad High Court, which order had merged
in the order of the Supreme Court. Therefore, the subsequent order of the Full
Bench of the Allahabad High Court would no longer hold good since the Supreme
Court had taken a view contrary to that taken by the Full Bench of the
Allahabad High Court. This aspect does not seem to have been appreciated by the
Gujarat High Court.

The better
view, therefore, is the view taken by the Kerala and Rajasthan High Courts –
that failure to dispose of an application u/s 12A within the period of six
months results in a deemed registration u/s 12AA.

At the
same time note should be taken of the decisions of the Madras High Court in the
cases of CIT vs. Sheela Christian Charitable Trust 354 ITR 478
and CIT vs. Karimangalam Omriya Pangal Semipur Amaipur Ltd. 354 ITR
483. In the said cases the Court held that the non-decision by the
Commissioner within the prescribed time did not result in deemed registration
of the institution. These decisions should be held to be no longer good law in
view of the subsequent decision of the Apex Court.

The law is now amended with effect from 1^st
April, 2021, with registration now required u/s 12AB. Section 12AB(3) also
requires disposal of the application within a period of three months, six
months or one month, depending upon the type of application, from the end of
the month in which the application is filed. The issue would therefore continue
to be relevant even under the amended law.

shailesh.kwebmaker

Explanation 1 to section 37(1): Deduction made by the buyers from the price, on account of damage / variance in the product quality does not attract Explanation 1 to section 37 (1) and same is an allowable deduction even when the assessee classified it as ‘penalty on account of non-fulfilment of contractual requirements’

5. [2020] 77 ITR
(Trib.) 165 (Del.)(Trib.) DCIT vs. Mahavir
Multitrade (P) Ltd. ITA No.:
1139/Del/2017 A.Y.: 2012-13 Date of order: 27^th
November, 2019

Explanation 1 to
section 37(1): Deduction made by the buyers from the price, on account of
damage / variance in the product quality does not attract Explanation 1 to
section 37 (1) and same is an allowable deduction even when the assessee
classified it as ‘penalty on account of non-fulfilment of contractual
requirements’

FACTS

The assessee was
engaged in trading of imported coal. It sold coal as per the specifications and
requirements of the buyer and in the event of failure to comply with the
requirements, the buyer used to make deduction while releasing the payment on
account of variation in quantity and quality; the amount of deduction for A.Y.
2012-13 was Rs. 3,66,68,504 which was claimed as a deduction while computing
the business income. During the course of assessment proceedings, the assessee
categorised such deduction as penalty levied for not complying with the terms
of the contract. But the A.O. made an addition on the ground that such penalty
cannot be regarded as a deductible expenditure as per the Explanation to
section 37(1). It was explained to the A.O. that the nature of the product was
such that there was high possibility of degradation or variance and the
deduction made by the buyers represented compensatory levy for not meeting the
specifications / agreed parameters of coal.

On an appeal before
the CIT(A), considering various judicial precedents it was held that
exigibility of an item to tax or tax deduction cannot be based merely on the
label (nomenclature) given to it by the assessee. It was held that deduction by
buyers represented the expenditure for the damages caused, which is
compensatory payment made by the assessee and it entitled him to claim the
deduction from the income. It could not be equated with infraction of law as
provided in the Explanation to section 37(1). Accordingly, the additions made
by the A.O. were directed to be deleted.

Thereafter, the
Department filed an appeal before the ITAT against the order of the CIT(A).

HELD

1. It was accepted by the A.O. that the assessee
received less payment from the buyers because of the variance in the quality of
coal. The allegation of the A.O. only revealed that there was failure on the
part of the assessee to meet the contractual obligation but it was nowhere
specified as to which provision of law was violated so as to invite the penal
consequences.

2. The A.O. had failed to consider the explanation
given by the assessee wherein it was clearly stated that the contract with the
buyers stipulated the consequence of price reduction / adjustment when there
was variation in the quality or quantity of the coal.

3. The inability to meet the contractual
obligation by the assessee could not be termed as an offence or infraction of
law so as to deny the claim of the assessee by invoking Explanation 1 to
section 37(1) and exigibility of an item to tax or tax deduction cannot be made
merely on the label given to it by the parties. The penalty was levied on the
assessee for not complying with the terms of the contract, which is a civil
consequence for not complying with certain terms of the contract, and has
nothing to do with any offence.

4. The CIT(A) had rightly relied upon the
decisions in Prakash Cotton Mills (P) Ltd. vs. CIT [1993] 201 ITR 684
(SC), Swadeshi Cotton Mills Co. Ltd. vs. CIT [1980] 125 ITR 33 (All.),
Continental Constructions Ltd. vs. CIT [1992] 195 ITR 81 (SC) and also
the decisions of the Kerala and the Andhra Pradesh High Courts in CIT vs.
Catholic Syrian Bank Ltd. [2004] 265 ITR 177 (Ker.) and CIT vs.
Bharat Television (P) Ltd. [1996] 218 ITR 173 (AP).

Accordingly, the
order of the CIT(A) was upheld.

shailesh.kwebmaker

PERSONAL DATA PROTECTION

BACKGROUND

Privacy as a
fundamental right is recognised by all the democratic countries. This right
stems from recognition of a need to uphold individual dignity in a free world. Right to privacy flows from right to life and personal liberty given to every
citizen by our Constitution. The first law in the world about privacy data
protection was enacted in Sweden in 1973. Subsequently, the European nations
adopted Data Protection Directive (95/46/EC) in 1995 about protection of
processing of personal data which later became known as the General Data Protection Regulation (GDPR) in April,
2016 and has become enforceable on 25^th May, 2018. Similarly, in the
US, the federal law of Health Insurance Portability and Accountability Act
(HIPPA) was passed in 1996 which mandated strict protection of personally
identifiable information processed by the healthcare and healthcare insurance
industry. A similar law in Canada called Personal Information Protection and Electronic
Documents Act (PIPEDA) was made effective from April, 2020.

India has awakened
to the fact that in view of the fast-paced growth in every field, be it
technology, trade, medical science or sport, the interaction with the world has
impacted our eco-systems and the way we do business and adopt technology. Since
technology will form part of everything we do, we will need to formally protect
the personal information of citizens from abuse and manipulation. A new law
through the Personal Data Protection Bill of 2019 is likely to be enacted soon.

In the wake of the
recognition of the need to protect personal data by law, business enterprises
in many Western and Far Eastern countries are looking for solutions to
implement the regulations and save on huge penalties that are levied for
non-compliance.

This has opened
up new avenues of opportunity for the professionals in India to expand into
providing valuable solutions to these enterprises.

An attempt has
been made here to provide broad guidelines and a roadmap to implement the
regulations on personal data protection which will help our professionals and
IT service industries to provide value-added service to their customers.

WHAT DATA
IS SUBJECT TO PROTECTION?

It is important to
understand what is ‘data’ and what are the activities that are subjected to
protection. With little variations, most of the prevailing laws define
‘Personal Data’ as ‘data about or relating to a natural person who is
directly or indirectly identifiable, having regard to any characteristic,
trait, attribute or any other feature of the identity of such natural person,
whether online or offline, or any combination of such features with any other
information, and shall include any inference drawn from such data for the
purpose of profiling.’

Thus, all the
information like birth date, name, address, contact number, email address,
personal image, ID card No., payment card Nos., health details, financial
information, political and religious affiliation, biometric data and data about
the individual on the basis of which inference can be drawn is also subject of
the regulations, e.g., membership of clubs, religious, political or social
groups.

After considering
the scope of the privacy regulations in developed countries, it is found that
in general the scope of the activities and entities to which the privacy
regulations apply is as follows:

(a) the processing of personal data where such data
has been collected, disclosed, shared or otherwise processed within the
jurisdiction,

(b) the processing of personal data by any
enterprise, company, body of persons operating within the jurisdiction,

(c) to entities outside the territory of the
regulations but processing personal data of the citizens residing in the
jurisdiction; e.g., GDPR applies to the enterprises outside the European Union
but processing and collecting data of the citizens of the European Union.

DRIVERS
FOR IMPLEMENTING DATA PRIVACY REGULATIONS

(A) Legal obligation:
Business enterprises take the initiative to implement the regulations about
protection of personal data primarily as a legal compliance requirement.
However, few organisations have taken proactive decisions as a good governance
practice.

(B) Risk arising out of Data breach: Damage to reputation and uncalled publicity due to incidents like
data breach is a single good reason for management to take up data protection with
priority. One can refer to the incidents of data theft at the Marriott group,
the Target group, the SBI Card data breach which left
these companies struggling to answer the media and regulators.

(C) Governance: It is
now widely accepted in the capital market that the companies which have good
practices in governance and have implemented data security framework, are
valued more than the enterprises which do not have such practices. The
companies with good governance practices will be less likely to be victim of
data breaches.

(D) Punishment:
Punitive provisions of the law are a great driver for a majority of the
enterprises. In case of Personal Data Protection provisions, the penalty for
violations of the provisions could result in penalty up to Rs. 5 crores or 2%
of global turnover, whichever is higher. In case of more grave violations like
transfer of personal data outside India or children’s data in violation, may
attract penalty of Rs. 15 crores or 4% of global turnover, whichever may be
higher. This is in tune with European regulations (GDPR) where the penalty is
Euro 20 million or 4% of the global turnover of the enterprise.

(E) Customer: Another
important driver for adoption of early implementation of personal data
protection by the enterprise is the customer. Where the customer obliges (or
insists on) the vendor enterprise that there should be policies and procedures
about personal data protection, the enterprise in a move to win over the
customer resorts to quick compliance.

It becomes
imperative, therefore, and has become an important agenda for boards to take up
implementation of personal data protection as a strategy. Chartered Accountants
with IT security skills are often roped into audit committee discussions for
ways to comply with and implement the personal data protection policies. If one
has adequate knowledge and plans for implementation one may add great value to
the governance and provide leadership in data protection.

IMPLEMENTATION
ROAD MAP

1. Board level initiative

A move to implement
PDP (personal data protection) should flow from the governing body. It is seen
that PDP is more effectively implemented where the board drives the
implementation and monitors its progress.

2. Set up framework for the PDP

Framework for PDP
would include:

(a) Identification of Personal Data

Personal data
qualifying for protection as per the regulations may be part of databases
e-residing on owned database or data may be uploaded in cloud environment which
may be outside the territory of India but subject to control from India. The
Procedure needs to be defined as to how to obtain inventory of database
instances and identify personal data qualifying within the definition of
personal data.

(b) Governance policies and procedures

For effective
implementation of compliance, policies and SOPs for acquiring, identifying,
classifying and storing for processing need to be defined and documented.
Policies for personal data protection should be based on the following
principles:

(i) Objective of adopting organisational, business
practices, processes and technical system to anticipate, identify and prevent
harm to the privacy data principal. ‘Data principal’ means an individual whose
data is processed by the data fiduciary;

(ii) Policy to include the declaration that
processing of personal data shall adopt the commercially accepted, or
certified, standards;

(iii) Processing of data should be in transparent
manner and capable of easy identification;

(iv) Protection shall be offered throughout the data
life cycle, from collection, processing, storage, to deletion or disposal;

(v) Policy should demonstrate that the manner of
collecting, processing and disposing personal data shall be transparent, fair
and lawful.

(c) Data fiduciary and Data protection officer

Data fiduciary
means any person, including the State, a company, any

– juristic entity
or any individual who alone or in conjunction with others determines the

– purpose and means
of processing of personal data who is also known as Data Controller.

Thus, an entity
like a company, firm, association, or proprietary firm which acquires the data
and is responsible for protecting it is termed as data fiduciary.

A Data protection
officer needs to be appointed and be responsible for

* providing
information and advice to the data fiduciary on matters relating to fulfilling
obligations under the regulations;

* monitoring
personal data processing activities of the data fiduciary to ensure that such
processing does not violate the provisions of the regulations;

* providing advice
to the data fiduciary on carrying out the data protection impact assessments,
and carry out its review;

* providing advice
to the data fiduciary on carrying out the data protection activities;

* act as the point
of contact for the data principal for the purpose of grievance redressal.

(d) Set up mechanism for data breach or incident
response management

A procedure needs
to be documented for reporting responsibility, escalation of data breach and
prompt reporting of incident of data breach should be defined. This would also
include notifying the authority within reasonable time about data breach.

(e) Maintenance of records

The backbone of the
framework for privacy data protection is maintenance and organisation of
records or electronic data sets. As most of the information is collected,
stored and processed through IT systems, it is inevitable that how the data is
organised and retrievable is of great importance. The primary object of the
management should be that the format and manner in which data records are
maintained would demonstrate beyond doubt that due diligence is exercised by it
in protecting the personal data in case of litigation.

(f) Monitoring

The framework for
the implementation would be incomplete without providing for supervising the
efforts taken for the personal data management. From the beginning an
independent authority be established in the form of internal audit or
supervisory in nature to see that the processes and compliances are well
integrated and the exceptions are reported and corrected in time

Personal Data
Protection implementation plan can be graphically represented in the following Fig.
1 which shows the key components. These can be viewed and considered from
top to bottom order.

Fig. 1, Personal Data Protection Implementation Plan

3. Identification of processes and Data sets

As a first step to
comply with the provisions of privacy law it is important to identify the
processes through which this personal data comes into the possession of the
company. There are business processes and supporting IT processes which need to
be identified and documented. For example, to generate customer inquiry about a
product or service you may have an application (API) where the customer enters
his / her name, email-id, or in case of on-boarding of new employee the
organisation may have a process to obtain personal details like address,
qualification, health details, etc. Such processes then become the focus for
identification and need to be documented. A register can be prepared containing
process identifier, purpose, input data, output data, geographical
jurisdiction, responsibility, third party interface and so on.

Similarly,
supporting IT processes to the above business processes need to be documented
containing relevant information like database, data sets (tables), input and
output interfaces. A register for data collected from these processes should be
maintained which would serve as the basis for demonstration of privacy law
compliance. The data register can be maintained as spreadsheet or database
containing details like source, type of information (personal attributes),
purpose, owner of the data, storage destination, jurisdiction, type of storage,
retention period, consent obtained and data whether exported to other
applications,

4. Communication with Data Principal

The person who owns
his / her personal information is called as Data Principal who has prime right
to share his / her privacy data. Hence, communication with the data principal
is of great importance. The communication procedure also recommends a
structured approach and should have the following features:

NOTICE

Notice to the data
principal contains the company’s privacy policy and procedure description and
should be communicated at or before the time the personal information is
collected or immediately on collection, or if the personal information is sought
to be used for a new purpose (other than the purpose for which it was
originally collected). The language of the notice should be unambiguous and
conspicuous. It should state clearly the purpose of collecting the personal
information and intended use. Notice can be in multiple languages and contain
the identity and contact details of the data fiduciary (company) and contact
details of the data processing officer.

CONSENT

Communication with
the data principal should state the choice available with the individual
whether or not to share his / her personal information. The proposed bill makes
it obligatory for the data fiduciary to obtain consent. The provisions state
that ‘Personal data shall not be processed except on the consent given at the
commencement of its processing.’ The language of the consent should have
features like free, informed, specific, clear and capable of being withdrawn.
It should be noted that the provision of the goods or services or the
performance of any contract shall not be made conditional on giving consent to
the processing of personal data not necessary for that purpose. The burden of
proof is on the data fiduciary to prove that consent has been given by the data
principal for processing personal data.

EXCEPTIONS

In the following
cases, however, personal data can be processed without consent of data
principal:

– In connection with performance of any
function authorised by law for providing any benefit or service or issuance of
license or permit to the data principal,

– In compliance with an order or judgment by a
court or tribunal in India,

– As a response to medical emergency or threat
to life of data principal or any other person,

– To undertake any measure to provide medical
treatment or health service to any individual during outbreak of disease,
epidemic or threat to public health,

– Any non-sensitive data can be processed if
and when necessary for recruitment or termination of employment of data
principal by data fiduciary,

– In connection with providing any benefit to
employee data principal,

– In connection with reasonable purpose as
prescribed by the regulations. Reasonable purpose would include
whistle-blowing, network or information security, credit scoring, recovery of
debt and operation of search engine.

5. Collection

Once the purpose of
collection of personal data is communicated to the data principal, the process
of collection is to be standardised to satisfy two conditions: the collection
should be by lawful and fair means.

The information to
be collected should be necessary and which fulfils the purpose of collection.
It should be collected without intimidation, without deceptive means. The rules
of collection by law or by customary method must be complied with. The
management needs to ensure that information gathered from third parties like
intermediaries, e.g., social media site should also follow fairness and lawful
means.

6. Data retention and disposal

The international
laws provide that the data collected of personal nature should not be retained
by the data fiduciary beyond the intended purpose of collection. For the
purpose of demonstrating that the company does not retain the personal data
beyond required limit, a ‘Data Retention Policy’ be documented. Employee data
may be retained longer, till in employment, but marketing data of customer
inquiry needs to be retained only up to order fulfilment. Data beyond retention
limit can be retained only if required by any other law or with explicit
consent of the data principal. Responsibility of complying with the retention
policy should be assigned to the data processing officer. Options for disposal
of the data no longer required are anonymisation, i.e. data is cleansed of
personal identification fields, deletion or disposal in a manner that prevents
loss, theft, misuse or unauthorised access.

7. Data security

As a part of
personal data protection compliance, the sole accountability of protection of
the data is placed with the data fiduciary. The company should therefore have
data protection as part of its general information security policy. Personal
data needs to be protected after collection, during processing and while in
store. Data security standards prescribe for encryption of the data so that in
case of breach of theft it is very difficult to decipher the vital data stored.
Data security implies that the data should be accessible only to authorised
users. Therefore, strong access control like user authentication and multiple
authentication techniques be implemented. Internal audit can perform reviews and
monitor the controls over data security. Any lapses in the security policy
operations may be reported to the governing body. Many of the data breaches in
recent years have been possible for want of adequate data protection policies
and poor implementation. Data breaches have ruined reputations of big companies
and ended in huge penalties and risk of survival.

To give a few
instances in 2020, Roblox gaming company saw its 100 million accounts with
passwords exposed by a hacker who bribed an insider and badly ruined its brand.
Popular Zoom video conference service data of nearly 500,000 users was stolen
and was available for sale on the dark web. British airline Easyjet suffered
from their nine million customer account email addresses, travel details and 2,000
credit card credentials being stolen. Now the victims are subjected to
e-phishing attacks. In 2017, the Equifax (credit reporting and data analytics
company) data breach of 147 million people ended with the company settling for
425 million dollars with the US Fed Trade Commission. In 2019, Capital One, a
reputed bank, got its 106 million records compromised with precious data of
social security numbers, social insurance numbers and financial history of
customers. Similarly, in India SBI credit card data was breached in 2019.

8. Risk Management

It is evident from
the above examples that risk of personal data being exposed is very high and
sensitive for any organisation. The best way to approach this is by resorting
to risk management seriously. Risk management includes three factors: Risk
identification, Risk assessment and Risk treatment. The starting point is that
all the events and threats be listed and discussed with the tech team and
operations. The more exhaustive the identification of events and threats, means
the more robust will be the risk mitigating plan. Equally important is the
assessment, i.e., likely loss from each event. It is no doubt difficult to quantify
the impact of the likely event in monetary terms but the magnitude can be
estimated by assigning values on a 1 to 10 scale. Risk treatment should include
the description of controls considering available resources and technology. The
risk assessment and treatment for mitigating the risks need to be addressed at
the highest level of management. A documented risk treatment plan can be a
guiding tool for internal audit, the executive management and should be updated
from time to time.

Many organisations
document this as a one-time exercise (and shelve it or remove it) only to show
to the auditors or regulatory authority. In case of sensitive data, the law
provides for ‘Data Protection Impact Assessment’ to be undertaken. Sensitive
data means such information about data principal which may cause harm if
disclosed. The assessment in such a case should contain a detailed description
of the proposed processing operation, purpose and nature of data to be
processed and so on. It would also indicate how the data fiduciary intends to
protect the sensitive data. This information will then be reviewed by the
statutory authority before giving approval. Sensitive information may include
credit, health related, financial or banking related information.

9. Personal Data Access Management

The primary defence
against attack on personal data is strong access control. Having access
(logical and physical) procedures which have the following controls embedded in
it will go a long way in building a defence framework. Some of the controls
could be authorising limited internal users to limited access; managing the
change of access due to addition or separation of internal users effectively;
restricting access to offline storage; backup data; systems and media;
monitoring access activities of privilege users (system administrators) through
log reviews; restricting system configurations; super-user functionality;
remote access utilities and security devices like firewalls.

The most vulnerable
segment in personal data is transmission over email or public networks and
wireless networks. Companies dealing with collection of personal data often
resort to industry standard encryption methods. Importantly, testing of the
above safeguard controls should be carried out periodically and reported.

10. Incident management and breach reporting

As a part of the
personal data management, every legislation provides for immediate response
communication to the authority. The incident-reporting provision states that
information about the breach should be communicated without undue delay. A
similar provision in the GDPR (General Data Protection Regulations) in the
European Union prescribes the time limit as 72 hours. A baseline reporting
mechanism needs to be developed about reporting of a data breach incident from
internal or external source by designing reporting templates. The reporting
mechanism should mainly include information-gathering and investigation
procedure about interaction between parts of the organisation and the data
processor. An important part of the incident management process is notification
to the data principals, i.e., individuals or groups whose data is subjected to
the breach. The notification should be proactive and should provide several
channels of communication like press, media and website notification at large.
The process should include legal advisory involvement, organisational
responsibility about formulating an appropriate message. Formal incident and
crisis management should be brought in in case of significant data breach.

The above stages in
strengthening data protection at any business enterprise would go a long way in
cultivating good governance practices. To adopt the best practices of personal
data protection, the International Standard Organization has released ISO 27701
which would help the organisations to provide the required assurance to
customers and authorities.

The above roadmap
and stages on this road to data protection compliance are no doubt initially
cumbersome but one should note that these are also steps towards good corporate
governance. The processes once set, if periodically reviewed for gaps and
improved, would certainly demonstrate due diligence and form a good defence in
data breach litigations.

References:

1. The
Personal Data Protection Bill, 2019, India

2.    The
Regulation (EU) 2016/679 of European
       Parliament, and Directive 95/46/EC
(aka General
       Data Protection Regulations, GDPR)

3. www.capitalone.com

4.
PIPEDA (Personal Information Protection and
Electronic Documents Act), Canada.

shailesh.kwebmaker

WHETHER PRACTISING CAs CAN DEAL IN DERIVATIVES ON STOCK EXCHANGES

Chartered
Accountants who are in practice are not supposed to carry on any business
activity other than accounting professional activity. Reference must be made in
this regard to Part-I of the First Schedule of the Chartered Accountants Act,
1949 which deals with professional misconduct by CAs in practice; clause (11)
of the Act reads as follows:

The Chartered
Accountants Act, 1949

‘THE FIRST
SCHEDULE

[See Sections
21(3), 21A(3) and 22]

PART-I:
Professional misconduct in relation to chartered accountants in practice.

A Chartered
Accountant in practice shall be deemed to be guilty of professional misconduct,
if he –

(1) to (10)
……………

(11) engages in
any business or occupation other than the profession of chartered accountants
unless permitted by the Council so to engage;

Provided that nothing contained herein shall disentitle a chartered
accountant from being a director of a company (not being a managing director or
a whole time director) unless he or any of his partners is interested in such
company as an auditor.’

Given this
background, an attempt will be made here to understand ‘Whether chartered
accountants in practice can have dealings in Derivatives listed on stock
exchanges.’

Let us first look
at section 43(5) of the Income Tax Act; sub-clauses (d) and (e) of the same
read as under:

‘Sec. 43(5) –

(a) to (c)
……………..

(d) an eligible transaction in respect of trading
in derivatives referred to in clause [(ac)] of section 2 of the Securities
Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognized stock
exchange; or

(e) an eligible transaction in respect of trading
in commodity derivatives carried out in a [recognized stock exchange] which is
chargeable to commodities transaction tax under Chapter VII of the Finance Act,
2013 (17 of 2013),

shall not be
deemed to be a speculative transaction.’

WHAT ARE
DERIVATIVES?

The term
‘Derivative’ indicates that it has no independent value, i.e., its value is
entirely ‘derived’ from the value of the underlying asset. The underlying asset
can be securities, commodities, bullion, currency, livestock or anything else.
In other words, Derivative means a forward, future, option or any other hybrid
contract of pre-determined fixed duration, linked for the purpose of contract
fulfilment to the value of a specified real or financial asset or to an index
of securities.

The definition of
Derivatives is specified u/s 2(ac) of the Securities Contracts
(Regulation) Act, 1956 and reads as under:

‘(ac)
“Derivative” includes –

(A) a security derived from a debt instrument,
share, loan, whether secured or unsecured, risk instrument or contract for
difference or any other form of security;

(B) a contract which derives its value from
the prices, or index of prices, of underlying securities.’

Whether
income / loss on dealings in Derivatives results in Income from Business

Since the issue of
Derivatives is laid down in section 43(5) of the Income Tax Act which falls
within the provisions of sections 28 to 44 which deal with ‘Income from
Business or Profession’, it seems implied that income / loss from dealing in
Derivatives shall form part of the ‘Income from Business’ and not any Other
Head of Income such as Income from Other Sources.

Reference is made to the ‘Guidance Note’ of the Institute of Chartered
Accountants of India on Tax Audit u/s 44AB of the Income Tax Act (Revised 2014
Edition), which contains a chapter dealing with determining the turnover or
gross receipt in respect of transactions in Derivatives / Future & Option. The
relevant paragraph 5.14 clause (b) of the said ‘Guidance Note’ u/s 44AB reads
as under:

‘5.14 –

(a)………….

(b) Derivatives,
futures and options: Such transactions are completed without the delivery of
shares or securities. These are also squared up by payment of differences. The
contract notes are issued for the full value of the asset purchased or sold but
entries in the books of accounts are made only for the differences. The
transactions may be squared up any time on or before the striking date. The
buyer of the option pays the premia. The turnover in such types of transactions
is to be determined as follows:

(i) The total of
favourable and unfavourable differences shall be taken as turnover.

(ii) Premium
received on sale of options is also to be included in turnover.

(iii) In respect
of any reverse trades entered, the difference thereon should also form part of
the turnover.’

This also added to
the understanding that income / loss from transactions of Derivatives, Futures
and Options shall likely be treated as Income from Business since the same is
considered in the ‘Guidance Note’ for the purpose of section 44AB which relates
to Income from Business or Profession only and not any other heads of income
under the Act.

In view of the
above, the following points emerge for consideration:

1. Whether the income from the activity of a
chartered accountant in practice in respect of his investment dealing in
Derivatives listed on the stock exchange shall be treated as Income from
Business, in case there are multiple transactions of Derivatives undertaken by
a chartered accountant in a year.

2. Whether a chartered accountant in practice can
otherwise invest in Derivatives listed on the stock exchange as part of his
investment activity.

3. Although such income / loss on account of
dealings in Derivatives may be treated as Income from Business for the purpose
of Income Tax, but whether such income / loss can escape being treated as
Income from Business or Profession as per the guidelines of the Institute on
the subject, if any.

4. Whether a chartered accountant in practice is
under obligation to seek permission of the Council of the Institute before
dealing in Derivatives.

To attain clarity
on the issue, the necessary clarification was sought from the Institute of
Chartered Accountants of India and the Secretary, Ethical Standards Board of
the Institute of Chartered Accountants of India, clarified the position as
under:

‘In this regard,
please note that the Ethical Standards Board at its 148^th Meeting
held on 13.06.2019 was of the view that “Derivative transaction on stock exchange is not any kind of
investment but it’s more likely a business prohibited under Clause (11) of Part
1 of the First Schedule to the Chartered Accountants Act, 1949. Such kind of
practice is not permissible to members in practice.”’

In view of this, it
is submitted that the above clarification may be kept in mind by the chartered
accountants in practice in case they undertake transactions in Derivatives and
they should do so with the prior permission of the Council of the Institute so
as to protect them from any possible (charge of) professional misconduct under
the Chartered Accountants Act, 1949.

Practising chartered accountant as ‘Karta’ of Hindu Undivided Family

In case a chartered
accountant in practice undertakes dealings in Derivatives as the karta
of his HUF, such activity shall also not be permissible in view of the above
guidelines of the Ethical Board of the
Institute.

In this regard
reference may be made to Part-1 of the First Schedule – Clause 11 of the Code
of Ethics, Volume-III (Case Law Referencer) published by the Institute
which reads as under:

Practising CA as karta of Hindu Undivided Family

1.1.11(191) – A
member as a karta of his Hindu Undivided Family entered into a
partnership business for a short period with non-chartered accountants for
engaging in business other than the profession of chartered accountants without
prior permission of the Council.

Therefore, he was
found guilty in terms of clauses (4) and (11).

[R.D. Bhatt
vs. K.B. Parikh – Page 191 of Vol. VI (2) of Disciplinary Cases – Decided on 15^th,
16^th and 17^th December, 1988].

1.1.11(192) – Where
a chartered accountant was karta of the HUF and was engaged in the
business of a firm without permission of the Council.

He was held guilty
of professional misconduct.

[V. Krishnamoorthy vs. T.T.
Krishnaswami – Page 192 of Vol. VII (2) of Disciplinary Cases – Council’s decisions
dated 27^th to 29^th September, 1992].

1.1.11(193) – Where
a chartered accountant acted as karta of a Hindu Undivided Family
without taking prior permission of the Council.

It was held that he
was inter alia guilty of professional misconduct.

[B.L. Asawa,
Chief Manager, Punjab National Bank, Delhi vs. P.K. Garg – Page 728 of Vol. IX
– 2A – 21(4) of Disciplinary Cases – Council’s decisions dated 16^th
to 18^th September, 2003].

Clause (4) be read with Authority of the Council as contained in
Clause (11)

These guidelines of
the Ethical Board of the Institute are self-explanatory and may be kept in mind
by chartered accountants in practice who carry on dealings in Derivatives as karta
of and on behalf of their HUF.

Applicability to other professionals and Government servants

In case the same
analogy is extended to other professionals, such as doctors in practice or
advocates in practice, these categories of professionals may also need to be
vigilant about it. It may not be out of place to point out that even Government
servants who are not otherwise eligible to carry on any business need to be
cautious about dealings in Derivatives in view of the above clarification by
the Institute.

CONCLUSION

This article has
been written with the intention of bringing this issue to the notice of the
fraternity of chartered accountants so that while undertaking any transactions
/ dealings in Derivatives either in their individual capacity or as the karta of their Hindu Undivided Family, they may not be caught
on the wrong foot vis-à-vis the Ethical Rules of the Institute of
Chartered Accountants of India; they should seek the prior permission of the
Council of the Institute as laid down in Part-1 of the First Schedule of the
Chartered Accountants Act, 1949 before carrying out dealings in Derivatives.

The Idea of Dharma and Adharma

Dharma is both that which we hold to and that which
holds together our inner and outer activities. In its primary sense it means a
fundamental law of our nature which secretly conditions all our activities, and
in this sense each being, type, species, individual, group has its own dharma.
Secondly, there is the divine nature which has to develop and manifest in us,
and in this sense dharma is the law of the inner workings by which that grows
in our being. Thirdly, there is the law by which we govern our outgoing thought
and action and our relations with each other so as to help best both our own
growth and that of the human race towards the divine ideal.…Dharma is all that
helps us to grow into the divine purity, largeness, light, freedom, power,
strength, joy, love, good, unity, beauty, and against it stands its shadow and
denial, all that resists its growth and has not undergone its law, all that has
not yielded up and does not will to yield up its secret of divine values, but
presents a front of perversion and contradiction, of impurity, narrowness,
bondage, darkness, weakness, vileness, discord and suffering and division, and
the hideous and the crude, all that man has to leave behind in his progress.
This is the adharma, not-dharma, which strives with and seeks to overcome the
dharma, to draw backward and downward, the reactionary force which makes for
evil, ignorance and darkness

— Sri
Aurobindo

(Essays on the Gita, CWSA, Vol. 19, p.172)

shailesh.kwebmaker

TRANSFER PRICING DATABASES – REQUIREMENT, USAGE AND REVIEW

This article is an attempt to understand
the purpose of transfer pricing software and to review the existing databases
based on certain parameters. But first a basic introduction to transfer pricing
will help us to appreciate the importance of these databases.

WHAT IS TRANSFER PRICING?

Transfer pricing (TP) refers to the pricing
of cross-border transactions between two related entities, referred to as
associated enterprises (AEs). When two AEs enter into any cross-border
transaction, the price at which they undertake the transaction is called
transfer price. Due to the special relationship between related companies, the
transfer price may be different from the price that would have been agreed to
between two unrelated companies. Thanks to their control over prices,
Multinational Enterprises (MNEs) have the flexibility to influence –

i) Tax liabilities of individuals or a group of
persons / entities

ii) Government tax targets

iii) Cash flow requirements of the MNE group.

Every Government wants to prevent erosion
of its tax base and plug potential tax leakages, and hence there are TP regulations all over the world. In India, section 92 of the IT Act
was substituted by the Finance Act, 2001 with a set of new sections, 92 to 92F,
providing a detailed statutory framework for the determination of arm’s length
price (ALP) and maintenance of documentation.

TRANSFER PRICING DOCUMENTATION

As per Rule 10D(2) of the Income Tax Rules,
1962, when transactions with related parties cross the threshold of Rs. 1
crore, it is mandatory to keep and maintain information and documents as per
Rule 10D(1). TP Documentation also includes maintenance of proper records and
the process of how the ALP has been determined. The relevant extracts of Rule
10D which require proper documentation of process are reproduced below:

Rule

Description of the Rule 10D

10D(1)(h)

A record of the analysis performed to evaluate comparability
of uncontrolled transactions with the relevant international transaction

10D(1)(i)

A description of the methods considered for determining the
arm’s length price in relation to each international transaction or class of
transactions, the method selected as the most appropriate one along with
explanations as to why such method was selected and how such method was
applied in each case

10D(1)(j)

A record of the actual working carried out for determining
the ALP, including details of the comparable data and financial information
used in applying the most appropriate method and adjustments, if any, which
were made to account for the difference between international transactions,
or between the enterprises entering into such transactions

As per the rules, the entire analysis /
search process needs to be documented including the procedure being followed
and financial information of comparables. In such a case, the transfer pricing
database helps in the entire analysis and the working of documentation to a
great extent. This depends on which database is used and the features of each
database.

WHY A DATABASE IS REQUIRED

A TP database for determination of ALP can
be employed when the following methods are used:

(a) Cost plus method (CPM)

(b) Transactional net margin method (TNMM)

The above methods require a comparison of
the assessee’s gross / net margin with that of the industry.

A question that arises here is, how to
calculate the industry-wide margin. Can the assessee choose to pick companies
having similar transactions or competitors in their industry; ferret out their
financial information from the Ministry of Company Affairs (MCA) site; the BSE
/ NSE website; other private websites and then work out the industry margin?
Tribunals have generally held that the search process should be systematic and
consistent year on year. They have also held that cherry-picking of comparables
is not allowed. This approach will not only enable officers to only cherry-pick
companies having higher profitability but they can also reject the search
process and hence prove that the assessee’s transactions are not at ALP.
However, the ALP determined based on a detailed search process cannot be
rejected without any cogent reasons. Therefore, Transfer Pricing Databases are
used to remove the ambiguity involved and to bring standardisation in the
search process.

Apart from comparison margins, there are
some transaction-specific databases also available, such as Royalty Stat, Loan
Connector, OneSource, etc., which are used to benchmark specific transactions
like royalty and loan transactions and where the gross / net margins of
companies are not required.

GENERAL
SEARCH PROCEDURES IN A DATABASE

In general, a comparable search begins with
the identification of all companies appearing in the database in a particular
period in the relevant industry. Whenever the potential comparable is believed
to be spread over more than one industry, searches are supplemented by text
searches for business descriptions / products containing appropriate keywords.
Various filters (quantitative) are then applied in the database to arrive at a
set of reasonably comparable companies. Textual descriptions including the
background report and directors’ report identified by the database in the
initial screens are reviewed, along with the website details of certain
relevant companies (qualitative filters), first to eliminate companies that are
misclassified and then to narrow down the search to a reasonable number of the
most potentially comparable companies which can be selected.

A list of common filters (quantitative)
applied in the database is as follows:

1. Select companies in the same / similar industry
according to business activity and finished products produced / services
rendered. The first step is like creating a basket of similar companies.

2. Data Availability Filter to select companies
having data availability for the past three years. Companies for which the
latest financials are not available for the last three years are excluded
because their margin will not reflect the current trends.

3. Turnover Filter depending on the turnover of
your company as these companies would not be comparable to assess due to
differences in their scale of operations.

4. Net Worth Filter to select companies having net
worth > 0 because companies having negative net worth have a bankruptcy risk
and therefore margins may not be comparable to a normal company.

5. Select companies having manufacturing / sales
or services / sales ratio > X% depending on the industry in which the
company operates to restrict the list of selected companies with comparable
size and operations.

6. Select companies with related party transactions
< X% as a company having significant related party transactions would itself
be prone to incorrect transfer prices among related parties.

7. Other specific filters can be applied depending
on the facts of each case and the industry in which the company operates.

After applying all these filters, finally,
companies are accepted by applying Qualitative Filters. Qualitative Filters
include reviewing short business descriptions / directors’ report / annual
reports / generated from the database to ensure that their primary line of
business activities is matched with the assessee by excluding companies that

(a) were misclassified

(b) performed activities which involved
significantly different functions, assets and risks (FAR Analysis) as compared
to the assessee.

Having identified the comparable companies,
it is necessary to analyse the nature of these companies by performing a FAR
Analysis. A FAR Analysis identifies the functions undertaken by each party, the
risks each party assumes and the assets used by each party to the transaction.
It also assists in determining the economic value added by each relevant party.

Further, this analysis can help in
identifying specialised and critical business assets and activities that are
fundamental to the business. The CBDT emphasises the importance of the
functional analysis in determining the arm’s length price and identifying
suitable entities for comparison purposes.

Once the final companies are selected after
applying Qualitative Filters, the next step is to remove margins of companies
selected from the database / annual reports and compare the same with our
margin.

Adjustments, if any, can be made to the
margin of companies depending upon the difference, if any, in the FAR Analysis
of comparable companies. For example, Working Capital Adjustment, Risk
Adjustment, Idle Capacity Adjustment, etc.

DIFFERENT
TRANSFER PRICING DATABASES CHOSEN FOR DISCUSSION

We have analysed the three databases
mentioned below from the software available in India for transfer pricing
purposes. We have also identified certain objective parameters based on which
these databases can be evaluated.

(I) Prowess¹

Developed by the Centre for Monitoring
Indian Economy (CMIE) Private Limited.

The service is only available for desktop version
but the application can be downloaded on any number of desktops.

* Number of Companies – Over 50,000

* Unique Data fields – Over 3,500

* Data Availability – from 1989

Prowess as a software is extensively used
in research projects and its usage is not restricted to only transfer pricing.
Since it is not created specifically for transfer pricing, data collation and
maintenance in the way that is required by Transfer Pricing Reports is a more
cumbersome process. However, it also has an advantage over other databases
based on the numbers of companies analysed and the years of experience in the
statistical field.

(II) Ace-TP²

Developed by Accord Fitch Private Limited.

It is a web database-based browser
application for comparing company financial information of Indian business
entities. The service is available for both web-based and desktop versions.

* Number of Companies – Over 38,000

* Unique Data fields – Over 1,750

* Data Availability – Past 15 years of
historical data

Ace-TP was the first software which was
specifically designed for TP and therefore has a very easy User Interface. It
directly saves stepwise information and speeds up the documentation process.
However, it is a relatively newer setup compared to the other software.

(III) Capitoline TP³

Developed by Capital Markets Publishers
India Pvt. Ltd.

It is an
internet web portal related to transfer pricing issues. The service is
available for both web-based and desktop versions.

* Number of Companies – Over 35,000

* Unique Data fields – 1,250

Capitoline TP
Database has entered into an arrangement⁴ with ICAI wherein CA firms
would be charged a discounted rate.

Capitoline TP is an extension of Capitoline
Software which is extensively used for the stock market. Thanks to its arrangement
with ICAI, its web version is one of the most used TP software by SME firms.

COMMON
FEATURES OF ABOVE DATABASES

# Categorisation of companies based on industry,
sub-industry, NIC 2008 classification, business activities, products sold, raw
material consumed and various other factors. (Helpful in Search Procedure
Common Filter – Step 1 as mentioned above.)

# Historical Data of Financials of company for
many years in easy-to-download Excel format. (Helpful in Search Procedure
Common Filter – Step 2 as mentioned above.)

# Query Triggers and Formula Filters depending
on requirement of turnover, net worth, net profit and other parameters. Various
formulae can be clubbed together to derive more complex parameters. (Helpful
in Search Procedure Common Filter – Steps 3, 4, 5 and 6 as mentioned above.)

# Data of both listed and unlisted companies.
Plus brief description / profile of companies and their business. (Helpful
in Search Procedure qualitative filters.)

# Annual Report and financials of various companies
available in database. (Helpful in finding margins of comparable companies.)

# Automation of filters applied for future use
by saving the process which is defined once.

Database does not cover Proprietorship,
Partnership and LLP.

Data is also compiled from notes of
accounts and aspects such as related party transactions, capacity utilisation,
export and import figures, etc.

__________________________________________________________________________________________________

1
As per website https://prowessiq.cmie.com/ and brochure shared by the company’s
representatives with the authors

*
Kindly review prices from vendors before taking a decision

2
http://www.acetp.com/

3
https://www.capitaline.com/Demo/tp.aspx and brochure shared by the company’s
representatives with the authors

4
https://www.icai.org/post/16361

* Kindly review
prices from vendors before taking decision

SELECTION
PARAMETER FOR ANY DATABASE

Many professionals use two databases for
getting a higher number of companies in the search process. However, the same
could also create duplication. With the above three options available, the
following major parameters can be kept in mind to select any one TP Database.

• Number of companies available,

• Pricing of the software,

• User interface,

• Training and customer support provided.

TP
DATABASE – CAN IT ONLY BE USED FOR TP?

TP Database contains various data points
for various companies for several years. These can also be used for various
other functions such as the following:

Industry Peer and Trend Comparison –
Some clients are interested in comparing their own companies’ financial health
and growth with their competitors / industry leaders. These databases are a
very effective tool to do the same.

Due Diligence – If any of the
companies on which due diligence needs to be conducted is presented in the
database, it is easy to collate all the information and work upon it in a
readily available manner. Even if the company is not available, these databases
are an excellent tool to understand the industry dynamics.

Stock Market – While investing in
shares of a particular company / sector, a deep-dive analysis of a company /
industry and its comparative peer set can be done in the database.

Analysis of Business Ratios – Various
ratios based on specific industry and specific companies can be collated
instantly from these databases, thereby making them a very effective research
tool.

Authors’ suggestions to database
companies based on our survey:

+ Instead of a yearly subscription, the
database should also be made available for short tenures. This will enable more
users to subscribe to them.

+ High pricing is the general concern of
respondents. They should target an increase in the number of users rather than
frequent increases in prices.

+ Users should be educated about the usage
of the database over and above transfer pricing. This will enable more
subscribers to join.

+ Companies can consider having a tie-up
with professional bodies for increasing awareness amongst users.

CONCLUSION

India is one of the fastest-growing
economies. A lot of businesses are being set up abroad by Indian MNC’s and many medium-sized companies are also expanding their footprints
globally. Besides, many foreign companies are setting up businesses in India. This
will lead to further increase in cross-border transactions between AEs.
Transfer Pricing Practice in India is about to step out of its teens. It’s
young, bubbling with energy and still shaping up. A more complex, granular and
widely covered yet affordable database will take this practice from the Metros
to Tier-II cities and can be a good practice area for budding chartered
accountants.

This article was an attempt to touch
base on the usage of the various databases available and to evaluate them in the
backdrop of various parameters. The user should assess or evaluate all the
databases before making any subscription decision.

Disclaimer: None of the authors is associated with / interested in any of the
databases and any relationship with them is purely restricted to the usage /
subscription of database licenses. All the information that is part of this
article has been gathered from the respective websites and brochures shared by
the databases with the authors.

shailesh.kwebmaker

TAXABILITY OF FORFEITURE OF SECURITY DEPOSIT

As we enter the seventh month living with
the coronavirus in India, with each passing day we come across new issues and
manage to find ways to skip / survive them. The virus has not only affected
one’s physical well-being, it has also had an impact on one’s mental, social
and economic health!

Talking of the impact on economic health,
every individual, whether in business or employed, is grappling with liquidity
issues. With the entire payment chain affected, no one in the cycle is left
untouched. Needless to say, the domino effect of salary cuts and layoffs has
only multiplied people’s woes.

This article deals with the consequences
under the Income-tax Act, 1961 (‘the Act’) arising out of one of the many
issues which most people will come across or are already experiencing. It is
now common to hear about people defaulting on their monthly rental payments.
Apart from this, a lot of people are seeking reduction in rent or are prematurely
terminating their existing agreements in order to obtain the benefit of
competitive market rates. Whatever may be the reason, what could ensue, inter
alia, is the forfeiture of the security deposit placed by the licensee with
the licensor.

An attempt will be made in this article to
explain the nature of security deposits and the taxability on their forfeiture
by the licensor and / or waiver by the licensee.

UNDERSTANDING THE NATURE OF SECURITY DEPOSITS

In general terms, a security deposit is

(a) a sum of money

(b) taken from the licensee

(d) to protect the licensor from the damage, if
any, caused to the property.

In a typical leave and license agreement,
the licensor takes a security deposit from the licensee. This is done to ensure
due performance by the licensee of his obligations under the contract and, more
particularly, as the name suggests, the deposit acts as a security to make sure
about the safe return of the property at the end of the license period. It is
usually refundable by the licensor to the licensee upon termination of the
license period. The amount of security deposit is not fixed and is mutually
agreed upon by the parties involved. The amount of security deposit is held in
trust for the licensee and is repayable to him. Therefore, the security deposit
represents the liability of the licensor / owner of the premises which has to
be repaid to the licensee at the end of the license period, provided no damage
is caused to the property.

The Supreme Court in Lakshmainer and
Sons vs. CIT (23 ITR 202) (SC) held that a security deposit is in the
nature of a loan and observed as follows:

‘The fact that one of the conditions is
that it is to be adjusted against a claim arising out of a possible default of
the depositor cannot alter the character of the transaction. Nor can the fact
that the purpose for which the deposit is made is to provide a security for the
due performance of a collateral contract invest the deposit with a different
character. It remains a loan of which the repayment in full is conditioned
by the due fulfilment of the obligations under the collateral contract.’

Generally, in
most leave and license agreements security deposit is refundable upon
termination of the agreement. The question being considered is whether
forfeiture / waiver of security deposit constitutes ‘income’ chargeable to tax
or whether it is a capital receipt not chargeable to tax.

SECURITY DEPOSIT AND ITS FORFEITURE – WHETHER ‘INCOME’
UNDER THE ACT?

Section 4 of the Act deals with the charge
of income tax. As per this section, income tax shall be charged in respect of
the total income of every person.

‘Income’ is defined u/s 2(24). A security
deposit is not specifically covered within any of the specific sub-clauses under
this section. However, since the definition of income is an inclusive
definition, a particular item could still be treated as the income of the
assessee if it partakes the character of income even though it is not expressly
included in the definition of income. The scope of income is therefore not
restricted to the receipts mentioned in the specific sub-clauses of the
definition, but also includes the receipts which could generally be understood
as income.

The term ‘income’ has been judicially
interpreted in the case of Shaw Wallace 6 ITC 178 by the Privy
Council to mean:

‘Income… in this Act connotes a
periodical monetary return “coming in” with some sort of regularity, or
expected regularity from definite sources. The source is not necessarily one which
is expected to be continuously productive but must be one whose object is the
production of a definite return, excluding anything in the nature of a mere
windfall.’

Further, receipts which are generally
capital in nature are not chargeable to tax unless there is a specific
provision in the Act which requires taxing such an item.

There are specific provisions under the Act
to bring certain capital receipts to tax, for example, capital gains u/s 45 and
gifts u/s 56(2); subsidy received from the Central or State Government, though
generally capital in nature, is specifically included in the definition of
income u/s 2(24) and hence chargeable to tax. However, there is no such
specific provision which treats a security deposit or its forfeiture as income in
the hands of the assessee.

Security deposit is a liability and cannot,
therefore, be regarded as income.

However, a question arises as to whether the
security deposit becomes taxable if the same is no longer required to be repaid
to the licensee and is forfeited for breach of the agreed terms of contract
between the licensor and the licensee, or if the licensee defaults in the
payment of rent to the licensor.

Like security deposit, forfeiture of
security deposit is also not specifically covered within the definition of
income. Further, forfeiture of security deposit also cannot be construed as
being a regular activity, nor is it expected to have any regularity and hence
is also out of the scope of income as judicially interpreted by the Privy
Council.

Besides, since security deposit itself does
not constitute income and is not chargeable to tax, its forfeiture also cannot
be brought to tax as income.

BURDEN OF PROOF

If the Department seeks to tax the same as
income, then the burden lies on it to prove that it falls within the taxing
provisions. The Supreme Court in Parimisetti Seetharamamma vs. CIT [1965]
57 ITR 532 (SC) has observed as follows:

‘By
sections 3 and 4 the Act imposes a general liability to tax upon all income.
But the Act does not provide that whatever is received by a person must be
regarded as income liable to tax. In all cases in which a receipt is sought to
be taxed as income, the burden lies upon the Department to prove that it is
within the taxing provision. Where however a
receipt is of the nature of income, the burden of proving that it is not
taxable because it falls within an exemption provided by the Act lies upon the
assessee.’

A similar view has been taken by the Courts
in the following cases:

i) Udhavdas vs. CIT
[1965] 66 ITR 462 (SC);

ii) Dr. K. George Thomas
vs. CIT [1985] 156 ITR 412 (SC);

iii) Amartaara Ltd. vs. CIT
[2003] 262 ITR 598 (Bom.);

iv) CIT vs. Rajkumar Ashok
Pal Singh Ji [1977] 109 ITR 581 (Bom.).

Therefore, if the Revenue authorities seek
to tax the security deposit, the onus will be on them to establish that the
same is covered within the taxing provisions and hence chargeable to tax. The
Department may also, inter alia, look into the terms of the agreement
and the conduct between the parties so as to determine the taxability of the
forfeiture of security deposit.

The following paragraphs deal with the
taxability or otherwise of forfeiture of security deposit under different
scenarios. For the sake of clarity and ease of understanding, the scenarios are
broadly classified depending upon whether the rental income is offered by the
assessee / licensor under the head ‘Profits and Gains of Business or
Profession’, or under the head ‘Income from House Property’.

IF THE ASSESSEE OFFERS RENTAL INCOME UNDER THE HEAD PROFITS
AND GAINS FROM BUSINESS OR PROFESSION

In this case, the licensor would primarily
be regarded as engaged in the business of renting of properties and would,
therefore, be offering the rental income under the head Profits and Gains from
Business or Profession.

Termination of agreement and consequent
forfeiture is a rare exception and can never be contemplated as a method of
profit-making by the assessee. Premature termination of a long-term contract
is not, by any means, a feature of business activity. Upon forfeiture of
security deposit, the amount received by the assessee in the past which
undisputedly was capital in nature at the time of receipt, is now partly not
payable or is waived by the creditor, i.e., the licensee, and the amount
forfeited / waived continues to retain the same character as it held at the
time of receipt.

However, the same may not hold true in a
case where the security deposit is adjusted against dues. Where a person
defaults on payment of rent, the dues are adjusted against the security deposit
placed with the licensor. In such cases, the taxability will differ and the
same is dealt with in later paragraphs.

If the forfeiture of security deposit is
considered to be a revenue receipt chargeable to tax, the same would have to be
taxed u/s 28 which provides for items chargeable to tax under the head ‘Profits
and Gains of Business or Profession’, or u/s 41 which deals with taxing of
expenditure or trading liability upon its remission or cessation.

In CIT vs. Mahindra & Mahindra Ltd.
[2018] 404 ITR 1 (SC), the Apex Court considered the question whether
waiver of loan and interest thereon is a benefit or a perquisite arising from
the business of the assessee so as to be chargeable to tax under clause (iv) of
section 28. On this issue, the Court remarked that for applicability of section
28(iv), the income which can be taxed shall arise from the business or
profession. It also observed that the benefit which is received has to be in
‘some form other than money’. In the said case, the assessee procured equipment
from a US company. The supplier provided the said equipment on loan bearing
interest which was repayable after a period of ten years. Subsequently, another
US entity acquired the supplier company from whom equipment was purchased and
the loan was waived. In these facts, the Supreme Court held that the assessee
had received an amount due to waiver of loan and therefore the very first
condition of section 28(iv) which requires benefit or perquisite in the shape
of any form other than money, was not satisfied and in no circumstances could
it be said that the amount so received could be taxed u/s 28(iv). The Court therefore categorically laid down that waiver of loan is not income.

The ratio laid down by the Court in Mahindra
& Mahindra (Supra) will also apply to a case of forfeiture of
security deposit since it is similar to that of loan and forfeiture of security
deposit, not being a benefit in any form other than money, section 28(iv)
cannot apply.

It is worthwhile to note that in the Mahindra
& Mahindra case, the loan was taken for acquiring a capital asset
and the waiver was considered to be a capital receipt. Therefore, one may argue
that the ratio laid down in this case will apply only in cases where the
licensor holds the property as a capital asset and not where it is held as
stock-in-trade. However, for the purposes of section 28(iv) what is relevant is
that the benefit must be in some form other than money. Now, whether the
property is held as capital asset or stock-in-trade, the condition of section
28(iv) of benefit being in some form other than money still does not get
satisfied and therefore, even if the property is held as stock-in-trade, the
decision of the Supreme Court in this case (Mahindra & Mahindra)
will still apply and the forfeiture of security deposit will not be chargeable
to tax.

In continuation to the question of
taxability of forfeiture of security deposit u/s 28, a question arises as to
whether the same can be brought to tax as a normal business receipt. The
Department may tax forfeiture of security deposit u/s 28(i) rather than u/s
28(iv). For this, reliance may be placed by the Department on the decision of
the Bombay High Court in the case of Solid Containers Ltd. vs. DCIT
[2009] 308 ITR 417 (Bom.) wherein it has been held that loan taken for
business purposes and subsequently waived is ultimately retained in business by
the assessee and since the same is directly arising out of the business
activity, it is liable to be taxed. With utmost respect, this ruling of the
Bombay High Court may not be correct in light of the following decisions
wherein it has been held that the character of the receipt is determined
initially at the time of receipt and if the receipt is not a trading receipt
initially, then subsequent events cannot turn it into a trading receipt. The
Courts, therefore, held that if a loan / security deposit is not repaid, then
it cannot be treated as income.

i) Morely vs. Tattersall
7 IR 316 (CA);

ii) British Mexican
Petroleum Company Ltd. vs. Jackson 16 TC 570 (HL);

iii) CIT vs. P. Ganesh
Chettiar 133 ITR 103 (Madras);

vi) CIT vs. Sesashayee Bros.
(P) Ltd. 222 ITR 818 (Madras).

To contest the abovementioned decisions, the
Department generally resorts to the decision of the Supreme Court in the case
of CIT vs. T.V. Sundaram Iyengar & Sons Ltd. [1996] 222 ITR 112 (SC).
In this case, the assessee received deposits from its customers in the course
of carrying on its business and these were treated as capital receipts. Since
the balances remained to be claimed by the customers, the assessee transferred
the amounts credited in the accounts of the customers to the Profit & Loss
Account. The Court held that though the amounts were not in the nature of
income when they were received, they subsequently became income and the
assessee’s own money since the claim of the customers became barred by
limitation. However, the Supreme Court categorically held that it was not a
case of security deposit and held as follows:

‘We are unable to uphold the decision of
the Tribunal. The amounts were not in the
nature of security deposits held by the assessee for performance of contract by
its constituents…

…The
amounts were not given and retained as security to be retained till the
fulfilment of the contract. There is no finding to that effect. The deposits
were taken in course of the trade and adjustments were made against these
deposits in course of trade. The unclaimed surplus retained by the assessee
will be its trade receipt. The assessee itself treated the amount as its trade
receipt by bringing it to its profit and loss account’ (paras 18 & 19).

In fact, after considering the decision of
the Supreme Court in T.V. Sundaram Iyengar & Sons (Supra),
the Mumbai Tribunal in ACIT vs. Das & Co. [2010] 133 TTJ 542 (Mum.)
held that forfeiture of security deposit on premature termination of agreement
is a capital receipt in the hands of the assessee. The question to be decided
by the Tribunal was regarding the taxability of forfeiture of security deposit.
The relevant facts in the said case were as follows:

i) The assessee was engaged in the business of
leasing of properties, warehouses, etc., and offered the income from leasing of property as its business income;

ii) The assessee had entered into a leave and
license agreement to sub-lease its property. However, the licensee terminated
the agreement prematurely and upon termination of the lease, the assessee
forfeited the security deposit of Rs. 1.5 crores and received an amount towards
compensation. The assessee treated the said forfeiture of security deposit as a
capital receipt.

iii) The A.O. as well as the Commissioner of
Income-tax (Appeals) [CIT(A)] held that the receipts were revenue receipts and
were taxable as income;

iv) The Tribunal allowed the appeal of the
assessee and held as follows:

* Perusal of the terms of agreement showed that
security deposit was capital receipt and was treated as such by the assessee
and the same was accepted by the Department. The deposit was neither in the
nature of advance for goods nor could it be treated as part of the rental
component;

* From the clauses of the termination agreement
it was clear that the forfeiture of security deposit was not in lieu of
the rental payments;

* The quality and nature of receipt is fixed
once and for all when the same is received and its character cannot be changed
subsequently.

In the aforesaid case, the assessee was
engaged in the business of leasing of properties, warehouses, etc., and offered
the income from leasing of property as its business income.

A similar view has been taken by the Mumbai
Tribunal in the case of Samir N. Bhojwani vs. DCIT ITA No. 4212/Mum./2006
which has been relied upon and considered in the aforementioned decision of the
Mumbai Tribunal in the Das & Co. case (Supra).
Even in this case, the assessee was engaged, inter alia, in the business
of renting of its properties and offered rental income from leasing of flats
under the head business income.

However, the Mumbai Tribunal, in Anand
Automotive Systems Ltd. vs. Addl. CIT (ITA No. 1343/Mum./2012)(Mum) order dated
3^rd June, 2013, after considering the decision of the
coordinate bench in Das & Co. (Supra) has, in a subsequent
decision, held that forfeiture of security deposit on termination of lease
agreement was a receipt in lieu of the rents and hence liable to
be taxed as revenue receipt. The facts in the said case were as follows:

(a) The assessee had given premises on rent to one
of its group concerns and received a security deposit of Rs. 10.58 crores for
the same;

(b) Pursuant to sealing of the assessee’s premises,
the lessee requested the assessee to discontinue the agreement;

(c) The matter went into arbitration and the
Arbitrator, inter alia, ordered the lessee to forego the security
deposit to the extent of Rs. 5.8 crores and directed the assessee to refund the
balance security deposit to the assessee;

(d) The assessee regarded the said forfeiture of
security deposit as a capital receipt not chargeable to tax.

(e) The A.O. as well as the CIT(A) held the receipt
to be in the nature of revenue.

(f) The Tribunal held that it was evident from the
order of the Arbitrator that the amount of Rs. 5.8 crores was nothing but
compensation received for loss of rent as a result of early termination of the
agreement. The amount so received by the assessee was on revenue account and
not capital account which constituted the business income of the assessee as
the rental income received from the property earlier was offered to tax as
business income by the assessee.

In the Das & Co. case (Supra),
the assessee had not forfeited the security deposit but was directed to adjust
it against the compensation due to it for loss of rent. The Tribunal
categorically observed that compensation received by the assessee from the
licensor was nothing but a payment in lieu of rent and since the
assessee offered rental income as its business income, the Tribunal held that
the compensation received was also chargeable to tax as business income of the
assessee.

However, the Mumbai Tribunal, in the Anand
Automotive Systems Ltd. case (Supra), while dealing with
the case of the coordinate bench in Das & Co. (Supra), has
relied on the part of the judgment which deals with the taxability of
compensation to hold that the amount of security deposit forfeited was
chargeable to tax in the hands of the assessee. In this case, the security
deposit was forfeited by the assessee pursuant to an order of the Arbitrator
which also required the assessee to adjust the same towards the compensation
for early termination of the license agreement. In the peculiar facts of the
case, it was held by the Tribunal that the forfeiture of deposit was nothing
but compensation for loss of rent and therefore chargeable to tax as business
income of the assessee.

This decision of the Mumbai Tribunal in the
case of Anand Automotive Systems Ltd. vs. Addl. CIT (ITA No.
1343/Mum./2012)(Mum) has been challenged by way of an appeal before the
Bombay High Court which has been admitted and the same is pending till date.
The matter has, therefore, not attained finality.

Insofar as taxability u/s 41(1) is
concerned, it provides for taxing of loss, expenditure or trading liability in
respect of which allowance or deduction has been made in the past and,
subsequently, the assessee obtains any benefit in respect thereof by way of
remission or cessation. Therefore, what is necessary is that loss, expenditure
or trading liability in respect of which the assessee obtains benefit must have
been allowed as a deduction in the past.

When the licensor takes a security deposit,
there is no deduction whatsoever claimed by the licensor in respect thereof and
therefore there is no question of obtaining any benefit by the remission or
cessation and hence the provisions of section 41(1) cannot apply irrespective
of the fact whether the property is held by the licensor as a capital asset or
as a stock-in-trade.

This view also draws support from the
following decisions:

i) CIT vs. Compaq
Electric Ltd. [2019] 261 Taxman 71 (SC), SLP dismissed by the Supreme
Court against the decision of the Karnataka High Court reported in CIT
vs. Compaq Electric Ltd. [2012] 204 Taxman 58 (Kar.);

ii) CIT vs. Gujarat State
Fertilizers & Chemicals Ltd. [2013] 217 ITR 343 (Guj.);

iii) Pr. CIT vs. Gujarat
State Co-op. Bank Ltd. [2017] 85 taxmann.com 259 (Guj.).

The views expressed in the above
paragraphs apply to cases where the security deposit is forfeited.

Where the forfeiture is treated as
compensation for damages or adjusted towards the rent, it no longer remains a
security deposit and its colour changes to rent and will therefore be a revenue
receipt chargeable to tax in the hands of the licensor.

It is, therefore, necessary to determine
from the fine print of the agreement between the licensor and the licensee as
to whether the deposit is compensatory or in lieu of rent
and if that be the case, then the same will be chargeable to tax.

IF THE LICENSOR OFFERS RENTAL INCOME UNDER THE HEAD
INCOME FROM HOUSE PROPERTY

In this scenario, the licensor offers rental
income under the head Income from House Property, i.e., the income of the
licensor is charged u/s 22. As per section 22, the annual value of the property
consisting of any buildings or land appurtenant thereto of which the assessee
is the owner is chargeable to tax. Section 23 provides how the annual value of
any property is determined.

Now, in a case where the licensor offers
income under the head House Property and the licensee makes a default in
payment of rent or prematurely terminates the agreement, the licensor may either:

(a) Adjust the dues from the security deposit and
return the balance to the licensee:

In this situation,
the colour of deposit changes to rent to the extent it is adjusted. It is
nothing but an amount received by the licensor as rent and therefore taxable
under the head Income from House Property. The charge u/s 22 is on the annual
value and for the purpose of computing annual value the rent receivable has to
be considered.

(b) Adjust the dues from the security deposit and
forfeit the balance security deposit:

In this case, the
taxability of the adjusted security deposit remains the same as mentioned at
point (1.) above. However, so far as the forfeited deposit is concerned,
the same cannot be brought to tax. This is based on the reasoning that what is
taxed u/s 22 is the annual value and any receipt other than annual value cannot
be brought to tax under the head Income from House Property.

In such a scenario as well, nothing will be
chargeable to tax in the hands of the licensor since it is only the annual
value which is chargeable to tax.

The Pune Tribunal in Datar & Co.
vs. ITO [2000] 67 TTJ 546 (Pune) held that compensation received by the
owner from the lessee for premature termination of tenancy agreement was a
revenue receipt. However, such compensation was held not taxable as property
income. This was held so on the basis that it is only the annual value which is
assessable under the head Income from House Property and any other receipt
other than annual value cannot be computed as income under this head.

The Tribunal observed that the agreement was
terminated with effect from September, 1988 and there was a loss of future
rents for 20 months which amounted to Rs. 1,50,000. The compensation of Rs.
1,00,000 received by the assessee was nothing but the discounted present value
of the future rent for the unexpired period of the agreement. Plus, the
assessee was free to let out the bungalow to any party. Based on these facts,
the Tribunal held the compensation to be revenue receipt. However, as regards
the taxability of the compensation, the Tribunal held that it is only the
annual value which is assessable under the head Income from House Property as
follows:

‘In the present case, the compensation arises out of the agreement of
letting out immovable property and therefore, assumes the nature of the income
from house property. Therefore, in our opinion, such receipt would fall under
the head “income from house property”. However, it is only annual
value which can be assessed under the head “income from house
property”. Any other receipt other than the annual value cannot be
computed as income under this head. Therefore, following the decision of the
Bombay High Court in the case of T.P. Sidhwa (Supra) and the decision of Supreme
Court in the case of N.A. Mody (Supra), it is held that the compensation received by the assessee cannot
be taxed.’

Further, the Mumbai Tribunal in Addl.
CIT vs. Rama Leasing Co. (P) Ltd. [2008] 20 SOT 505 (Mum.), following
the decision of the Pune Tribunal in the Datar & Co. case
(Supra) held that compensation received by the assessee on premature
termination of the lease agreement is not chargeable to tax though it is a
revenue receipt.

A similar view has also been taken in one
more decision of the Mumbai Tribunal in ITO vs. Nikhil S. Goklaney in ITA
No. 2542/Mum/2017 order dated 6^th September. 2019.

Though the aforementioned decisions of the
Pune and Mumbai Benches of the Tribunal deal with the receipt of compensation
due to premature termination of tenancy agreement and not forfeiture / waiver
of security deposit, the principle laid down by the Tribunal that it is only
the annual value which can be taxed under the head Income from House Property
still applies. In fact, a case of forfeiture of security deposit stands on a
better footing than receipt of compensation.

CONCLUSION

To conclude, forfeiture of security deposit,
to the extent the forfeited amount is adjusted towards rent, in my view, will
be chargeable to tax irrespective of the fact whether rental income is offered
as business income or income under the head House Property. Therefore, it is
essential to determine from the terms of the agreement whether or not the
deposit forfeited is compensatory. To the extent that the forfeited amount is
not adjusted or is not compensatory in nature, forfeiture will not be
chargeable to tax u/s 28(iv) or section 41(1) even if the assessee offers
rental income as business income. If rental income is offered as business income
and the property is held as stock-in-trade, the same could be taxed as regular
business income of the assessee u/s 28(i). If, however, the assessee offers
rental income under the head House Property, forfeiture of security deposit
will be a capital receipt not chargeable to tax. However, even if the same is
held to be a revenue receipt, nothing will be charged to tax as annual value
under sections 22 and 23. In my view, one must first determine from the terms
of the agreement between the parties the exact nature of deposit and then
determine the taxability in view of the provisions contained as well as the
decisions laid down by the Courts.

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THE NEW EDGE BANKING

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TAXABILITY OF TRANSFER FEE RECEIVED BY A CO-OPERATIVE HOUSING SOCIETY1

INTRODUCTION

In this article
would be discussed the taxability of transfer fee received by a
co-operative
housing society under the principles and provisions of the Income-tax
Act, 1961
(‘the Act’). A co-operative housing society (hereinafter also referred
to as ‘Society’) here would include all Societies – residential,
commercial and industrial. Apart from transfer fee simpliciter, the
taxability of its many variants such as voluntary contribution on transfer,
premium on transfer, etc. would also be examined.

NATURE OF TRANSFER FEE

At the outset, it
is most pertinent to understand the nature of a co-operative housing society
and the nature and purpose of the transfer fee collected by a Society. A
Society is generally formed and registered with the following objects in its
bye-laws:

(a) To obtain conveyance from the owner / promoter
builder, in accordance with the provisions of the Ownership Flats Act and the Rules
made thereunder, of the right, title and interest, in the land with building /
buildings thereon, the details of which are as hereunder:

The building /
buildings known / numbered as…….. constructed on the plot / plot Nos. …… /
Survey No……… / CTS No…….. of ……….. (village / taluka) admeasuring……. sq.
metres, more particularly described in the application for the registration of
the Society;

(b) To manage, maintain and administer the property
of the Society;

(d) To undertake and provide for, on its own
account or jointly with a co-operative or other institution social, cultural or
recreative activities;

(e) To provide
co-operative education and training to develop co-operative skills to….. …..its………
Members, Committee Members, officers and employees of the Society; and

(f) To do all
things, necessary or expedient for the attainment of the objects of the
Society, specified in these Bye-laws.

(Refer clause 5 of
the Model Bye-laws as approved by the Commissioner for Co-operation and
Registrar, C.S., M.S., Pune, which are generally adopted by the Societies in
Maharashtra.)

From the above, one
can decipher that a Society is nothing but a pool of people residing in /
occupying a building, and having as its common object managing and maintaining
the building / property for the common benefit of all in a spirit of camaraderie.
Thus, there is no taint of commerciality, nor any intention of carrying on any
trade or any activity for the purpose of profits in the objects of a Society.

For this management
and maintenance of the building / property for the common benefit of all the
members, the Society has to pay various outgoings like property tax to the local
authorities, water charges, common electricity charges, salaries to security
and other staff members, repair, maintenance and proper upkeep of the building,
lift, etc. To defray all these common expenses, the Society collects from all
the members contribution by way of monthly maintenance charges, specific
collection against the outgoings mentioned above, transfer fee,
donation, etc. The authority for the collection for and payment of the common
expenses is embodied in the bye-laws of the Society to which every member is a
party. So, the modus operandi of the entire scheme is such that the
Society is the convenient instrument or medium or conduit through which the
building / property is maintained and managed by the members, for the common
benefit of all the members, from the contributions received from all the
members in different ways and on different occasions.

__________________________________________________________________________________________________

1 An article on this subject was written by
the same author in the July 1990 issue of The BCA Journal. After over 30 years, at the suggestion of The BCA Journal, the author discusses in this article the
current position on this evergreen or ever-grey subject of great importance. – Editor.

Transfer fee is one
such mode of collecting contribution towards common expenses by a Society on
the occasion or the event of the transfer of a flat / office / unit by the
member of the Society, credited to a separate account called ‘Reserve Fund’ by
the Society. (See clause 12 of the Model Bye-laws.) The ‘Reserve Fund’ is
utilised by the Society for the ‘expenditure on repairs, maintenance and
renewals of the Society’s property’. [See clause 14(a) of the Model Bye-laws.]

Thus, by nature,
character or quality, transfer fee is only a form of collection or contribution
from the members which is utilised for the common benefit of all the members
only.

DOCTRINE OF MUTUALITY

Another concept
which has a material bearing while analysing the taxability of transfer fee is
the concept or doctrine of mutuality. The doctrine of mutuality is the
foundation on which the entire edifice of the non-taxability of transfer fee is
built. It is submitted that this is a simple but often misunderstood concept,
especially by the tax authorities.

The concept of
mutuality is extensively discussed and relied upon in a large number of
judicial cases which are commonly called ‘club cases’², and which
concern the taxation of sports or other creative clubs, because the
non-taxability of the income of the clubs is also based on the doctrine of
mutuality.

Let us try to
understand this doctrine by turning to some decided cases. In CIT vs.
Madras Race Club [1976] 105 ITR 433, 443 (Mad), this doctrine was
elucidated thus: ‘To take a common instance, supposing a dozen persons gather
together and agree to purchase certain commodities in bulk and distribute them
among themselves in accordance with their individual requirements, they may
collect a certain amount provisionally based on the anticipated price of the
commodities to be purchased. If it ultimately happens that the commodities are
available at a cheaper price so that at the end of the distribution of the
commodities among themselves, a part of the original amount provisionally
collected is repaid, then what is repaid cannot by any test be classified as
income. This would represent savings and not income. The Income-tax Act seeks
to tax income and not savings….’

The fundamental
test of mutuality was explained succinctly by Lord Macmillan in Municipal
Mutual Insurance Ltd. vs. Hills [1932] 16 TC 430, 448 (HL): ‘The
cardinal requirement is that all the contributors to the common fund must be
entitled to participate in the surplus and that all the participators in the
surplus must be contributors to the common fund; in other words, there must
be complete identity between the contributors and the participators. If
this requirement is satisfied the particular form which the association takes
is immaterial.’ (Emphasis supplied)

In the often-quoted
case of Styles vs. New York Life Insurance Company [1889] 2 TC 460 (HL)
the doctrine of mutuality was discussed as follows by Lord Watson: ‘When a
number of individuals agree to contribute funds for a common purpose, such as
the payment of annuities or of capital sums, to some or all of them, on the
occurrence of events certain or uncertain, and stipulate that their
contributions, so far as not required for that purpose, shall be repaid to
them, I cannot conceive why they should be regarded as traders, or why
contributions returned to them should be regarded as profits.’

The Supreme Court
in a recent decision in ITO vs. Venkatesh Premises Co-operative Society
Ltd. [2018] 402 ITR 670 (SC), after referring to numerous weighty
authorities – both Indian and English – narrated the concept of mutuality in
the following crystal clear words (see head notes):

‘The doctrine of mutuality, based on common law principles, is
premised on the theory that a person cannot make a profit from himself. An
amount received from oneself, therefore, cannot be regarded as income and
taxable. The essence of the principle of mutuality lies in the commonality of
the contributors and the participants who are also the beneficiaries. The
contributors to the common fund must be entitled to participate in the surplus
and the participators in the surplus are contributors to the common fund. The
law envisages a complete identity between the contributors and the participants
in this sense. The principle postulates that what is returned is
contributed by a member. Any surplus in the common fund shall therefore not
constitute income but will only be an increase in the common fund meant to meet
sudden eventualities.’ (Emphasis supplied)

________________________________________________________________________________________________

2 For instance, see CIT vs. Royal Western India Turf
Club Ltd. [1953] 24 ITR 551 (SC); CIT vs. Bankipur Club [1997] 226 ITR 97 (SC);
Chelmsford Club vs. CIT [2000] 243 ITR 89 (SC); Bangalore Club vs. CIT [2013]
350 ITR 509 (SC); IRC vs. Eccentric Club Ltd. [1925] 12 TC 657 (HL); CIT vs.
Merchant Navy Club [1974] 96 ITR 261 (AP); The Presidency Club Ltd. vs. CIT
[1981] 127 ITR 264 (Mad); CIT vs. Cawnpore Club Ltd. [1984] 146 ITR 181 (All); CIT
vs. Darjeeling Club Ltd. [1985] 153 ITR 676 (Cal) and CIT vs. Willingdon Sports
Club [2008] 302 ITR 279 (Bom). The principle of mutuality is also explained in CIT vs. Common Effluent Treatment
Plant (Thane Belapur) Association [2010] 328 ITR 362 (Bom); CIT vs. Kumbakonam
Mutual Benefit Fund Ltd. [1964] 53 ITR 241 (SC) and CIT vs. Shree Jari Merchants Association
[1977] 106 ITR 542 (Guj).

The concept of
mutuality is based on the principle that no man can make profit out of himself.
So, when more than one person combine themselves for some common purpose or
mutual benefit and contribute for the common purpose or benefit and if afterwards
some surplus is left over and is returned to those contributors in their
capacity as contributors, the same does not amount to income in the hands of
the contributor-recipient, nor does the contribution as such amount to income
in the hands of the mutual benefit association of such persons.

BASIC PROPOSITION: TRANSFER FEE IS GOVERNED BY THE DOCTRINE OF MUTUALITY

Based on the nature
of the transfer fee received by a Society, discussed hereinabove, and based on
the principle of mutuality, discussed above, it is submitted that the transfer
fee received by a Society on the transfer of a flat / office / shop / unit by a
member of the Society is completely governed by the principle of mutuality and
hence not liable to any tax under the Act. Transfer fee is nothing but a
contribution to the common fund of a mutual benefit association, i.e., the
Society, by its member on the occasion of the transfer of a flat, etc. which is
going to be utilised, either immediately or at a later date, for the common
benefit of all the members of the Society.

There is no express
statutory provision in the Act contrary to the above proposition. Whenever the
legislature intends to tax an item, it specifically provides for the same. For
example, section 2(24)(vii) of the Act specifically includes within the
definition of the term ‘Income’, ‘the profits and gains of any business of
insurance carried on by a mutual insurance company or by a co-operative
society, computed in accordance with section 44 or any surplus taken to be such
profits and gains by virtue of provisions contained in the First Schedule’.
Such income is, obviously, excluded from the principle of mutuality.³

Another example of
an express statutory provision creating an exception to the principle of
mutuality is section 2(24)(viia) which includes within the definition of
‘Income’, ‘the profits and gains of any business of banking (including
providing credit facilities) carried on by a co-operative society with its
members’.

________________________________________________________________________________________

3 See the observations at p. 679 in ITO vs. Venkatesh Premises
Co-operative Society Ltd. [2019] 402 ITR 670 (SC). See also the observations at pp. 40-41 in State of West Bengal vs. Calcutta
Club Ltd. 2019-VIL-34-SC-ST.

JUMPING SOME HURDLES

As stated above,
the transfer fee received by a Society is non-taxable on the principle of
mutuality. But there are some hurdles in the way of this theory, which are
jumped over in the succeeding paragraphs.

Hurdle 1:
Incorporation

The principle of mutuality requires that there must be complete identity
between the contributors to the common fund and the participators in the
surplus, but a Society is always formed and registered under the Societies
Registration Act, 1860 or under the relevant State law concerning the
incorporation and registration of a Society, e.g., The Maharashtra Co-operative
Societies Act, 1960 (hereinafter also referred to as ‘the Societies Act’), which is a legal entity, separate and distinct from its members.
Then, how does the principle of mutuality apply to a Society?

It is well settled
now that once the identity between the contributors to the common fund and the
participators in the benefits and surplus is established completely, the fact
of incorporation of the mutual benefit association does not damage the
applicability of the principle of mutuality to it. As Lord Macmillan observed
in a passage reproduced above from Municipal Mutual Insurance Ltd. vs.
Hills [1932] 16 TC 430, 448 (HL): ‘… in other words, there must be
complete identity between the contributors and the participators. If this
requirement is satisfied the particular form which the association takes is
immaterial.’ (Emphasis supplied)

Likewise, the House
of Lords held in Styles vs. New York Life Insurance Co. [1889] 2 TC 460
(HL): ‘…. Incorporation does not destroy or even impair the complete
identity between the contributors and the participators.’ (Emphasis
supplied)

The Supreme Court in an early case in CIT vs. Royal Western India
Turf Club Ltd. [1953] 24 ITR 551, 560 (SC) explained convincingly: ‘In such cases where there is
identity in the character of those who contribute and of those who participate
in the surplus, the fact of incorporation may be immaterial and the
incorporated company may well be regarded as a mere instrument, a convenient
agent for carrying out what the members might more laboriously do for
themselves.’ (Emphasis supplied)

Later, in yet
another decision in CIT vs. Chelmsford Club [2000] 243 ITR 89 (SC),
it was observed (see head notes at p. 90): ‘There must be complete identity
between the contributors and the participators. If these requirements are
fulfilled, it is immaterial what particular form the association takes.’ (Emphasis supplied)

When one surveys
all the club cases, one notices that in most of the cases, the club was an
incorporated company, still, the Courts have upheld the applicability of the
principle of mutuality to the club. The incorporation of the club as a company
did not pose a hurdle in the way of applying the principle of mutuality to the
club.

In view of the
above, one can safely conclude that it is settled law that incorporation of
members into a registered society under the Societies Act would not adversely
impact the applicability of the principle of mutuality to the transfer fee
received by a Society.

Hurdle 2:
Members as a class

As discussed above,
the cardinal requirement of mutuality is that all the contributors to the
common fund must be participators in the surplus and that all the participators
in the surplus must be contributors to the common fund. In the case of transfer
fee received by a Society, the beneficiaries are all the members of the
Society, but the contributors are only those members who have transferred their
flat / shop / office / unit and not all the members. Then, how does it
satisfy the requirement of mutuality?

In terms of the
bye-laws of every Society, every member who transfers the flat / office,
etc. is liable to pay to the Society transfer fee. So, the basic or primary
liability to contribute to the Society in the form of transfer fee is on every
member, meaning thereby that all the members are liable to pay the transfer
fee and not a particular member or a particular section of the members is
liable to pay the transfer fee – only the occasion to pay, i.e., transfer of
the flat / office, should arise. The person paying the transfer fee is paying
in his capacity or character as ‘a member’ of the Society and not in any
other capacity. Further, the participators in or beneficiaries of the transfer
fee received by the Society are also enjoying the same in their capacity or character as ‘members’. Thus, the identity between the
contributors and the participators is perfectly established.

While comparing the
contributors and the participators, they should be compared as ‘a class’ and no
individual contributor or participator is to be compared. For the purpose of
applicability of the principle of mutuality to the transfer fee received by a
Society it is not necessary that all the members should contribute or pay the
transfer fee at the same time which is an impossible event. It is sufficient if
all the members are liable by terms of the agreement to the bye-laws to
pay the transfer fee at the time of ‘transfer’.

The above reasoning
of comparing the members as ‘a class’ is well settled by numerous judicial
precedents. In CIT vs. Merchant Navy Club [1974] 96 ITR 261, 273 (AP) the
Court articulated with precision: ‘The contributors to the common fund and the
participators in the surplus must be an identical body. That does not mean
that each member should contribute to the common fund or that each member
should participate in the surplus or get back from the surplus precisely what
he has paid. What is required is that the members as a class should
contribute to the common fund and participators as a class must be able
to participate in the surplus….’ (Emphasis supplied)

On this topic, a
learned author, Wheatcroft enlightens in his authoritative treatise ‘The Law
of Income-tax, Sur-tax and Profits Tax’ in paragraph 1-417 at pp. 1200-01:
‘For this doctrine to apply it is essential that all the contributors to the
common fund are entitled to participate in the surplus and that all the
participators in the surplus are contributors, so that there is complete
identity between contributors and participators. This means identity as a
class, so that at any given moment of time the persons who are contributing are
identical with the persons entitled to participate: it does not matter that the
class may be diminished by persons going out of the scheme or increased by
others coming in.’ (Emphasis supplied) This paragraph was noted and followed
by the Andhra Pradesh High Court in CIT vs. Merchant Navy Club (Supra)
while making the above observations.

Likewise, in CIT
vs. Shree Jari Merchants Association [1977] 106 ITR 542, 550-551 (Guj)
it was commented: ‘…. the main test of mutuality is complete identity of the
contributors with the recipients. This identity need not necessarily be of
individuals, because it is the identity of status or capacity which matters
more. Thus, individual members of an association may be different at different
times; but so long as the contributors and recipients are both holding the
membership status in the association, their identity would be clearly
established, and the principle of mutuality would be available to them.’
(Emphasis supplied)

Thus, if the
character or capacity of the persons paying the transfer fee, i.e., members, is
compared with the character or capacity of the persons enjoying the benefits or
participating in the surplus, i.e., members, the identity between the two is
established beyond the slightest shadow of doubt.

As rightly observed
in many cases⁴, in a Society the members are a class and that class
may be diminished by the members going out or increased by the members coming
in – but the class remains the same.

The Department
often argues that the member contributing the transfer fee is an outgoing
member, whereas the members enjoying the benefits of the transfer fee are the
existing members and the incoming members and therefore the contributors and
the participators are not identical. This argument stands answered by the class
theory discussed above.

Practically
speaking, it should be ensured that when the transfer fee is received by the
Society, the contributor is technically a ‘member’ registered in the records of
the Society. The occasion to take care arises more when the transfer fee or a
part thereof is received from an incoming member (‘transferee’) and on the date
when he pays the transfer fee he is not yet technically admitted as a member in
the records of the Society. The Department, in such a situation, often contends
that the transfer fee is paid by a person who is not a member and hence the
identity between the contributors and the participators is not established and the transfer fee is therefore taxable.⁵
Fortunately, however, the Supreme Court has adopted a very liberal and
pragmatic view even in such situations by granting the exemption even though
the admission of the transferee was pending when he paid the transfer fee. The
Supreme Court⁶ has unequivocally held that the transfer fee received
by a Society from a transferee member would not partake of the nature of profit
or commerciality as the amount is appropriated by the Society only after the
transferee is inducted as a member and the moment the transferee is inducted as
member the principle of mutuality applies, and in the event of non-admission,
the amount is refunded.⁷

Hurdle 3:
Participation in the surplus

In order to satisfy
the test of mutuality it is not necessary that the transfer fee received by a
Society should be utilised for the repairs and renewals of the Society’s
property in the year of receipt of the transfer fee. It may happen that the
transfer fee received may remain unutilised in the year of receipt and may have
to be carried forward to the future years under ‘Reserve Fund’ to be utilised
for ‘expenditure on repairs, maintenance and renewals of the Society’s
property’. Practically, one day or the other the amount is going to be utilised
for the repairs, renewals, etc. of the Society’s property, and there would be
no damage to the applicability of the principle of mutuality to the transfer
fee received by the Society. But, theoretically, technically or legally, what
happens if the surplus remains unutilised and the Society is to be wound up?

As per section 110
of the Maharashtra Co-operative Societies Act, 1960, in the event of winding up
of the Society, the following are the options available for the disposal of the
surplus:

(a) The same may be divided by the Registrar, with
the previous sanction of the State Government, amongst its members in such
manner as may be prescribed; or

(b) The same may be devoted to any object or
objects provided in the bye-laws of the Society; or

(c) If the same is not divided amongst the members
and the Society has no such bye-laws for its utilisation for its objects, the
surplus shall vest in the Registrar, who shall hold it in trust and shall
transfer the same to the reserve fund of any other Society having similar
objects and serving more or less an area which the Society, to which the
surplus belonged, was serving. It is further provided that if no such Society
is available, the Registrar may use it for some public purpose or charitable
purpose.

If the surplus is
utilised as per (a) and (b) above, there is certainly no damage to the
applicability of the principle of mutuality to the transfer fee since, in those
cases, it is the members who are the ultimate beneficiaries of or the
participators in the surplus and that would be perfectly in keeping with the
requirement of the principle of mutuality. But, in the event the surplus vests
in the Registrar in terms of (c) above, and is not utilised by or for the
members, would it militate against the applicability of the principle of
mutuality to the transfer fee received by the Society, because the
participators in the surplus would not be the members who have contributed to
it?

________________________________________________________________________________________________________

4 See, for example, Sind Co-operative Housing Society
vs. ITO [2009] 317 ITR 47, 60-61 (Bom).

5 This was the view expressed in Walkeshwar Triveni Co-operative
Housing Society Ltd. vs. ITO [2004] 267 ITR (AT) 86 (Mum)(SB).

6 ITO vs. Venkatesh Premises Co-operative
Society Ltd. [2018] 402 ITR 670, 681 (SC).

7 See the similar views expressed in Sind Co-operative Housing Society
vs. ITO [2009] 317 ITR 47, 60 (Bom) [after considering the decision in Walkeshwar Triveni Co-operative
Housing Society Ltd. vs. ITO [2004] 267 ITR (AT) 86 (Mumbai) (SB)], followed in Mittal Court Premises Co-operative
Society Ltd. vs. ITO [2010] 320 ITR 414, 419 (Bom) (later affirmed by the Supreme

First of all,
looking at the provisions of the Model Bye-laws adopted by all the Societies,
the possibility of a situation arising under (c) is practically almost none.
But theoretically, technically or legally, what happens if the situation in (c)
arises and there is a possibility of the surplus falling into the hands of
persons other than members? Would it militate against the applicability of the
principle of mutuality? Let us go through some decided cases in search of
judicial guidance.

In IRC vs.
Eccentric Club [1925] 12 TC 657 (HL), there was a club incorporated as
a company with the object to promote social relations amongst gentlemen connected
with literature, art, music, drama, etc., which conducted a club of
non-political character. Clause 6 of its memorandum of association prohibited
distribution of dividend and also provided that on winding up of the club, the
surplus, if any, was not to be distributed amongst the members, but was to be
given or transferred as the committee of management may determine. In spite of
these features, it was held by the House of Lords that the principle of
mutuality was applicable to the club and the income of the club was
non-taxable.

This decision was
followed in India by the Madras High Court in CIT vs. Madras Race Club
[1976] 105 ITR 433 (Mad). In this case the memorandum of association of
the club provided that in the event of winding up, the surplus was not
divisible amongst the members, but had to be made over to the entities having
similar objects. Despite this feature, the Madras High Court held that the
principle of mutuality was applicable, following the above referred decision in
IRC vs. Eccentric Club (Supra). The Court made very interesting
observations (p. 443): ‘It is well settled that the memorandum and
articles of a company represent the contract between the company and the
members. It is only by virtue of their ownership of the surplus assets, if any,
that the members had agreed to the clause that they would not take back the
surplus, but allow it to be transferred to any similar entity. As they
themselves are to deal with the surplus, if any, at the time of winding up, it
cannot be said that they are not participators in the surplus. The clause
is only a fetter in the manner of disposal. The participation envisaged in
the principle of mutuality is not that the members should willy-nilly take the
surplus to themselves. It is enough if they held a right of disposal over the
surplus to show that they were the participators.’ (Emphasis supplied)

However, the
Gujarat High Court adopted a contrary view in CIT vs. Shree Jari
Merchants Association [1977] 106 ITR 542 (Guj). In this case a rule of
the constitution of the association provided that at the time of its
dissolution the surplus assets of the association shall be used in the manner
proposed in the resolution passed by the association. The Court observed (p.
551-552): ‘It is apparent that any resolution which may come up for
consideration in future would not necessarily provide for the distribution of
the surplus assets only amongst the members of the association. If, therefore,
the assets of the association are not liable to be returned to the members, the
identity between the contributors and recipients would be lost. This would
militate against the very basic principle of mutuality.’ The Court
concluded (p. 553): ‘In the result, we conclude that the assessee is not
a mutual concern and cannot claim exemption on that ground.’

Thus, in this case,
it is the fear or possibility of distribution of surplus amongst non-members
which influenced the decision of the Court against the assessee.

But, in a
subsequent case, the Andhra Pradesh High Court in CIT vs. West Godavari
Dist. Rice Millers Association [1984] 150 ITR 394 (AP) held the
principle of mutuality applicable to the association despite the provision that
the surplus remaining with the association should not, at the time of
dissolution, go to the members but it should be made over to an
association with similar objects. The Court followed the
above decisions in IRC vs. Eccentric Club (Supra) and CIT
vs. Madras Race Club (Supra) and dissented from the above
decision in CIT vs. Shree Jari Merchants Association (Supra).⁸

It would be
worthwhile to note that every Society is subject to rigid discipline of the
Maharashtra Co-operative Societies Act, 1960 or any other relevant law under
which it is registered and therefore the apprehension expressed by the Gujarat
High Court in CIT vs. Shree Jari Merchants Association (Supra) of
the possibility of the surplus being distributed among non-members is not
present in the case of a Society.

____________________________________________________________________________________________________________

8 For identical views, see CIT vs. Cochin Oil Merchants’
Association [1987] 168 ITR 240 (Ker); CIT vs. Northern India Motion Pictures
Association [1989] 180 ITR 160 (P & H) and CIT vs. Indian Paper Mills
Association [1994] 209 ITR 28 (Cal).

Later, in CIT vs. Adarsh Co-operative
Housing Society Ltd.
[1995] 213 ITR 677 (Guj), the Gujarat High Court has taken a
favourable view by distinguishing the earlier adverse decision in
CIT vs. Shree Jari Merchants Association (Supra). This case was concerned with
determining the taxability of the premium amounts received by a Society on the
transfer of lease of plots by its members. Despite the fact that the bye-laws
of the Society provided that the surplus could be dealt with in accordance with
the resolution of the committee of the Society, the Court held that the premium
amounts were exempt on the principle of mutuality. The Court raised a pertinent
question (p. 692): ‘… the question which arises is: what is meant by ‘‘return’’
of what has been contributed to a common fund? Does it mean the return of the
corpus of the fund or does it include retention of control over the
corpus to be used in consonance with the statute regulating the association,
company or society, as the case may be?’ (Emphasis supplied)

Dispelling the fear of the surplus going into the
hands of non-members,
the Court, taking into consideration the scheme and provisions of the
Gujarat
Co-operative Societies Act, observed that it is only on the failure of
the
members to exercise such power that the surplus vests in the Registrar
and not
otherwise. The Court observed that the phrase ‘return of the surplus to
contributors’ in the context of regulatory provisions as opposed to
voluntary act of parties, cannot be construed in the narrow sense of
division
of the corpus, where the body of the members as a whole retains the
power and
control over utilisation of surplus left at the time of dissolution or
winding
up, though division of the corpus is prohibited; it is return of the
corpus to
the members for their use. The Court elaborated the concept by stating
that it
is not the requirement that return of the corpus to the members must be
only
for the purpose of division; the fact that the members may in future
abandon
their power and may allow the surplus to be vested in the Registrar
cannot be a
decisive factor in determining the present status of mutuality. The
Court made
very significant comments (p. 693):

‘What is of the
essence is: what are the ordinary consequences envisaged by members within the
framework of the statute to deal with the surplus? The right of the members to
deal with the surplus is not destroyed but is only restricted to the extent
that instead of dividing the corpus pro rata, it has been confined to
utilisation or expending of the surplus for the objectives as per their own
decision. This does not detract from the concept of return of the surplus to
members which they have contributed in making that fund.’

After referring to
the facts of the adverse decision in Shree Jari Merchants Association
(Supra), strongly relied upon by the Department, the Court observed
that in that case the question as to what is the meaning of ‘return of surplus’
was neither raised nor decided by the Court, but it proceeded on the assumption
that ‘return of surplus’ relates to ‘return of corpus’ to be shared by the
members pro rata. The Court finally stated: ‘We find that the facts of the present case do not attract the ratio
of the decision in the case of Shree Jari Merchants Association [1977]
106 ITR 542 (Guj).’

On this point, in Kanga
& Palkhivala’s The Law & Practice of Income Tax, ninth edition (pp.
193-194), after referring to several judicial pronouncements discussed
hereinabove, the principle is summarised with precision: ‘….The contributors to
the common fund and the participators in the surplus must be an identical body.
That does not mean that each member should contribute to the common fund or
each member should participate in the surplus or get back from the surplus
precisely what he has paid.…..the test of mutuality does not require that
the contributors to the common fund should distribute the surplus amongst
themselves; it is enough if they have a right of disposal over the surplus,
and in exercise of that right they may agree that on winding-up the surplus
will be transferred to a similar association or used for some charitable
objects.’⁹ (Emphasis supplied)

In view of the
foregoing discussion, it is submitted that the applicability of the principle
of mutuality to the transfer fee received by a Society is not impaired on the
ground that the surplus might be distributed amongst non-members and
consequently the identity between the contributors and the participators may be
lost.

Hurdle 4:
Presence of other income

The fourth hurdle
could be the presence of some incidental receipts by the Society which may not
be governed by the principle of mutuality and hence may be taxable, e.g.,
interest received by a Society on excess funds deposited with a co-operative
bank. But would the presence of such taxable items jeopardise the applicability
of the principle of mutuality to the Society as a whole and qua the
transfer fee?

__________________________________________________________________________________________________

9
These observations are noted and followed in many judicial rulings. See, for example,
Sind Co-operative Housing Society vs. ITO [2009] 317
ITR 47, 57-58 (Bom). See also the
observations at p. 63 in this case.

It is submitted
that mere presence of certain incidental items of taxable income should not
adversely affect the claim of the Society to the principle of mutuality in
respect of its main activities and in respect of the transfer fee.

In CIT vs.
Madras Race Club [1976] 105 ITR 433 (Mad), where there were
transactions of the same nature with members as well as non-members resulting
in surplus, the Court applied the principle of mutuality to the transactions
with members, and observed (p. 442): ‘….
the application of the principle of mutuality is not destroyed by the
presence of transactions with or profits derived from non-members. The said
principle could apply to transactions with members.’¹⁰ (Emphasis
supplied)

SOME DIRECT JUDICIAL PRECEDENTS ANALYSED

In a plethora of
judicial decisions on the subject rendered by the Tribunal as well as several
High Courts over the last three decades, the issue of taxability of transfer
fee received by a Society came to be examined. Some decisions earlier had gone
against the assessee and the transfer fee was held taxable. But the recent
trend of the judicial decisions has been of upholding the applicability of the
principle of mutuality to the transfer fee received by a Society from its
members and treat it as non-taxable. To avoid overcrowding of citations, only a
few selected recent decisions and that, too, of the High Courts are discussed
here.

In CIT vs.
Apsara Co-operative Housing Society Ltd.
[1993] 204 ITR 662 (Cal) the assessee was a co-operative housing society which provided residential premises to its members
and received transfer fee for transfer of flats. The question arose about the
taxability of the transfer fee received by the assessee-society. Applying the
principle of mutuality the Court held that the transfer fee was not taxable.

In Sind
Co-operative Housing Society vs. ITO [2009] 317 ITR 47 (Bom)¹¹,
the Court categorically held (at p. 63) that the principle of mutuality will
apply to a co-operative housing society which has as its predominant activity,
the maintenance of the property of the Society which includes its building or
buildings and as long as there is no taint of commerciality, trade or business.
This decision was followed in Mittal Court Premises Co-operative Society
Ltd. vs. ITO [2010] 320 ITR 414 (Bom).¹²

Earlier there were
several Tribunal and High Court¹³ decisions where the taxability or
otherwise of the transfer fee was examined with reference to whether the
transfer fee is a capital receipt or revenue receipt, and not on the principle
of mutuality. Those decisions are not discussed here, since now they have no
relevance, especially when there are umpteen judicial rulings upholding the
applicability of the principle of mutuality to the transfer fee received by a
Society.

SUPREME COURT’S VIEW

In a recent
decision, several issues concerning the taxability of transfer fees,
non-occupancy charges, contribution to common amenities fund, etc. came up for
the consideration of the Apex Court in ITO vs. Venkatesh Premises
Co-operative Society Ltd. [2018] 402 ITR 670 (SC).¹⁴ Based
on a careful reading of this decision, it is submitted that the Supreme Court
is of the clear-cut view that the transfer fee received by a co-operative
housing society gets the shelter of the principle of mutuality and is not taxable.
Fortunately, after a long battle, the issue has been finally set at rest by
this decision of the Supreme Court in favour of the assessee.

PREMIUM COLLECTED BY SOCIETIES

Some Societies have
a provision in their bye-laws, or in their lease agreements in case of plot
holder Societies, providing that at the time of transfer of the plot, the
transferor will pay to the Society a certain amount of premium calculated
either as a percentage of the sale price realised by the transferor or at a
rate per square foot of the plot. The question has arisen many times whether
such premium received by such Society is taxable or it gets the shelter of the
principle of mutuality.

It is submitted
that such premium collected by the Society from members is ultimately going to
be utilised for the common benefit of all the members only and hence such
premium is also governed by the principle of mutuality and is non-taxable. No
doubt, earlier there were some adverse Tribunal decisions, but now most of the
judicial decisions are in favour of the view that such premium is not taxable
being covered by the principle of mutuality.

___________________________________________________________________________________________________

10 For reaching this conclusion, the Court
relied upon Carlisle
& Silloth Golf Club vs. Smith [1912] 6 TC 48, 54, 55 (KB).

11 This decision has been consistently
followed in countless judicial decisions (of the Tribunal and of the High
Courts) in favour of the assessee (which are not discussed here for brevity’s
sake).

12 Later affirmed in ITO vs. Venkatesh Premises
Co-operative Society Ltd. [2018] 402 ITR 670 (SC).

13 For example, see CIT vs. Presidency Co-operative
Housing Society Ltd. [1995] 216 ITR 321 (Bom). See the comments on this decision in Sind Cooperative Housing Society
vs. ITO [2009] 317 ITR 47 (Bom) at p. 57.

14 By the way, the Supreme Court considered
several judicial pronouncements in this case and affirmed Mittal Court Premises Co-operative
Society Ltd. vs.
ITO
[2010] 320 ITR 414 (Bom) and CIT vs. Shree Parleshwar Co-operative Housing Society Ltd. [2017] 10
ITR-OL 202 (Bom).

In CIT vs.
Adarsh Co-operative Housing Society Ltd. [1995] 213 ITR 677 (Guj) the
assessee was a co-operative society registered under the Bombay Societies Act,
1925. The Society acquired land and leased out the same to its members for a
period of 998 years. The Society permitted disposition or devolution of the
lease of any plot with any building thereon from an existing member to another
who registered himself as a member of the Society. On such transfer of lease
the existing member to whom the plot was leased had to pay to the Society half
of the premium amount received by him from the purchaser. The Court held that
the amounts contributed by the outgoing members were utilised by the Society
for extending common amenities to the members and hence the premium so
collected was non-taxable on the principle of mutuality.

In CIT vs.
Jai Hind Co-operative Housing Society Ltd. [2012] 349 ITR 541 (Bom)¹⁵
the assessee was a co-operative housing society formed of plot owners, who had
obtained land on lease from the Maharashtra Housing Board. The assessee in turn
entered into sub-lease agreements with its members. The assessee looked after
the maintenance and infrastructure. In terms of a resolution passed by the
assessee-society a member who desired to avail of the benefit of transferable
development rights and carry out construction or additional construction on his
plot, had to pay a premium of Rs. 250 per square foot to the assessee-society.
The assessee collected a premium of Rs. 18.75 lakhs in the previous year
relevant to the assessment year 2005-06. The A.O. was of the view that by
allowing the member to commercially exploit the plot and charging the premium
for that, the assessee-society was sharing the profit which was of commercial
nature. When the dispute regarding its taxability reached the High Court, it
held that such premium received by the Society is non-taxable on the principle
of mutuality as the premium flowed from a member.¹⁶

VOLUNTARY CONTRIBUTION OVER AND ABOVE TRANSFER FEE

As per the
notification¹⁷ issued, in the State of Maharashtra, the maximum
transfer fee which a Society can collect is Rs. 25,000. With increasing costs
of repairs and maintenance of buildings, the Societies are finding it difficult
to garner resources to maintain their buildings. As a result, many Societies,
especially in South Mumbai, are, in terms of resolutions passed in their
general body meetings, collecting voluntary contributions on transfer of flats
/ offices over and above the transfer fee of Rs. 25,000 as per the Government
notification. This voluntary contribution is fixed either at a particular rate
per square foot of the flat / office or sometimes even as a percentage of the
sale price of the flat / office. The Department has been contending that
collecting from the members any amount over and above the limit fixed by the
Government notification is illegal and amounts to profiteering and therefore
taxable.

But, fortunately,
even this controversy is now settled in favour of the assessee by the Supreme
Court decision in ITO vs. Venkatesh Premises Co-operative Society Ltd.
[2018] 402 ITR 670 (SC). The Department relied upon (at p. 677) the
decision in New India Co-operative Housing Society vs. State of
Maharashtra [2013] 2 MHLJ 666 (Bom) and contended that any receipt by the
Society beyond the permissible limit was not only illegal but also amounted to
rendering of services for profit attracting an element of commerciality and
thus was taxable. In response, the Supreme Court held (at p. 683) that in New
India Co-operative Housing Society (Supra), the challenge by the
aggrieved was to the transfer fee levied by the Society in excess of that
specified in the notification, which is a completely different cause of action
having no relevance to the present controversy; that it is not the case of the
Revenue that such receipts have not been utilised for the common benefit of
those who have contributed to the funds. From these observations of the Supreme
Court it is clear that the Supreme Court is of the unequivocal view that so long
as the amount contributed over and above the limit specified in the Government
notification is utilised for the common benefit of all the members, it
satisfies the test of mutuality and is non-taxable. There is another pointer to
support this in the Supreme Court decision. At p. 676, the Supreme Court notes:
‘The assessee in Civil Appeal No. 1180 of 2015 assails the finding that such
receipts, to the extent they were beyond the limits specified in the Government
notification dated August 9, 2001 issued under section 79A of the Maharashtra
Co-operative Societies Act, 1960…was exigible to tax falling beyond the
mutuality doctrine.’ In this regard, the Supreme Court held (p. 684): ‘Civil
Appeal No. 1180 of 2015 preferred by the assessee-society is allowed.’

__________________________________________________________________________________________________

15 On identical facts, earlier same view was
expressed by the Mumbai Bench of the Tribunal in The Friends Co-operative Housing
Society Ltd. vs. ITO (ITA No. 962/Mum/2010)(Order dated October 22, 2010). For identical views, see ITO vs. Presidency Co-operative
Housing Society Ltd. (ITA No. 6076/M/2017) (Order dated December 5, 2017). See also Hatkesh Co-operative Housing Society Ltd. vs. Asst. CIT [2017]
10 ITR-OL 263 (Bom).

16 The Court followed Mittal Court Premises Co-operative
Society Ltd. vs. ITO [2010] 320 ITR 414 (Bom) (later affirmed by the Supreme Court).

17 Circular No. CHS-2001/M. No. 188/14-C
dated August 9, 2001 issued under section 79A of the Maharashtra Co-operative
Societies Act, 1960, by the Cooperation & Textile Department, Government of
Maharashtra. The validity of this circular was upheld in New India Co-operative Housing
Society vs. State
of
Maharashtra [2013] 2 MHLJ 666 (Bom).

Earlier, in CIT
vs. Darbhanga Mansion Co-operative Housing Society Ltd. (ITXA No. 1474 of 2012)
(Order dated December 18, 2014)¹⁸ the Bombay High Court held
that even if the amount of transfer fee collected exceeds the limit of Rs.
25,000 it is non-taxable on the principle of mutuality, because the
applicability of the principle of mutuality is not dependent upon the amount.

In view of the
above, it is submitted that the voluntary contribution collected by a Society
over and above the limit specified in the Government notification gets the
shelter of the doctrine of mutuality and hence is non-taxable. It is noteworthy
that this will not be affected even if it is found that the contribution is not
voluntary but involuntary.¹⁹

SECTION 56(2)(x): APPLICABLE TO TRANSFER FEE?

Section 56(2)(x)²⁰
of the Act contains a legal fiction to the effect that where any person
receives any benefit in terms of money or money’s worth, without consideration
or for inadequate consideration, such benefit is taxable as income in his hands
under the head ‘Income from other sources’. In effect, a gift or deemed gift is
subjected to tax as income in the hands of the recipient.²¹ This
provision encompasses within its fold three types of gifts: (i) sum of money
(b) immovable property and (iii) property²² other than an immovable
property. There is a threshold exemption of Rs. 50,000 of such gift from this
tax. There are of course some exemptions from this charge, contained in the proviso
to section 56(2)(x), such as gift received from any relative, gift received on
the occasion of marriage, etc.

Can the Department
contend that the Society has ‘received’ the transfer fee from a member without
consideration and therefore is taxable as income under section 56(2)(x)?

As discussed above,
a Society is a mutual benefit association governed by the doctrine of
mutuality, and the principle of mutuality is premised on the theory that a
person cannot make a profit from himself and an amount received from
oneself, therefore, cannot be regarded as income and taxable.²³
Thus, the Society and the members constitute ‘one person’ and not two persons.
Incorporation as a Society is only a convenient mode. It is held that the word
‘received’ implies two persons, namely,
the person who receives and the person from whom he receives; a person cannot
receive a thing from himself. [Rai Bahadur Sundar Das vs. The Collector
of Gujarat (1922) ITC 189, 192 (Lahore).] Since the Society and the
members constitute one person, the Society cannot be said to have ‘received’
the sum of money from another person (member) and hence the transaction does
not fall within the purview of section 56(2)(x) at all.²⁴ Thus,
section 56(2)(x) does not override, or carve an exception to, the principle of mutuality. It is pertinent to note that
even in the contexts of sales tax²⁵ and service tax²⁶, it
is settled that in the case of a mutual concern, there is only one person and
there are no two persons involved and therefore there cannot be any ‘sale’ by
one person to another to be subjected to sales tax and that there is no
‘service provided’ by one person to another and therefore there is no question
of charging service tax.

It can be argued
alternatively that the transfer fee is paid by a member to the Society for
discharging the obligation cast upon him by the bye-laws of the Society and
hence it is not ‘without consideration’ and hence it does not fall within the
purview of section 56(2)(x).

It can also be further contended that the member paying the transfer
fee to the Society receives the consideration in the form of all amenities and facilities of
the Society, including particularly good maintenance of the building in which
such member lives; and, therefore, there is a consideration for payment of
transfer fee. As such, the Society does not receive it ‘without
consideration’ and hence it does not fall
within the purview of section 56(2)(x).

____________________________________________________________________________________________________________

18 For identical views, see The Friends Co-operative Housing
Society Ltd. vs. ITO (ITA No. 962/Mum/2010)(Order dated October 22, 2010); ITO
vs. Damodar Bhuvan Co-operative Housing Society Ltd. (ITA No. 1610/ Mum/2010)
(Order dated September 16, 2011); ITO vs. The Presidency Co-operative Housing
Society Ltd. (ITA No. 6076/M/2017) (Order dated December 5, 2017) and ITO vs. The Casa Grande
Co-operative Housing Society Ltd. (ITA No. 4598/Mum/2014) (Order dated January
29, 2016). 19 See
Sind
Co-operative Housing Society vs. ITO [2009] 317 ITR 47, 61 (Bom).

20 Read with section 2(24)(xviia).

21 As is known, gift-tax, hitherto levied
under the Gift-tax Act, 1958, has been abolished from October 1, 1998.

22 The term ‘property’ is defined to mean
nine specific items enumerated therein (which includes an immovable property).
See the Explanation
below
clause (x) of sub-section (2) of section 56 with clause (d) of the Explanation to clause (vii) of sub-section (2) of section
56.

23 See ITO vs. Venkatesh Premises
Co-operative Society Ltd. [2018] 402 ITR 670, 679 (SC).

24 Whenever the legislature intended to tax a
transaction with self, it has provided so by an express statutory provision.
For example, see section 45(2) (conversion of a capital asset into
stock-in-trade) and section 28(via) (conversion of stockin- trade into a
capital assert). (See the observations at p. 41 in State of West Bengal vs. Calcutta Club Ltd.
2019-VIL-34-SC-ST.) Section
56(2)(x) is not a provision which would encompass transfer fee within its fold.

25 See CTO vs. Young Men’s Indian
Association (1970) 1 SCC 462.

26 See State of West Bengal vs. Calcutta
Club Ltd. 2019-VIL-34-SC-ST.

It is further
arguable that section 56(2)(x) contains a legal fiction. As is settled, a legal
fiction is created for a specific purpose and it has to be construed strictly²⁷,
and its application has to be confined to the purpose for which it is
created and should not be extended beyond its legitimate field. Section
56(2)(x) (as well as its predecessors) was enacted to
fill the void created by the abolition of the Gift-tax Act, 1958 and to
tax
gifts by one person to another. Going by this principle, it is submitted
that
the transfer fee received by a Society (which is non-taxable on the
principle
of mutuality) cannot be accommodated within the scope and ambit of the
legal
fiction of section 56(2)(x).

GST IMPACT

As stated above, in
the contexts of sales tax and service tax, it is settled by the Supreme Court
that in the case of a mutual concern, where the doctrine of mutuality is
applicable, there cannot be sales tax and service tax. A view is maintained
that this judicial position holds good even for the purpose of tax under the
Goods and Services Tax Laws (‘GST Laws’), but there are a few recent rulings to
the contrary. Be that as it may, the position of income-tax on transfer fee
stands concluded in favour of the assessee as discussed above and it will
remain intact and unaffected by some adverse rulings under the GST Laws.

TO SUM UP

In conclusion, it
is submitted that all the following amounts received by a Society –
residential, commercial and industrial – on the transfer of a flat / office /
shop / unit are non-taxable on the principle of mutuality:

(i) the normal transfer fee up to Rs. 25,000;

(ii) the voluntary contribution / donation by a
member, over and above the normal transfer fee of Rs. 25,000; and

(iii) the premium on transfer
of plots or leasehold rights in plots.

27 See Principles
of Statutory Interpretation by G. P. Singh, ninth edition, page 328.
See also CIT vs. Vadilal Lallubhai [1972]
86 ITR 2 (SC); CIT vs. Amarchand B. Doshi [1992]
194 ITR 56, 59 (Bom) and CIT vs. Khimji
Nenshi [1992] 194 ITR 192, 196 (Bom).

shailesh.kwebmaker

SPOTLIGHT ON MEDIA

Journalists cannot serve two masters. To the extent
that they take on the task of suppressing information or biting their tongue
for the sake of some political agenda, they are betraying the trust of the
public and corrupting their own profession – Thomas Sowell

Media in a democracy is the sole agency for
citizens to get a factual, impartial, multi-dimensional and unbiased glimpse of
the facts as they unfold. It was this responsibility to inform
people that gave it the salutary title of the fourth pillar of democracy.
It was an enabler for citizens to separate fact from fiction, news
from nonsense, and get details not spin.

Cushrow Irani, who ran The Statesman, once
said that the press in India is as free as it chooses to be. The
credibility, continuity and need of the media will depend on this choice.
Everyone has preferences and political ones, too, but when one puts on the hat
of a journalist one has to leave those preferences at the door and seek facts.

Watching the quality of discourse, bias and even
fear pelted on screen (remember someone predicted millions of deaths within
months), many friends have told me that they have stopped watching the
televised news.

Considering the recent events involving media, US
elections and the pandemic, we are faced with more questions: Do
we get news or views? Are views objective and clearly demarcated
from news? Do we see multiple dimensions or a preferred perspective?
What level of responsibility should accompany freedom? Is the
media still a watchdog or are they lapdogs? Is a news anchor /
owner seeking to be a celebrity or a medium? Are the questions
posed on channels meant to find facts or are they traps? Do questions
come from a curious mind or are they leading to prove the anchor right? Is
there expected intellectual honesty and depth in presenting facts and
analysis? Is it a truth-seeking game or a spectator sport?

There are practical issues too. High costs for one.
A story could cost a few lakhs for two to three minutes of screen time, whereas
running a panel with screaming guests (even if they are paid) is cheaper
to get eyeballs and TRPs. As per reports, 45% of all revenue of television
channels comes from advertisements. So perhaps it is the sales team that
decides rather than the editorial team.

Then there are other issues – Can media be a
business which gives the market what it wants? Should media have an ideology?
(CNN as anti-Trump and Fox as pro-Trump, and the Facebook CEO saying that most
people in Silicon Valley who screen social media are left-leaning!)

The greatest outcome of free speech is a free
press. But often that freedom is taken as a license to drive and control public
discourse. Amidst all this, one looks out for the calm, well-reasoned,
calibrated voice of a reporter. Remember JRD’s interview on DD? Contrast
that with a ‘senior journalist’ reprimanded by the late President Mukherjee for
interrupting him.

Social media felt like the ultimate democratisation
of media for millions. But there is increasing discrimination there in the form
of ‘violating policies’, ‘fact checks’ and ‘labelling’. Twitter put ‘fact
checks’ on Trump but not on the Ayatollah of Iran. A US Senator said last week
that the three Internet companies pose the biggest threat to free speech and to
free and fair elections.

We need a level format of accountability and
regulation on the media. Perhaps an internal ombudsman to handle
complaints and an independent commission to hold media responsible so that Imaandaari
is mainstreamed and Yakin is restored. With the business of catching
attention, misinformation and 24×7 discourses becoming the norm, it seems less Mumkin
to achieve that goal. As long as the guardian of truth refrains from being the
butcher of facts, we will see through an ever fuzzy world!

Raman
Jokhakar

Editor

shailesh.kwebmaker

DO YOU HAVE A KRISHNA IN YOUR LIFE?

For many of us, the answer to the question
may be an obvious yes. But first a story which needs retelling only to put
things in perspective.

Arjuna was the third of the Pandavas in the
epic Mahabharat. He was a great archer, a mighty warrior and a key
player in the Kurukshetra war of the Pandavas against their cousins, the
Kauravas.

When they entered the battlefield of
Kurukshetra to ultimately fight a bloody battle for 18 days, the Pandavas,
including Arjuna, knew against whom they were fighting. However, on the day
when the opposing armies assembled facing each other, Arjuna developed cold
feet when he saw the line-up of his own elders and cousins on the other side.

He expressed his predicament to Krishna who
was his charioteer. Gita, the holy book, begins with what is variously
called as Arjuna’s dilemma, anguish, despair or confusion. The conversation
that follows is what we understand as the Gita. At the end of the
conversation, Arjuna decides to go ahead with the battle. And the rest is
history.

We, in the profession, acquire our
qualifications, groom ourselves as professionals, gather expertise, gain
experience and command the profession. It is likely that we come to believe
that what is required to continue as professionals is accumulating some CPE
hours of updating knowledge and participating in some seminars and conferences
to keep abreast of professional updates.

But here is the point that I wish to make. Do
we as professionals never get caught up in situations where we need to seek
help or guidance? I am not talking of knowledge and skill sets. Kindly recall
that Arjuna did not require to be guided in the skills of archery.

There are enough occasions when we, as
professionals, are caught up in predicaments where it is not our knowledge of
the subject which is put to the test. But the dilemma is to be or not to be,
or to do or not to do, or to act or not to act, or to be
inert, or to say a yes or to say a no – to give a nod of approval
or raise an eyebrow of negation.

Whom do we turn to? Saints and seers down
the ages have stressed on the importance of a Guru. Explaining the significance
of a Guru, Kabir had this to say, among the various thoughts that he expressed
in connection with Gurus:

‘Guru kumhaar shish kumbha hai

Gadih gadih kaadhe khot

Antar haath sahaar dai

Baahar baahai chot’

Likening the Guru to a potter and the
disciple to a pitcher, Kabir says that the Guru hits at the defects of the
disciple with the aim of removing them while supporting and loving him from
within.

Unfortunately, we have largely relegated a
Guru to a teacher whom we abandon after acquiring our qualifications. However,
that is not the idea of a Guru handed down to us by the sages. For the purposes
of this write-up, I have therefore changed the metaphor. Do you have a Krishna
in your life who guides you on such occasions? He does not take decisions for
you but does definitely enlighten you enough to take decisions.

At the end of
his conversation, Krishna tells Arjuna – ‘Yatha icchasey, tatha kuru’ [As you desire (wish), do thus.]

Finally, the choice is yours. However, it is
an informed and a well-thought-out choice. As the poet Robert Frost famously
stated:

‘Two roads diverged in a wood

And I – I took the one less travelled by

And that has made all the difference’

That brings me back to the question – Do you
have a Krishna in your life?

shailesh.kwebmaker

REPRESENTATIONS

1. Dated: 8^th
September, 2020

Subject: Request for making necessary legislative and procedural amendments
in the Income-tax Act, 1961 to ensure transparency in claim of Tax Deducted at
Source (TDS) and to reduce hardships to the taxpayers.

To: The Chairman,
Central Board of Direct Taxes, New Delhi

Representation by:
Lucknow Chartered Accountants’ Society, Bombay Chartered Accountants’ Society,
Chartered Accountants Association, Ahmedabad, Chartered Accountants
Association, Surat, Karnataka State Chartered Accountants Association.

Note: For full Text of the above
Representation, visit our website www.bcasonline.org

2. Dated: 23^rd
September, 2020

Subject: Request for taking up certain measures under Income-tax Act, 1961
in the backdrop of Covid-19 outbreak.

To: Smt. Nirmala
Sitharaman, Hon’ble Minister of Finance, Government of India, New Delhi

Note: For full Text of the above
Representation, visit our website www.bcasonline.org

3. Dated: 23^rd
September, 2020

Subject: Request for granting relief from provisions of Tax Collection at
Source (TCS) under section 206C(1H) of the Income-tax Act, 1961.

To: Smt. Nirmala
Sitharaman, Hon’ble Minister of Finance, Government of India, New Delhi

Note: For full Text of the above
Representation, visit our website www.bcasonline.org

4. Dated: 24^th
September, 2020

Subject: Extension of dates for various provisions under Goods &
Services Tax Act, 2017.

To: The Hon’ble
Finance Minister & Chairperson, GST Council North Block, New Delhi

Representation by:
Bombay Chartered Accountants’ Society.

Note: For full Text of the above Representation,
visit our website www.bcasonline.org

The structure of the atom has
been found by the mind. Therefore the mind is subtler than the atom. That which
is behind the mind, namely the individual soul, is subtler than the mind

— Ramanna Maharshi

shailesh.kwebmaker

FRONT-RUNNING: SEBI RUNS EVEN FASTER AFTER PERPETRATORS

BACKGROUND

A recent order
of SEBI (dated 7^th August, 2020 in the matter of dealers of Reliance
Securities Limited) on front-running is noteworthy on several grounds. Firstly,
it has been rendered in less than four months after the alleged front-running
took place. The transactions in question took place from December, 2019 to
April, 2020; SEBI completed the preliminary examination which, as we shall see,
involved numerous aspects and passed its order on 7^th August, 2020.

Secondly, as the
order shows, a lot of detailed detective work has been carried out wherein the
alleged connections between more than 25 parties have been detected and
demonstrated. The connections are in various ways. They are through
transactions in bank accounts, they are through calls made to each other, there
are social media connections and also through family relations between the
parties concerned. SEBI then passed an interim order banning from the capital
markets the parties allegedly involved in the front-running and also ordered
them to deposit the profits made until a final order has been passed.

Front-running
cases, like insider trading, are notoriously difficult to detect. Investigation
and demonstration of guilt is even tougher. In view of this, the meticulously
detailed order at a preliminary stage is credit-worthy.

This order is in
the matter of certain dealers of Reliance Securities Limited in respect of
transactions by Reliance in their capacity as stockbrokers for Tata Absolute
Return Fund, a scheme of Tata AIF, a SEBI-registered Alternate Investment Fund
(‘Tata Fund’). The interim order finds these parties, along with various
associated persons, to have been involved in front-running and allegedly making
profits by trading ahead of the large orders of Tata Fund.

WHAT IS FRONT-RUNNING?

There have been
several cases of front-running in the past and in respect of which SEBI has
passed orders. However, earlier what amounted to front-running and even whether
it was a violation of securities laws, was in question. Indeed, the Securities
Appellate Tribunal had even held that front–running did not amount to violation
of the securities laws then existing [e.g., Dipak Patel (2012) 116 SCL
581 (SAT)], [Sujit Karkera (2013) 118 SCL 84 (SAT)]. However, the
Supreme Court decision in the case of SEBI vs. Kanaiyalal Baldeobhai Patel
[(2018) 207 Comp Cas 416 (SC)] laid the matter more or less to rest and
held that it was a violation of specified provisions of the securities laws.
Further, the relevant clause in the SEBI PFUTP Regulations has also been
amended to explicitly include front-running as it is generally understood.
Hence, today, it is more or less well settled that front-running is a violation
punishable under the securities laws.

However, there
is no specific definition in the Securities Laws of the term ‘front-running’. There
are clauses that do describe what is understood as front-running. There are
also several other dictionary definitions and also a fairly detailed
description in the decision of the Supreme Court. For guidance, although in a
different context, there is also a definition of front-running in a SEBI
Circular (dated 25^th May, 2012).

Front-running is
also known as trading ahead. It essentially means that, armed with valuable
information of a proposed large transaction which would result in a change in
the price of a security, a person, in breach of trust, trades before such a
transaction takes place and makes personal illicit profits. To take an example,
a stockbroker has been given an order to buy a very large quantity of shares of
a particular company by his client. The experienced stockbroker knows that this
order will result in a rise in the price of that scrip in the market. He then
proceeds to first buy for himself these shares at the then prevailing price.
After doing this, he places the order of his client at the increased price.
Simultaneously, he sells the shares that he has just acquired, at this higher
price. The result is that his client ends up paying a higher price for the
shares – and the difference is pocketed by the stockbroker.

This is breach
of trust of the client. This also affects faith in the markets and its
integrity because, if permitted, there would be concerns that such malpractices
can happen on a regular basis and cause losses to the public. SEBI has alleged
in this case that front-running harms not just the client but the market and
the public in general.

Front-running is
thus similar to insider trading. In insider trading, a person in possession of
price-sensitive information which has been given to him in trust, abuses such
trust and trades and makes a profit for himself. So also in front-running.
However, interestingly, there are comprehensive regulations for insider trading
that define various terms, have several deeming provisions, etc. This, at least
in theory, should help inside traders to be caught and punished. It is another
thing that insider trading is still notoriously rampant and yet difficult to
catch. Front-running, in comparison, has just one specific provision under the
PFUTP Regulations. There are no definitions, no deeming provisions, no
explanations of how persons may be deemed to have been connected as insiders,
etc. In this context, the SEBI order in the present case is thus a good case
study for all on how the violation has been established, albeit by an
interim order.

WHAT ARE THE ALLEGED FINDINGS OF THIS
CASE?

As discussed
earlier, the Tata Fund used to carry out trades through its stockbrokers,
Reliance Securities Ltd. The orders were large and expectedly would result in a
change in the price of the ordered scrip. A large purchase order would thus be
expected to result in rise in prices, and vice versa in case of an order
of sale. The Fund also dealt heavily in derivatives where, again, the impact of
the orders would be similar.

Front-running in
such a circumstance, as the order also explains in detail, follows two
strategies. In case of a purchase order, it is the Buy-Buy-Sell (BBS) strategy.
In case of a sale transaction, it is the Sell-Sell-Buy (SSB) strategy. If the
Fund had placed a buy order, the front-runner would buy ahead, and then place
the order of purchase for the Fund. Against such purchase order of the Fund,
the front-runner would sell the shares bought by him earlier.

SEBI found
through its surveillance that transactions suspiciously of the nature of
front-running were taking place. An analysis of the data followed and the
various parties who allegedly did the front-running were investigated. Their
connections with the dealers of the stockbroker who had executed the
transactions of the Fund were looked into by checking the bank transactions,
inquiry with the brokers, their phone records and even their Facebook accounts.
Personal connections and relations were also looked into. It was established
that three such dealers had connections directly or indirectly with various
parties who had actually traded ahead of the orders of the Fund. This was seen
in the equity segment as well as the derivative segment. The timing of these
orders and how they matched with the orders of the Fund were analysed. Analysis
was also done of the volume of trading of such persons, particularly in the
derivatives segment before and during the period when such alleged
front-running took place. It was alleged that a significant proportion of the
transactions of such parties matched with those of the Fund and a large amount
of profit was made in a short time by these parties.

In view of these
findings, SEBI passed an interim order and prohibited the parties from dealing
in or being associated with the securities market.

SEBI also
ordered these parties to deposit the profits allegedly made from front-running
– of nearly Rs. 4.50 crores – pending further investigation, a hearing to the
parties and a final order. The parties have been required to deposit this
amount within 15 days of the order. Their assets have also been frozen.

SOME ISSUES IN THE ORDER

As stated
earlier, the order is credit-worthy on several grounds. It has detected, even
in an interim way and through an ex parte order, a difficult case of
front-running. Not only this, the speed of detection and investigation is indeed
very fast. It is expected to act as a warning to those who indulge in such
activities.

However, there
are some concerns, too. To begin with, the connections alleged are on
relatively flimsy basis. A few phone calls between the dealer and the alleged
front-runner have been held sufficient to establish a connection. Transfers of
funds of relatively small amounts between parties have also become the basis of
the connection. What is surprising is that even being a Facebook friend is seen
as a connection. While checking the Facebook profiles of persons is surely good
use of modern technology to go behind the scenes, it is also unrealistic. It is
very common for people active on social media to have hundreds or even
thousands of so-called Facebook friends. Facebook, Twitter and even LinkedIn
are generally used for exchange of information and ideas and do not necessarily
mean that there is also an off-line connection between the parties.

Interestingly,
this is not the first time SEBI has used online connections to allege
‘connections’. In another case of alleged front-running, SEBI had noticed a
‘connection’ through a matrimonial site and passed an interim order (dated 4^th
December, 2019). There have been other cases, too, where a Facebook connection
has been relied upon to allege ‘connections’.

The connection
alleged on account of the calls made between parties may also not be sufficient
to uphold such serious allegations. Unless the calls are timed with the
transactions it may be difficult to say that this meant such a connection that
parties are engaged in front-running together. In this case, of course, SEBI
has also tabulated the data of transactions and alleged that the timing also
matched.

Then there is
the connection alleged on account of financial transactions. Being an interim
order, it appears that no further information has been collected as to the
reason for entering into such transactions. It may be possible that such
financial transactions may be for genuine reasons having no connection with
front-running and also not establishing any connection sufficient for
front-running.

Nevertheless,
all these parties have been debarred even in the interim by this order. They
have been made to deposit a very large sum of money being alleged profits of
front-running. Their assets are also barred from sale, etc.

There is another
angle here. As stated, at least on first impression, the basis for alleging
connections is shaky. What is possible is that in the future such parties may
ensure that even such connections are not there, or not evident. After all,
these are white-collar crimes committed by educated people having a level of
sophistication. Indeed, if such flimsy connections are relied on, it may mean
that many persons perpetrating front-running would not come under the radar.

To conclude,
being an interim order, it may happen that the explanation given by the parties
may result in it being set aside either wholly or in part. Nevertheless, this
order is a wake-up call and a warning to persons operating the markets that
SEBI by its market surveillance collects and analyses information that may
throw up white-collar frauds. The fact that such white-collar frauds have been
tackled in a timely manner should make one hope that other less sophisticated
orders would also be caught in larger numbers.

Do not wait; the time will never
be ‘just right.’
Start where you stand and work with whatever tools you may have at your
command, and better tools will be found as you go along

—
George Herbert

shailesh.kwebmaker

LAW OF EVIDENCE RELATING TO WITNESSES TO A WILL

INTRODUCTION

One of the most crucial ingredients for a valid Will is the fact of it
being witnessed by two attesting witnesses. Many a Will has been found wanting
for the fact of improper attestation. However, what would be the state of a
Will where both the attesting witnesses are also dead and when it is being
proved in Court (say in a probate petition)? Would the Will suffer for want of
attestation or could it yet be considered valid? The Supreme Court was faced
with this interesting issue in the case of V. Kalyanaswamy (D) by LRs vs.
L. Bakthavatsalam (D) by LRs, Civil Appeal Nos. 1021-1026/2013, order dated 17^th
July, 2020. Let us analyse this case and other related judgments on
this issue.

FACTS AND THE ISSUE

In the Kalyanaswamy case (Supra) in the Supreme Court, both
the attesting witnesses to the Will were not alive. One of them was an
Income-tax practitioner and the other a doctor. The questions framed by the
Supreme Court for its consideration were as follows:

(a) When both the attesting witnesses are dead, is it required that the
attestation has to be proved by the two witnesses? Or

(b) Is it sufficient to prove that the attestation of at least one of the
attesting witnesses is in his handwriting and proving the testator’s signature?

Before we analyse the Court’s findings it would be worthwhile to understand
the requirements of witnessing a Will and the manner of proving the same.

WITNESSING A WILL

The mode of making a Will in India is provided in section 63 of the Indian
Succession Act, 1925. This Act applies to Wills by all persons other than
Muslims. For a Will to be valid under this Act, its execution by a testator
must be attested by at least two witnesses. The manner of witnessing a Will is
as is provided in section 63 of the Indian Succession Act which requires that
it is attested by two or more witnesses, each of whom has:

(a) seen the testator sign the Will; or

(b) received from the testator a
personal acknowledgement of his signature.

It is trite that the witnesses need not know the contents of the Will. All
that they need to see is the testator and each other signing the Will ~ nothing
more and nothing less!

MANNER OF EVIDENCE

Section 68 of the Indian Evidence Act, 1872 (‘the
Evidence Act’) explains how a document that is required to be attested must be
proved to be executed. In the case of a Will, if the attesting witness is alive
and capable of giving evidence, then the Will can be proved only if one of the
attesting witnesses is called for proving its execution. Thus, in the case of a
Will, the witness must be examined in Court and he must confirm that he indeed
attested the execution of that Will.

WHAT IF WITNESSES CANNOT BE FOUND?

However, section 69 of the Act provides that if no such attesting witness
can be found, it must be proved that the attestation by at least one of the
witnesses is in his own handwriting and that the signature of the person
executing the document is in the handwriting of that person. Thus, evidence
needs to be produced which can confirm the signature of at least one of the
attesting witnesses to the Will as well as that of the testator of the Will.

The Madras High Court in N. Durga Bai vs. Mrs. C.S. Pandari Bai,
Testamentary Original Suit No. 22 of 2010, order dated 27^th
February, 2017, has explained that u/s 69 of the Evidence Act, two
conditions are required to be proved for valid proof of the Will, i.e., the
person who has acquaintance with the signature of one of the attesting
witnesses and also the person executing the document should identify both such
signatures before the court. In that case, a person had identified the
signature of the testator. However, his evidence clearly showed that he was not
acquainted with the signature of both the attesting witnesses. Therefore, the
High Court held there was no compliance of section 69.

The Supreme Court in Kalyanaswamy (Supra)
explained that the attesting witness not being found refers to a variety of
situations ~ it would cover a case of an incapacity on account of any physical
illness; a case where the attesting witnesses are dead; the attesting witness
could be mentally incapable / insane. Thus, the word ‘found’ is capable of
comprehending a situation as one where the attesting witness, though physically
available, is incapable of performing the task of proving the attestation and,
therefore, it becomes a situation where he is not found.

In Master Chankaya vs. State and others, Testamentary Case No.
40/1999, order dated 12^th September, 2019 the Delhi High
Court explained that it was not the case of the petitioner that the attesting
witnesses could not be found. In fact, the petitioner had throughout contended
that he was aware of their whereabouts and assured the Court that he would
produce them before the Court. Later, he dropped the said witnesses on the
ground that their whereabouts were not known and he was therefore unable to
produce them. The Court held that the petitioner did not exhaust all the
remedies for producing the witnesses before it. The petitioner could have
resorted to issuance of a summons to the witnesses under Order 16 Rule 10 of
the Civil Procedure Code, 1908 for the purpose of seeking their appearance. No
such assistance was taken from the Court and hence section 69 could not
automatically be invoked. Thus, all possible remedies must be exhausted before
resorting to this section.

The Calcutta High Court in Amal Sankar Sen vs. The Dacca Co-operative
Housing Society Ltd. (in liquidation), AIR 1945 Cal 350, observed:

‘…In order that Section 69, Evidence Act, may be applied, mere taking out
of the summons or the service of summons upon an attesting witness or the mere
taking out of warrant against him is not sufficient. It is only when the
witness does not appear even after all the processes under Order 16 Rule 10,
which the Court considered to be fit and proper had been exhausted, that the
foundation will be laid for the application of Section 69, Evidence Act………In
order that S.69, Evidence Act, may be applied ………….the plaintiff must move the
Court for process under Order 16 Rule 10 Civil P.C., when a witness summoned by
him has failed to obey the summons…’

Further, in Hare Krishna Panigrahi vs. Jogneswar Panda & Ors.,
AIR 1939 Cal 688, the Calcutta High Court observed that the section
required that the witness was actually produced before the court and then if he
denied execution or his memory failed or if he refused to prove or turned
hostile, other evidence could be admitted to prove execution. If, however, the
witness was not before the court at all and the question of denying or failing
to recollect the execution of the document did at all arise… the plaintiff
simply took out a summons against the witness and nothing further was done
later on. The court held that in all such cases it was the duty of the
plaintiff to exhaust all the processes of the court in order to compel the
attendance of any one of the attesting witnesses, and when the production of
such witnesses was not possible either legally or physically, the plaintiff
could avail of the provisions of section 69 of the Evidence Act.

In this respect, the Supreme Court in Babu Singh and others vs. Ram
Sahai alias Ram Singh (2008) 14 SCC 754 has explained that section 69
of the Evidence Act would apply where the witness is either dead or out of the
jurisdiction of the court, or kept out of the way by the adverse party, or
cannot be traced despite diligent search. Only in that event the Will may be
proved in the manner indicated in section 69, i.e., by examining witnesses who
were able to prove the handwriting of the testator. The burden of proof then
may be shifted to others. The Court further propounded that while in ordinary
circumstances a Will must be proved keeping in view the provisions of section
63 of the Indian Succession Act and section 68 of the Evidence Act, in the
extraneous circumstances laid down in section 69 of the Evidence Act, the
strict proof of execution and attestation stands relaxed. However, in this case
the signature and handwriting, as contemplated in section 69, must be proved.

FINDINGS OF THE COURT

The Supreme Court in the Kalyanaswamy
case (Supra) considered the question whether (despite the fact
that both the attesting witnesses were dead), the matter to be proved u/s 69 of
the Evidence Act was the same as a matter to be proved u/s 68 of the same Act?
In other words, section 68 of the Act mandatorily requires that in the case of
a Will at least one of the attesting witnesses must not only be examined to
prove attestation by him, but he must also prove the attestation by the other
attesting witness. The court held that while it was open to prove the Will and
the attestation by examining a single attesting witness, it was incumbent upon
him to prove attestation not only by himself but also the attestation by the
other attesting witness.

The Apex Court agreed with the principle that section 69 of the Evidence
Act manifests a departure from the requirement embodied in section 68. In the
case of a Will, when an attesting witness is available, the Will is to be
proved by examining him. He must not only prove that the attestation was done
by him, but he must also prove the attestation by the other attesting witness.
This is subject to the situation which is contemplated in section 71 of the Evidence
Act which allows other evidence to be adduced in proof of the Will among other
documents where the attesting witness denies or does not recollect the
execution of the Will.

Section 71 of the Evidence Act states that if the
attesting witness to a document denies or does not recollect the execution of
that document, its execution may be proved by other evidence. The Apex Court
held that the fate of the transferee or a legatee under a document (which is
required by law to be attested), is not placed at the mercy of the attesting
witness and the law enables corroborative evidence to be effected for the
document despite denial of the execution of the document by the attesting
witness.

One of the important rules laid down by the Supreme Court is that in a case
covered u/s 69 of the Evidence Act, the requirement pertinent to section 68 of
the same Act (that the attestation by both the witnesses is to be proved by
examining at least one attesting witness), is dispensed with. In a case covered
u/s 69 what was to be proved as far as the attesting witness was concerned was
that the attestation of one of the attesting witness was in his handwriting.
The language of the section was clear and unambiguous. Section 68 of the
Evidence Act contemplated attestation of both attesting witnesses to be proved
but that was not the requirement in section 69.

The Court also dealt with another aspect about section 69 of the Evidence
Act. Section 69 spoke about proving the Will in the manner provided therein.
The word ‘proved’ was defined in section 3 of the Evidence Act as follows:

‘Proved. – A fact is said to be proved when, after considering the matters
before it, the Court either believes it to exist, or considers its existence so
probable that a prudent man ought, under the circumstances of the particular
case, to act upon the supposition that it exists.’

According to the Supreme Court, the question to be asked was whether having
regard to the evidence before it, the Court could believe the fact as proved.
The Court held that in a case where there was evidence which appeared to
conform to the requirement u/s 69, the Court was not relieved of its burden to
apply its mind to the evidence and it had to find whether the requirements of
section 69 were proved. In other words, the reliability of the evidence or the
credibility of the witnesses was a matter for the Court to still ponder over.
In this case, one of the witnesses was an Income-tax practitioner and the other
was a doctor. Both of them were respectable professionals who were well known
to the testator and there was no reason to doubt their credibility. Applying
these principles, the Supreme Court found that based on external evidence
before it, the signature of one of the attesting witnesses and the testator
were proved.

The Court also considered the physical and mental
capacity of the testator to make a valid Will. It held that as far as his
health was concerned, it was well settled that the requirement of sound
disposing capacity was not to be confused with physical well-being. A person
who has had a physical ailment may not automatically be robbed of his sound
disposing capacity. The fact that a person was afflicted with a physical
illness or that he was in excruciating pain would not deprive him of his
capacity to make a Will. What was important was whether he was conscious of
what he was doing and whether the Will reflected what he had chosen to decide.
In this case, the testator was suffering from cancer of the throat but there
was nothing to indicate in the evidence that he was incapable of making up his
own mind in the matter of leaving a Will behind. The fact that he was being fed
by a tube could hardly have deprived him of his capacity to make a Will.

Accordingly, the Court opined that the requirements of section 69 were
fulfilled and, hence, the Will was a valid Will.

CONCLUSION

A Will is a very important, if not the most
important, document which a person may execute. Selecting an appropriate
witness to the Will is equally important. Some suggestions in this respect are
selecting a relatively younger witness. Further, one should consider having
respectable professionals, businessmen, etc., as witnesses so that their
credibility is not doubted. As far as possible, have people who know the
testator well enough. In the event that both the witnesses predecease the
testator, he must make a new Will with new witnesses. Always remember, that all
precautions should be taken to ensure that a Will should live longer than the
testator!

shailesh.kwebmaker

PRACTICAL GUIDANCE ON SIGNIFICANT INFLUENCE

There
are numerous situations where, concluding whether an investor exercises
significant influence over the investee and consequently whether the investee
is an associate of the investor, requires considerable judgement to be
exercised. When there is no significant influence, and an entity incorrectly
interprets the relationship to be that of significant influence, it will end up
wrongly consolidating (using the equity method) the entity in the consolidated
financial statements, rather than measuring it in accordance with Ind AS 109 – Financial
Instruments and vice versa.

In this
article, we discuss two examples. But before we do that, it is important to
understand the following key provisions in Ind AS 28 – Investments in
Associates and Joint Ventures which is reproduced below.

Paragraph
3 defines the following terms:

‘An associate is an entity over which the investor has significant
influence.’

‘Significant influence is the power to participate in the financial and
operating policy decisions of the investee but is not control or joint control
of those policies.’

Paragraph
5:

‘If an entity holds, directly or indirectly (e.g.
through subsidiaries), 20 per cent or more of the voting power of the investee,
it is presumed that the entity has significant influence, unless it can be
clearly demonstrated that this is not the case. Conversely, if the entity
holds, directly or indirectly (e.g., through subsidiaries), less than 20 per
cent of the voting power of the investee, it is presumed that the entity does not
have significant influence, unless such influence can be clearly demonstrated.
A substantial or majority ownership by another investor does not necessarily
preclude an entity from having significant influence.’

Paragraph
6:

‘The existence of significant influence by an entity is usually evidenced
in one or more of the following ways:

a) representation on the board of
directors or equivalent governing body of the investee;

b) participation in policy-making
processes, including participation in decisions about dividends or other
distributions;

c) material transactions between the
entity and its investee;

d) interchange of managerial
personnel; or

e) provision of essential technical
information.’

Example 1A – Significant influence in a group structure

Fact Pattern

The
parent has two subsidiaries, Sub 1 and Sub 2. Sub 1 has a 16% ownership
interest in Sub 2. The group structure is as follows:

The
parent has appointed two executives of Sub 1 as Directors to the Board of Sub
2. Thanks to the number of Directors on the Board, the two Directors are able
to have an impact on Sub 2’s Board. The parent has the right to remove the two
executives from the Board at any time. Sub 1 has also been directed to manage
Sub 2 in a way that maximises the return for the parent, rather than for Sub 1.
The parent can amend this directive at any time. Whether Sub 1 has significant
influence over Sub 2?

Response

Ind AS
28:5 indicates that ‘[a] substantial or majority ownership by another investor
does not necessarily preclude an entity from having significant influence’. In
this fact pattern, however, Sub 1 does not have significant influence over Sub
2, because although Sub 1 can participate in policy-making decisions, the
parent can remove Sub 1’s executives from Sub 2’s Board at any time. Therefore,
Sub 1’s apparent position of significant influence over Sub 2 can be removed by
the parent and Sub 1 does not have the power to exercise significant influence
over Sub 2. Since Sub 1 does not have significant influence over Sub 2, Sub 2
is not an associate of Sub 1. It is actually the parent that has 100% control
over Sub 2, directly and indirectly through Sub 1.

Example 1B – Board
participation alone does not provide significant influence

Fact pattern

Internet
Ltd.’s Board is the ultimate decision-making authority and has ten Directors.
The shareholder analysis of Internet Ltd. shows the following shareholders.
Other shares are widely held by the public.

Shareholding

Board
representation

Viz Ltd.

38%

Fiz Ltd.

36%

Ke Ltd.

Individual M (Managing Director of Internet Ltd.)
appointed by Viz Ltd.

Others – widely held

11%

none

100%

Board
decisions are passed by a 70% majority of voting Directors. Is a 9%
shareholding and representation of one Director on the Board enough to provide
Ke Ltd. with significant influence?

Response

Whether
Ke Ltd. has significant influence is a matter of judgement. Ke Ltd. has only
one Director out of the ten. The Board is dominated by Viz and Fiz who can make
decisions without the agreement of the other Board members. Under Ind AS 28,
the Board representation is an indicator of significant influence. However, it
does not provide any further guidance on

how to evaluate the representation in the context of the size of the Board,
voting patterns, significant transactions, exchange of managerial personnel and
the like. Ke Ltd. only has 10% of the Board seats and believes this is not
enough to exercise significant influence, given the presence of the two major
investors and the Managing Director on the Board. Although Ke Ltd. participates
in the policy-making processes and decisions, that alone does not enable it to significantly
influence those decisions as suggested under Ind AS 28.

Having a
representation on the Board of Directors is an indicator of significant
influence. It is not an automatic confirmation. Additional analysis would be
required and relevant facts and circumstances will need to be considered. Ke
Ltd., in this scenario, holds far less than 20% shareholding threshold
indicated in the standard. It therefore does not have significant influence
over Internet Ltd.

CONCLUSION

The
determination of significant influence is a matter of considerable judgement
and needs careful evaluation of all the details, the facts and circumstances of
the case.

shailesh.kwebmaker

UNEXPLAINED DEPOSITS IN FOREIGN BANK ACCOUNTS

ISSUE FOR CONSIDERATION

A few years back, around 2011, the Government of France shared certain
information with the Government of India concerning deposits in several bank
accounts with HSBC Bank, Geneva, Switzerland held in the names of Indian
nationals, or where such nationals had a beneficial interest. The information
was received in the form of a document known as ‘Base Note’ wherein various
personal details of account holders such as name, date of birth, place of
birth, sex / gender, residential address, profession, nationality, date of
opening of bank account in HSBC Bank, Geneva and balances in certain years, etc.,
were mentioned.

A number of cases
have since then been reopened on the basis of the ‘Base Note’, leading to
reassessments involving substantial additions and sizable consequential
additions which are being contested in numerous appeals across the country
mainly on the following grounds:

(i) the assessee is a resident of a foreign
country and his income is not taxable in India,

(ii) the source of income of the assessee in India
has no connection with the bank deposits concerned,

(iii) the bank account was not opened or operated by
the assessee,

(iv) the bank account was not in the name of the
assessee,

(v) the bank account was in the name of a private
trust which was a discretionary trust and the assessee had not received any
payment or income from the trust,

(vi) the reopening was bad in law.

In addition to the
above defences, the assessees have also contended that the additions were made
on the basis of unauthentic material (the ‘Base Note’), that copies of the
material relied upon were not provided, or that adequate opportunity of hearing
was not provided, or that the principles of natural justice were violated on
various grounds, and also that the A.O. had failed in establishing his case for
addition and in linking the deposits to an Indian source.

More than 20 cases
have been adjudicated by the Tribunal or the courts on the issue of the
additions, some in favour of the Revenue, some against the Revenue and in
favour of the assessee, either on application of the provisions of the
Income-tax Act, 1961 or on the grounds of natural justice. Most of these
decisions have been rendered on the facts of the case. In a few cases, the
issue involved was about the possibility of taxing an income in India for a
year during which the assessee was a non-resident and was the beneficiary of a
discretionary trust under the Income-tax Act, 1961. In one of the cases, one of
the Mumbai benches of the Tribunal held that no addition could be made on
account of such deposits in the assessment year in the hands of the assessee who
was a non-resident and had not received any money on distribution from the
trust in that year. As against this, recently in another case, another Mumbai
bench of the Tribunal held that the addition was sustainable even when the
assessee in question was not a resident for the purposes of the Act and claimed
to be a beneficiary of a discretionary trust.

THE DEEPAK B. SHAH CASE

The issue came up
for consideration in the case of Deepak B. Shah 174 ITD 237 (Mum).
The assessees in this case had filed income-tax returns which were processed
u/s 143(1). Subsequently, the Government of India received information from the
French Government under DTAA that some Indian nationals and residents had
foreign bank accounts in HSBC Bank, Geneva, Switzerland which were not
disclosed to the Indian Tax Department. This information was received in the
form of a document known as ‘Base Note’ wherein various personal details of
account holders, such as name, date of birth, place of birth, sex / gender,
residential address, profession, nationality, date of opening of bank account
in HSBC Bank, Geneva and balances in certain years, etc., were mentioned. After
receiving the ‘Base Note’ as a part of the Swiss leaks, the Investigation Wing
of the Income Tax Department conducted a survey u/s 133A at the premises of one
Kanu B. Shah & Co. During the course of the survey proceedings, the ‘Base
Note’ was shown to the assessees Deepak B. Shah and Kunal N. Shah and it was
indicated that the Revenue was of the view that both the assessees had a
foreign bank account. The said foreign bank account was opened in 1997 by an
overseas discretionary trust known as ‘B’ Trust, set up by a Settlor, an NRI
since 1979 and a non-resident u/s 6. Both the assessees with Indian residency
were named as discretionary beneficiaries of the said trust.

The A.O. added peak
balance in the hands of both the assessees at Rs. 6,13,09,845 and Rs.
5,99,75,370 for assessment years 2006-07 and 2007-08, respectively. The same
additions were also made in the case of Dipendu Bapalal Shah who created the
private discretionary trust known as Balsun Trust.

On appeal, the
CIT(A) affirmed the addition to the tune of half of the peak balance in the
hands of both the assessees to avoid double taxation. The CIT(A) confirmed the
addition to the tune of Rs. 3,06,54,922 and Rs. 2,74,007 (sic) in
A.Ys. 2006-07 and 2007-08 u/s 69A of the Act in both the cases.

In the appellate
proceedings of Dipendu Bapalal Shah, the CIT(A) set aside the addition on the
basis that as an NRI none of his business monies earned outside India could be
brought to tax in India, unless they were shown to have arisen or accrued in
India. He also held that there was no linkage of the amounts to India and the
Revenue had not discharged its duty on this issue. The said order of the CIT(A)
in the case of Dy. CIT vs. Dipendu Bapalal Shah 171 ITD 602 (Mum.-Trib.)
was upheld by the Tribunal on the ground that the contents of the affidavit
dated 13^th October, 2011 were not denied or proved to be not true by
the A.O. Further, it was held that the bank account with HSBC Bank, Geneva was
outside the purview of the IT Act as Dipendu Bapalal Shah was a non-resident
Indian.

In the second
appeal, the assessees reiterated the undisputed facts about the ‘Base Note’ of
2011, denied knowledge of any such bank account and highlighted that no
incriminating material was found during the course of the survey; the Settlor
had created and constituted an overseas discretionary trust known as ‘Balsun
Trust’ by making a contribution to the said trust from his own funds / sources
with Deepak and Kunal as discretionary beneficiaries of the said trust; during
the years under consideration, they did not receive any distribution of income
from the said trust as no such distribution was done by the trust during those
years; the Settlor was a foreign resident since 1979 and was a non-resident u/s
6 of the Act; the Settlor and both the assessees in their respective assessment
proceedings had filed their sworn-in affidavits; the affidavit of the Settlor was
sworn before the UAE authority, stating on oath that he had settled an offshore
discretionary trust with his initial contribution, none of the discretionary
beneficiaries had contributed any funds to the trust, and none of the
beneficiaries had received any distribution from the trust.

The sworn
affidavits of the assessees stated that they were not aware of the existence of
any of the accounts in HSBC Bank, Geneva, that they never carried out any
transactions in relation to the said account, nor received any benefit from the
said account, and that they had not signed any documents nor operated the said
bank account. A clarificatory letter from HSBC Bank, Geneva was also filed
stating that they had neither visited nor opened or operated the bank accounts
and that no payments had been received from them or made to them in relation to
the said account; the addition was made in three hands but the Commissioner
(Appeals) deleted the addition in the hands of the Settlor, which order of
deletion was also upheld by the coordinate bench of the Tribunal, holding that
the contents of the affidavit of the Settlor were not declined or held to be
not true by the A.O.

It was explained
further that the bank account of HSBC Bank, Geneva was out of the purview of
the IT Act, as the Settlor was a non-resident Indian since 1979; looking to the
decision of the coordinate bench holding that the money belonged to the
Settlor, who was a non-resident, and the income of the non-resident held abroad
was not assessable in India unless it was shown to have arisen or accrued in
India; since it was held by the Tribunal that the amount in the HSBC account in
Geneva was owned by the Settlor who was a non-resident, there was no
justification or reason to sustain the order of the Commissioner (Appeals); the
Revenue had completely failed to show any linkage of the foreign bank account
with Indian money; addition had been made u/s 69A and it was a sine qua non
for invoking section 69A that the assessee must be found to be the owner of
money, bullion, jewellery or other valuable articles. The money was held in the
name of the Settlor, who claimed to be the owner of the said deposits from his
own funds / sources, and the Revenue had failed to bring any cogent and
convincing materials on record which proved that the assessees were owners of
the money in the HSBC account.

It was further
contended that the Settlor was the owner of the HSBC Bank account, Geneva and
the assessees were discretionary beneficiaries which led to the positive
inference that they were not the owners of the said account and hence the
additions u/s 69A could not be sustained; the assessees had not made any
contribution to, nor done any transaction with, the said trust at all; the
income of the trust could not be added in the hands of the beneficiaries and
the trustees, as the representative assessees, were liable to be taxed on the
income of the trust; if the discretionary trust had made some distribution of
income during the year in favour of the discretionary beneficiaries, only then
was the distributed income taxable in the hands of the beneficiaries; but
nothing of the sort had happened nor had the assessees received any money as
distribution of income by the discretionary trust; so long as the money was not
distributed by the discretionary trust, the same could not be taxed in the
hands of the beneficiaries.

It was explained
that as per the provisions of sections 5 and 9 read with sections 160-166 of
the IT Act, qua a trust, the statute clearly prescribed a liability to
tax in the hands of the trustee, and stipulated that a discretionary
beneficiary having received no distribution would not be liable to tax. As
such, the provisions required to be read strictly and no tax liability could be
imputed to the assessees as discretionary beneficiaries when the statute
specifically provided otherwise.

The Revenue
contended that the affidavits filed were self-serving documents without any
corroborative or evidentiary value; in the affidavit of Dipendu Bapalal Shah,
there was no detail of his family members, and, therefore, the said document
was self-serving without any evidentiary value; the confirmation submitted by
HSBC Bank had confirmed the names of Deepak B. Shah and Kunal N. Shah (the
assessees); the names of the assessees had been mentioned in the information
received by the Government of India as a part of Swiss Leaks in relation to
HSBC Bank, Geneva by way of the ‘Base Note’; the assessee had refused to sign
any consent paper, which clearly showed that the said transactions were proved
beyond doubt that these two assessees had a connection with the said bank
account; the assessees did not co-operate at any stage of the proceedings; in
such clandestine operations and transactions, it was impossible to have direct
evidence or demonstrative proof of every move of the assessee and that the
income tax liability was to be assessed on the basis of parameters gathered
from the inquiries, and that the A.O. had no choice but to take recourse to the
material available on record.

The Tribunal, on
due consideration of the contentions of both the parties, vide
paragraphs 14, 15, 17 and 18 of the order held as under:

‘14. Further, the bank account of HSBC Bank, Geneva is out of the
purview of the IT Act, as Mr. Dipendu Bapalal Shah is a non-resident Indian
since 1979. In the case of the two appellants before us, the same amount was
added in AYs 2006-07 and 2007-08 which was reduced by Ld. CIT(A) to one half of
the total additions to avoid any double taxation affirming the additions to
that extent. Looking to the decision of the coordinate bench holding that the
money belonged to Mr. Dipendu B. Shah who is non-resident and the income of the
non-resident held abroad is not assessable in India unless it is shown to have
arisen or accrued in India. Since it is held by the ITAT that the amount in
HSBC Account in Geneva is owned by Mr. Dipendu Bapalal Shah who is non-resident
we do not find any justification or reasons to sustain the order of Ld. CIT(A)
when the Revenue has completely failed to show any linkage with foreign bank
account with Indian money. We find that addition has been made by the A.O. u/s
69A of the Act to justify the addition on account of peak balance. We agree
with the contentions of the Ld. AR that it is sine
qua non for invoking section 69A of the IT Act, the assessee must be found
to be the owner of money, bullion, jewellery or other valuable articles and
whereas in the present case the money is owned and held by Mr. Dipendu Bapalal
Shah a foreign resident in an account (with) HSBC, Geneva and also admitted
that he is the owner of the money in the HSBC Account Geneva.’

‘15. In the present case the money is held in the name of Mr. Dipendu
Bapalal Shah who vehemently claimed to be owner of the said deposits from his
own fund / sources and the Revenue has failed to bring any cogent and
convincing materials on record which proved that the two appellants are owners
of the money in HSBC Account.’

‘17. In the present case, undisputedly Mr. Dipendu Bapalal Shah is owner
of HSBC Bank account, Geneva and the appellants are discretionary beneficiaries
which leads to positive inference that the appellants are not the owners of the
said bank account and hence the additions under section 69A cannot be
sustained. In the present case before us, admittedly both the appellants,
namely Deepak B. Shah and Kunal N. Shah are discretionary beneficiaries of the
“Balsun Trust” created by Mr. Dipendu Bapalal Shah and the two
appellants have not made any contribution nor done any transaction with the
said trust at all. In our opinion in the case of discretionary trust, the
income of the trust could not only be added in the hand of beneficiary but the
trustees are the representative assessees who are liable to be taxed for the
income of the trust. If the discretionary trust has made some distribution of
income during the year in favour of the discretionary beneficiaries only then
the distributed income is taxable in the hands of the beneficiaries but nothing
of the sort has happened nor two appellants have received any money as
distribution of income by the discretionary trust. So long as the money is not
distributed by the discretionary trust, the same cannot be taxed in the hands
of the beneficiaries. Similarly, in the present case before us, the deposits held
in HSBC, Geneva account cannot be taxed in the hand of beneficiaries /
appellants at all.’

‘18. So applying the ratio laid down by the Hon’ble Apex Court in the
abovesaid two decisions, we are of the considered view that the additions
cannot be made and sustained in the hands of the appellants as the Balsun Trust
is a discretionary trust created by Mr. Dipendu Bapalal Shah and said trust has
neither made any distribution of income nor did the two beneficiaries /
appellants receive any money by way of distribution. While the Department has
failed to bring any conclusive evidence to establish nexus between these two
appellants and the bank account in HSBC, Geneva and more so when Mr. Dipendu
Bapalal Shah has owned the balance in the HSBC, Geneva bank account, we are not
in agreement with the conclusions of the CIT(A) in sustaining the additions
equal to fifty percent of the peak balance in the hands of both the appellants.
Considering the facts of the two appellants, in view of various decisions as
discussed hereinabove, we hold that the order of CIT(A) is wrong in assuming
that the said money may belong to these two appellants and such conclusion is
against the facts on record and based on surmises and presumptions.
Accordingly, we set aside the order of Ld. CIT(A) and direct the A.O. to delete
the additions made u/s 69A in respect of HSBC Bank account for assessment years
2006-07 and 2007-08 in the case of both the appellants before us.’

In the result, the
appeals of the assessees were allowed and the additions made in their hands
were deleted.

THE RENU T. THARANI CASE

Recently, the issue
arose in the case of Renu T. Tharani 107 taxmann.com 804 (Mum).
The assessee in the case was an elderly woman in her late eighties. On 29^th
July, 2006 she had filed her income tax return for A.Y. 2006-07 disclosing a
returned income of Rs. 1,70,800 in Ward 9(1), Bangalore. Her case was
transferred to Mumbai under an order dated 20^th December, 2013
passed u/s 127 of the Act. The return was not subjected to any scrutiny and the
assessment thus reached finality as such. The investigation wing of the Income
Tax Department received information that the assessee had a bank account with
HSBC Private Bank (Suisse) SA Geneva. Based on the information, this case was
reopened for fresh assessment on 30^th October, 2014 by issuance of a
notice u/s 148.

She responded by
stating that she had neither been an account holder of HSBC nor a beneficial
owner of any assets deposited in the account with HSBC Private Bank (Suisse)
SA, Switzerland, during the last ten years. It was further stated that HSBC
Private Bank (Suisse) SA had also confirmed that GWU Investments Ltd. was the
holder of account number 1414771 and, according to their records, GWU
Investments Limited used to be an underlying company of Tharani Family Trust,
of which Mrs. Renu Tharani was a discretionary beneficiary, and that the
Tharani Family Trust was terminated and none of the assets deposited with them
were distributed to her. It was further stated that the ‘Base Note’ issued was
inaccurate, as she did not have any account with HSBC Bank Geneva bearing
number BUP_SIFIC_PER_ID_5090178411 or any other number.

It was explained
that the income of a discretionary trust could not be taxed in her hands as per
the decision in the case of Estate of HMM Vikramsinhji of Gondal, 45
taxmann.com 552(SC), wherein it was held that in the hands of the
beneficiary of a discretionary trust income could only be taxed when the income
was actually received, but in her case she had not received any money in the
capacity of beneficiary. It was submitted that in the light of the abovesaid
facts, there was no reason why the A.O. should insist on asking the assessee to
provide the details of the account standing in the name of GWU Investments
Ltd., as she was in no position to provide the details for the reasons
mentioned to the A.O.

However, none of
the submissions impressed the A.O. He rejected the submissions made by the
assessee and proceeded to make an addition of Rs. 196,46,79,146, being an
amount equivalent to US $3,97,38,122 at the relevant point of time, by
observing as follows:

‘12. The
assessee has not provided the bank account statement in which she is the
discretionary beneficiary nor has explained the sources of deposits made in the
said account… not acceptable because of the following reasons:

(a) It is surprising that she does not know about
the Settlor of the Trust as well as the sources of deposits made in the HSBC
account. No bank account statement has been provided nor the source of deposits
made in the account explained by the assessee even after specific queries were
raised on this.

(b) It is also surprising that as a beneficiary
she did not receive any assets when the Tharani Family Trust was terminated and
if that be so, then where all the money went after termination of the Tharani
Family Trust is open to question and the same remains unexplained.

Considering the
facts of this case, the decision of the Hon’ble ITAT, Mumbai in the case of Mohan Manoj Dhupelia in ITA No. 3544/Mum/2011 etc. is
directly applicable to this case.

In absence of
anything contrary, the only logical conclusion that can be inferred is that the
amounts deposited are unaccounted deposits sourced from India and therefore
taxable in India. This presumption is as per the provisions of section 114 of
The Indian Evidence Act, 1872.

Thus, as per the
provisions of section 114 of The Indian Evidence Act, 1872 also, it needs to be
held at this stage that the information / details not furnished were
unfavourable to the assessee and that the source of the money deposited in the
HSBC account is undisclosed and sourced from India.’

Aggrieved, the
assessee carried the matter in appeal but without any success. The CIT(A)
confirmed the conclusions so arrived at by the A.O. He noted as under:

‘21. The focus
of the submission is shifting responsibility on Assessing Officer without
furnishing any supplementary and relevant details. Vital facts (at cost of
repetition) regarding the entities involved / persons are as under:

A. Smt. Renu Tharani is the beneficiary of
Tharani Family Trust.

B. Smt. Renu Tharani is the sole beneficiary.

C. Tharani Family Trust is the sole beneficiary
of GWU Investments Ltd.

D. Smt. Renu Tharani holds interest in GWU
Investments Ltd. through Tharani Family Trust.

E. Income attributable directly or indirectly to
GWU Investments Ltd. or Tharani Family Trust pertains to Smt. Renu Tharani.

F. GWU Investments Ltd. having address in Cayman
Islands has investment manager as Shri Haresh Tharani, son of the appellant.

The holding
pattern of entities concerned and the contents of the base note cement the
issue. The fact that the appellant is sole beneficiary implies that there is
never a case of distribution and all income concerning the asset only belongs
to her, i.e., will accrue or arise only to her from the moment beneficial
rights came to the appellant.’

Coming to the
quantum of additions, however, the CIT(A) upheld the stand of the assessee and
gave certain directions to the A.O.

On second appeal,
the assessee stated that she was admittedly a non-resident assessee, inasmuch
as the impugned assessment was framed on the assessee in her residential status
as ‘non-resident’, and it was thus not at all required of her to disclose her
foreign bank accounts, even if any. It was explained that unlike in the United
States, where global taxation of income of the assessee was on the basis of
citizenship, the basis of taxability of income outside India, in India, was on
the basis of the residential status of the assessee. The fundamental principles
of taxation of global income in India were explained in detail to highlight
that unless someone was resident in India, taxability of such a person was
confined to income accruing or arising in India, income deemed to accrue or
arise in India, income received in India and income deemed to have been
received in India. None of those categories covered the income, even if any, on
account of an unexplained credit outside India.

The assessee
pointed out that since 23^rd March, 2004 she was regularly residing
in the United States of America, and that, post the financial year ended 31^st
March, 2006 onwards, the assessee was a non-resident assessee. In this
backdrop, she was not required to disclose any bank account outside India or
report any income outside India unless it was covered by the specific deeming
fiction which was admittedly not the case for her. It was, therefore, contended
that any sums credited in the bank account in question could not be taxed in
her hands.

Attention was
invited to a coordinate bench decision in the case of Hemant Mansukhlal
Pandya 100 taxmann.com 280, 174 ITD 101 (Mum), wherein it was inter
alia held that where additions were made to the income of an assessee who
was a non-resident since 25 years, since no material was brought on record to
show that funds were diverted by the assessee from India to source deposits
found in a foreign bank account, the impugned additions were unjustified. It
was thus contended that she, too, being a non-resident, such an income in
foreign bank deposits, even if that were so, could not be taxed in the hands of
the assessee.

It was further
contended that when the account did not belong to the assessee, there was no
question of the assessee being in a position to furnish any evidence in respect
of the same; that she did not have information whatsoever about the source of
deposits in this account, and the assets held therein; that the account was
held with GWU Investments Limited with which the assessee had no relationship
whatsoever; she at best was a beneficiary of the discretionary trust, settled
by GWU Investments Limited, but then in such an eventuality the question of
taxability would arise only at the point of time when the assessee actually
received any money from the trust by relying on the judgment in the case of Estate
of HMM Vikramsinhji of Gondal (Supra), in support of the proposition;
that the entire case of the A.O. was based on gross misconception of facts and
ignorance of the well-settled legal position.

It was reiterated
that the assessee did not have any account with the HSBC Private Bank (Suisse)
SA, and yet she was treated as the owner of the account. The account was of the
investments, but was treated as a bank account. The assessee was a
non-resident, taxable in India in respect of her income earned in India, and yet
the assessee was being taxed in respect of an account which undisputedly had no
connection with India. Denying the tax liability in respect of such an account
at all, it was submitted that if at all it had tax implications anywhere in the
world, the liability was in the jurisdiction of which the assessee was a
resident. The assessee was taxable only on disbursement of the benefits to the
beneficiary, but then the beneficiary was being taxed in respect of the corpus
of the trust. The impugned additions were, even on merits, wholly devoid of any
substance.

The Revenue in
response vehemently relied upon, and elaborately justified, the orders of the
authorities below by highlighting that it was a case in which a specific
information had come to the possession of the Government of India, through
official channels, and this information, amongst other things, categorically
indicated that the assessee was a beneficiary and beneficial owner of a
particular account which had peak assets worth US $3,97,38,122 and that the
genuineness of the account was not in doubt and had not even been challenged by
the assessee, which reality could not be wished away. It was contended that the
IT Department had discharged its burden of proof by bringing on record
authentic information received through government channels about the bank
relationships which were unaccounted in India and unaccounted abroad, and
whatever documents the assessee had given were self-serving documents and
hyper-technical explanations, which did not contradict the official information
received by the Government of India through official channels, and it did in
fact corroborate and evidence the existence of the account with the assessee as
beneficiary and, in any case, the documents submitted could not be considered
enough to discharge the burden of the assessee that the evidences produced by
the Department were not genuine or the inescapable conclusions flowing from the
same were not tenable in law.

It was highlighted
by the Revenue that all that the assessee said was that she had no idea as to
who did it, and passed on the blame to a Cayman Island-based company which was
operating the said account, but then the Cayman Island company could not be a
person unconnected with the assessee. It was inconceivable that a rank outsider
would be generous enough to put that kind of huge money at her disposal or for
her benefit but, as a beneficiary, she was expected to know the related facts
which she alone knew. The fact of the Swiss Bank accounts being operated
through conduit companies based in tax havens was common knowledge and, seen in
that light, if the assessee had an account for her benefit in a Swiss Bank,
whether she operated it directly or through a web of proxies, the natural
presumption was that the money was her money which she must account for.

It was also pointed
out that within months of her changing the residential status, the account was
opened and the credits were afforded. Where did this money come from?
Obviously, in such a short span of time that kind of huge wealth of several
millions of dollars could not be earned by her abroad, but then if she had
shown that kind of earning anywhere to any tax authorities, to that extent, the
balance in Swiss account could be treated as explained. The technicalities
sought to be raised were of no use and the judicial precedents, rendered in an
altogether different context, could not be used to defend the unaccounted
wealth stashed away in the assessee’s account with HSBC Private Bank, Geneva.

In a brief
rejoinder, the assessee submitted that the sweeping generalisations by the
Revenue had no relevance to the facts before the Tribunal. The hard reality was
that the account did not belong to the assessee and that there was no direct or
indirect evidence to support that inference. The assessee was only a
beneficiary of a trust but the taxability in her hands must, at best, be
confined to the monies actually received from the trust; that admittedly GWU
Investments Ltd. was owner of the account in which the assessee was neither a
director nor a shareholder; and that, in any case, nothing remained in the
account as the same stood closed now. It was then reiterated that the assessee
was a non-resident and she could not be taxed in respect of monies credited,
even if that be so, in her accounts outside India; that there was no evidence
whatsoever of the assessee having an account abroad, that whatever evidence had
been given to the assessee was successfully controverted by her, that she was a
non-resident and her taxability was confined to the incomes sourced in India,
and that, for the detailed reasons advanced by her, the impugned addition of
Rs. 196,46,79,146 in respect of her alleged and non-existent bank account in
HSBC Private Bank (Suisse) SA Geneva must be deleted.

The Tribunal deemed
it important to recall the backdrop in which the information about the
assessee’s account with the HSBC Private Bank (Suisse) SA was received by the
Government of India to also refresh memories, and certain undisputed facts,
about the ‘HSBC Private Bank Geneva scandal’ as it was often referred to. In
paragraph 23 of the judgment, it detailed the backdrop. In paragraph 24, it
also referred to one more BBC report, which could throw some light on the
backdrop of this case, and found the report worth a look at by reproducing
extensively from it. The Tribunal further noted that those actions of the HSBC
Private Bank (Suisse) SA had not gone unnoticed so far as law enforcement
agencies were concerned, and the bank had to face criminal investigations in
several parts of the globe, and had to pay millions of dollars in settlement
for its lapses. In paragraph 26, it explained that the above press reports were
referred to just to set the backdrop in which the case before them was set out,
and, as they explain the rationale of their decision, the relevance of the
backdrop would be appreciated.

The Tribunal took it upon itself to examine the trust structures
employed by HSBC Private Bank since a lot had been said about the assessee
being a discretionary beneficiary of a trust which was said to have the account
with HSBC Private Bank (Suisse) SA Geneva. The Tribunal found that it would be
of some use to understand the nature of trust services offered by HSBC Private
Bank, as stated on their website even on the date of the decision.

It noted that the
assessee had shifted to the USA just seven days before the beginning of the
relevant previous year, and it would be too unrealistic an assumption that
within those seven days plus the relevant financial year, the assessee could
have earned that huge an amount of around Rs. 200 crores which, at the rate at
which she did earn in India in the last year, would have taken her more than
11,500 years to earn. Even if one went by the basis, though the material on
record at the time of recording reasons did not at all indicate so, that the
assessee was a non-resident for the assessment year, which was, going by the
specific submissions of the assessee, admittedly the first year of her
‘non-resident’ status, it was wholly unrealistic to assume that the money at
her disposal in the Swiss Bank account reflected income earned outside India in
such a short period of one year.

The Tribunal took a
very critical note of the fact that the assessee had, in response to a specific
request from the A.O., declined to sign ‘consent waiver’ so as to enable the IT
Department to obtain all the necessary details from the HSBC Private Bank
(Suisse) SA, Geneva which aspect of the matter was clear from the extracts from
the assessee’s submissions dated 25^th February, 2015 filed by the
A.O. as follows:

‘……..we would
like to submit that the letter from HSBC Private Bank dated 5^th
January, 2015 categorically states that the assessee does not have any account
in HSBC Private Bank (Suisse) SA in Switzerland, hence question of providing
you with CD of HSBC Bank account statement does not arise. Also, the question
of signing the consent waiver does not arise as the assessee does not have any
account in HSBC Private Bank (Suisse) SA.’

The Tribunal
observed that the net effect of not signing the consent waiver form was that
the A.O. was deprived of the opportunity to seek relevant information from the
bank in respect of the assessee’s bank account; if she had nothing to hide,
there was no reason for not signing the consent waiver form; all that the
consent waiver form did was to waive any objection to the furnishing of
information relating to the assessee’s bank account, i.e. HSBC Private Bank
(Suisse) SA Geneva in her case. The Tribunal found it necessary to take note of
the above position so as to understand that the assessee had not come with
clean hands and, quite to the contrary, had made conscious efforts to scuttle
the Department’s endeavours to get at the truth.

Proceeding with the
consent letter aspect, the Tribunal further observed that clearly, therefore,
the consent waiver being furnished by the assessee did not put the assessee to
any disadvantage so far as getting at the actual truth was concerned. Of
course, when the monies so kept in such banks abroad were legal or the
allegations incorrect, the assessee could always, and in many a case assessees
did, co-operate with the investigations by giving the consent waivers. The case
before the Tribunal, however, was in the category of cases in which consent
waiver had been emphatically declined by the assessee, and thus a deeper probe
by the Department had been successfully scuttled.

On the aspect of
the consent, the Tribunal found it useful to refer to a judgment of the
jurisdictional Bombay High Court on materially similar facts, wherein the Court
had disapproved and deprecated the conduct of the assessee in not signing the
consent waiver form, in the judgment reported as Soignee R. Kothari’s
case in 80 taxmann.com 240. The Tribunal noted that it
was also a case in which the assessee, originally a resident in India, had
migrated to the USA and in whose case the information by way of a ‘Base Note’
was received from the French Government under the DTAA mechanism (as in the
assessee’s case), about the existence of her bank account with the same bank,
i.e. HSBC Private Bank (Suisse) SA Geneva; it was a case in which the assessee
had declined to sign the consent waiver form outright, and taken a stand that
the question of signing the consent waiver form did not arise. Neither such a
conduct could be appreciated, nor anyone with such a conduct merited any
leniency, the Court had held in that case.

The Tribunal
observed that on the one hand the assessee had not co-operated with the IT
authorities in obtaining the relevant information from HSBC Private Bank (Suisse)
SA Geneva, or rather obstructed the flow of full, complete and correct
information from the said bank by not waiving her rights to protect privacy for
transactions with the bank, and, on the other hand, the assessee had complained
that the IT authorities had not been able to find relevant information.
Obviously, those two things could not go together.

The Tribunal found
that while the claim of the assessee was that she was a discretionary
beneficiary of the Tharani Family Trust, that fact did not find mention in the
‘Base Note’ which showed that the assessee was the beneficial owner or
beneficiary of GWU Investments Ltd.; that in the remand report filed by the
A.O., there was a reference to some unsigned draft copy of the trust deed
having been filed before him but neither the deed was authentic nor was it
placed before the Tribunal in the paper-book. The assessee had not submitted
the trust deed or any related papers but merely referred to a somewhat
tentative claim made in a letter between one Mahesh Tharani, apparently a
relative of the assessee, and the HSBC Private Bank (Suisse) SA, an
organisation with a globally established track record of hoodwinking tax
authorities worldwide. Nothing was clear, nor did the assessee throw any light
on the same. The letter did not deny, nor show any material to controvert, what
was stated in the ‘Base Note’ i.e. GWU Investments Ltd. and the assessee were
linked as beneficial owners. There was no dispute that the account was in the
nominal name of GSW Investments Ltd., but the question was who was the natural
person / beneficial owner thereof. As for the trust, there was no corroborative
evidence about the statement, but nothing turned thereon as well. The assessee
being the discretionary beneficiary owner of the trust, and beneficial owner of
the underlying company, was not mutually exclusive anyway; but the claim of the
assessee being a discretionary beneficiary of the trust was without even
minimal evidence.

As regards the
reference to the judgment in the case of the estate of HMM Vikramsinhji
of Gondal (Supra), the Tribunal noted that it was important to
understand that it was a case in which a discretionary trust was settled by the
assessee and the limited question for adjudication was taxability of the income
of the trust, after the death of the Settlor and in the hands of the
beneficiary. The observations had no relevance in the context of the case of
the assessee; firstly, neither was there any trust deed before the Tribunal,
nor the question before it pertained to the taxability of the income of the
trust; secondly, beyond a mention in the ‘Base Note’ as a personnes légales
liées (i.e. related legal persons), there was no evidence even about the
existence, leave aside the nature, of the trust; thirdly, the point of
taxability here was beneficial ownership of GWU Investments Ltd., a Cayman
Island-based company, by the assessee; finally, even if there was a dispute
about the alleged trust, the dispute was with respect to taxability of funds
found with the trust and the source thereof. Clearly, therefore, the issue
adjudicated upon in the said decision had no relevance in the present context.
The very reliance on the said decision presupposed that the assessee was
discretionary beneficiary simplicitor of a discretionary family trust,
and nothing more – an assumption which was far from established on the facts of
the case.

As regards the
question of income which could be brought to tax in the hands of the assessee,
being a non-resident, and certain errors in computation on account of duplicity
of entries, etc., the Tribunal had noted that the CIT(A) had given certain
directions which it had reproduced in paragraph 18 of the Order, and those
directions were neither challenged nor any infirmities were shown therein. Obviously,
therefore, there was no occasion, or even prayer, for interference in the same.

In the end, the
Tribunal while confirming the order of the A.O. read with the order of the
CIT(A), nonetheless recorded that their decision could not be an authority for
the proposition that wherever the name of the assessee figured in a ‘Base Note’
from HSBC Private Bank (Suisse) SA Geneva an addition would be justified in
each case. The mere fact of an account in HSBC Private Bank (Suisse) SA Geneva
by itself could not mean that the monies in the account were unaccounted,
illegitimate or illegal. The conduct of the assessee, the actual facts of each
case, and the surrounding circumstances were to be examined on merits, and then
a call was to be taken about whether or not the explanation of the assessee
merited acceptance. There could not be a short-cut and a one-size-fits-all
approach to the exercise.

OBSERVATIONS

The provisions of
the Income-tax Act, 1961 extend to the whole of India vide section 1 of
the Act. Section 4 of the Act provides for the charge of income tax in respect
of the total income of the previous year of a person. The total income so
liable to tax includes, vide section 5 of the Act, the income of a
person who is a non-resident, derived from whatever source which is received or
is deemed to be received in India or has accrued or arisen or is deemed to
accrue or arise to him in India. A receipt by any person on behalf of the
assessee is also subject to tax in India. The scope of the total income subject
to tax in case of a resident is a little wider inasmuch as, besides the income
referred to above, he is also liable to tax in respect of the income that
accrues or arises to him outside India, too, unless the person happens to be
Not Ordinarily Resident in India.

Section 9 expands
the scope of the income that is deemed to have accrued or arisen in India even
where not actually accrued or arisen in India and the income listed therein, in
the circumstances listed in section 9, such income would be ordinarily taxable
in India even where belonging to a non-resident, subject of course to the
provisions of sections 90, 90A and 91 of the Act.

The sum and
substance of the provisions is that the global income of a resident is taxable
in India, irrespective of its place of accrual. In contrast, income in the case
of a non-resident or Not Ordinarily Resident person is taxed in India only
where such an income is received in India or has accrued or arisen in India or
where it is deemed to be so received or accrued or arisen.

In both the cases
under consideration the assessees were non-residents and applying the
principles of taxation explained above, the income could be taxed in their
hands only where such income for the respective assessment years under
consideration was received in India or had accrued or arisen in India or where
it was deemed to be so. In both cases, the deposits were made during the
relevant financial year in the bank account with HSBC Geneva, Switzerland held
in the name of the discretionary trust or its nominee during the period when
the assessees in question were non-residents for the purposes of the Act. In
both the cases, the provisions of section 5 were highlighted before the
authorities to explain that the deposits in question did not represent any
income of the assessee that was received in India or had accrued or arisen in
India or where it was deemed to be so. In both cases, the assessees were the
beneficiaries of discretionary trusts and had not received any money or income
on distribution by the trust and it was explained to the authorities that the
additions could not have been made in the hands of the beneficiaries of such
trusts. In both the cases, the authorities had sought the consent of the
assessees for facilitating the investigation with the Swiss bank and collecting
information and documents from the bank – and in both the cases the consent was
refused.

In the first case
of Deepak B. Shah, the Tribunal found that the assessee was a non-resident for
many years, and the A.O. had failed to establish any connection between the
deposits in the impugned bank account and his Indian income. No addition was
held to be sustainable by the Tribunal in the hands of the non-resident
assessee on account of such deposits which could not be considered to be
received in India or had accrued or arisen in India or was deemed to be so. In
this case, the bank account was in the name of a discretionary trust of which
the assessee was a beneficiary and the Settlor of the trust had admitted the
ownership of the funds in the bank account and these facts weighed heavily with
the Tribunal in deleting the additions. It held that a beneficiary of the
discretionary trust could be taxed only when there was a receipt by him during
the year, on distribution by the trust.

And in the second
case, of Renu T. Tharani, the assessee, aged 83 years, a resident of the USA
for a few years, was a sole beneficiary of a discretionary trust who operated
the HSBC Geneva bank account. The addition was made in the hands of the
beneficiary assessee on account of deposits in a foreign bank account held in
the name of a company, whose shares were held by a discretionary trust, the
Tharani Beneficiary Trust; in the course of reopening and reassessment, and on
appeal to the Tribunal, the addition was sustained in spite of the fact that
not much material was available for linking the deposits to the Indian income
of the assessee for the year under consideration, and the fact that the
assessee was a beneficiary of the discretionary trust from which she had not
received any income on distribution during that year.

In the latter
decision, the assessee had brought to the attention of the Tribunal the
decision in the case of Hemant Mansukhlal Pandya, 100 taxmann.com 280
(Mum) but that did not help her case. The fact that the assessee had
refused to grant the consent, as required under the treaties and agreements,
for facilitating the inquiry and investigation by permitting the authorities to
obtain documents from the foreign bank, had substantially influenced the
adjudication by the Tribunal. That the bank account was closed and the trust
was dissolved with no trail was also a factor that was not very helpful. The
fact that the trust was in a tax haven, Cayman Islands, and was managed by
‘professional trustees’ did not help the case of the assessee. The Tribunal
gave due importance to the international reports on the clandestine movement of
funds to go to the root of the source. It was also not very happy with the
genuineness of the evidences produced or their authenticity and also with the
withholding of information by the assessee, as also with the limited
co-operation extended by her.

The fact that the
assessee in the latter case had ceased to be a resident only a few years in the
past and had left India just a year before the year of deposit, and that the
quantum of deposits was very huge, might have influenced the outcome in the
case, though in our opinion these factors were not determinative of the
outcome. It is true that the deposits were made during the year under
consideration, but it is equally true that during the year under consideration
the assessee was a non-resident and therefore the addition to the income could
have been sustained only if it was found to have been received in India or was
linked to Indian operations. The fact that the assessee was a beneficiary of a
discretionary trust and the bank account was not in her name but in the name of
the company that belonged to the trust, coupled with the fact that the assessee
had not received any money on distribution from the trust during the year, are
the factors which weighed in favour of not taxing the assessee, but although
considered, these did not inspire the Tribunal to delete the addition.

The decisions of
the Apex Court relating to the taxation of a discretionary trust were held by
the Tribunal to be delivered in the context of the facts of the cases before
the Court and not applicable to the facts and the issue before it. In case of a
discretionary trust, the beneficiaries could be taxed only on receipt from the
trust on distribution of income by the trust. Please see Estate of HMM
Vikramsinhji of Gondal 45 taxamnn.com 552 (SC); and Smt. Kamalini
Khatau 209 ITR 101 (SC).

The Tribunal in the
first case of Deepak B. Shah approved the contention of the assessee that the
addition in his hands was not sustainable in a case where the bank account was
in the name of the discretionary trust and the assessee was only the
beneficiary. It also upheld that the addition could not have been sustained
when no income of the trust was distributed amongst the beneficiaries. Its
decision was also influenced by the fact that the Settlor of the trust had
admitted the ownership of the account and the addition made in the Settlor’s
hands was deleted vide an order of the ITAT, reported in 171 ITD
602 (Mum) in the name of Dipendu B. Shah on the ground that the
Settlor was a non-resident during the year under consideration.

As against that, in
the latter case of Renu T. Tharani, all the three facts that influenced the
Tribunal in the Deepak B. Shah case were claimed to be present. But those facts
did not deter the Tribunal from sustaining the addition, perhaps for the lack
of evidence acceptable to it to satisfy itself and delete the addition on the
basis of the evidence available on record. Had proper evidence in support of
the existence of a discretionary trust or in support of the non-resident source
of the funds been available, it could have strengthened the case of the
assessee.

There was no
finding of the A.O. to the effect that there was, nor had the A.O. established,
any Indian connection to the deposits. If the deposits were considered to be
made out of her income while she was in India, then such income should have
been taxed in that year alone, and not in the year of deposit.

A receipt in the
hands of a non-resident in a foreign country is not taxable under the Indian
tax laws unless such a receipt is found to be connected to an Indian activity
giving rise to accrual or arising of income in India. Please see Finlay
Corporation Ltd. 86 ITD 626 (Delhi); Suresh Nanda 352 ITR 611 (Delhi);
and Smt. Sushila Ramaswamy 37 SOT 146; Saraswati Holding Corporation 111
TTJ Delhi 334; and Vodafone International Holding B.V. 17
taxmann.com 202 (SC).

Besides various
unreported case laws, the issue of addition based on the said ‘Base Note’
concerning the deposits in HSBC Bank account Geneva, Switzerland arose in the
following reported cases:

1. Mohan M. Dhupelia, 67 SOT 12 (URO) (Mum)

2. Ambrish Manoj Dhupelia, 87 taxmann.com 195
(Mum)

3. Hemant Mansukhlal Pandya, 100 Taxmann.com 280
(Mum)

4. Shravan Gupta, 81 taxmann.com 123 (Delhi)

5. Shyam Sunder Jindal, 164 ITD 470 (Delhi)

6. Soignee R. Kothari, 80 taxmann.com 240 (Bom).

The first two cases
were decided by the Tribunal against the assessees, while the later cases were
decided in favour of the assessee mainly on account of the failure of the A.O.
to establish the nexus of the bank deposits to an Indian source of income or to
adhere to the rules of natural justice or to obtain authentic documents.

A deposit in the
foreign bank account of a trust wherein the assessee was a beneficiary of a
trust was held to be taxable in the hands of the assessee for A.Y. 2002-03 for
the inability of the assessee to render satisfactory explanation in the course
of reopening and reassessment which were also held to be valid. Please see Mohan
M. Dhupelia, 67 SOT 12 (URO) (Mum). Also see Ambrish Manoj
Dhupelia, 87 taxmann.com 195 (Mum).

The assessee, a
non-resident since 25 years, was found to have a foreign bank account in HSBC
Bank Geneva in his name for which no explanation was provided by the assessee,
staying in Japan for A.Y. 2006-07 and 2007-08. The addition made by the A.O.
was deleted on the ground that the A.O. had not brought on record any material
to show that the income had accrued or arisen in India and the money was
diverted by the assessee from India. As against that, the assessee had proved
that he was a non-resident for 25 years. Please see Hemant Mansukhlal
Pandya, 100 Taxmann.com 280 (Mum).

In the absence of a
nexus between the deposits found in a foreign bank account and the source of
income derived from India, the addition made for A.Y. 2006-07 and 2007-08 on
account of deposits in HSBC Account Geneva on the basis of a ‘Base Note’ in the
hands of the assessee who was a non-resident since 1990, was deleted. The
assessee was a Belgian resident. Please see Dipendu Bapalal Shah 171 ITD
602 (Mum).

For A.Y. 2006-07,
the A.O. had made additions to the total income on account of deposits in a
foreign bank account with HSBC Geneva. The assessee claimed complete ignorance
of the fact of the bank account. The addition was deleted on the ground that it
was made on the basis of unsubstantiated documents which were not signed by any
bank official and were without any adequate and reliable information. Please
see Shravan Gupta, 81 taxmann.com 123 (Delhi).

The addition was
made by the A.O. to the assessee’s income in respect of undisclosed amount kept
in a foreign bank account HSBC, Geneva, Switzerland. However, the same was set
aside due to non-availability of authentic documents and requisite information
to be relied upon by the A.O. to make the addition. Please see Shyam
Sunder Jindal, 164 ITD 470 (Delhi).

shailesh.kwebmaker

ECONOMIC SUBSTANCE REQUIREMENTS REGULATIONS – AN OVERVIEW

1.0
Introduction

‘Substance
over Form’ is an evergreen debate now tilting in favour of the former. Can a
legal form justify weak substance, or can a strong substance without a legal form be relevant or
practical? Does one score over the other? Are they interdependent or independent
of each other? How does one determine substance in a given transaction or
arrangement? Is it necessary to lift the corporate veil each time to examine
substance? Can a perfectly legal structure within the four corners of the law
be challenged and ignored for want of (or say, apparent lack of) substance? Is
every case of double non-taxation or lower taxation attributable to lack of
substance? There are a host of questions in this arena, some with answers, many
with grey areas and some without an answer. The easiest answer, perhaps, could
be that each case is fact-specific. However, in this uniqueness we need to have
certain rules and regulations and / or patterns to determine substance and give
tax certainty to businesses.

Recently, many jurisdictions introduced
Economic Substance Requirements Regulations (or ESR Regulations) for
enterprises carrying on business activities in / from that jurisdiction in any
form.

In this Article, we shall attempt to
understand what are the provisions of a typical ESR Regulations regime, their
significance and how does one comply with them.

2.0
Genesis of substance requirements

Way back in 1998, OECD published a Report
on ‘Harmful Tax Competition: An Emerging Global Issue’ expressing
concern about the preferential regimes that lack in transparency and that are
being used by Multi-National Enterprises (MNEs) for artificial profit shifting.
OECD created the Forum on Harmful Tax Practices (FHTP) to review and monitor
compliances by preferential tax regimes with respect to transparency and other
aspects of tax structuring.

One of the twelve factors set out in the
1998 Report to determine whether a preferential regime is potentially harmful
or not was, ‘The regime encourages operations or arrangements that are purely
tax-driven and involve no substantial
activities’.

Fifteen Action Plans to prevent BEPS are
based on the following three main pillars:

(1) coherence of corporate tax at the
international level,

(2) realignment of taxation and substance,
and

(3) transparency, coupled with certainty
and predictability.

BEPS Action Plan 5 dealing with ‘Countering
Harmful Tax Practices More Effectively, Taking into Account Transparency and
Substance,’ intends to achieve the objectives of the second pillar of
realigning taxation with substance to ensure that taxable profits are not
artificially shifted away from countries where value is created.

FHTP identified many harmful preferential
tax regimes that were providing an ideal atmosphere for profit-shifting with no
or low effective tax rates, lack of transparency and no effective exchange of
information.

To counter such harmful regimes more
effectively, BEPS Action Plan 5 requires FHTP to revamp the work on harmful tax
practices, with priority and renewed focus on requiring substantial activity
for any preferential regime and on improving transparency, including compulsory
spontaneous exchange on rulings related to preferential regimes¹.

_____________________________________________________________

1 Paragraph 23 of the BEPS Action Plan 5

3.0
FHTP’s approaches

FHTP has provided three approaches to
address the issue of substance in an Intellectual Property (IP) regime. They
are as follows:

(i) Value Creation:
This approach requires taxpayers to undertake a set number of significant
development activities in the jurisdiction to claim tax benefits;

(ii) Transfer Pricing:
This approach would require a taxpayer to undertake a set level of important
functions in the jurisdiction concerned to take advantage of lower tax regime.
These functions could include legal ownership of assets or bearing economic
risks of the assets, giving rise to the tax benefits.

(iii) Nexus Approach:
This approach has been agreed to by FHTP and endorsed by G20. It looks at
whether an IP regime makes its benefits conditional on the extent of R&D
activities of taxpayers in its jurisdiction. The Nexus Approach not only
enables the IP regime to provide benefits directly to the expenditures incurred
to create the IP, but also permits jurisdictions to provide benefits to the
income arising out of that IP, so long as there is a direct nexus between the
income receiving benefits and the expenditures contributing to that income.

In other words, when the Nexus Approach is
applied to an IP regime, substantial activity requirements establish a link
between expenditures, IP assets and IP income. The expenditure criterion acts
as a proxy for activities and IP assets are used to ensure that the income that
receives benefits does, in fact, arise from the expenditures incurred by the
qualifying taxpayer. The effect of this approach is therefore to link income and
activities.

Based on the above approach for the IP
regime, the Action Plan suggests applying this method to non-IP regimes as
well. Thus, a preferential regime should provide the substance requirement with
a clear link between income qualifying for benefits and core activities
necessary to earn the income.

What constitutes a Core Activity depends
upon the type of regime. However, the Action Plan has given certain indicative
Core Income Generating Activities (CIGA) for different types of preferential regimes,
such as Headquarters regimes, Distribution and service centre regimes,
Financing or leasing regimes, Fund management regimes, Banking and Insurance
regimes, Shipping regimes and Holding company regimes. (Paragraphs 74 to 87
of the BEPS Action Plan 5.)

Under each of these regimes the Plan
identifies how preferential regimes give benefits and related concerns arising
from these regimes. Two common concerns under each regime are: (i)
‘Ring-fencing’, whereby foreign income is ring-fenced from domestic income to
provide tax exemption to the foreign-sourced income, and (ii) ‘Artificial
definition of the tax base’, whereby a certain fixed percentage or amount of
income is taxed, irrespective of the actual income of the taxpayer.

In order to address the above concerns, the
Action Plan provides CIGA in respect of each of the regimes mentioned above. A
taxpayer is expected to undertake CIGA commensurate with the nature and level
of activities. The idea underlying this is to tax income where value is
created. And value creation is determined by looking at the CIGA and also the
expenditure incurred to earn relevant income.

Another major concern about preferential
regimes is lack of transparency. This concern is addressed through Automatic
Exchange of Information through Common Reporting Standard (CRS)².
Besides this, when information is sought on request, the international standard
on information exchange covers the provision not only of exchange of
information, but also availability of information, including ownership,
banking, and account information. The Global Forum on Transparency and Exchange
of Information for Tax Purposes monitors implementation of international
standards on transparency and exchange of information for tax purposes and
reviews the effectiveness of their implementation in practice.

________________________________________________________________________________________________

2 The Common Reporting Standard (CRS), developed in response to the
G20 request and approved by the OECD Council on 15th July, 2014 calls
on jurisdictions to obtain information from their financial institutions and
automatically exchange that information with other jurisdictions on an annual
basis. It sets out the financial account information to be exchanged, the financial
institutions required to report, the different types of accounts and taxpayers
covered, as well as common due diligence procedures to be followed by
financial institutions. [Source: OECD (2017), Standard for Automatic Exchange
of Financial Account Information in Tax Matters]

4.0 Economic Substance Requirements Regulations
(ESR Regulations)

ESR Regulations require economic substance
in a jurisdiction where an entity reports relevant income. The underlying
objective of ESR Regulations is to ensure that entities report profits in a
jurisdiction where economic activities that generate them are carried out and
where value is created.

In December, 2017, the European Union Code
of Conduct Group (EU COCG) assessed preferential tax regimes with nil or only
nominal tax to identify harmful practices and enforce substance requirements.
The EU COCG also published a list of ‘non-co-operative jurisdictions for tax
purposes’ which were engaged in harmful tax practices such as ring-fencing
(through offshore tax regimes), artificial definition of tax base and lacked
transparency. Many countries promised to revamp their tax systems to curb
harmful tax practices and introduce substance requirements to avoid being
blacklisted. The work of EU COCG has been strengthened by BEPS Action Plan 5,
with similar objectives and wider applicability.

BEPS Action Plan 5 is also a Minimum
Standard which requires all G20 Nations and countries in the inclusive group
(over 135 countries) who are signatories of the BEPS Project to mandatorily
implement the same.

To comply with the above, the following
countries enacted legislation to introduce the Economic Substance Regulations
for tax purposes with effect from 1^st January, 2019 or an accounting
period commencing thereafter:

(i) Bahamas

(ii) Bermuda

(iii) British Virgin Islands (BVI)

(iv) Cayman Islands

(v) Guernsey

(vi) Jersey

(vii) Isle of Man

(viii) Mauritius

(ix) Seychelles

(x) United Arab Emirates (UAE) (implemented with
amendments effective from 10^th August, 2020).

In this Article we shall look closely at
the ESR Regulations as implemented in the UAE. However, it may be noted that
ESR Regulations as introduced by the above-mentioned countries are by and large
similar as they are based on the guidance and requirements issued by the EU as
well as by the OECD; the requirements of CIGA for different regimes are almost
identical.

Broadly, ESR Regulations in every
jurisdiction would require resident entities to prove economic substance with
respect to the following criteria:

4.1
Management test

The entity should be directed and managed
from the jurisdiction concerned. This can be proved by having physical board
meetings at regular frequency, maintaining minutes and accounts in the tax
jurisdiction concerned, directors having domain expertise of the activities of
the company, handling day-to-day operations and banking transactions, etc.

4.2
CIGA test

The entity will have to clearly demonstrate
that Core Income Generating Activities are undertaken in the relevant
jurisdiction and such activities are commensurate with the level of income
generated therefrom. What is CIGA will depend upon the nature of income or the
regime. CIGA can be outsourced to a corporate service provider in the
jurisdiction, subject to oversight by the entity (e.g., monitoring and
control). In such cases, the relevant resources of the service providers will
be taken into account when determining whether the CIGA test is satisfied.

4.3
Adequacy test

The entity will have to prove that it has
adequate number of qualified employees and infrastructure to carry out CIGA. It
has to also demonstrate that adequate expenditure is incurred to generate the
relevant income in that jurisdiction. ‘Adequacy’ of expenditure, employees or
infrastructure would depend upon the nature of the CIGA.

4.4 Summary of tests for Economic Substance
Requirements

1. The management and direction of the entity
should be located in the offshore jurisdiction concerned;

2. Core Income Generating Activities with respect to
the relevant activity must be undertaken in the offshore jurisdiction
concerned;

3. The entity should have a physical presence in
the offshore jurisdiction;

4. The entity should have full-time employees with
suitable qualifications in the jurisdiction concerned; and

5. The entity should have incurred operating
expenditure in the offshore jurisdiction concerned in relation to the relevant
activity.

5.0
ESR Regulations in UAE

On 30^th April, 2019, the Cabinet
of Ministers of the UAE issued Cabinet Resolution No. 31 of 2019 concerning
Economic Substance Requirements Regulations (Resolution 31). On 10^th
August, 2020 amendments were introduced to Resolution 31 by the Cabinet of
Ministers by way of Resolution No. 57 of 2020 (ESR Regulations), which repealed
and replaced Resolution 31.

The UAE ESR Regulations contain 22
articles, a list of which is given below.

Article No.	Description
1.	Definitions
2.	Objective of the Resolution
3.	Relevant Activity and Core Income Generating Activity
4.	Regulatory Authorities
5.	National Assessing Authority
6.	Requirement to meet Economic Substance Test
7.	Assessment of whether Economic Substance Test is met
8.	Requirement to provide Information
9.	Provision of Information by the Regulatory Authority
10.	Provision of Information by the National Assessing Authority
11.	Exchange of Information by Competent Authority
12.	Co-operation by other Governmental Authorities
13.	Offences and Penalties for failure to provide a Notification
14.	Offences and Penalties for failure to submit an Economic Substance Report and for failure to meet the Economic Substance Test
15.	Offences and Penalties for providing inaccurate information
16.	Period for imposition of Administrative Penalty
17.	Right of Appeal against Administrative penalty
18.	Date of Payment of Administrative Penalties
19.	Power to enter Business Premises and Examine Business Documents
20.	Executive Regulations
21.	Revocation
22.	Entry into Force

Article
No.

Description

Definitions

Objective of the Resolution

Relevant Activity and Core Income Generating Activity

Regulatory Authorities

National Assessing Authority

Requirement to meet Economic Substance Test

Assessment of whether Economic Substance Test is met

Requirement to provide Information

Provision of Information by the Regulatory Authority

10.

Provision of Information by the National Assessing Authority

11.

Exchange of Information by Competent Authority

12.

Co-operation by other Governmental Authorities

13.

Offences and Penalties for failure to provide a Notification

14.

Offences and Penalties for failure to submit an Economic
Substance Report and for failure to meet the Economic Substance Test

15.

Offences and Penalties for providing inaccurate information

16.

Period for imposition of Administrative Penalty

17.

Right of Appeal against Administrative penalty

18.

Date of Payment of Administrative Penalties

19.

Power to enter Business Premises and Examine Business
Documents

20.

Executive Regulations

21.

Revocation

22.

Entry into Force

Ministerial Decision No. 100 for the year
2020 dated 19^th August, 2020 is intended to provide further guidance
and direction to entities carrying out one or more Relevant Activities. An
entity subject to ESR Regulations shall have regard to this Decision for the
purposes of ensuring compliance with ESR Regulations.

5.1
Basis of ESR Regulations

The basis of ESR Regulations in UAE as
stated in its ‘Ministerial Decision No. 100 for the year 2020 on the Issuance
of Directives for the implementation of the provisions of the Cabinet Decision
No. 57 of 2020 concerning Economic Substance Requirements’ (hereafter referred
to as ‘Ministerial Directives’) is as follows:

‘The ESR Regulations are issued pursuant
to the global standard set by the Organisation for Economic Cooperation and
Development (“OECD”) Forum on Harmful Tax Practices, which requires entities
undertaking geographically mobile business activities to have substantial
activities in a jurisdiction. In addition to the work of the OECD, the European
Union Code of Conduct Group (“EU COCG”) also adopted a resolution on a code of
conduct for business taxation which aims to curb harmful tax practices. The
Cabinet of Ministers enacted the ESR Regulations taking into account the
relevant standards developed by the OECD and the EU COCG.’

5.2
Applicability

Article 3 of the Ministerial Directives
deals with the Licensees required to meet the Economic Substance test and
provides that ESR Regulations are applicable to Licensees. The term ‘Licensee’
is defined in Article 1 of the ESR Regulations to mean any of the following two
entities:

‘i. a juridical person (incorporated inside
or outside the State, i.e., UAE); or

ii. an Unincorporated Partnership;

registered in the State, including a Free
Zone and a Financial Free Zone and carries on a Relevant Activity.’

A juridical person is defined to mean a
corporate legal entity with a separate legal personality from its owners.

An Unincorporated Partnership is defined
under ESR Regulations to include those forms of partnerships that may operate
in the UAE without having a separate legal personality and are thereby
identified separately under the ESR Regulations.

In other words, the regulations cover all
Licensees (natural and juridical person) having the commercial license,
certificate of incorporation, or any other form of permit necessarily taken
from the licensing authority to do business. Going by the spirit of the ESR
Regulations, it is interpreted that entities in Free Zone (including offshore
companies) would also be covered.

Branches

Branch of a foreign entity in the UAE

Since a licensee could be in the form of a
UAE branch of a foreign entity (juridical person incorporated outside UAE is
covered in the definition), Article 3 of the Ministerial Directives
specifically covers them for compliance of ESR Regulations.

Similarly, a branch of a foreign entity
registered in the UAE that carries out a Relevant Activity is required to
comply with the ESR Regulations, unless the Relevant Income of such branch is
subject to tax in a jurisdiction outside the UAE.

Branch of a UAE entity outside UAE

Where a UAE entity carries on a Relevant
Activity through a branch registered outside the UAE, the UAE entity is not
required to consolidate the activities and income of the branch for purposes of
ESR Regulations, provided that the Relevant Income of the branch is subject to
tax in the foreign jurisdiction where the branch is located. In this context, a
branch can include a permanent establishment, or any other form of taxable
presence for corporate income tax purposes which is not a separate legal
entity.

5.3 Licensees exempted from ESR Regulations

The following entities which are registered
in the UAE and carry out a Relevant Activity are exempt from ESR Regulations:

(a) an Investment Fund,

(b) an entity that is tax resident in a
jurisdiction other than the UAE,

(i) the
entity is not part of an MNE Group;

(ii) all
of the entity’s activities are only carried out in the UAE;

(d) a Licensee that is a branch of a foreign
entity, the Relevant Income of which is subject to tax in a jurisdiction other
than the UAE.

(a) Investment Funds

The ESR Regulations define an Investment
Fund as ‘an entity whose principal business is the issuing of investment
interests to raise funds or pool investor funds with the aim of enabling a
holder of such an investment interest to benefit from the profits or gains from
the entity’s acquisition, holding, management or disposal of investments and
includes any entity through which an investment fund directly or indirectly
invests (but does not include an entity or entities in which the fund
invests).’

The above definition would include the
Investment Fund itself and any entity through which the Fund directly and indirectly
invests, but not the entity or entities in which the Fund ultimately invests.
It is clarified that the words ‘through which an investment fund directly or
indirectly invests’ refers to any UAE entity whose sole function is to
facilitate the investment made by the Investment Fund. The exemption for
Investment Funds is distinct from the Investment Fund Management Business as
regulated under ESR Regulations. The Investment Fund itself is not considered
an Investment Fund Management Business unless it is a self-managed fund (the
Investment Manager and the Investment Fund are part of the same entity).

(b) Tax resident in a jurisdiction other
than the State

An entity which is tax resident in a
jurisdiction outside the UAE need not comply with the ESR Regulations. However,
in order for such an entity to avail this exemption, the entity must be
subjected to corporate tax on all of its income from a Relevant Activity by
virtue of being a tax resident in a jurisdiction other than the UAE. It should
be noted that an entity that pays withholding tax in a foreign jurisdiction
will not be considered as tax resident in a foreign jurisdiction other than the
UAE solely on that basis.

An entity that is ultimately wholly and
beneficially owned (directly or indirectly) by UAE residents is exempt from the
Economic Substance Test only where such entity is: (i) not part of an MNE
Group; (ii) all of its activities are exclusively carried out in the UAE; and
(iii) UAE resident owners of the entity reside in the UAE. The entity must
therefore not be engaged in any form of business outside the UAE. In this
context, ‘UAE residents’ means UAE citizens and individuals holding a valid UAE
residency permit, who reside in the UAE.

(d) A
UAE branch of a foreign entity the Relevant Income of which is subject to tax
in a jurisdiction other than the State

An entity is not required to meet the
Economic Substance Test if such entity is a branch of a foreign entity and its
Relevant Income is subject to corporate tax in the jurisdiction where such
foreign entity is a tax resident.

Evidence
to be submitted to claim exemption from ESR Regulations

A Licensee that claims to be exempt on the
basis of being a tax resident in a foreign jurisdiction is required to submit
one of the following documents along with its Notification in respect of each
relevant Financial Year:

(a) Letter or certificate issued by the competent
authority of the foreign jurisdiction in which the entity claims to be a tax
resident stating that the entity is considered to be resident for corporate
income tax purposes in that jurisdiction; or

(b) An assessment to corporate income tax on the
entity, a corporate income tax demand, evidence of payment of corporate income
tax, or any other document, issued by the competent authority of the foreign
jurisdiction in which the entity claims to be a tax resident.

It is further provided that where an entity
fails to provide sufficient evidence to substantiate its status as an Exempted
Licensee, the entity will be regarded as a Licensee for the purposes of ESR
Regulations and shall be subject to the requirements of ESR Regulations as
applicable to a Licensee, including the requirement to meet the Economic
Substance Test.

5.4 First reportable Financial Year

It is provided that all Licensees and
Exempted Licensees are subject to ESR Regulations from the earlier of (i) their
financial year commencing on 1^st January, 2019, or (ii) the date on
which they commence carrying out a Relevant Activity (for a Financial Year
commencing after 1^st January, 2019).

5.5 What are the Relevant Activities?

Article 3(1) of ESR Regulations identifies
any of the following activities to be a Relevant Activity: (i) Banking
Business, (ii) Insurance Business, (iii) Investment Fund Management Business,
(iv) Shipping Business, (v) Lease-Finance Business, (vi) Distribution and
Service Centre Business, (vii) Headquarters Business, (viii) Intellectual
Property Business, and (ix) Holding Company Business.

Entities are expected to use a ‘substance
over form’ approach to determine whether or not they undertake a Relevant
Activity and as a result will be considered Licensees for the purposes of ESR
Regulations, irrespective of whether such Relevant Activity is included in the
trade licence or permit of the entity. A Licensee may have undertaken more than
one Relevant Activity during the same financial period. In such a case, the
Licensee would be required to demonstrate economic substance in respect of each
Relevant Activity.

Any form of passive income from a Relevant
Activity can also bring the entity within the scope of the ESR Regulations.

5.6 Relevant Income

The Economic Substance Test has to be
satisfied by a Licensee having regard to the level of Relevant Income derived
from any Relevant Activity. For the purposes of the ESR Regulations, ‘Relevant
Income’ means entity’s gross income from a Relevant Activity as recorded in its
books and records under applicable accounting standards, whether earned in the
UAE or outside, and irrespective of whether the entity has derived a profit or
loss from its activities.

For the purposes of ‘Relevant Income’,
gross income means total income from all sources, including revenue from sales
of inventory and properties, services, royalties, interest, premiums, dividends
and any other amounts, and without deducting any type of costs or expenditure.
It appears that even capital gains are to be included while computing gross
income.

In the context of income from sales or
services, gross income means gross revenues from sales or services without
deducting the cost of goods sold or the cost of services. It is further
clarified that gross income does not mean taxable or accounting income or
profit.

5.7
Liquidation or otherwise ceasing to carry on Relevant Activities

A Licensee and an Exempted Licensee shall
be subject to ESR Regulations as long as such an entity continues to exist.

5.8
The Economic Substance Test – How to substantiate economic substance in the
UAE?

In order for a Licensee to demonstrate that
it has adequate substance in the UAE in a given financial year, an entity must
meet the following tests:

(a) Core Income Generating Activities
(CIGA) Test

The Licensee
should conduct Core Income Generating Activities in the UAE. The CIGAs are
those activities that are of central importance to the Licensee for the
generation of the gross income earned from its Relevant Activity.

The CIGAs
depend upon the nature of the Relevant Activity. The list given in Article 3(2)
of the ESR Regulations is an indicative list and not exhaustive³. A
Licensee is not required to perform all of the CIGAs listed in the ESR
Regulations for a particular Relevant Activity. However, it must perform any of
the CIGAs that generate Relevant Income in the UAE. It is clarified that
activities that are not CIGAs can be undertaken outside the UAE.

(b) Directed and Managed Test

The ‘directed and managed’ test aims to
ensure that a Relevant Activity is directed and managed in the UAE and requires
that, inter alia, there are an adequate number of board meetings held
and attended in the UAE. A determination as to whether an adequate number of
board meetings are held and attended in the UAE will depend on the level of
Relevant Activity being carried out by a Licensee.

Consideration must also be given to more
onerous requirements in respect of board meetings prescribed under the applicable
law regulating the Licensee or as may be stipulated in the constitutional
documents of the Licensee.

The ‘directed and managed’ test further
requires that:

(i) meetings are recorded in written minutes and
that such minutes are kept in the UAE;

(ii) quorum for such meetings is met and those
attendees are physically present in the UAE; and

(iii) directors have the necessary knowledge and
expertise to discharge their duties and are not merely giving effect to
decisions being taken outside the UAE.

The minutes of the board meetings must
record all the strategic decisions taken in relation to Relevant Activities and
must be signed by the directors physically present. The quorum shall be
determined in accordance with the law applicable to the Licensee setting out
quorum requirements, or as may be set out in the constitutional documents of
the Licensee (or both).

It is clarified that for the purposes of
ESR Regulations the ‘directed and managed’ requirement does not prescribe that
board members (or equivalent) be resident in the UAE. Rather, the board members
(or equivalent) are required to be physically present in the UAE when taking
strategic decisions. In the event that the Licensee is managed by its
shareholders / owners / partners, an individual manager (e.g., general manager
or CEO), or more than one manager, the above requirements will apply to such
persons to the fullest extent possible.

(c) Expenditure Test

Having regard to the level of Relevant
Income earned from a Relevant Activity, the Licensee should ensure that it (i)
has an adequate number of qualified full-time (or equivalent) employees in
relation to the activity who are physically present in the UAE (whether or not
employed by the Licensee or by another entity and whether on temporary or long-term
contracts), (ii) incurs adequate operating expenditure by it in the UAE, and
(iii) has adequate physical assets (e.g. premises) in the UAE.

What is adequate or appropriate for each
Licensee will depend on the nature and level of Relevant Activity being carried
out by such Licensee. A Licensee will have to ensure that it maintains
sufficient records to demonstrate the adequacy and appropriateness of the
resources and assets utilised and expenditure incurred.

It is provided that the National Assessing
Authority shall review such records and other supporting documentation
submitted in assessing whether a Licensee has demonstrated the adequacy and
appropriateness of resources and assets utilised and expenditures incurred.

The requirement for adequate employees is
aimed at ensuring that there are a sufficient number of suitably qualified
employees carrying out the Relevant Activity. The requirement for adequate
physical assets is intended to ensure that a Licensee has procured appropriate
physical assets to carry out a Relevant Activity in the UAE. Physical assets
can include offices or other forms of business premises (such as warehouses or
facilities from which the Relevant Activity is being conducted) depending on
the nature of the Relevant Activity. Such premises may be owned or leased by
the Licensee, provided that the Licensee is able to produce the lease
agreement, etc., to prove the right to use the premises for the purposes of
carrying out the Relevant Activity.

__________________________________________________________________________________

3 The indicative list of CIGAs is based on the recommendations of the BEPS
Action Plan 5 (paragraphs 74 to 87).

5.9 Outsourcing

Article 6(2)
of the ESR Regulations provides that a Licensee may conduct all or part of its
CIGAs for a Relevant Activity through an Outsourcing Provider. For the purposes
of ESR Regulations, an Outsourcing Provider may include third parties or
related parties. The substance (e.g., employees and physical assets) of the
Outsourcing Provider in the UAE will be taken into account when determining the
substance of the Licensee for the purpose of the Economic Substance Test,
subject to certain conditions.

5.10 Notification Filings

Every Licensee and Exempted Licensee is
required to submit a Notification to their respective Regulatory Authorities
setting out the following for each relevant financial year:

i. the nature of the Relevant Activity being
carried out;

ii. whether it generates Relevant Income;

iii. the date of the end of its financial year;

iv. any other information as may be requested by
the Regulatory Authority.

A Notification submitted by an Exempted
Licensee must be accompanied by sufficient evidence to substantiate the
Exempted Licensee’s status for each category in which it claims to be exempt.
Failure to provide sufficient evidence to this effect will result in the
Exempted Licensee not being able to avail itself of the exemption and having to
comply with the full requirements of the ESR Regulations, including meeting the
Economic Substance Test.

The time frames for compliance with the
requirement to submit a Notification are different from the time frames to
submit an Economic Substance Report as discussed in paragraph 5.11 below.

The Notification must be submitted within
six months from the end of the financial year of the Licensee or Exempted
Licensee. The Notification must be submitted electronically on the Ministry of
Finance Portal.

5.11 Submission of Economic
Substance Report

Every Licensee shall be required to meet
the applicable Economic Substance Test requirements and submit an Economic
Substance Report containing the requisite information and documentation
prescribed under the ESR Regulations within 12 months from the end of the
relevant financial year.

The Economic
Substance Report of the
Licensee will be assessed by the National Assessing Authority within a
period of six years from the end of the relevant financial year. The
National
Assessing Authority will issue its decision as to whether a Licensee has
met
the Economic Substance Test. This six-year limitation period shall not
apply if
the National Assessing Authority is not able to make a determination
during
this period due to gross negligence, fraud, or deliberate
misrepresentation by
the Licensee or any other person representing the Licensee.

5.12
Exchange of information with foreign authorities

The Competent Authority will spontaneously
exchange information with relevant Foreign Competent Authorities under the ESR
Regulations pursuant to an international agreement, treaty or similar
arrangement to which the UAE is a party in the following circumstances:

i) where a Licensee fails to satisfy the
Economic Substance Test;

ii) where a Licensee is a high-risk IP Licensee;

iii) where an entity claims to be tax resident in a
jurisdiction outside the UAE; and

iv) where a branch of a foreign entity claims to be
subject to tax in a jurisdiction outside the UAE.

Every Licensee that is carrying out a
Relevant Activity must identify the jurisdiction in which the Parent Company,
Ultimate Parent Company and Ultimate Beneficial Owner claim to be tax resident.
An Exempted Licensee that is either (i) tax resident in a jurisdiction other
than the UAE; or (ii) a UAE branch of a foreign company of which all the income
of the UAE branch is subject to tax in a jurisdiction other than the UAE must,
in addition to identifying the foregoing, also identify the jurisdiction in
which such Exempted Licensee claims to be (a) a tax resident or (b) the
jurisdiction of the foreign company of the UAE branch (as may be relevant).

5.13 Penalties

Stringent penalties are prescribed for
non-compliance with ESR Regulations, which are as follows:

Article No.

Nature of offence

Penalty

Remarks

Failure to provide Notification

AED 20,000

Failure to submit Economic Substance Report and any other
information or documents in accordance with ESR Regulations or Failure to
meet the Economic Substance Test

AED 50,000

AED 4,00,000 for a repeat offence in the subsequent year

Providing inaccurate information

AED 50,000

5.14
Summary of the Relevant Activities, related CIGAs and the Regulatory Authority⁴

One may refer to the Text of ‘Schedule 1 –
Relevant Activities Guide’, of the Ministerial Directives referred to in
Paragraph 5.1 infra, for detailed explanations and examples.

Relevant Activity pursuant to Article 3.1 of Cabinet Resolution No. (57) of 2020	Core Income Generating Activities (non-exhaustive) Article 3.2 of Cabinet Resolution No. (57) of 2020	Regulatory Authority pursuant to Article 4 of Cabinet Resolution No. (57) of 2020
Banking Business	(a) Raising funds, managing risk including credit, currency and interest risk. (b) Taking hedging positions. (c) Providing loans, credit or other financial services to customers.	1. UAE Central Bank 2. The competent authority in the Financial Free Zone for the Banking Businesses
Insurance Business	(a) Predicting and calculating risk. (b) Insuring or re-insuring against risk and providing Insurance Business services to clients. (c) Underwriting insurance and reinsurance.	1. Securities and Commodities Authority 2. The competent authority in the Free Zone and Financial Free Zone for the Insurance Business
Investment Fund Management Business	(a) Taking decisions on the holding and selling of investments. (b) Calculating risk and reserves. (c) Taking decisions on currency or interest fluctuations and hedging positions. (d) Preparing reports to investors or any government authority with functions relating to the supervision or regulation of such business.	1. Securities and Commodities Authority 2. The competent authority in the Free Zone and Financial Free Zone for the Investment Fund Management Business
Lease-Finance Business	(a) Agreeing funding terms. (b) Identifying and acquiring assets to be leased (in the case of leasing). (c) Setting the terms and duration of any financing or leasing. (d) Monitoring and revising any agreements. (e) Managing any risks.	1. UAE Central Bank 2. The competent authority in the Free Zone and Financial Free Zone for the Lease-Finance Business
Headquarter Business	(a) Taking relevant management decisions. (b) Incurring operating expenditures on behalf of group entities. (c) Coordinating group activities.	1. Ministry of Economy 2. The competent authority in the Free Zone and Financial Free Zone for the Headquarter Business
Shipping Business	(a) Managing crew (including hiring, paying and overseeing crew members). (b) Overhauling and maintaining ships. (c) Overseeing and tracking shipping. (d) Determining what goods to order and when to deliver them, (e) Organising and overseeing voyages.	1. Ministry of Economy 2. The competent authority in the Free Zone and Financial Free Zone for the Shipping Business
Holding Company Business	Activities related to a Holding Company Business.	1. Ministry of Economy 2. The competent authority in the Free Zone and Financial Free Zone for the Holding Company Business
Intellectual Property Business	Where the Intellectual Property Asset is a (a) Patent or similar Intellectual Property Asset: Research and development. (b) Marketing intangible or a similar Intellectual Property Asset: Branding, marketing and distribution. In exceptional cases, except where the Licensee is a High-Risk IP Licensee, the Core Income Generating Activities may include: (i) taking strategic decisions and managing (as well as bearing) the principal risks related to development and subsequent exploitation of the intangible asset generating income. (ii) taking the strategic decisions and managing (as well as bearing) the principal risks relating to acquisition by third parties and subsequent exploitation and protection of the intangible asset. (iii) carrying on the ancillary trading activities through which the intangible assets are exploited leading to the generation of income from third parties.	1. Ministry of Economy 2. The competent authority in the Free Zone and Financial Free Zone for the Intellectual Property Business
Distribution and Service Centre Business	(a) Transporting and storing component parts, materials or goods ready for sale. (b) Managing inventories. (c) Taking orders. (d) Providing consulting or other administrative services.	1. Ministry of Economy 2. The competent authority in the Free Zone and Financial Free Zone for the Distribution and Service Centre Business

Relevant Activity
pursuant to Article 3.1 of Cabinet Resolution No. (57) of 2020

Core Income
Generating Activities (non-exhaustive) Article 3.2 of Cabinet Resolution No.
(57) of 2020

Regulatory Authority
pursuant to Article 4 of Cabinet Resolution No. (57) of 2020

Banking Business

(a) Raising funds, managing risk
including credit, currency and interest risk.

(b) Taking hedging positions.

1. UAE Central Bank

2. The competent authority in the
Financial Free Zone for the Banking Businesses

Insurance Business

(a) Predicting and calculating risk.

(b) Insuring or re-insuring against risk
and providing Insurance Business services to clients.

1. Securities and Commodities Authority

2. The competent authority in the Free
Zone and Financial Free Zone for the Insurance Business

Investment Fund Management Business

(a)
Taking decisions on the holding and selling of investments.

(b) Calculating risk and reserves.

(d) Preparing reports to investors or
any government authority with functions relating to the supervision or
regulation of such business.

1. Securities and Commodities Authority

2. The competent authority in the Free
Zone and Financial Free Zone for the Investment Fund Management Business

Lease-Finance Business

(a) Agreeing funding terms.

(b) Identifying and acquiring assets to
be leased (in the case of leasing).

(d) Monitoring and revising any
agreements.

(e) Managing any risks.

1. UAE Central Bank

2. The competent authority in the Free
Zone and Financial Free Zone for the Lease-Finance Business

Headquarter Business

(a) Taking relevant management
decisions.

(b) Incurring operating expenditures on
behalf of group entities.

1. Ministry of Economy

2. The competent authority in the Free
Zone and Financial Free Zone for the Headquarter Business

Shipping Business

(a) Managing crew (including hiring,
paying and overseeing crew members).

(b) Overhauling and maintaining ships.

(d) Determining what goods to order and
when to deliver them,

(e) Organising and overseeing voyages.

1. Ministry of Economy

2. The competent authority in the Free
Zone and Financial Free Zone for the Shipping Business

Holding Company Business

Activities related to a Holding Company Business.

1. Ministry of Economy

2. The competent authority in the Free
Zone and Financial
Free Zone for the Holding Company Business

Intellectual Property Business

Where the Intellectual Property Asset is
a

(a) Patent or similar Intellectual
Property Asset: Research and development.

(b) Marketing intangible or a similar
Intellectual Property Asset: Branding, marketing and distribution.

In exceptional cases, except where the
Licensee is a High-Risk IP Licensee, the Core Income Generating Activities
may include:

(i) taking strategic decisions and
managing (as well as bearing) the principal risks related to development and
subsequent exploitation of the intangible asset generating income.

(ii) taking the strategic decisions and
managing
(as well as bearing) the principal risks relating to acquisition by third
parties and subsequent exploitation and protection of the intangible asset.

(iii) carrying on the ancillary trading
activities through which the intangible assets are exploited leading to the
generation of income from third parties.

1. Ministry of Economy

2. The competent authority in the Free
Zone and Financial Free Zone for the Intellectual Property Business

Distribution and Service Centre Business

(a) Transporting and
storing component parts, materials or goods ready for sale.

(b) Managing inventories.

(d) Providing consulting or other
administrative services.

1. Ministry of Economy

2. The competent authority in the Free
Zone and Financial Free Zone for the Distribution and Service Centre Business

_____________________________________________________________________

4 Source:https://www.mof.gov.ae/en/StrategicPartnerships/Document/Economic%20Substance%20Relevant%20Activities%20Summary.pdf

5.15 Flow-chart of the Applicability of ESR
Regulations⁵

________________________________________________________________________

5.Source: https://www.mof.gov.ae/en/StrategicPartnerships/Pages/ESR.aspx

6.0.
Relevance of ESR Regulations for Indian Entities

Many Indian companies have their
subsidiaries, branches, project offices or other forms of entities operating in
the UAE. Every such entity needs to strictly follow the ESR Regulations as
stringent penalties are prescribed. The provisions of the ESR Regulations are
stricter than Limitation of Benefits under a Tax Treaty. Therefore, each structure
would need a reassessment, review and restructuring if need be. As the
Regulations are applicable to each type of Licensee, including Free Trade
Zones, Proprietorships, etc., even individual investments need to be examined
and should comply with ESR Regulations.

7.0 Epilogue

There is a well-known saying, ‘Don’t judge
a book by its cover’. It means, a beautiful cover cannot determine the worth of
a book. It can enhance its visual appeal but not the underlying (inherent)
value. In a lighter vein, an old Bollywood song also gives us some guidance… Dil
ko dekho, chehera na dekho, chehere ne lakhon ko loota… Dil sachcha aur chehera
jhutha.

So, there is no doubt that one needs to
have a substance and purpose in whatever structure one enacts, whichever
jurisdiction one chooses or whatever business activities / transactions one
undertakes. One has to justify every action from the perspective of non-tax
evasion, while one can always take benefits and advantages of favourable tax
treaties / regimes with good business substance.

It is equally important for Indian
entrepreneurs to bear in mind the ESR Regulations in different jurisdictions,
their reporting requirements while structuring or undertaking any outbound
investments / activities. They may also need to revisit their existing
structures to fall in line with the stringent substance requirements of various
jurisdictions. It may be noted that genuine businesses need not worry, but they
will have to prove their bona fides.

shailesh.kwebmaker

Special deduction u/s 80-IA of ITA, 1961 – Telecommunications services – Computation of profits u/s 80-IA(1) – Change in shareholding of company – Effect of section 79 – Losses which have lapsed cannot be taken into account for purposes of section 80-IA

8. Vodafone Essar
Gujarat Ltd. vs. ACIT [2020] 424 ITR 498
(Guj.) Date of order: 3^rd
March, 2020 A.Ys.: 2005-06 and
2006-07

Special deduction u/s 80-IA of ITA, 1961 –
Telecommunications services – Computation of profits u/s 80-IA(1) – Change in
shareholding of company – Effect of section 79 – Losses which have lapsed
cannot be taken into account for purposes of section 80-IA

The assessee company, established in
1997-98, was in the business of providing cellular telecommunications services
in the State of Gujarat. During the previous year relevant to the A.Y. 2001-02,
there was a change in the shareholding of the assessee, as a result of which the provisions of section 79 of the IT Act, 1961 were made applicable and the accumulated losses from the A.Ys. 1997-98 to 2001-02 lapsed. The assessee made a claim for
deduction u/s 80IA for the first time for the A.Y. 2005-06. In the return of income, the assessee had shown total income of Rs. 191,59,84,008 and claimed the entire
amount as deduction u/s 80IA(4)(ii) of the Act. According to the A.O., the
quantum of deduction available to the assessee u/s 80IA(4)(ii) was to be
computed in accordance with the provisions of section 80IA(5), without the
application of the provisions of section 79.

This was upheld by the Commissioner
(Appeals) and the Tribunal.

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

‘i) The application of section 80IA(5) to deny the
effect of provisions of section 79 cannot be sustained. When the loss of
earlier years has already lapsed, it cannot be notionally carried forward and
set off against the profits and gains of the assessee’s business for the year
under consideration in computing the quantum of deduction u/s 80IA(1). The
provisions of section 80IA(5) cannot be invoked to ignore the provisions of
section 79.

ii)
The appeals are allowed. The impugned orders passed by the Tribunal in the
respective tax appeals are quashed and set aside. The substantial question is
answered in favour of the assessee and against the Revenue.’

shailesh.kwebmaker

Reassessment – Notice u/s 148 of ITA, 1961 – Validity – Officer recording reasons and issuing notice must be the jurisdictional A.O. – Reasons recorded by jurisdictional A.O. but notice issued by officer who did not have jurisdiction over assessee – Defect not curable u/s 292B – Notice and consequential proceedings and order invalid

7. Pankajbhai
Jaysukhlal Shah vs. ACIT [2020] 425 ITR 70
(Guj.) Date of order: 9^th
April, 2019 A.Y.: 2011-12

Reassessment – Notice u/s 148 of ITA, 1961
– Validity – Officer recording reasons and issuing notice must be the
jurisdictional A.O. – Reasons recorded by jurisdictional A.O. but notice issued
by officer who did not have jurisdiction over assessee – Defect not curable u/s
292B – Notice and consequential proceedings and order invalid

For the A.Y.
2011-12 an order u/s 143(1) of the Income-tax Act, 1961 was passed against the
assessee. Thereafter, a notice dated 29^th March, 2018 u/s 148 was issued
to reopen the assessment u/s 147 of the Act. In response to the notice, the assessee submitted that the original return filed by him be
treated as the return filed in response to the notice u/s 148 and requested the
A.O. to supply a copy of the reasons recorded for reopening the assessment. The
assessee participated in the assessment proceedings and raised objections
against the initiation of proceedings u/s 147 on the ground that the assumption
of jurisdiction on the part of the A.O. by issuance of notice u/s 148 was
invalid, contending that the notice was issued by the Income-tax Officer, Ward
No. 2(2), whereas the reasons were recorded by the Deputy Commissioner of
Income-tax, Circle 2. The Department contended that issuance of the notice by
the Income-tax Officer was a procedural lapse which had happened on account of
the mandate of the E-assessment scheme and non-migration of the permanent
account number of the assessee in time and that such defect was covered under
the provisions of section 292B and therefore, the notice issued could not be
said to be invalid.

The assessee filed
a writ petition and challenged the validity of the notice. The Gujarat High
Court allowed the writ petition and held as under:

“i) While the reasons for reopening the assessment
had been recorded by the jurisdictional A.O., viz., the Deputy Commissioner,
Circle 2, the notice u/s 148(1) had been issued by the Income-tax Officer, Ward
2(2), who had no jurisdiction over the assessee and, hence, such a notice was
bad on the count of having been issued by an Officer who had no authority to
issue such notice.

ii) It was the Officer recording the reasons who
had to issue the notice u/s 148(1), whereas the reasons had been recorded by
the jurisdictional A.O. and the notice had been issued by an Officer who did
not have jurisdiction over the assessee. The notice u/s 148 being a
jurisdictional notice, any inherent defect therein could not be cured u/s 292B.

iii) It was not possible for the jurisdictional
A.O., viz., the Deputy Commissioner, to issue the notice u/s 148 on or before
31^st March, 2018 as migration of the permanent account number was
not possible within that short period and therefore, the Income-tax Officer had
issued the notice instead of the jurisdictional Assessing Officer. Thus there
was an admission on the part of the Department that the Deputy Commissioner,
Circle 2, who had jurisdiction over the assessee had not issued the notice u/s
148 but it was the Income-tax Officer, Ward 2(2) who did not have any
jurisdiction over the assessee who had issued such notice.

iv) No proceedings could have
been taken u/s 147 in pursuance of such invalid notice. The notice u/s 148(1)
and all the proceedings taken pursuant thereto could not be sustained.’

shailesh.kwebmaker

Reassessment – Notice u/s 148 of ITA, 1961 – Validity – Notice issued in name of dead person – Objection to notice by legal heir and representative – Department intimated about death of assessee in reply to summons issued u/s 131(1A) – Legal heir not submitting to jurisdiction of A.O. in response to notice of reassessment u/s 148 – Provisions of section 292A not attracted – Notice and proceedings invalid

6. Durlabhai
Kanubhai Rajpara vs. ITO [2020] 424 ITR 428
(Guj.) Date of order: 26^th
March, 2019 A.Y.: 2011-12

Reassessment – Notice u/s 148 of ITA, 1961
– Validity – Notice issued in name of dead person – Objection to notice by
legal heir and representative – Department intimated about death of assessee in
reply to summons issued u/s 131(1A) – Legal heir not submitting to jurisdiction
of A.O. in response to notice of reassessment u/s 148 – Provisions of section
292A not attracted – Notice and proceedings invalid

For the A.Y.
2011-12, the A.O. issued a notice in the name of the assessee who was the
father of the petitioner u/s 148 of the Income-tax Act, 1961 dated 28^th
March, 2018 to reopen the assessment u/s 147. Even prior to that, the Deputy
Director (Investigation) had issued a witness summons u/s 131(1A) in the name
of the assessee, the father of the petitioner, to personally attend the office
and the notice was served upon the petitioner. The petitioner furnished the
death certificate of his late father before the authority and submitted that he
had expired on 12^th June, 2015, therefore, the notice was required
to be withdrawn. Thereafter, the notice in question dated 28^th
March, 2018 was issued in the name of the late assessee. The petitioner also
received a notice dated 16^th July, 2018 issued u/s 142(1) on 17^th
July, 2018. The petitioner filed a reply and submitted that his father had
expired on 12^th June, 2015 and a copy of the death certificate was
also annexed. The petitioner also contended in his reply that the fact of the
death of his father was disclosed pursuant to the summons issued by the Deputy
Director (Investigation) u/s 131(1A), that the notice issued u/s 148 was
without any jurisdiction as it was issued against a dead person and prayed that
the proceedings be dropped. The Department rejected the objections.

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

‘i) The petitioner at the first point of time had
objected to the issuance of notice u/s 148 in the name of his deceased father
(assessee) and had not participated or filed any return pursuant to the notice.
Therefore, the legal representatives not having waived the requirement of
notice and not having submitted to the jurisdiction of the A.O. pursuant
thereto, the provisions of section 292A would not be attracted and hence the
notice had to be treated as invalid.

ii) Even prior to the issuance of such notice, the
Department was aware about the death of the petitioner’s father (the assessee)
since in response to the summons issued u/s 131(1A) the petitioner had
intimated the Department about the death of the assessee. Therefore, the
Department could not say that it was not aware of the death of the petitioner’s
father (the assessee) and could have belatedly served the notice u/s 159 upon
the legal representatives of the deceased assessee.

iii)
The notice dated 28^th March, 2018 issued in the name of the deceased
assessee by the A.O. u/s 148 as well as further proceedings thereto were to be
quashed and set aside.’

shailesh.kwebmaker

Reassessment – Notice u/s 148 of ITA, 1961 – Validity – Amalgamation of companies – Notice issued against transferor-company – Amalgamating entity ceases to have its own existence and not amenable to reassessment proceedings – Notice and subsequent proceedings unsustainable

5. Gayatri Microns
Ltd. vs. ACIT [2020] 424 ITR 288
(Guj.) Date of order: 24^th
December, 2019 A.Y.: 2012-13

Reassessment – Notice u/s 148 of ITA, 1961
– Validity – Amalgamation of companies – Notice issued against
transferor-company – Amalgamating entity ceases to have its own existence and
not amenable to reassessment proceedings – Notice and subsequent proceedings
unsustainable

In the return for the A.Y. 2015-16, the
assessee company furnished information regarding amalgamation of three
companies GMCL, GISL and GFL with it. In the return, under the heading ‘holding
status’, further details were provided below the column ‘business
organisation’, that is, the status of those three companies which were
amalgamated with it.

For the A.Y. 2015-16, the A.O. called for
certain information, and the assessee submitted the details categorically
stating that by virtue of the order passed by the High Court dated 18^th
June, 2015, the amalgamation had taken place amongst the three companies. The
Assistant Commissioner issued a notice dated 25^th March, 2019 u/s
148 of the Income-tax Act, 1961 for the A.Y. 2012-13 to GISL.

The assessee filed a writ petition and
challenged the notice. The Gujarat High Court allowed the writ petition and
held as under:

‘i) The notice issued u/s 148 had been issued to
GISL which had been amalgamated with the assessee by order dated 18^th
June, 2015 passed by the court and thus, it had ceased to have its own
existence so as to render it amenable to reassessment proceedings under the
provisions of section 147.

ii) The amalgamation had taken place much prior to
the issuance of the notice dated 25^th March, 2019 for reopening the
assessment. Thereafter, the assessee had informed the Assistant Commissioner
about the amalgamation of all the three companies with it with sufficient
details, viz., (i) the passing of the order dated 18^th June, 2015 by
the court ; (ii) the communication dated 9^th September, 2017
addressed by the assessee to the Income-tax Officer, during the assessment proceedings
for the A.Y. 2015-16 containing the information of amalgamation; and (iii) the
details of amalgamation in the return for the A.Y. 2015-16. Moreover, the
Assistant Commissioner and the Department were duly informed by the assessee
about the amalgamation and despite this a statutory notice u/s 148 (was sent).

iii)
The notice for reopening of the assessment being without jurisdiction, was not
sustainable. The notice and all the proceedings taken pursuant thereto were to
be quashed and set aside.’”

shailesh.kwebmaker

Income – Unexplained money – Section 69A of ITA, 1961 – Condition precedent for application of section 69A – There should be evidence that assessee was the owner of the money – Assessee acting as financial broker – Material on record showing amounts passing through his hands – No evidence that amounts belonged to him – Amounts not assessable in his hands u/s 69A

4. CIT vs.
Anoop Jain [2020] 424 ITR 115
(Del.) Date of order: 22^nd
August, 2019 A.Y.: 1992-93

Income – Unexplained money – Section 69A of
ITA, 1961 – Condition precedent for application of section 69A – There should
be evidence that assessee was the owner of the money – Assessee acting as
financial broker – Material on record showing amounts passing through his hands
– No evidence that amounts belonged to him – Amounts not assessable in his
hands u/s 69A

The assessee
was a financial broker. During the course of assessment for the A.Y. 1992-93,
the A.O. found that the assessee had received 13 pay orders aggregating to Rs.
5,17,45,958 from Standard Chartered Bank, Bombay during the financial years in
question, and mostly between December, 1991 and February, 1992. All these pay
orders were utilised by him for purchasing units and shares from different banks
and mutual funds. The explanation offered by the assessee was that all the pay
orders were received from C, a Bombay broker, and the purchase of units and
shares was done by him on behalf of C and these were then sold back to C after
earning normal brokerage. The A.O. found that all 13 pay orders were actually
tainted pay orders relating to the securities scam of 1992 and that they had
been issued by the Standard Chartered Bank under extraordinary circumstances.
The Standard Chartered Bank had informed the Assistant Commissioner, Circle
7(3) that it had been a victim of a massive fraud perpetrated in 1992 by
certain brokers in collusion with some ex-employees of the Bank to siphon out
funds. It was also conveyed that the Standard Chartered Bank had filed a first
information report with the C.B.I. in which ‘JP’, an ex-employee, was named as
one of the accused and the 13 pay orders were part of a total of 15 pay orders
fraudulently issued by ‘JP’. The A.O. did not accept the explanation and added
an amount of Rs. 5,17,45,958 to the income of the assessee u/s 69A of the
Income-tax Act, 1961.

The Commissioner (Appeals) noted that
certain assets were found by the C.B.I. in the possession of C, who then
surrendered them to the Bureau. The Commissioner (Appeals) also held that there
was no evidence to show that the money in question was utilised by the
assessee. The Commissioner (Appeals) accordingly deleted the addition. This was
upheld by the Tribunal.

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

‘i) The very basis for making the additions was
the inference drawn by the A.O. that the assessee had received pay orders and
spent the monies for purchase of shares and units as a result of some “financial
quid pro quo”. There were certain facts that stood out which showed that
these amounts received by the assessee as pay orders did not belong to him. The
assessee was only a conduit through whom the amounts were floated.

ii) One of the essential conditions in section 69A
of the Act is that the assessee should be the “owner of the money” and it
should not be recorded in his books of account. There was overwhelming evidence
to show the involvement of C acting on behalf of SP for SMI. The C.B.I. also did
not proceed against the assessee and that discounted the case of any collusion
between the assessee and C along with P.

iii)
The assessee was at the highest used as a conduit by the other parties and did
not himself substantially gain from these transactions. In that view of the
matter, the concurrent view of both the Commissioner (Appeals) and the Tribunal
that the addition of the sum to the income of the assessee was not warranted
was justified.’

shailesh.kwebmaker

Income – Business income or income from house property – Sections 22 and 28 of ITA, 1961 – Company formed with object of developing commercial complexes – Setting up of commercial complex and rendering of services to occupants – Income earned assessable as business income

3. Principal CIT vs. City Centre Mall Nashik Pvt. Ltd. [2020] 424 ITR 85
(Bom.) Date of order: 13^th
January, 2020 A.Y.: 2010-11

Income – Business income or income from
house property – Sections 22 and 28 of ITA, 1961 – Company formed with object
of developing commercial complexes – Setting up of commercial complex and
rendering of services to occupants – Income earned assessable as business
income

The assessee was a private limited company
incorporated with the object of construction and running of commercial and
shopping malls. The assessee set up a commercial complex-cum-shopping mall and
the operations commenced during F.Y. 2009-10. The assessee let out various
shops in this commercial complex dealing with various products.

Apart from letting out the premises, the
assessee also provided various services to the occupants such as security
services, housekeeping, maintenance, lighting, repairs to air conditioners,
marketing and promotional activities, advertisement and such other activities.
The premises were let out on leave and licence basis, and the compensation was
based on revenue-sharing basis. For the A.Y. 2010-11, the assessee declared its
income under the head ‘Income from business’. The A.O., however, treated it as
income from house property.

The Tribunal held that the income was
assessable as business income.

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

‘i) The object of
the assessee was clearly to acquire, develop, and let out the commercial
complex. The assessee provided even marketing and promotional activities. The
intention of the assessee was a material circumstance and the objects of
association, and the kind of services rendered, clearly pointed out that the
income was from business.

ii)
All the factors cumulatively taken demonstrated that the assessee had intended
to enter into a business of renting out commercial space to interested parties.
The findings rendered by the Tribunal on assessment of the factual position
before it that the income in question had to be treated as business income was
justified.’

shailesh.kwebmaker

Section 28(iv) – Waiver of loan

1. M/s Essar Shipping Limited vs. Commissioner of
Income-tax, City-III, Mumbai [Income-tax Appeal (IT) No. 201 of 2002 Date of order: 5^th March, 2020 [Order dated 16^th August, 2001
passed by the ITAT ‘A’ Bench, Mumbai in Income-tax Appeal No. 144/Ban/91 for
the A.Y. 1984-85] (Bombay High Court)

Section 28(iv) – Waiver of loan

The appellant company earlier was known as
M/s Karnataka Shipping Corporation Limited and carrying on the business of
shipping. During the relevant previous year, because of certain developments it
was amalgamated with M/s Essar Bulk Carriers Limited, Madras, whereafter it
came to be known as M/s Essar Shipping Limited.

In the assessment proceedings for the A.Y.
1984-85 following amalgamation, it filed a revised return of income wherein an
amount of Rs. 2,52,00,000 was claimed as a deduction being the amount of loan
given by the Government of Karnataka which was subsequently waived. It was
claimed on behalf of the appellant that the Government of Karnataka had written
off the said loan advanced to the appellant as the said amount had become
irrecoverable. The A.O. did not accept the claim of the appellant and observed
that waiver of loan benefited the appellant in carrying on its business and in
terms of the provisions contained in section 28, the said benefit enjoyed by
the appellant should constitute income in its hand. Accordingly, the aforesaid
amount was added to the total income of the assessee.

Aggrieved
by this, the assessee preferred an appeal before the CIT(Appeals)-III,
Bangalore. The first appellate authority considered the requirement of section
28(iv) of the Act and held that waiver of loan could not be treated as a
benefit or perquisite because it was clearly a cash item. The amount would be
includible u/s 28(iv) only if it was a non-cash item and that cash item cannot
be treated as a perquisite. It was further held that what can be assessed u/s
28 are only items of revenue nature and not items of capital nature. Therefore,
waiver of loan cannot partake the character of income to be includible for
assessment. Accordingly, the addition made by the A.O. was deleted.

On further appeal by Revenue, the Tribunal
took the view that writing off of the loan was inseparably connected with the
business of the assessee and therefore this benefit had arisen out of the
business of the assessee. The amount written off was nothing but an incentive
for its business. It was held that the benefit was received by the assessee in
the form of writing off of the liability to the extent of the loan. Therefore,
it could not be said that the assessee received cash benefit. The Tribunal
opined that the A.O. had correctly made the addition considering the waiver of
loan as revenue receipt of the assessee and, therefore, set aside the finding
of the first appellate authority, thereby restoring the order of the A.O.

The appellant contended that to be an income
chargeable to income tax under the head ‘profits and gains of business and
profession’, the value of any benefit or perquisite has to arise from business
or the exercise of a profession and it should not be in cash. He submitted that
this court in Mahindra & Mahindra vs. CIT, 261 ITR 501 has
held that the income which can be taxed u/s 28(iv) must not only be referable
to a benefit or perquisite, but it must be arising from business. Secondly,
section 28(iv) would not apply to benefits in cash or money. The Supreme Court
in CIT vs. Mahindra & Mahindra Ltd., 404 ITR 1 had affirmed
the finding of the Bombay High Court and declared that for applicability of
section 28(iv) of the Act, the income should arise from the business or
profession and that the benefit which is received has to be in some other form
rather than in the shape of money.

On the other hand, the Department contended
that after a loan is waived or written off, it partakes the character of a
subsidy, more particularly an operational subsidy. Emphasis was laid on the
expression ‘operational subsidy’ to contend that the action of the Government
of Karnataka in writing off of the loan provided was an act of providing
operational subsidy to the assessee, thus extending a helping hand to the
assessee to salvage its losses thereby benefiting the assessee to the extent of
the waived loan and it is in this context that he placed reliance on the
decision of Sahney Steel & Press Works Limited (Supra) and
Protos Engineering Company Private Limited vs. CIT, 211 ITR 919.

The Court observed that section 28 deals with profits and gains of
business or profession. It says that the incomes mentioned therein shall be
chargeable to income tax under the head ‘profits and gains of business or
profession’. Clause (iv) refers to the value of any benefit or perquisite
whether or not convertible into money arising from business or the exercise of
a profession. The Court relied on the decision in the case of Mahindra & Mahindra Limited (Supra)
wherein the Supreme Court was examining whether the amount due by Mahindra
& Mahindra to Kaiser Jeep Corporation which was later on waived off by the
lender constituted taxable income of Mahindra & Mahindra or not. The
Supreme Court held as under:

‘On a plain reading of section 28(iv) of
the Income-tax Act, prima facie, it appears that
for the applicability of the said provision, the income which can be taxed
shall arise from the business or profession. Also, in order to invoke the
provisions of section 28(iv) of the Income-tax Act, the benefit which is
received has to be in some other form rather than in the shape of money.’

In the above case, according to the Supreme
Court, for applicability of section 28(iv) of the Act the income which can be taxed has to arise from the business or profession. That apart,
the benefit which is received has to be in some other form rather than in the
shape of money. Therefore, it was held that section 28(iv) was not satisfied
inasmuch as the prime condition of section 28(iv) that any benefit or
perquisite arising from the business or profession shall be in the form of
benefit or perquisite other than in the shape of money, was absent. Therefore,
it was held that the said amount could not be taxed u/s 28(iv) in any circumstances.

The Court observed that the facts and issue
in the present case are identical to those in Mahindra & Mahindra
(Supra). Here also, a loan of Rs. 2.52 cores was given by the Karnataka
Government to the assessee which was subsequently waived off. Therefore, this
amount would be construed to be cash receipt in the hands of the assessee and
cannot be taxed u/s 28(iv). In view of the Supreme Court decision in Mahindra
& Mahindra, the earlier decision of this court in Protos
Engineer Comp. would no longer hold good.

The Court further observed that in the
decision in Sahney Steel & Press Works Limited (Supra) the
issue pertained to subsidy received by the assessee from the Andhra Pradesh
Government. The question was whether or not such subsidy received was taxable
as revenue receipt. In the facts of that case, it was held that such subsidies
were of revenue nature and not of capital nature.

Insofar as the argument of the Department,
that upon waiver of loan the amount covered by such loan would partake the
character of operational subsidy, the Court is unable to accept such a
contention. Conceptually, ‘loan’ and ‘subsidy’ are two different concepts.

In Sahney Steel and Press Works Ltd.
(Supra), the Supreme Court held that the subsidy provided by the Andhra Pradesh Government was basically an endeavour of the state to extend
a helping hand to newly-set up industries to enable them to be viable and
competitive.

Thus, the Court held that there is a
fundamental difference between ‘loan’ and ‘subsidy’ and the two cannot be
equated. While ‘loan’ is a borrowing of money required to the repaid with
interest, ‘subsidy’ being a grant, is not required to be repaid. Such grant is
given as part of a public policy by the state in furtherance of the public
interest. Therefore, even if a ‘loan’ is written off or waived, which may be
for various reasons, it cannot partake the character of a ‘subsidy’.

The substantial question of law therefore is
answered in favour of the assessee by holding that waiver of loan cannot be
brought to tax u/s 28(iv) of the Act. The appeal is accordingly allowed.

BCAJ:
Positive impact of COVID-19 on number of pages

Month

2019

2020

% change

May

112

148

32%

June

124

132

July

136

148

August

116

124

September

140

156

11%

Total

628

708

13%

Do not dwell in the past, do not
dream of the future, concentrate the
mind on the present moment

—
Buddha

God doesn’t dwell in the wooden,
stony or earthen idols.
His abode is in our feelings, our thoughts

—
Chanakya

shailesh.kwebmaker

Charitable institution – Exemption – Sections 2(15) and 11 of ITA, 1961 – Denial of exemption – Activity for profit – Effect of proviso to section 2(15) – Concurrent finding of appellate authorities that the assessee was charitable institution – Event organised to raise money – Amount earned entitled to exemption

2. CIT (Exemption)
vs. United Way of Baroda [2020] 423 ITR 596
(Guj.) Date of order: 25^th
February, 2020 A.Y.: 2014-15

Charitable institution – Exemption –
Sections 2(15) and 11 of ITA, 1961 – Denial of exemption – Activity for profit
– Effect of proviso to section 2(15) – Concurrent finding of appellate
authorities that the assessee was charitable institution – Event organised to
raise money – Amount earned entitled to exemption

The assessee is a
charitable institution registered u/s 12A of the Act. For the A.Y. 2014-15, the assessee filed its return of income declaring total income as Nil after claiming exemption u/s
11. But the A.O. assessed the total income at Rs. 4,53,97,808. He had found
that the assessee had received a total sum of Rs. 5,48,04,054 which included
Rs. 4,37,61,637 as income from organising the event of garba during the
Navratri festival. According to the A.O., the assessee sold passes and gave
food stalls on rent, etc., which constitutes 79.85% of its total income. The
assessee, during the year, had declared gross receipts of Rs. 5,27,40,432 and
showed surplus of Rs. 26,27,243. The assessee thereby claimed Rs. 4,42,59,665
as income from charitable event. The A.O. held that the activities of the
assessee as per the amended provision of section 2(15) could not be said to be
advancement of any other object of general public utility and, therefore, the
assessee was not eligible to claim the benefit under sections 11 and 12,
respectively, more particularly in view of section 13(8) of the Act. The A.O.,
having regard to the gross receipts of Rs. 5,48,04,054, made the addition of
Rs. 58,90,500 on account of the interest on FSF fund and Rs. 1,67,90,118 on
account of anonymous donation.

The Commissioner of
Income-tax (Appeals), allowed the appeal of the assessee, taking the view that
the activities of the assessee could be termed as charitable in nature and the
assessee would be eligible for the benefit under sections 11 and 12. The
Tribunal concurred with the findings of the Commissioner (Appeals) and
dismissed the appeal filed by the Revenue.

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

‘i) Once the activity of the assessee falls within
the ambit of trade, commerce or business, it no longer remains a charitable
activity and the assessee is not entitled to claim any exemption under sections
11 and 12 of the Income-tax Act, 1961. The expression “trade”, “commerce” and
“business” as occurring in the first proviso to section 2(15) must be
read in the context of the intent and purport of section 2(15) and cannot be
interpreted to mean any activity which is carried on in an organised manner.
The purpose and the dominant object for which an institution carries on its
activities is material to determine whether or not it is business.

ii) The object of introducing the first proviso
is to exclude organisations which carry on regular business from the scope of
“charitable purpose”. An activity would be considered “business” if it is
undertaken with a profit motive, but in some cases, this may not be
determinative. Normally, the profit motive test should be satisfied, but in a
given case the activity may be regarded as a business even when the profit
motive cannot be established. In such cases, there should be evidence and
material to show that the activity has continued on sound and recognised
business principles and pursued with reasonable continuity. There should be
facts and other circumstances which justify and show that the activity
undertaken is in fact in the nature of business.

iii) The main object of the
assessee could not be said to be organising the event of garba. The
assessee had been supporting 120 non-government organisations. The assessee was
into health and human services for the purpose of improving the quality of life
in society. All its objects were charitable. The activities like organising the
event of garba, including the sale of tickets and issue of passes, etc.,
cannot be termed as business. The two authorities had taken the view that
profit-making was not the driving force or the objective of the assessee. The
assessee was entitled to exemption under sections 11 and 12.’

shailesh.kwebmaker

Assessment: (i) Effect of electronic proceedings – Possibility of erroneous assessment if transactions and statement of account of assessee not properly understood – A.O. to call for assessee’s explanation in writing to conclude that cash deposits made by assessee post-demonetisation of currency was unusual; (ii) Unexplained money – Sections 69A and 115BBE of ITA, 1961 – Chit company – Tax on income included u/s 69A – Monthly subscriptions / dues – Cash deposits of collection made post-demonetisation of currency by Government – Cash deposits during period in question not in variance with same period during preceding year – Addition of amount as unexplained money – Provisions of section 115BBE cannot be invoked

1. Salem Sree Ramavilas Chit Co. Pvt. Ltd. vs. Dy. CIT [2020] 423 ITR 525
(Mad.) Date of order: 4^th
February, 2020 A.Y.: 2017-18

Assessment: (i) Effect of electronic
proceedings – Possibility of erroneous assessment if transactions and statement
of account of assessee not properly understood – A.O. to call for assessee’s
explanation in writing to conclude that cash deposits made by assessee post-demonetisation
of currency was unusual;

(ii) Unexplained money – Sections 69A and
115BBE of ITA, 1961 – Chit company – Tax on income included u/s 69A – Monthly
subscriptions / dues – Cash deposits of collection made post-demonetisation of
currency by Government – Cash deposits during period in question not in
variance with same period during preceding year – Addition of amount as
unexplained money – Provisions of section 115BBE cannot be invoked

The assessee was in
the chit fund business. For the A.Y. 2017-18, the A.O. added the amounts
received and deposited by it during the period between 9^th November,
2016 and 31^st December, 2016, post-demonetisation of Rs. 500 and Rs.
1,000 notes by the Government on 8^th November, 2016 to the income of
the assessee. The order stated that the assessee did not properly explain the
source and the purpose of cash along with party-wise break-up as required in
the notice issued u/s 142(1) of the Income-tax Act, 1961.

The assessee filed
a writ petition and challenged the assessment order. The Madras High Court
allowed the writ petition and held as under:

‘i) The order making the assessee liable to tax at the maximum marginal
rate of tax by invoking section 115BBE was misplaced. The assessee had prima
facie demonstrated that the assessment proceedings had resulted in
distorted conclusion on the facts that the amount collected by it during the
period was huge and remained unexplained and therefore the amount was liable to
be treated as unaccounted money in the hands of the assessee u/s 69A. The
closing cash on hand during the preceding months of the same year was not at
much variance with the closing cash on hand as on 31^st October,
2016. The demonetisation of Rs. 500 and Rs. 1,000 notes by the Government was
on 8^th November, 2016 and the collection of the assessee between 1^st
November, 2016 and 8^th November, 2016 was not unusual compared to
its collection during the month of November, 2015. The cash deposits made by
the assessee in the year 2016 were not at variance with the cash deposits made
by it in the preceding year. Collection of monthly subscription / dues by the
assessee during the period in question was reasonable as compared to the same
period in the year 2015.

ii) Since the
assessment proceedings no longer involved human interaction and were based on
records alone, such assessment proceedings could lead to erroneous assessment
if officers were not able to understand the transactions and statement of
accounts of the assessee or the nature of the assessee. The assessee was to
explain its stand in writing so that the A.O. could arrive at an objective
conclusion on the facts based on the record.

iii) Under these
circumstances, the impugned order is set aside and the case is remitted back to
the respondent to pass a fresh order within a period of sixty days from the
date of receipt of a copy of this order. The petitioner shall file additional
representation if any by treating the impugned order as the show cause notice
within a period of thirty days from the date of receipt of a copy of this
order. Since the Government of India has done away with the human interaction
during the assessment proceedings, it is expected that the petitioner will
clearly explain its stand in writing so that the respondent-A.O. can come to an
objective conclusion on facts based on the records alone. It is made clear that
the respondent will have to come to an independent conclusion on facts
uninfluenced by any of the observations contained herein.’

shailesh.kwebmaker

Article 12 of India-USA and India-Netherlands DTAAs – Testing and certification charges paid to US and Netherlands entities did not qualify as FTS since they did not satisfy ‘make available’ requirement Article 12 of India-China and India-Germany DTAAs – Testing and certification charges were FTS and taxable in India

2. [2020] 117
taxmann.com 983 (Delhi-Trib.) Havells India Ltd.
vs. ACIT ITA Nos.:
6072/Del./2010; 6073/Del./2010; 466/Del./2011 A.Ys.: 2004-05 and
2007-08 Date of order: 25^th
August, 2020

Article 12 of
India-USA and India-Netherlands DTAAs – Testing and certification charges paid
to US and Netherlands entities did not qualify as FTS since they did not
satisfy ‘make available’ requirement

Article 12 of
India-China and India-Germany DTAAs – Testing and certification charges were
FTS and taxable in India

FACTS

The assessee was
engaged in the manufacture of electrical goods. It made payments to various
foreign entities in the USA, the Netherlands, China and Germany for testing and
certification of its products. The foreign entities had specialised knowledge
and facilities for undertaking testing and certification, which was required
for the manufacturing activity of the assessee. These were country-specific
certifications that were mandatory for sale in the respective countries.

The A.O. held that
the payments for testing fees were taxable u/s 9(1)(vii). As regards the
applicability of the DTAAs, the A.O. held that the services met the requirement
of ‘made available’ under the India-Netherlands and India-USA DTAAs. The A.O.
further held that the testing fees were in any case taxable under the
India-China and India-Germany DTAAs wherein the ‘make available’ clause was not
present.

The CIT(A) upheld
the order of the A.O.

Being aggrieved,
the assessee appealed before the Tribunal.

HELD

Payments to
US and Netherlands entities

Relying upon its
order in the assessee’s own case for A.Y. 2005-06 and A.Y. 2006-07 and
following orders for earlier years, the Tribunal held that the services
provided did not satisfy the ‘make available’ condition. Hence, the services
were not chargeable to tax in India.

Payment to
Chinese entity

(a) The assessee contended that in terms of Article
12 of the India-China DTAA, the meaning of FTS was restricted to only services
performed in India, based on ‘place of performance test’.

(b) Relying on the decision in Ashapura
Minichem Ltd.² dealing with Article 12 of the India-China
DTAA, the Tribunal observed that: (i) FTS shall be deemed to accrue or arise in
the source country when the payer is resident of that country; (ii) it is the ‘provision
of services’, and not necessarily the ‘performance of services’ in the
source country which triggers taxability. The Tribunal observed that the
expression ‘provision for services’ used in the India-China DTAA is much wider
in scope than the expression ‘provision for rendering of services’
used in other DTAAs. Hence, rendition of services in India is not necessary for
taxability of FTS in India. It is sufficient that services were utilised in
India. Accordingly, under India-China DTAA, FTS was taxable in India.

Payment to
German entity

In case of payments
made to the German entity, the Tribunal held that the services provided by it
were in the nature of technical services and hence were taxable under the
India-Germany DTAA.

Standard
services and machine-provided services

(i) The assessee relied upon the Supreme Court
decision in Kotak Securities³ to contend that
technical services were standard services. However, the Tribunal held that
testing services were not standard services as they were for a specific
country, a specific product, and / or a specific manufactured lot of the
assessee, which was exported to that particular country and conformed to the
standards specified in that country.

(ii) The assessee also relied
on the decision of the Apex Court in Bharti Cellular Ltd.⁴
to contend that services were not FTS as they were provided by machines without
any human intervention. However, relying on the Supreme Court decision in Kotak
Securities (Supra), the Tribunal did not accept the contention of the
assessee. In the said decision, after taking note of the decision in Bharti
Cellular (Supra), the Court had observed that services could be
technical even in case of a fully-automated process which did not involve human
intervention.

_________________________________________________________________________________________________

2 (2010)
40 SOT 220 (Mum)

3 (2016)
383 ITR 1 (SC)

4 (2011)
330 ITR 239 (SC)

You can’t blame gravity for
falling in love

—
Albert Einstein

shailesh.kwebmaker

Article 5 of India-UK DTAA – Section 195 of the Act – Payment for production and delivery of film outside India is not taxable in India

1. [2020] 118
taxmann.com 314 (Mumbai-Trib.) Next Gen Films (P)
Ltd. vs. ITO ITA Nos.: 3782,
3783/Mum./2016 A.Ys.: 2011-12 to
2012-13 Date of order: 11^th
August, 2020

Article 5 of
India-UK DTAA – Section 195 of the Act – Payment for production and delivery of
film outside India is not taxable in India

FACTS

The assessee and another Indian Company (E1) were co-producers of a
feature film. They entered into a commission agreement with D, a UK-based
company which was to provide production services like pre-production,
production, post-production and delivery of the feature film. Key terms of the
agreement were as follows:

(a) Based on the story concept provided by the
assessee, development of storyboards and screenplay, selection of locations and
special and visual effects services. D was to consult and take consent of the
assessee over important aspects like the identity of all key cast members, budget,
production schedule, delivery materials, cash flow, screenplay, production
services companies to be engaged, etc., to ensure that the film was produced
and delivered in accordance with the material requirement.

(b) Ownership of the film was solely and
exclusively with the assessee.

(c) As a consideration for the
aforesaid services, D was paid 100% of the budget. This amount was to be
reduced by the amount of UK Tax Credit advance, any underspent amount, interest
accrued on monies held in the production account and any realisable value from
equipment / materials sale at the end of production of the film.

To execute the
Indian leg of the project, D entered into a production service agreement with
E2 (a subsidiary of the parent of E1). The services of E2 were subject to the
direction and control of D. The A.O. was of the view that D had a place of
management in India. He further held that the assessee, D and E2 were
associated enterprises in terms of Article 10. Accordingly, E2 had also created
a service PE of D in India. Since the assessee had not withheld tax on
remittance, the A.O. deemed it as ‘assessee in default’ and initiated
proceedings u/s 201/201(1A) of the Act.

In appeal, the
CIT(A) held against the assessee who, being aggrieved, appealed before the
Tribunal.

HELD

Associated
enterprise

+ The contract
between the assessee and D was on a principal-to-principal basis which required
D to produce the film in accordance with the specifications laid down by the
assessee.

+ D carried out its
activities in consultation with the assessee to ensure that the film was
produced as per specifications and in keeping with the storyline.

+ D acted
independently and was free to take decisions and also engage other service
providers.

+ D had borrowed
against expected UK tax credit¹. Thus, it could not be said that D
was dependent upon the assessee for its financial requirement.

+ D also recorded
revenue received from the assessee and consequential loss in its books of
accounts.

Thus, it could not
be said that the assessee participated directly or indirectly in the
management, control or capital of D.

Permanent
Establishment

* The agreement
between D and E2 was that between a principal and an agent. E2 had provided
limited production services for a lump sum consideration of Rs. 3 crores.

* The gross
receipts of E2 were Rs. 133.55 crores (A.Y. 2011-12) and Rs. 76.27 crores (A.Y.
2012-13), respectively, as compared to the fees of Rs. 3 crores received from
D. Therefore, E2 was an agent of independent status. Consequently, D did not
create a PE in India.

Thus, D and E2 were
not associated enterprises in terms of Article 10 of the DTAA.

_________________________________________________________________________________________________

1 Decision
does not mention nature or conditions qualifying for tax credit in UK

shailesh.kwebmaker

Section 40(a)(ia) r/w section 195 – Payments to overseas group companies considered as reimbursement of expense incurred, not liable to deduction of tax at source

3. ACIT vs. APCO Worldwide (India) Pvt. Ltd. (Delhi) Members: Sushma Chowla (V.P.) and Anil Chaturvedi (A.M.) ITA No. 5614/Del./2017 A.Y.: 2013-14 Date of order: 9^th September, 2020 Counsel for Revenue / Assessee: Rakhi Vimal / Ajay Vohra and Gaurav
Jain

Section
40(a)(ia) r/w section 195 – Payments to overseas group companies considered as
reimbursement of expense incurred, not liable to deduction of tax at source

FACTS

The issue was
with respect to disallowance of expenses u/s 40(a)(ia). The assessee had made
payments to its overseas group companies towards recoupment of actual cost
incurred by them on behalf of the assessee for corporate administration,
finance support, information technology support, etc., without deduction of tax
u/s 195. According to the assessee, the payments made cannot be considered as
income of the recipients, as no profit element was involved. However, according
to the A.O., the provisions of section 40(a)(ia) were attracted. He accordingly
disallowed the payment of Rs. 1.49 crores so made. On appeal, the CIT(A)
deleted the addition by holding that the assessee was not required to deduct
tax at source on the reimbursement of the expenses made to overseas entities.

HELD

The Tribunal
noted that the CIT(A) had found that the payments made were on cost-to-cost
basis. Further, the coordinate bench of the Tribunal while deciding an
identical issue in the assessee’s own case in A.Ys. 2010-11, 2011-12 and
2012-13, had held that the provisions of section 195 were not attracted on the
amounts paid by the assessee to its overseas group companies as it was mere
reimbursement. Accordingly, it was held that no disallowance u/s 40(a)(ia) was
required to be made.

shailesh.kwebmaker

Section 199(3) and Rule 37BA – Credit for TDS allowed in the year of deduction even when related revenue was booked in subsequent year(s)

2. HCL Comnet Limited vs. DCIT (Delhi) Members: O.P. Kant (A.M.) and Kuldip Singh (J.M.) ITA No. 1113/Del./2017 A.Y.: 2012-13 Date of order: 4^th September, 2020 Counsel for Assessee / Revenue: Ajay Vohra, Aditya Vohra and Arpit
Goyal / S.N. Meena

Section
199(3) and Rule 37BA – Credit for TDS allowed in the year of deduction even
when related revenue was booked in subsequent year(s)

FACTS

The assessee
was in the business of selling networking equipment and installation and
provision of after-sales services. In respect of after-sales services, the
customers would make payment which covered
a period of three to four years. The assessee would recognise revenue
from such services on a year-to-year basis. However, the customer would deduct
TDS on the entire amount at the time of payment as per the provisions of the
Act. Relying on the decision of the Visakhapatnam bench of the Tribunal in the
case of Asstt. CIT vs. Peddu Srinivasa Rao (ITA No. 324/Vizag./2009, CO
No. 68/Vizag./2009, dated 3^rd March, 2011), the assessee
claimed that it was eligible to claim the entire TDS in the year of deduction
(even when the related revenue was booked in subsequent financial years).
Reliance was also placed on the decision of the Mumbai Tribunal in the case of Toyo Engineering India Limited vs. JCIT (5 SOT 616)
and of the Delhi Tribunal in the case of HCL Comnet Systems and Services
Ltd. vs. DCIT (ITA No. 3221/Del./2017 order dated 31^st December,
2019). However, the A.O. rejected the claim of the assessee.

HELD

The Tribunal,
following the order passed by the coordinate bench of the Tribunal in the case
of HCL
Comnet Systems and Services Ltd., held that the TDS credit is to be
granted irrespective of the fact that related revenue is booked in subsequent financial years. Accordingly, the assessee’s
claim for credit of the TDS in the year of deduction was allowed.

shailesh.kwebmaker

Section 80IC – Income arising from scrap sales is part of business income eligible for deduction u/s 80IC

1. Isolloyd Engineering Technologies Limited vs. DCIT (Delhi) Members: O.P. Kant (A.M.) and Kuldip Singh (J.M.) ITA No. 3936/Del./2017 A.Y.: 2012-13 Date of order: 4^th September, 2020 Counsel for Assessee / Revenue: None / S.N. Meena and M. Barnwal

Section 80IC
– Income arising from scrap sales is part of business income eligible for
deduction u/s 80IC

FACTS

The assessee
had three manufacturing units. It was entitled to claim deduction u/s 80IC @30%
on the first two units and @100% on the third one. During the year under
appeal, the assessee’s claim for deduction u/s 80IC included the sum of Rs.
52.67 lakhs qua the amount of scrap sales aggregating to Rs. 80.13
lakhs. According to the A.O., the same was not related to manufacturing
activity, hence it was disallowed. On appeal, the CIT(A) restricted the
addition to Rs.7.08 lakhs by allowing the deduction to the extent of Rs. 45.59
lakhs claimed u/s 80IC.

HELD

The Tribunal
noted that the scrap consisted of empty drums, off-cuts, trims, coils,
leftovers, packing material, ‘gatta’, scrap rolls, etc., which were generated
in the course of the business. According to it, it was settled principle of law
that scrap generated in the business is part and parcel of the income derived
from the business and as such forms part of the business profit, as held by the
Delhi High Court in the case of CIT vs. Sadu Forgings Ltd. (336 ITR 444).
It further noted that the CIT(A) had duly obtained and analysed unit-wise
details of scrap sold in the year under appeal and found the claim of the
assessee prima facie plausible. However, without giving any reason, the
sum of Rs. 7.08 lakhs was disallowed. According to the Tribunal, the CIT(A) had
erred in disallowing the amount of Rs. 7.08 lakhs out of the total claim of Rs.
52.67 lakhs made u/s 80IC. Accordingly, it allowed the appeal of the assessee.

shailesh.kwebmaker

Section 244A – Interest is payable on refund arising out of payment of self-assessment tax even though refund is less than ten per cent of tax determined

4. [2020] 119 taxmann.com 40 (Del.)(Trib.) Maruti Suzuki India Ltd. vs. CIT ITA Nos. 2553, 2641 (Delhi) of 2013 &
others A.Ys.: 1999-00 to 1994-95 Date of order: 31^st August, 2020

Section 244A – Interest is payable on
refund arising out of payment of self-assessment tax even though refund is less
than ten per cent of tax determined

FACTS

The assessee
claimed refund of Rs. 201,37,93,163 comprising of advance tax, TDS and
self-assessment tax of Rs. 14,59,79,228 and Rs. 186,78,13,935, the tax paid on
different dates. The A.O. did not allow interest u/s 244A(1)(a) on the amount
of Rs. 14.59 crores as the refund was less than 10% of the tax determined u/s
254 r/w/s 143(3).

Aggrieved, the
assessee preferred an appeal to the CIT(A) who confirmed the order on the
ground that to give effect to the provisions of section 244A(3), the assessee
had to mandatorily cross the limitations imposed u/s 244A(1)(a).

Aggrieved, the
assessee preferred an appeal to the Tribunal.

HELD

The Tribunal observed that the CIT(A) treated the entire amount of Rs.
14.60 crores as prepaid taxes for the purpose of section 244A(1)(a). This, according to the Tribunal, was where the
CIT(A) considered / read the provisions wrong. The Tribunal held that the
prepaid taxes consist of TDS and advance tax. The provisions of self-assessment
tax are governed by section 140A which is not covered by the provisions of
section 244A(1)(a). Self-assessment tax which is payable on the basis of return
does not constitute part of advance tax. For the purpose of embargo of 10% of
tax determined in accordance with the provisions of section 244A(1)(a), it is
clear from the provisions of the section that self-assessment tax does not form
part of the embargo as self-assessment tax falls under clause (b) of section
244A(1). The proviso to clause (a) of sub-section (1) of section 244A is
applicable and has to be considered for the computational purpose of interest
computable for the refund payable u/s 244A(1)(a).

As regards the
question whether or not interest is payable on self-assessment tax paid, the
Tribunal observed that it is trite law that whenever the assessee is entitled
to refund, there is a statutory liability on the Revenue to pay the interest on
such refund on general principles to pay interest on sums wrongfully retained.

Section 244A does
not deny payment of interest in case of refund of amount paid u/s 140A. On the
contrary, clause (b) being a residuary clause, necessarily includes payment
made u/s 140A. Since there is no proviso attached to sub-clause (b), the
embargo of 10% is not applicable for calculation of interest for the refund
arising out of payment of self-assessment tax.

The Tribunal held
that with regard to the self-assessment tax paid, the assessee is eligible for
interest on the total amount of refund in accordance with the provisions of
section 244A(1)(b). This ground of appeal was allowed.

shailesh.kwebmaker

Sections 250 and 271AAA – Ex parte dismissal of appeal by CIT(A), without considering the material on record on the ground that the written submissions were not signed by the assessee, is contrary to the provisions of sub-section (6) of section 250

3. 118 taxmann.com 223 (Raj.)(Trib.) Keshavlal Devkaranbhai Patel vs. ACIT ITA No. 124 /Rajkot/2017 A.Y.: 2012-13 Date of order: 28^th July, 2020

Sections 250 and 271AAA – Ex parte
dismissal of appeal by CIT(A), without considering the material on record on
the ground that the written submissions were not signed by the assessee, is
contrary to the provisions of sub-section (6) of section 250

FACTS

Aggrieved by the
order levying penalty u/s 271AAA, the assessee preferred an appeal to the
CIT(A). The assessee had filed his explanation before the A.O. and also before
the CIT(A). However, the submissions filed before the CIT(A) were not signed by
the assessee.

In view of this,
the CIT(A) dismissed the appeal by recording that the assessee was not
interested in pursuing the appeal.

Aggrieved, the
assessee preferred an appeal to the Tribunal.

HELD

The Tribunal found
the order of the CIT(A) to be very cryptic and not having any discussion on the
material already available on record before him. The Tribunal observed that:

(i) there is no valid and justifiable reason
given by the appellate authority in his order while dismissing the claim of the
assessee;

(ii) the CIT(A) has recorded in his order that the
assessee has filed written submissions in the office on 29^th August,
2017 but without signature, hence the same were not considered by the CIT(A);
and

(iii) the CIT(A) dismissed the appeal for want of
prosecution even when the written submission was on record which did not bear
the signature of the assessee.

The Tribunal held
that the CIT(A) ought to have adjourned the matter and passed a further
direction to file fresh written submissions, duly signed. It is a basic
principle that justice should not only be done, but it must also be seen to be
done. In the absence of that, the Tribunal held, the order impugned is not in
consonance with the spirit and object of sub-section (6) of section 250.

The Tribunal set
aside the issue to the file of the CIT(A) with a direction to adjudicate it
afresh after giving the assessee an opportunity of being heard and to pass a
speaking order thereon keeping in mind, inter alia, the mandate of the
provisions of section 250(6) in order to render true and effective justice.

shailesh.kwebmaker

Section 50C – Provisions of section 50C are not applicable to introduction of development rights as capital contribution in an AOP of which assessee is a member

2. 119 taxmann.com 186 (Mum.)(Trib.) Network Construction Company vs. ACIT ITA No. 2279/Mum./2017 A.Y.: 2012-13 Date of order: 11^th August, 2020

Section 50C – Provisions of section 50C are
not applicable to introduction of development rights as capital contribution in
an AOP of which assessee is a member

FACTS

The assessee firm
acquired development rights in respect of seven buildings of which the assessee
firm developed and sold four on its own and disclosed the profit earned as
business profit in its return of income. The development rights in respect of
the remaining three buildings were shown as investments in the balance sheet as
at 31^st March, 2010.

As per the joint
venture agreement dated 1^st July, 2010, the assessee contributed
development rights in respect of three buildings as ‘capital contribution’ in
an AOP for an agreed consideration of Rs. 5 crores. The assessee contended that
the capital gains were to be computed in accordance with the provisions of
section 45(3).

The A.O. treated
the introduction of the development rights as a transfer and computed capital
gains by applying the provisions of section 50C by adopting Rs. 10,10,47,000,
being stamp duty value of these rights, as the full value of consideration.

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

The assessee
preferred an appeal to the Tribunal.

HELD

The Tribunal
observed that section 45(3) is a charging provision having two limbs joined by
the conjunction ‘AND’. The first limb is a charging provision which levies
capital gains tax on gains arising from the contribution of a capital asset in the
AOP by a member, and the second limb is an essential deeming fiction for
determining the value of consideration without which the charging provision
would fail. The Tribunal also observed that the provisions of section 50C are
also a deeming fiction which deems only the value of consideration for the
purpose of calculating capital gains in the transfer of a capital asset from
one person to another. It held that the provisions of section 50C are not
applicable in the present case and that the provisions of section 45(3) will be
applied.

The Tribunal
reversed the orders of the A.O. and the CIT(A) and allowed this ground of
appeal filed by the assessee.

shailesh.kwebmaker

Section 44AD r/w sections 44AB and 144 – Assessing Officer can resort to estimation of income under the provisions of section 44AD only after rejecting the books of accounts of the assessee, by best judgment assessment u/s 144

1. [118 taxmann.com
347] Saykul Islam vs.
ITO ITA No.
64/Ahd./2018 A.Y.: 2014-15 Date of order: 31^st
July, 2020

Section 44AD r/w sections
44AB and 144 – Assessing Officer can resort to estimation of income under the
provisions of section 44AD only after rejecting the books of accounts of the
assessee, by best judgment assessment u/s 144

FACTS

The assessee is an
individual trading in hardware goods. His business turnover was in excess of
Rs. 1 crore, but he had declared profit at 0.99% of the turnover in his tax
return. The information was provided by the assessee in his return of income
reflecting maintenance of books of accounts, but not audited as required under
the provisions of section 44AB. The A.O. was of the view that as per the
provisions of section 44AD, an assessee may claim lower profits and gains than
the profits and gains specified in sub-section (1) of section 44AD provided
that the assessee keeps and maintains such books of accounts and other
documents as required under sub-section (2) of section 44AA and gets his
accounts audited and furnishes a report of such audit as required u/s 44AB. The
assessee submitted that the net profit percentage was very low in his business
and requested the officer to take the net profit percentage @3% of the
turnover.

The A.O. rejected
this contention and estimated the net profit at 8% of the turnover. On appeal
to the CIT(A), he reduced the estimated profit on turnover from 8% to 5%.
Aggrieved by the order of the CIT(A), the assessee filed an appeal with the
Tribunal.

HELD

The assessee had
produced all books of accounts, bills, vouchers and other documents; however, without
pointing out any mistake or error in the books of accounts, the A.O. made an
addition at 8%. Moreover, the books of accounts were not rejected. The Tribunal
observed that the A.O. could resort to estimation of net profits only after
rejecting the books of accounts u/s 145(3) and thereafter making best judgment
assessment u/s 144. Instead, he estimated net profits only on the basis of
suspicion that the assessee might be inflating expenses and showing a lower net
profit ratio. On the factual position of the case, the Tribunal directed the
A.O. to estimate the income at 2.5% of the turnover.

The appeal of the
assessee was partly allowed.

shailesh.kwebmaker

NEW TCS PROVISIONS – AN ANALYSIS

The Finance Act,
2020 has inserted a new sub-section (1H) in section 206C of the Income-tax Act,
1961 with effect from 1^st October, 2020 to provide for collection of
tax at source (Tax Collected at Source or TCS) on consideration received on
sale of certain goods. In this article an effort is being made to set out
various issues that are likely to arise out of these newly-inserted provisions.

AMENDMENT IN BRIEF

Every seller whose
turnover in the immediately preceding F.Y. exceeds Rs. 10 crores and who
receives an amount exceeding Rs. 50 lakhs in aggregate from a buyer in any
previous year on the sale of goods, is required to collect a sum of 0.1%
(0.075% for F.Y. 2020-21) on the sale consideration exceeding Rs. 50 lakhs from
the buyer of such goods.

The rate is to be
increased to 1% if neither PAN nor the Aadhaar number are provided.

Receipts from sale
of scrap, alcohol, motor vehicles, remittances under Liberalised Remittance
Scheme (LRS) and overseas tour programme packages are excluded from this
sub-section since they are covered by other clauses of section 206C.

The provisions of
TCS shall not be applicable in cases where the buyer is liable to make a tax
deduction at source from the amount payable to the seller, and such tax has
been deducted. Besides, goods exported out of India have also been excluded
from the applicability of TCS.

Further, the
following have been excluded from the meaning of the term ‘buyer’, thus making
these provisions inapplicable to them:

– Central Government

– State Government

– Embassy

– High Commission

– Legation

– Commission

– Consulate

– Trade Representation of a foreign state

– Local Authority

– Person importing goods into India

– Other Notified Person

ISSUES

‘Goods’

The levy of TCS is
on the consideration received on the sale of goods. The Income-tax Act does not
define the term ‘goods’. But it can be interpreted widely since anything that
is marketable, i.e., capable of being sold in the market, can be classified as
goods. The other relevant legislation from which a definition can be drawn is
the Sale of Goods Act. As per section 2(7) of the Sale of Goods Act, ‘goods’
are described as: ‘Every kind of movable property other than actionable claims
and money; and includes stock and shares, growing crops, grass and things
attached to or forming part of the land which are agreed to be severed before
sale or under the contract of sale.’

Under this
definition, shares and securities are included within the definition of goods.
Let us analyse this position in the following scenarios:

Shares &
securities held as stock in trade by a dealer trading in them

Listed shares and securities:

In case of listed
shares and securities, the dealer who regularly trades in them is required to
pay Securities Transaction Tax (STT) for transactions carried out through the
recognised stock exchanges. The identity of the buyer is not known to the
seller and, therefore, whether the sale consideration exceeds Rs. 50 lakhs for
each buyer cannot be determined. The machinery for implementation of TCS
provisions would not work in these cases. In view of these practical
difficulties, the CBDT vide its Circular No. 17 of 2020 dated 29^th
September, 2020 (the Circular) has provided that the provisions of sub-section
(1H) of section 206C will not be applicable to transactions for sale of shares
/ securities and commodities which are carried out through recognised stock /
commodities exchanges. Though welcome, the Circular gives only limited clarity
and a few more issues with regard to ‘goods’ covered under this section are
discussed below.

Unlisted shares & securities:

In such a
scenario, there would be no STT payable on the sale of these shares. Since the
consideration would be received directly from the buyer, the seller will be in
a position to collect tax at source. Therefore, unless there is a specific
exclusion, unlisted shares and securities sold by a dealer may be covered under
these provisions. However, shares of private limited companies are not tradable
on account of restrictions on their transfer and may therefore not be regarded
as stock-in-trade. Sales proceeds of such shares may not be regarded as turnover
if they are held as capital assets. If the seller of such shares is otherwise a
dealer in goods having a turnover of more than Rs. 10 crores in the preceding
year, the question of applicability of TCS may arise. The question is whether
TCS provisions are attracted by sale of goods only in the course of business or
even otherwise in the case of a businessman. This is discussed further below.
Shares held as capital assets are taken up next.

Shares &
securities held as investments / Capital assets by an investor

Listed shares and securities:

In the case of
listed shares and securities, they would remain outside the scope of TCS for
the same reasons as discussed above.

Unlisted shares and securities:

In a case where unlisted shares and securities held as investments are
sold, whether they would constitute ‘goods’ would determine the applicability
of the TCS provisions. These shares and securities would usually be capital
assets and their sale would give rise to resultant capital gains / loss. Though
the definition of ‘goods’ under the Sale of Goods Act includes stocks and
shares, the fact that they would be considered as ‘goods’ in the context of
these provisions seems unlikely, and therefore may be excluded.

In order to
extrapolate this thought further, let us analyse the criteria to be fulfilled
for the applicability of TCS provisions. This sub-section has two-fold
criteria:

(i) the turnover from business of the preceding
financial year should be in excess of Rs. 10 crores, and

(ii) the aggregate consideration received from sale
of goods during the previous year should be in excess of Rs. 50 lakhs.

The consideration
received from the sale of such shares will not be included in the ‘turnover’
from business while determining the threshold of Rs. 10 crores. It would be
inappropriate to include such consideration while ascertaining the threshold
for aggregate consideration for the applicability of the TCS provisions. One
cannot apply an independent sense to interpret the words ‘turnover’ and
‘consideration’ on sale of goods which has been used in the same sub-section
(this reasoning has been elaborated further).

OTHER ASSETS

Next, would TCS
provisions be applicable in the case of other assets (other than the ones in
which the seller deals) that are sold? To illustrate the same, let us look at a
scenario: Say, Mr. A sells certain automobile parts (which constitute his
stock-in-trade) to Mr. B (buyer) during the year, the aggregate consideration
being Rs. 60 lakhs and the other relevant conditions have been fulfilled.
Assume that he further sells some machinery / furniture to Mr. B for a
consideration of Rs. 25 lakhs.

Will Mr. A collect
tax at source on the consideration received for the sale of machinery /
furniture as well?

A prima facie
view that one may be inclined to adopt is that TCS would be required to be
collected on the consideration received from the sale of machinery or
furniture, since the section does not carve out any specific exclusion. That
may be a conservative view, but it would be unfair to not evaluate the contrary
view. Before we analyse the same, it is pertinent to note that Mr. A in the
illustration above trades in or deals in automobile parts. In what is probably
an isolated transaction, he has sold certain machinery / furniture to one of
his buyers, Mr. B.

Before taking up
the contrary view, the following are certain important observations:

1. As discussed above, the term ‘goods’ has not
been defined in the Act. It is therefore capable of being applied to a wide
range of things. ‘Goods’ may also cover every movable asset except money and
actionable claims. However, when a particular word has not been defined in the
statute, it is important to understand its usage in the context of the
provision.

2. The provisions related to TCS are covered
under Chapter VII-B of the Income-tax Act, 1961 which deals with Collection
& Recovery of Tax. The heading for section 206C containing the group of
sub-sections u/s 206C reads as ‘Profits & Gains from the business of
trading in alcoholic liquor, forest produce, scrap, etc.’

3. While the term ‘goods’ may mean a wide range of
items, the heading to the section in which the particular sub-section appears
clearly hints at receipts in the nature of profits / gains from the business of
‘trading’… In view of this, one may infer that the receipts intended to be
covered in this section are such receipts as arise to the seller from the sale
of such items that he trades in as part of his business.

4. Further, as per the Literal Rule of
Interpretation of Statutes, where a statute uses a word which is of everyday
use, such a word should be interpreted in its popular sense, i.e., construed as
it is understood in common language. Therefore, to interpret goods as
understood in common language, would ordinarily mean stock in trade or goods
that a person trades in regularly in the course of his business activities.

5. Explanation to this sub-section defines
‘seller’ as…

‘seller’ means
a person whose total sales, gross receipts or turnover from the business
carried on by him exceed ten crore rupees during the financial year immediately
preceding the financial year in which the sale of goods is carried out, not
being a person as the Central Government may, by notification in the Official
Gazette, specify for this purpose, subject to such conditions as may be
specified therein.

The seller in the context of this sub-section is a person whose sales /
gross receipts or turnover from ‘business’ carried on by him exceeds Rs. 10
crores in the preceding financial year. In determining the threshold for one of
the two criteria for applicability of these provisions, the sales / turnover
from ‘business activities’ of such seller has to be taken into account. It
would be inappropriate to include receipts on sale of such items which would
otherwise not form a part of
turnover or sales in determining the threshold for consideration of goods sold.
To put it simply, in the illustration above, when Mr. A sells machinery /
furniture to Mr. B, such amount will not be included in his ‘turnover from
business’ as clearly stated by the meaning of seller given in the explanation.
To include it in the aggregate consideration for goods sold, and
collect tax on such amount, would therefore not be appropriate.

Thus, a possible
contrary view is that other assets sold by the seller to the buyer which do not
represent goods or items that the seller trades in as a part of his business
would not be covered by these provisions.

APPLICABILITY OF
PROVISIONS

This sub-section
is effective from 1^st October, 2020 and is prospective in
application. It is triggered if the consideration received for sale of goods of
the value, or aggregate of such value, is in excess of Rs. 50 lakhs in any
previous year (other than goods exported out of India). Therefore, the
threshold criterion of consideration in excess of Rs. 50 lakhs has to be
considered for the entire previous year.

This has been
clarified by paragraph 4.4.2(iii) of the Circular, which states that since
the threshold of fifty lakh rupees is with respect to the previous year,
calculation of receipt of sale consideration for triggering TCS under
sub-section (1H) of Section 206C shall be computed from 1^st April,
2020. Let us take up a few probable scenarios here:

(I) Mr. A sells goods to Mr. B for Rs. 65 lakhs –
for Rs. 20 lakhs, both sale and receipt of consideration were pre-October,
2020; for Rs. 45 lakhs, both sale and receipt of consideration were
post-October, 2020. Though TCS provisions will be applicable on the receipt of
sale consideration of Rs. 45 lakhs post-October, for determining the threshold
criterion, receipt of sale consideration of Rs. 20 lakhs will be considered.

(II) Mr. A sells goods to Mr. B and receives an
aggregate consideration of Rs. 75 lakhs. The sale and receipt of the entire
consideration take place post-1^st October, 2020. Here, without any
doubt, the TCS provisions will be applicable and Mr. A will be under an
obligation to collect tax on Rs. 25 lakhs (Rs. 75 lakhs minus Rs. 50 lakhs).
Before we analyse further, it is important to take note of paragraph 4.4.2(ii)
of the Circular which states as under: Since sub-section (1H) of section
206C of the Act applies on receipt of sale consideration, the provision of this
sub-section shall not apply on any sale consideration received before 1^st
October, 2020. Consequently, it would apply on all sale consideration
(including advance received for sale) received on or after 1^st
October, 2020 even if the sale was carried out before 1^st October,
2020.

(III) Mr. A had sold certain goods to Mr. B in F.Y.
2019-20 for a consideration of Rs. 80 lakhs. Of this, Rs. 10 lakhs was received
in F.Y. 2019-20. Of the balance Rs. 70 lakhs, further Rs. 5 lakhs was received
in July, 2020 and Rs. 65 lakhs was received post-October, 2020.

In view of the
above paragraph of the Circular, the seller would be required to make TCS on
the receipt of Rs. 15 lakhs of consideration received in the month of October,
2020 (Rs. 65 lakhs minus Rs. 50 lakhs), even though the sales were effected in
F.Y. 2019-20.

The Circular
categorically states that TCS would be applicable on all sale considerations,
even if the sale was carried out before 1^st October, 2020. This is
not sufficiently asserted in the provisions of section 206C (1H) which states –
Every person, being a seller, who receives any amount as consideration for
sale of any goods of the value or aggregate value exceeding fifty lakh rupees
in any previous year…

In my humble view,
as mentioned above, this section is prospective in its application and takes
effect from 1^stOctober, 2020. Though the trigger for applicability
of TCS provisions is ‘receipt of sale consideration’, it should not be made
applicable to such receipts for sales effected prior to 1^st October,
2020.

Considering the
language used in the Circular, it will imply that all outstanding amounts due
to the seller for sales effected prior to 1^st October, 2020 will now
be included in the ambit of the TCS provisions. This may span over a period of
the past one or two financial years, and the seller will be required to collect
TCS on receipts of such amounts. It may pose practical difficulties as the
buyers may be reluctant to remit additional amounts as they would not reflect
in the original invoices raised.

These practical
issues notwithstanding and referring to the arguments above, it will be unjust
to include receipts of consideration for sales affected prior to 1^st
October, 2020 within the ambit of TCS.

There seems to be
an intention to apply the TCS provisions in respect of all sale considerations,
including advances, received on or after 1^st October, 2020. However,
it’s ‘lost in translation’ as it further states advances received on or after 1^st
October, 2020 including those for sales carried out before 1^st
October, 2020. The only aspect clear from this paragraph is that the provisions
of TCS shall not apply on any sale consideration received before 1^st
October, 2020.

Again, it is
important to note that the section does not use the word ‘advance’ and refers
to receipt of amount as ‘consideration for sale of goods’, or sale
consideration as used in common parlance. Further, neither has the term
‘consideration’ nor ‘sale consideration’ been defined in the sub-section, in
view of which the term will have to be understood in the context of its use in
common parlance. Any amount received as advance cannot partake the character of
‘sale consideration’ unless the corresponding sale against such sum of money
received is effected.

Thus, by merely
using a particular term in the Circular, which does not find place in the
section, its meaning cannot be imported in the section. Therefore, in my humble
view, TCS provisions will not be applicable on advances.

(IV) Mr. A,
dealing in a particular category of goods, sells them to Mr. B who uses them
further for his manufacturing / processing activity and is not the ultimate
consumer of such goods. Whether TCS would be collected by Mr. A in respect of
such goods?

To correlate,
section 206C(1A) excludes applicability of TCS on such sale transactions
covered u/s 206C(1) where the buyer uses the goods for further manufacturing or
production activities. At present, there is no such exclusion u/s 206C(1H).

The Circular makes
reference to transactions for sale of motor car, covering receipts from all
kinds of transactions of sale of motor car, under the TCS provisions, either
under sub-section (1H) or sub-section (1F), both sub-sections being mutually
exhaustive.

GOODS & SERVICES
TAX IMPLICATION

Another important
aspect that requires consideration is whether TCS is required to be collected
on the consideration inclusive of GST, or otherwise. The term sale
consideration has not been defined in the sub-section. It will mean the price
paid for purchase of goods. The question to be considered is whether it can be
said that GST is a part of the consideration? There are contrary views on this
issue as well. Based on certain judicial precedents, a view which prevails is
that GST is includible in the consideration and therefore TCS should be made on
the amount of consideration inclusive of GST.

Paragraph 4.6 of
the Circular clarifies that no adjustment on account of sale return or discount
or indirect taxes including GST is required to be made for collection of tax
under sub-section (1H) of section 206C of the Act since the collection is made
with reference to the receipt of the amount of sale consideration.

Let us evaluate
each of the items covered under this paragraph:

i. Sales
return:

a. Sales
returns post receipt of amount of sale consideration by the seller: In this case, the receipt will not
be net of sale return and the seller would have collected TCS on the same, as
it has been received. Assuming the sales return takes place in the subsequent
month, by when the seller has paid the amount of tax collected to the credit of
the government, the buyer will claim credit of the same while furnishing his
income tax return.

b. Sales returns before receipt of amount of sale
consideration by the seller: In this case, under
the terms of contract, the buyer will pay the amount net of sales return, and
thus the amount of consideration received will be subjected to TCS.

ii. Discounts: The
discounts will be factored in the invoice, and / or the amount of sale
consideration received by the seller from the buyer will be net of such
discounts. As TCS is to be made on the amount received, no adjustment would be
required.

iii. GST: The Circular
states that no adjustment is required to be made on account of GST. It brings
little clarity on this aspect. In my view, GST should not be included for the
purpose of TCS though a conservative and practical approach adopted may be that
TCS is to be made inclusive of GST.

In case the
component of TCS is charged in the invoice, whether GST would be applicable on
the TCS component?

GST applies on the
consideration for supply of goods or services, whereas TCS is a collection of
the income tax component.

The Central Board
of Indirect Taxes (CBIC) Corrigendum to Circular No. 76/50/2018-GST dated 31^st
December, 2018 issued vide F. No. CBEC-20/16/04/2018-GST has clarified
that for the purpose of determining value of supply under GST, TCS will not be
includible since it is in the nature of an interim levy. Therefore, if the TCS
component is reflected in the invoice, there will be no GST applicable on the
TCS component.

RESULTANT PRACTICAL
ASPECTS

The tax collected
by the seller shall be paid to the account of the Government by the 7^th
of the month subsequent to the month in which the consideration was received.

No separate TAN is
required for TCS under this sub-section. The seller has to furnish TCS return
in Form 27EQ on a quarterly basis. The CBDT has amended the IT Rules in line
with the above changes to the TCS provisions.

The existing Rules
require the assessee to file quarterly TCS returns in Form 27EQ. Under the
amended Rules, the assessee (seller) is required to report the amount on which
TCS is not collected from the buyer. An annexure for party-wise break-up of TCS
is also provided in the form.

Due dates of
filing of Form 27EQ are:

Quarter	Due date (normally)
April – June	15^th July
July – September	15^th October
October – December	15^th January
January – March	15^th May

Quarter

Due
date (normally)

April – June

15^th July

July – September

15^th October

October – December

15^th January

January – March

15^th May

CONCLUSION

As we cope with the implications of this newly-inserted sub-section, it
will be interesting to have a sneak peek into the history of these provisions.
The TCS provisions were first inserted by the Finance Act, 1988. The rationale
behind introducing these provisions was the fact that there was difficulty in
assessing the income of persons undertaking contracts for sale of liquor, etc.
Over the years, there have been several other sub-sections added to section
206C on the pretext of widening the tax base or to track high-value
transactions, the latest amendment being this insertion of sub-section 1H. From
1988 to 2020, both tax administration and tax compliance have undergone a sea
change. Considering the ‘E-mode’ of operations, several tests and checks are in
place to ensure minimal evasion of taxes and non-reporting of transactions.

Against this
backdrop, one wonders about the necessity of such provisions which are most
likely to increase the hassles of businessmen.

‘Lord Atkin once
said that an impartial administration of the law is like oxygen in the air:
people know and care little about it till it is withdrawn.’’

– Fali S. Nariman, Before Memory
Fades:
An Autobiography

shailesh.kwebmaker

BCAJ SURVEY ON DIGITAL GEARING OF CHARTERED ACCOUNTANT FIRMS

The BCAJ carried out a dipstick
survey in September 2020 to gauge the Digital awareness and adoption of
technology by CA firms.

Attributes of the
respondents:

A> Location and Presence

32.5% respondents
had presence in Non-Metros and about 67.5% in both Metros and Non-Metros.

B> Nature
of Respondents

45.5% respondents
were proprietors, 33.5% were firms having up to 4 partners, 11% were firms
having 5-9 partners and 10% were firms having more than 10 partners.

Survey Questions and Responses

1. In the
present scenario, considering where the world is heading (WFH, extreme
digitisation, digital filings, client needs) and the role you perform at work,
how do you describe your personal digital skills?

2. In the
role which you perform, how much time are you required to use digital skills?

3. In terms
of awareness of where things are moving for accountants and digital
products/services available for CAs, how do you rate your DIGITAL AWARENESS?

4. As part of
the digital journey, which of the following digital tools do you use?

(Percentage
of participants using the tools)

5. Considering
the present scenario, how effectively are your personnel operating under WFH in
the last several months?

6. Keeping
the future in mind, what is the status of formal assessment of the current
state of digital maturity of your firm/practice?

7. In order to gear up for the change, what
is/are you hindrance/s?
(Percentage of participants selecting each issue)

8. Going
ahead, how important do you consider the digital skills and digital quotient in
GROWTH or even SURVIVAL of your practice?

9. How often
do you consider upgrading digital capabilities and practices through SOFTWARE
and HARDWARE upgrades?

10. Going
ahead, at what capacity do you feel that your personnel can work from home?

shailesh.kwebmaker

EXECUTIVE PRESENCE

Executive
Presence – we admire it in others and want it for
ourselves! Also called Personal Presence, Leadership Presence or The
‘It’ Factor, this intangible, difficult to define yet must-have trait
is found in business and political leaders across the world.

In today’s
competitive world, technical and intellectual skills are not enough to
guarantee success as a business leader. While in-depth industry knowledge is
the foundation of your career, your ability to deliver and articulate a
confident message which engages your audience, and is consistent with your
corporation’s value system, and at times even a calibrated response in
stressful times, is a leadership skill which inspires trust.

Your executive
presence is on display when you

(a) Meet with prominent clients and important
prospects,

(b) Communicate with your team,

(d) Increase your internal and external visibility
at public fora and networking events,

(e) Present your company to shareholders, investors
and media.

Leaders know about
this influential dimension and believe that communication is made up of both
verbal and non-verbal components and know how to use both effectively. Your
body movements, posture, facial expressions, gestures, eye contact and attire
influence the audience and inspire trust. By integrating their verbal and
non-verbal communication, they deliver a powerful signal saying ‘I am
capable and confident’. It’s necessary for creating a powerful impact when
interacting with clients, board members, teams and shareholders. As defined by
Sheryl Sandberg, COO of Facebook, ‘Leadership is about making others better
as a result of your presence and making sure that impact lasts in your
absence’.

VISUAL RESUME

As per a research
study, people wearing branded clothes were ‘perceived’ as being richer and of a
higher status than those wearing non-designer clothes. But then Warren Buffet
once said, ‘I buy expensive suits. They just look cheap on me’. While
many argue that clothes are mere ‘packaging’ and it’s what’s inside that
matters, gurus of the advertising industry will convince you that brands spend
billions of dollars every year to enhance their packaging before marketing it
to their target customers. Similarly, when you meet people for business, your
appearance can inspire confidence, putting people at ease, or it can elicit
hesitation and create confusion in their minds.

Body
language: Has body language taken a backseat in
today’s information age? Not really. Think about it – we continue to judge a
book by its cover, appreciate restaurants with nicely laid-out tables, enjoy
opening beautifully-wrapped gifts. And we also believe in Hollywood movies that
show love at first sight and vote for politicians who look trustworthy. Look
around you and observe the popular world leaders, from J.F. Kennedy, Winston
Churchill, Ronald Reagan, Barack Obama to Justin Trudeau, Vladimir Putin,
Angela Merkel and Emmanuel Macron, they all display strong body language and
have used it to create an imposing presence. Physicality counts for a lot in
the business world, too. Body language is an integral component of Executive
Presence. Defined as a non-verbal form of communication, when used
effectively it can be your key to greater success as it

(i) Conveys interest, helping you build rapport
with stakeholders,

(ii) Helps develop positive business relationships,

(iii) Influences and motivates your team members,

(iv) improves
productivity, and

(v) helps
you present your ideas with more confidence and with greater impact.

Personal
branding: In today’s day and age, and a highly
digitised and virtually connected world, personal branding and image management
have become ever so important. Chances are that you are working on your
personal branding – without even realising it. Every Facebook post or tweet on
Twitter is an opportunity to let others know who you are. Unlike traditional
meetings or conversations, our digital footprints are here to stay for a very
long time. They not only create a lasting impression on internal and external
stakeholders, but also help ensure better networking for the individual, which
is an important factor for success in today’s world. The word branding conjures
up an image of logos, advertising and models, which till today forms a large
chunk of how companies spend on a brand. Think IPL – look at the millions spent
by team-owners and their battery of consultants to ensure they look different
from the other teams and their fans recall their brand. For the past decade,
each IPL team has ‘invested’ millions on its logos, cricketers, sponsorships,
parties and cheerleaders.

(A) The leader as a statesman: There’s something about Mr. Deepak Parekh that inspires confidence.
Maybe it’s his serious demeanour or his succinct manner of communicating, but
when he makes a suggestion people listen and act on it. This explains why he is
invited on the boards of the best companies and by the government’s most
important policy-making committees. How has he managed to create this aura of
calm energy around himself? In his long career as a banker and head of HDFC,
the country’s premier housing finance company, he has built an impeccable
reputation for his integrity and decisiveness. Following in his footsteps is
the younger Mr. Uday Kotak, CEO, Kotak Bank. If he makes a comment in the
press, it is respected, if he is on a committee to define corporate governance,
investors believe he will steer it along the right path. Mr. Parekh and Mr.
Kotak are the most mature kind of leaders we call ‘statesman’ and it is
gravitas on display.

As per research
done at Princeton University, people decide on your trustworthiness within
one-tenth of a second. Whether it’s at an office meeting or a large social
gathering, successful leaders have an uncanny ability to command the room. They
get noticed when they walk into a room, and as they work their way through the
room, they make a connection with everyone they meet. They look people in the
eye, give them their full attention, listen to their story and say things that
make the other person feel good about the interaction. Interestingly, they
linger in your thoughts even after they have left. Clearly, leaders are in
complete agreement with American poet and civil rights activist Maya Angelou
who had famously remarked, ‘People will forget what you said, people will
forget what you did, but people will never forget how you made them feel.’

(B) In a virtual
world: Today, managers and their teams are finding
it challenging to transition from high-contact, face-to-face meetings to remote
interactions. Despite the circumstances which have led to this sudden shift, it
may prove to be the new ‘normal’ for the next few months, maybe even forever.
Today, it has become a forced reality. The organisations of the future may not
need a physical location as their employees collaborate from remote locations,
creating new opportunities for both people and companies.

Leaders are
expected to add value by inspiring and motivating remote teams; the traditional
role of the leader as a supervisor is no longer relevant. As team members are
capable of solving their own problems, they need a leader who is both a coach
and a mentor. Simply put, leaders of remote teams have to make things smoother
for their teams to achieve their targets and stay engaged with the
organisation.

TEN WAYS TO ENHANCE YOUR EXECUTIVE PRESENCE

1. Embrace structure: As a leader, create a structure which allows smoother flow of
information. Spend time both at the individual level and at the group level
getting to know your team members better.

2. Focus on
enhanced communication: We have to make changes in
our communication style to less distant and more accessible to our colleagues.
Communicating using technology requires a slightly more enthusiastic greeting,
speaking a tad bit louder, using a few extra gestures and spending a little
more time setting the context.

3. Encourage
participation: A common complaint by all leaders is
that team members appear distracted during face-to-face meetings. With remote
teams, this problem has increased several fold. To encourage participation,
assign and allocate agenda items to team members. Ask specific questions to
individuals, e.g., ‘what was the highlight of your last week’s project?’ ‘what
more did you learn about this problem after speaking with the client?’

4. Redefine
trust: When you can see team members sitting across
the corridor, you automatically assume that they are working. On the other
hand, if you see them once a month or twice a quarter, you might start doubting
their productivity. Managers will have to learn to trust their remote teams by
focusing on the deliverables, a major shift from the old order which gave
credit to the number of hours spent at the desk.

In the virtual
world, leaders tend to connect for task-based agendas, relying on technology.
However, humans need face-to-face interactions to trust and share their ideas.
Push for video calls – both at the individual level and at the group level.
Video calls are ideal for client meetings and internal reviews as they allow
screen-sharing and increased participation. Be quick to catch cues from members
who could be feeling lonely, appearing less motivated or possibly facing mental
health issues. Being clued-in enhances the leader’s ability to sense conflicts
and discontent at an early stage.

5. Micromanaging
is passé: Check in frequently, but resist
micro-managing. Maintain clarity of communication, track the deliverables and
let your teams take ownership for their work.

6. Maintain
transparency: Create a culture of being
non-judgmental and learn to manage biases. In the virtual world, it’s easier to
create sub-groups and alienate others. As a leader, you have to be sensitive to
this and nip it in the bud.

7. Enhance your
listening skills: As a leader, an integral part of
your job is listening to your teams and clients. With remote working, leaders
are expected to further sharpen their ability to listen, offering support and
encouragement. Listen effectively, focus on vocal intonations, summarise and
repeat, ensuring you have a good grip on the ‘real’ problem.

8. Create a
sense of togetherness: Like a traditional business
meeting, start remote interactions, too, with small talk. Ask pointed questions
to individual members, e.g., ‘How was your weekend?’ ‘What is the news from
your city?’ or ‘Give us a visual trip of your work zone.’ Small talk creates a
bridge, works as an ice-breaker and helps build relationships. Scheduling a
‘Zoom coffee’ for one-on-one interactions or a ‘Happy Hour’ for team drinks is
an excellent way to bond.

9. Civility
remains non-negotiable: Some members will be
comfortable using technology while others may be awkward as they view it as a
physical barrier, leading to aggressiveness, rudeness and off-hand comments. As
a leader, be firm about acceptable behaviour and set the boundaries.

10. Promote a
culture of sharing: Email, phone call, video call
or social media – what is the right communication tool for this query? Matching
the technology to your communication query requires planning. Plan the levels
of escalation and communicate them to your team.

CONCLUSION

It’s important to
note that Executive Presence can be developed through a combination of
self-awareness and coaching. In other words, you can learn to be a
leader who can influence and inspire and energise those around you. Is it
possible to build Executive Presence? Yes, it’s something you need to
focus on and you can develop it. Like any other skill, once you build awareness
on your strengths and weaknesses, you can get coached on your shortcomings. As
billionaire Warren Buffet said, his number one tip for success is: ‘Invest
in yourself.’

(Ms Shital
Kakkar Mehra is an executive coach, speaker and writer. She is the author of
‘Business Etiquette, A Guide for Indian Professional’ and has recently released
‘Executive Presence: The P.O.I.S.E. Formula for Leadership’, in July, 2020)

Life is a song – sing it

Life is a game – play it

Life is a challenge – meet it

Life is a dream – realise it

Life is a sacrifice – offer it

Life is love – enjoy it

—
Sai Baba

shailesh.kwebmaker

PROVISIONING FOR EXPECTED CREDIT LOSSES FOR FINANCIAL INSTITUTIONS AND NBFCs POST-COVID-19

INTRODUCTION

The Covid-19 outbreak which surfaced in
China towards the end of 2019 was declared a global pandemic by the WHO in
March, 2020. It has affected economic and financial markets, and virtually all
industries are facing challenges associated with the economic conditions
resulting from efforts to address it. As the pandemic increases both in magnitude
and duration, entities are experiencing conditions often associated with a
general economic downturn. The continuation of these circumstances could result
in an even broader economic downturn that could have a prolonged negative
impact on an entity’s financial results. In response thereto, the RBI announced
a series of regulatory measures and relief packages dealing with rescheduling
of loans and credit facilities, providing moratorium, asset classification and
provisioning for the entire financial services sector which comprises of banks,
financial institutions and NBFCs.

Since the purpose of this article is to
highlight some of the key issues that emanate from the Covid pandemic to be
considered by financial institutions and NBFCs, in particular, in applying the
expected credit loss model (ECL) for provisioning in their Ind AS financial
statements, the discussion of the regulatory aspects will only be limited to
the extent it impacts the ECL. Whilst the focus of this article is for lenders,
much of it would apply to measurement of ECL in industries other than financial
services.

For the purpose of this article, it is
assumed that the readers have reasonable working knowledge of the various
technical requirements and guidance under Ind AS on ECL and related matters.

OVERVIEW OF THE ECL
MODEL AND ITS INTERPLAY WITH OTHER TECHNICAL AND REGULATORY REQUIREMENTS IN THE
COVID ENVIRONMENT

ECL model as per Ind AS 109

Ind AS 109 on
Financial Instruments sets out a framework for determining the amount of
ECL that should be recognised. It requires that lifetime ECLs be
recognised when there is a significant increase in credit risk (SICR) on a
financial instrument. However, it does not set bright lines or a mechanical
approach to determining when lifetime losses are required to be recognised, nor
does it dictate the exact basis on which entities should determine
forward-looking scenarios to consider when estimating ECLs.

Ind AS 109 requires entities to measure
expected losses and consider forward-looking information by reflecting ‘an
unbiased and probability-weighted amount that is determined by evaluating a
range of possible outcomes’ and taking into account ‘reasonable
and supportable information that is available without undue cost or effort at
that date about past events, current conditions and forecasts of future
economic conditions’. Whilst it always required entities to consider
multiple scenarios, entities may not have done so because it did not make a
material difference to the outcome in a benign / static economic environment.
However, such an approach may no longer be appropriate in the current Covid
scenario. Further, Ind AS 109 requires the application of judgement and
permits entities to adjust their approach to determining ECLs in different
circumstances. A number of assumptions and linkages underlying the way ECLs
have been implemented to date may no longer hold in the current Covid
environment and therefore entities will have to revisit the ECL approach /
methodology and should not continue to apply their existing ECL methodology
mechanically.

PRESENTATION AND
DISCLOSURES

In line with the requirements of Ind AS
107 on Financial Instruments – Disclosures and Ind AS 1 on Presentation
of Financial Statements, entities would be required to provide more
additional information to enable users of financial statements to understand
the overall impact of Covid-19 on their financial position and performance.
This is particularly important for areas in which Ind AS requires that
significant judgement is applied, which might also include other areas of
financial reporting. Similarly, the auditors would also need to consider
whether reporting on Covid-related matters needs to be reported as a key audit
matter in terms of the Auditing Standards.

Finally, distinguishing between adjusting
and non-adjusting events requires significant judgement,
particularly in the current environment for those entities where the economic
severity of the pandemic became apparent very shortly after the end of their
reporting period. The Guidance issued by the ICAI in connection therewith
should be referred to.

Impact of regulatory measures

The government and the RBI have been
announcing various relief measures / packages to enable entities to tide over
the adverse impact of Covid on their operations and financial position.
However, it may be difficult to initially incorporate the specific effects of
Covid and government support measures on a reasonable and supportable basis. The
changes in economic conditions should be reflected in macro-economic scenarios
applied by entities and in their weightings. If the effects of Covid are
difficult to be reflected in models considering the timing of Covid and
implications on Internal Financial Controls over Financial Reporting (IFCoFR),
post-model overlays or adjustments duly considering the portfolio segmentation
having shared credit risk characteristics and staging criteria (Stages 1, 2 and
3) may need to be considered as a pragmatic approach.

Further, entities should carefully assess
the impact of the economic support and relief measures on recognised financial
instruments and their conditions. This includes the assessment of whether such
measures result in modification of the financial assets and whether
modifications lead to their de-recognition. If it is concluded that the
support measures provide temporary relief to borrowers affected by the Covid
outbreak and the net economic value of the loan is not significantly affected,
the modification would be unlikely to be considered as substantial.

Finally, measures taken in the context of
the Covid outbreak that permit, require or encourage suspension or delays in
payments, should not be regarded as automatically having a one-to-one impact on
the assessment of whether loans have suffered an SICR. Therefore, a
moratorium under these circumstances should not in itself be considered as an
automatic trigger of SICR. Assessing whether there is an SICR is a holistic
assessment of a number of quantitative and qualitative indicators. Furthermore,
when relief (forbearance) measures are provided to borrowers by issuers, these
measures should be analysed taking into account all the facts and circumstances
in order to distinguish, for example, whether the credit risk on the financial
instrument has significantly increased or whether the borrower is only
experiencing a temporary liquidity constraint and there has not been a
significant increase in credit risk and consequential impact on the ECL to be considered.

These and some other specific considerations
arising out of Covid-19 on the assessment of ECL are examined later in this
article.

SPECIFIC CONSIDERATIONS

The following are some of the specific
considerations which need to be kept in mind whilst determining the adequacy
and appropriateness of the ECL provisions in the post-Covid scenario.

Reassessing the business model

As per Ind AS 109, the classification and
measurement of financial assets is dependent on the contractual cash flows
of the asset and the business model within which the asset is held, which
in turn determines the basis of valuation of the financial assets and
the provisioning thereof. An entity’s business model is determined at a
level that reflects how groups of financial assets are managed together
to achieve a particular business objective. Going forward, entities may need to
revisit their business model to determine whether it (the business model) has
changed due to the Covid implications, as the entity may decide to sell its
‘hold to collect’ portfolio as part of its revised strategy to manage liquidity
and credit risks.

Revisiting overall portfolio
segmentation

In accordance with Ind AS 109, financial
instruments should be grouped on the basis of shared credit
risk characteristics. Due to the disruptions in the business
operations, entities might witness an impact on the credit quality of their
portfolio across certain industries, geographies, customer segments, etc., that
may require them to revisit their portfolio segmentation and revise the ECL
assessment as appropriate. This may result in new portfolios being created or
assets moving to an existing portfolio that better reflects the similar credit
risk characteristics of that group of assets.

Further, forward-looking information might
need to be tailored for each portfolio. How much weight to give that
information depends on the specific credit risk drivers relevant to the
entities’ portfolios.

To illustrate, entities may lend across a
broad customer base resulting in concentration of risk exposure because of the
sectors and geographic areas in which customers are based or work. An entity’s
expectations over future unemployment in a particular sector may only be
relevant to borrowers who work in that sector.

At a broader level the portfolios can be
segregated between corporate and retail customer base which can be further
segregated based on the representative shared credit risk characteristics,
as considered relevant. Examples of shared credit risk characteristics may
include, but are not limited to, the following:

(a) instrument type;

(b) credit risk ratings;

(d) date of initial recognition;

(e) remaining term to maturity;

(f) industry;

(g) geographical location of the borrower; and

(h) the value and liquidity of collateral
relative to the financial asset if it has an impact on the probability of a
default occurring (for example, loan-to-value ratios).

Assessment of SICR vis-à-vis
moratorium

When an entity grants an extension of terms
to a counter-party, the management should assess whether or not this indicates
that there has been a significant increase in credit risk. Measures taken in
the context of the Covid outbreak that permit, require or encourage suspension
or delays in payments should not be regarded as automatically having a
one-to-one impact on the assessment of whether loans have suffered an SICR.
Determining whether a change in the timing of contractual cash flows is an
SICR, or evidence of a credit-impaired financial asset, requires careful
consideration of the specific facts and circumstances.

Within the population of customers that
apply for a moratorium, separating those that are in financial difficulty
(borrowers with a solvency issue) from those that are not (borrowers with a
temporary liquidity issue), will be an operational challenge. Consideration
will need to be given to the payment status and history of the borrower
on the date when he applies for a moratorium. Therefore, an assessment will be
needed as to whether the moratorium is providing a short-term liquidity benefit
or addressing a deterioration in the borrower’s ability to meet its obligation
when due which, if it is a significant increase in lifetime Probability of
Default (PD), is an SICR.

An illustrative list of factors which can be
considered in making the aforesaid evaluations is as under:

1. ‘Days Past Due’ metrics could reflect
the impact of the payment moratorium where borrowers take advantage of a
payment holiday and so instalments due on or after 1^st March, 2020 may
no longer be ‘past due’.

2. Payment history: Has the customer made
regular payments over, say, the last year on the loan in question and its other
credit obligations?

3. Collateral: Has the valuation of the
underlying collaterals been significantly depleted?

4. Leverage: Has the customer seen a
recent increase in leverage or indebtedness?

5. Repeat forbearance: Has the customer
been granted prior / subsequent (post-balance sheet) forbearance treatments?

6. Changes to credit risk policy: Do the
previous qualitative indicators of SICR need a reconsideration?

7. Breach of the covenants of a credit
contract is a possible indication of unlikeliness to pay under the definition
of default. However, a covenant breach does not automatically trigger a
default. Rather, it is important to assess covenant breaches on a case-by-case
basis and determine whether they indicate unwillingness to pay.

8. Sector in which the customer is
employed or operates, including its representative income profiles.

9. Reference may also be drawn from various credit
agency reports which detail the sectors which have had a significant
impact, e.g., travel, aviation, tourism, etc.

10. In case of wholesale customers, factors
including current cash position, gearing status, future payments (including
loan repayments, expenses), future cash inflows and likely covenant breaches
can be evaluated.

Paragraph B5.5.17 of Ind AS 109 also provides a non-exhaustive list of information that may be
relevant and considered by entities in assessing and evaluating changes in
credit risk.

The entity should have a clearly defined
policy based on its portfolio to detail its evaluation of SICR and
how it will be applied across various portfolios and it should be approved by
the Board. (Refer to discussion under Governance process for further
details).

Assessing management overlays

This is an important consideration in the
context of the current unprecedented situation. The speed and timing of the
economic impact of Covid would require entities to include Post-Model
Adjustments (PMAs) to cater for the inadequacies of their ECL
models that are not designed to cater for the extreme economic
circumstances and government support measures that currently exist and to
reflect risks and other uncertainties that are not included in the underlying
ECL measurement models. Some of the macro-economic factors which could
be considered for making the assessment include, but are not limited to, GDP
growth rates, bank credit growth, wholesale price index, consumer price index,
Index of Industrial Production, unemployment rate, crude oil price, exchange
rates, etc., depending upon the nature of the portfolio. Considering the
timing, availability of information and uncertainties involved, a pragmatic
approach needs to be considered depending on the facts and circumstances in doing the overlay on Probability of Default (PD)
scenarios at the identified segmented portfolio levels. This would result
in additional downside scenarios in their year-end results, which topped
up the amount of their ECL allowances to specifically address economic
uncertainty.

Such PMAs should be well-controlled,
authorised, documented and need to be disclosed in accordance with the
governance framework for ECL as laid down by the entity. It is recommended
that entities disclose an explanation for each material post-model
adjustment or overlay made, along with the reason for the adjustment,
how the amount is determined, the approach used for the estimation and the
amount of each material post-model adjustment.

Probability weightage of various
scenarios

Paragraph 5.5.17(a) of Ind AS 109 requires the estimate of ECL to reflect an unbiased and
probability-weighted amount that is determined by evaluating a range of
possible outcomes. In practice, this may not need to be a complex analysis,
and relatively simple modelling may be sufficient without the need for a large
number of detailed simulations of scenarios.

However, currently there is little
visibility on how long the pandemic would last and the economic impact could
range from a mild downturn (where growth slows for a quarter or two, and the
economy bounces back immediately) to a severe slowdown (where growth slows for
more than a year followed by a tenuous recovery). Accordingly, ECL computation
needs to be done based on a range of possible scenarios, presenting a varying
degree of the economic and financial crisis and predict corresponding outcomes
such as:

(i) an optimistic scenario, considering a
temporary impact of Covid-19 and a V-shaped recovery,

(ii) a scenario, considering a severe and extended
impact of Covid-19 and a U-shaped recovery; and

(iii) a pessimistic scenario, with a prolonged severe
downturn, leading to a new low-level normal.

An unbiased estimate is one that is neither
overly optimistic nor overly pessimistic. For this purpose, entities will need
to develop an estimate based on the best available data about past events,
current conditions and forecasts of future economic conditions. Adjustments to
expected loss rates in provision matrices and overlays to formal models (where
used) will be needed. Updated facts and circumstances should continue to be
monitored for any new information relevant to assessing the conditions at the
reporting date. The probabilities assigned to these multiple economic scenarios
will often be a significant judgement warranting disclosure, which is a
critical component of ECL reporting, given the level of measurement uncertainty
resulting from Covid.

Forward-looking
information

The use of forward-looking information is a
key component of the ECL impairment approach. But this is not straight-forward
and involves judgement. No one can predict the future with certainty so the
incorporation of forward-looking information introduces considerable volatility
into entities’ results.

The economic forecasts that entities use to
estimate lifetime losses should not only be consistent with internal
managements’ forward-looking views, but also supportable with sound
quantitative data and methods. It is recommended that lenders consider official
economic forecasts issued by RBI and internal economists in assessing the
severity and duration of the macro-economic deterioration. Economic forecasts
generated by research agencies or professional forecasters could also be used.
However, over-reliance on these sources may become problematic as market prices
for debt and derivatives might reflect factors other than the borrower’s risk
of default (such as market liquidity) and the credit ratings could be a lagging
indicator of credit risk. But so long as the forecasts are defensible and
consistent with the institution’s own views, these could also be used where
relevant for the particular financial instrument or group of financial
instruments, and not at the entity level, to which the impairment requirements
are being applied. Different factors may be relevant to different financial instruments
and, accordingly, the relevance of particular items of information may vary
between financial instruments, depending on the specific drivers of credit
risk. Some examples in respect thereof are as under:

(A) For corporate lending, forward-looking information
includes the future prospects of the industries in which the group’s
counter-parties operate, obtained from economic expert reports, financial
analysts, governmental bodies, relevant think-tanks and other similar
organisations, as well as consideration of various internal and external
sources of actual and forecast economic information.

(B) For retail lending forward-looking information
includes the same economic forecasts as corporate lending with additional
forecasts of local economic indicators, particularly for regions with a
concentration of certain industries, as well as internally generated
information of customer payment behaviour.

As required by paragraph 35G (b) of Ind
AS 107, financial statements should disclose how forward-looking information
has been incorporated into the determination of expected credit losses,
including the use of macro-economic information. Further, paragraph
35G(c) requires disclosure on changes in the estimation techniques or
significant assumptions made during the reporting period and the reasons for
those changes.

Events after the reporting period

Ind AS 10 on Events
after the Reporting Period distinguishes between adjusting and non-adjusting
events, with adjusting events being those that provide further evidence of
conditions that existed at the end of the reporting period and therefore need
to be reflected in the measurement of balances in the reporting period. Non-adjusting
events are those that are indicative of
a condition that arose after the end of the reporting period.

Entities will need to update their forward-looking
information to reflect expectations at the reporting date. Entities will need
to distinguish between those events that arose after the end of the reporting
period that reflect new events, as opposed to those that were reasonably
expected at the reporting period end and so would have been reasonably assessed
as being included in the forward-looking assessment made at the end of the
reporting period. This assessment might include, for example, assessing the
status and extent of the Covid-19 pandemic in geographies relevant to the
entity’s credit risk exposures at the reporting period end and considering the
path and extent of the increase in infection rates in other areas that were affected
earlier.

An entity may consider it reasonable at the
reporting period end to forecast particular macro-economic inputs used in ECL
modelling. If those macro-economic inputs end up not occurring or changing
after the reporting date, this should not be used as evidence to adjust the
entity’s expectation at the period end. Doing so would represent inappropriate
use of hindsight and would not reflect the conditions that existed at the
reporting period end. Distinguishing between adjusting and non-adjusting events
requires significant judgement, particularly in the current environment for
those entities where the economic severity of the pandemic became apparent very
shortly after the end of their reporting period.

The severity of the economic impact of Covid
after the end of the reporting period will require consideration even if those
economic impacts are non-adjusting events. When non-adjusting events after the
reporting period are material, an entity is required to disclose the nature of
the event and an estimate of its financial effect, or a statement that such an
estimate cannot be made.

Governance process

An entity’s Board of Directors (or
equivalent) and senior management are responsible for ensuring that it has
appropriate credit risk practices, including an effective system of internal
control, to consistently determine adequate allowances in accordance with its
stated policies and procedures, the applicable accounting framework and
relevant supervisory guidance.

As per the RBI circular dated 13^th
March, 2020 on Implementation of Indian Accounting Standards, for
Non-Banking Financial Companies and Asset Reconstruction Companies, the
RBI expects the Board of Directors to approve sound methodologies for
computation of ECL that address policies, procedures and controls for assessing
and measuring credit risk on all lending exposures, commensurate with the size,
complexity and risk profile specific to the NBFC / ARC. These matters
become more critical in the context of the Covid-19-induced environment.
It would not be out of place for entities to set up a separate sub-committee
of the Board to monitor the impact on various aspects of the business due to
Covid, which could also cover the above referred matters.

The following are some of the specific matters
which need to be documented and approved by the Board and / or the Audit
Committee of the Board (ACB):

(I) The parameters and assumptions considered
as well as their sensitivity to the ECL output.

(II) NBFCs / ARCs are advised to not make
changes in the parameters, assumptions and other aspects of their ECL model for
the purposes of profit smoothening.

(III) The rationale and justification for any
change in the ECL model.

(IV) Any adjustments to the model output (i.e.,
a management overlay) which are necessitated due to Covid-19 should be approved
by the ACB together with its rationale and basis.

(V) ACB should also approve the
classification of accounts that are past due beyond 90 days but not treated as
impaired, together with the rationale for the same.

CONCLUSION

Covid-19 is likely to be the new normal and
will continue to pose several challenges which will require quick responses on
a real-time basis, which may make it difficult to incorporate the specific
effects of the regulatory support measures on a reasonable and supportable
basis. However, changes in economic conditions should be reflected in
macro-economic scenarios applied by entities and in their weightings. If the
effects of Covid-19 cannot be reflected in models, post-model overlays or adjustments
will need to be considered. Although the current circumstances are difficult
and create high levels of uncertainty, ECL estimates can still be made if
monitored under the appropriate supervision and governance framework laid down
by the entities, based on reasonable and supportable information supplemented
by adequate disclosures for transparency in the entity’s financial statements.

(The author
would like to acknowledge the contribution of CA Rukshad Daruvala and CA
Neville Daruwalla for their inputs in preparing this article.)

shailesh.kwebmaker

FRAUD ANALYTICS IN INTERNAL AUDIT

BACKGROUND

Even though some organisations are
disinclined to report fraud, it is still necessary to try to prevent and detect
it. There is, however, some confusion over who exactly is responsible for this
task, with many non-auditors having the misconception that it is the duty of
auditors, internal or external, to uncover fraud. From the external auditors’
perspective, their role is to say whether the financial statements fairly
represent the operations of the company. Internal auditors would argue that
revealing fraud is not their ultimate goal – they aim to test the effectiveness
of internal controls. In reality, it’s much more likely that errors rather than
frauds will be found during an audit.

Under the
Companies (Auditor’s Report) Order, 2020 – CARO 2020 – the Statutory Auditor is
required to report on fraud and whistle-blower complaints as below:

(a) Has there
been any fraud by the company or any fraud done on the company? Has any such
fraud been noticed or reported at any time of the year? If yes, the nature and
amount involved have to be reported.

(b) Whether
the auditors of the company have filed a report in Form ADT-4 with the Central
Government as prescribed under the Companies (Audit and Auditors) Rules, 2014?

While
uncovering fraud may not be an auditor’s main responsibility, there is
certainly a variety of tools, tests and processes that can be utilised to
detect it. And data analytics increases the chances of uncovering fraud.

WHAT IS FORENSIC
ACCOUNTING?

Forensic
accounting is a specialty practice area where accounting, auditing and
investigative skills are used to analyse information that is suitable for use
in a court of law.

Forensic
accountants are often engaged to quantify damages in instances related to fraud
and embezzlement, as well as on matters involving insurance, personal injury,
business disputes, business interruption, divorce and marital disputes,
construction, environmental damages, cyber-crime, products liability, business
valuation and more.

What is
fraud investigation?

Fraud investigation is the process of
resolving allegations of fraud from inception to disposition. Standard tasks
include obtaining evidence, reporting, testifying to findings and assisting in
fraud detection and prevention.

Developing an
investigation plan includes:

(i) Review and gain a basic
understanding of key issues.

(ii) Define the goals of the
investigation.

(iii) Identify whom to keep
informed.

(iv) Determine the terms of
reference and timeline for completion.

(v) Address the need for law
enforcement assistance.

(vi) Define team member roles and
assign tasks.

(vii) Outline the course of
action.

(viii) Prepare the organisation
for the investigation.

What is
fraud analytics?

Fraud
analytics is an integral part of fraud investigation. Fraud analytics combines
analytic technology and techniques with human interaction to help detect
potential improper transactions, such as those based on fraud and / or bribery,
either before the transactions are completed or as they occur.

The process of
fraud analytics involves gathering and storing relevant data and mining it for
patterns, discrepancies and anomalies. The findings are then translated into
insights that can allow a company to manage potential threats before they occur
as well as develop a proactive fraud and bribery detection environment.

KEY REASONS FOR USING DATA ANALYTICS FOR FRAUD DETECTION

Forensic data
analysis tools help organisations to fully realise or realise to a credible
extent early fraud detection, increased business transparency and reduced costs
of their anti-fraud programme.

Some of the
key reasons for using forensic data analysis tools are:

(A) Early fraud detection.

(B) Ability to detect fraud that
could not be detected earlier.

(D) Increased business
transparency.

(E) Getting the business to take
more responsibility for managing the company’s anti-fraud programme.

(F) Reduced costs of the
anti-fraud programme.

Case
study on fraud analytics – ‘Procure to Pay’

‘Procure to
Pay’ is one of the major areas of success with fraud analytics. The main
objective is to check for the validity of items. This encompasses supplier
overpricing, invalid invoices, frauds of various types, accidental duplication
and simply picking up out-of-control expenses.

Some of the
illustrative fraud analytics tests for visualisation and / or red flag
detection are:

1. Analyse purchases or payments
by value bands and identify unusual trends.

2. Test for splitting,
particularly below threshold authority limits.

3. Summarise by type of payment
– regular supplier, one-time supplier, etc.

4. Analyse by period to
determine seasonal fluctuations.

5. Analyse late shipments for
impact on jobs, projects, or sales orders due.

6. Reconcile orders received
with the purchase orders to identify shipments not ordered.

7. Report on purchasing
performance by location.

8. Summarise item delivery and
quality and compare vendor performance.

9. Compare accrued payables to
received items to reconcile to general ledger.

10. Check for continued purchases
despite high rate of returns, rejections, or credits.

11. Track scheduled receipt dates
versus actual receipt dates.

12. Identify price increases
higher than acceptable percentages.

13. Capture invoices without a
valid purchase order.

14. Find invoices for more than
one purchase order authorisation.

15. Isolate and extract pricing
and receipt quantity variations by vendor and purchase order.

16. Filter out multiple invoices
just under approval cut-off levels.

17. Detect invoice payments on
weekends or public holidays.

18. Find high value items being
bought from a single vendor.

19. Aging analysis of open orders
beyond a specified number of months.

20. Changes to orders in terms of
quantity and unit price after receipt of material.

21. Orders raised after receipt of
material and / or after receipt of supplier’s bills.

22. Sequential orders raised on
suspect vendors.

23. Backdating of orders.

24. Same material being bought
under different material codes.

25. Same material being bought
from the same vendor on different payment terms and / or delivery terms.

26. Payments to vendors initiated
and approved by the same user.

27. Same vendor having multiple
vendor codes of which one or more code/s have debit balances (on account of
advances) while other code/s are receiving bill-based payments without
adjusting the on-account advances.

28. Duplicate bill payments to a
vendor against the same invoice and order – exact match on invoice.

29. Duplicate bill payments to a
vendor against the same invoice and order – near match on invoice (fuzzy
pattern-based match).

30. Material bought at a higher
price from a vendor when there is an open order within the system for the same
material pending delivery at a lower price.

The examples
given in this article are based on use of IDEA Data Analysis Tool. However, a
reader can choose and use any Data Analytical Tool for conducting such fraud
analytics.

Case
Study 1 – Using Benford’s Law in IDEA Software to identify Vendor Payment
splitting and / or skimming

In this tool Benford’s Law has been
incorporated for easy detection of red flags. Any significant alteration to the
natural flow of numbers is identified in the form of a graph. The graph
containing many specialised views is designed to identify common forms of
fraud.

Benford’s Law
lets you compare your data under review for patterns predicted by Benford’s Law
of Digital Analysis. Spot irregularities by analysing digits in numerical data
sets to capture potential fraud (exploratory analytics). Apply the Benford’s
Law – Last 2 Digits Test, to detect skimming and circumvention of vendor
payments just below a threshold approval limit as seen in the ‘Highly
Suspicious’ red bars in the Benford’s screenshot below.

Case
Study 2 – Apply the Relative Size Factor (RSF) test to capture Vendor Payment
outliers

The purpose of
the Relative Size Factor (RSF) test is to identify anomalies where the largest
amount for subsets in a given key is outside the norm for those subsets. This
test compares the top two amounts for each subset and calculates the RSF for
each. The RSF test utilises the largest and the second largest amount to
calculate a ratio based on purchases that are grouped by vendors in order to
identify potential fraudulent activities in invoice payment data, as has often
been suggested in fraud examination literature.

Case Study 3 – Apply the Fuzzy Duplicate test to
capture duplicate pattern matches

The Fuzzy
Duplicate task identifies pattern-based matching (similar) records within
selected character field/s and then groups them based on their degree of
similarity. Identify multiple similar records within selected character fields
to detect data entry errors, multiple data conventions for recording
information and fraud. Generate a potential list of pattern matching duplicates
on the Inventory Description in an Inventory Master Dump.

Case
Study 4 – Apply Anti-Bribery and Corruption checks through Search on a General
Ledger narration field

A search
provides keyword searching capabilities to find text within fields in a database
without the need to write code / equations to execute the search criteria.
Anti-bribery and corruption checks can be applied through Search on a General
Ledger to look for the narration field containing key words like ‘gift’,
‘donation’, ‘suspense’ and other such text.

CONCLUSION

Incorporating
an anti-fraud programme for internal auditors (even for external / statutory
auditors) is extremely important, irrespective of the requirement of the law as
the top management and stakeholders are moving towards ‘zero tolerance’ of such
incidents. If a process / area has been reviewed / audited and later there are
incidents of fraud detected, then there is always a close scrutiny of the work
carried out by the internal auditor.

With the
advent of technology and the data explosion, it is necessary for the internal
auditor to employ data analytics tools and techniques, or ‘Fraud Analytics’,
for:

*
comprehensive coverage of process / area under review,

* storing
evidence using the analytics tool on the steps taken for each test, full
coverage of the period under review or even sample selection,

* devising and
completing various tests for detecting any anomaly or red flags,

* focusing on
transactions / areas which show patterns which deviate from the norms.

shailesh.kwebmaker

BENEFITS FOR SMPs UNDER MSME ACT & OTHER STATUTES

The
Chartered Accountants in public practice spread across India are generally
categorised as Small and Medium Practitioners (SMP). As per ICAI statistics,
almost 97% of the CA firms in India are sole proprietorships or partnership
firms with up to five partners. This category forms the backbone of the
profession in India catering to a vast number of entities.

The
ICAI’s Ethical Standards Board in a recent decision has clarified that ‘A CA
firm may register itself on Udyog Aadhar, a web portal of the Ministry of
Micro, Small and Medium Enterprises’. Accordingly, the SMP CA firms can avail
the various benefits available to the MSME units by registering themselves
under ‘UDYAM’ (earlier Udyog Aadhar).

The
Micro, Small and Medium Enterprises Development (MSMED) Act was notified in
2006 to address policy and practical issues affecting MSMEs as well as the
coverage and investment ceiling of the sector.

Many CAs
do not register as MSMEs due to lack of familiarity with the various benefits
and support made available by the government for the sector. The authors have
attempted to summarise in this article the key benefits available to SMPs.

CLASSIFICATION OF MICRO, SMALL & MEDIUM ENTERPRISES

The
revised classification of MSME’s applicable w.e.f. 1^st July, 2020
for Manufacturing and Service Enterprises is as follows:

Micro

Small

Medium

Investment in Plant & Machinery (for manufacturing entities) or
Equipment (for service entities) not more than

Rs. 1
crore

Rs. 10
crores

Rs. 50
crores

AND

Annual turnover not more than

Rs. 5 crores

Rs. 50 crores

Rs. 250 crores

REGISTRATION OF MSME (UDYAM)

Registration
under the MSME Act, 2006 will be called Udyam
Registration w.e.f. 1^st July, 2020 and a dedicated web portal has
been made available for registration at the following web address:
https://udyamregistration.gov.in.

The
following are important features of the new registration process:

* The
MSME registration process is fully online, paperless and based on
self-declaration.

* No
documents or proofs are required to be uploaded for registering as an MSME.

* No fees
are payable for registration.

* Aadhaar
number is mandatory for obtaining Udyam Registration (Aadhaar of
proprietor / partner / karta / authorised signatory).

* PAN and
GSTIN are mandatory for Udyam Registration from 1^st April, 2021.

* PAN and
GST-linked details on investment and turnover of enterprises will be taken
automatically from government data bases.

*
Registration of entities not having either PAN or GSTIN will be cancelled
w.e.f. 1^stApril, 2021.

* A
registration certificate will be issued which will have a dynamic QR Code from
which the details about the enterprise can be accessed.

* All
existing enterprises registered under EM–Part-II or Udyog Aadhar shall register
again on the Udyam Registration portal on or after 1^stJuly,
2020. All enterprises registered till 30^th June, 2020 shall be
reclassified in accordance with this Notification.

* The
existing enterprises registered prior to 30^th June, 2020 and not
having registered under Udyam shall continue to be valid only for the
period up to 31^stMarch, 2021.

KEY BENEFITS FOR SMPs UNDER THE MSMED ACT AND OTHER STATUTES

1.
Protection against delayed payments to Micro & Small Enterprises (MSEs)

The MSMED
Act, 2006 gives protection to MSME-registered entities against delay in
payments from buyers. Further, the MSME’s have right of interest on delayed payment through
conciliation and arbitration and settlement of disputes to be done in minimum
time.

If any micro or small
enterprise that has MSME registration supplies any goods or services, then
the buyer is required to make payment on or before the date agreed upon
between the buyer and the micro or small enterprise.

In case there is
no payment date on the agreement, then the buyer is required to make
payment within 15 days of acceptance of goods or services.

Further, in any case,
a payment due to a micro or small enterprise cannot exceed 45 days from
the day of acceptance or the day of deemed acceptance.

In case of failure by
the buyer to make payment on time, the buyer is required to pay compound
interest with monthly interest rests to the supplier on that amount from
the agreed date of payment or 15 days of acceptance of goods or services.

The penal
interest chargeable for delayed payment to an MSME enterprise is three
times the bank rate notified by the Reserve Bank of India. Such
interest is also not a tax-deductible expense under the Income-tax Act.

Further, as mentioned
in section 22 of the MSMED Act, 2006, where any buyer is required to get
his annual accounts audited under any law for the time being in force,
such buyer shall furnish additional information in his annual statement of
accounts regarding the outstanding principal and interest payable to MSME
enterprises.

MSME
units can access the MSME SAMADHAAN portal
(https://samadhaan.msme.gov.in/) for prompt settlement of any disputes relating
to delay in payment or interest.

2. Credit Guarantee Scheme for Micro & Small
Enterprises (CGTMSE)

Credit guarantee for
loans up to Rs. 2 crores, without collateral and third-party guarantee.

New and existing Micro
and Small Enterprises engaged in manufacturing or service activity are
eligible borrowers under this scheme.

Borrowers need to
conduct a market analysis and prepare a business plan containing relevant
information, such as business model, promoter profile, projected
financials, etc. and submit the loan application which is sanctioned as
per the bank’s policy. After the loan is sanctioned, the bank applies to
the CGTMSE authority and obtains the guarantee cover.

Guarantee coverage
ranges from 85% (Micro Enterprise up to Rs. 5 lakhs) to 75% (others).

50% coverage is for
retail activity.

Detailed
information and application can be obtained from https://www.cgtmse.in/

3.
Interest Subvention Scheme for MSMEs – 2018

2% interest subvention
on fresh or incremental loans, maximum up to Rs. 1 crore, to MSMEs.

This interest relief
will be calculated at two percentage points per annum (2% p.a.), on outstanding
balance from time to time from the date of disbursal / drawl or the date
of notification of this scheme, whichever is later, on the incremental or
fresh amount of working capital sanctioned or incremental or new term loan
disbursed by eligible institutions.

Incremental / fresh
term loan or incremental / fresh working capital extended from 2^nd
November, 2018 by any scheduled commercial banks, NBFCs, RRBs, UCBs
(scheduled and non-scheduled) and DCCBs would be covered under the scheme.

SIDBI shall act as a
nodal agency for the purpose of channelling of interest subvention to the
various lending institutions through their nodal office.

MSMEs already availing
interest subvention under any of the schemes of the State / Central
government are not eligible under the scheme.

Detailed
information about the scheme can be obtained from: https://rbidocs.rbi.org.in/rdocs/notification/PDFs/125ISCUR72A9B5ADE83345F9A47410967A83ED27.PDF

Detailed
information and application can be obtained from
https://sidbi.in/files/circulars/ISS-for-MSMEs,-2018—Circular-and FAQs.pdf

4.
Emergency Credit Line Guarantee Scheme – Atmanirbhar Bharat Mission 2020

The
Emergency Credit Line Guarantee Scheme, worth Rs. 3 lakh crores, was launched
as part of the Atmanirbhar Bharat Mission on 20^th May, 2020. The
scheme provides credit relief to MSMEs facing hardships due to coronavirus
pandemic-triggered lockdowns.

In a
pragmatic mid-scheme assessment, the government on 1^st August, 2020
has expanded the eligibility criteria for the Emergency Credit Line Guarantee
Scheme (ECLGS) beyond MSMEs to include ‘individuals who take loans for business
purpose’. With the eligibility expansion, Chartered Accountants, who
have taken loans for their professional needs, will be eligible for credit
under the special credit guarantee scheme which was earlier aimed to benefit
medium and small enterprises.

KEY FEATURES

All MSME borrower
accounts with outstanding credit of up to Rs. 25 crores as on 29^th
February, 2020 which were less than or equal to 60 days past due as on
that date, i.e., regular, SMA 0 and SMA 1 accounts, and with an annual
turnover of up to Rs. 100 crores, would be eligible for Guaranteed
Emergency Credit Line (GECL) funding under the scheme.

The amount of funding
shall be either in the form of additional working capital term loans (in
case of banks and FIs), or additional term loans (in case of NBFCs).

Funding would be up to
20% of their entire outstanding credit up to Rs. 25 crores as on 29^th
February, 2020.

The entire funding
shall be provided with a 100% credit guarantee.

Tenor of loan under
the scheme shall be four years with moratorium period of one year on the
principal amount.

No guarantee fee shall
be charged.

Interest rates under
the scheme shall be capped at 9.25% for banks and FIs, and at 14% for
NBFCs.

5. Trade Receivables
Discounting System (TReDS)

TReDS is a digital
platform for MSMEs to auction / discount their trade receivables at
competitive rates through online bidding by financiers.

The system, which is
accessible online through three exchanges, was launched to ensure that
suppliers are credited their due receivables in a timely manner.

The system is
initiated when a transaction is conducted between the supplier and buyer.

The receivable is
logged into the system by the supplier.

Receivables are funded
by financiers through a bidding process.

Only the supplier is
able to view all the bids placed by different financiers. When the
supplier selects the best bid, the amount is received within two to three
business days from the financier.

On the regular due date,
the due amount is debited from the buyer and transferred to the financier.

The objective is to
address the critical needs of MSMEs:

(i)
Promptly finance trade receivables, and (ii) Financing trade receivables based
on buyers’ credit rating.

TReDS has
been licensed to three exchanges:

(1)
Receivables Exchange of India Ltd. (RXIL): A joint venture between
Small Industries Development Bank of India (SIDBI) and National Stock Exchange
of India Limited (NSE).

https://www.rxil.in/AboutTreds/Treds

(2) Invoicemart: Promoted by A TReDS Ltd.
(a joint venture between Axis Bank and mjunction services).

https://www.invoicemart.com

(3) M1Xchange: Promoted by Mynd Solutions
Private Limited

M1xchange:
https://www.m1xchange.com/treds.php

Detailed
information available at: https://rbidocs.rbi.org.in/rdocs/Content/PDFs/TREDSG031214.pdf

6. Public
Procurement Policy from MSME

The Public Procurement
Policy for Micro and Small Enterprises (MSME) Order, 2012 has mandated every
Central Ministry / Department / PSU to procure minimum 25% of the annual
value of goods or services and certain reserved items from Micro and Small
Enterprises.

No fees for procuring
tender document or furnishing earnest money; and, in certain cases, price
adjustment also permissible for MSEs to the extent of 15% to match lowest
bid in tender.

The MSME SAMBANDH is
the Public Procurement Portal launched by the Central Government for the
MSMEs to monitor the implementation of the public procurement from MSEs by
Central Public Sector Enterprises (sambandh.msme.gov.in).

7.
Reimbursement of ISO Certification

All registered Micro
and Small Industries can avail an exemption of all expenses incurred for
obtaining ISO 9000, ISO 14001 and HACCP certifications.

It includes 75%
of the certification expenses up to a maximum of Rs. 75,000 to each unit
as one-time reimbursement.

Scheme applicable only
to those MSEs which have acquired Quality Management Systems (QMS) / ISO
9001 and / or Environment Management Systems (EMS) / ISO14001 and / or
Food Safety Systems (HACCP) Certification.

For more
information:
https://www.startupindia.gov.in/content/sih/en/government-schemes/reimbursement_iso_standards.html

8. Service Exports
from India Scheme (SEIS)

To facilitate growth
in export of services so as to create a powerful and unique ‘Served from
India Scheme’ brand, instantly recognised and respected the world over.

Under this scheme, all
Indian Service Providers having free foreign exchange earning of at least
US $15,000 in the preceding year can claim the Duty Credit Scrip.

For Individual Service
Providers and sole proprietorships, such minimum net free foreign exchange
earnings criterion would be US $10,000 in the preceding financial year.

This Duty Credit Scrip
is equivalent to 3% – 7% of ‘NET’ free foreign exchange earned during the
previous financial year.

The Duty Credit Scrips
and goods imported against them shall be freely transferable.

The services of SMPs
are covered under the category – Professional Services – Legal Services,
Accounting, Auditing and Bookkeeping Services and Taxation Services.

Free foreign exchange
earned through International Credit Cards and other instruments as
permitted by RBI for rendering of service are also taken into account for
computation of Duty Credit Scrip.

Import Export Code
(IEC) is mandatory at the time of rendering service for claiming benefits.

For more
information: https://dgft.gov.in/CP/

9.
Reduced IPR Filing Fee

The Department of
Electronics and Information Technology (DeiTY) has launched a scheme
entitled ‘Support for International Patent Protection in E&IT
(SIP-EIT)’ to provide financial support to MSMEs and Technology Startup
units for international patent filing.

The reimbursement
limit has been set to the maximum of Rs. 15 lakhs per invention or 50% of
the total charges incurred in filing and processing of a patent
application, whichever is lesser.

For
details refer: http://www.ict-ipr.in/sipeit/SIPEITForm

CONCLUSION

The
Micro, Small & Medium Enterprises (MSME) is one of the top priority sectors
for the present Government of India and it is providing all the support and
assistance needed for the development of the sector. The Small and Medium
Chartered Accountant Practitioners (SMPs) are the most popular source of advice
and support to MSMEs.

Among
other MSMEs, the SMPs are also in need of credit and technical support for
growth and development. The delayed recovery of outstanding dues from clients
leads to working capital issues and a major roadblock for the growth of small
CA firms. The lockdown due to the Covid-19 pandemic has further reduced the
inflow of client funds and resulted in a cash crunch. The various schemes as
discussed above will come as a great guidance to the practising Chartered
Accountancy firms in these difficult times.

shailesh.kwebmaker

TAXPAYER SERVICES: MESSAGE, MEANING AND MEANS – 2/2

This Editorial covers the remainder of what the previous
one couldn’t due to limitations of space. In September we had covered tax
overreach, accountability, creating grounds for taxpayers and stoppage of target-setting.
Here are more points on detailing the Taxpayer’s Charter (TC) to honour the
honest taxpayer:

Scrutiny: The time between notice, commencement of actual
proceedings and closure must be three to five months. Today, assessment happens
in the last few months before time-barring. This is as unfair to an ITO who has
to read, study, understand and form an opinion, as it is to a taxpayer /
professional.

Time as the essence: Outer time limit at the CIT(A) level is
specified as one year and six months for fact-based appeals. Non-response by an
ITO / assessee to a CIT(A)’s call for information and response time trails
should be mentioned in orders and non-response by the A.O. cannot be a reason
for stretching dispute resolution. At the ITAT level, the time limit
should generally be fixed up to three years, and two years for matters of fact.
Remand of cases should be monitored, statistics of the number of matters
remanded and the average time taken should be reported in public domain.

Structure of orders: Orders should carry the dates of submissions and
hearings, brief nature and number of submissions and questions raised from both
sides. Additions / SCNs should state clearly, where possible, whether the
issues are predominantly about law or fact so that further dispute resolution
can be placed in the right bucket. Just as the assessee makes a statement at
the end of an ITR, the ITO should declare that the assessment order, demand,
etc. are in accordance with the Taxpayer’s Charter and the provisions of law.

Data: A.Y.-wise statistics, including drill-down up to
Commissionerate level, is made available in the public domain. This should
include the number of orders passed at each level, the number and value of
demands raised, how many appealed, appealed by assessee or Department [in case
of CIT(A) onwards], did the matter contain an issue of law or fact or
indeterminate, ageing of each appeal at each level, determination in favour of
Department or assessee, and amount demanded vs. amount determined at each level
of dispute resolution. Such data must be published regularly. A periodic
jurisdiction-wise transparent reporting will show us what is happening.

Reservation in tax system: It is outrageous that
agricultural income without any limit goes ‘tax-free’. As reported by the CAG,
in A.Y. 2017-18, Rs. 500 crores of agricultural income went tax-free without
adequate verification based in 1527 / 6778 cases. This is inequitable,
unreasonable and disrespectful to honest taxpayers. Section 10(1) is a conduit
for evasion, misuse and laundering (refer TARC Report in 2014).

Data obesity: Today ITR seeks so many details of the assessee
which the assessee has already given elsewhere. When companies have filed data
on the MCA, GST or customs portals, why ask for it, then send mismatch notices,
and trigger some action based on incomparable data points? Recent example of
ISIN in ITR (A.Y. 2021): Can an honest taxpayer not share his DP ID, CAS ID,
etc., and ITD can thereafter fetch data from the Stock Exchanges to match it? Let’s
have one nation, one Government!

Other issues include: Sharpening selection of cases (1% of
taxpayers make up 50% of demands), consider cost incurred by the taxpayer in cost
of collection vs. collected, accounting of revenue collected (disputed
amounts collected should be treated as an advance), rewriting ITA in plain
English and giving due attention to what the taxpayer gets after a lifetime
of paying taxes when 98% others don’t. While an Honest Taxpayer is not
defined, if his rights and services are enumerated, it will be a stronger,
meaningful and praiseworthy start.

Raman
Jokhakar

Editor

shailesh.kwebmaker

BE THE CHANGE: REMEMBERING GANDHI

‘Be the
change you wish to see in the world,’ said Gandhiji as he invited us to become agents
of change. Today, as we face a severe environmental crisis, this teaching is
more relevant than ever. But what does it really mean to you and me?

Often people
ask me – what difference will it make if I make a small change in my life? Will
I be able to
save the Amazon forests that are burning down? Will I be able to save those
dolphins and whales that are dying on the shores with stomachs full of plastic?
What can I do?

The damage
that disposable plastic has had on our natural world and on other living beings
is unprecedented. The seas and oceans are now filled with microplastics that it
will be almost impossible to clean up. But who is using these products that end
up in the ocean?

Imagine if
one billion Indians took a pledge never to use a plastic carry bag in their
lives, to find creative alternatives to plastic water bottles and to never ask
for plastic spoons in a restaurant.

Gandhiji
reminds us that real change comes from an individual level and grows into
national and international change. He said, ‘What is true of the individual
will be tomorrow true of the whole nation if individuals will but refuse to
lose heart and hope.’

Making this
change is not as difficult as we make it out to be. When I was growing up, we did
not have
single-use disposables in our life. We carried our own cloth bags to the market
and we bought oils and milk in bottles. Drinking water was available at train
stations and restaurants for free. The idea of using plastic spoons and forks
emerged much later. So we have seen that it is possible to live a life without
disposable plastics.

You might
think – but this is so inconvenient! The one reason that people in the UK gave
for not carrying their own cloth bags was that they ‘forgot’. The cost we are
paying for this forgetfulness is so high that future generations will never
forgive us. Microplastics are entering the water we drink and the food we eat.
Cancers are being caused by these nano particles of plastic. Is this worth it?

As
individuals, if we find ways to reuse items in our own lives, we will be
saving money, saving our own health and our environment. As accountants and
auditors to businesses, if we can conduct waste audits, even as a complimentary
service, we enable huge savings by establishing systems of reuse.

Here are some
of the small things you can do at the corporate level:

1. Can ball pens get refills
instead of being thrown out each time the ink gets over?

2. Can plastic water bottles
be replaced by drinking water stations at each level?

3. Can food be packaged in larger
steel containers instead of small individual plastic packets?

4. Can conferences use ‘green’
kits – do nametags have to be in disposable plastics?

5. Can cleaning supplies be
ordered in larger quantities and stored rather than in smaller plastic
containers?

6. Can plastic packaging be
replaced by paper and cloth packaging?

7. Can waste be segregated
and wet waste composted at source?

8. Can plastic wastes be recycled?

9. Can the corporate campus be
declared a plastic-free zone?

Such a waste
audit and its recommendations can be followed up with change of habit and new
norms.

Gandhiji
visited the UK wearing a khadi dhoti to make a point about
self-determination. How can we make a point and redesign our lifestyle and
working style as we celebrate the birth anniversary of Bapu?

You and I may
not be able to make grand and brave statements, but even the smallest change we
make in our choices can lead the world towards the change we wish to see. It is
because Gandhiji believed that one voice mattered, that the entire world
listened to them.

Be the change
you wish to see in the world.

shailesh.kwebmaker

WHO CONTROVERSY: LACK OF GLOBAL LEADERSHIP IN CORONA CRISIS

INTRODUCTION

When the metaphorical ship of a growing,
prosperous world hit the figurative iceberg of Covid-19, it sank and it sank
like no ship had ever sunk before. While all of this happened, the WHO behaved
very much like the band in the movie ‘Titanic’ that continued to play songs
while lives were lost and the ship sank.

The World Health Organization (WHO) was
established on 7^th April, 1948 and was entrusted with the responsibility
of creating a better, healthier future for people all over the world. It was
assigned the role of providing leadership on matters critical to health,
shaping the research agenda and stimulating the generation, translation and
dissemination of valuable knowledge. However, when D-Day beckoned, the WHO
failed and it failed gloriously. Just when the world was looking up to this
multinational body, it failed with repercussions that will perhaps only get
worse in the course of time.

Covid-19 has fallen like a clutch of bombs
on the world. As of today, the number of coronavirus cases stands at a
bewildering figure of 1,71,51,191 and has claimed 6,69,435 innocent lives. It
is truly astonishing that despite technical advancements, life-changing inventions
and incredible leaps in the field of medicine, we are still in such a situation
that things are worsening day after day, every day. There is perhaps nothing
better to showcase the gruesomeness of our reality. This is the question
uppermost in the minds of everyone, whether a daily wage labourer in a small
village in Uttar Pradesh, or a migrant worker desperately trying to go back
home from Mumbai to Bihar. The world today asks the same question and does so
in bewilderment when a prestigious and well-funded global watchdog for health,
the WHO, appears to have fallen flat on its face.

Let us look at the attitude that the
international health body has displayed. Look at the statements of some of its
members, such as Prof. Dieder Houssin, who is also a member of the Review
Committee, International Health Regulations. On 23^rd January he
said, ‘Now is not the time. That’s a bit too early to consider that this
event is a public health emergency of international concern’.

These comments were made on the exact day
when the lockdown commenced in the city of Wuhan where it all started. It is
perhaps because of the sluggishness and negligence of such massive proportions
that we face a time where there is little hope for those who have to choose
between food on the table and contracting the deadly virus. The world today is
paying the cost for the blunders committed by the WHO. Its leadership has
proved to be ineffective and is likely to adversely affect the lives of
billions who now confront a prolonged tragedy worsened by an economic slowdown
of gigantic proportions.

Through this paper I attempt to draw the
reader’s attention to the shortcomings of and the blunders committed by the WHO
which have led us to where we are today.

BACK IN TIME

The SARS epidemic of 2002-03 had let loose
fear, concern and death in a similar manner. Even then, China was slow to
acknowledge the epidemic domestically and failed to inform the global community
about its possible spread.

During the SARS epidemic, WHO was quick to
recommend travel restrictions and criticise China for delaying the submission
of vital information that would have limited its global spread. Even after
eradication of SARS, WHO warned that the world would not remain free from other
novel forms of the coronavirus. The then Director-General of WHO, Dr Gro Harlem
Brundtland, implored the international community to investigate possible animal
reservoirs that could be a source for future outbreaks and better study the
movement of the virus to humans.

China’s wet markets were specifically
identified as a likely environment for the virus to incubate and jump from
animals to humans. The mutable nature of the virus, coupled with China’s rapid
urbanisation, proximity to exotic animals and refusal to tackle illegal
wildlife trade and commerce, were together termed a ‘time bomb’ by a research
paper in 2007.

As late as December, 2015 the coronavirus
family of diseases was selected to be included in a list of priorities
requiring urgent research and development. It was earmarked as a primary
contender for emerging diseases likely to cause a major pandemic.

JUMP TO PRESENT

Here is a list of mistakes that the WHO
committed. Had these been avoided, it could have changed the history of the
world as we know it today.

Mistake 1: Sluggish reaction

China informed WHO on 31^st
December, 2019, while it was first public on news channels on 8^th
January, 2020. Surprisingly, when a pneumonia-like virus was detected in Wuhan
in late December, 2019, the WHO reacted sluggishly. Dr. Tedros Adhanom,
Director-General of WHO, applauded China’s ‘commitment to transparency’ in the
early days of the epidemic in January.

Mistake 2: Denied human-to-human
transmission

The WHO denied evidence of human-to-human
transmission on 14^th January, 2020 which has now become a famous
tweet by the WHO.

WHO refused to acknowledge the
human-to-human transmission of the virus despite several cases already showing
transmission. WHO also castigated countries like the USA and India who started
restricting flights to and from China or issued travel advisories.

Mistake
3: Ignored Taiwan which had critical information

One country that got their advice was
Taiwan, which also warned the WHO that it suspected the virus was spreading
through human-to-human transmission. Taiwan, which has one of the lowest rates
of known Covid-19 infections per capita among countries impacted by the virus,
was prevented from joining the WHO as a member country in 2015 by China which
refuses to acknowledge its independence. A newspaper headline of 3^rd
April, 2020, said famously, ‘The WHO Ignores Taiwan. The World Pays the
Price’.

In late March, WHO Epidemiologist Bruce
Aylward declined to answer a Hong Kong reporter’s question about Taiwan, or
even acknowledge its existence.

As Taiwan was distributing facemasks to its
citizens, the WHO was advising the rest of the world that they were doing so
unnecessarily while initially the CDC and the US Surgeon-General followed its
lead; but health experts pointed out as to how mounting evidence that masks can
help slow the spread of respiratory diseases by about 50%, especially among
asymptomatic carriers in a population, and what the WHO maintained was
virtually non-existent despite mounting evidence to the contrary in
mid-February.

A CNN Health news article said, ‘Infected
people without symptoms might be driving the spread of coronavirus more than we
realised”

While Beijing informed the WHO on 31^st
December, there are expert estimates that the virus had spread to humans as far
back as October.

Mistake 4: Delayed response

Even after being told, the WHO showed no
urgency to send an investigative team, careful not to displease the Chinese
government. A joint WHO-Chinese team went to Wuhan only in mid-February and
wrote a report with decidedly Chinese characteristics misleading the entire
world of the then situation.

A South China Morning Post article said, ‘Coronavirus: China’s first confirmed Covid-19
case traced back to November 17’.

Mistake 5: Misled the world

Covid-19 continued to exhibit
characteristics of a pandemic, spreading rapidly around the world. But not only
did Dr. Tedros Adhanom and his team fail to declare a public health emergency,
they also urged the international community to not spread fear and stigma by
imposing travel restrictions.

The global health body even criticised early
travel restrictions by the US as being excessive and unnecessary. It declared
Covid-19 as a pandemic only on 11^th March.

Mistake 6: Criticised preventive measures

Following the WHO’s advice, the European
Centre for Disease Prevention and Control (ECDC) suggested that the probability
of the virus infecting the EU was low, likely delaying more robust border
controls by European states.

As the virus continued spreading across
Europe and reached America, WHO recommended that the travel industry maintain
the status quo. Dr. Tedros said on 3^rd February: ‘There is
no reason for measures that unnecessarily interfere with international travel
and trade.’

Mistake 7: Didn’t learn from mistakes

Indeed, the WHO’s response to Ebola was
similarly criticised by the international community. This is not a first in
WHO’s history. In the 1950s and 60s, WHO found itself manoeuvring between the
Soviet-led Communist bloc and the US.

Mistake 8: Colluding with China

The first cases of the Wuhan virus were seen
as early as November but the Chinese government silenced the whistleblowers and
downplayed the threat. Dr. Lee Wenliang is one of those whistleblowers who died
as a hero trying to sound the alarm of coronavirus weeks before he contracted
the illness himself and died. The CNN news headline on 11^th February
was: ‘China’s hero doctor was punished for telling truth about coronavirus.’

During such testing times, the WHO only
continued to please the authoritarian government of China. It praised China for
releasing the virus’s genome while neglecting to mention that it took them at
least 17 days to do so.

China also did not report human-to-human
transmission until late January, even though Chinese doctors suspected the same
at least a month earlier. WHO scientists weren’t allowed into Wuhan until three
weeks after the outbreak first came to light. While all of this happened, Dr.
Tedros continued to glorify the all-powerful regime by saying, ‘We would have
seen many more cases outside China by now if it were not for the government’s
efforts to protect their own people and the people of the world. The Chinese
government is to be congratulated for the extraordinary measures it has taken
to contain the outbreak’.

There is nothing hidden about China’s
efforts at undermining international organisations. Its growing clout in
international organisations is creating new fault lines in global politics and
the WHO has been an early victim. Remember, the WHO, led by Margret Chan in
2013 was one of the first international institutions to have signed an MoU with
China to advance health priorities under the Belt and Road Initiative.

China has not only attempted to censor all
official accounts of its early failings but has also employed an overt global
disinformation campaign, trying to pinpoint the source of the outbreak as the
US or Europe.

It is an irony of our times that the world’s
most potent authoritarian state (China) heads over a quarter of all specialised
agencies in the UN, ostensibly the centrepiece of the international liberal
order.

Mistake 9: Personal interest

Dr. Tedros, an Ethiopian politician, was
also seen as a China-backed candidate in 2017 for the Director-General’s
election. The ex-Health Minister of Ethiopia has favoured China in innumerable
ways which may be due to China having made a lot of investments in Ethiopia
under the One Belt One Road initiative and because Ethiopia does not want to
anger the red dragon. Dr. Tedros could also be favouring China because of these
reasons. In late January, he visited China and on 28^th January he
met with President Xi Jinping in Beijing. Following the meeting, he commended
China for ‘setting a new standard for outbreak control’ and praised the
country’s top leadership for its ‘openness to sharing information’ with the WHO
and other countries.

Dr. Tedros said on 5^th February
that ‘China took action massively at the epicentre and that helped in
preventing cases from being exported’.

Mistake 10: Political background

Dr. Tedros’ inaction stands in stark
contrast to the WHO’s actions during the 2003 SARS outbreak in China.

The then WHO Director-General, Dr. Gro
Harlem Brundtland, who had been the Prime Minister of Norway twice, made
history by declaring the WHO’s first travel advisory in 55 years which
recommended against travel to and from the disease epicentre in southern China.
Dr. Brundtland also criticised China for endangering global health by
attempting to cover up the outbreak through its usual playbook of arresting
whistleblowers and censoring the media. It is said that Dr. Tedros is not from
a political background, hence he is unable to face China bluntly and blame it
for the coronavirus.

Mistake 11: Funding

WHO has
required voluntary budgetary contributions to meet its broad mandate. In recent
years, it has grown more reliant upon these funds to address its budget
deficits.

This dependence on voluntary contributions
leaves WHO highly susceptible to the influence of individual countries or
organisations. China’s WHO contributions have grown by 52% since 2014 to
approximately $86 million.

CONCLUSION

It is an open secret among international
diplomats and public health experts that WHO is ‘not fit for its mission’,
riddled as it is with politics and bureaucracy. Given its previous failures and
the warning that was SARS, its leadership has no excuse for reacting in such a
sluggish and indifferent manner.

A global
pandemic does not occur every time a novel infectious pathogen emerges. It does
when there is an absence of accurate information about the pathogen and a
failure of basic public services – in this case, the failure to regulate food
and marketplaces to prevent the transmission of pathogens and the failure to
shut down transportation and control movement once it spreads. When authorities
regulate public health, share information about a pathogen and co-operate to
control its movement, diseases are contained and pandemics are unlikely to
occur.

The collateral price that the world has paid
for this lesson is perhaps too exorbitant. Hopefully, we will take a leaf from
this book and have better, more accountable and robust structures in place for
such pathogens that threaten all life on our planet.

Bibliography

1.
https://beta.ctvnews.ca/national/health/2020/1/23/1_4779972.html

2.
https://www.bbc.com/news/world-asia-52088167

3.
https://www.youtube.com/watch?v=YA-x_XOe9T4

4.
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7112390/

5.
https://www.who.int/activities/prioritizing-diseases-for-research-and-development-in-emergency-contexts

6.
http://natoassociation.ca/belt-and-road-initiative-understanding-chinas-foreign-policy-strategy/

7.
https://downloads.studyiq.com/free-pdfs

8.
https://foreignpolicy.com/2020/06/16/china-health-propaganda-covid/

9.
https://www.theguardian.com/world/2014/oct/17/world-health-organisation-botched-ebola-outbreak

10.
https://www.usnews.com/news/world/articles/2020-02-03/who-chief-says-widespread-travel-bans-not-needed-to-beat-china-virus

11.
https://www.cnn.com/asia/live-news/coronavirus-outbreak-02-04-20/index.html

12.
https://www.bbc.com/news/world-asia-china-51409801

* The above article was chosen as the
best article from over 50 entries submitted at
‘Tarang 2020’, the 13^th Jal Erach CA Students’ Annual Day organised
by the BCAS. One of the features of this year’s event was ‘Writopedia’.

Indian Firm made the world’s first cruelty free soap;
got Rabindranath THakur to model for it

The first rule of every manufacturing company is to
keep its process a secret. But Godrej brothers did the opposite and distributed
pamphlets in Gujarati that explained the process of making soaps from vegetable
oils. Did it establish trust and appealed a larger audience? You bet.

Rabindranath Thakur sits in his quintessential calm
position in a photo, hands obediently placed on his laps as he stares into the
abyss. Next to his portrait is a quote that reads, “I know of no foreign soaps
better than Godrej’s and I will make a point of using it.”

Yes, as hard as it may seem to believe, the Nobel
Laureate had agreed to endorse a toilet soap in the early 1920s. Not just him,
other freedom fighters like Annie Besant and C. Rajagopalachari also followed
suit and marketed the ‘Godrej No. 1’ soap.

The aim was to promote the first made-in-India and
cruelty-free soap and further strengthen India’s freedom struggle movement, and
the leaders made their political statements by requesting people to cripple the
economy of colonisers by boycotting foreign goods and instead opting for
something that is ‘for Indians, and by Indians’.

Ardeshir Godrej, a businessman by profession and patriot
at heart, is the man behind starting this humble swadeshi brand in 1897. His
younger brother Pirojsha also joined the business and together they came to be
known as the Godrej Brothers.

Fast forward to 2020, a 122-year-old consumer-goods
giant, the Godrej Group controls $4.7 billion revenue. It comprises five major
companies with interests in real estate, FMCG, agriculture, chemicals and
gourmet retail.

Godrej has not only been an undying witness to India’s
rapid development but has also paved way for many ‘firsts’ in India including
springless lock, Prima typewriter, ballot box and refrigerators.

(Better India, August 7, 2020)

shailesh.kwebmaker

SOME USEFUL APPS

In this month’s edition we
look at some apps which are useful to us professionally.

McKINSEY INSIGHTS

The McKinsey Insights
app offers business insights and analysis on the biggest issues facing senior
executives today – from leadership and corporate strategy to the future of work
and AI’s impact on business and society. In addition, explore new articles on
digitisation, marketing and analytics across industries such as consumer goods,
financial services and tech. In fresh content updated daily, McKinsey
consultants and contributing experts look at the latest in climate change,
diversity and inclusion in the workplace, organisational restructuring,
bringing data to bear on business strategy and more. Content includes articles
from McKinsey Quarterly, reports from the McKinsey Global Institute, podcasts
and videos.

This app allows you to
view recent and most popular content, save articles for offline reading and
register to personalise your app experience.

The best part is that all
content is free. Go ahead, get insights into your business and professional
world today!

Android: https://bit.ly/2Q1Un4TiOS:
https://apple.co/3l2fylN

LINKEDIN – SLIDESHARE

LinkedIn SlideShare is the world’s largest community for sharing
presentations and professional content, with 60 million unique visitors a month
and more than 15 million uploads. It is much more than just slides. Find
infographics, videos, how-to guides, data and analytics reports, industry
research, thought-leadership articles, Q&As, DIY instructions, visual
guides and more. You can follow companies and organisations like Dell, Ogilvy,
the White House, Netflix, NASA and more, who share their expertise on
SlideShare.

Students can use
SlideShare for academic research, professionals can deepen their industry
knowledge and everyone can explore interesting topics to learn something new.

You can save your
favourites to read later (even offline) on your phone or Android tablet. And
now you can even clip the best content on SlideShare and organise your research
into Clipboards, all in one place.

Android: http://bit.ly/2GpTq1PiOS:
https://apple.co/2Z3fjet

LAYOUT FROM INSTAGRAM: COLLAGE

This is a simple app which
allows you to stitch up to nine images together and load them onto Instagram.
Instagram allows you to add only one image at a time. However, sometimes you
may wish to combine multiple similar selfies or landscape shots to fit into one
collage picture. This app lets you do just that.

It also helps you tweak many
parameters for each photo, including the size, border width or zoom. You are
the editor, so feel free to experiment and get creative – tell a story, show
off an outfit, or just splice, dice and change the look of your regular photos
to convey a mood or theme.

The app also has three
handy buttons at the bottom to replace an image, mirror it or flip it upside
down. The final product can be quite neat and impressive. It can be further
enhanced by using Instagram’s native filters.

Android:
http://bit.ly/2L5glDI iOS: https://apple.co/2L5ljAl

TICKTICK

TickTick is a simple and effective to-do list and task manager
app which helps you make schedules, manage time, remind about deadlines and
organise life at work, home and everywhere else. It is very easy to get started
with its intuitive design and personalised features. Add tasks and reminders in
mere seconds and then focus on important work. The app syncs across devices, so
you are always up to date.

You can add your tasks by
voice input or by typing. With Smart Date Parsing, the date info you enter into the new field will be automatically set as due date for task reminder with an
alarm. You can set multiple notifications for important tasks and notes to
never miss any deadline.

You can even get easy
access to your tasks and notes by adding a checklist widget to your home
screen. That is pretty neat.

Android: http://bit.ly/2KF9uAG iOS:
https://apple.co/2N9Tp7R

INSTAPAPER

Instapaper is the simplest way to save and store articles for
reading: offline, on-the-go, anytime, anywhere, perfectly formatted. It
provides a mobile and tablet-optimised text view that makes reading Internet
content a clean and uncluttered experience. Read offline, even on airplanes,
subways, on elevators, or on Wi-Fi-only devices away from Internet connections.
It saves most web pages as text-only, stripping away the full-sized layout to
optimise for tablet and phone screens with adjustable fonts, text sizes, line
spacing and margins.

You
have the option to sort and search downloadable files for easy access. You can
download up to 500 articles on your phone or tablet and store unlimited
articles on the Instapaper website. Dictionary and Wikipedia lookups, tilt
scrolling, page-flipping, preview links in the built-in browser without leaving
the app are all available, just like in Kindle.

A great app to consume
content at your own time and space.

Android:
http://bit.ly/2FxujtG iOS: https://apple.co/2FAjrv5

I hope you will be able to use these apps
effectively to become more productive in your professional life.

shailesh.kwebmaker

TAXABILITY OF A PROJECT OFFICE OR BRANCH OFFICE OF A FOREIGN ENTERPRISE IN INDIA

In our last article
published in the August, 2020 issue of the BCAJ, we discussed various
aspects relating to taxability of a Liaison Office (LO) in India, including the
recent decision of the Supreme Court in the case of the U.A.E. Exchange Centre.

In addition to a Liaison
Office (LO), Project Offices (PO) and Branch Offices (BO) of foreign
enterprises have also been important modes of doing business in India for many
foreign entities.

Issues have arisen for
quite some time as to under what circumstances a PO / BO has to be considered
as a Permanent Establishment (PE) of a foreign enterprise in India and then be
subjected to tax here.

In this article, we
discuss various aspects relating to taxability of a PO / BO in India, including
the recent decision of the Supreme Court in the case of Samsung Heavy
Industries Ltd.

BACKGROUND

The determination of tax
liability of a foreign enterprise has been a contentious subject in the Indian
tax regime for a very long time. And whether a foreign enterprise has a PE in
India has been a highly debatable issue, though it is very fact-intensive. The
ITAT and the courts have been taking different views based on the facts of each
case.

A Project Office means a
place of business in India to represent the interests of the foreign company
executing a project in India but excludes a Liaison Office. A Site Office means a
sub-office of the Project Office established at the site of a project but does
not include a Liaison Office.

A foreign company may open
project office(s) in India provided it has secured from an Indian company a
contract to execute a project in India, and (i) the project is funded directly
by inward remittance from abroad; or (ii) the project is funded by a bilateral
or multilateral international financing agency; or (iii) the project has been
cleared by an appropriate authority; or (iv) a company or entity in India
awarding the contract has been granted term loan by a public financial
institution or a bank in India for the project.

A Branch Office in
relation to a company means any establishment described as such by the company.

As per Schedule I read
with Regulation 4(b) of the FEM (Establishment in India of a Branch Office or a
Liaison Office or a Project Office or any Other Place of Business) Regulations,
2016 [(FEMA 22(R)], a BO in India of a person resident outside India is
permitted to carry out the following activities:

(i) Export / import of goods.

(ii) Rendering
professional or consultancy services.

(iii) Carrying out
research work in which the parent company is engaged.

(iv) Promoting technical
or financial collaborations between Indian companies and parent or overseas
group company.

(v) Representing the
parent company in India and acting as buying / selling agent in India.

(vi) Rendering services in
Information Technology and development of software in India.

(vii) Rendering technical
support to the products supplied by parent / group companies.

(viii) Representing a
foreign airline / shipping company.

Normally, a branch office
should be engaged in the same activity as the parent company. There is a
difference between the PO / BO and LO, both in terms of their models and, more
importantly, their permitted activities. As per the FEMA 22(R), an LO is
permitted to carry out very limited activities and can only act as a
communication channel between the source state and the Head Office; whereas a
PO / BO is permitted to carry out commercial activities, but only those
specified activities as per the RBI Regulations.

Thus, under FEMA 22(R) a PO
is allowed to play a larger role as compared to an LO in India. Further, the
scope of permitted activities of a BO provided in Schedule I of FEMA 22(R) is
much larger than the scope of permitted activities of an LO provided in
Schedule II of FEMA 22(R).

In National
Petroleum Construction Company vs. DIT (IT) [2016] 66 taxmann.com 16 (Delhi),
the Delhi High Court, after referring to the definitions of LO and PO in the
Foreign Exchange Management (Establishment in India of Branch or Office or
Other Place of Business) Regulations, 2000, held that ‘It is apparent from
the plain reading of the aforesaid definitions that whereas a liaison office
can act as a channel of communication between the principal place of business
and the entities in India and cannot undertake any commercial trading or
industrial activity, a project office can play a much wider role. Regulation (6)(ii)
of the aforesaid regulations mandates that a “project office” shall not
undertake or carry on any other activity other than the “activity relating
and incidental to execution of the project”. Thus, a project office can
undertake all activities that relate to the execution of the project and its
function is not limited only to act as a channel of communication.’

WHETHER A PO / BO CONSTITUTES A PE IN INDIA?

As mentioned above, as per
the prevailing FEMA regulations a PO / BO can carry out activities which may
not be limited to acting as a communication channel between the parent company
and Indian companies.

An issue that arises for
consideration is whether just because the scope of the permitted activities of
a PO / BO is much wider as compared to an LO under FEMA 22(R), would that be an
important consideration in determining the existence of a PE of a foreign
enterprise in India?

Due to the difference in
scope of activities to be carried out by an LO and a PO / BO, the assessing
officers many a times take a stand that the PO / BO is a PE of a foreign
enterprise as they are permitted to carry out commercial activities as compared
to an LO. This perception leads to the conclusion of a PO / BO being a PE in
India.

In order to decide whether
a PO / BO constitutes a PE in the source state, the actual activities carried
out by them in India need to be minutely analysed irrespective of the fact
whether such activities were carried out in violation of FEMA regulations and
RBI approval.

RELEVANT
PROVISIONS OF THE INCOME-TAX ACT, 1961 (the ITA) and the (DTAAs) relating to
PEs

Definition
under the ITA

Section 92F(iiia) defines
a PE as follows: ‘permanent establishment’, referred to in clause (iii),
includes a fixed place of business through which the business of the
enterprise is wholly or partly carried on.’

Section 94B defines a PE
as a ‘permanent establishment’ and includes a fixed place of business
through which the business of the enterprise is wholly or partly carried on.

Similarly, Explanation (b)
to section 9(1)(v), Explanation (c) to sections 44DA, 94A(6)(ii) and 286(9)(i)
defines a PE by referring to the definition given in section 92F(iiia).

It is important to note
that under the ITA a PE is defined in an inclusive manner. It has two limbs,
i.e. (a) it has to be a fixed place of business, and (b) through such fixed
place the business of the enterprise is wholly or partly carried on.

Definition of
Fixed Place PE and exceptions under the OECD Model Conventions

Since the publication of
the first ambulatory version of the OECD Model Convention in 1992, the Model
Convention was updated ten times. The last such update which was adopted in
2017 included a large number of changes resulting from the OECD / G20 Base
Erosion and Profit Shifting (BEPS) Project and, in particular, from the final
reports on Actions 2 (Neutralising the Effects of Hybrid Mismatch
Arrangements), 6 (Preventing the Granting of Treaty Benefits in
Inappropriate Circumstances), 7 (Preventing the Artificial Avoidance
of Permanent Establishment Status), and 14 (Making Dispute
Resolution Mechanisms More Effective), produced as part of that project.

Article 5(1) of the OECD
Model Convention 2017 update defines the term ‘permanent establishment’ as
follows:

‘1. For the purposes of
this Convention, the term ‘‘permanent establishment’’ means a fixed
place of business through which the business of an enterprise is wholly
or partly carried on.

Article 5(2) of the OECD
Model Convention 2017 provides that the term ‘permanent establishment’
includes, especially, (a) a place of management; (b) a branch; (c) an
office; (d) a factory; (e) a workshop; and (f) a mine, an oil or gas well,
a quarry or any other place of extraction of natural resources.

Thus, on a plain reading
of Articles 5(1) and 5(2), a branch or an office is normally considered as a PE
under a DTAA.

The updated Article 5(4)
provides that the term PE shall be deemed not to include:

(a) the use of facilities
solely for the purpose of storage, display or delivery of goods or
merchandise belonging to the enterprise;

(b) the maintenance of a
stock of goods or merchandise belonging to the enterprise solely for the
purpose of storage, display or delivery;

(c) the maintenance of a
stock of goods or merchandise belonging to the enterprise solely for the
purpose of processing by another enterprise;

(d) the maintenance of a
fixed place of business solely for the purpose of purchasing goods or
merchandise or of collecting information for the enterprise;

(e) the maintenance of a
fixed place of business solely for the purpose of carrying on, for the
enterprise, any other activity;

(f) the maintenance of a
fixed place of business solely for any combination of activities mentioned
in sub-paragraphs (a) to (e), provided that such activity or, in the
case of sub-paragraph (f), the overall activity of the fixed place of
business is of a preparatory or auxiliary character.

Paragraph 4.1 of Article 5
provides for exception to paragraph 4 as under:

‘4.1 Paragraph 4 shall not
apply to a fixed place of business that is used or maintained by an
enterprise if the same enterprise or a closely related enterprise
carries on business activities at the same place or at another place in
the same Contracting State, and

(A) that place or other
place constitutes a permanent establishment for the enterprise or the
closely related enterprise under the provisions of this Article, or

(B) the overall
activity resulting from the combination of the activities carried on by the
two enterprises at the same place, or by the same enterprise or closely related
enterprises at the two places, is not of a preparatory or auxiliary
character, provided that the business activities carried on by the two
enterprises at the same place, or by the same enterprise or closely related
enterprises at the two places, constitute complementary functions that are
part of a cohesive business operation.’

It is important to note
that the UN Model Convention 2017 contains a modified version of Article 5 to
prevent the avoidance of PE status which is on the same lines as Articles 5(4)
and 5(4.1) of the OECD MC mentioned above, except that in Articles 5(4)(a) and
5(4)(b) of the UN MC 2017, the word ‘delivery’ is missing. This is due to the
fact that the UN MC does not consider activity of ‘delivery’ of goods as of
preparatory or auxiliary character.

Determination
of existence of PE in cases of non-carrying on of ‘business’ or ‘core business’
of the assessee

On a proper reading and
analysis of Article 5(1), it would be observed that it contains two limbs and
to fall within the definition of a fixed place PE both the limbs have to be
satisfied. Therefore, in case of a PO / BO, normally the first limb is
satisfied, i.e., there is a ‘fixed place of business’ in India but if the second
limb ‘through which the business of an enterprise is wholly or partly
carried on’ is not satisfied, then a fixed place PE cannot be said to be in
existence.

The Tribunal and courts
have, based on the facts of each case, often held that if the actual activities
of a PO / BO did not tantamount to carrying on the business of an enterprise
wholly or partly, then a fixed place PE cannot be said to have come into
existence.

Recently, the Supreme
Court in the case of DIT vs. Samsung Heavy Industries Limited (SHIL)
[2020] 117 taxmann.com 870 (SC) after in-depth analysis of the facts
held that the Mumbai Project Office of SHIL cannot be said to be a fixed place
of business through which the ‘core business’ of the assessee was wholly or
partly carried on. Relying on a number of judicial precedents of the Supreme
Court in the cases of CIT vs. Hyundai Heavy Industries Co. Ltd., [2007] 7
SCC 422; DIT (IT) vs. Morgan Stanley & Co. Inc., [2007] 7 SCC 1;
Ishikawajima-Harima Heavy Industries Ltd. vs. DIT, [2007] 3 SCC 481;
and ADIT vs. E-Funds IT Solution Inc. [2018] 13 SCC 294, the
Court in paragraphs 23 and 28 held as follows:

‘23. A reading of the aforesaid judgments makes it clear that
when it comes to “fixed place” permanent establishments under double
taxation avoidance treaties, the condition precedent for applicability of
Article 5(1) of the double taxation treaty and the ascertainment of a
“permanent establishment” is that it should be an establishment
“through which the business of an enterprise” is wholly or partly
carried on. Further, the profits of the foreign enterprise are taxable only where the said enterprise carries on its core
business through a permanent establishment. What is equally clear is
that the maintenance of a fixed place of business which is of a preparatory or
auxiliary character in the trade or business of the enterprise would not be
considered to be a permanent establishment under Article 5. Also, it is
only so much of the profits of the enterprise that may be taxed in the other
State as is attributable to that permanent establishment.

28. Though it was pointed out to the ITAT that there were
only two persons working in the Mumbai office, neither of whom was qualified to
perform any core activity of the assessee, the ITAT chose to ignore the
same. This being the case, it is clear, therefore, that no permanent
establishment has been set up within the meaning of Article 5(1) of the DTAA, as
the Mumbai Project Office cannot be said to be a fixed place of business
through which the core business of the assessee was wholly or partly carried
on. Also, as correctly argued by Shri Ganesh, the Mumbai Project Office,
on the facts of the present case, would fall within Article 5(4)(e) of the
DTAA, inasmuch as the office is solely an auxiliary office, meant to act as a
liaison office between the assessee and ONGC. This being the case, it is
not necessary to go into any of the other questions that have been argued
before us.’

In the context of a fixed
place PE, in the SHIL case the Supreme Court mentioned and summarised the
aforesaid aspect in the decision in the case of Morgan Stanley & Co.
Inc. (Supra) as under:

‘17. Some of the judgments of this Court have dealt with
similar double taxation avoidance treaty provisions and therefore need to be
mentioned at this juncture. In Morgan Stanley & Co. Inc. (Supra),
the Double Taxation Avoidance Agreement (1990) between India and the United
States of America was construed. …..Tackling the question as to whether a
“fixed place” permanent establishment existed on the facts of that
case under Article 5 of the India-US treaty – which is similar to Article 5 of
the present DTAA – this Court held:

“10. In our view, the second requirement of Article 5(1) of DTAA is not
satisfied as regards back office functions. We have examined the
terms of the Agreement along with the advance ruling application made by MSCo
inviting AAR to give its ruling. It is clear from reading of the above
Agreement / application that MSAS in India would be engaged in supporting the
front office functions of MSCo in fixed income and equity research and in
providing IT-enabled services such as data processing support centre and
technical services, as also reconciliation of accounts. In order to
decide whether a PE stood constituted one has to undertake what is called as a
functional and factual analysis of each of the activities to be undertaken by
an establishment. It is from that point of view we are in agreement with the
ruling of AAR that in the present case Article 5(1) is not applicable as the
said MSAS would be performing in India only back office operations. Therefore
to the extent of the above back office functions the second part of Article
5(1) is not attracted.”

14. There is one more
aspect which needs to be discussed, namely, exclusion of PE under Article 5(3).
Under Article 5(3)(e) activities which are preparatory or auxiliary in
character which are carried out at a fixed place of business will not
constitute a PE. Article 5(3) commences with a non obstante clause. It states that notwithstanding what is stated in
Article 5(1) or
under Article 5(2) the term PE shall not include maintenance of a fixed place
of business solely for advertisement, scientific research or for activities
which are preparatory or auxiliary in character. In the present case we are
of the view that the abovementioned back office functions proposed to be
performed by MSAS in India falls under Article 5(3)(e) of the DTAA. Therefore,
in our view in the present case MSAS would not constitute a fixed place PE
under Article 5(1) of the DTAA as regards its back office operations.’

The Supreme Court further
mentioned about the decision in the case of E-Funds IT Solution Inc. (Supra)
as follows:

‘22. Dealing with “support services” rendered by an Indian
Company to American Companies, it was held that the outsourcing of such
services to India would not amount to a fixed place permanent establishment
under Article 5 of the aforesaid treaty, as follows:

“22. This report
would show that no part of the main business
and revenue-earning activity of the two American companies is carried on
through a fixed business place in India which has been put at their
disposal. It is clear from the above that the Indian company only renders
support services which enable the assessees in turn to render services to their
clients abroad. This outsourcing of work to India would not give rise to a
fixed place PE and the High Court judgment is, therefore, correct on this
score.”’

In view of above
discussion, to constitute a fixed place PE it is particularly important to
determine what constitutes the ‘Business’, ‘Core Business’ or the ‘Main
business’, as referred to by the Supreme Court, of the assessee foreign
enterprise. This determination is going to be purely based on the facts and
hence an in-depth functional and factual analysis of the activities being
actually performed by the PO / BO would be required to be carried out in each
case.

The term ‘business’ is
defined in an inclusive manner in section 2(13) of the ITA as follows:
‘Business’ includes any trade, commerce, manufacture or any adventure or
concern in the nature of trade, commerce or manufacture.

Article 3(1)(h) of the
OECD MC provides that the term ‘business’ includes the performance of
professional services and of other activities of an independent character.

From
an overall analysis of the decisions, it appears that if the activities of the
PO / BO are purely in the nature of back office activities or support services
which enables the assessee foreign enterprise in turn to render services to
their clients abroad or performing mere coordination and executing delivery of
documents, etc., then the same would not be considered as the core or main
business of the assessee, and accordingly a PO / BO performing such activities
would not constitute a fixed place PE in India.

It is not quite clear as
to whether to constitute Core or Main business of the assessee foreign
enterprise there has to be revenue-earning activity in India, i.e., having
customers or clients in India to whom goods are sold or for whom services are
rendered, invoiced and revenue generated in India, is necessary for the same to
be constituting a fixed place PE in India and consequently be taxable in India.

RELIANCE OF RELEVANT DOCUMENTS

Since the determination of
a fixed place PE is predominantly an in-depth fact-based exercise, the ITAT and
the courts have to rely on various relevant documents.

It has been observed that
in the application to the Reserve Bank of India (RBI) for obtaining approval of
PO / BO, the relevant Board resolution of the foreign enterprise to open a PO /
BO, the approval given by the RBI, the accounts maintained by the PO / BO in
India, etc., are very relevant for arriving at the determination of the
existence of a PE in India.

The ITAT in SHIL vs.
ADIT IT [2011] 13 taxmann.com 14 (Delhi), largely relied upon (a)
SHIL’s application to RBI for opening the PO; (b) SHIL’s Board Resolution for
opening the PO; and (c) RBI’s approval for opening the PO. In respect of the
Board Resolution, the ITAT focused on its first paragraph alone and in
paragraph 71 of the order observed as follows:

‘71. There is a force in the contention of Learned DR that
the words “That the Company hereby open one project office in Mumbai,
India for co-ordination and execution of Vasai East Development Project for Oil
and Natural Gas Corporation Limited (ONGC), India” used by the assessee company
in its resolution of Board of Directors meeting dated 3-4-2006 makes it
amply clear that the project office was opened for coordination and execution
of the impugned project. In the absence of any restriction put by the assessee
in the application moved by it to the RBI, in the resolutions passed by the
assessee company for the opening of the project office at Mumbai and the
permission given by RBI, it cannot be said that Mumbai project office was not a
fixed place of business of the assessee in India to carry out wholly or partly
the impugned contract in India within the meaning of Article 5.1 of DTAA.
These documents make it clear that all the activities to be carried out in
respect of impugned contract will be routed through the project office only.’

All these gave a prima
facie impression that the PO was opened for coordination and execution of
the entire project and was thus involved in the core business activity of SHIL
in India.

However, the Supreme Court
delved deeper and looked at various other factors which the ITAT had ignored or
dismissed. In paragraphs 27 and 28, the Court, relying on the second paragraph
of the Board Resolution which clarified that the PO was established for
coordinating and executing delivery of certain documents, and not for the
entire project, the fact that the accounts of the PO showed no expenditure
incurred in relation to execution of the contract and that the only two people
employed in the PO were not qualified to carry out any core activity of SHIL,
concluded that no fixed place PE has been set up within the meaning of Article
5(1) read with Article 5(4)(e) of the India-Korea DTAA.

The
above indicates that the determination of the existence of a fixed place PE of
a foreign enterprise in India requires a deep factual and functional analysis
and the same cannot be determined on mere prima facie satisfaction.

Even in the case of Union
of India vs. U.A.E. Exchange Centre [2020] 116 taxmann.com 379 (SC)
dealing with the question relating to a Liaison Office being considered as a
fixed place PE in India, the Court relied on the approval letter given by the
RBI. In paragraph 9 of the judgment. the Supreme Court mentioned that ‘keeping
in mind the limited permission and the onerous stipulations specified by the
RBI, it could be safely concluded, as opined by the High Court, that the
activities in question of the liaison office(s) of the respondent in India are
circumscribed by the permission given by the RBI and are in the nature of
preparatory or auxiliary character. That finding reached by the High Court is
unexceptionable.’

In Hitachi High
Technologies Singapore Pte Ltd. vs. DCIT [2020] 113 taxmann.com 327
(Delhi-Trib.) the ITAT held that whether the assessee violated the
conditions of RBI or FEMA is not relevant in determining the LO as a PE under
the I.T. Act.

It appears
that there is an increasing reliance by the ITAT and courts, inter alia, on the application and related documents
and the approval of the RBI in considering whether an LO / PO / BO can
constitute a fixed place PE in India.

INITIAL ONUS REGARDING EXISTENCE OF A FIXED PLACE PE IN
INDIA

An important question
arises as to whether the onus is on the assessee or the tax authorities to
first show that a PO / BO is a fixed place PE in India.

The ITAT in the SHIL
case (Supra) held that the initial onus was on the assessee and not the
Revenue. However, the Supreme Court in the SHIL case reiterated the fact
that the initial onus lies on the Indian Revenue, and not the assessee, to
prove that there is a PE of the foreign enterprise in India before moving
further to determine the Indian tax liability of that enterprise. While
reversing the finding of the ITAT, the Supreme Court stated that ‘Equally
the finding that the onus is on the Assessee and not on the Tax Authorities to
first show that the project office at Mumbai is a permanent establishment is
again in the teeth of our judgment in E-Funds IT Solution Inc. (Supra).’

The Supreme Court in E-Funds
IT Solution Inc. (Supra) stated that the burden of proving the fact
that a foreign assessee has a PE in India and must, therefore, suffer tax from
the business generated from such PE, is initially on the Revenue. The
Court observed as follows:

‘16. The Income-tax Act,
in particular Section 90 thereof, does not speak of the concept of a PE. This
is a creation only of the DTAA. By virtue of Article 7(1) of the DTAA, the
business income of companies which are incorporated in the US will be taxable
only in the US, unless it is found that they were PEs in India, in which event
their business income, to the extent to which it is attributable to such PEs,
would be taxable in India. Article 5 of the DTAA set out hereinabove provides
for three distinct types of PEs with which we are concerned in the present
case: fixed place of business PE under Articles 5(1) and 5(2)(a) to 5(2)(k);
service PE under Article 5(2)(l) and agency PE under Article 5(4). Specific and
detailed criteria are set out in the aforesaid provisions in order to fulfil
the conditions of these PEs existing in India. The burden of proving the
fact that a foreign assessee has a PE in India and must, therefore, suffer tax
from the business generated from such PE is initially on the Revenue. With
these prefatory remarks, let us analyse whether the respondents can be brought
within any of the sub-clauses of Article 5.’

In view of above referred
two Supreme Court decisions, it can be said that the initial onus is on the
Revenue and not on the assessee.

PREPARATORY OR AUXILIARY ACTIVITIES TEST

As mentioned above,
Article 5(4) of the OECD MC provides exclusionary clauses in respect of a fixed
place PE provided the activities of a PE, or in case of a combination of
activities the overall activities, are of a preparatory or auxiliary
character. In this connection, the readers may refer to extracts of the
OECD Commentary in this regard discussed in paragraph 4 of the article
published in the BCAJ of August, 2020 in respect of Taxability of the
Liaison Office of a Foreign Enterprise in India.

Further, in the context of
activities of an ‘auxiliary’ character, in National Petroleum
Construction Company vs. DIT (IT) (Supra) the Delhi High Court in paragraph
28 explained as follows:

‘28. The Black’s Law Dictionary defines the word “auxiliary”
to mean as “aiding or supporting, subsidiary”. The word “auxiliary”
owes its origin to the Latin word “auxiliarius” (from auxilium meaning help).
The Oxford Dictionary defines the word auxiliary to mean “providing
supplementary or additional help and support”. In the context of Article
5(3)(e) of the DTAA, the expression would necessarily mean carrying on
activities, other than the main business functions, that aid and support the
Assessee. In the context of the contracts in question, where the main
business is fabrication and installation of platforms, acting as a
communication channel would clearly qualify as an activity of auxiliary
character – an activity which aids and supports the Assessee in carrying on its
main business.’

BEPS Report on Action 7 – Preventing
the Artificial Avoidance of Permanent Establishment Status

When the exceptions to the
definition of PE that are found in Article 5(4) of the OECD Model Tax
Convention were first introduced, the activities covered by these exceptions
were generally considered to be of a preparatory or auxiliary nature.

Since the introduction of
these exceptions, however, there have been dramatic changes in the way that
business is conducted. Many such challenges of a digitalised economy are
outlined in detail in the Report on Action 1, Addressing the Tax Challenges
of the Digital Economy. Depending on the circumstances, activities
previously considered to be merely preparatory or auxiliary in nature may nowadays
correspond to core business activities. In order to ensure that profits derived
from core activities performed in a country can be taxed in that country,
Article 5(4) is modified to ensure that each of the exceptions included therein
is restricted to activities that are otherwise of a ‘preparatory or auxiliary’
character.

BEPS concerns related to
Article 5(4) also arose from what is typically referred to as the
‘fragmentation of activities’. Given the ease with which multinational
enterprises may alter their structures to obtain tax advantages, it was
important to clarify that it is not possible to avoid PE status by fragmenting
a cohesive operating business into several small operations in order to argue
that each part is merely engaged in preparatory or auxiliary activities that
benefit from the exceptions of Article 5(4).

Article 13 of
Multilateral Instrument (MLI) – Artificial avoidance of Permanent Establishment
status through the Specific Activity Exemptions

MLI has become effective
in India from 1^st April, 2020 and it will affect many Indian DTAAs
post MLI because, wherever applicable, MLI will impact the covered tax
agreements. Article 13 of MLI deals with the artificial avoidance of PE through
specific activity exemptions, i.e., activities which are preparatory or
auxiliary in nature, and provides two options, i.e. ‘Option A’ and ‘Option B’.

India
has opted for ‘Option A’, which continues with the existing list of exempted
activities from (a) to (e) in Article 5(4), but has added one more sub-clause
(f) which states that the maintenance of a fixed place of business solely for
any combination of activities mentioned in sub-paragraphs (a) to (e) is covered
in the exempt activities, provided all the activities mentioned in sub-clauses
(a) to (e) or a combination of these activities must be preparatory or
auxiliary in nature. Therefore, as per modified Article 5(4), in order to be
exempt from fixed place PE, each activity on a standalone basis as well as a
combination of activities should qualify as preparatory or auxiliary activity
test.

INDIAN JUDICIAL PRECEDENTS

On the issue of whether a
PO / BO constitutes a fixed place PE in India, there are mixed judicial
precedents, primarily based on the facts of each case. In addition to various Supreme
Court cases mentioned and discussed above, there are many other judicial
precedents in this regard.

BO Cases

In a few cases, based on
the peculiar facts of each case, the Tribunals and courts have held that a BO
does not constitute a fixed place PE in India. In this regard, useful reference
can be made to the following case: Whirlpool India Holdings Ltd. vs. DDIT
IT [2011] 10 taxmann.com 31 (Delhi).

However, in the following
case it has been held that a BO constitutes a fixed place PE in India: Hitachi
High Technologies Singapore Pte Ltd. vs. DCIT [2020] 113 taxmann.com 327
(Delhi-Trib.).

In the case of Wellinx
Inc. vs. ADIT IT [2013] 35 taxmann.com 420 (Hyderabad-Trib.), where it
was contended by the assessee that the income of the BO is not taxable in
India, the ITAT held that services performed by a branch office are on account
of outsourcing of commercial activities by its head office, and income arising
out of such services rendered would be taxable under article 7(3) of the
India-USA DTAA.

PO Cases

Similarly, in the case of
POs, based on the factual matrix the following cases have been decided in
favour of assessees as well as the Revenue:

In favour of the
assessees:

Sumitomo
Corporation vs. DCIT [2014] 43 taxmann.com 2 (Delhi-Trib.);

National
Petroleum Construction Company vs. DIT (IT) [2016] 66 taxmann.com 16 (Delhi);

HITT Holland
Institute of Traffic Technology B.V. vs. DDIT (IT) [2017] 78 taxmann.com 101
(Kolkata-Trib.).

In favour of the Revenue:

Voith Paper
GmbH vs. DDIT [2020] 116 taxmann.com 127 (Delhi-Trib.);

Orpak Systems
Ltd. vs. ADIT (IT) [2017] 85 taxmann.com 235 (Mumbai-Trib.).

KEY POINTS OF JUDGMENT OF THE SUPREME COURT IN SHIL

The Supreme Court in this
case has clearly established that facts are important in deciding about the
existence of a fixed place PE in India, while principles of interpretations
more or less remain constant. It is imperative that one must minutely look into
the facts and actual activities to decide existence of a fixed place PE in case
of a PO / BO.

The key points of this
judgment can be summarised as under:

In deciding whether a
project office constitutes a fixed place PE, the entire set of documentation
including the relevant Board resolutions, application to RBI and approval of
the RBI, should be read minutely and understood in their entirety.

The detailed factual and
functional analysis of the actual activities and role of PO / BO in India is
crucial in determining a PE. It would be necessary to determine whether the PO
/ BO carries on business / core business or the main business of the foreign
enterprise in India.

The nature of expenses
debited in the accounts of the PO / BO throws light and cannot be brushed aside
on the ground that the accounts are entirely in the hands of the assessee. They
do have relevance in determining the issue in totality.

It reiterates that the
initial onus is on the Revenue to prove the existence of a fixed placed PE in
India.

Even post-MLI, the Supreme
Court ruling in SHIL’s case should help in interpretation on a fixed place PE
issue.

CONCLUSION

The issue of existence of
a fixed place PE in case of a PO / BO has been a subject matter of debate
before the ITAT and courts for long. The ruling of the Supreme Court in SHIL’s case
endorses the settled principles on fixed place PE in the context of a PO of a
turnkey project. The Supreme Court reiterated that a fixed place PE emerges
only when ‘core business’ activities are carried on in India. The Court brings
forth more clarity on the existence of a fixed place PE or otherwise in case of
a PO / BO and should instil confidence in multinationals to do business in
India and bring much needed certainty in this regard.

shailesh.kwebmaker

COPARCENARY RIGHT OF A DAUGHTER IN FATHER’S HUF: FINAL TWIST IN THE TALE?

INTRODUCTION

The Hindu Succession
(Amendment) Act, 2005 (‘2005 Amendment Act’) which was made operative from 9^th
September, 2005, was a path-breaking Act which placed Hindu daughters on an
equal footing with Hindu sons in their father’s Hindu Undivided Family by
amending the age-old Hindu Succession Act, 1956 (‘the Act’). However, while it
ushered in great reforms it also left several unanswered questions and
ambiguities. Key amongst them was to which class of daughters did the 2005
Amendment Act apply? The Supreme Court by two important decisions had answered
some of these questions and helped clear a great deal of confusion. However,
just when one thought that things had been settled, a larger bench of the Apex
Court has turned the decision on its head and come out with a more liberal
interpretation of the law. Let us analyse the Amendment and the old and the new
decisions to understand the situation in greater detail.

THE 2005 AMENDMENT ACT

First, let us understand
the Amendment to put the issue in perspective. The Hindu Succession (Amendment)
Act, 2005 amended the Hindu Succession Act, 1956 which is one of the few
codified statutes under Hindu Law. It applies to all cases of intestate succession
by Hindus. The Act applies to Hindus, Jains, Sikhs, Buddhists and to any person
who is not a Muslim, a Christian, a Parsi or a Jew. Any person who becomes a
Hindu by conversion is also covered by the Act. The Act overrides all Hindu
customs, traditions and usages and specifies the heirs entitled to such
property and the order or preference among them. The Act also deals with some
important aspects pertaining to an HUF.

By the 2005 Amendment Act,
Parliament amended section 6 of the Hindu Succession Act, 1956 and the amended
section was made operative from 9^th September, 2005. Section 6 of
the Hindu Succession Act, 1956 was totally revamped. The relevant portion of
the amended section 6 is as follows:

‘6. Devolution of interest
in coparcenary property.?(1) On and from the commencement of the Hindu
Succession (Amendment) Act, 2005 (39 of 2005), in a Joint Hindu family governed
by the Mitakshara law, the 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;

(c) 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:

Provided that nothing
contained in this sub-section shall affect or invalidate any disposition or
alienation including any partition or testamentary disposition of property
which had taken place before the 20^th day of December, 2004.’

Thus, the amended section
provides that a daughter of a coparcener shall become by birth a coparcener in
her own right in the same manner as the son and, further, she shall have the
same rights in the coparcenary property as she would have had if she had been a
son. It also provides that she shall be subject to the same liabilities in
respect of the coparcenary property as a son. Accordingly, the amendment
equated all daughters with sons and they would now become coparceners in their
father’s HUF by virtue of being born in that family. She has all rights and
obligations in respect of the coparcenary property, including testamentary
disposition. Not only would she become a coparcener in her father’s HUF, but
she could also make a will for the same.

One issue which remained
unresolved was whether the application of the amended section 6 was prospective
or retrospective?

Section 1(2) of the Hindu
Succession (Amendment) Act, 2005, stated that it came into force from the date
it was notified by the Government in the Gazette, i.e., 9^th
September, 2005. Thus, the amended section 6 was operative from that date.
However, did this mean that the amended section applied to:

(a) daughters born after
that date,

(b) daughters married
after that date, or

There was no clarity under
the Act on this point.

PROSPECTIVE APPLICATION UPHELD

The Supreme Court, albeit
in a different context, clarified that the 2005 Amendment Act did not seek to
reopen vesting of a right where succession has already taken place. According
to the Supreme Court, ‘the operation of the Statute is no doubt prospective
in nature… the 2005 Act is not retrospective, its application is prospective” –
G. Sekar vs. Geetha (2009) 6 SCC 99.

The Supreme Court has held
in Sheela Devi vs. Lal Chand, (2007) 1 MLJ 797 (SC) that if the
succession was opened prior to the Hindu Succession (Amendment) Act, 2005, the
provisions of the 2005 Amendment Act would have no application.

FATHER-DAUGHTER COMBINATION IS A MUST

Finally, the matter was
settled by a two-Judge Bench of the Apex Court in its decision in the case of Prakash
vs. Phulavati, (2016) 2 SCC 36. The Supreme Court examined the issue in
detail and held that the amendment was prospective and not retrospective. It
further held that the rights under the Hindu Succession Act Amendment were
applicable to living daughters of living coparceners (fathers) as on 9^th
September, 2005 irrespective of when such daughters were born. It further held
that any disposition or alienation including a partition of the HUF which may
have taken place before 20^th December, 2004 (the cut-off date
provided under the 2005 Amendment Act) as per law applicable prior to the said
date, would remain unaffected. Thus, as per the above Supreme Court decision,
in order to claim benefit what was required was that the daughter should be
alive and her father should also be alive on the date of the amendment, i.e., 9^th
September, 2005. Once this condition was met, it was immaterial whether the
daughter was married or unmarried. The Court had also clarified that it was
immaterial when the daughter was born.

DAUGHTER BORN BEFORE THE ACT

In Danamma @ Suman
Surpur & Anr. vs. Amar & Ors., (2018) 3 SCC 343, another
two-Judge Bench of the Supreme Court took off from the Prakash case
(Supra) and agreed with it. It held that the Amendment used the words ‘in
the same manner as the son’. It was therefore apparent that both the sons
and the daughters of a coparcener had been conferred the right of becoming
coparceners by birth. It was the very factum of birth in a coparcenary that
created the coparcenary, therefore the sons and daughters of a coparcener
became coparceners by virtue of birth. The net effect of the amendment
according to the Court was that it applied to living daughters of living
coparceners as on 9^th September, 2005. It did not matter whether the
daughters were married or unmarried. It did not matter when the daughters were
born. They might be born even prior to the enactment of the 1956 Act, i.e., 17^th
June, 1956.

THREE-JUDGE VERDICT LAYS DOWN A NEW LAW

A three-Judge Bench of the
Supreme Court in the case of Vineeta Sharma vs. Rakesh Sharma, CA 32601
/2018, Order dated 11^th August, 2020 considered a bunch of
SLPs before it on the issue of the 2005 Amendment Act. The Court by a very
detailed verdict considered the entire genesis of the HUF Law. It held that in
the Mitakshara School of Hindu law (applicable to most parts of India), in a coparcenary
there is unobstructed heritage, i.e., right is created by birth. When right is
created by birth it is called unobstructed heritage. At the same time, the
birthright is acquired in the property of the father, grandfather, or great
grandfather. In case a coparcener dies without leaving a son, right is acquired
not by birth, but by virtue of there being no male issue and is called
obstructed heritage. It is called obstructed because the accrual of right to it
is obstructed by the owner’s existence. It is only on his death that obstructed
heritage takes place. It held that property inherited by a Hindu from his
father, father’s father, or father’s grandfather (but not from his maternal
grandfather) is unobstructed heritage as regards his own male issues, i.e., his
son, grandson, and great-grandson. His male issues acquire an interest in it
from the moment of their birth. Their right to it arises from the mere fact of
their birth in the family, and they become coparceners with their paternal
ancestor in such property immediately on their birth, and in such cases
ancestral property is unobstructed heritage.

Further, any property, the
right to which accrues not by birth but on the death of the last owner without
leaving a male issue, is called obstructed heritage. It is called obstructed
because the accrual of right to it is obstructed by the existence of the owner.
Consequently, property which devolves on parents, brothers, nephews, uncles,
etc. upon the death of the last owner is obstructed heritage. These relations
do not have a vested interest in the property by birth. Their right to it
arises for the first time on the death of the owner. Until then, they have a
mere spes successionis, or a bare chance of succession to the property,
contingent upon their surviving the owner. Accordingly, the Apex Court held
that unobstructed heritage took place by birth and obstructed heritage took
place after the death of the owner.

The Apex Court laid down a
very vital principle that coparcenary right, under section 6 (including
after Amendment), is given by birth which is called unobstructed heritage.
It is not a case of obstructed heritage depending upon the owner’s death. Thus,
the Supreme Court concluded that a coparcener’s father need not be alive
on 9^th September, 2005, i.e., the date of the Amendment.

The Court observed that
the Amendment was a gender bender inasmuch as it sought to achieve removing ‘gender
discrimination to a daughter who always remains a loving daughter’. It
further held that though the rights could be claimed, w.e.f. 9^th
September, 2005, the provisions were of a retroactive application, i.e., they
conferred benefits based on the antecedent event and the Mitakshara coparcenary
law should be deemed to include a reference to a daughter as a coparcener.
Under the amended section 6, since the right was given by birth, i.e., an
antecedent event, the provisions concerning claiming rights operated on and
from the date of the Amendment Act. Thus, it is not at all necessary that the
father of the daughter should be living as on the date of the Amendment, as she
has not been conferred the rights of a coparcener by obstructed heritage. The
effect of the amendment is that a daughter is made coparcener with effect from
the date of the amendment and she can claim partition also, which is a
necessary concomitant of the coparcenary. Section 6(1) recognises a joint Hindu
family governed by Mitakshara Law. The coparcenary must exist on 9^th
September, 2005 to enable the daughter of a coparcener to enjoy rights
conferred on her. As the right is by birth and not by dint of inheritance, it
is irrelevant whether a coparcener whose daughter is conferred with the rights
is alive or not. Conferral is not based on the death of a father or other
coparcener.

The Court also held that
the daughter should be living on 9^th September, 2005. In the
substituted section 6, the expression ‘daughter of a living coparcener’ has not
been used. One corollary to this explanation would mean that if the daughter
has died before this date, then her children cannot become coparceners in their
maternal grandfather’s HUF. However, if she dies on or after this date, then
her children can become coparceners in their maternal grandfather’s HUF.

The Court explained one of
the implications of becoming a coparcener was that a daughter has now become
entitled to claim partition of coparcenary w.e.f. 9^th September,
2005, which was a vital change brought about by the statute. Accordingly, the
Supreme Court in Vineeta Sharma vs. Rakesh Sharma, CA 32601/2018, Order
dated 11^th August, 2020 expressly overturned its earlier
verdict in Prakash vs. Phulavati, (2016) 2 SCC 36 and those
portions of Danamma @ Suman Surpur & Anr. vs. Amar & Ors., (2018)
3 SCC 343 which approved of the decision in Prakash vs. Phulavati.

EXCEPTION TO THE RULE

Section 6(5) of the Act
provides that the Amendment will not apply to an HUF whose partition has been
effected before 20^th December, 2004. For this purpose, the partition
should be by way of a registered partition deed / a partition brought out by a
Court Decree. In the Amendment Bill even oral partitions, supported by
documentary evidence, were allowed. However, this was dropped at the final
stage since the intention was to avoid any sham or bogus transactions in order
to defeat the rights of coparcener conferred upon daughters by the 2005
Amendment Act.

It was argued before the
Court that the requirement of a registered deed was only directory and not
mandatory. But the Court negated this argument. It held that the intent of the
provisions was not to jeopardise the interest of the daughter but to take care
of sham or frivolous transactions set up in defence unjustly to deprive the
daughter of her right as coparcener. In view of the clear provisions of section
6(5), the intent of the Legislature was clear and a plea of oral partition was
not to be readily accepted. However, in exceptional cases where the plea of
oral partition was supported by public documents and partition was finally
evinced in the same manner as if it had been effected by a decree of a court,
it may be accepted. A plea of partition based on oral evidence alone could not
be accepted and had to be rejected outright.

CONCLUSION

The conclusion arrived at
by the Supreme Court in Vineeta Sharma’s case (Supra) undoubtedly
appears to be correct as compared to the earlier decisions on the point. A
beneficial Amendment was sought to be made restrictive and the same has now
been set right. However, consider the turmoil and the legal complications which
this decision would now create. Several disputes in HUFs were created by the
2005 Amendment and those raging fires were settled by the decision in Prakash
vs. Phulavati (Supra). It has been almost five years since this
decision was rendered. Now comes a decision which overrules the settled law.
One can expect a great deal of litigation on this issue now that the
restrictive parameters set down have been removed. In respect of cases pending
before different High Courts and subordinate courts, the Supreme Court in Vineeta
Sharma’s case (Supra) has held that daughters cannot be deprived of
their equal right and hence it requested that all the pending matters be
decided, as far as possible, within six months. However, what happens to cases
where matters are settled? Would they be reignited again?

One wonders
how Parliament can enact such a path-breaking enactment and not pay heed to a
simple matter of its date of applicability. Could this issue not have been
envisaged at the drafting stage? This is a classic case of a very advantageous
and laudable Amendment suffering from inadequate drafting! Is it not strange
that while the language of some of our pre-Independence Acts (such as the
Contract Act 1872, Transfer of Property Act 1882, Indian Succession Act 1925,
etc.) have stood strong for over a century, some of our recent statutes have
suffered on the drafting front. Ultimately, matters have to travel to the
Supreme Court leading to a lot of wastage of time and money. One can only hope
that this issue of the coparcenary right of a daughter in her father’s
HUF is settled once and for all. Or are there going to be some more
twists in this tale?

If you disrupt yourself, you
will be able to manage and even thrive through disruption.

—
Whitney Johnson, Executive Coach and Author

shailesh.kwebmaker

DISGORGEMENT OF ILL-GOTTEN GAINS – A US SUPREME COURT JUDGMENT AND A SEBI COMMITTEE REPORT

BACKGROUND

One of the
important enforcement tools that SEBI has against wrong-doers in capital
markets is disgorging their ill-gotten gains. This means taking away by SEBI
those gains that such persons have made from their wrong-doings. For example,
an insider may trade based on unpublished price-sensitive information and make
profits. SEBI would take away, i.e., disgorge, such profits and deposit them in
the Investors’ Protection and Education Fund. There can be numerous other
similar cases of ill-gotten gains such as through price manipulation, excessive
remuneration, fraudulent schemes of issue of securities, etc.

Disgorgement is
not a punitive action and thus is limited to the gains made. Penalty and other
actions may be over and above such disgorgement. The idea of disgorgement is
that a wrong-doer should not retain the profits from his wrong-doing.

While this power
is expressly available to SEBI under law (thanks to a curiously worded
‘Explanation’ to section 11B), there are many areas on which there is ambiguity
and lack of clarity. Recently, however, there have been two developments that
finally have highlighted these areas of concern in relation to disgorgement.
The first is a judgment of the Supreme Court of the USA (in Charles C.
Liu et al vs. SEC, Supreme Court dated 22^nd June 2020, No. 18-501
– referred to here as Liu), and the second is the report of the
high-level committee under the Chairmanship of Justice A.R. Dave (Retired
Judge, Supreme Court of India) dated 16^th June, 2020 (‘the Report’).

The US judgment
in Liu has highlighted three qualifications to the absolute power
of disgorgement of the Securities and Exchange Commission (SEC) in the context
of the prevailing law. The Report, on the other hand, makes recommendations for
amendments in these areas, although to some extent different from what the US
judgment in Liu has held. These developments need discussion
because disgorgement happening at present in India (and even in the US) is
often ad hoc, arbitrary and even unfair.

For example, the
Securities Appellate Tribunal in Karvy Stock Broking Ltd. vs. SEBI
[(2008) 84 SCL 208] pointed out the arbitrary manner in which
disgorgement was ordered by the Securities and Exchange Board of India. Persons
who rendered services, and thus were part of the alleged scam, were required to
disgorge the entire illegal gains. Similar orders of disgorgement were,
however, not made against others in the same matter who had made the major
gains.

There are no
legal or judicial guidelines regarding the manner of disgorgement except some
generic remarks in SEBI orders or SAT decisions. Some of the issues raised in Liu
and the Report can be strongly raised before SEBI and appellate authorities in
the hope that they would be ruled on, thus creating clarity and precedents. In
some or all areas, the law itself could be amended, thus creating a strong, transparent
and comprehensive base that SEBI and parties can rely on.

PRESENT PROVISIONS RELATING TO
DISGORGEMENT IN INDIA UNDER THE SEBI ACT, 1992

SEBI has ordered
disgorgement of ill-gotten gains in numerous cases over the years. While
disgorgement is accepted as an inherent power based on equity, the basis in
terms of specific legal provisions in the Act is almost a belated
after-thought. It is in the form of an ‘Explanation’ to section 11B of the SEBI
Act inserted in 2013. The Explanation declares that SEBI has the power to
disgorge any profit made / loss avoided by any transaction or activity in
contravention of the Act or Regulations made thereunder. Such ‘wrongful gain
made or loss averted’ can be disgorged. No further guidance or details are
given in the provision or in any Rules / Regulations / Circulars.

Thus, while
power has been granted in the law, many aspects remain unclear and thus result
in arbitrary actions in many cases that have now been highlighted, particularly
through the US judgment and the Report.

Who should be
made to disgorge the profits? Should every person who has contravened the law
be made to disgorge the full profits, or should each person be made to disgorge
the profits that he has made? In particular, can a wrong-doer be made to pay
even the profits earned by another wrong-doer in the same wrong but who cannot
or does not pay the amount? In short, should the liability be joint and
several? If yes, are all wrong-doers to be subject to such joint and several
liability, or only certain specific categories of such wrong-doers should be so
subject?

Should the gross
gains earned by a wrong-doer be fully disgorged or only his net gains
that have gone into his pocket? In other words, should any deductions be
allowed for expenses, taxes, etc. incurred while earning such profits?

Should any
account be taken of losses incurred by the victims or should the disgorgement
be only of the gains made?

Who should keep
such disgorged profits? Should they be paid to those who incurred the losses,
or can SEBI / Government keep them? Can an employer disgorge profits earned by
an employee through violations of Securities Laws?

THE DECISION OF THE US SUPREME COURT IN
LIU

Summarised and simplified, these were the
facts: A married couple formulated a scheme to defraud foreign nationals,
inviting them to invest in certain commercial enterprises. This, it was
promised, would enable them to obtain permanent residence in the USA. It turned
out that this was allegedly a scam and only a small part of such amounts raised
(about $27 million) were invested for such purposes. A substantial portion of
the rest was diverted to personal accounts. Such acts were found to be in
violation of the relevant laws and SEC ordered disgorgement.

SEC, for the
purpose of disgorgement, applied a provision that enabled grant of ‘equitable
relief that may be appropriate or necessary for the benefit of investors’. The
core question before the Court was whether such disgorgement satisfied this
condition of ensuring equitable relief.

The Court
upheld the right of SEC to disgorge the ill-gotten gains. However, three
conditions were placed: First, joint and several liability cannot be placed on
all the guilty persons, except in cases where the parties are partners in the
wrong-doing. Second, the condition that it is for the benefit of investors
should be satisfied. In the ordinary course, if the disgorged proceeds are used
to compensate the loss caused to investors, the condition would be satisfied.
In other cases, compliance of this condition would have to be demonstrated.
Third, it was held that it would not be correct to disgorge all the profits
without giving appropriate deductions. While monies that go into the pocket of
the wrong-doer cannot be allowed as deductions, fair deductions on legitimate
expenses related to the activity that was in violation of law could be allowed.

Indian
Securities Laws do have parallels with those in the USA and thus judicial
developments there are considered by SEBI and Courts here. The judgment is not
only on certain general legal principles but also lays down issues that have
relevance even in the Indian context. However, the language of the law in India
is specifically different in some respects and hence it cannot be directly
applied to India in all aspects. For example, there is no condition in the
Explanation to section 11B that the disgorged amount should be for the benefit
of investors. It is also specifically stated in section 11(5) that the amount
disgorged should be credited to the IPEF fund, the uses of which have been
prescribed in the regulations. Thus, the decision in Liu, while
raising interesting questions, would have to be applied after considering the
niceties of specific and different provisions in India.

REPORT OF JUSTICE A.R. DAVE COMMITTEE

The Report is
fairly detailed and covers suggestions for reforms in certain major areas. In
one of the sections, where suggestions have been given relating to
quantification of penalties and the like, the subject of disgorgement has been
discussed in some detail. Notably, the Report was released before the decision
in Liu was rendered. Nevertheless, the issues that came up in Liu
have also been discussed to an extent.

The Report notes
the language of the Explanation and its possible interpretations. A literal
view could be that a wrong-doer could be held liable to disgorge only the gains
that have gone into his pocket and he would not be made to pay what other
wrong-doers gained. However, the Report opines that the better view is that the
gains made by all wrong-doers can be recovered from each person. The Committee,
however, suggests that the language should be made more clear and specific to provide
for joint and several liability of all persons who indulged in such
wrong-doing.

It also opines that disgorgement should be
of net gains and not of gross gains. It suggests detailed guidance on what
deductions should be allowed from the gains, so that only the net gains are
disgorged. Interestingly, income-tax is allowed as a deduction where it has
been incurred on gains from certain insider trading but not, say, where there
are identifiable investors who have lost money.

The Report also
notes that SEBI has no powers of compensating investors by helping them recover
their losses from the wrong-doers. For recovering their losses, the victims
have to approach civil courts. It also notes that it is the gains made that can
be disgorged and not the losses caused to others. Such losses can, however, be
taken into account for levy of penalty.

The Report makes
detailed and specific amendments to the law. It has been released for public
comments after which SEBI may implement it by amending the law.

CONCLUSION

Wrong-doings in
securities laws usually have a motive of financial gain. If the gains are
disgorged consistently, the motive is frustrated and wrong-doers lose their
incentive. That, coupled with penalty and other enforcement and even prosecution,
should help curb the ills in our securities markets.

The law relating
to disgorgement, however, continues to remain vague and opaque, leading to
arbitrary actions. The absence of guidelines also leads to inconsistent
actions. Appellate authorities also face the same problem of absence of a base
in law in terms of clear provisions.

Even the
decision in Liu is general in nature though broad guidelines are
given. Fortunately, we have the detailed and scholarly report of Justice Dave
and one hopes that it is quickly implemented after due consideration.

shailesh.kwebmaker

Part A Service Tax

I. HIGH COURT

25. [2020-TIOL-1285-HC-AHM-ST] M/s. Linde Engineering India Pvt. Ltd. vs.
Union of India Date of order: 16^th January, 2020

Services rendered by a
company located in India to its holding company outside India not being
establishments of distinct persons, are considered as export of service

FACTS

The petitioner is engaged
in providing services in India and outside India. Service is provided to their
holding company located outside India. A show cause notice was issued alleging
that the services provided to the holding company being merely an establishment
of a distinct person, cannot be considered as export of service and would fall
within the definition of exempted service, and therefore Rule 6(3) of the
CENVAT Credit Rules, 2004 is applicable and hence a demand is raised for
reversal of credit.

HELD

The Court noted that the
demand is raised on mere misinterpretation of the provisions of the law. The
petitioner and its parent company can by no stretch of the imagination be
considered as the same entity. The petitioner is an establishment in India
which is a taxable territory and its 100% holding company, which is the other
company in the non-taxable territory, cannot be considered as establishment so
as to treat them as distinct persons for the purpose of rendering services.
Thus, services provided to its holding company are considered as export of
service as per Rule 6A of the Service Tax Rules, 1994.

II. TRIBUNAL

26. [2020-TIOL-1178-CESTAT-ALL] M/s Encardio-Rite Electronics Pvt. Ltd. vs.
Commissioner of Appeals, Central Excise and Service Tax Date of order: 25^th November, 2019

Even though the
sub-contractor and the main contractor are located in the taxable territory,
since the service is consumed in the state of Jammu and Kashmir the service is
not taxable

FACTS

The appellants are sub-contractors
engaged in laying of tracks for the Indian Railways and work associated with the construction of dams. The entire activity is performed in the state of
Jammu and Kashmir. The Revenue argues that since both the sub-contractor and
the main contractor are located in the taxable territory in view of Rule 6 of
the Taxation of Services (Provided from Outside and Received in India) Rules
2006 as well as Rule 8 of the Place of Provision of Service Rules, 2012, the service is taxable and therefore tax is leviable.

HELD

The Tribunal primarily
noted that the services were provided and consumed in the state of Jammu and
Kashmir. It was held that the provisions of the rule cannot override provisions
of the sections provided in the Act. Section 64 clearly lays down that provisions
of Chapter V of the Finance Act, 1994 which deals with service tax are not
applicable in the state of Jammu and Kashmir. Accordingly, since the service is
consumed in a non-taxable territory, the demand of service tax is not
sustainable.

27. [2020-TIOL-1167-CESTAT-CHD] State Bank of India vs. Commissioner
(Appeals) of CGST, Ludhiana Date of order: 27^th February, 2019

Refund cannot be rejected
on technical grounds that the payment of tax sought to be refunded was made in
a wrong service code

FACTS

The appellant is a banking
company providing banking and financial services. They received services from a
contractor and discharged service tax under reverse charge on works contract
service. However, while making the payment the same was made under the category
of banking and financial services. Since they were not required to pay service
tax under reverse charge, they filed a refund claim. The claim was rejected on
the ground that they have failed to show that the payment was made under works contract
service.

HELD

The Tribunal noted that
whatever service tax was payable by the appellant has been paid under banking
and financial services. They have also produced a certificate issued by the
chartered accountant showing that the service tax of which the refund claim is
filed is none other than the works contract service. The Tribunal accordingly
held that the refund claim cannot be rejected on technical grounds and the
appeal was allowed.

28. [2020-TIOL-1166-CESTAT-CHD] M/s Hitachi Metals India Pvt. Ltd. vs.
Commissioner of Central Excise and Service Tax Date of order: 3^rd April, 2019

The provisions of section
11B are not applicable when tax is not required to be paid

FACTS

The appellant entered into
an agreement with a foreign company for promotion of products in India by way
of customer identification and contact, communication to or from, inquiries
relating to business, co-operate with and represent companies in its
promotional efforts, etc. Due to confusion and lack of clarity, the appellant
paid service tax during the period from April, 2006 to February, 2008 for the
services provided to their foreign-based service recipient for the payment
received against the services in convertible foreign exchange. A refund claim
was filed which was rejected on the ground that the same is filed beyond the
time limit prescribed u/s 11B of the Central Excise Act, 1944. Accordingly, the
present appeal is filed.

HELD

The
Tribunal relying on the decision in the case of National Institute of
Public Finance and Policy vs. Commissioner of Service Tax
[2018-TIOL-1746-HC-DEL-ST] held that since the appellant was not liable
to pay service tax, the time limit prescribed u/s 11B of the Central Excise
Act, 1944 for filing of refund claim is not applicable.

shailesh.kwebmaker

TAXATION OF RECEIPT BY RETIRING PARTNER

ISSUE FOR CONSIDERATION

On retirement of a
partner from a partnership firm, at times the outgoing partner may be paid an amount
which is in excess of his capital, current account and loan balances with the
firm. Such amount paid to the outgoing partner is often determined on the basis
of an informal valuation of the net assets of the firm, or of the business of
the firm.

Taxation of such
receipts by a partner on retirement from a partnership firm has been an issue
which has been the subject matter of disputes for several decades. As far back
as in September, 1979, the Supreme Court in the case of Malabar Fisheries
Co. vs. CIT 120 ITR 49, held that dissolution of a firm did not amount
to extinguishment of rights in partnership assets and was thus not a ‘transfer’
within the meaning of section 2(47). In 1987, the Supreme Court, in a short
decision in Addl. CIT vs. Mohanbhai Pamabhai 165 ITR 166,
affirmed the view taken by the Gujarat High Court in 1973 in the case of CIT
vs. Mohanbhai Pamabhai 91 ITR 393. In that case, the Gujarat High Court
had held that when a partner retires from a partnership and the amount of his
share in the net partnership assets after deduction of liabilities and prior
charges is determined on taking accounts on footing of notional sale of
partnership assets and given to him, what he receives is his share in the
partnership and not any consideration for transfer of his interest in
partnership to the continuing partners. Therefore, charge of capital gains tax
would not apply on such retirement.

The law is amended
by the Finance Act, 1987 with effect from Assessment Year 1988-89 by insertion
of section 45(4) and simultaneous deletion of section 47(ii). Section 47(ii)
earlier provided that distribution of assets on dissolution of a firm would not
be regarded as a transfer. Section 45(4) now provides as under:

‘The profits or
gains arising from the transfer of a capital asset by way of distribution of
capital assets on the dissolution of a firm or other association of persons or
body of individuals (not being a company or a co-operative society) or
otherwise, shall be chargeable to tax as the income of the firm, association or
body, of the previous year in which the said transfer takes place and, for the
purposes of section 48, the fair market value of the asset on the date of such
transfer shall be deemed to be the full value of the consideration received or
accruing as a result of the transfer.’

Section 45(4), with
its introduction, so far as the firm is concerned, provides for taxing the firm
on distribution of its assets on dissolution or otherwise. However, even
subsequent to these amendments, the taxability of the excess amounts received
by the partner on retirement from the firm, in his hands, has continued to be a
matter of dispute before the Tribunals and the High Courts. While the Pune,
Hyderabad, Mumbai and Bangalore benches have taken the view that such excess
amounts are chargeable to tax as capital gains in the hands of the partner, the
Mumbai, Chennai, Bangalore and Hyderabad benches have taken the view that such
amounts are not taxable in the hands of the retiring partner. Further, while
the Bombay, Andhra Pradesh and Madras High Courts have taken the view that such
amount is not taxable in the hands of the partner, the Delhi High Court has
taken the view that it is taxable in the hands of the partner as capital gains.

THE HEMLATA S. SHETTY CASE

The issue came up
before the Mumbai bench of the Tribunal in the case of Hemlata S. Shetty
vs. ACIT [ITA Nos. 1514/Mum/2010 and 6513/Mum/2011 dated 1st December, 2015].

In this case,
relating to A.Y. 2006-07, the assessee was a partner in a partnership firm of
D.S. Corporation where she had a 20% profit share. The partnership firm had
acquired a plot of land in September, 2005 for Rs. 6.50 crores. At that time,
the original capital contributions of the partners was Rs. 3.20 crores, the
partners being the assessee’s husband (Sudhakar M. Shetty) and another person.
The assessee became a partner in the partnership firm on 16^th
September, 2005, contributing a capital of Rs. 52.50 lakhs. On 26^th
September, 2005 three more partners were admitted to the partnership firm. Most
of the tenants occupying the land were vacated by paying them compensation, and
the Ministry of Tourism’s approval was received for setting up a five-star
hotel on the plot of land.

On 27^th
March, 2006 the assessee and her husband retired from the partnership firm, at
which point of time the land was revalued at Rs. 193.91 crores and the surplus
on revaluation was credited to the partners’ capital accounts. The assessee and
her husband each received an amount of Rs. 30.88 crores on their retirement
from the partnership firm, over and above their capital account balances.

The A.O. noted that
the revaluation of land resulted in a notional profit of Rs. 154.40 crores for
the firm and 20% share therein of the assessee and her husband at Rs. 30.88
crores each was credited to their accounts. No tax was paid on such revalued
profits on the plea that those amounts were exempt u/s 10(2A). The A.O. held
that the excess amount received on retirement from the partnership firm was
liable to tax as short-term capital gains as there was a transfer within the
meaning of section 2(47) on retirement of the partner.

The Commissioner
(Appeals), on appeal, confirmed the order of the A.O.

Before the
Tribunal, on behalf of the assessee, reliance was placed on a decision of the
Bombay High Court in the case of Prashant S. Joshi vs. ITO 324 ITR 154,
where the Bombay High Court had quashed the reassessment proceedings initiated
to tax such excess amount received on retirement of a partner from the
partnership firm, on the ground that the amount was a capital receipt not
chargeable to tax and the reopening of the case was not maintainable.

It was argued on
behalf of the Department that the Tribunal had decided the issue against the
assessee in the case of the assessee’s husband, Sudhakar M. Shetty vs.
ACIT 130 ITD 197, on 9^th September, 2010. In that case, the
Tribunal had referred to the observations of the Bombay High Court in the case
of CIT vs. Tribhuvandas G. Patel 115 ITR 95, where the Court had
held that there were two modes of retirement of a partner from a partnership
firm; in one case, a retiring partner, while going out, might assign his
interest by a deed; and in the other case, he might, instead of assigning his
interest, take the amount due to him from the firm and give a receipt for the
money and acknowledge that he had no more claim on his co-partners. In that
case, the Bombay High Court held that where, instead of quantifying his share
by taking accounts on the footing of a notional sale, the parties agreed to pay
a lump sum in consideration of the retiring partner assigning or relinquishing
his share or right in the partnership and its assets in favour of the
continuing partners, the transaction would amount to transfer within the
meaning of section 2(47). This view was followed by the Bombay High Court in
subsequent decisions in the cases of CIT vs. H.R. Aslot 115 ITR 255
and N.A.Mody vs. CIT 162 ITR 420, and the Delhi High Court in the
case of Bishan Lal Kanodia vs. CIT 257 ITR 449.

In the case of Sudhakar
Shetty (Supra), the Tribunal observed that in deciding the case of Prashant
S. Joshi (Supra), the Bombay High Court had not considered its earlier
decisions in the cases of N.A. Mody (Supra) and H.R. Aslot
(Supra) and the said decision was rendered by the Court in the context
of the validity of the notice u/s 148, and therefore the ratio of the
decision in that case did not apply to the facts of the case before it in the Sudhakar
Shetty case.

On behalf of the
assessee, Hemlata Shetty, it was pointed out to the Tribunal that, after the
Tribunal’s decision in Sudhakar Shetty’s case, the Department had
reopened the assessment of the firm where the assessee and her husband were
partners and assessed the notional profits as income in the hands of the firm
u/s 45(4). It was argued that the Department had realised the mistake that it
could not have assessed the partners on account of receipt on retirement u/s
45(4). It was therefore pointed out that due to subsequent developments, the
facts and circumstances had changed from those prevalent when the Tribunal had
decided the case of Sudhakar Shetty.

It was further
argued on behalf of the assessee that after the judgment in the Sudhakar
Shetty case on 9^thSeptember, 2010, a similar matter had
been decided by the Mumbai bench of the Tribunal in the case of R.F.
Nangrani HUF vs. DCIT [ITA No. 6124/Mum/2012] on 10^th
December, 2014, where the decision in Sudhakar Shetty’s case was
also referred to. The issue in that case was similar to the issue in the case
of Hemlata Shetty. In R.F. Nangrani HUF’s case, the
Tribunal had followed the decision of the Supreme Court in the case of CIT
vs. R. Lingamallu Rajkumar 247 ITR 801, where it had held that the
amount received on retirement by a partner was not liable to capital gains tax,
and the Tribunal in that case had also considered the decision of the Hyderabad
bench in ACIT vs. N. Prasad 153 ITD 257, which had taken a
similar view. It was argued on behalf of the assessee that when there were
conflicting decisions delivered by a bench of equal strength, the later
judgment should be followed, especially when the earlier judgment was referred
to while deciding the matter in the later judgment.

The Tribunal noted
that in the case of CIT vs. Riyaz A. Shaikh 221 Taxman 118, the
Bombay High Court referred to the fact that the Tribunal in that case had
followed the Bombay High Court decision in Prashant S. Joshi’s
case, while noting that Tribuvandas G. Patel’s case, which had
been followed in N.A. Mody’s case, had been reversed by the
Supreme Court. The Bombay High Court further noted in Riyaz Shaikh’s
case that Prashant Joshi’s case had also noted this fact of
reversal, and that it had followed the decision of the Supreme Court in R.
Lingamallu Rajkumar’s case 247 ITR 801.

The Tribunal
therefore followed the decision of the jurisdictional High Court in Riyaz
Shaikh’s case and held that the amount received by the assessee on
retirement from the partnership firm was not taxable under the head ‘Capital
Gains’.

This decision of
the Tribunal in Hemlata Shetty’s case has been approved by the
Bombay High Court in Principal CIT vs. Hemlata S. Shetty 262 Taxman 324.
R.F. Nangrani HUF’s Tribunal decision has also been approved by the
Bombay High Court in Principal CIT vs. R.F. Nangrani HUF 93 taxmann.com
302. A similar view has also been taken by the Andhra Pradesh High
Court in the case of CIT vs. P.H. Patel 171 ITR 128, though this
related to A.Y. 1973-74, a period prior to the deletion of clause (ii) of
section 47. Further, in the case of CIT vs. Legal Representative of N.
Paliniappa Goundar (Decd.) 143 ITR 343, the Madras High Court also
accepted the Gujarat High Court’s view in the case of Mohanbhai Pamabhai
(Supra) and disagreed with the view of the Bombay High Court in the
case of Tribhuvandas G. Patel (Supra), holding that excess amount
received by a partner on retirement was not taxable.

A similar view has
also been taken by the Mumbai bench of the Tribunal in the case of James
P. D’Silva vs. DCIT 175 ITD 533, following the Bombay High Court
decisions in Prashant S. Joshi and Riyaz A. Shaikh’s
cases and by the Bangalore bench in the case of Prabhuraj B. Appa, 6 SOT
419 and by the Chennai bench in the case of P. Sivakumar (HUF),
63 SOT 91.

SAVITRI KADUR’S CASE

The issue again
came up before the Bangalore bench of the Tribunal recently in the case of Savitri
Kadur vs. DCIT 177 ITD 259.

In this case, the
assessee and another person had formed a partnership with effect from 1^st
April, 2004. Yet another person was admitted as a partner with effect from 1^st
April, 2007, and simultaneously the assessee retired from the firm with effect
from that date. The assessee had a capital balance of Rs. 1.64 crores as on 1^st
April, 2006 and her share in the profit for the year of Rs. 46 lakhs was
credited to her account. The land and building held by the firm was revalued
and her share of Rs. 62.51 lakhs in the surplus on revaluation was credited to
her account. Interest on capital of Rs. 18.12 lakhs was also credited to her
account which, after deducting drawings, showed a balance of Rs. 2.78 crores as
on the date of her retirement. The assessee was paid a sum of Rs. 3.40 crores
on her retirement. The assessee had invested an amount of Rs. 50 lakhs in
capital gains bonds.

The difference of
Rs. 62 lakhs between Rs. 3.40 crores and Rs. 2.78 crores was taxed as capital
gains by the A.O. in her hands. According to the A.O., such amount was nothing
but a payment for her giving up her right in the existing goodwill of the firm,
that there was a transfer u/s 2(47) on her retirement, which was therefore
liable to capital gains tax.

The Commissioner
(Appeals) upheld the order of the A.O., placing reliance on the decision of the
Bombay High Court in the case of CIT vs. A.N. Naik Associates 265 ITR 346,
where the High Court had held that there was a charge to capital gains tax u/s
45(4) when the assets of the partnership were distributed even on retirement of
a partner, and the scope of section 45(4) was not restricted to the case of
dissolution of the firm alone.

On appeal, the
Tribunal observed that it was necessary to appreciate how the act of the
formation, introduction, retirement and dissolution of partnership was used by
assessees as a device to evade tax on capital gains; first by converting an
asset held individually into an asset of the firm and later on retiring from
the firm; and likewise by conversion of capital assets of the firm into assets
of the partners by effecting dissolution or retirement. In that direction, the
Tribunal analysed the background and tax implications behind conversion of
individual assets into assets of partnership, distribution of assets on
dissolution, reconstitution of the firm with the firm continuing whereby a
partner retired and the retiring partner was allotted a capital asset of the
firm for relinquishing all his rights and interests in the partnership firm as
partner, and continuation of the firm after reconstitution whereby a partner
retired and the retiring partner was paid a consideration for relinquishing all
his rights and interests in the partnership firm as partner in any of the
following manner:

(a) on the basis of
amount lying in his / her capital account, or

(b) on the basis of
amount lying in his / her capital account plus amount over and above the sum
lying in his / her capital account, or

The Tribunal
thereafter held that the case of the appellant, on the basis of the facts
before it, was a situation falling under (b) above, meaning that the assessee
on her retirement from the firm was paid on the basis of the amount lying in
her capital account plus an amount over and above the sum lying in her capital
account.

The Tribunal
observed that:

(i) there was no
dispute that there could not be any incidence of tax in situation (a) above on
account of the Supreme Court decision in the case of Additional CIT vs.
Mohanbhai Pamabhai (Supra);

(ii) so far as
situations (b) and (c) were concerned, they had been the subject matter of
consideration in several cases, and there had been conflict of opinion between
courts on whether there would be incidence of tax or not;

(iii) the fact that
there was revaluation of assets of the firm with a resultant enhancement of the
capital accounts of the partners was not relevant.

The Tribunal
further observed that:

(1) the share or
interest of a partner in the partnership and its assets would be property and,
therefore, a capital asset within the meaning of the aforesaid definition. To
this extent, there could be no doubt;

(2) the question
was whether it could be said that there was a transfer of capital asset by the
retiring partner in favour of the firm and its continuing partners so as to
attract a charge u/s 45;

(3) the share or
interest of a partner in the partnership and its assets would be property and,
therefore, a capital asset within the meaning of the aforesaid definition. The
next question was whether it could be said that there was a transfer of capital
asset by the retiring partner in favour of the firm and its continuing partners
so as to attract a charge u/s 45;

(4) the question
whether there would be incidence of tax on capital gains on retirement of a
partner from the partnership firm would depend upon the mode in which
retirement was effected. Therefore, taxability in such a situation would depend
on several factors like the intention, as was evidenced by the various clauses
of the instrument evincing retirement or dissolution, the manner in which the
accounts had been settled and whether the same included any amount in excess of
the share of the partner on the revaluation of assets and other relevant
factors which would throw light on the entire scheme of retirement /
reconstitution;

(5) for the
purposes of computation, what was to be seen was the credit in the capital
account of the partner alone.

The Tribunal,
referring to the observations of the Bombay High Court in the case of Tribhuvandas
G. Patel (Supra), held that the terms of the deed of retirement had to
be seen as to whether they constituted a release of any assets of the firm in
favour of the continuing partners; where on retirement an account was taken and
the partner was paid the amount standing to the credit of his capital account,
there would be no transfer and no tax was exigible; however, where the partner
was paid a lump sum consideration for transferring or releasing his interest in
the partnership’s assets to the continuing partners, there would be a transfer,
liable to tax. The Tribunal noted that the Supreme Court, in appeal in that
case, had held that there was no incidence of tax on capital gains on the
transaction only because of the provisions of section 47(ii), which exempted
the distribution of capital assets on dissolution, even though the facts in the
case in appeal before the Supreme Court were concerning the case of a retiring
partner giving up his rights over the properties of the firm.

The Tribunal
referred to the cases of the Pune bench in the case of Shevantibhai C.
Mehta 4 SOT 94 and the Mumbai bench of the Tribunal in the case of Sudhakar
M. Shetty (Supra) and held that the facts in the case before it were
almost identical to the facts in the case of Sudhakar M. Shetty.

It distinguished
the other cases cited before it on behalf of the assessee on the grounds that
some of those cases related to a period prior to the amendment of the law made
effective from A.Y. 1988-89, or were cases where the issue involved was whether
the reassessment proceedings were valid, or were cases involving the
partnership firm and not the partner, or were cases where the retiring partner
was paid a share in the goodwill of the firm. In short, the Tribunal held that
those cases were not applicable to the facts of the assessee’s case.

The Tribunal
finally upheld the action of the A.O. in taxing the excess paid to the retiring
partner over and above the sum standing to the credit of her capital account as
capital gains. However, it modified the computation of the capital gains by
treating the amount lying to the credit of the partner’s account, including the
amount credited towards goodwill in the partner’s capital account, as a cost
and allowing the deduction thereof. It also held the gains to be long-term
capital gains and allowed exemption u/s 54EC to the extent of investment in
capital gains bonds.

A similar view has
been taken by the other benches of the Tribunal in the cases of Shevantibhai
C. Mehta (Supra), Sudhakar M. Shetty (Supra) and Smt. Girija
Reddy vs. ITO 52 SOT 113 (Hyd)(URO). The Delhi High Court also, in a
case relating to A.Y. 1975-76 (before the amendment), Bishan Lal Kanodia
vs. CIT 257 ITR 449, followed the decision of the Bombay High Court in Tribhuvandas
G. Patel (Supra) to hold that the receipt on retirement was liable to
capital gains tax.

OBSERVATIONS

To understand the
root of the controversy, one would have to go back to the decision of the
Gujarat High Court in the case of CIT vs. Mohanbhai Pamabhai 91 ITR 393,
which was affirmed by the Supreme Court, 165 ITR 166, holding
that there was no transfer of capital assets by a partner on his retirement. In
that case, on retirement, the assessee received a certain amount in respect of
his share in the partnership which was worked out by taking the proportionate
value of a share in the partnership assets, after deduction of liabilities and
prior charges, including an amount representing his proportionate share in the
value of the goodwill. It was this proportionate share in the goodwill which
was sought to be taxed as capital gains by the authorities.

In that case, the
Gujarat High Court held that:

(i) what the
retiring partner was entitled to get was not merely a share in the partnership
assets, he has also to bear his share of the debts and liabilities, and it was
only his share in the net partnership assets, after satisfying the debts and
liabilities, that he was entitled to get on retirement;

(ii) Since it was only in the surplus that the
retiring partner was entitled to claim a share, it was not possible to predicate
that a particular amount was received by the retiring partner in respect of his
share in a particular partnership asset, or that a particular amount
represented a consideration received by the retiring partner for extinguishment
of his interest in a particular partnership asset;

(iii) when the
assessee retired from the firm, there was no transfer of interest of the
assessee in the goodwill or any other asset of the firm;

(iv) no
consideration received or accrued as a result of such transfer of such interest
even if there was a transfer; and

(v) no part of the amount received by the assessee
was assessable to capital gains tax u/s 45.

The Gujarat High
Court relied on its earlier decision in the case of CIT vs. R.M. Amin 82
ITR 194, for the proposition that where transfer consisted in
extinguishment of a right in a capital asset, unless there was an element of
consideration for such extinguishment, the transfer would not be liable to
capital gains tax.

It may be noted
that in Mohanbhai Pamabhai, the document pursuant to which
retirement was effected stated that the amount had been decided as payable to
the retiring partners in lieu of all their rights, interest and share in
the partnership firm, and each of them voluntarily gave up their right, title
and interest in the partnership firm. The goodwill had not been recorded or
credited to the capital accounts of the partners, and therefore it was a (b)
type of situation classified by the Bangalore Tribunal. The Bangalore bench of
the Tribunal therefore does not seem to have been justified in stating that
only cases where only balance standing to credit of the capital account is paid
to the retiring partner [situation (a) cases] are not transfers as was held by
the Supreme Court in Mohanbhai Pamabhai. In other words, the
facts of the Mohanbhai Pamabhai case classified with situation
(b) and the Tribunal overlooked this fact; had it done so by appreciating that
the facts in the case before the Supreme Court were akin to situation (b), the
decision could have been different.

The Supreme Court
approved the Gujarat High Court decision on the footing that there was no
transfer within the meaning of section 2(47) on retirement of a partner from a
partnership firm. By implication, the Supreme Court held that such cases of
retirement, where a partner was paid a sum over and above the balance due as
per the books of accounts, was not chargeable to capital gains tax.
Interestingly, in deciding the case the Supreme Court, while holding that the
receipts in question were not taxable, did not distinguish between different
modes of retirement, as some of the Tribunals and High Courts have sought to
do, for taxing some and exempting others.

The Tribhuvandas
G. Patel case (Supra) was one where the retiring partner was paid his
share in the goodwill of the firm and was also paid his share of appreciation
in the assets of the firm. Here, relying on the Commentary of Lindley on
Partnership, the Bombay High Court observed as under:

‘Further, under
section 32, which occurs in Chapter V, retirement of a partner may take any
form as may be agreed upon between the partners and can occur in three
situations contemplated by clauses (a), (b) and (c) of sub-section (1) of
section 32. It may be that upon retirement of a partner his share in the net
partnership assets after deduction of liabilities and prior charges may be
determined on taking accounts on the footing of notional sale of partnership
assets and be paid to him, but the determination and payment of his share may
not invariably be done in that manner and it is quite conceivable that, without
taking accounts on the footing of notional sale, by mutual agreement, a
retiring partner may receive an agreed lump sum for going out as and by way of
consideration for transferring or releasing or assigning or relinquishing his
interest in the partnership assets to the continuing partners and if the
retirement takes this form and the deed in that behalf is executed, it will be
difficult to say that there would be no element of “transfer”
involved in the transaction. In our view, it will depend upon the manner in
which the retirement takes place. What usually happens when a partner retires
from a firm has been clearly stated in the following statement of law, which
occurs in Lindley on Partnership, 13^thedition, at page 474:

“24.
Assignment of share, etc., by retiring partner.—When a partner retires or dies,
and he or his executors are paid what is due in respect of his share, it is
customary for him or them formally to assign and release his interest in the
partnership, and for the continuing or surviving partners to take upon
themselves the payment of the outstanding debts of the firm, and to indemnify
their late partner or his estate from all such debts, and it is useful for the
partnership agreement specifically so to provide.”

At page 475,
under the sub-heading “stamp on assignment by outgoing partner”, the
following statement of law occurs:

“An
assignment by a partner of his share and interest in the firm to his
co-partners, in consideration of the payment by them of what is due to him from
the firm, is regarded as a sale of property within the meaning of the Stamp
Acts; and consequently the deed of assignment, or the agreement for the
assignment, requires an ad valorem stamp. But if
the retiring partner, instead of assigning his interest, takes the amount due
to him from the firm, gives a receipt for the money, and acknowledges that he
has no more claims on his co-partners, they will practically obtain all they
want; but such a transaction, even if carried out by deed, could hardly be held
to amount to a sale; and no ad valorem stamp, it is apprehended, would
be payable.”

A couple of
things emerge clearly from the aforesaid passages. In the first place, a
retiring partner while going out and while receiving what is due to him in
respect of his share, may assign his interest by a deed or he may, instead of
assigning his interest, take the amount due to him from the firm and give a
receipt for the money and acknowledge that he has no more claim on his
co-partners. The former type of transactions will be regarded as sale or
release or assignment of his interest by a deed attracting stamp duty, while
the latter type of transaction would not. In other words, it is clear, the
retirement of a partner can take either of two forms, and apart from the
question of stamp duty, with which we are not concerned, the question whether
the transaction would amount to an assignment or release of his interest in
favour of the continuing partners or not would depend upon what particular mode
of retirement is employed and as indicated earlier, if instead of quantifying
his share by taking accounts on the footing of notional sale, parties agree to
pay a lump sum in consideration of the retiring partner assigning or
relinquishing his share or right in the partnership and its assets in favour of
the continuing partners, the transaction would amount to a transfer within the
meaning of section 2(47) of the Income-tax Act.’

Based on the
language of the Deed of Retirement, the Bombay High Court took the view that
since there was an assignment by the outgoing partner of his share in the
assets of the firm in favour of the continuing partners, there was a transfer
and the gains made on such transfer were exigible to tax.

In the context of
taxation, the Bombay High Court observed:

‘It may be
stated that the Gujarat decision in Mohanbhai
Pamabhai’s case [1973] 91 ITR 393 is the only
decision directly on the point at issue before us but the question is whether
the position of a retiring partner could be equated with that of a partner upon
the general dissolution for capital gains tax purposes? The equating of the two
done by the Supreme Court in Addanki
Narayanappa’s case, AIR 1966 SC 1300, was not
for capital gains tax purposes but for considering the question whether the
instrument executed on such occasion between the partners inter se required registration and could be admitted in evidence
for want of registration. For capital gains tax purposes the question assumes
significance in view of the fact that under section 47(ii) any distribution of
assets upon dissolution of a firm has been expressly excepted from the purview
of section 45 while the case of a retirement of a partner from a firm is not so
excepted and hence the question arises whether the retirement of a partner
stands on the same footing as that upon a dissolution of the firm. In our view,
a clear distinction exists between the two concepts, inasmuch as the
consequences flowing from each are entirely different. In the case of
retirement of a partner from the firm it is only that partner who goes out of
the firm and the remaining partners continue to carry on the business of the
partnership as a firm, while in the latter case the firm as such no more exists
and the dissolution is between all the partners of the firm. In the Indian
Partnership Act the two concepts are separately dealt with.’

This distinction between the dissolution and the retirement, made by
the High Court for taxing the receipt was overruled by the Supreme Court by
holding that the two are the same for the purposes of section 47(ii) of the
Act.

It was therefore
that the Bombay High Court first held that there was a transfer and later that
the receipt of consideration on transfer was not exempt from tax u/s 47(ii) of
the Act. The Supreme Court, however, overruled the Bombay High Court decision,
holding that retirement was also covered by dissolution referred to in section
47(ii), and that such retirement would therefore not be chargeable to capital
gains. It may also be noted that the Bombay High Court’s decision was rendered
prior to the Supreme Court decision in the case of Mohanbhai Pamabhai
(Supra).

Surprisingly, the
Delhi High Court, while deciding the case of Bishanlal Kanodia (Supra),
relied upon the decision of the Bombay High Court in Tribuhuvandas G.
Patel (Supra), overlooking the implications of the decisions of the
Supreme Court in the cases of Mohanbhai Pamabhai and Tribhuvandas
G. Patel wherein the ratio of the decision of the Bombay High
Court was rendered inapplicable. The Delhi High Court sought to distinguish
between dissolution and retirement, even though the Supreme Court had held that
the term ‘dissolution’ for the purpose of section 47(ii) included retirement up
to A.Y. 1987-88; the case before the Delhi High Court concerned itself with
A.Y. 1975-76.

Further, though the
decision of the Madras High Court in the case of the Legal Representatives of
N. Paliniappa Goundar (Supra) was relied upon by the assessee in the
case of Savitri Kadur (Supra), it was not considered by the
Bangalore bench of the Tribunal. The Madras High Court in that case, for A.Y.
1962-63, considering the provisions of section 12B of the 1922 Act, had dealt
with the decisions of the Gujarat High Court in the case of Mohanbhai
Pamabhai and of the Bombay High Court in the case of Tribhuvandas
G. Patel, which had not yet been decided by the Supreme Court. While
disagreeing with the view of the Bombay High Court, the Madras High Court
observed as under:

With respect, we
cannot see why a retirement of a partner from a firm should be treated as
having different kinds of attributes according to the mode of settlement of the
retiring partner’s accounts in the partnership. In our view, whether the
retiring partner receives a lump sum consideration or whether the amount is
paid to him after a general taking of accounts and after ascertainment of his
share in the net assets of the partnership as on the date of retirement, the
result, in terms of the legal character of the payment as well as the
consequences thereof, is precisely the same. For, as observed by the Gujarat
High Court in Mohanbhai‘s case when a partner retires from the firm and receives an amount
in respect of his share in the partnership, what he receives is his own share
in the partnership, and it is that which is worked out and realised. Whatever
he receives cannot be regarded as representing some kind of consideration
received by him as a result of transfer of assignment or extinguishment or
relinquishment of his share in favour of the other partners.

We hold that
even in a case where some kind of a lump sum is received by the retiring
partner, it must be regarded as referable only to the share of the retiring
partner. This being so, no relinquishment at all is involved. What he receives
is what he has already put in by way of his share capital or by way of his
exertions as a partner. In a true sense, therefore, whether it is a dissolution
or a retirement, and whether in the latter case the retirement is on the basis
of a general taking of accounts or on the basis of an ad hoc payment to the retiring partner, what the partner obtains
is nothing more and nothing less than his own share in the partnership. A
transaction of this kind is more fittingly described as a mutual release or a
mutual relinquishment. In the very case dealt by the Bombay High Court, the
particular amount paid by the remaining partners in favour of the retiring
partner was only a payment in consideration of which there was a mutual
release, a release by the retiring partner in favour of the remaining partners
and a release by the remaining partners in favour of the retiring partner. The
idea of mutual release is appropriate to a partnership, because a retired
partner will have no hold over the future profits of the firm and the partners
who remain in the partnership release the retired partner from all future
obligations towards the liabilities of the firm.

We, therefore,
unqualifiedly accept the decision of the Gujarat High Court as based on a
correct view of the law and the legal relations which result on the retirement
of a partner from the partnership. With respect, we do not subscribe to the distinction
sought to be drawn by the learned Judges of the Bombay High Court between an ad hoc payment to a retiring partner and a payment to him after
ascertaining his net share in the partnership.

The Andhra Pradesh High Court in the case of CIT vs. L. Raghu
Kumar 141 ITR 674, also had an occasion to consider this issue for the
A.Y. 1971-72. In this case, the retiring partner received an amount in excess
of the balance lying to the credit of his capital account and his share of
profits. The Andhra Pradesh High Court considered the decisions of the Bombay
High Court in the case of Tribhuvandas G. Patel (Supra) and CIT
vs. H.R. Aslot 115 ITR 255, where the Bombay High Court had held that
whether there was a transfer or not would depend upon the terms of the retirement
deed – whether there is an assignment by the outgoing partner in favour of the
continuing partners, or whether the retiring partner merely receives an amount
for which he acknowledges receipt.

The Andhra Pradesh
High Court observed as under:

‘It is no doubt
true as submitted by the learned counsel for the revenue that the Bombay High
Court did not accept the principle in the Mohanbhai case, that there is no distinction between a case of a retirement
of the partner and dissolution of the partnership firm and that there can never
be a transfer of a capital asset in the case of a retirement of a partner as
there is no relinquishment of a capital asset or extinguishment of rights
therein. With great respect, we are unable to agree with the view of the Bombay
High Court. The rights of a partner are governed by the provisions of the
Partnership Act. Otherwise by a mere description, the nature of the transaction
can be altered. Further, the Gujarat High Court in Mohanbhai’s case (Supra) followed the
decision of the Supreme Court in Narayanappa
(Supra) which laid down the proposition of law
unequivocally.’

This decision of
the Andhra Pradesh High Court has been affirmed by the Supreme Court in CIT
vs. R. Lingmallu Raghukumar 247 ITR 801. Therefore, effectively, the
Supreme Court has approved of the approach taken by the Andhra Pradesh High
Court, to the effect that there can never be a transfer of a capital asset in
the case of retirement of a partner as there is no relinquishment of a capital
asset or extinguishment of rights therein, and that the nature of the
transaction cannot be altered by a mere description, but is governed by the
provisions of the Partnership Act. It is only logical that a transfer cannot
arise merely because a retiring partner is paid an amount in excess of his
capital, or because the retirement deed wording is different.

This fact of law
laid down by the Supreme Court and the overruling of the law laid down by the
Bombay High Court, has been recognised by the Bombay High Court in its later
decision in the case of Prashant S. Joshi (Supra), clearly and
succinctly, where the Bombay High Court observed:

‘The Gujarat
High Court held that there is, in such a situation, no transfer of interest in
the assets of the partnership within the meaning of section 2(47). When a
partner retires from a partnership, what the partner receives is his share in
the partnership which is worked out by taking accounts and this does not amount
to a consideration for the transfer of his interest to the continuing partners.
The rationale for this is explained as follows in the judgment of the Gujarat
High Court (in the Mohanbhai Pamabhai case):

“…What
the retiring partner is entitled to get is not merely a share in the
partnership assets; he has also to bear his share of the debts and liabilities
and it is only his share in the net partnership assets after satisfying the
debts and liabilities that he is entitled to get on retirement. The debts and
liabilities have to be deducted from the value of the partnership assets and it
is only in the surplus that the retiring partner is entitled to claim a share.
It is, therefore, not possible to predicate that a particular amount is
received by the retiring partner in respect of his share in a particular
partnership asset or that a particular amount represents consideration received
by the retiring partner for extinguishment of his interest in a particular
asset.”

14. The appeal
against the judgment of the Gujarat High Court was dismissed by a Bench of
three learned Judges of the Supreme Court in Addl.
CIT vs. Mohanbhai Pamabhai [1987] 165 ITR 166.
The Supreme Court relied upon its judgment in Sunil
Siddharthbhai vs. CIT [1985] 156 ITR 509. The
Supreme Court reiterated the same principle by relying upon the judgment in Addanki Narayanappa vs. Bhaskara Krishnappa AIR 1966 SC 1300. The Supreme Court held that what is envisaged on the retirement of
a partner is merely his right to realise his interest and to receive its value.
What is realised is the interest which the partner enjoys in the assets during
the subsistence of the partnership by virtue of his status as a partner and in
terms of the partnership agreement. Consequently, what the partner gets upon
dissolution or upon retirement is the realisation of a pre-existing right or
interest.

The Supreme
Court held that there was nothing strange in the law that a right or interest
should exist in praesenti but its realisation or
exercise should be postponed. The Supreme Court inter alia cited with
approval the judgment of the Gujarat High Court in Mohanbhai Pamabhai’s
case (Supra) and held that there is no transfer upon the retirement of a
partner upon the distribution of his share in the net assets of the firm. In CIT
vs. R. Lingmallu Raghukumar [2001] 247 ITR 801, the Supreme Court held,
while affirming the principle laid down in Mohanbhai Pamabhai
that when a partner retires from a partnership and the amount of his share in
the net partnership assets after deduction of liabilities and prior charges is
determined on taking accounts, there is no element of transfer of interest in
the partnership assets by the retired partner to the continuing partners.

15. At this
stage, it may be noted that in CIT vs.
Tribhuvandas G. Patel [1978] 115 ITR 95 (Bom.),
which was decided by a Division Bench of this Court, under a deed of
partnership, the assessee retired from the partnership firm and was inter alia paid an amount of Rs. 4,77,941 as his share in the
remaining assets of the firm. The Division Bench of this Court had held that
the transaction would have to be regarded as amounting to a transfer within the
meaning of section 2(47) inasmuch as the assessee had assigned, released and
relinquished his share in the partnership and its assets in favour of the
continuing partners. This part of the judgment was reversed in appeal by the
Supreme Court in Tribhuvandas G. Patel vs. CIT [1999] 236 ITR 515.

Following the
judgment of the Supreme Court in Sunil
Siddharthbhai’s case (Supra), the Supreme Court
held that even when a partner retires and some amount is paid to him towards
his share in the assets, it should be treated as falling under clause (ii) of
section 47. Therefore, the question was answered in favour of the assessee and
against the revenue. Section 47(ii) which held the field at the material time
provided that nothing contained in section 45 was applicable to certain
transactions specified therein and one of the transactions specified in clause
(ii) was distribution of the capital assets on a dissolution of a firm. Section
47(ii) was subsequently omitted by the Finance Act of 1987 with effect from 1^st
April, 1988. Simultaneously, sub-section (4) of section 45 came to be inserted
by the same Finance Act. Sub-section (4) of section 45 provides that profits or
gains arising from the transfer of a capital asset by way of distribution of
capital assets on the dissolution of a firm or other association of persons or
body of individuals (not being a company or a co-operative society) or
otherwise, shall be chargeable to tax as the income of the firm, association or
body, of the previous year in which the said transfer takes place.

The fair market
value of the assets on the date of such transfer shall be deemed to be the full
value of the consideration received or accruing as a result of the transfer for
the purpose of section 48. Ex facie sub-section
(4) of section 45 deals with a situation where there is a transfer of a capital
asset by way of a distribution of capital assets on the dissolution of a firm
or otherwise. Evidently, on the admitted position before the Court, there is no
transfer of a capital asset by way of a distribution of the capital assets on a
dissolution of the firm or otherwise in the facts of this case. What is to be
noted is that even in a situation where sub-section (4) of section 45 applies,
profits or gains arising from the transfer are chargeable to tax as income of
the firm.’

The Bombay High
Court in Prashant Joshi’s case (Supra) also considered the fact
that section 45(4) was brought in simultaneously with the deletion of section
47(ii), providing for taxation in the hands of the firm, in a situation of
transfer of a capital asset on distribution of capital assets on the
dissolution of a firm or otherwise. Clearly, therefore, the intention was to
tax only the firm and that too only in a situation where there was a
distribution of capital assets of a firm on dissolution or otherwise, which
situation would include retirement of a partner as held by the Bombay High
Court in the case of CIT vs. A.N. Naik Associates 265 ITR 346.
This understanding of the law has clearly been brought out by the Bombay High
Court in Hemlata Shetty’s case (Supra), where the Bombay High
Court has observed that amount received by a partner on his retirement from the
partnership firm is not subject to tax in the retiring partners’ hands in view
of section 45(4), and the liability, if any, for tax is on the partnership
firm.

Had the intention
been to also tax a partner on his retirement on the excess amount received over
and above his capital balance in the books of the firm, an amendment would have
been made to cover such a situation involving the receipt of capital asset by a
partner on distribution by the firm simultaneously with the deletion of section
47(ii).

The Bombay High
Court’s decision in the case of Riyaz A. Shaikh (Supra) is a
decision rendered in the context of A.Y. 2002-03, i.e., post-amendment. It was
not a case of a writ petition filed against any reassessment but was an appeal
from the decision of the Tribunal. The Court in that case has considered all
the relevant decisions – the Bombay High Court’s decisions in the cases of Prashant
S. Joshi, N.A. Mody and Tribhuvandas G. Patel, besides
the Supreme Court decisions in the cases of Tribhuvandas G. Patel
and R. Lingamallu Rajkumar – while arriving at the view that the
amounts received on retirement by a partner are not liable to capital gains
tax.

Similarly, Hemlata
Shetty’s case pertained to the post-amendment period and the Court
therein has considered the earlier decisions of the Bombay High Court in the Prashant
S. Joshi and Riyaz A. Sheikh cases and has also
considered the impact of section 45(4). It is indeed baffling that the Bombay
High Court decision delivered on 5^th March, 2019 and the earlier
decision of the Tribunal in the same case have not been considered by the
Bangalore bench of the Tribunal in Savitri Kadur’s case, decided
on 3^rd May, 2019, which chose to follow the decision of Sudhakar
M. Shetty (Supra), where the matter was still pending before the Bombay
High Court, rather than a decision of the Bombay High Court in his wife’s case
on identical facts (retirement from the same partnership firm) for the
immediately preceding assessment year, where the matter had already been
decided on 5^th March, 2019. We are sure that the decision of the
Tribunal could have been different if the development had been in its
knowledge.

One may note that
the Legislature, realising that the receipt in question was not taxable under
the present regime of the Income-tax Act, 1961, had introduced a specific
provision for taxing such receipt in the hands of the partner under the
proposed Direct Tax Code which has yet to see the light of the day.

The better view of
the matter therefore is that retirement of a partner from a partnership firm is
not subject to capital gains tax, irrespective of the mode of retirement of the
partner, as rightly held by the Bombay High Court in various decisions, and the
Mumbai bench of the Tribunal in the cases of Hemlata Shetty and James
P. D’Silva (Supra). It is rather unfortunate that this issue has been
continuing to torture assessees for the last so many decades, even after
several Supreme Court judgments. One hopes that this matter will finally be
laid to rest either through a clarification by the CBDT or by a decision of the
Supreme Court.

The beauty of doing nothing is that you can do it
perfectly. Only when you do something is it almost impossible to do it without
mistakes. Therefore people who are contributing nothing to society, except
their constant criticisms, can feel both intellectually and morally superior.

—
Thomas Sowell

shailesh.kwebmaker

Article 11(3)(c) of the India-Mauritius DTAA – Interest income earned from India by a Mauritian company engaged in the banking business is exempt under Article 11(3)(c) of the India-Mauritius DTAA; in terms of Circular No 789, TRC issued by Mauritius tax authority is valid proof of residence as well as beneficial ownership

18. [2020] 117 taxmann.com 750 (Mumbai-Trib.) DCIT vs. HSBC Bank
(Mauritius) Ltd. ITA No: 1320/ Mum/2019 A.Y.: 2015-16 Date of order: 8^th
July, 2020

Article 11(3)(c) of the India-Mauritius DTAA
– Interest income earned from India by a Mauritian company engaged in the
banking business is exempt under Article 11(3)(c) of the India-Mauritius DTAA;
in terms of Circular No 789, TRC issued by Mauritius tax authority is valid
proof of residence as well as beneficial ownership

FACTS

The assessee, a resident of Mauritius, carried on banking business as a
licensed bank in Mauritius. The assessee was also registered as an FII with
SEBI. Article 11(3)(c) of the India-Mauritius DTAA exempts interest income from
tax in India if: (i) the interest is derived and beneficially owned by the
assessee; and (ii) the assessee is a bank carrying on bona fide banking
business in Mauritius. The assessee had received interest income from
securities and loans to Indian tax residents. According to the assessee, being
a tax resident of Mauritius, it qualified for exemption under Article 11(3)(c)
of the DTAA and hence, interest earned by it was not chargeable to tax in
India. To support its beneficial ownership and residential status, the assessee
placed reliance on the Certificate of Residency (TRC) issued by Mauritius tax
authorities and also Circular No 789⁶.

The A.O., however, did not grant exemption on the ground that the banking
activities carried out by the assessee in Mauritius were minuscule and were
only for namesake purpose. Further, Circular No. 789 dealt with taxation of
dividends and capital gains under the India-Mauritius DTAA and did not apply in
case of interest. Accordingly, the A.O. charged tax on interest @ 5% u/s 115AD
of the Act, read with section 194LD.

On appeal, relying upon the orders of the Tribunal in favour of the
assessee in earlier years⁷, the CIT(A) concluded in favour of the
assessee.

Being aggrieved, the Tax Department filed an appeal before the Tribunal
where it contended that the earlier years’ orders did not deal with the Tax
Department’s objection that the assessee was not a beneficial owner of the
interest and was a conduit company.

HELD

The following observations from the orders of earlier years⁸
in the case of the assessee are relevant:

As per Circular 789, wherever a Certificate of Residency is issued by
the Mauritius tax authority, such Certificate will constitute sufficient
evidence for accepting residential status as well as beneficial ownership for
application of the India-Mauritius DTAA.

Circular 789 equally applies to taxability of interest in terms of
Article 11(3)(c) of the DTAA.

Thus, having regard to the Tax Residency Certificate issued by the
Mauritius tax authority, the assessee is ‘beneficial owner’ of interest income.

Accordingly, interest earned by the assessee is exempt in terms of
Article 11(3)(c) of the India-Mauritius treaty.

Note: The decision is in the context of the India-Mauritius DTAA prior
to its amendment with effect from 1^st April, 2017. Post-amendment,
Article 11(3A) reads as follows:

‘Interest arising in a Contracting State shall be exempt from tax in
that State provided it is derived and beneficially owned by any bank resident
of the other Contracting State carrying on bona fide
banking business. However, this exemption shall apply only if such interest
arises from debt-claims existing on or before 31^st March, 2017.’

_________________________________________________________________________________________________

6 Circular No 789 provides that TRC will
constitute sufficient evidence in respect of tax residence as well as
beneficial ownership for application of DTAA

7 A.Y. 2009-10 (ITA No. 1086/Mum/2018), A.Y.
2010-11 (ITA No. 1087/Mum/2018) and A.Y. 2011-12 (ITA No. 1708/Mum/2016)

8 A.Y. 2014-15 (ITA No. 1319/Mum/2019)

shailesh.kwebmaker

Article12 of the India-Ireland DTAA – Consideration received by the assessee for supply / distribution of its copyrighted software products was not chargeable to tax in India as royalty under Article 12 of India-Ireland DTAA

17. [2020] 117 taxmann.com 983 (Delhi – Trib.) Mentor Graphics Ireland
Ltd. vs. ACIT ITA No. 3966/Del/2017 A.Y.: 2014-15 Date of order: 9^th
July, 2020

Article12 of the India-Ireland DTAA – Consideration received by the
assessee for supply / distribution of its copyrighted software products was not
chargeable to tax in India as royalty under Article 12 of India-Ireland DTAA

FACTS

The assessee, an Ireland resident company, received consideration for
sale of software and provision of support services. According to the assessee,
it had received consideration for sale of copyrighted product and not for sale
of copyright and hence, in terms of Article 12 of the India-Ireland DTAA, such
consideration was not chargeable to tax in India. However, it offered income
from support services to tax.

Relying upon the Karnataka High Court decisions in the case of Samsung
Electronics Company Ltd² and Synopsis International
Old Ltd.³, the A.O. and the DRP held that the consideration
received by the assessee for supply / distribution of copyrighted software
products was for grant of ‘right to use’ of the copyright in the software and
hence it qualified as ‘royalty’.

Being aggrieved, the assessee appealed before the Tribunal.

HELD

In
earlier years, on an identical issue in the assessee’s case⁴,
the Tribunal had ruled in favour of the assessee.

Further,
in DIT vs. Infrasoft Ltd.⁵ , the jurisdictional
High Court had held that receipt from sale of software by the assessee in
that case was not royalty under Article 12 of the India-Ireland DTAA.

Accordingly,
income from sale of software was not in the nature of ‘royalty’ under
Article 12 of the India-Ireland DTAA and was not taxable in India.

———————————————————————-

2
345 ITR 494 (Kar)

3 212 Taxman 454 (Kar)

4 ITA No. 6693/Del/2016 relating to Assessment
Year 2013-14

5 [2013] 220 Taxman 273 (Del.)

shailesh.kwebmaker

Article 12 of India-Singapore DTAA; Section 9 of the Act – Provision for IT infrastructure management and mailbox / website hosting services were not in nature of royalty, whether under the Act or Article 12 of DTAA; fees for management services (such as sales support, financial advisory and human resources assistance) and fees for referral services did not satisfy the requirement of ‘make available’ under Article 12 of DTAA

16. [2020] 118
taxmann.com 2 (Mumbai-Trib.) Edenred (P) Ltd.
vs. DDIT ITA Nos.
1718/Mum/2014; 254/Mum/2015 A.Ys.: 2010-11 to
2012-13 Date of order: 20^th
July, 2020

Article 12 of
India-Singapore DTAA; Section 9 of the Act – Provision for IT infrastructure
management and mailbox / website hosting services were not in nature of
royalty, whether under the Act or Article 12 of DTAA; fees for management
services (such as sales support, financial advisory and human resources
assistance) and fees for referral services did not satisfy the requirement of
‘make available’ under Article 12 of DTAA

FACTS

The assessee was a
Singapore tax resident company. It entered into certain agreements with its
group companies in India for rendering the following services:

Infrastructure Data Centre (IDC) services

Management services

Referral services

Administration and supervision of central infrastructure

Mailbox hosting services

Website hosting services

Sales support activities

Legal services

Financial advisory services

Human resource assistance

Support services¹ to serve clients in India that
were referred by assessee

Relying upon
Article 12 of the India-Singapore DTAA, the assessee contended that income
received from the aforesaid agreements was not taxable in India. The A.O. as
well as the DRP rejected this contention of the assessee. The following is a
summary of the conclusions of the A.O. and of the DRP:

Services

Draft A.O. order

Draft DRP direction

Final assessment order

IDC charges

Taxable as royalty under Act and DTAA

Management services

Taxable as FTS under Act and DTAA

Referral fees

Taxable as royalty under Act and DTAA

Taxable as royalty and FTS under Act and DTAA

Being aggrieved,
the assessee appealed to the Tribunal.

HELD

IDC Charges

Facts pertaining
to IDC agreement are as follows:

The assessee
had an infrastructure data centre and not an information centre in Singapore.

The Indian
group companies did not access or use the CPU of the assessee; the IDC
agreement did not permit such use / access to group companies of the assessee
nor had the assessee provided any system which enabled group companies such use
/ access.

The assessee
did not maintain any centralised data; IDC did not have any capability in
respect of information analytics, data management.

The assessee
provided IDC service using its own hardware / security devices / personnel;
Indian group companies received standard IDC services without use of any
software; the assessee had used bandwidth and networking infrastructure for
rendering IDC services; Indian companies only received output generated by the
assessee using bandwidth and network but not the use of underlying
infrastructure.

Consideration
paid by group companies was for IDC services and not for any specific
programme. Besides, the assessee had not developed any embedded / secret
software which was used by group companies.

Having regard to
the case law relied upon by the assessee and the Tax Department, since the
assessee had merely provided IDC services, such as administration and
supervision of central infrastructure, mailbox hosting services and website
hosting services, income from IDC services was not in the nature of ‘royalty’,
whether under the Act or under the DTAA.

Management
Services

The assessee had
provided management services to support Indian group companies in carrying on
their business efficiently and running the business in line with the business
model, policies and best practices uniformly followed by companies of the
assessee group.

Services did not
‘make available’ any technical knowledge, skill, know-how or processes to
Indian group companies.

Hence,
consideration received by the assessee for management services was not in the
nature of ‘fees for technical services’ under the DTAA.

Referral Fees

The fees
received by the assessee in consideration for referral services did not ‘make
available’ any technical knowledge, skill, know-how or processes to Indian
group companies because there was no transmission of the technical knowledge,
experience, skill, etc. by the assessee to the group company or its clients.

Hence, the
consideration received by the assessee for referral services was not in the
nature of ‘fees for technical services’, whether under the Act or under the
DTAA.

__________________________________

1
Decision does not describe nature of services in detail

shailesh.kwebmaker

Section 28: Share of profits paid to co-developer based on oral understanding not disallowable as the recipient had offered it to tax and there was no revenue loss and the transaction was tax-neutral

14. HP Associates vs. ITO (Mumbai) Vikas Awasthy (J.M.) and G. Manjunatha (A.M.) ITA No. 5929/Mum/2018 A.Y.: 2011-12 Date of order: 12^th June, 2020 Counsel for Assessee / Revenue: Haridas Bhatt / R. Kavitha

Section 28:
Share of profits paid to co-developer based on oral understanding not
disallowable as the recipient had offered it to tax and there was no revenue
loss and the transaction was tax-neutral

FACTS

The A.O.
disallowed a sum of Rs. 61,800 being share of profit transferred by the
assessee to Lakshmi Construction Co. The disallowance was made on the ground
that there was no formal written agreement to share profit in an equal ratio.

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

Aggrieved, the assessee preferred an appeal to the
Tribunal where it was contended that the assessee had jointly developed a
project with Lakshmi Construction Co. for which there was a joint development
agreement. Though there was no formal written agreement between the co-developers
for sharing profits in equal ratio, there was, however, an oral understanding
between the parties that the profits will be shared in equal ratio. The
transfer of share of profits by the assessee has not resulted in any loss of
revenue as the recipient has offered the same to tax and paid taxes thereon.

HELD

The Tribunal observed that the contention on
behalf of the assessee that there was no revenue loss has been substantiated by
placing on record the income-tax return of M/s Lakshmi Construction Co. It also
noted that both the firms are assessed at the same marginal rate of tax.
Therefore, the transaction is tax-neutral and no loss is caused to the
Government exchequer. The Tribunal deleted the addition of Rs. 61,800 made by
the A.O. and confirmed by the CIT(A).

shailesh.kwebmaker

Section 35(1)(ii): Deduction claimed by an assessee in respect of donation given by acting upon a valid registration / approval granted to an institution cannot be disallowed if at a later point of time such registration is cancelled with retrospective effect

13. Span Realtors vs. ITO (Mumbai) G. Manjunatha (A.M.) and Ravish Sood (J.M.) ITA No. 6399/Mum/2019 A.Y.: 2014-15 Date of order: 9^th June, 2020 Counsel for Assessee / Revenue: Rashmikant Modi and Ketki Rajeshirke
/ V. Vinod Kumar

Section
35(1)(ii): Deduction claimed by an assessee in respect of donation given by
acting upon a valid registration / approval granted to an institution cannot be
disallowed if at a later point of time such registration is cancelled with
retrospective effect

FACTS

The assessee
firm, engaged in the business of real estate, had made a donation of Rs. 1
crore to a Kolkata-based institution, viz. ‘School of Human Genetics and
Population Health’ (SHG&PH) and claimed deduction of Rs. 1.75 crores u/s
35(1)(ii) @ 175% on Rs. 1 crore. The A.O. called upon the assessee to
substantiate the claim of such deduction. The assessee submitted all the
evidences which were required to substantiate the claim of deduction.

However, the A.O. was not persuaded to subscribe
to the genuineness of the aforesaid claim of deduction by the assessee. He
observed that a survey operation conducted u/s 133A of the Act on 27^th
January, 2015 in the case of SHG&PH had revealed that the said research
institution had indulged in providing accommodation entries of bogus donations
to the donors through a network of brokers. The A.O. gathered that the
secretary had admitted in her statement that was recorded in the course of
survey proceedings u/s 131(1) of the Act that the said institution, in lieu of commission, was
providing accommodation entries of bogus donations through a network of market
brokers. Besides, the accountant of SHG&PH, in the course of survey
proceedings, was found to be in possession of a number of messages from brokers
regarding bogus donations and bogus billings. He also observed that as per the
information shared by DDIT (Inv.), Kolkata, the said institution had filed a
petition before the Settlement Commission, Kolkata Bench, wherein it had
admitted that in consideration of service charge they had indulged in providing
accommodation entries of bogus donations.

Moreover, the
Ministry of Finance vide a Notification dated 15^th September,
2016, had withdrawn its earlier Notification dated 28^th January,
2010. Hence, the A.O. disallowed the claim of deduction of Rs. 1.75 crores.

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

Still
aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal observed that as on the date of
giving of donation, SHG&PH was having a valid approval granted under the
Act. Having regard to the language of the Explanation to section 35(1)(ii), the
Tribunal was of the view that it can safely be gathered that a subsequent
withdrawal of such approval cannot form a reason to deny the deduction claimed
by the donor. By way of analogy, the Tribunal observed that the Supreme Court in
the case of CIT vs. Chotatingrai Tea [(2003) 126 Taxman 399 (SC)]
while dealing with section 35CCA of the Act, had concluded that a retrospective
withdrawal of an approval granted by a prescribed authority would not
invalidate the assessee’s claim of deduction. The Tribunal also observed that
on a similar footing the Bombay High Court has in the case of National
Leather Cloth Mfg. Co. vs. Indian Council of Agricultural Research [(2000) 100
Taxman 511 (Bom.)] observed that such retrospective cancellation of
registration will have no effect upon the deduction claimed by the donor since
such donation was given acting upon the registration when it was valid and
operative.

The Tribunal
held that if the assessee acting upon a valid registration / approval granted
to an institution had donated the amount for which deduction is claimed, such
deduction cannot be disallowed if at a later point of time such registration is
cancelled with retrospective effect. It also observed that the co-ordinate
Mumbai bench of the Tribunal in Pooja Hardware Pvt. Ltd. vs. ACIT [ITA
No. 3712/Mum/2016 dated 28^th October, 2019] has, after
relying on the earlier orders of the co-ordinate benches of the Tribunal on the
issue pertaining to the allowability of deduction u/s 35(1)(ii) of the Act in
respect of a donation given to SHG&PH by the assessee, vacated the
disallowance of the assessee’s claim for deduction u/s 35(1)(ii) of the Act.
The Tribunal observed that the issue is squarely covered by the orders of the
co-ordinate benches of the Tribunal, and therefore it has no justifiable reason
to take a different view. Following the same, the Tribunal set aside the order
of the CIT(A) and vacated the disallowance of the assessee’s claim for
deduction u/s 35(1)(ii) of Rs. 1.75 crores.

shailesh.kwebmaker

Section 254: Non-consideration of decision of jurisdictional High Court, though not cited before the Tribunal at the time of hearing of appeal, constitutes a mistake apparent on record

12. Tata Power Company vs. ACIT (Mumbai) Shamim Yahya (A.M.) and Saktijit Dey (J.M.) M.A. No. 596/Mum/2019 arising out of ITA No. 3036/Mum/2009 A.Y.: 2003-04 Date of order: 22^nd May, 2020 Counsel for Assessee / Revenue: Nitesh Joshi / Micheal Jerald

Section 254:
Non-consideration of decision of jurisdictional High Court, though not cited
before the Tribunal at the time of hearing of appeal, constitutes a mistake
apparent on record

FACTS

In ground No.
3 of ITA No. 3036/Mum/2009, the Revenue challenged the decision of the CIT(A)
in deleting the surplus on buyback on Euro Notes issued by the assessee
earlier. It was the claim of the assessee that since Euro Notes were issued by
the assessee for capital expenditure, the income derived as a surplus on
buyback of Euro Notes would be capital receipt and hence not taxable. Although,
the A.O. treated it as the income of the assessee, the CIT(A), relying upon the
decision of the Tribunal in the assessee’s own case for the assessment year
2000-01, allowed the assessee’s claim and deleted the addition.

Before the
Tribunal, the assessee, apart from relying upon the decision of the Tribunal in
its own case, also relied upon the decision of the Hon’ble Supreme Court in CIT
vs. Mahindra & Mahindra Ltd. [(2018) 302 CTR 201 (SC)] to contend
that foreign exchange fluctuation gain on buyback of Euro Notes cannot be
treated as income chargeable to tax as Euro Notes were raised for incurring
capital expenditure. The Tribunal restored the issue to the A.O. for fresh
adjudication after applying the ratio laid down in Mahindra &
Mahindra Ltd. (Supra).

In the course
of hearing of the Miscellaneous Application, it was submitted that after taking
note of the decisions of the Supreme Court in Mahindra & Mahindra
Ltd. (Supra) and in CIT vs. T.V. Sundaram Iyengar & Sons
[(1996) 222 ITR 344 (SC)], the Jurisdictional High Court has reiterated
the view expressed by the Supreme Court in Mahindra & Mahindra Ltd.
(Supra) and consequently the issue stands settled in favour of the
assessee. Therefore, there is no need for restoring the issue to the A.O.

HELD

The Tribunal
observed that the Jurisdictional High Court in Reliance Industries Ltd.
(ITA No. 993 of 2016, dated 15^th January, 2019), after
taking note of the decisions of the Supreme Court in Mahindra &
Mahindra Ltd. (Supra) and T.V. Sundaram Iyengar & Sons
(Supra) has upheld the decision of the Tribunal in holding that the
gain derived from buyback of foreign currency bonds issued by the assessee
cannot be treated as revenue receipt.

The Tribunal
held that though it may be a fact that the aforesaid decision was not cited
before the Tribunal at the time of hearing of appeal, however, as held by the
Supreme Court in Saurashtra Kutch Stock Exchange Ltd. [(2008) 305 ITR 227
(SC)], non-consideration of a decision of the Supreme Court or the
Jurisdictional High Court, even rendered post disposal of appeal, would
constitute a mistake apparent on the face of record. It held that since the
aforesaid decision of the Hon’ble Jurisdictional High Court will have a crucial
bearing on the disputed issue, non-consideration of the said decision certainly
constitutes a mistake apparent on the face of record as envisaged u/s 254(2) of
the Act.

The Tribunal
recalled the order dated 21^st May, 2019 passed in ITA No.
3036/Mum/2009 and restored the appeal to its original position.

shailesh.kwebmaker

Sections 2(47), 28(i), 45 – Gains arising on transfer of development rights held as a business asset are chargeable to tax as ‘business income’ – Only that part of the consideration which accrued, as per terms of the agreement, would be taxable in the year of receipt

22. [117 taxmann.com 637 (Del.)(Trib.)] ITO vs. Abdul Kayum Ahmed Mohd. Tamboli ITA No. 1408/Del/2011 A.Y.: 2006-07 Date of order: 6^th July, 2020

Sections 2(47), 28(i), 45 – Gains arising
on transfer of development rights held as a business asset are chargeable to
tax as ‘business income’ – Only that part of the consideration which accrued,
as per terms of the agreement, would be taxable in the year of receipt

FACTS

The assessment of the assessee was re-opened because the consideration
received for transfer of development rights was not offered for taxation. Since
the assessee had handed over possession of the land and also transferred the
development rights, the A.O. in the course of reassessment proceedings taxed
the amount received by the assessee on transfer of development rights as
business income. The assessee submitted that under the contract with the
developer, he was to perform work on the basis of receipt of funds from the
developer. Accordingly, the assessee had offered only a part of the receipts as
income to the extent that receipts had accrued. The balance, according to him,
were conditional receipts. The developer, in response to a notice sent u/s
133(6), confirmed the position as stated by the assessee.

But the A.O. opined that the said accounting treatment was not in
consonance with the mercantile system of accounting followed by the assessee. Besides, since the transfer had been
completed, the consideration would be taxable in the year of receipt as
business income.

Aggrieved, the assessee preferred an appeal to the CIT(A) and contended
that the balance amount be considered as capital receipts. The CIT(A)
adjudicated in the assessee’s favour and held that only the part of the amount
accrued as per the agreement would be taxable in the year of receipt. He
estimated an amount of 10% of the gross receipts to be taxable in the year of
receipt. The provisions pertaining to capital gains were also held to be
inapplicable as the development rights were business assets.

Aggrieved, the Revenue filed an appeal to the Tribunal.

HELD

It was evident from
the terms of the joint venture agreement that only part income accrued to the assessee on execution of the project agreement. The balance consideration was a
conditional receipt and was to accrue only in the event of the assessee
performing certain obligations under the agreement. Since the development
rights constituted the business assets of the assessee, the provisions of
capital gains would not be applicable. The order of the CIT(A) taxing 10% of
the gross receipts was justified. The Tribunal upheld the decision of the
CIT(A) and held that only part of the receipts as estimated accrued to the
assessee were taxable.

shailesh.kwebmaker

Sections 28, 36(1)(iii) – In a case where since the date of incorporation the assessee has carried on substantial business activities such as raising loans, purchase of land, which was reflected as stock-in-trade in the books of accounts, and entering into development agreement, the assessee can be said to have not only set up but also commenced the business. Consequently, interest on loan taken from bank for purchase of land which was held as stock-in-trade is allowable as a deduction

21. [117 taxmann.com 419 (Del.)(Trib.)] Jindal Realty (P) Ltd. vs. ACIT ITA No. 1408/Del/2011 A.Y.: 2006-07 Date of order: 22^nd June, 2020

Sections 28, 36(1)(iii) – In a case where
since the date of incorporation the assessee has carried on substantial
business activities such as raising loans, purchase of land, which was
reflected as stock-in-trade in the books of accounts, and entering into
development agreement, the assessee can be said to have not only set up but
also commenced the business. Consequently, interest on loan taken from bank for
purchase of land which was held as stock-in-trade is allowable as a deduction

FACTS

During the previous
year relevant to the assessment year under consideration, the assessee, engaged
in real estate business, borrowed monies from banks and utilised the same to
purchase land for township projects and also for giving as advance to other
associate parties for purchase of land by them. The interest on such monies
borrowed was claimed by the assessee as deduction u/s 36(1)(iii), and the
return of income was filed for the previous year declaring a loss.

The A.O. disallowed
the claim of deduction of interest on the ground that the assessee had not
commenced any business activity and held the same to be pre-operative in
nature.

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

Still aggrieved,
the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal held
that since the date of incorporation, the assessee carried on substantial
business activities such as raising loans, purchase of land which was reflected
as stock-in-trade in the books of accounts and entering into development
agreements. The Tribunal relied on the decision of the Delhi High Court in the
case of CIT vs. Arcane Developers (P) Ltd. 368 ITR 627 (Del.)
wherein it is held that in case of real estate business, the setting up of
business was complete when the first steps were taken by the
respondent-assessee to look around and negotiate with parties.

Thus, the assessee
had not only set up the business but also commenced the business in the
previous year and therefore was eligible to claim deduction of interest
expenditure u/s 36(1)(iii).

The appeal filed by
the assessee was allowed.

shailesh.kwebmaker

Section 50B read with sections 2(19), 2(42C) and 50 – Windmills of an assessee, engaged in the business of aqua culture, export of frozen shrimp, sale of hatchery seed and wind-power generation, along with all the assets and liabilities, constitute an ‘undertaking’ for the purpose of slump sale

20. [117
taxmann.com 440 (Vish.)(Trib.)] ACIT vs. Devi Sea
Foods Ltd. ITA No.
497/Vish./2019 A.Y.: 2013-2014 Date of order: 19^th
June, 2020

Section 50B read
with sections 2(19), 2(42C) and 50 – Windmills of an assessee, engaged in the
business of aqua culture, export of frozen shrimp, sale of hatchery seed and
wind-power generation, along with all the assets and liabilities, constitute an
‘undertaking’ for the purpose of slump sale

FACTS

The assessee sold
three windmills, declared the gains arising on such sale as a slump sale and
computed the long-term capital gains as per section 50B. The assessee had not
furnished separate financial statements for the windmill business activity;
however, it was claiming deduction u/s 80-IA on the income from the windmill as
a separate business which was allowed by the A.O. from A.Y. 2009-10 onwards.
But at the time of the sale, the A.O. denied the applicability of the
provisions related to slump sale by stating that the windmills did not
constitute an ‘undertaking’ and charged the income as short-term capital gains.

Aggrieved, the
assessee preferred an appeal to the CIT(A) who held that each windmill is a
unit of the undertaking and is covered by the definition of slump sale. He also
noted that though the assessee had shown windmills as part of the block of
assets, depreciation claim could not be a factor to deny benefit of slump sale.
He directed the A.O. to compute long-term capital gains u/s 50B.

Aggrieved, the
Revenue filed an appeal to the Tribunal.

HELD

The Tribunal observed that the windmills were part of the assessee’s
business, for which the assessee was claiming deduction since A.Y. 2009-10. The
A.O. had not made any adverse remarks in respect of deduction claimed u/s
80-IA. Though separate books of accounts had not been maintained, the assessee
had demonstrated separate ledger account belonging to the windmill operation,
and income from such activity was independently ascertainable. Further, there
is no requirement in the Act that all assets sold under slump sale should be
together. The Tribunal held that the real test for considering any sale of an asset
as non-slump sale would be any independent asset or liability not forming part
of the business operations. It held that the windmills satisfied all conditions
for being considered as an ‘undertaking’ and the provisions of slump sale would
be applicable.

shailesh.kwebmaker

Reopening – Capital gains arising on conversion of the land into stock-in-trade – Closing stock has to be valued at cost or market price whichever is lower – No reason to believe income had escaped assessment – Reopening bad in law: Sections 45(2) and 147 of the Act

9. M/s. J.S. & M.F. Builders vs. A.K. Chauhan and others [Writ Petition
No. 788 of 2001 A.Ys.: 1992-93, 1993-94, 1994-95 and 1995-96 Date of order: 12^th
June, 2020 (Bombay High Court)

Reopening – Capital gains arising on conversion of the land into
stock-in-trade – Closing stock has to be valued at cost or market price
whichever is lower – No reason to believe income had escaped assessment –
Reopening bad in law: Sections 45(2) and 147 of the Act

The petitioner had challenged the legality and validity of the four
impugned notices, all dated 25^th February, 2000 issued u/s 148 of
the Act, proposing to re-assess the income of the petitioner for the A.Ys.
1992-93, 1993-94, 1994-95 and 1995-96 on the ground that income chargeable to
tax for the said assessment years had escaped assessment.

The case of the petitioner is that it is a partnership firm constituted by
a deed of partnership dated 21^st October, 1977. The object of the
firm is to carry out business as builders and developers.

An agreement was entered into on 8^th November, 1977 between one
Mr. Krishnadas Kalyanji Dasani and the petitioner whereby and whereunder Mr.
Dasani agreed to sell, and the petitioner agreed to purchase, a property
situated at Borivali admeasuring approximately 6,173.20 square metres. The
property consisted of seven structures and two garages. The property was
mortgaged and all the tenements were let out. The aggregate consideration for
the purchase was Rs. 3,00,000 and a further expenditure of Rs. 44,087 was
incurred by way of stamp duty and registration charges. The said property was
purchased subject to all encumbrances. The purchased property was reflected in
the balance sheets of the petitioner drawn up thereafter as a fixed asset. For
almost a decade after purchase, the petitioner entered into various agreements
with the tenants to get the property vacated. In the process, they incurred a
further cost of Rs. 9,92,427.

In the balance sheet as on 30^th September, 1987 the Borivali
property was shown as a fixed asset the value of which was disclosed at Rs.
13,36,514; a detailed break-up of it was furnished. With effect from 1^st
October, 1987, the petitioner converted a portion of the property into
stock-in-trade and continued to retain that part of the property which still
remained tenanted as a fixed asset. The market value of the entire Borivali
property as on 1^st October, 1987 was arrived at Rs. 69,38,000 out of
which the value of the property that was converted into stock-in-trade was
determined at Rs. 66,29,365.

The petitioner thereafter demolished the vacant structures and commenced
construction of a multi-storied building. In the balance sheet as on 31^st
March, 1989, the petitioner reflected the tenanted property as a fixed asset at
a cost of Rs. 2,86,740 and the stock-in-trade at a value of Rs. 66,29,365.. A
revaluation reserve of Rs. 55,58,759 was also credited. In the Note
accompanying the computation of income it was clearly mentioned that the
conversion of a part of the Borivali property was made into stock-in-trade and
the liability to tax u/s 45(2) of the Act would arise as and when the flats
were sold. During the previous year relevant to the A.Y. 1992-93, the
petitioner had entered into 14 agreements for sale of 14 flats, the total area
of which admeasured 10,960 square feet (sq. ft.).

For the A.Y. 1992-93 the petitioner declared income chargeable under the
head ‘profits and gains of business or profession’ at Rs. 9,37,385 and the
income chargeable under the head ‘capital gains’ at Rs. 8,10,993. The ‘capital
gains’ was arrived at by determining the difference between the market value of
the land converted into stock-in-trade as on 1^st October, 1987 and
the cost incurred by the petitioner which came to a figure of Rs. 55,87,591.
Having regard to the total built-up area of 37,411 sq. ft., the ‘capital gains’
per sq. ft. was computed at Rs. 149.36 on a pro-rata basis. Accordingly,
having regard to the area of 10,960 sq. ft. sold, the ‘capital gains’ was
determined at Rs. 16,36,986. Along with the return of income, a computation of
income as well as an audit report in terms of section 44AB of the Act were also
filed. The A.O. completed the assessment u/s 143(3) of the Act assessing the
petitioner at the income of Rs. 17,85,560.

For the A.Y. 1993-94, as in the previous A.Y., income was computed both
under the head ‘profits and gains of business or profession’ as well as under
the head ‘capital gains’ for 12 flats sold during the relevant previous year.
The return was accompanied by the tax audit report as well as the profit and
loss account and balance sheet. The A.O. completed the assessment u/s 143(3)
assessing the petitioner at an income of Rs. 17,30,230. It is stated that in
the assessment order the A.O. specifically noted that income from ‘long-term
capital gains’ was declared in terms of section 45(2) of the Act.

The petitioner’s return of income for the A.Y. 1994-95 was processed u/s
143(1)(a) of the Act and an intimation was issued on 30^th March,
1995.

For the A.Y. 1995-96, the petitioner filed its return declaring income
under both heads, i.e., ‘income from business’ and ‘capital gains’. The income
of the petitioner was computed in a similar manner as in the earlier years with
similar disclosures in the tax audit report, profit and loss account and
balance sheet furnished along with the return. In the course of the assessment
proceedings, the petitioner furnished details of flats sold as well as the
manner of computing profit in terms of section 45(2). The assessment for the
A.Y. 1995-96 was completed u/s 143(3) of the Act determining the taxable income
at Rs. 1,32,930.

According to the petitioner, it received on 8^th March, 2000 four notices, all dated 25^th
February, 2000, issued u/s 148 of the Act for the four assessment years, i.e.,
1992-93 to 1995-96.

The reasons recorded for each of the assessment
years were identical save and except the assessment details and figures. The
A.O. broadly gave four reasons to justify initiation of re-assessment
proceedings. Firstly, the petitioner was not justified in assuming that the
market value of the stock adopted as on 1^st October, 1987 would
continue to remain static in the subsequent years. In other words, the closing
stock of the land should have been valued at the market price as on the date of
closing of accounts for the year concerned. This resulted in undervaluation of
closing stock and consequent reduction of profit.

Secondly, even though the petitioner might have entered into agreements and
sold certain flats, the ownership of the land continued to remain with the
petitioner. The whole of the land under the ownership of the petitioner
constituted its stock-in-trade and it should have been valued at the market
price as on the date of closing of accounts for the year concerned. Thus, the
assessee had suppressed the market price of the closing stock, thereby reducing
the profit.

Thirdly, for the purpose of computing the ‘capital gains’ in terms of
section 45(2) of the Act, the petitioner was not justified in taking the cost
of the entire land; rather, the petitioner ought to have taken only a fraction
of the original cost of Rs. 3,00,000. Thus, there was inflation of cost.
Lastly, in terms of section 45(2), the ‘capital gains’ arising on conversion of
the land into stock-in trade ought to have been assessed only in the year in
which the land was sold or otherwise transferred. As the land was not conveyed
to the co-operative society, the petitioner was not justified in offering to
tax the ‘capital gains’ in terms of section 45(2) of the Act on the basis of
the flats sold during each of the previous years relevant to the four A.Y.s
under consideration.

The Court admitted the writ petition for final hearing.

The petitioner submitted that it had fully complied with the requirement of
section 45(2) of the Act and the capital gains arising on the conversion of the
land into stock-in-trade was offered and rightly assessed to tax in the years
in which the flats were sold on the footing that on the sale of the flat there
was also a proportionate sale of the land. This methodology adopted by the
petitioner is in accordance with law. It was also submitted that it is not
correct to think that any profit arises out of the valuation of the closing
stock. In this connection, reliance was placed on a decision of the Supreme
Court in Chainrup Sampatram vs. CIT, 24 ITR 481.

The Petitioner also referred to a decision of this Court in CIT vs.
Piroja C. Patel, 242 ITR 582 to contend that the expenditure incurred
for having the land vacated would certainly amount to cost of improvement which
is an allowable expenditure.

The case of the Revenue was that the A.O. after recording the sequence of
events from acquiring the property vide the deed of conveyance dated 23^rdApril, 1980 noted that the assessee had converted part of the property
into stock-in-trade on 1^st October, 1987 with a view to construct
flats. On the date of conversion into stock-in-trade, the value thereof was
determined at Rs. 66,29,365. Up to A.Y.1991-92 there was no construction. After
the building was constructed, the constructed flats were sold to various
customers. On the sale of flats, the assessee reduced the proportionate market
value of the land as on 31^st March, 1989, in the same ratio as the
area of the flat sold bore to the total constructed area. However, the assessee
valued the closing stock at market price prevailing as on 1^st
October, 1987. According to the A.O., the closing stock should have been valued
at the market price on the close of each accounting year. This resulted in
undervaluation of closing stock and consequent reduction of profit.

Secondly, land as an asset is separate and distinct from the building. The
building was shown as a work in progress in the profit and loss account
prepared by the assessee and filed with the return. Even after construction of
the building and sale of flats, the stock, i.e., the land was still under the
ownership of the assessee. Ownership of land was not transferred. As the land
continued under the ownership of the assessee, its value could not be reduced
on the plea that a flat was sold. The whole of the land under ownership of the
assessee constituted its stock-in-trade and it should have been valued at the
market price as on the date of closing of the accounts for the year under
consideration. Therefore, the A.O. alleged that the assessee had suppressed the
market price of the closing stock, thus reducing the profit.

The third ground given was regarding computation of ‘capital gains’
furnished with the return of income. The A.O. noted that the total capital
gains as on 1^st October, 1987 was arrived at by deducting the cost
of the land as on 1^st October, 1987, i.e., Rs. 10,41,774, from the
fair market value of the land, i.e., Rs. 66,29,365, which came to Rs.
55,87,591. According to the A.O., the assessee made deduction of the cost
incurred for the entire land whereas only a fraction of the said land was
converted into stock-in-trade where construction was done.

The A.O. worked out that the cost of the converted piece of land was only
Rs. 13,260. He arrived at this figure by deducting Rs. 2,86,740, which was the
value of the tenanted property from the cost of the property, i.e., Rs.
3,00,000. Thus, he alleged that there was inflation of cost by Rs. 10,28,514
(Rs. 10,41,774 – Rs.13,260).

The last ground given by the A.O. was regarding offering of long-term
capital gain by the assessee. He noted that for the purpose of computation of
long-term capital gain, the assessee estimated the fair market value of the
land converted to stock as on 1^stOctober, 1987 at Rs. 66,29,365
which was reduced by the cost incurred as on 1^st October, 1987,
i.e., Rs. 10,74,774. However, the A.O. also noted that the method of
computation of cost was not clear in view of the fact that the whole of the
land with tenanted structures was purchased for Rs. 3,00,000. The A.O. further
noted the methodology adopted by the assessee for computation of long-term
capital gain. According to him, the assessee had worked out the difference
between the fair market value of the land converted to stock and the cost and
thereafter divided it by the total permissible built-up area. The quotient was
identified by the assessee as capital gains per sq. ft. The assessee thereafter
multiplied the built-up area of individual flats sold with such quotient and
claimed it to be the ‘capital gains’ for the year under consideration. By
adopting such a computation, the assessee was claiming sale of land in
different years in the same ratio as the area of flat sold bore to the total
permissible FSI area. But this calculation was not accepted by the A.O.
primarily on the ground that land as a stock was different from the flats.
Selling of flats did not amount to selling of proportionate quantity of land.

The Court held that u/s 45(2) of the Act, ‘capital gains’ for land should
be considered in the year when land was sold or otherwise transferred by the
assessee. Though flats were sold, ownership of the land continued to remain
with the assessee. ‘Capital gains’ would be chargeable to tax only in the year
when the land was sold or transferred to the co-operative society formed by the
flat purchasers and not in the year when individual flats were sold.

The Court accepted the contention of the petitioner that the A.O. proceeded
on the erroneous presumption that stock-in-trade had to be valued at the
present market value. In Chainrup Sampatram (Supra), the Supreme
Court had held that it would be wrong to assume that the valuation of the
closing stock at market rate has for its object the bringing into charge any
appreciation in the value of such stock. The true purpose of crediting the
value of unsold stock is to balance the cost of those goods entered on the
other side of the account so that the cancelling out of the entries relating to
the same stock from both sides of the account would leave only the transactions
on which there had been actual sales in the course of the year showing the
profit or loss actually realised on the year’s trading. While anticipated loss
is taken into account, anticipated profit in the shape of appreciated value of
the closing stock is not brought into the account as no prudent trader would
care to show increased profit before its actual realisation. This is the theory
underlying the rule that the closing stock has to be valued at cost or market
price whichever is lower and it is now generally accepted as an established
rule of commercial practice and accountancy. In such circumstances, taking the
view that profits for income tax purposes are to be computed in conformity with
the ordinary principles of commercial accounting unless such principles have
been superseded or modified by legislative enactments, the Supreme Court held
that it would be a misconception to think that any profit arises out of
valuation of the closing stock.

With regard to the third ground, i.e., computation of ‘capital gains’, the
Court held that the cost incurred included not only the sale price of the land,
i.e., Rs. 3,00,000, but also the expenditure incurred by way of stamp duty and
registration charges amounting to Rs. 44,087. That apart, the assessee had
incurred a further sum of Rs. 9,92,427 in getting the entire property vacated.
The contention of the A.O. that there was inflation of cost is not correct.
Thus, for computing the income under the head ‘capital gains’, the full value
of consideration received as a result of transfer of the capital asset shall be
deducted by the expenditure incurred in connection with such transfer, cost of
acquisition of the asset and the cost incurred in improvement of the asset. The
expression ‘the full value of the consideration’ would mean the fair market
value of the asset on the date of such conversion. The meaning of the
expressions ‘cost of improvement’ and ‘cost of acquisition’ are explained in
sections 55(1) and 55(2) of the Act, respectively.

The expression ‘capital asset’ occurring in sub-section (1) of section 45
is defined in sub-section (14) of section 2. ‘Capital asset’ means property of
any kind held by an assessee whether or not connected with his business or
profession as well as any securities held by a foreign institutional investor,
but does not include any stock-in-trade, consumable stores or raw materials,
personal effects, etc.

Again, the word ‘transfer’ occurring in sub-section (1) of section 45 has
been defined in section 2(47) of the Act. As per this definition, ‘transfer’ in
relation to a capital asset includes sale, exchange or relinquishment of the
asset or the extinguishment of any rights therein, or compulsory acquisition of
the asset, or in case of conversion of the asset by the owner into
stock-in-trade of the business carried on by him, such conversion or any
transaction involving the allowing of possession of any immovable property to
be taken or retained in part performance of a contract, or any transaction
whether by way of becoming a member of or acquiring shares in a co-operative
society, etc. which has the effect of transferring or enabling the enjoyment of
any immovable property.

In the case of Miss Piroja C. Patel (Supra), the court held
that on eviction of the hutment dwellers from the land in question, the value
of the land increases and therefore the expenditure incurred for having the
land vacated would certainly amount to cost of improvement.

Thus, the cost incurred on stamp duty, etc., together with the cost
incurred in carrying out eviction of the hutment dwellers would certainly add
to the value of the asset and thus amount to cost of improvement which is an
allowable deduction from the full value of consideration received as a result of
the transfer of the capital asset for computing the income under the head
‘capital gains’.

Insofar as the fourth ground is concerned, the A.O. has taken the view that
long-term capital gains arising out of sale or transfer of land would be
assessed to tax only in the year in which the land is sold or otherwise
transferred by the assessee. Opining that land as a stock is a different item
of asset than a flat, the A.O. held that ownership of land continued to remain
with the assessee notwithstanding the sale of flats. Therefore, he was of the view
that ‘capital gains’ would be chargeable to tax only in the year when the land
is sold or otherwise transferred to the co-operative society formed by owners
of the flats and not in the year when individual flats are sold.

According to the A.O., the assessee had erred in
offering to tax ‘capital gains’ in the year when the individual flats were
sold, whereas such ‘capital gains’ could be assessed to tax only when the land
was transferred to the co-operative society formed by the flat purchasers. If
the assessee had offered to tax as ‘capital gains’ in the assessment years
under consideration that which should have been offered to tax in the
subsequent years, it is beyond comprehension as to how a belief can be formed
that income chargeable to tax for the assessment year under consideration had
escaped assessment. That apart, the flat purchasers by purchasing the flats had
certainly acquired a right or interest in the proportionate share of the land
but its realisation is deferred till the formation of the
co-operative society by the owners of the flats and eventual transfer of the
entire property to the co-operative society.

The Court also referred to various other decisions, namely, Prashant
S. Joshi [324 ITR 154 (Bom)], Additional CIT vs. Mohanbhai Pamabhai, 165 ITR
166 (SC), Sunil Siddharthbhai vs. CIT, 156 ITR 509 (SC) and
Addanki Narayanappa vs. Bhaskara Krishnappa, AIR 1966 SC 1300, wherein
the Court held that what is envisaged on the retirement of a partner is merely
his right to realise his interest and to receive its value. What is realised is
the interest which the partner enjoys in the assets during the subsistence of
the partnership by virtue of his status as a partner and in terms of the
partnership agreement. Therefore, what the partner gets upon dissolution of the
partnership or upon retirement from the partnership is the realisation of a
pre-existing right or interest. The Court held that there was nothing strange
in the law that a right or interest should exist in praesenti but
its realisation or exercise should be postponed. Applying the above principle,
the Court held that upon purchase of the flat, the purchaser certainly acquires
a right or interest in the proportionate share of the land but its realisation
is deferred till formation of the co-operative society by the flat owners and
transfer of the entire property to the co-operative society.

Thus, on an overall consideration of the entire matter, the Court held
that there was no basis or justification for the A.O. to form a belief that any
income of the assessee chargeable to tax for the A.Y.s under consideration had
escaped assessment within the meaning of section 147 of the Act. The reasons
rendered could not have led to formation of any belief that income had escaped
assessment within the meaning of the aforesaid provision.

Therefore, in the facts and circumstances of the case, the impugned
notices issued u/s 148 of the Act dated 25^th February, 2000 were set
aside and quashed.

shailesh.kwebmaker

Settlement of cases – Chapter XIX-A of ITA, 1961 – Powers of Settlement Commission – Application for settlement of case – Settlement Commission cannot consider merits of case at that stage; A.Ys. 2015-16 to 2018-19

51. Hitachi Power Europe GMBH vs. IT Settlement Commission [2020] 423 ITR
472 (Mad.) Date of order: 17^th February, 2020 A.Ys.: 2015-16 to
2018-19

Settlement of cases – Chapter XIX-A of ITA, 1961 – Powers of Settlement
Commission – Application for settlement of case – Settlement Commission cannot
consider merits of case at that stage; A.Ys. 2015-16 to 2018-19

In June, 2010, the National Thermal Power Corporation had invited bids
under international competitive bidding for the supply and installation of
eleven 660-megawatt steam generators at five locations in India. A bid was
successfully submitted by B, a company incorporated in India and engaged in
providing turnkey solutions for coal-based thermal power plants. B
sub-contracted a portion of the scope of work under three contracts to its
joint venture company, which in turn sub-contracted a portion thereof to the
assessee. One of the contentions raised by the assessee on the merits was that
the scope of work under each of the contracts was separate and distinct in all
respects including the delineation of the work itself, the modes of execution
of the contract and the payments therefor.

For this reason, the assessee took the stand that the income from offshore
supplies would not be liable to tax in India. For the A.Ys. 2015-16 to 2018-19
the assessee filed returns of income offering to tax the income from onshore
supply and services only. While assessment proceedings were pending, the
assessee applied for settlement of the case. The Settlement Commission held
that the contract was composite and indivisible and hence the applicant, i. e.,
the assessee, had failed to make a full and true disclosure of income.

On a writ petition against the order, the Madras High Court held as under:

‘i) The scheme of Chapter XIX-A of the Income-tax Act, 1961 is to provide a
holistic resolution of issues that arise from an assessment in the case of an assessee that has approached the
Commission. The question of full and true disclosure and the discharge of tax
liability at all stages prior to final hearing should be seen only in the
context of the issues offered for settlement and the remittances of additional
tax thereupon. Issues decided by the Commission and the liability arising
therefrom will be payable only at the stage of such determination, which is the
stage of final hearing u/s 245D(4) of the Act.

ii) The assessee had just applied for settlement of the case. The Commission,
however, in considering the “validity” or otherwise of the application,
proceeded to delve into the merits of the matter even at that stage. The order
of the Settlement Commission was beyond the scope of section 245D(2C) having
been passed on the merits of the issue raised and set aside the same. This writ
petition is allowed.’

shailesh.kwebmaker

DEFINITION OF A BUSINESS (AMENDMENTS TO Ind AS 103)

The definition of business
has been amended (vide MCA notification dated 24^thJuly,
2020) and continues to be intended to assist entities to determine whether a
transaction should be accounted for as ‘a business combination’ or as ‘an asset
acquisition’.

The accounting for the
acquisition of an asset and for the acquisition of a business are very different,
hence the classification is very critical. The amendments are applicable to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after 1^st
April, 2020 and to asset acquisitions that occur on or after the beginning of
that period. In a nutshell, the amendments have made the following broad
changes:

(i) the definition of a
business and the definition of outputs is made narrow.

(ii) clarify the minimum
features that the acquired set of activities and assets must have in order to
be considered a business.

(iii) the evaluation of
whether market participants are able to replace missing inputs or processes and
continue to produce outputs is removed.

(iv) an optional concentration
test that allows a simplified assessment of whether an acquired set of
activities and assets is not a business has been introduced.

The amendments replace the
wording in the definition of a business as follows:

Old Definition

New Definition

‘An integrated set of activities and assets
that is capable of being conducted and managed for the purpose of providing a
return in the form of dividends, lower costs or other economic benefits
directly to investors or other owners, members or participants’

‘An integrated set of activities and assets
that is capable of being conducted and managed for the purpose of providing
goods or services to customers, generating investment income (such as
dividends or interest) or generating other income from ordinary activities’

The changed definition
focuses on providing goods and services to customers, removes the emphasis from
providing a return to shareholders as well as to ‘lower costs or other
economics benefits’, because many asset acquisitions are made with the motive
of lowering costs but may not involve acquiring a substantive process.

Under the revised
standard, the following steps are required to determine whether the acquired
set of activities and assets is a business:

Step 1

Consider whether
to apply the concentration test

Does the entity want to apply the
concentration test?

If yes go to Step 2, if no go to Step 4

Step 2

Consider what
assets have been acquired

Has a single identifiable asset or a group
of similar identifiable assets been acquired?

If yes go to Step 3, if no go to Step 4

Step 3

Consider how the
fair value of gross assets acquired is concentrated

Is substantially all of the fair value of
the gross assets acquired concentrated in a single identifiable asset or a
group of similar identifiable assets?

If yes, the concentration test has passed,
transaction is not a business, if no go to step 4

Step 4

Consider whether
the acquired set of activities and assets has outputs

Does the acquired set of activities and
assets have outputs?

Go to step 5

Step 5

Consider if the
acquired process is substantive

If there are no outputs, in what
circumstances is the acquired process considered substantive?

If there are outputs, in what circumstances
is the acquired process considered substantive?

If acquired process is substantive,
transaction is a business; if acquired process is not substantive,
transaction is an asset acquisition

OPTIONAL CONCENTRATION TEST

The optional concentration
test allows the acquirer to carry out a simple evaluation to determine whether
the acquired set of activities and assets is not a business. The optional
concentration test is not an accounting policy choice; therefore, it may be
used for one acquisition and not for another. If the test passes, then the
acquired set of activities and assets is not a business and no further
evaluation is required. If the test fails or the entity chooses not to apply
the test, then the entity needs to assess whether or not the acquired set of
assets and activities meets the definition of a business by making a detailed
assessment.

The amended standard does
not prohibit an entity from carrying out the detailed assessment if the entity
has carried out the concentration test and concluded that the acquired set of
activities and assets is not a business. The standard-setter decided that such
a prohibition was unnecessary, because if an entity intended to disregard the
outcome of the concentration test, it could have elected not to apply it.

In theory, the
concentration test might sometimes identify a transaction as an asset
acquisition when the detailed assessment would identify it as a business
combination. That outcome would be a false positive. The standard-setter
designed the concentration test to minimise the risk that a false positive
could deprive users of financial statements of useful information. The
concentration test might not identify an asset acquisition that would be
identified by the detailed assessment. That outcome would be a false negative.
An entity is required to carry out the detailed assessment in such a case and
is expected to reach the same conclusion as if it had not applied the
concentration test. Thus, a false negative has no accounting consequences.

What is a
single identifiable asset?

A single identifiable
asset includes any asset or group of assets that would be recognised and
measured as a single identifiable asset in a business combination. This will
include assets that are attached or cannot be removed from other assets without
incurring significant cost or loss of value of either asset. Examples of single
identifiable asset include land and buildings, customer lists, trademarks,
outsourcing contracts, plant and machinery, intangible asset (for example, a
coal mine), etc. Land and buildings cannot be removed from each other without
incurring significant cost or loss of value to either of them, unless the
building is inconsequential or very insignificant in value.

What is a
group of similar identifiable assets?

Assets are grouped when
they have a similar nature and have similar risk characteristics (i.e., the
risks associated with managing and creating outputs from the assets). The
following are examples of groupings which are not considered to be similar
assets:

(a) a tangible asset and
an intangible asset.

(b) different classes of
tangible assets under Ind AS 16, for example, equipment and building (unless
the equipment is embedded in the building and cannot be removed without
incurring significant cost or loss of value to either the building or the
equipment).

(c) tangible assets that
are recognised under different Standards (e.g. Ind AS 2 ‘Inventories’ and Ind
AS 16 ‘Property, Plant and Equipment’).

(d) a financial asset and
a non-financial asset.

(e) different classes of
financial assets under Ind AS 109 ‘Financial Instruments’ (e.g receivables,
equity investments, etc.).

(f) different classes of
intangibles (e.g. brand, mineral rights, etc.)

(g) assets belonging to
the same class but have significantly different risk characteristics, for
example, different types of mines.

In applying the
concentration test, one test is to evaluate whether substantially all of the
fair value of the gross assets acquired is concentrated in a single
identifiable asset or a group of similar identifiable assets? How is the fair
value determined?

The fair value of the
gross assets acquired shall include any consideration transferred (plus the
fair value of any NCI and the fair value of any previously held interest) in
excess of the fair value of net identifiable assets acquired. The fair value of
the gross assets acquired may normally be determined as the total obtained by
adding the fair value of the consideration transferred (plus the fair value of
any NCI and the fair value of any previously held interest) to the fair value
of the liabilities assumed (other than deferred tax liabilities), and then
excluding cash and cash equivalents, deferred tax assets and goodwill resulting
from the effects of deferred tax liabilities.

The
standard-setter concluded that whether a set of activities and assets includes
a substantive process does not depend on how the set is financed. Consequently,
the concentration test is based on the gross assets acquired, not on net
assets. Thus, the existence of debt (for example, a mortgage loan financing a
building) or other liabilities does not alter the conclusion on whether an acquisition is a business combination. In addition, the gross assets
considered in the concentration test exclude cash and cash equivalents
acquired, deferred tax assets, and goodwill resulting from the effects of
deferred tax liabilities. These exclusions were made because cash acquired, and
the tax base of the assets and liabilities acquired, are independent of whether
the acquired set of activities and assets includes a substantive process.

Example – Establishing the
fair value of the gross assets acquired

Ze Co holds a 30% interest
in Ox Co. A few years later, Ze acquires control of Ox by acquiring an
additional 45% interest in Ox for INR 270. Ox’s assets and liabilities on the
acquisition date are the following:

a building with a fair
value of INR 720

an identifiable
intangible asset with a fair value of INR 420

cash and cash
equivalents with a fair value of INR 180

deferred tax assets of
INR 120

financial liabilities
with a fair value of INR 900

deferred tax liabilities
of INR 240 arising from temporary differences associated with the building and
the intangible asset.

Ze determines that at the
acquisition date the fair value of Ox is INR 600, that the fair value of the
NCI in Ox is INR 150 (25% x INR 600) and that the fair value of the previously
held interest is INR 180 (30% x INR 600).

Analysis

When performing the
optional concentration test, Ze needs to determine the fair value of the gross
assets acquired. Ze determines that the fair value of the gross assets acquired
is INR 1,200, calculated as follows:

the total (INR 1,500)
obtained by adding:

– the consideration paid
(INR 270), plus the fair value of the NCI (INR 150) plus the fair value of the
previously held interest (INR 180); to

– the fair value of the
liabilities assumed (other than deferred tax liabilities) (INR 900); less

the cash and cash
equivalents acquired (INR 180); less

deferred tax assets
acquired (INR 120).

Alternatively, the fair
value of the gross assets acquired (INR 1,200) is also determined by:

the fair value of the
building (INR 720); plus

the fair value of the
identifiable intangible asset (INR 420); plus

the excess (INR 60) of:

– the sum (INR 600) of the
consideration transferred (INR 270), plus the fair value of the NCI (INR 150),
plus the fair value of the previously held interest (INR 180); over

– the fair value of the
net identifiable assets acquired (INR 540 = INR 720 + INR 420 + INR 180 + INR
120 – INR 900).

MINIMUM REQUIREMENTS TO QUALIFY AS BUSINESS

What are the
minimum requirements to meet the definition of a business?

Elements
of a business

Explanation

Examples

Inputs

An
economic resource that creates outputs or has the ability to contribute to
the creation of outputs when one or more processes are applied to it

tangible assets

•
right-of-use assets

•
intangible assets

•
intellectual property

•
employees

•
ability to obtain necessary material or rights

Processes

A
system, standard, protocol, convention or rule that when applied to an input
or inputs, creates outputs or has the ability to contribute to the creation
of outputs. These processes typically are documented, but the intellectual
capacity of an organised workforce having the necessary skills and experience
following rules and conventions may provide the necessary processes that are
capable of being applied to inputs to create outputs. (Accounting, billing,
payroll and other administrative systems typically are not processes used to
create outputs.)

•
strategic management processes

•
operational processes

•
resource management processes

Outputs

The
result of inputs and processes applied to those inputs that provide goods or
services to customers, generate investment income (such as dividends or
interest) or generate other income from ordinary activities

•
revenue

To qualify as a business,
the acquired set of activities and assets must have inputs and substantive
processes that together enable the entity to contribute to the creation of
outputs. However, the standard clarifies that outputs are not necessary for an
integrated set of assets and activities to qualify as a business. A business
need not include all of the inputs or processes that the seller used in
operating that business. However, to be considered a business, an integrated
set of activities and assets must include, at a minimum, an input and a
substantive process that together enable the entity to contribute to the
creation of outputs.

According to the
standard-setters, the reference in the old definition to lower costs and other
economic benefits provided directly to investors did not help to distinguish
between an asset and a business. For example, many asset acquisitions may be
made with the motive of lowering costs but may not involve acquiring a
substantive process. Therefore, this wording was excluded from the definition
of outputs and the definition of a business.

Ind AS 103 adopts a market
participant’s perspective in determining whether an acquired set of activities
and assets is a business. This means that it is irrelevant whether the seller
operated the set as a business or whether the acquirer intends to operate the
set as a business. An assessment made from a market participant’s perspective
and driven by facts that indicate the current state and condition of what has
been acquired (rather than the acquirer’s intentions) helps to prevent similar
transactions being accounted for differently. Moreover, bringing more subjective
elements into the determination would most likely have increased diversity in
practice.

When is an acquired process considered to be substantive?

The amended Standard
requires entities to assess whether the acquired process is substantive. The evaluation
of whether an acquired process is substantive depends on whether the acquired
set of activities and assets has outputs or not. For example, an early-stage
entity may not have any outputs / revenue, and is therefore subjected to a
different analysis of whether the acquired process along with the acquisition
of the development stage entity is substantive or not. Moreover, if an acquired
set of activities and assets was generating revenue at the acquisition date, it
is considered to have outputs at that date, even if subsequently it will no
longer generate revenue from external customers, for example because it will be
integrated by the acquirer.

For activities and assets
that do not have outputs at the acquisition date, the acquired process is substantive
only if:

(i) it is critical to the
ability to develop or convert an acquired input or inputs into outputs; and

(ii) the inputs acquired
include both an organised workforce that has the necessary skills, knowledge,
or experience to perform that process (or group of processes) and other inputs
that the organised workforce could develop or convert into outputs. Those other
inputs could include:

(a) intellectual
property that could be used to develop a good or service;

(b) other
economic resources that could be developed to create outputs; or

Examples of the inputs
include technology, in-process research and development projects, real estate
and mineral interests.

As can be seen from the
above discussion, for an acquired set of activities and assets to be considered
a business, if the set has no outputs, the set should include not only a
substantive process but also both an organised workforce and other inputs that
the acquired organised workforce could develop or convert into outputs.
Entities will need to evaluate the nature of those inputs to assess whether
that process is substantive.

For activities and assets
that have outputs at the acquisition date, the acquired process is substantive
if, when applied to an acquired input or inputs:

(1) it is critical to the
ability to continue producing outputs, and the inputs acquired include an
organised workforce with the necessary skills, knowledge, or experience to
perform that process (or group of processes); or

(2) significantly
contributes to the ability to continue producing outputs and is considered
unique or scarce; or cannot be replaced without significant cost, effort, or delay
in the ability to continue producing outputs.

The following additional
points support the above:

(A) an acquired contract
is an input and not a substantive process. Nevertheless, an acquired contract,
for example, a contract for outsourced property management or outsourced asset
management, may give access to an organised workforce. An entity shall assess
whether an organised workforce accessed through such a contract performs a
substantive process that the entity controls, and thus has acquired. Factors to
be considered in making that assessment include the duration of the contract
and its renewal terms.

(B) difficulties in
replacing an acquired organised workforce may indicate that the acquired
organised workforce performs a process that is critical to the ability to
create outputs.

(C) a process (or group of
processes) is not critical if, for example, it is ancillary or minor within the
context of all the processes required to create outputs.

As can be seen from the
above discussions, more persuasive evidence is required in determining whether
an acquired process is substantive, when there are no outputs, because the
existence of outputs already provides some evidence that the acquired set of
activities and assets is a business. The presence of an organised workforce
(although itself an input) is an indicator of a substantive process. This is
because the ‘intellectual capacity’ of an organised workforce having the
necessary skills and experience following rules and conventions may provide the
necessary processes (even if not documented) that are capable of being applied
to inputs to create outputs.

The standard-setter
concluded that although an organised workforce is an input to a business, it is
not in itself a business. To conclude otherwise would mean that hiring a
skilled employee without acquiring any other inputs could be considered to be
acquiring a business. The standard-setter decided that such an outcome would be
inconsistent with the definition of a business.

Prior to the amendments,
Ind AS 103 stated that a business need not include all of the inputs or
processes that the seller used in operating that business, ‘if market
participants are capable of acquiring the business and continuing to produce
outputs, for example, by integrating the business with their own inputs and
processes’. The standard-setter, however, decided to base the assessment on
what has been acquired in its current state and condition, rather than on
whether market participants are capable of replacing any missing elements, for
example, by integrating the acquired activities and assets. Therefore, the
reference to such integration was deleted from Ind AS 103. Instead, the
amendments focus on whether acquired inputs and acquired substantive processes
together significantly contribute to the ability to create outputs.

Illustrative
examples

Example
–Acquisition of real estate

Base facts

Ze
Co purchases a portfolio of 8 single-family homes along with in-place lease
contracts for each of them. The fair value of the consideration paid is equal
to the aggregate fair value of the 8 single-family homes acquired. Each
single-family home includes the land, building and lease-hold improvements.
Each home is of a different carpet size and interiors. The 8 single-family
homes are in the same area and the class of customers (e.g., tenants) are
similar. The risks in relation to the homes acquired and leasing them out are
largely similar. No employees, other assets, processes or other activities are
received in this transaction.

Scenario 1 – Application of optional concentration test

Analysis

Ze elects to apply the
optional concentration test set and concludes that:

each single-family home
is considered a single identifiable asset because:

the building and
lease-hold improvements are attached to the land and cannot be removed without
incurring significant cost; and

the building and the
associated leases are considered a single identifiable asset, because they
would be recognised and measured as a single identifiable asset in a business
combination.

the group of 8
single-family homes is a group of similar identifiable assets because they are
all single-family homes, are similar in nature and the risks associated with
operations and creating outputs are not significantly different. This is
consistent with the fact that the types of homes and classes of customers are
not significantly different.

Ze concludes that the
acquired set of activities and assets is not a business because substantially
all of the fair value of the gross assets acquired is concentrated in a group
of similar identifiable assets.

Scenario 2 –Corporate
office park

Facts

Assume the same base case,
except that Ze also purchases a multi-tenant corporate office park with four
15-storey office buildings with in-place leases. The additional set of
activities and assets acquired includes the land, buildings, leases and
contracts for outsourced cleaning, security and maintenance. However, no
employees, other assets, other processes or other activities are transferred.
The aggregate fair value associated with the office park is similar to the
aggregate fair value associated with the 8 single-family homes. The processes
performed through the contracts for outsourced cleaning and security are minor
within the context of all the processes required to create outputs.

Analysis

Ze elects to apply the
optional concentration test and concludes that the single-family homes and the
office park are not similar identifiable assets, because the risks associated
with operating the assets, obtaining tenants and managing tenants are
significantly different. This is consistent with the fact that the two classes
of customers are significantly different. As a result, the concentration test
fails because the fair value of the corporate office park and the 8
single-family homes is similar. Thus, Ze proceeds to evaluate whether the
acquisition is a business in the normal way.

The set of activities and
assets has outputs because it generates revenue through the in-place leases. Ze
needs to evaluate if there is an acquired process that is substantive. For
activities and assets that have outputs at the acquisition date, the acquired
process is substantive if, when applied to an acquired input or inputs:

it is critical to the
ability to continue producing outputs, and the inputs acquired include an
organised workforce with the necessary skills, knowledge, or experience to
perform that process (or group of processes); or

significantly
contributes to the ability to continue producing outputs and is considered
unique or scarce; or cannot be replaced without significant cost, effort, or
delay in the ability to continue producing outputs.

Ze concludes that the
above criterion is not met because:

the set does not include
an organised workforce;

the only processes
acquired (processes performed by the outsourced cleaning, security and
maintenance personnel) are ancillary or minor and, therefore, are not critical
to the ability to continue producing outputs.

the processes do not
significantly contribute to the ability to continue producing outputs.

the processes are not
unique or scarce and can be replaced without significant cost, effort, or delay
in the ability to continue producing outputs.

Consequently, Ze concludes
that the acquired set of activities and assets is not a business. Rather, it is
an asset acquisition.

Scenario 3 –Corporate
office park

Facts

Consider the same facts as
in Scenario 2, except that the acquired set of activities and assets also
includes the employees responsible for leasing, tenant management, and managing
and supervising all operational processes.

Analysis

Ze elects not to apply the
optional concentration test and proceeds to evaluate whether there is a
business in the normal way. The acquired set of activities and assets has
outputs because it generates revenue through the in-place leases. Consequently,
Ze carries out the same analysis as in Scenario 2.

The acquired set includes
an organised workforce with the necessary skills, knowledge or experience to
perform processes (i.e. leasing, tenant management, and managing and
supervising the operational processes) that are substantive because they are
critical to the ability to continue producing outputs when applied to the
acquired inputs (i.e. the land, buildings and in-place leases). Additionally,
those substantive processes and inputs together significantly contribute to the
ability to create output. Therefore, Ze concludes that the acquired set of
activities and assets is a business.

In the author’s view,
these amendments may result in more acquisitions being accounted for as asset
acquisitions as the definition of business has narrowed. Further, the
accounting for disposal transactions will also be impacted as Ind AS 110 Consolidated
Financial Statements will be applicable in case of the recognition of
proceeds from the sale of a business, while Ind AS 115 Revenue from
Contracts with Customers will be applied for the recognition of proceeds
from the sale of an asset.

shailesh.kwebmaker

REPORT: ROLE OF THE PROFESSIONAL IN A CHANGING TAX LANDSCAPE

HITESH D. GAJARIA
Chartered Accountant

(BCAS
Lecture Meeting, 8^thJuly, 2020)

A
report by CA Riddhi Lalan

Hitesh D. Gajaria, a respected member of the BCAS family since 1985, delivered a remarkable speech at the BCAS Lecture Meeting on 8^thJuly, 2020. We are publishing this summary just when the profession is at the threshold of change, a trending theme of 2020-21: Tradition, Transition and Transformation, adopted by the BCAS. A summary cannot convey the full import of his talk but we hope it will enable the professionals to get an eagle-eye view of the landscape of the tax profession, both near and far. We would recommend that you also watch the captivating talk on the BCAS YouTube channel.

The tax world is in a state of rapid flux. Earlier, the tax profession was all about filing returns, assessments, filing appeals and litigating matters. From simple and straight-forward days, where the most common tax concerns were additions on account of lower GP Ratio, deductions u/s 37 and revenue expenditure vs. capital expenditure for the Income-tax and the lack of C-Forms in the Sales Tax Assessments, the tax profession today has morphed into a complex, multi-dimensional arena requiring unique and varied skills from the tax professionals.

In light of this background, the learned speaker sought to dwell upon the most gripping questions for the tax professionals today – What are the current global and local trends? What factors have caused the changes? And as a result, how is the tax world different today? Is tax planning still possible? What is the future of the tax profession? What can be done by a tax professional to stay relevant and on top of the changes?

THE CURRENT TRENDS

Global

Increased reporting obligations in a number of tax jurisdictions.

Increased collaborations between tax authorities of different jurisdictions and robust exchange of information mechanisms.

Tightened rules to combat profit shifting with reference to concepts like transfer pricing, which India adopted only in 2002, but the US had since the mid-1960s.

Increasing tendency to focus on ‘formula-based approaches’ to profit attribution.

Strong anti-abuse rules to target treaty shopping and other abusive arrangements.

No consensus on tackling the tax challenge arising from digitisation of the global economy. Even if a consensus is reached, it may result in re-thinking of the way taxation of income is approached and highly sophisticated and complex rules which a tax professional will have to master.

Increased blurring of direct and indirect taxes, with a shift towards transaction type tax levies invading the domain of direct taxes.

Local

Protectionism and increased unilateral measures, triggered by the revival of nationalistic politics in various nations, developed as well as developing, and partially by the slow pace of multilateral reform in tax.

At the same time, countries still want to attract investments (both domestic and foreign) by way of large headline rate cuts for businesses to flourish in a jurisdiction. While this may trigger another round of tax competition, there will be greater need for not only tax competition but also tax co-operation. Tax war is an extreme situation which no country can afford today; however, tax competition shall always sustain.

Proliferation of preferential regimes (e.g., patent box regimes).

Many countries have combated preferential regimes by way of disallowance provisions for foreign related party transactions.

Uncertainty over tariffs and potential trade wars has ripened the entire area of customs and indirect taxes for rethinking and overhaul.

Unilateral measures to tax the digital sector have been introduced by many countries including India.

In many countries, including India, huge compliance burden has been embedded at the stage of business transactions taking place, leading to huge burden on businesses.

Closer home, an oncoming storm of tax assessments, audits, recoveries and tax enforcement measures is on the anvil because the government needs to start recovering taxes to make up for the increasing fiscal deficit and to fund more social welfare programmes if the needs of the lowest strata of society have to be met.

WHAT FACTORS HAVE CAUSED THESE CHANGES?

The changes in the tax trends began after the global financial crisis of 2008 which put huge fiscal pressure on governments worldwide. Improving tax compliance and increasing tax enforcement were seen as better routes rather than increasing tax rates, leading to increased global political interest in tax issues and driving the agenda for tax reforms. There has been a greater public focus and media scrutiny on taxpayer behaviour (Apple, Starbucks, Amazon, Panama papers leak, etc.). While there has been an increased alignment of interests between nations with exceptions, tax simplification, rationalisation and reforms have led to even more burdensome compliance for taxpayers. Covid-19 could be yet another turning point for unknown reforms in the tax world.

HOW IS THE TAX WORLD DIFFERENT TODAY?

THEN	NOW
Tax liability depended on the strict letter of the law Remedies to correct abuse lay with the legislature to amend the tax laws	Tax ‘morality’ has gained significance Factors such as substance, purpose and the acceptability of the outcome are extremely relevant for both taxpayers and advisers
Secrecy and confidentiality was generally maintained	There has been a rise in publicising tax outcomes, naming and shaming of tax defaulters Increasing data leaks have proved that the so-called tax havens have been mirages in some sense Information asymmetries between countries have been largely plugged through exchange of information mechanisms
Tax matters involved only the government and the taxpayer assisted by tax advisers	List of stakeholders has expanded to include the media, NGOs and even consumers
Compliance was a labour-intensive and assured source of regular work	Compliance functions are being radically overhauled through use of technology tools
Clear distinction between tax avoidance and tax evasion Tax avoidance was thought to be a goal	The term ‘tax avoidance’ is under a cloud The new standard is ‘tax morality’

IS TAX PLANNING STILL POSSIBLE?

The days of tax planning in the form of reduction of tax liability with little or no impact on economic circumstances and ascertaining and implementing the most tax efficient way of achieving legitimate business objectives are over. That type of tax planning which disregards commercial realities no longer exists but it has evolved. Tax planning, in the traditional sense, will no longer work in an era where international measures such as CFC, MLI and domestic measures such as General Anti-Avoidance Rules are in place. However, planning for real business transactions is still possible.

A professional, who is fully grounded in understanding and mastering the law and able to guide businesses about what is permissible and what is not, will sustain. However, any planning will now involve a much higher risk of scrutiny at assessment and judicial levels. Higher threshold for acceptability and higher risk of scrutiny of the transactions from a large number of stakeholders would be inevitable. There is heightened risk of such transactions being reported on the front pages of newspapers due to increased information availability; a professional must measure himself by these standards. Extremely robust documentation and robust proof of commercial substance will be critical.

WHAT IS THE FUTURE OF THE TAX PROFESSION?

The entire platform of tax services will rest on three main pillars which will broadly define how tax professionals may need to specialise their skillsets and garner focused experience:

(1) Technology-enabled tax compliance:

Technology has ruthlessly changed the landscape and has been eagerly embraced by tax authorities; this, perhaps, has been a big revelation!

It is the need of the hour to completely adapt and master technology to stay ahead.

Competition would not only be limited to the tax professionals but also more disruptors, say non-professional technology firms, who enable compliance at a fraction of the cost, will now enter the arena.

Technology using Artificial Intelligence (AI) and Machine Learning (ML) must take over a number of repetitive tasks.

Technology has raised a question as to ‘Whether professionals, going forward, would even be engaged for compliance?’

Compliance would not be dead for a professional, but will need adaptability and agility.

Additional challenges of data safety, security and protection need to be addressed.

By embracing mass compliance and processing data in larger volumes, a tax professional can gain leverage from the data available which will open a whole new vista predicting tax outcomes to better serve clients.

While drafting and research has been taken over by AI, there are two ways to look at it – (i) threat to routine compliance, and therefore, accept technology; (ii) opportunity for value addition due to increasing uncertainty.

Technology has merits but with the overload of the digital world there is also digital distraction. Tax professionals need to engage in deep work, detox periodically from technologies and opt for in-depth and consistent reading. Advisory services flowing from such detailed reading and connecting theory to practice in how that impacts a client is now more valuable.

Technology cannot substitute experience and deep knowledge. Here lies the true value of a tax professional.

By using algorithms and data mining, the Department is in a position to point out anomalies. Tax professionals need to be better prepared to address such anomalies. To walk the path of technology, assistance from data scientists may be required.

(2) High end advisory:

Global convergence of tax methodologies, the drive against base erosion with accompanying changes in domestic and international laws and the emergence of and seeping in of transaction tax type levies, gives rise to fresh challenges for a professional to overcome.

Today, with the convergence of accounting and tax principles, giving clear preference to the doctrine of substance over form and new and ever-changing corporate law, foreign exchange and SEBI regulations, we are in the middle of a perfect storm with attendant opportunities.

There is a perceived need for professionals who have experience in more than just one or two core areas and also for those professionals who can collaboratively work together with other professionals in different disciplines to evolve solutions which overcome complex problems, while simultaneously not falling foul of any regulations.

A longer-term strategy to develop and nurture appropriate talent needs to be undertaken because, in this arena, too, sister professions are nibbling away at pieces of work that Chartered Accountants traditionally did.

(3) Litigation:

Complexities and uncertainties shall lead to an explosion of tax litigation.

The tax professional has only witnessed the implementation aspects of GST; audits are yet to commence.

There was no reduction in number of tax officers due to digitisation of the GSTN. These officers would be trained to do tax assessments more intelligently. The Income-tax Department, also, has sharply climbed up the learning curve. Even judges in Tribunals and Courts are keeping abreast with latest trends.

Conflict between the needs of the government to garner more revenue and that of businesses to conserve more revenue will result in a sharp increase in litigation.

At the same time, it needs to be understood that not all litigation is good. Hand-holding and guidance to clients would gain relevance to decide which litigation to pursue and which not to, having regard to the alternate forums of dispute resolution available under domestic laws as well as under international tax laws.

Government is also realising the futility of litigations and therefore a scheme like VSVS is an attempt to clear such backlogs.

The tax professional needs to be nuanced in how to assist clients to shape their litigation strategies. Jurisprudence is not static as more case laws are available online nationally and internationally.

Mandatory disclosure regulations in case of aggressive tax positions require a balance in audit, assurance and litigation.

These three pillars are not independent compartments. A strong professional may have competency either in all or in more than one of these.

Certification assignments should be taken up only if capabilities and professional competency are available before pitching for such assignments. The Department is now equipped with algorithms to intelligently search all the reports and ferret out anomalies. Therefore, there is no easy way, either to discharge the certification function correctly or refrain from accepting – there is just no other option.

Tax risk in the corporate world: Barring a few exceptions, there is polarisation in the way the market is valuing companies having clear, transparent, ethical policies. Effective tax rate is not to be viewed in an absolute sense; it needs to be looked at on a comparative basis, based on a bench-marking analysis and tax policies and decided accordingly. The tone and culture of the corporate decides whether tax risk is a subject of discussion in the Board Room. Adverse tax consequences with attendant negative publicity is already tinged with social stigma, at least in the minds of independent directors whether the corporates believe in it or not. Therefore, tax risk is, increasingly, forming a part of the Board Room discussions.

HOW TO STAY RELEVANT?

Maximum advantage available with the younger professionals having agility, ability, keenness, inquisitiveness and willingness to change.

Develop a willingness to adapt to changed circumstances.

Ability to manage tax risks without overpaying taxes.

Adherence to ethical standards is not old-fashioned; it is expected and demanded today.

An analogy may be drawn from the letter ‘T’. The vertical line is the depth and core. Develop that depth, that core, own it, invest in it and nurture it. But do not forget the horizontal line which is the adjacent line. It is now, more than ever, important to read commercial news, develop good communication skills, understand cultural differences, learn personal etiquette, etc. Both lines need to be worked upon simultaneously.

SME firms and bigger firms need to come together and collaborate, especially after the Covid-19 pandemic.

Develop cutting-edge technical skills and become comfortable with a fast-paced legal and regulatory environment.

We find ourselves at the crossroads to reinvent ourselves and today is the day to start. When nothing is certain, the maximum opportunity lies ahead – just re-trim your masts to catch that wind.

shailesh.kwebmaker

THE FINANCE ACT, 2020

1. BACKGROUND

1.1 Ms Nirmala Sitharaman, the Finance Minister, presented her second
Budget to the Parliament on 1^stFebruary, 2020. The Finance Bill, 2020, presented along with the Budget
with certain amendments suggested by the Finance Minister on the basis of
discussions with the stakeholders, was passed by the Parliament without any
discussion on 23^rd March, 2020. It received the assent of the
President on 27^th March, 2020. The Finance Act, 2020 was passed by
both the Houses of Parliament without any discussion in view of the recent
lockdown due to the coronavirus pandemic which has affected India and the whole
world.

1.2 Some of the
important proposals in the Budget, relating to the Direct Taxes, can be
summarised as under:

(i) In line with
the reduction in rates of Income-tax for certain domestic companies which forgo
certain deductions and tax incentives introduced last year, the Finance Act,
2020 provides for revised slabs of Income-tax rates for Individuals and HUFs
who do not claim certain deductions and tax incentives.

(ii) Dividend
Distribution Tax, hitherto payable by companies and Mutual Funds and consequent
exemption on dividend received by shareholders and unitholders, has been
discontinued effective from 1^st April, 2020. Consequently, the
exemption in respect of dividend receipt enjoyed by the shareholders and
unitholders of Mutual Funds has been withdrawn.

(iii) The
compliance burden of Charitable Trusts and Institutions has been increased.

(iv) The Finance
Minister has recognised the need for a ‘Taxpayer’s Charter’. A new section 119A
has been inserted in the Income-tax Act effective from 1^st April,
2020 to provide that CBDT shall adopt and declare the Taxpayer’s Charter. CBDT
will issue guidelines for ensuring that this Charter is honoured by the
Officers of the Tax Department.

(v) One important
measure announced by the Finance Minister this year relates to the Disputed
Income-tax Settlement Scheme. ‘The Direct Tax Vivad Se Vishwas Bill,
2020’ was introduced by her and was passed by Parliament on 13^th
March, 2020. This Scheme has been introduced with a view to reduce litigation.
It is stated that about 4,83,000 Direct Tax cases are pending before various
appellate authorities. The assessees can avail the benefit of this Scheme by
paying the disputed tax and getting waiver of penalty, interest and fee.

1.3 This Article discusses some of the important
amendments made in the Income-tax Act by the Finance Act, 2020.

2. RATES OF TAXES

2.1 The slab rates
in the case of Individuals, HUFs, AOP, etc., for A.Y. 2021-22 (F.Y. 2020-21)
are the same as in A.Y. 2020-21 (F.Y. 2019-20). Similarly, the tax rates for
firms, LLPs, co-operative societies and local authorities for A.Y. 2021-22 are
the same as in A.Y. 2020-21. In the case of a domestic company, the rate of tax
is the same for A.Y. 2021-22 as in A.Y. 2020-21. However, the rate of 25% is
applicable in A.Y. 2021-22 to a domestic company having total turnover or gross
receipts of less than Rs. 400 crores in F.Y. 2018-19. In A.Y. 2020-21, this
requirement was with reference to total turnover or gross receipts relating to
F.Y. 2017-18.

2.2 The rates for Surcharge on tax applicable in A.Y. 2020-21 will
continue in A.Y. 2021-22. It may be noted that dividend declared and received
on or after 1^st April, 2020 is now taxable in the hands of the
shareholder. Earlier, the company was required to pay Dividend Distribution Tax
(DDT) and the shareholder was not liable to pay any tax. Therefore, dividend
income for F.Y. 2020-21 (A.Y. 2021-22) will be liable to tax in the hands of
the shareholder. In order to provide relief in the rate of Surcharge to
Individual, HUF, AOP, etc. having total income exceeding Rs. 2 crores, it is
provided that the rate of Surcharge will be 15% on the Income-tax on dividend income
included in the total income.

2.3 The Health and
Education Cess of 4% of Income-tax and Surcharge shall continue as in the
earlier year.

3. REDUCTION IN TAX RATES FOR INDIVIDUALS AND HUFs

3.1 Last year, the
Income-tax Act was amended by insertion of new sections 115BAA and 115BAB to
reduce the tax rates of a domestic company to 22% if the company does not claim
certain deductions and tax incentives. In respect of newly-formed manufacturing
companies, registered on or after 1^st January, 2019, the tax rate
was reduced to 15% if certain deductions and tax incentives were not claimed.

3.2 In the Finance Act, 2020 a new section 115BAC has been inserted
in the Income-tax Act with effect from A.Y. 2021-22 (F.Y. 2020-21) to reduce
the tax rates for Individuals and HUFs if the assessee does not claim certain
deductions and tax incentives. For claiming this concession in tax rates, the
assessee will have to exercise the option in the prescribed manner. The reduced
tax rates are as under:

Income (Rupees in lakhs)

Existing rate

Reduced rate (section 115BAC)

2.50 L

Nil

2.50 to 5.00 L

5.00 to 7.50 L

20%

10%

7.50 to 10.00 L

20%

15%

10.00 to 12.50 L

30%

20%

12.50 to 15.00 L

30%

25%

Above 15.00 L

30%

Surcharge and Cess
at the specified rates will be chargeable. It may be noted that there is no
separate higher threshold for senior and very senior citizens in the above
concessional tax rate scheme.

3.3 For claiming
the benefit of the above concession in tax rates, the assessee will have to
forgo the deductions under sections, (i) 10(5) – Leave Travel Concession, (ii)
10(13A) – House Rent Allowance, (iii) 10(14) – Dealing with special allowances
granted to employees other than conveyance and transport allowance under Rule
2BB(1)(a), (b), (c) and Sr. No. 11 of Table under Rule 2BB(2) as notified by
CBDT Notification dated 26^th June, 2020.

Out of the above,
some of the allowances as may be prescribed will be allowed, (iv) 10(17) –
Allowances to MPs and MLAs, (v) 10(32) – Deduction of clubbed income of minor
up to Rs. 1,500, (vi) 10AA – Deduction of income of SEZ unit, (vii) 16 –
Standard deduction of Rs. 50,000, deduction for entertainment expenses in
specified cases, deduction for professional tax, etc., available to salaried
employees, (viii) 24(b) – Interest on borrowing for self-occupied property,
(ix) 32(1)(iia) – Additional depreciation, (x) 32AD – Investment in new plant
and machinery in notified areas in certain states, (xi) 33AB – Deposits in tea,
coffee and rubber development account, (xii) 35(1)(ii), (iia), (iii) and (2AA)
– Specified deduction for donations or expenses for Scientific Research, (xiv)
35AD – Deduction of capital expenditure for specified business, (xv) 35CCC –
Weighted deduction for specified expenditure on Agricultural Extension Project,
(xvi) 57(iia) – Standard deduction for Family Pension, (xvii) Chapter VIA – All
deductions under Chapter VIA – excluding deduction u/s 80CCD(2) – Employee’s
contribution in notified Pension Scheme, section 80JJAA – Expenditure on
employment of new employees and section 80LA(1A) dealing with deduction in
respect of certain income of International Financial Services Centre.

This will mean that deductions under sections 80C (investment in PPF
A/c, LIP payments or investments in other savings instruments up to Rs. 1.50
lakhs), 80D (medical insurance), 80TTA/80TTB (deduction for interest on bank
deposits), 80G (donations to charitable trusts, etc.) cannot be claimed,
(xviii) Section 71 – Set-off of carried-forward loss from house property
against income from other heads, (ixx) Section 32 – Depreciation u/s 32 [other
than section 32(1)(iia)] shall be allowed in the prescribed manner, (xx) No
exemption or deduction for allowances or perquisites allowable under any other
law can be claimed, (xxi) provisions of Alternate Minimum Tax and credit under
sections 115JC/115JD will not be available.

3.4 As stated
above, the assessee will have to exercise the option in the prescribed manner
where an Individual or HUF has no business income, this option can be exercised
for A.Y. 2021-22 or any subsequent year along with the filing of the return of
income u/s 139(1). In other words, the option can be exercised every year in
the prescribed manner.

3.5 If the
Individual or HUF has income from business or profession, the option can be
exercised for A.Y. 2021-22 or any subsequent year before the due date for
filing the return of income for that year u/s 139(1). The option once exercised
shall apply to that year and all subsequent years. Such an assessee can
withdraw the option at any time in a subsequent year and, thereafter, it will
not be possible to exercise the option at any time so long as the said assessee
has income from business or profession.

3.6 It may be
noted that the above option for concession in tax rates will not be available
to AOP, BOI, etc. The existing slab rates will continue to apply to them.
Further, the provisions of sections 115JC and 115JD relating to Alternative
Minimum Tax and credit for such tax will not apply to the person exercising
option u/s 115BAC.

3.7 Considering
the above conditions, it is possible that very few assessees will exercise this
option for lower tax rates. If deductions for PPF contribution, LIP, etc., u/s
80C, donation u/s 80G, Mediclaim Insurance u/s 80D, Standard Deduction from
Salary income u/s 16, travel and other allowances under sections 10(5), 10(13A)
and 10(14), and similar other deductions are not to be allowed, this concession
in tax rates to Individuals and HUFs will not be attractive.

4. TAXATION OF DIVIDENDS

4.1 Up to 31^st
March, 2020, domestic companies declaring / distributing dividend to
shareholders were required to pay DDT u/s 115-O of the Income-tax Act at the
rate of 15% plus applicable Surcharge and Cess. Similarly, section 115-R
provided for payment of tax by a Mutual Fund while distributing income on its
units at varying rates. Consequently, sections 10(34) and 10(35) provided that
the shareholder receiving dividend from a domestic company or a unitholder
receiving income from an M.F. will not be required to pay any tax on such
dividend income and income received from an M.F. in respect of the units of the
M.F. However, from A.Y. 2017-18 (F.Y. 2016-17), dividend from a domestic
company received by an assessee, other than a domestic company and Public
Trusts, was made taxable u/s 115BBDA at the rate of 10% plus applicable
Surcharge and Cess if the total dividend income was more than Rs. 10 lakhs.

4.2 Now, after
about two decades, the system of levying tax on dividends has been changed
effective from 1^st April, 2020. Sections 115-O and 115-R levying DDT
on domestic companies / M.F.s are now made inoperative. Sections 10(34), 10(35)
and 115BBDA are also not operative from 1^st April, 2020.

4.3 In view of the above, any dividend declared by
a domestic company or income distributed by an M.F., on or after 1^st
April, 2020 will be taxable in the hands of the shareholder / unitholder at the
rate applicable to the assessee. In the case of a non-resident assessee it will
be possible to claim benefits of applicable tax treaties which will include
limit on tax rate for dividend income and tax credit in home country as
provided in the applicable tax treaty.

4.4 Section 57 has
been amended to provide that expenditure by way of interest paid on monies
borrowed for investment in shares and units of M.F.s will be allowed to be
deducted from Dividend Income or Income from units of M.F.s. This deduction
will be restricted to 20% of Dividend Income or Income from units of M.F.s. No
other deduction will be allowed from such income.

4.5 A new section,
80M, has been inserted in the Income-tax Act effective from A.Y. 2021-22 (F.Y.
2020-21). This section provides for deduction in the case of a domestic company
whose gross total income includes dividend from any other (i) domestic company,
(ii) foreign company, or (iii) a business trust. The deduction under this
section will be allowed to the extent of dividend distributed by such company
on or before the due date. For this purpose ‘Due Date’ means the date one month
prior to the due date for filing the return of income u/s 139(1). In other
words, if a domestic company has received dividend of Rs. 1 crore from another
domestic company, Rs. 50 lakhs from a foreign company and Rs. 25 lakhs from a
business trust during the year ending 31^st March, 2021, it will be
entitled to claim deduction from this total dividend income of Rs. 1.75 crores,
amount of dividend of say Rs. 1.60 crores declared on or before 31^st
August, 2021 if the last date for filing its return of income u/s 139(1) is 30^th
September, 2021. It may be noted that the benefit u/s 80M will not be available
in respect of income from units of M.F.s.

4.6 In order to
provide some relief to Individuals, HUFs, AOP, BOI, etc., a concession in the
rate of Surcharge has been provided in respect of dividend income. In case of
such assessees, the rate of Surcharge on income between Rs. 2 crores and Rs. 5
crores is 25% and the rate of Surcharge on income above Rs. 5 crores is 37.5%.
It is now provided that if the income of such assessee exceeds Rs. 2 crores,
the rate of Surcharge shall not exceed 15% on Income-tax computed in respect of
the Dividend Income included in the total income. From the wording of this
concession given to Dividend Income, it appears that this concession will not
apply to the income from units of M.F.s received by the assessee.

4.7 Since the
income from dividend on shares is now taxable, section 194 has been amended to
provide that tax at the rate of 10% of the dividend paid to the resident
shareholder will be deducted at source. In the case of a non-resident
shareholder, the TDS will be at the rate of 20%. Similarly, new section 194K now
provides that an M.F. shall deduct tax at source at 10% of income distributed
to a resident unitholder. In the case of a non-resident unitholder, the rate of
TDS is 20% as provided in section 196A.

4.8 It may be
noted that u/s 193 it is provided that tax is not required to be deducted at
source from interest paid by a quoted company to its debenture-holders if the
said debentures are held in demat form. This concession is not given under
sections 194 or 194K in respect of quoted shares or units of M.F.s held in
demat form. Therefore, the provisions for TDS will apply in respect of shares
or units of M.F.s held in demat form.

5. TAX DEDUCTION AND COLLECTION AT SOURCE

5.1 Sections
191 and 192: Both these sections are amended effective from A.Y. 2021-22
(F.Y. 2020-21). At present, section 17(2)(vi) of the Income-tax Act provides
for taxation of the value of any specified securities or sweat equity shares
(ESOP) allotted to any employee by the employer as a perquisite. The value of
ESOP is the fair market value on the date on which the option is exercised as
reduced by the actual payment made by the employee. When the shares are
subsequently sold, any gain on such sale is taxable as capital gain. The
employer has to deduct tax at source on such perquisite at the time of exercise
of such option u/s 192.

In order to ease
the burden of startups, the amendments in these two sections provide that a
company which is an eligible startup u/s 80IAC will have to deduct tax at
source on such income within 14 days (i) after the expiry of 48 months from the end of the relevant assessment year, or (ii) from
the date of sale of such ESOP shares by the employee, or (iii) from the date on which the employee who
received the ESOP benefit ceases to be an employee of the company, whichever is
earlier. For this purpose, the tax rates in force in the financial year in
which the said shares (ESOP) were allotted or transferred are to be considered.
By this amendment, the liability of the employee to pay tax on such perquisite
and deduction of tax on the same is deferred as stated above. Consequential
amendments are also made in sections 140A (self-assessment tax) and 156 (notice
of demand).

5.2 Sections
194, 194K and 194LBA: Sections 194 and 194LBA are amended and a new section
194K is inserted effective from 1^st April, 2020. These sections now
provide as under:

(i) Section 194
provides that if the dividend paid to a resident shareholder by a company
exceeds Rs. 5,000 in any financial year, tax at the rate of 10% shall be
deducted at source. In the case of a non-resident shareholder, the rate for TDS
is 20% as provided in section 195.

(ii) New section 194K provides that if any income is
distributed by an M.F. to a resident unitholder and such income distributed
exceeds Rs. 5,000 in a financial year, tax at the rate of 10% shall the
deducted at source by the M.F. In the case of a non-resident unitholder, the
rate of TDS is 20% u/s 196A.

(iii) Section 194LBA has been amended to provide that
in respect of income distributed by a Business Trust to a resident unitholder,
being dividend received or receivable from a Special Purpose Vehicle, the tax
shall be deducted at source at the rate of 10%. In respect of a non-resident
unitholder, the rate for TDS is 20% on dividend income.

5.3 Section 196C:
Section 196C dealing with TDS from income by way of interest or dividends in
respect of Bonds or GDRs purchased by a non-resident in foreign currency has
been amended from 1^st April, 2020. Under the amended section, TDS at
10% is now deductible from the dividend paid to the non-resident.

5.4 Section
196D: This section deals with TDS from income in respect of securities held
by an FII. Amendment of this section from 1^st April, 2020 now
provides that dividend paid to an FII or FPI will be subject to TDS at the rate
of 20%.

5.5 Section
194A: This section deals with TDS from interest income. This section is
amended effective from 1^st April, 2020. At present, a co-operative
society is not required to deduct tax at source on interest payment in the
following cases:

(i) Interest
payment by a co-operative society (other than a Co-operative Bank) to its
members.

(ii) Interest
payment by a co-operative society to any other co-operative society.

(iii) Interest
payment on deposits with a Primary Agricultural Credit Society or Primary
Credit Society or a Co-operative Land Mortgage Bank.

(iv) Interest
payment on deposits (other than time deposits) with a co-operative society
(other than societies mentioned in iii above) engaged in the business of
banking.

Under the
amendments made in section 194A effective from 1^st April, 2020, the
above exemptions have been modified and a co-operative society shall be
required to deduct tax at source in all the above cases at the rates in force,
if the following conditions are satisfied:

(a) The total
sales, gross receipts or turnover of the co-operative society exceeds Rs. 50
crores during the immediately preceding financial year, and

(b) The amount of
interest, or the aggregate of the amounts of such interest payment during the
financial year, is more than Rs. 50,000 in case the payee is a senior citizen
(aged 60 years or more) or more than Rs. 40,000 in other cases.

5.6 Section 194C: This section is amended effective from 1^st
April, 2020. At present the term ‘Work’ is defined in the section to include
manufacturing or supplying a product according to the requirement or
specification of a customer by using material purchased from such customer.
Now, this term ‘Work’ will also include material purchased from the associate
of such customer. For this purpose, the ‘associate’ means a person specified
u/s 40A(2)(b).

5.7 Section
194J: This section is amended effective from 1^st April, 2020.
The rate of TDS has been reduced to 2% from 10% in respect of TDS from fees for
technical services. The rate of TDS from professional fees will continue at 10%
of such fees.

5.8 Section
194LC: This section is amended effective from 1^st April, 2020.
The eligibility of borrowing under the loan agreement or by issue of long-term
bonds for concessional rate of TDS under this section has now been extended
from 30^th June, 2020 to 30^th June, 2023. Further, section
194LC(2) has now been amended to include interest on monies borrowed by an
Indian company from a source outside India by issue of long-term Bonds or
Rupee-Denominated Bonds between 1^st April, 2020 and 30^th
June, 2023, which are listed on a recognised stock exchange in any
International Financial Services Centre. In such a case, the rate of TDS will
be 4% (as against 5% in other cases).

5.9 Section
194LD: This section is amended effective from 1^st April, 2020.
This amendment is made to cover interest payable from 1^st June, 2013
to 30^th June, 2023 by a person to an FII or a Qualified Foreign
Investor on Rupee-Denominated Bonds of an Indian company or Government security
u/s 194LD. Further, now interest at specified rate on Municipal Debt Securities
issued between 1^st April, 2020 and 30^th June, 2023 will
also be covered under the provisions of this section. The rate for TDS is 5% in
such cases.

5.10 Section
194N: Section 194N was inserted effective from 1^st September,
2019 by the Finance (No. 2) Act, 2019. It provided that a banking company,
co-operative bank or a Post Office shall deduct tax at source at 2% in respect
of cash withdrawn by any account holder from one or more accounts with such
bank / Post Office in excess of Rs. 1 crore in a financial year. This limit of
Rs. 1 crore applied to all accounts of the person in any bank, co-operative
bank or Post Office. Hence, if a person has accounts in different branches of
the bank, total cash withdrawals in all these accounts will be considered for
this purpose. This TDS provision applied to all persons, i.e., Individuals,
HUFs, AOP, firms, LLPs, companies, etc., engaged in business or profession, as
also to all persons maintaining bank accounts for personal purposes. Under this
section there will be no TDS on cash withdrawn up to Rs. 1 crore in a financial
year. The TDS provision will apply on cash withdrawal in excess of Rs. 1 crore.

Now, the above
section has been replaced by a new section 194N effective from 1^st
July, 2020. This new section provides as under:

(i) The provision
relating to TDS at 2% on cash withdrawals exceeding Rs. 1 crore as stated above
is continued. However, w.e.f. 1^st July, 2020, if the account holder
in the bank / Post Office has not filed the returns of income for all the three
assessment years relevant to the three previous years, for which the time for
filing such return of income u/s 139(1) has expired, the rate of TDS will be as
under:

(a) 2% of cash withdrawal from all accounts with a bank or Post
Office in excess of Rs. 20 lakhs but not exceeding Rs. 1 crore in a financial
year.

(b) 5% of cash withdrawal from all accounts with a bank or Post
Office in excess of Rs. 1 crore in a financial year.

(ii) The Central
Government has been authorised to notify, in consultation with RBI, that in the
case of any account holder the above provisions may not apply or tax may be
deducted at a reduced rate if the account holder satisfies the conditions
specified in the Notification.

(iii) This section
does not apply to cash withdrawals by any Government, bank, co-operative bank, Post
Office, banking correspondent, white label ATM operators and such other persons
as may be notified by the Central Government in consultation with RBI if such
person satisfies the conditions specified in the Notification. Such
Notification may provide that the TDS rate may be at reduced rates or at Nil
rate.

(iv) This
provision is made in order to discourage cash withdrawals from banks and
promote digital economy. It may be noted that u/s 198 it is provided that the
tax deducted u/s 194N will not be treated as income of the assessee. If the
amount of this TDS is not treated as income of the assessee, credit for tax
deducted at source u/s 194N will not be available to the assessee u/s 199 read
with Rule 37BA. If such credit is not given, this will be an additional tax
burden on the assessee.

5.11 Section
194-O and 206AA: New section 194-O has been inserted effective from 1^st
April, 2020. Existing section 206AA has been amended from the same date.
Section 194-O provides that the TDS provisions will apply to E-commerce
operators. The effect of this provision is as under:

(i) The two terms
used in the section are defined to mean (a) ‘E-commerce operator’ is a person
who owns, operates or manages digital or electronic facility or platform for
electronic commerce, and (b) ‘E-commerce participant’ is a person resident in
India selling goods or providing services or both, including digital products,
through digital or electronic facility or platform for electronic commerce. For
this purpose the services will include fees for professional services and fees
for technical services.

(ii) An E-commerce
operator facilitating sale of goods or provision of services of an E-commerce
participant, through its digital electronic facility or platform, is now
required to deduct tax at source at the rate of 1% of the payment of gross
amount of sales or services or both to the E-commerce participant. Such TDS is
to be deducted from the amount paid by the purchaser of goods or recipient of
services directly to the E-commerce participant / E-commerce operator.

(iii) No tax is
required to be deducted if the payment is made to an E-commerce participant who
is an Individual or HUF if the payment during the financial year is less than
Rs. 5 lakhs and the E-commerce participant has furnished PAN or Aadhaar Card
Number.

(iv) Further, in
the case of an E-commerce operator who is required to deduct tax at source as
stated in (ii) above or in a case stated in (iii) above, there will be no
obligation to deduct tax under any provisions of Chapter XVII-B in respect of
the above transactions. However, this exemption will not apply to any amount
received by an E-commerce operator for hosting advertisements or providing any
other services which are not in connection with sale of goods or services.

(v) If the
E-commerce participant does not furnish PAN or Aadhaar Card Number, the rate
for TDS u/s 206AA will be 5% instead of 1%. This is provided in the amended
section 206AA.

(vi) It is also
provided that CBDT, with the approval of the Central Government, may issue
guidelines for the purpose of removing any difficulty that may arise in giving
effect to provisions of section 194-O.

5.12 Section 206C: This section dealing with collection of tax at
source (TCS) has been amended effective from 1^st October, 2020.
Hitherto, this provision for TCS applied in respect of specified businesses.
Under this provision a seller is required to collect tax from the buyer of
certain goods at the specified rates. The amendment of this section effective
from 1^st October, 2020 extends the net of TCS u/s 206C (1G) and (1H)
to other transactions as under:

(i) An authorised
dealer, who is authorised by RBI to deal in foreign exchange or foreign
security, receiving Rs. 7 lakhs or more from any person in a financial year for
remittance out of India under the Liberalised Remittance Scheme (LRS) of RBI,
is liable to collect TCS at 5% from the person remitting such amount. Thus, LRS
remittance up to Rs. 7 lakhs in a financial year will not be liable for this
TCS. If the remitter does not provide PAN or Aadhaar Card Number, the rate of
TCS will be 10% u/s 206CC.

(ii) In the above
case, if the remittance in excess of Rs. 7 lakhs is by a person who is
remitting the foreign exchange out of education loan obtained from a financial
institution, as defined in section 80E, the rate of TCS will be 0.5%. If the
remitter does not furnish PAN or Aadhaar Card Number, the rate of TCS will be
5% u/s 206CC.

(iii) The seller of an overseas tour programme
package, who receives any amount from a buyer of such package, is liable to
collect TCS at 5% from such buyer. It may be noted that the TCS provision will
apply in this case even if the amount is less than Rs. 7 lakhs. If the buyer
does not provide PAN or Aadhaar Card Number, the rate for TCS will be 10% u/s
206CC.

(iv) It may be
noted that the above provisions for TCS do not apply in the following cases:

(a) An amount in
respect of which the sum has been collected by the seller.

(b) If the buyer
is liable to deduct tax at source under the provisions of the Act. This will
mean that for remittance for professional fees, commission, fees for technical
services, etc. from which tax is to be deducted at source, this section will
not apply.

(c) If the
remitter is the Central Government, State Government, an Embassy, High
Commission, a Legation, a Commission, a Consulate, the Trade Representation of
a Foreign State, a Local Authority or any person in respect of whom the Central
Government has issued a Notification.

(v) Section
206C(1H) which comes into force on 1^st October, 2020 provides that a
seller of goods is liable to collect TCS at the rate of 0.1% on receipt of
consideration from the buyer of goods, other than goods covered by section
206C(1), (1F) or (1G). This TCS provision will apply only in respect of the
consideration in excess of Rs. 50 lakhs in the financial year. If the buyer
does not provide PAN or Aadhaar Card Number, the rate of TCS will be 1%. If the
buyer is liable to deduct tax at source from the seller on the goods purchased and
made such deduction, this provision for TCS will not apply.

(vi) It may be
noted that the above section 206C(1H) does not apply in the following cases:

(a) If the buyer
is the Central Government, State Government, an Embassy, a High Commission,
Legation, Commission, Consulate, the Trade Representation of a Foreign State, a
Local Authority, a person importing goods into India or any other person as the
Central Government may notify.

(b) If the seller
is a person whose sales, turnover or gross receipts from the business in the
preceding financial year does not exceed Rs. 10 crores.

(vii) The CBDT,
with the approval of the Central Government, may issue guidelines for removing
any difficulty that may arise in giving effect to the above provisions.

5.13 Obligation
to Deduct Tax at Source: Hitherto, the obligation to comply with the
provisions of sections 194A, 194C, 194H, 194-I, 194-J or 206C for TDS was on
Individuals or HUFs whose total sales or gross receipts or turnover from
business or profession exceeded the monetary limits specified in section 44AB
during the immediately preceding financial year. The above sections are now
amended, effective from 1^stApril, 2020, to provide that the above
TDS provisions will apply to an individual or HUF whose total sales or gross
receipts or turnover from business or profession exceeds Rs. 1 crore in the
case of business or Rs. 50 lakhs in the case of profession. Thus, every
Individual or HUF carrying on business will have to comply with the above TDS
provisions even if he is not liable to get his accounts audited u/s 44AB.

5.14 General:

(i) From the above
amendments it is evident that the net for TDS and TCS has now been widened and
even transactions which do not result in income are now covered under these
provisions. Individuals and HUFs carrying on business and not covered by Tax
Audit u/s 44AB will now be covered by the TDS and TCS provision. In particular,
persons remitting foreign exchange exceeding Rs. 7 lakhs under LRS of RBI will
have to pay tax u/s 206C. This tax will be considered as payment of tax by the
remitter u/s 206C(4) and he can claim credit for such tax u/s 206C(4) read with
Rule 37-1.

(ii) It may be
noted that the Government has issued a Press Note on 13^th May, 2020
giving certain relief during the Covid-19 pandemic. By this Press Note it is
announced that TDS / TCS under sections 193 to 194-O and 206C will be reduced
by 25% during the period 14^th May, 2020 to 31^st March,
2021. This reduction is given only in respect of TDS / TCS from payments or receipts
from residents. This concession is not in respect of TDS from salaries or TDS
from non-residents and TDS / TCS under sections 260AA or 206CC.

6. EXEMPTIONS AND DEDUCTIONS

6.1 Section 10(23FE): This is a new clause providing for
exemption of income from dividend, interest or long-term capital gain arising
from investment made in India by a specified person during the period 1^st
April, 2020 to 31^st March, 2024. The investment may be in the form
of a debt, share capital or unit. For this purpose the specified person means a
wholly-owned subsidiary of Abu Dhabi Investment Authority which complies with
the various conditions of the Explanation given in the section. For claiming
the above exemption the specified person has to hold the investment for at least
three years. Further, the investment should be in (a) a Business Trust, (b) an
Infrastructure Company as defined in section 80-IA, (c) such other company as
may be notified by the Central Government, or (d) a Category I or Category II
Alternative Investment Fund regulated by SEBI and having 100% investment in one
or more companies as referred to in (a), (b) or (c) above.

If exemption under
this section is granted in any year, the same shall be withdrawn in any
subsequent year when the specified person violates any of the conditions of the
section in a subsequent year. It is also provided in the section that if any
difficulty arises about interpretation or implementation of this section, CBDT,
with the approval of the Central Government, may issue guidelines for removing
the difficulty.

6.2 Section
10(48C): This a new clause inserted from 1^st April, 2020. It
provides for exemption in respect of any income of Indian Strategic Petroleum
Reserves Ltd., as a result of arrangement for replenishment of crude oil stored
in its storage facility in pursuance of directions of the Central Government.

6.3 Section
80EEA: This section was added by the Finance (No. 2) Act, 2019 to provide
for deduction of interest payable up to Rs. 1,50,000 on loan taken by an
Individual from a Financial Institution for acquiring a residential house. One
of the conditions in the section is that the loan should be sanctioned during
the period 1^st April, 2019 to 31^st March, 2020. This
period is now extended to 31^st March, 2021.

6.4 Section
80GGA: This section deals with certain donations for Scientific Research or
Rural Development. Till now, this deduction was allowed even if amounts up to
Rs. 10,000 were paid in cash. Now this section is amended, effective from 1^st
June, 2020 and the above limit of Rs. 10,000 is reduced to Rs. 2,000.

6.5 Section
80-IAC: This section deals with deduction in case of startup entities
engaged in specified businesses. The section is amended from A.Y. 2021-22 (F.Y.
2020-21). At present, the deduction under this section can be claimed for three
consecutive assessment years out of seven years from the year of incorporation.
By amendment of this section, the outer limit of seven years has been increased
to ten years.

In the Explanation
defining ‘Eligible Startup’, at present it is provided that the total turnover
of the business of the startup claiming deduction under this section should not
exceed Rs. 25 crores. This limit is now increased to Rs. 100 crores.

6.6 Section
80-IBA: This section deals with deduction in respect of income from
specified housing projects. At present, for claiming deduction under this
section one of the conditions is that the housing project should be approved by
the Competent Authority during the period from 1^st June, 2016 to 31^st
March, 2020. This period is now extended up to 31^st March, 2021.

6.7 Filing Tax
Audit Report: At present sections 80-IA, 80-IB and 80JJAA provide that for
claiming deduction under these sections the assessee has to file the Tax Audit
Report u/s 44AB along with the return of income. These sections are now
amended, effective from 1^st April, 2020 to provide that the Tax
Audit Report shall be filed one month before the due date for filing return of
income u/s 139(1). This will mean that in all such cases the Tax Audit Report
will have to be finalised one month before the due date for filing the return
of income u/s 139(1).

7. CHARITABLE TRUSTS

At present, a
University, Educational Institution, Hospital or other Medical Institution
claiming exemption u/s 10(23C) of the Income-tax Act is required to get
approval from the designated authority (Principal Commissioner or a
Commissioner of Income-tax). The procedure for this is provided in section
10(23C). The approval once granted is operative until cancelled by the
designated authority. For other Charitable Trusts the procedure for
registration is provided in section 12AA. Registration, once granted, continues
until it is cancelled by the designated authority. The Charitable Trusts and
other Institutions are entitled to get approval u/s 80G from the designated
authority. This approval is valid until cancelled by the Designated Authority.
On the strength of this certificate u/s 80G the donor to the Charitable Trust
or other Institutions can claim deduction in the computation of his income for
the whole or 50% of the donations as provided in section 80G. The Finance Act,
2020 has amended sections 10(23C), 11, 12A, 12AA and 80G and inserted section
12AB to completely change the procedure for registration of Trusts. These
provisions are discussed below.

7.1. New
procedure for registration:

(i) A new section
12AB is inserted effective from 1^st October, 2020 which specifies
the new procedure for registration of Charitable Trusts. Similarly, section
10(23C) is also amended and a similar procedure, as stated in section 12AB, has
been provided. All the existing Charitable Trusts and other Institutions
registered under sections 10(23C) and 12AA will have to apply for fresh
registration under the new provisions of section 10(23C)/12AB within three
months, i.e., on or before 31st December, 2020. The fresh registration will be
granted for a period of five years. Therefore, all Trusts / Institutions
claiming exemption under sections 10(23C)/11 will have to apply for renewal of
registration every five years.

(ii) Existing
Charitable Trusts, Educational Institutions, Hospitals, etc., will have to
apply for fresh registration u/s 12AB or 10(23C) within three months, i.e. ,on
or before 31^stDecember, 2020. The designated authority will grant
registration under section 12AB or 10(23C) for a period of five years. This
order shall be passed within three months from the end of the month in which
the application is made. Six months before the expiry of the above period of five
years, the Trusts / Institutions will have to again apply to the designated
authority for renewal of registration which will be granted for a period of
five years. This order has to be passed by the designated authority within six
months from the end of the month when the application for renewal is made.

(iii) For new
Charitable Trusts, Educational Institutions, Hospitals, etc., the following
procedure is to be followed:

(a) The
application for registration in the prescribed form should be made to the designated
authority at least one month prior to the commencement of the previous year
relevant to the assessment year for which the registration is sought.

(b) In such a
case, the designated authority will grant provisional registration for a period
of three assessment years. The order for provisional registration is to be
passed by the designated authority within one month from the last date of the
month in which the application for registration is made.

(c) Where such
provisional registration is granted for three years, the Trust / Institutions
will have to apply for renewal of registration at least six months prior to
expiry of the period of the provisional registration or within six months of
commencement of its activities, whichever is earlier. In this case, the
designated authority has to pass the order within six months from the end of
the month in which the application is made. In such a case, renewal of
registration will be granted for five years.

(iv) Section 11(7)
is amended to provide that the registration of the Trust u/s 12A/12AA will
become inoperative from the date on which the Trust is approved u/s
10(23C)/10(46), or on 1^st October, 2020, whichever is later. In such
a case the Trust can apply for registration u/s 12AB. For this purpose the application
for registration u/s 12AB will have to be made at least six months prior to the
commencement of the assessment year for which the registration is sought. The
designated authority will have to pass the order within six months from the end
of the month in which the application is made.

(v) Where a Trust
or Institution has made modifications in its objects and such modifications do
not conform with the conditions of registration, application should be made to
the designated authority within 30 days from the date of such modifications.

(vi) Where the
application for registration, renewal of registration is made as stated above,
the designated authority has power to call for such documents or information
from the Trust / Institutions or make such inquiry in order to satisfy itself
about (a) the genuineness of the Trust / Institutions, and (b) the compliance
with requirements of any other applicable law for achieving the objects of the
Trust or Institution. After satisfying himself, the designated authority will
grant registration for five years or reject the application for registration
after giving a hearing to the trustees. If the application is rejected, the
Trust or Institutions can file an appeal before the ITA Tribunal within 60
days. The designated authority also has power to cancel the registration of any
Trust or Institutions u/s 12AB on the same lines as provided in the existing
section 12AA. All applications for registration pending before the designated
authority as on 1^st October, 2020 will be considered as applications
made under the new provisions of section 10(23C)/12AB.

7.2. Corpus
donation:

(i) Hitherto, a
corpus donation given by an Educational Institution, Hospital, etc. claiming
exemption u/s 10(23C) to a similar institution claiming exemption under that
section, was not considered as application of income under that section. By
amendment of section 10(23C), effective from 1^st April, 2020, a
corpus donation given by such an Institution to a Charitable Trust registered
u/s 12AA also will not be considered as application of income u/s 10(23C).
Similarly, section 11 at present provides that a corpus donation given by a
Charitable Trust to another Charitable Trust registered u/s 12AA is not
application of income. This section is also amended, effective from 1^stApril,
2020, to provide that a corpus donation given by a Charitable Trust to a
Charitable Trust registered u/s 12AA and to Educational Institutions or a
Hospital registered u/s 10(23C) will not be considered as application of income.

(ii) Section 10(23C) is amended, effective from 1^st
April, 2020, to provide that any corpus donation received by an Educational
Institution or a Hospital claiming exemption under that section will not be
considered as its income. At present, this provision exists in section 12 and
Charitable Trusts claiming exemption u/s 11 are getting benefit of this
provision.

7.3. Section
80G(5)(vi):

A proviso
to section 80G(5)(vi) is added from 1^st October, 2020. At present, a
certificate granted u/s 80G is valid until it is cancelled. Now, this provision
is deleted and a new procedure is introduced. Briefly stated, this procedure is
as under:

(i) Where the
Trust / Institution holds a certificate u/s 80G it will have to make a fresh
application in the prescribed form for a new certificate under that section
within three months, i.e. on or before 31^st December, 2020. In such
a case the designated authority will give a fresh certificate which will be
valid for five years. The designated authority has to pass the order within
three months from the last date of the month in which the application is made.

(ii) For renewal
of the above certificate, an application will have to be made at least six
months before the date of expiry of the said certificate. The designated authority
has to pass the order within six months from the last date of the month in
which the application is made.

(iii) In a new
case, the application for certificate u/s 80G will be required to be filed at
least one month prior to the commencement of the previous year relevant to the
assessment year for which the approval is sought. In such a case, the
designated authority will give provisional approval for three years. The
designated authority has to pass the order within one month from the last date
of the month in which the application is made.

(iv) In a case
where provisional approval is given, application for renewal will have to be
made at least six months prior to the expiry of the period of provisional
approval, or within six months of the commencement of the activities by the
Trust / Institution, whichever is earlier. In this case the designated
authority has to pass the order within six months from the last date of the
month in which the application is made.

In cases of
renewal of approval as stated in (ii) and (iv) above, the designated authority
shall call for such documents or information or make such inquiries as he
thinks necessary in order to satisfy himself that the activities of the Trust /
Institution are genuine and that all conditions specified at the time of grant
of registration earlier have been complied with. After it is satisfied it shall
renew the certificate u/s 80G. If it is not so satisfied, it can reject the
application after giving a hearing to the Trustees. The Trust / Institution can
file an appeal to the ITAT within 60 days if the approval u/s 80G is rejected.

7.4. Sections
80G(5)(viii) and (ix): Clauses (viii) and (ix) are added in section 80G(5)
from 1^st October, 2020 to provide that every Trust / Institution
holding a section 80G certificate will be required to file with the prescribed
Income-tax Authority particulars of all donors in the prescribed form within
the prescribed time. The Trust / Institution has also to issue a certificate in
the prescribed form to the donor about the donations received by it. The donor
will get deduction u/s 80G only if the Trust / Institution has filed the
required statement with the Income-tax Authority and issued the above
certificate to the donor. In the event of failure to file the above statement
or issue the above certificate to the donor within the prescribed time, the
Trust / Institution will be liable to pay a fee of Rs. 200 per day for the
period of delay under the new section 234G. This fee shall not exceed the
amount in respect of which the failure has occurred. Further, a penalty of Rs.
10,000 (minimum) which may extend to Rs. 1 lakh (maximum) may also be levied
for the failure to file details of donors or issue certificate to donors under
the new section 271K.

It may be noted
that the above provisions for filing particulars of donors and issue of
certificate to donors will apply to donations for Scientific Research to an
association or company u/s 35(1)(ii)(iia) or (iii). These sections are also
amended. Provisions for levy of fee or penalty for failure to comply with these
provisions will also apply to the donee company or association which received
donations u/s 35. As stated earlier, the donor will not get deduction for
donations as provided in section 80GG if the donee company or association has
not filed the particulars of donors or not issued the certificate for donation.

Further, there is
no provision for filing appeal before the CIT(A) or ITATl against the levy of
fee u/s 234G.

7.5. Filing of
Audit Report: Sections 12A and 10(23C) are amended, effective from 1^st
April, 2020 to provide that the audit reports in Forms 10B and 10BB for A.Y.
2020-21 (F.Y. 2019-20) and subsequent years shall be filed with the tax
authorities one month before the due date for filing the return of income.

7.6 General:
The existing provisions relating to Charitable Trusts and Institutions are
complex. By the above amendments they are made more complex. The effect of
these amendments will be that there will be no ease of doing charities. In
particular, smaller Charitable Trusts will find it difficult to comply with
these procedural requirements. The compliance burden for them will increase. If
the Trusts are not able to comply with the requirement of filing details of
donors with the Tax Authorities or giving certificates to donors, they will
have to pay late filing fees as well as penalty. Again, the requirement of
getting fresh registration for all Trusts and Institutions and renewing the
same every five years under sections 10(23C), 12AB and 80G will be a
time-consuming process. Those dealing with Trust matters know how difficult it
is to get any such certificate or registration from the Income-tax Department.
In order to reduce the compliance burden, the requirements of filing details
about donors should have been confined to information relating to donations
exceeding Rs. 50,000 received from a donor during the year. Trustees of the
Charitable Trusts are rendering honorary service. To put such an onerous
responsibility on such persons is not at all justified. Under the new
provisions the donors will not get deduction for the donations made by them if
the trustees of the Trust do not file the prescribed particulars relating to
donors every year. Therefore, smaller Trusts will find it difficult to get
donations as donors will have apprehension that the donee trust may not file
the required details with the Income-tax Department in time.

8. RESIDENTIAL STATUS

The provisions
relating to residential status of an assessee are contained in section 6 of the
Income-tax Act. Significant changes are made by amendments in section 6 so far
as the residential status of an individual is concerned. In brief, these
amendments are as under:

(i) An individual
is resident in India in an accounting year if, (a) his stay in India is for 182
days or more in that year, or (b) his stay in India is for 365 days or more in
four years preceding that year and he is in India for a period of 60 days or
more in the accounting year.

(ii) At present,
in the case of a citizen of India or a Person of Indian Origin who is outside
India and comes on a visit to India in the accounting year, the threshold of 60
days stated in (i) above is relaxed to 182 days. By amendment of this provision
from A.Y. 2021-22 (F.Y. 2020-21), it is provided that in the case of a citizen
of India or a Person of Indian Origin who is outside India having total income
other than the specified foreign income, exceeding Rs. 15 lakhs during the
relevant accounting year, comes on a visit to India for 120 days or more in the
accounting year, will be considered as a resident in India.

(iii) It may be noted that the existing provision
applicable to a citizen of India who leaves India in any accounting year as a
member of the crew of an Indian ship or for the purpose of employment outside
India remains unchanged.

(iv) New sub-section (1A) is added in section 6 to
provide that if a citizen of India, having total income other than the
specified foreign income in the accounting year exceeding Rs. 15 lakhs, shall
be deemed to be a resident for that year, if he is not liable to tax in any
other country or territory by reason of his domicile or residence or any other
criterion of similar nature.

(v) Section 6(6) defines a person who is deemed to
be a ‘Resident but not Ordinary Resident’ (‘R but not OR’). By amendment of
this section, it is provided that the following persons shall also be
considered as ‘R but not OR’.

(a) A citizen of India, or a Person of Indian Origin, having total
income other than specified Foreign income exceeding Rs.15 lakhs during the
accounting year and who has been in India for a period of 120 days or more but
less than 182 days in that year.

(b) A citizen of India, who is deemed to be a resident in India, as
stated in (iv) above, will be considered as ‘R but not OR’.

(vi) For the above purpose the ‘specified foreign
income’ is defined to mean income which accrues or arises outside India, except
income derived from a business controlled in India or a profession set up in
India.

(vii) It may be
noted that under the Income-tax Act, an ‘R and OR’ is liable to pay tax on his
world income and a non-resident or an ‘R but not OR’ has to pay tax on income
accruing, arising or received in India. Therefore, individuals who are citizens
of India or Persons of Indian Origin will have to be careful about their stay
in India and abroad and determine their residential status on the basis of this
amended law.

9. SALARY INCOME

(i) At present, the contribution by an employer (a)
to the account of an employee in a recognised Provident Fund exceeding 12% of
the salary, (b) Contribution to superannuation fund in excess of Rs. 1,50,000,
and (c) contribution in National Pension Scheme is fully taxable in the hands
of an employee. However, deduction provided in section 80CCD(2) can be claimed
by the employee. There is no combined upper limit for the purpose of deduction
of amount of contribution made by the employer.

(ii) Section 17(2) has been amended, effective from
A.Y. 2021-22 (F.Y. 2020-21), to provide that the aggregate contribution made by
the employer to the account of the employee by way of PF, superannuation fund,
NPS exceeding Rs. 7,50,000 in an accounting year will be taxable as perquisite
in the hands of the employee. Further, any annual accretion by way of interest,
dividend or any other amount of similar nature during the year to the balance
at the credit of the fund or scheme, will be treated as perquisite to the
extent it relates to the employer’s taxable contribution. The amount of such
perquisite will be calculated in such manner as may be prescribed by the Rules.

10. BUSINESS INCOME

10.1 Section
35: Expenditure on scientific research

Section 35(1)
provides for weighted deduction for expenditure on Scientific Research by a
Research Association, University, College or other Institution or a Specified
Company (herein referred to as Research Bodies). The existing section provides
that these Research Bodies have to obtain approval of the prescribed authority.
Now this section is amended, effective from 1^st October, 2020, to
provide as under:

(i) The approval
granted to such Research Bodies on or before 1^st October, 2020 shall
stand withdrawn unless a fresh application for approval in the prescribed form
is made to the prescribed authority within three months, i.e., on or before 31^st
December, 2020. The notification issued by the prescribed authority shall be
valid for five consecutive assessment years beginning from A.Y. 2021-22.

(ii) It is also
stated that the Notification issued by the Central Government in respect of the
Research Bodies after 31^st December, 2020 shall, at any one time,
have effect for such assessment years not exceeding five assessment years as
may be specified in the Notification.

(iii) The
amendment in the section also provides that the above Research Bodies shall be
entitled to the deduction under the section only if the following conditions
are satisfied:

(a) They have to
prepare such statement about donations for such period as may be prescribed and
deliver these to the specified Income-tax Authority.

(b) They should
furnish to the donor a certificate specifying the amount of the donation in the
prescribed form.

(iv) It may be noted that if the statement in the
prescribed form is not filed in time or the certificate to the donor is not
given in time as stated above, the Research Body will be liable to pay a fine
of Rs. 200 per day of default u/s 234G. Further, penalty of Rs. 10,000
(minimum) which may extend to Rs. 1 lakh (maximum) may also be levied u/s 271K.

(v) The donor will not get deduction for the
donation if the above statement is not filed and the certificate in the
prescribed form is not issued by the Research Body.

10.2 Section
35AD: At present, section 35AD(1) provides for 100% deduction of Capital
Expenditure (other than expenditure on Land, Goodwill and Financial Assets)
incurred by any specified business. Further, section 35AD(4) provides that no
deduction is allowable under any other section in respect of which 100%
deduction is allowed u/s 35AD(1).

The section is now
amended, effective from A.Y. 2020-21 (F.Y. 2019-20), giving option to the
assessee either to claim deduction under the section or not do so. If such
option is exercised and the assessee has not claimed deduction u/s 35AD(1),
deductions u/s 32 can be claimed.

10.3 Section
43CA: This section provides that if the consideration for transfer of land
/ building, which is held as stock-in-trade, is less than 105% of the stamp
duty valuation, the stamp duty valuation (SDV) will be deemed to be the
consideration. This provision is now amended, effective from A.Y. 2021-22 (F.Y.
2020-21), to provide that if the consideration is less than 110% of the SDV,
then the SDV shall be deemed to be the consideration. Thus, further concession
of 5% is given in this transaction.

10.4 Section
72AA: At present, this section deals with carry-forward and set-off of
accumulated losses and unabsorbed depreciation on amalgamation of Banks. This
section is amended, effective from A.Y. 2020-21 (F.Y. 2019-20). By this
amendment, the benefit of carry-forward and set-off losses and unabsorbed
losses which was given on amalgamation of Banks has been extended to the
following entities.

(a) Amalgamation of one or more Banks with another
Bank under a scheme framed by the Central Government under the Banking
Companies (Acquisition and Transfer of Undertakings) Act, 1970 or the similar
Act of 1980.

(b) Amalgamation of one or more Government
companies with another Government company under a scheme sanctioned by the
Central Government under the General Insurance Business (Nationalisation) Act,
1972.

11. CAPITAL GAINS

11.1 Sections
49 and 2(42A): Section 49 provides for cost of acquisition for capital
assets which became the property of the assessee under specified circumstances.
Further, section 2(42A) provides for the period of holding of a capital asset
by an assessee for being considered as a short-term capital asset. These two
sections are amended, effective from A.Y. 2020-21 (F.Y. 2019-20). Briefly
stated, these amendments are as under:

(a) In the event
of downgrade in credit rating of debt and money market instruments in M.F.
schemes, SEBI has permitted the Asset Management Companies an option to
segregate the portfolio of such Schemes. In the event of such segregation, all
existing investors are allotted equal number of units in the segregated
portfolio held in the main portfolio. It is now provided that in determining
the period of holding of such segregated portfolio, the period for which the
original units in the main portfolio were held will be included.

(b) Further, the
cost of acquisition of such units in the segregated folio shall be the cost of
acquisition of the units held by the assessee in the total portfolio in
proportion to the NAV of the asset transferred to the segregated portfolio out
of the NAV of the total portfolio before the date of segregation. The cost of
acquisition of the original units in the main portfolio will be suitably
reduced by the amount derived as cost of units in the segregated portfolio.
These provisions are similar to those applicable for allocation of cost of
shares on demerger of a company.

11.2 Sections
50C and 56(2)(X): Section 50C provides that if the consideration for
transfer of a capital asset (land or building or both) is less than 105% of the
Stamp Duty Valuation (SDV), the SDV will be deemed to be the consideration.
This provision is now amended, effective from A.Y. 2021-22 (F.Y. 2020-21) to
provide that if the consideration is less than 110% of the SDV, the SDV will be
deemed to be the consideration. Thus, further concession of 5% is given for
such transactions.

On the same basis,
section 56(2)(X) is also amended. Under this section if land / building is
received by an assessee from a non-relative for a consideration which is less
than 105% of the SDV, the difference between the SDV and consideration is
treated as income from other sources. This section is also amended on the same
line as section 50C and further concession of 5% is given for such a
transaction.

11.3 Section
55: At present, this section provides that if the capital asset became the
property of the assessee before 1^st April, 2001, the assessee has
the option to adopt the fair market value of the asset transferred as on 1^st
April, 2001 for its cost of acquisition. This section is now amended, effective
from A.Y. 2021-22 (F.Y. 2020-21), to provide that if the capital asset is land
/ building, the fair market value on 1^st April, 2001 which the
assessee wants to adopt, shall not be more than the SDV on 1^st
April, 2001.

12. FILING OF RETURN OF INCOME

12.1 Section
139(1): At present, a person (including a company) who is required to get
his accounts audited is required to file his return of income on or before 30^th
September every year. By amendment of this section from A.Y. 2020-21 (F.Y.
2019-20), such a person will have to file his return of income on or before 31^st
October of the year. Further, at present a working partner of a firm or LLP
which is required to get its accounts audited is covered by this provision.
Now, any partner, including a working partner of a firm or LLP which is
required to get its accounts audited can file his return of income on or before
31^st October of that year. It may be noted that for A.Y. 2020-21,
the due date for filing return of income is extended up to 30^th
November, 2020 under CBDT Notification No. 35/2020 dated 24^th June,
2020.

12.2 Ordinance
dated 31^st March, 2020: By Taxation and Other Laws (Relaxation
of certain Provisions) Ordinance dated 31^st March, 2020 and CBDT
order u/s 119 dated 31^st March, 2020 and CBDT Notification dated 24^th
June, 2020 extends the time limit for filing return of income for A.Y. 2019-20
(F.Y. 2018-19) u/s 139(4) and revised return u/s 139(5), has been extended up
to 30^th September, 2020. This concession is due to Covid-19 and
consequential lockdown from 25^th March, 2020 onwards in the country.

12.3 Section
140: Under this section, at present the return of income has to be signed
in the case of a company by a Managing Director or Director and in the case of
an LLP by a Designated Partner or Partner. By amendment of this section from
A.Y. 2020-21 (F.Y. 2019-20), it is provided that in such cases the return of
income can be signed by such person as may be prescribed by the Rules.

13. TAX AUDIT REPORTS

13.1 Section 44AB: By amendment of this section, effective from
A.Y. 2020-21 (F.Y. 2019-20), it is provided that in the case of a person
carrying on business if the aggregate of all amounts received including for
sales, turnover or gross receipts and the aggregate amount of all payments
(including expenditure incurred) in cash during the accounting year does not
exceed 5% of the sales, turnover or gross receipts and 5% of the total
payments, Tax Audit u/s 44AB will be required only if the sales, turnover or
gross receipts exceed Rs. 5 crores in that accounting year. It may be noted
that this provision will apply to a company, firm, LLP, individual, AOP, HUF,
etc.

In other cases,
the existing turnover limit of Rs. 1 crore will apply. The above concession is
not applicable in the case of a person carrying on profession where the limit
with reference to gross receipts is Rs. 50 lakhs.

13.2 From the
wording of the amendment in section 44AB it appears that the limit of 5% of
cash receipts and payments applies with reference to all receipts from sales,
turnover or gross receipts, receipts from debtors, receipts from capital
account transactions, receipts of interest on loans and deposits, etc., and to
all payments for expenses for business or other purposes, payments to
creditors, payments of taxes, repayment of loans, payments for capital account
transactions, payments relating to transactions other than business, etc. In
other words, the above concession is not applicable if 5% or more of total
receipts as well as 5% or more of total payments are in cash.

13.3 At present,
the Tax Audit Report u/s 44AB is required to be filed along with the return of
income. This provision is now amended from the A.Y. 2020-21 (F.Y. 2019-20) to
provide that the Tax Audit Report should be filed with the tax authorities one
month before the due date for filing the return of income. Therefore, if the
due date for filing the return of income is 31^st October, then the
Tax Audit Report should be filed on or before 30^th September of that
year. In the case where Transfer Pricing Audit Report is to be obtained, the
due date for filing the return of income remains 30^th November. In
such cases, the Audit Report u/s 92F will have to be filed on or before 31^st
October.

13.4 It may be
noted that there are other sections under the Income-tax Act which require
different types of audit reports in the prescribed forms to be filed with the
return of income. These sections relate to charitable trusts, transfer pricing,
book profits, etc. Therefore, sections 10(23C), 10A, 12A, 32AB, 33AB, 33ABA,
35D, 35E, 44DA, 50B, 80-IA, 80-IB, 80JJAA, 92F, 115JB, 115JC and 155VW are
suitably amended from A.Y. 2020-21 (F.Y. 2019-20). In all these cases, the Tax
Audit Report will be required to be filed one month before the due date for
filing the Income-tax return of income.

13.5 In the
Memorandum explaining the provisions of the Finance Bill, 2020, it is stated
that to enable pre-filing of returns in case of the assessee having income from
business or profession, it is required that the Tax Audit Report may be
furnished by the said assessee at least one month prior to the date of filing
of the return of income. All the above sections are amended for this purpose
from A.Y. 2020-21.

14. APPEALS

14.1 Section
250: At present, an appeal before the CIT(A) is to be filed through
electronic mode. Thereafter, the assessee or his counsel has to attend before
the CIT(A) and argue the matter. In order to reduce human interface from the
system, section 250 has been amended from 1^st April, 2020 to provide
for a new E-appeal Scheme on lines similar to the E-assessment Scheme. This amendment
is as under:

(i) The Central
Government is given power to notify an E-appeal Scheme for disposal of appeal
so as to impart greater efficiency, transparency and accountability.

(ii) Interface
between CIT(A) and the appellant in the course of appellate proceedings will be
eliminated to the extent technologically feasible.

(iii) Utilisation
of resources through economies of scale and functional specialisation will be
optimised.

(iv) An appellate system with dynamic jurisdiction
in which an appeal shall be disposed of by one or more CIT(A)s will be
introduced.

Further, the
Central Government may direct for exception, modification and adaptation as may
be specified in the Notification. The above directions are to be issued before
31^st March, 2022.

14.2 Section
254: Under this section, the ITAT has been given power to grant stay of
disputed demand on an application filed by the assessee. At present, the
Tribunal is not required to impose any condition for deposit of any amount out
of the disputed demand while granting such stay.

This section is
amended from 1^st April, 2020 to provide that the ITAT can pass a
stay order subject to the condition that the assessee shall deposit at least
20% of the disputed tax, interest, fee, penalty, etc., or furnish security of
equal amount of such disputed tax.

Further, ITAT can
grant extension of stay only if the assessee has complied with the condition of
depositing the amount of disputed tax or furnishing of security for the amount
as stated above. The ITAT has to decide the appeal, where stay of demand is
granted, within 365 days of granting of the stay. Thus, the stay of demand
granted by the Tribunal cannot exceed 365 days.

15. PENALTIES

15.1 Section
271AAD: This is a new section inserted in the Act which will have
far-reaching implications. This section will take effect from 1^st
April, 2020. It provides that if, during any proceedings under the Act, either
a false entry or an omission of an entry, which is relevant for computation of
total income of such person is found in the books of accounts maintained by any
person with a view to evade tax liability, the A.O. can levy penalty of 100% of
the aggregate amount of such entry or omission of entry. Since this is a penal
provision, it is possible to take the view that this provision will apply to
any false entry or omission of entry found in the books for the accounting year
2020-21 and onwards.

The term ’false
entry’ for this purpose is defined in the Explanation to the section. It
includes use or intention to use:

(i) Forged or falsified documents such as false
invoice or, in general, a false piece of documentary evidence, or

(ii) Invoice in respect of supply or receipt of goods
or services or both issued by the person or any other person without actual
supply or receipt of such goods or services or both, or

(iii) Invoice in respect of supply or receipt of
goods or services or both to or from a person who does not exist.

15.2 Section
271K: This is a new section which comes into force on 1^st June,
2020. Under this section the A.O. is given power to levy penalty of Rs. 10,000
(minimum) which may extend to Rs. 1 lakh (maximum) for non-compliance of
requirements to (i) file required statements in time, or (ii) furnish
certificate to the donors as required under sections 35(1)(ii)(iia), or (iii),
35(1A)(ii), 80G(5)(viii) or (ix).

15.3 Section
274: This section has been amended from 1^st April, 2020 to
provide for a scheme for conducting penalty proceedings on lines similar to the
E-assessment Scheme. By this amendment, the Central Government is authorised to
notify a scheme for the purpose of imposing penalty so as to impart greater
efficiency, transparency and accountability. This scheme will provide for:

(i) Elimination of
interface between the A.O. and the assessee in the course of proceedings to the
extent technologically feasible,

(ii) Optimisation
of utilisation of resources through economies of scale and functional
specialisation,

(iii) Introduction
of mechanism of imposing penalty with dynamic jurisdiction in which penalty
shall be imposed by one or more Income-tax authorities.

Further, the
Central Government is also empowered to issue Notification directing that any
of the provisions of the Act relating to jurisdiction and procedure for
imposing penalty shall not apply or shall apply with such exceptions,
modifications or adaptations as may be specified in the Notification. Such
Notification can be issued on or before 31^st March, 2022.

16. OTHER AMENDMENTS

16.1 Section
115UA: This section deals with taxation of income of unit holders of
Business Trust. Section 115UA(3) is amended from A.Y. 2021-22 (F.Y. 2020-21) to
provide that the distributed income in the nature of interest, dividends and
rent shall be deemed to be income of the unit holder and shall be charged to
tax. Consequential amendments are made in section 194LBA to provide for
deduction of tax at source on such distributed income.

16.2 Section
133A: At present, the power to survey u/s 133A(1) can be exercised with the
approval of Joint Commissioner or Joint Director. This section is amended from
1^st April, 2020 and it is provided as under:

(i) Where the
information is received from the authority to be prescribed by the Rules, the
survey shall not be undertaken by Assistant Director, Deputy Director,
Assessing Officer, T.R.O. or an Inspector without obtaining approval of the
Joint Commissioner or Joint Director.

(ii) In any other
case, no survey can be conducted by the Joint Director, Joint Commissioner,
Assistant Director, Deputy Director, Assessing Officer, T.R.O. or Inspector
without the approval of the Director or Commissioner of Income-tax.

16.3 Section
143: Sections 143(3A) and (3B) deal with the E-Assessment Scheme for
assessment u/s 143(3). By amendment of this section from 1^st April,
2020 it is now provided that the E-Assessment Scheme shall also apply to ex
parte assessment u/s 144. Further, the time limit for issue of any
notification giving direction that any of the provisions of the Income-tax Act
relating to assessment of total income or loss shall not apply or shall apply
with such exceptions, modifications or adaptations as may be specified, has
been extended from 31^st March, 2020 to 31^st March, 2022.

16.4 Section
144C: This section deals with the Dispute Resolution Panel (DRP). At
present, the provision for sending draft assessment order by the A.O. to the
assessee applied only if the A.O. proposed variation in the income or loss
returned by the assessee. By amendment of this provision from 1^st
April, 2020 it is now provided that the A.O. will have to send the draft
assessment order to the assessee even if the A.O. proposes to make any
variation which is prejudicial to the interest of the assessee. Further, at
present the provisions of this section apply in the case of (i) an assessee in
whose case transfer pricing adjustments are proposed by an order passed by
T.P.O. and (ii) a foreign company. With effect from 1^st April, 2020,
this section will also apply in cases of all non-residents.

16.5 Section
234G: This is a new section inserted in the Income-tax Act from 1^st
June, 2020. It provides for levy of a fee for failure under sections (a)
35(1)(ii), (iia) or (iii), (b) 35(1A)(ii), (c) 80G(5)(viii), and (d) 80G(5)(ix)
to file statements or issue certificates to donors under these sections. This
fee is Rs. 200 per day during which the failure continues. However, such fine
shall not exceed the amount in respect of which the above failure has occurred.
This fee is payable before filing the statement or issuing the certificate
required under the above sections after the due date. As stated earlier, these
statements relate to particulars of donors to be filed with the tax authorities
and the certificates to be issued to donors. It may be noted that no appeal is
provided against the levy of this fee if the delay in filing statements or
issue of certificates is for reasonable cause.

16.6 Sections
203AA and 285BB: Section 203AA required the Income-tax authority to prepare
and deliver to the assessee a statement in Form 26AS giving details of TDS, TCS
and taxes paid. This section is deleted from 1^st June, 2020 and a
new section 285BB is inserted in the Act from the said date. This new section
provides that the prescribed Income-tax authority shall upload in the
registered account of the assessee an Annual Information Statement in the
prescribed form and within the prescribed time. This statement will include
information about taxes paid, TDS, TCS, sale / purchase transactions of
immovable properties, share transactions, etc., which are reported to the tax
authorities under various provisions.

16.7 Section
288: This section gives a list of persons who can appear before the
Income-tax authorities and Appellate Authorities as authorised representatives.
This section is amended from 1^st April, 2020 to authorise CBDT to
prescribe, by Rules, any other person who can appear as an authorised
representative.

17. TAXPAYER’S CHARTER

At present there is no provision under the Income-tax Act providing for
declaration of a Taxpayer’s Charter. A new section 119A has been inserted in
the Act from 1^st April, 2020 which provides that CBDT shall adopt
and declare a Taxpayer’s Charter and issue such orders, instructions, directions
and guidelines to the Income-tax Authorities for administration of such
Charter. This Charter may explain the Rights and Duties of taxpayers. Let us
hope that the Income-tax Authorities respect the rights of taxpayers in the
true spirit in which the Charter is to be issued by CBDT.

18. ‘VIVAD SE VISHWAS’ SCHEME

Parliament passed
‘The Direct Tax Vivad Se Vishwas Act, 2020’ in March, 2020. Certain
amendments are made in the Act by ‘The Taxation and Other Laws (Relaxation of
Certain Provisions) Ordinance, 2020’ promulgated by the President on 31^st
March, 2020. This Scheme has been introduced with a view to reduce litigation
in Direct Tax cases pending before various appellate authorities. The assessees
can avail the benefit of this Scheme by paying the disputed tax and getting
waiver of penalty, interest and late filing fee.

19. TO SUM UP

(i) From the above
analysis of the provisions of the Finance Act, 2020, the existing complex
Income-tax Act has been made more complex. Many provisions are added in the Act
which have increased the compliance burden of the taxpayers. The assessees and
their tax advisers will have to be more vigilant to ensure compliance with
these provisions and to meet the time limits provided for their compliance.

(ii) In last year’s
Budget, rates of Income-tax for certain domestic companies were reduced on the
condition that they forgo certain deductions and tax incentives. The scope of
deductions to be forgone has been widened and such companies will not be able
to claim deductions under all sections of chapter VIA, excluding sections
80JJAA and 80M. Similar benefit is now given to Individuals, HUFs and
Co-operative Societies who will pay lower tax if they opt to forgo various
deductions and tax incentives. Considering the list of deductions and
incentives to be forgone, it is possible that very few assessees will exercise
the option for lower rate of tax.

(iii) Dividend
Distribution Tax, hitherto levied on companies for over two decades, has now
been removed. Now, dividend on shares and income distribution on units of
Mutual Funds will be taxed in the hands of the share / unit holders. This is
one of the major steps taken in this Budget. This change will bring many
persons within the tax net as the exemption enjoyed by them so far has been
withdrawn.

(iv) By several
amendments made in the provisions relating to exemption granted to Charitable
Trusts, Educational Institutions and Hospitals, the compliance burden of such
institutions will increase. These amendments made in the Income-tax Act are
unfair.
When the Government is propagating for ease of doing business and ease of
living, it has made the life of Trustees of such Trusts more difficult. With
these new provisions, there will no ease of doing charities. In particular,
these provisions will make the life of Trustees of small trusts difficult. The
provisions for renewing registration of trusts every five years, renewing
section 80G
certificates every five years, filing particulars of donors every year and
issuing certificates to donors are time-consuming. Further, any delay in
compliance with these provisions will invite late filing fees and penalty. If
the Government wanted to keep track of the activities of such trusts, these
provisions could have been made applicable to Trusts having net worth exceeding
Rs. 5 crores or those who receive donations of more than Rs. 1 crore every
year.

(v) Several
amendments are made in the provisions relating to Tax Deduction and Tax
Collection at Source. Now, tax is required to be collected from persons
remitting foreign exchange under the LRS Scheme. The scope of the provisions
for TDS / TCS is now widened and, in some cases, tax will be collected at
source even on items which do not constitute income of the deductee.

(vi) Amendments
relating to residential status will bring some of the persons who could avoid
tax by planning their visits to India every year under the tax net. Now, many
persons will find it difficult to avoid tax liability in India.

(vii) The new
section 271AAD providing for 100% penalty for an alleged false entry or
omission of any entry is a harsh provision. This will raise many issues of
interpretation. This will create hardship to the assessees where arbitrary
addition is made by the tax authorities and penalties are levied under this
section. An incidental question arises whether this provision is retrospective
or applies to accounting entries relating to transactions entered into on or
after 1^st April, 2020.

(viii) One welcome feature of this year’s Budget is statutory
recognition of a ‘Taxpayer’s Charter”. CBDT has to prescribe the Rules for this
Charter which will declare the rights and duties of a taxpayer. Let us hope
that CBDT provides a comprehensive document when this Chapter is announced and
that the Income-tax Authorities respect the rights of taxpayers in the letter
and spirit of this document.

(ix) Another
welcome feature of this year’s Budget is the enactment of the Direct Tax Vivad
Se Vishwas Act. The objective of this Act is to reduce Direct Tax
litigation pending before the Appellate Authorities. Considering the liberal
provisions of this Act, it is possible that many assessees will avail the
benefit of this scheme for settlement of many pending tax disputes.

(x) This year’s
Finance Bill was introduced in both the Houses of Parliament on 1^st
February, 2020. The various provisions of the Bill were not discussed in Parliament.
More than 125 amendments to the original Bill were moved by the Finance
Minister on 23^rd March, 2020 and the Bill with the amendments was
passed by both Houses of the Parliament without any
discussion due to Covid-2019 which affected India and the entire world. Some of
the harsh provisions in the Finance Act, 2020, as pointed out above, have not
undergone legislative scrutiny. It is possible that these harsh provisions are
removed or suitably modified in the days to come.

(Like many
committed authors of the BCA Journal, Shri P.N. Shah has been authoring
an article on the Finance Act for as long as I can remember. This year due to
Covid-19 and non-availability of staff, we have received it much later than we
would have liked. The article summarises key direct tax provisions [except
co-operative societies, rate reduction of specified companies, taxation of
non-residents and provisions relating to DTAA and transfer pricing which we
couldn’t carry due to space constraints] and serves as a summary analysis of
the key changes – Editor)

shailesh.kwebmaker

Glimpses Of Supreme Court Ruilings

14. Yum! Restaurants (Marketing) Private Limited vs.
Commissioner of Income Tax, Delhi

Date of order: 24^th April, 2020

Doctrine of mutuality – Applicability of – The
receipt of money from an outside entity without affording it the right to have
a share in the surplus does not only subjugate the first test of common
identity, but also contravenes the other two conditions for the existence of
mutuality, i.e., impossibility of profits and obedience to the mandate – There
is a fine line of distinction between absence of obligation and presence of
overriding discretion – An arrangement wherein one member is subjected to the
absolute discretion of another, in such a manner that the entire liability may
fall upon one whereas benefits are reaped by all, is antithetical to the mutual
character in the eyes of law – The raison d’être behind the refund of
surplus to the contributors or mandatory utilisation of the same in the
subsequent assessment year is to reduce their burden of contribution in the
next year proportionate to the surplus remaining from the previous year –
Non-fulfilment of this condition is antithetical to the test of mutuality

The
appellant company Yum! Restaurants (Marketing) Private Limited (‘YRMPL’ or
‘assessee company’ or ‘assessee’) was incorporated by Yum! Restaurants (India)
Pvt. Ltd. (‘YRIPL’), formerly known as Tricon Restaurants India Pvt. Ltd., as
its fully-owned subsidiary for undertaking the activities relating to
advertising, marketing and promotion (‘AMP activities’) for and on behalf of
YRIPL and its franchisees after having obtained approval from the Secretariat
for Industrial Assistance (‘SIA’) for the purpose of economisation of the cost
of advertising and promotion of the franchisees as per their needs. The
approval was granted subject to certain conditions as regards the functioning
of the assessee whereby it was obligated to operate on a non-profit basis on
the principles of mutuality.

In
furtherance of the approval, the assessee entered into a tripartite operating
agreement (the ‘tripartite agreement’) with YRIPL and its franchisees, wherein
the assessee company received fixed contributions to the extent of 5% of gross
sales for the proper conduct of the AMP activities for the mutual benefit of
the parent company and the franchisees.

For the
assessment year 2001-02, the assessee filed its return stating the income to be
Nil under the pretext of the mutual character of the company. The same was not accepted by the A.O.
who observed that the assessee company along with the franchisees was to
contribute a fixed percentage of its revenue to YRMPL. However, as per the
tripartite agreement submitted by YRMPL, YRIPL had the sole absolute discretion
to pay to YRMPL any amount as it may deem appropriate and that YRIPL had no
obligation to pay any amount if it chooses not to do so. YRIPL was under no
legal obligation to pay any amount of contribution as per its own version
reflected from the tripartite agreement. The A.O. determined the total income
at Rs. 44,44,002, being the excess of income over expenditure for A.Y. 2001-02.

The
imposition of liability by the A.O. was upheld by the CIT(A) on the ground of taint
of commerciality in the activities undertaken by the assessee company.

The
liability was further confirmed by the Tribunal, wherein the essential
ingredients of the doctrine of mutuality were found to be missing. The Tribunal
inter alia found that apart from others, contributions were also
received from M/s Pepsi Foods Ltd. and YRIPL. Pepsi Foods Ltd. was neither a
franchisee nor a beneficiary. Similarly, some contribution was also received
from YRIPL who was not under any obligation to pay. Thus, the essential
requirement, that the contributors to the common fund are either to participate
in the surplus or they are beneficiaries of the contribution, was missing.
Through the common AMP activities no benefit accrued to Pepsi Foods Ltd. or
YRIPL. Accordingly, the principles of mutuality could not be applied.

The
consistent line of opinion recorded by the aforementioned three forums was
further approved in appeal by the High Court.

According
to the Supreme Court, the following questions of law arose in the present case:

(i)
Whether the assessee company would qualify as a mutual concern in the eyes of
law, thereby exempting subject transactions from tax liability?

(ii)
Whether the excess of income over expenditure in the hands of the assessee
company is not taxable?

The
assessee had contended before the Supreme Court that the sole objective of the
assessee company was to carry on the earmarked activities on a no-profit basis
and to operate strictly for the benefit of the contributors to the mutual
concern. It was further contended that the assessee company levied no charge on
the franchisees for carrying out the operations. While assailing the
observations made in the impugned judgment, holding that Pepsi Foods Ltd. and
YRIPL were not beneficiaries of the concern, the assessee company had urged
that YRIPL was the parent company of the assessee and earned a fixed percentage
from the franchisees by way of royalty. Therefore, it benefited directly from
enhanced sales as increased sales would translate into increased royalties. A
similar argument had been advanced as regards Pepsi Foods Ltd. It was stated
that under a marketing agreement the franchisees were bound to serve Pepsi
drinks at their outlets and, thus, an increase in the sales at KFC and Pizza
Hut outlets as a result of AMP activities would lead to a corresponding
increase in the sales of Pepsi. It was pointed out that Pepsi was also
advertised by the franchisees in their advertising and promotional material,
along with Pizza Hut and KFC.

As
regards the doctrine of mutuality, it was urged by the assessee company that
the doctrine merely requires an identity between the contributors and
beneficiaries and it does not contemplate that each member should contribute to
the common fund or that the benefits must be derived by the beneficiaries in
the same manner or to the same extent. Reliance had been placed by the
appellant upon reported decisions to draw a parallel between the functioning of
the assessee company and clubs to support the presence of mutuality.

The
Revenue / respondent had countered the submissions made by the assessee company
by submitting that the moment a non-member joins the common pool of funds created
for the benefit of the contributors, the taint of commerciality begins and
mutuality ceases to exist in the eyes of law. It had been submitted that the
assessee company operated in contravention of the SIA approval as contributions
were received from Pepsi, despite it not being a member of the brand fund. It
was urged that once the basic purpose of benefiting the actual contributors was
lost, mutuality stands wiped out.

The
Supreme Court held that it was undisputed that Pepsi Foods Ltd. was a contributor
to the common pool of funds. However, it did not enjoy any right of
participation in the surplus or any right to receive back the surplus which was
a mandatory ingredient to sustain the principle of mutuality.

The
assessee company was realising money both from the members as well as
non-members in the course of the same activity carried on by it. The Supreme
Court noted that in Royal Western India Turf Club Ltd., AIR 1954 SC 85
it has categorically held such operations to be antithetical to mutuality.
Besides, the dictum in Bankipur Club (1997) 5 SCC 394 was apposite.

According
to the Supreme Court, the contention of the assessee company that Pepsi Foods
Ltd., in fact, did benefit from the mutual operations by virtue of its
exclusive contracts with the franchisees was tenuous, as the very basis of
mutuality was missing. Even if any remote or indirect benefit is being reaped
by Pepsi Foods Ltd., the same could not be said to be in lieu of
it being a member of the purported mutual concern and, therefore, could not be
used to fill the missing links in the chain of mutuality. The surplus of a
mutual operation was meant to be utilised by the members of the mutual concern
as members enjoy a proximate connection with the mutual operation. Non-members,
including Pepsi Foods Ltd., stood on a different footing and had no proximate
connection with the affairs of the mutual concern. The exclusive contract
between the franchisees and Pepsi Foods Ltd. stood on an independent footing
and YRIPL as well as the assessee company were not responsible for
implementation of the contract. As a result, the first limb of the
three-pronged test stood severed.

The
Supreme Court held that the receipt of money from an outside entity without
affording it the right to have a share in the surplus did not only subjugate
the first test of common identity, but also contravened the other two
conditions for the existence of mutuality, i.e., impossibility of profits and
obedience to the mandate. The mandate of the assessee company was laid down in
the SIA approval wherein the twin conditions of mutuality and non-profiteering
were envisioned as the sine qua non for the functioning of the assessee
company. The contributions made by Pepsi Foods Ltd. tainted the operations of
the assessee company with commerciality and concomitantly contravened the
prerequisites of mutuality and non-profiteering.

The
Court further held that YRIPL and the franchisees stand on two substantially
different footings. For, the franchisees are obligated to contribute a fixed
percentage for the conduct of AMP activities, whereas YRIPL is under no such
obligation in utter violation of the terms of the SIA approval. Moreover, even
upon request for the grant of funds by the assessee company, YRIPL is not bound
to accede to the request and enjoys a ‘sole and absolute’ discretion to decide
against such request. An arrangement wherein one member is subjected to the
absolute discretion of another, in such a manner that the entire liability may
fall upon one whereas benefits are reaped by all, is the antithesis to the
mutual character in the eyes of law.

According
to the Supreme Court, the contention advanced by the appellant that it is not
mandatory for every member of the mutual concern to contribute to the common
pool failed to advance the case of the appellant. The Court held that there is
a fine line of distinction between absence of obligation and presence of
overriding discretion. In the present case, YRIPL enjoyed the latter to the
detriment of the franchisees of the purported undertaking, both in matters of
contribution and of management. In a mutual concern, it is no doubt true that
an obligation to pay may or may not be there, but in the same breath it is
equally true that an overriding discretion of one member over others cannot be
sustained in order to preserve the real essence of mutuality wherein members
contribute for the mutual benefit of all and not of one at the cost of others.

The
Court observed that the settled legal position is that in order to qualify as a
mutual concern, the contributors to the common fund either acquire a right to
participate in the surplus or an entitlement to get back the remaining
proportion of their respective contributions. Contrary to the above stated
legal position, as per clause 8.4 the franchisees did not enjoy any
‘entitlement’ or ‘right’ on the surplus remaining after the operations were
carried out for a given assessment year. As per the aforesaid clause the
assessee company may refund the surplus subject to the approval of its Board of
Directors. It implied that the franchisees / contributors could not claim a
refund of their remaining amount as a matter of right. According to the Supreme
Court, the raison d’être behind the refund of surplus to the
contributors or mandatory utilisation of the same in the subsequent assessment
year is to reduce their burden of contribution in the next year proportionate
to the surplus remaining from the previous year. Thus, the fulfilment of this
condition is essential. In the present case, even if any surplus is remaining
in a given assessment year, it would not reduce the liability of the
franchisees in the following year as their liability to the extent of 5% was
fixed and non-negotiable, irrespective of whether any funds were surplus in the
previous year. The only entity that could derive any benefit from the surplus
funds was YRIPL, i.e., the parent company. This was antithetical to the test of
mutuality.

It was
observed that the dispensation predicated in the tripartite agreement may
result in a situation where YRIPL would not contribute even a single paisa to
the common pool and yet be able to derive profits in the form of royalties out
of the purported mutual operations, created from the fixed 5% contribution made
by the franchisees. This would be nothing short of derivation of gains /
profits out of inputs supplied by others. According to the Supreme Court, the
doctrine of mutuality, in principle, entails that there should not be any
profit-earning motive, either directly or indirectly. One of the tests of
mutuality requires that the purported mutual operations must be marked by an
impossibility of profits and this crucial test was also not fulfilled in the
present case.

The
Supreme Court further observed that the exemption granted to a mutual concern
is premised on the assumption that the concern is being run for the mutual
benefit of the contributors and the contributions made by the members ought to
be directed accordingly. Contrary to this fundamental tenet, the tripartite
agreement relieves the assessee company from any specific obligation of
spending the amounts received by way of contributions for the benefit of the contributors.
It explicates that the assessee company does not hold such amount under any
implied trust for the franchisees.

According
to the Supreme Court, the assessee company had acted in contravention of the
terms of approval.

The
appellant had urged before the Supreme Court that no fixed percentage of
contribution could be imputed upon YRIPL as it did not operate any restaurant
directly and, thus, the actual volume of sales could not be determined.
According to the Court this argument was not tenable as YRIPL received a fixed
percentage of royalty from the franchisees on the sales. If the franchisees
could be obligated with a fixed percentage of contribution, 5% in the present
case, there was no reason as to why the same obligation ought not to apply to
YRIPL.

The
Court further noted that the text of the tripartite agreement pointed towards
the true intent of the formation of the assessee company as a step-down subsidiary.
It was established to manage the retail restaurant business, the advertising,
media and promotion at the regional and national level of KFC, Pizza Hut and
other brands currently owned or to be acquired in future. In its true form, it
was not contemplated as a non-business concern because operations integral to
the functioning of a business were entrusted to it.

The
Supreme Court held that the doctrine of mutuality bestows a special status to
qualify for exemption from tax liability. The appellant having failed to fulfil
the stipulations and to prove the existence of mutuality, the question of
extending exemption from tax liability to the appellant, that, too at the cost
of the public exchequer, did not arise.

The
assessee company had relied upon reported decisions before the Supreme Court to
establish a parallel between the operations carried out by it and clubs.
According to the Supreme Court, all the members of the club not only have a
common identity in the concern but also stand on an equal footing in terms of
their rights and liabilities towards the club or the mutual undertaking. Such
clubs are a means of social intercourse and are not formed for the facilitation
of any commercial activity. On the contrary, the purported mutual concern in
the present case undertook a commercial venture wherein contributions were
accepted both from the members as well as from non-members. Moreover, one
member was vested with a myriad set of powers to control the functioning and
interests of other members (franchisees), even to their detriment. Such
assimilation could not be termed as a case of ordinary social intercourse
devoid of commerciality.

The
Supreme Court was of the view that once it had conclusively determined that the
assessee company had not operated as a mutual concern, there was no question of
extending exemption from tax liability.

To
support an alternative claim for exemption, the assessee company took a plea in
the written submissions that it was acting under a trust for the contributors
and was under an overriding obligation to spend the amounts received for
advertising, marketing and promotional activities. It urged that once the
incoming amount is earmarked for an obligation, it does not become ‘income’ in
the hands of the assessee as no occasion for the application of such income
arises.

The
Supreme Court left the question of diversion by overriding title open as the
same was neither framed nor agitated in the appeal memo before the High Court
or before it (except a brief mention in the written submissions), coupled with
the fact that neither the Tribunal nor the High Court had dealt with that plea
and that the rectification application raising that ground was pending before
the Tribunal.

15. Basir Ahmed
Sisodiya vs. The Income Tax Officer Date of order: 24^th
April, 2020

Cash credits – The
appellant / assessee, despite being given sufficient opportunity, failed to
prove the correctness and genuineness of his claim in respect of purchase of
marble from unregistered dealers to the extent of Rs. 2,26,000 and resultantly,
the said transactions were assumed as bogus entries (standing to the credit of
named dealers who were non-existent creditors of the assessee) – The appellant
/ assessee, however, in penalty proceedings had offered explanation and caused
to produce affidavits and record statements of the unregistered dealers
concerned and establish their credentials and that explanation having been
accepted by the CIT(A) who concluded that the materials on record would clearly
suggest that the unregistered dealers concerned had sold marble slabs on credit
to the appellant / assessee, as claimed – That being the indisputable position,
the Supreme Court deleted the addition of amount of Rs. 2,26,000

The appellant / assessee was served with a notice u/s
143(2) of the Income-tax Act, 1961 (the ‘1961 Act’) by the A.O. for the A.Y.
1998-99, pursuant to which an assessment order was passed on 30^th
November, 2000. The A.O., while relying on the balance sheet and the books of
accounts, inter alia took note of the credits amounting to Rs. 2,26,000.
He treated that amount as ‘cash credits’ u/s 68 of the 1961 Act and added the
same in the declared income of the assessee (the ‘second addition’). According
to the A.O., the credits of Rs. 2,26,000 shown in the names of 15 persons were
not correct and any correct proof / evidence had not been produced by the
assessee with respect to the income of the creditors and source of income. He
also made other additions to the returned income.

Aggrieved, the assessee preferred an appeal before the
Commissioner of Income Tax (Appeals), Jodhpur. The appeal was partly allowed vide
order dated 9^th January, 2003. However, as regards the trading
account and credits in question, the CIT(A) upheld the assessment order.

The
assessee then preferred a further appeal to the ITAT. Having noted the issues
and objections raised by the Department and the assessee, the ITAT partly
allowed the appeal vide order dated 4^th November, 2004.
However, the order relating to the second addition regarding the credits of Rs.
2,26,000 came to be upheld.

The
assessee then filed an appeal before the High Court u/s 260A of the 1961 Act.
The appeal was admitted on 27^th April, 2006 on the following
substantial question of law:

‘Whether
claim to purchase of goods by the assessee could be dealt with u/s 68 of the
Income-tax Act as a cash credit, by placing burden upon the assessee to explain
that the purchase price does not represent his income from the disclosed
sources?’

The High
Court dismissed the appeal vide impugned judgment and order dated 21^st
August, 2008 as being devoid of merits. The High Court opined that the amount
shown to be standing to the credit of the persons which had been added to the
income of the assessee, was clearly a bogus entry in the sense that it was only
purportedly shown to be the amount standing to the credit of the fifteen
persons, purportedly on account of the assessee having purchased goods on
credit from them, while since no goods were purchased, the amount did represent
income of the assessee from undisclosed sources which the assessee had only
brought on record (books of accounts), by showing to be the amount belonging to
the purported sellers and as the liability of the assessee. That being the
position, the contention about impermissibility of making addition under this
head, in view of addition of Rs. 10,000 having been made in trading account,
rejecting the books of accounts for the purpose of assessing the gross profit,
could not be accepted. The gross profit shown in the books had not been
accepted on the ground that the assessee had not maintained day-to-day stock
registers, nor had he produced or maintained other necessary vouchers, but
then, if those books of accounts did disclose certain other assets which were
wrongly shown to be liabilities, and for acquisition of which the assessee did
not show the source, it could not be said that the A.O. was not entitled to use
the books of accounts for this purpose.

The
assessee in the civil appeal before the Supreme Court reiterated the argument
that the A.O., having made the addition u/s 144 of the 1961 Act being ‘best
judgment assessment’, had invoked powers under sub-section (3) of section 145.
For, assessment u/s 144 is done only if the books are rejected. In that case,
the same books could not be relied upon to impose subsequent additions as had
been done in this case u/s 68.

The
assessee filed an I.A. No. 57442/2011 before the Supreme Court for permission
to bring on record subsequent events. By this application, the assessee placed
on record an order passed by the CIT(A) dated 13^th January, 2011
which considered the challenge to the order passed by the Income-Tax Officer
(ITO) u/s 271(1)(c) dated 17^th November, 2006 qua the
assessee for the self-same assessment year 1998-99. The ITO had passed the said
order as a consequence of the conclusion reached in the assessment order which
had by then become final up to the stage of ITAT vide order dated 27^thApril, 2006 – to the effect that the stated purchases by the assessee
from unregistered dealers were bogus entries effected by him. As a result,
penalty proceedings u/s 271 were initiated by the ITO. That order was set aside
by the appellate authority [CIT(A)] in the appeal preferred by the assessee, vide
order dated 13^th January, 2011 with a finding that the assessee
had not made any concealment of income or furnished inaccurate particulars of
income for the assessment year concerned. As a consequence of this decision of
the appellate authority, even the criminal proceedings initiated against the
assessee were dropped / terminated and the assessee stood acquitted of the
charges u/s 276(C)(D)(1)(2) of the 1961 Act vide judgment and order
dated 6^th June, 2011 passed by the Court of Additional Chief City
Magistrate (Economic Offence), Jodhpur City in proceedings No. 262/2005.

The
Supreme Court noted that during the course of appellate proceedings, the
appellant filed an application under Rule 46A vide letter dated 16^th
October, 2008 and the same was sent to the ITO, Ward-1, Makrana vide
this office letter dated 28^th January, 2009 and 1^st
December, 2010 to submit remand report after examination of additional
evidences. Along with the application under Rules 46A, the appellant filed
affidavits from 13 creditors, the Sales Tax Order for the Financial Year
1997-98 showing purchases from unregistered dealers to the tune of Rs.
2,28,900, cash vouchers duly signed on revenue stamp for receipt of payment by
the unregistered dealers and copy of ration card / Voter ID Card to show the
identity of the unregistered dealers. The A.O. recorded statements of 12
unregistered dealers out of 13. In the report dated 22^nd December,
2010, he mentioned that statements of the above 12 persons were recorded on 15^th
/ 16^th December, 2010 and in respect of identify the unregistered
dealers filed photo copies of their voter identity cards and all of them had
admitted that they had sold marble on credit basis to Basir Ahmed Sisodiya, the
appellant, during F.Y. 1997-98 and received payments after two or three years.
However, he observed that none of them had produced any evidence in support of
their statement since all were petty, unregistered dealers of marble and doing
small business and therefore no books of accounts were maintained. Some of them
had stated that they were maintaining small dairies at the relevant period of
time but they could not preserve the old dairies. Some of them had stated that
they had put their signature on the vouchers on the date of the transactions.

The
Supreme Court further noted that the CIT(A) had observed that in respect of the
addition of Rs. 2,26,000 there had been no denial of purchase of marble slabs
worth Rs. 4,78,900 and sale of goods worth Rs. 3,57,463 and disclosure of
closing stock of Rs. 2,92,490 in the trading account for the year ended on 31^st
March, 1998. Without purchases of marble, there could not have been sale and
disclosure of closing stock in the trading account which suggested that the
appellant must have purchased marble slabs from unregistered dealers. The
CIT(A) had found that the explanation given by the appellant in respect of
purchases from unregistered dealers and their genuineness were substantiated by
filing of affidavits and producing these before the A.O. in the course of
remand report, and the A.O. did not find anything objectionable in respect of
the identity of the unregistered dealers and claims made for the sale of marble
slabs to the appellant in the F.Y. relevant to A.Y. 1998-99.

The
Supreme Court observed that considering the findings and conclusions recorded
by the A.O. and which were commended to the appellate authority as well as the
High Court, it must follow that the assessee despite being given sufficient
opportunity, failed to prove the correctness and genuineness of his claim in
respect of purchase of marble from unregistered dealers to the extent of Rs.
2,26,000. As a result, the said transactions were assumed as bogus entries
(standing to the credit of named dealers who were non-existent creditors of the
assessee).

According
to the Supreme Court, the assessee, however, in penalty proceedings had offered
explanation and caused to produce affidavits and record statements of the
unregistered dealers concerned and establish their credentials and that
explanation having been accepted by the CIT(A) who concluded that the materials
on record would clearly suggest that the unregistered dealers concerned had
sold marble slabs on credit to the assessee, as claimed.

The
Supreme Court was therefore of the view that the factual basis on which the
A.O. formed his opinion in the assessment order dated 30^th November,
2000 (for A.Y. 1998-99) in regard to the addition of Rs. 2,26,000, stood
dispelled by the affidavits and statements of the unregistered dealers
concerned in penalty proceedings. That evidence fully supported the claim of
the assessee. The appellate authority vide order dated 13^th
January, 2011, had not only accepted the explanation offered but also recorded
a clear finding of fact that there was no concealment of income or furnishing
of any inaccurate particulars of income by the appellant / assessee for the
A.Y. 1998-99. That now being the indisputable position, it must necessarily
follow that the addition of the amount of Rs. 2,26,000 could not be justified,
much less maintained.

The
Supreme Court, therefore, allowed the appeal.

16. Union of India (UOI) and Ors. vs. U.A.E.
Exchange Centre Date of order: 24^th
April, 2020

India-UAE DTAA – Merely
having a fixed place of business through which the business of the assessee is
being wholly or partly carried on is not conclusive unless the assessee has a
PE situated in India, so as to attract Article 7 dealing with business profits
to become taxable in India, to the extent attributable to the PE of the
assessee in India – As per Article 5, which deals with and defines the
‘Permanent Establishment (PE)’, a fixed place of business through which the
business of an enterprise is wholly or partly carried on is to be regarded as a
PE and would include the specified places referred to in Clause 2 of Article 5,
but Article 5(3) of the DTAA which starts with a non obstante clause and
also contains a deeming provision predicates that notwithstanding the preceding
provisions of the Article concerned, which would mean clauses 1 and 2 of
Article 5, it would still not be a PE if any of the clauses in Article 5(3) are
applicable – No income as specified in section 2(24) of the 1961 Act was earned
by the liaison office of the respondent in India because the liaison office was
not a PE in terms of Article 5 of DTAA as it was only carrying on activity of a
preparatory or auxiliary character

The
respondent, a limited company incorporated in the United Arab Emirates (UAE)
was engaged in offering, among other things, remittance services for
transferring amounts from UAE to various places in India. It had applied for
permission u/s 29(1)(a) of the Foreign Exchange Regulation Act, 1973 (‘the 1973
Act’), pursuant to which approval was granted by the Reserve Bank of India (the
RBI) vide letter dated 24^th September, 1996.

The
respondent set up its first liaison office in Cochin, Kerala in January, 1997
and thereafter in Chennai, New Delhi, Mumbai and Jalandhar. The activities carried on by the respondent
from the said liaison offices were stated to be in conformity with the terms
and conditions prescribed by the RBI in its letter dated 24^th
September, 1996. The entire expenses of the liaison offices in India were met
exclusively out of funds received from the UAE through normal banking channels.
Its liaison offices undertook no activity of trading, commercial or industrial,
as the case may be. The respondent had no immovable property in India otherwise
than by way of lease for operating the liaison offices. No fee / commission was
charged or received in India by any of the liaison offices for services
rendered in India. It was claimed that no income accrued or arose or was deemed
to have accrued or arisen, directly or indirectly, through or from any source
in India from liaison offices within the meaning of section 5 or section 9 of
the Income-tax Act, 1961 (the 1961 Act). According to the respondent, the
remittance services were offered by it to non-resident Indians (NRIs) in the
UAE. The contract pursuant to which the funds were handed over by the NRI to
the respondent in the UAE was entered into between the respondent and the NRI
remitter in the UAE. The funds were collected from the remitter by charging a
one-time fee of Dirhams 15. After collecting the funds from the NRI remitter,
the respondent made an electronic remittance of the funds on behalf of its
customer in one of two ways:

(i) By telegraphic transfer through bank
channels; or

(ii) On
the request of the NRI remitter, the respondent sent an instrument / cheque
through its liaison offices to the beneficiaries designated by the NRI
remitter.

In
compliance with section 139 of the ITA, 1961, the respondent had been filing
its returns of income from the A.Y. 1998-99 and until 2003-04, showing Nil
income, as according to the respondent no income had accrued or was deemed to
have accrued to it in India, both under the 1961 Act as well as the agreement
entered into between the Government of the Republic of India and the Government
of the UAE, which is known as the Double Taxation Avoidance Agreement (‘DTAA’).
This agreement (DTAA) had been entered into between the two sovereign countries
in exercise of powers u/s 90 of the 1961 Act for the purpose of avoidance of
double taxation and prevention of fiscal evasion with respect to taxes and
income on capital. The DTAA had been notified vide notification No. GSR
No. 710(E) dated 18^th November, 1993. The returns were filed on a
regular basis by the respondent and were accepted by the Department without any
demur.

However,
as some doubt was entertained, the respondent filed an application u/s 245Q(1)
before the Authority for Advance Rulings (Income Tax), New Delhi, which was
numbered as AAR No. 608/2003 and sought ruling of the Authority on the
following question:

‘Whether
any income is accrued / deemed to be accrued in India from the activities
carried out by the Company in India?’

The
Authority vide its ruling dated 26^th May, 2004 answered the
question in the affirmative, saying, ‘Income shall be deemed to accrue in India
from the activity carried out by the liaison offices of the applicant in
India.’ In so holding, the Authority opined that in view of the deeming
provision in sections 2(24), 4 and 5 read with section 9 of the 1961 Act, the
respondent-assessee would be liable to pay tax under the 1961 Act as it had
carried on business in India through a ‘permanent establishment’ (PE) situated
in India and the profits of the enterprise needed to be taxed in India, but
only that proportion that was attributable to the liaison offices in India (the
PE).

The
Authority held that the applicant had liaison offices in India which attended
to the complaints of the clients in cases where remittances were sent directly
to banks in India from the UAE. In addition, in cases where the applicant had
to remit the amounts to the beneficiaries in India as per the directions of the
NRIs, the liaison offices downloaded the information from the internet, printed
cheques / drafts in the name of the beneficiaries in India and sent them
through couriers to various places in India. Without the latter activity, the
transaction of remittance of the amounts in terms of the contract with the NRIs
would not be complete. The commission which the applicant received for
remitting the amount covered not only the business activities carried on in the
UAE but also the activity of remittance of the amount to the beneficiary in
India by cheques / drafts through courier which was being attended to by the
liaison offices.

There
was, therefore, a real relation between the business carried on by the
applicant for which it received commission in the UAE and the activities of the
liaison offices (downloading of information, printing and preparation of
cheques / drafts and sending the same to the beneficiaries in India), which
contributed directly or indirectly to the earning of income by the applicant by
way of commission. There was also continuity between the business of the
applicant in the UAE and the activities carried on by the liaison offices in
India. Therefore, it followed that income had deemed to have accrued / arisen
to the applicant in the UAE from ‘business connection’ in India.

The
Authority further held that insofar as the amount was remitted telegraphically
by transferring directly from the UAE through bank channels to various places
in India and in such remittances the liaison offices had no role to play except
attending to the complaints, if any, in India regarding the remittances in
cases of fraud etc., it could be said to be auxiliary in character. However,
downloading the data, preparing cheques for remitting the amount and
dispatching the same through courier by the liaison offices was an important
part of the main work itself because without remitting the amount to the
beneficiaries as desired by the NRIs, performance of the contract would not be
complete. It was a significant part of the main work of the UAE establishment.
It, therefore, followed that the liaison offices of the applicant in India for
the purposes of this mode of remittance were a ‘permanent establishment’ within
the meaning of the expression in the DTAA.

Following
the impugned ruling of the Authority, dated 26^th May, 2004, the
Department issued four notices of even date, i.e., 19^th July, 2004
u/s 148 of the 1961 Act addressed to the respondent and pertaining to A.Y.s
2000-01, 2001-02, 2002-03 and 2003-04, respectively. The respondent approached
the Delhi High Court by way of Writ Petition No. 14869/2004, inter alia
for quashing of the ruling of the Authority dated 26^th May, 2004,
quashing of the stated notices and for a direction to the appellants not to tax
the respondent in India because no income had accrued to it or was deemed to
have accrued to it in India from the activities of its liaison offices in
India.

The High
Court was of the opinion that the Authority proceeded on a wrong premise by
first examining the efficacy of section 5(2)(b) and section 9(1)(i) of the 1961
Act instead of applying the provisions in Articles 5 and 7 of the DTAA for
ascertaining the respondent’s liability to tax. Further, the nature of
activities carried on by the respondent-assessee in the liaison offices being
only of a preparatory and auxiliary character, were clearly excluded by virtue
of the deeming provision. The High Court distinguished the decisions relied
upon by the Authority in Anglo-French Textile Co. Ltd., by
agents, M/s. Best & Company Ltd., Madras vs. Commissioner of Income
Tax, Madras AIR 1953 SC 105 and R.D. Aggarwal & Company
(Supra). The ratio in these decisions, according to the High
Court, was that the non-resident entity could be taxed only if there was a
business connection between the business carried on by a non-resident which
yields profits or gains and some activity in the taxable territory which
contributes directly or indirectly to the earning of those profits or gains.

The High
Court then concluded that the activity carried on by the liaison offices of the
respondent in India did not in any manner contribute directly or indirectly to the
earning of profits or gains by the respondent in the UAE and every aspect of
the transaction was concluded in the UAE, whereas the activity performed by the
liaison offices in India was only supportive of the transaction carried on in
the UAE. The High Court also took note of Explanation 2 to section 9(1)(i) and
observed that the same reinforces the fact that in order to have a business
connection in respect of a business activity carried on by a non-resident
through a person situated in India, it should involve more than what is
supportive or subsidiary to the main function referred to in clauses (a) to
(c). The High Court eventually quashed the impugned ruling of the Authority and
also the notices issued by the Department u/s 148 of the 1961 Act, since the
notices were based on the ruling which was being set aside. The High Court,
however, gave liberty to the appellants to proceed against the respondent on
any other ground as may be permissible in law.

Feeling
aggrieved, the Department filed a Special Leave Petition before the Supreme
Court.

According
to the Supreme Court, the core issue that was required to be answered in the
appeal was whether the stated activities of the respondent-assessee would
qualify the expression ‘of preparatory or auxiliary character’?

The
Supreme Court observed that having regard to the nature of the activities
carried on by the respondent-assessee, as held by the Authority, it would
appear that the respondent was engaged in ‘business’ and had ‘business
connections’ for which, by virtue of the deeming provision and the sweep of
sections 2(24), 4 and 5 read with section 9 of the 1961 Act, including the
exposition in Anglo-French Textile Co. Ltd. (Supra) and R.D.
Aggarwal & Company (Supra), it would be a case of income deemed to
accrue or arise in India to the respondent. However, in the present case, the
matter in issue would have to be answered on the basis of the stipulations in
the DTAA notified in exercise of the powers conferred u/s 90 of the 1961 Act.

Keeping
in view the finding recorded by the High Court, the Supreme Court proceeded on
the basis that the respondent-assessee had a fixed place of business through
which its business was being wholly or partly carried on. That, however, would
not be conclusive until a further finding is recorded that the respondent had a
PE situated in India so as to attract Article 7 dealing with business profits
to become taxable in India, to the extent attributable to the PE of the
respondent in India. For that, one has to revert back to Article 5 which deals
with and defines the ‘Permanent Establishment (PE)’. A fixed place of business
through which the business of an enterprise is wholly or partly carried on is
regarded as a PE. The term ‘Permanent Establishment (PE)’ would include the specified
places referred to in clause 2 of Article 5. According to the Supreme Court, it
was not in dispute that the place from where the activities were carried on by
the respondent in India was a liaison office and would, therefore, be covered
by the term PE in Article 5(2). However, Article 5(3) of the DTAA opens with a non
obstante clause and also contains a deeming provision. It predicates that
notwithstanding the preceding provisions of the Article concerned, which would
mean clauses 1 and 2 of Article 5, it would still not be a PE if any of the
clauses in Article 5(3) are applicable. For that, the functional test regarding
the activity in question would be essential. The High Court had opined that the
respondent was carrying on stated activities in the fixed place of business in
India of a preparatory or auxiliary character.

The
Supreme Court, after noting the meaning of the expression ‘business’ in section
2(13) of the 1961 Act, discerning the meaning of the expressions ‘business
connection’ and ‘business activity’ from section 9(1) of the 1961 Act and the
dictionary meaning of the expressions ‘preparatory’ and ‘auxiliary’, concluded
that since the stated activities of the liaison offices of the respondent in
India were of preparatory or auxiliary character, the same would fall within
the excepted category under Article 5(3)(e) of the DTAA. As a result, it could
not be regarded as a PE within the sweep of Article 7 of the DTAA.

According
to the Supreme Court, while answering the question as to whether the activity
in question could be termed as other than that ‘of preparatory or auxiliary
character’, it was to be noted that the RBI had given limited permission to the
respondent u/s 29(1)(a) of the 1973 Act on 24^th September, 1996.
From paragraph 2 of the stated permission it was evident that the RBI had
agreed for establishing a liaison office of the respondent at Cochin, initially
for a period of three years, to enable the respondent to (i) respond quickly
and economically to inquiries from correspondent banks with regard to suspected
fraudulent drafts; (ii) undertake reconciliation of bank accounts held in
India; (iii) act as a communication centre receiving computer (via modem)
advices of mail transfer T.T. stop payments messages, payment details, etc.,
originating from the respondent’s several branches in the UAE and transmitting
to its Indian correspondent banks; (iv) printing Indian Rupee drafts with a
facsimile signature from the Head Office and counter signature by the
authorised signatory of the office at Cochin; and (v) following up with the
Indian correspondent banks. These were the limited activities which the
respondent had been permitted to carry on within India. This permission did not
allow the respondent-assessee to enter into a contract with anyone in India but
only to provide service of delivery of cheques / drafts drawn on the banks in
India.

The
permitted activities were required to be carried out by the respondent subject
to conditions specified in Clause 3 of the permission, which included not to
render any consultancy or any other service, directly or indirectly, with or
without any consideration and further that the liaison office in India shall
not borrow or lend any money from or to any person in India without prior
permission of the RBI. The conditions made it amply clear that the office in
India would not undertake any other activity of trading, commercial or
industrial, nor shall it enter into any business contracts in its own name
without prior permission of the RBI. The liaison office of the respondent in
India could not even charge commission / fee or receive any remuneration or
income in respect of the activities undertaken by it in India. From the onerous
stipulations specified by the RBI, it could be safely concluded, as opined by
the High Court, that the activities in question of the liaison office(s) of the
respondent in India were circumscribed by the permission given by the RBI and
were in the nature of preparatory or auxiliary character. That finding reached
by the High Court was unexceptionable.

The
Supreme Court concluded that the respondent was not carrying on any business
activity in India as such, but only dispensing with the remittances by
downloading information from the main server of the respondent in the UAE and
printing cheques / drafts drawn on the banks in India as per the instructions
given by the NRI remitters in the UAE. The transaction(s) had been completed
with the remitters in the UAE, and no charges towards fee / commission could be
collected by the liaison office in India in that regard. To put it differently,
no income as specified in section 2(24) of the 1961 Act was earned by the
liaison office in India and more so because the liaison office was not a PE in
terms of Article 5 of the DTAA (as it was only carrying on activity of a
preparatory or auxiliary character).

The
concomitant was that no tax could be levied or collected from the liaison
office of the respondent in India in respect of the primary business activities
consummated by the respondent in the UAE. The activities carried on by the
liaison office in India as permitted by the RBI clearly demonstrated that the
respondent must steer away from engaging in any primary business activity and
in establishing any business connection as such. It could carry on activities
of preparatory or auxiliary nature only. In that case, the deeming provisions
in sections 5 and 9 of the 1961 Act could have no bearing whatsoever.

The Supreme
Court dismissed the appeal with no order as to costs.

shailesh.kwebmaker

Settlement of cases – Sections 245C(1) and 245D(4) of ITA, 1961 – Powers and duties of Settlement Commission – Application for settlement – Duty of Commission either to reject or proceed with application filed by assessee – Settlement Commission relegating assessee to A.O. – Not proper; A.Ys. 2008-09 to 2014-15

50. Samdariya Builders Pvt. Ltd. vs. IT Settlement Commission [2020] 423
ITR 203 (MP) Date of order: 7^th May, 2019 A.Ys.: 2008-09 to 2014-15

Settlement of cases – Sections 245C(1) and 245D(4) of ITA, 1961 – Powers
and duties of Settlement Commission – Application for settlement – Duty of Commission
either to reject or proceed with application filed by assessee – Settlement
Commission relegating assessee to A.O. – Not proper; A.Ys. 2008-09 to 2014-15

The assessee was a part of a group of companies. Search and survey
operations under sections 132 and 133A of the Income-tax Act, 1961 were
conducted in the residential and business premises of the group, including
those of the assessee and some brokers. No incriminating material was found
against the assessee during the operations, but nine loose sheets of paper,
purportedly relating to the assessee, were seized from a broker. In compliance
with notices issued u/s 153A for the A.Ys. 2008-09 to 2013-14 and section
142(1) for the A.Y. 2014-15, the assessee filed returns of income. During the
assessment proceedings, the assessee filed an application u/s 245C(1) before
the Settlement Commission for settlement and the application was admitted u/s
245D(1) and was proceeded with by the Settlement Commission u/s 245D(2C).
Thereafter, the Principal Commissioner filed a report under Rule 9 of the
Income-tax Rules, 1962. The Settlement Commissioner, by his order u/s 245D(4)
relegated the assessee to the A.O. Hence, the A.O. issued a notice to the
assessee to comply with the earlier notice issued u/s 142(1).

The assessee filed a writ petition and challenged the order. The Madhya
Pradesh High Court allowed the writ petition and held as under:

‘i) The Settlement Commission’s power of settlement has to be exercised in
accordance with the provisions of the Income-tax Act, 1961. Though the
Commission has sufficient powers in assessing the income of the assessee, it
cannot make any order with a term of settlement which would be in conflict with
the mandatory provisions of the Act, such as in the quantum and payment of tax
and the interest. The object of the Legislature in introducing section 245C of
the Income-tax Act, 1961 is to see that protracted proceedings before the
authorities or in courts are avoided by resorting to settlement of cases.

ii) The Settlement Commission could have either rejected the application or
allowed it to be proceeded with further. If the Settlement Commission was of
the opinion that the matter required further inquiry, it could have directed
the Principal Commissioner or the Commissioner to inquire and submit the report
to the Commission to take a decision. The Commission could not get around the
application for settlement. When a duty was cast on the Commission, it is
expected that the Commission would perform the duty in the manner laid down in
the Act, especially when no further remedy is provided in the Act against the
order of the Settlement Commission. The order of the Settlement Commission
relegating the assessee to the A.O. was to be set aside.’

shailesh.kwebmaker

Offences and prosecution – Sections 271(1)(c), 276C(2), 278B(3) of ITA, 1961 and Section 391 of Cr.P.C., 1973 – Wilful default in payment of penalty for concealment of income – Conviction of managing director and executive director of assessee by judicial magistrate – Appeal – Evidence – Documents to prove there was no wilful default left out to be marked due to inefficiency and inadvertence – Interest of justice – Appellate court has power to allow documents to be let in as additional evidence; A.Y. 2012-13

49. Gangothri Textiles Ltd. vs. ACIT [2020] 423 ITR 382 (Mad.) Date of
order: 20^th November, 2019 A.Y.: 2012-13

Offences
and prosecution – Sections 271(1)(c), 276C(2), 278B(3) of ITA, 1961 and Section
391 of Cr.P.C., 1973 – Wilful default in payment of penalty for concealment of
income – Conviction of managing director and executive director of assessee by
judicial magistrate – Appeal – Evidence – Documents to prove there was no
wilful default left out to be marked due to inefficiency and inadvertence –
Interest of justice – Appellate court has power to allow documents to be let in
as additional evidence; A.Y. 2012-13

The assessee company was a textile manufacturer. It
was represented by its managing director and executive director. The Assistant
Commissioner of Income-tax filed a complaint before the Judicial Magistrate u/s
200 and 190(1) of the Code of Criminal Procedure, 1973 against the petitioners
for offences u/s 276C(2) read with section 278B(3) of the Income-tax Act, 1961
for the A.Y. 2012-13 for wilful default in payment of penalty levied u/s
271(1)(c) of the IT Act.

The petitioners filed revision petitions and
contended that the trial court had failed to take into consideration the
necessity and requirement for marking the documents adduced by way of
additional evidence. The Madras High Court allowed the revision petition and
held as under:

‘i) Where documents of evidence are left out to be
marked due to carelessness and ignorance, they can be allowed to be marked for
elucidation of truth, in the interests of justice, by exercising powers u/s 391
of the Code of Criminal Procedure, 1973. The intention of section 391 of the
Code is to empower the appellate court to see that justice is done between the
prosecutor and the prosecuted in the interests of justice.

ii) According to section 391
of the Code, if the appellate court opined that additional evidence was
necessary, it shall record its reasons and take such evidence itself. The
petitioners had been charged u/s 276C(2) read with section 278B(3) of the Act
for having wilfully failed to pay the penalty and having deliberately failed to
admit the capital gains that arose from the sale transactions done by the
assessee. The criminal revision petition u/s 391 of the Code had been filed by
the petitioners even at the time of presentation of the appeal. The documents
sought to be marked as additional evidence were not new documents and they were
documents relating to filing of returns with the Department in respect of the
earlier assessment years, copies of which were also available with the
Department. By marking these documents, the nature or course of the case would
not be altered. The documents had not been produced before the trial court due
to inefficiency or inadvertence of the person who had conducted the case. Where
documents were left out to be marked due to carelessness and ignorance, they
could be allowed to be marked for elucidation of truth, in the interest of
justice, by exercising powers u/s 391 of the Code.

iii) The petitioners should be allowed to let in
additional evidence subject to the provisions of Chapter XXIII of the Code in
the presence of the complainant and his counsel.’

shailesh.kwebmaker

Income – Accrual of income – Mercantile system of accounting – Business of distribution of electricity to consumers – Surcharge levied on delayed payment of bills – Assessee liable to tax on receipt of such surcharge; A.Y. 2005-06

48. Principal CIT vs. Dakshin Haryana Bijli Vitran Nigam
Ltd. [2020] 423 ITR 402 (P&H) Date of order: 29^th November, 2018 A.Y.: 2005-06

Income – Accrual of income – Mercantile system of accounting – Business of
distribution of electricity to consumers – Surcharge levied on delayed payment
of bills – Assessee liable to tax on receipt of such surcharge; A.Y. 2005-06

The assessee distributed electricity. For the A.Y.
2005-06 the assessment was completed u/s 143(3). Subsequently, proceedings for
reassessment were initiated on the ground that the assessee had charged
surcharge on delayed payment of bill and this was charged as part of the single
bill along with the electricity charges. The assessee did not account for the
surcharge as part of its income on the ground that its recovery was not
definite. The A.O. made an addition on account of the surcharge levied but not
realised since the assessee followed the mercantile system of accounting.

The Commissioner (Appeals) deleted the addition
following his earlier orders. The Tribunal affirmed his order.

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

‘i) As and when the assessee received payment of
surcharge, it would be obliged to pay tax on such amount. There was no
illegality or perversity in the findings recorded by the appellate authorities
which warranted interference.

ii) No question of law arose.’

shailesh.kwebmaker

Fringe benefits tax – Charge of tax – Section 115WA of ITA, 1961 – Condition precedent – Relationship of employer and employee – Free samples distributed to doctors by pharmaceutical company – Not fringe benefit – Amount spent not liable to fringe benefits tax; A.Y. 2006-07

47. Principal CIT vs. Aristo Pharmaceuticals P. Ltd. [2020] 423 ITR 295 (Bom.) Date of order: 23^rd January, 2020 A.Y.: 2006-07

Fringe benefits tax – Charge of tax – Section 115WA of ITA, 1961 –
Condition precedent – Relationship of employer and employee – Free samples
distributed to doctors by pharmaceutical company – Not fringe benefit – Amount
spent not liable to fringe benefits tax; A.Y. 2006-07

The
following questions were raised in the appeal filed by the Revenue before the
Bombay High Court:

‘i)
Whether on the facts and in the circumstances of the case and in law, the
Tribunal was right in setting aside the action of the A.O. without appreciating
the fact that the fringe benefit assessment was framed after duly considering
the CBDT Circular No. 8 of 2005 ([2005] 277 ITR (St.) 20] and the Explanatory
Notes to the Finance Act, 2005 on the provisions relating to fringe benefit
tax?

ii)
Whether on the facts and in the circumstances of the case and in law, the
Tribunal was right in ignoring the fact that the Tribunal has explained
considering the case of Eskayef vs. CIT [2000] 245 ITR 116 (SC),
of the Supreme Court that free medical samples distributed to doctors is in the
nature of sales promotion and, similarly, any expenditure on free samples of
other products distributed to trade or consumers would be liable to fringe
benefit tax?’

The
Bombay High Court held as under:

‘i) From
a bare reading of section 115WA of the Income-tax Act, 1961 it is evident that
for the levy of fringe benefits tax it is essential that there must be a
relationship of employer and employee and the fringe benefit has to be provided
or deemed to be provided by the employer to his employees. The relationship of
employer and employee is the sine qua non and the fringe benefits have
to be provided by the employer to the employees in the course of such
relationship.

ii) The
assessee was a pharmaceutical company. Since there was no employer-employee
relationship between the assessee on the one hand and the doctors on the other
hand to whom the free samples were provided, the expenditure incurred for them
could not be construed as fringe benefits to be brought within the additional
tax net by levy of fringe benefit tax.’

shailesh.kwebmaker

Deemed income – Section 41(1) of ITA, 1961 – Remission or cessation of trading liability – Condition precedent for application of section 41(1) – Deduction must have been claimed for the liability – Gains on repurchase of debenture bonds – Not assessable u/s 41(1)

46. CIT vs. Reliance Industries Ltd. [2020] 423 ITR 236 (Bom.) Date of order: 15^th January, 2019

Deemed income – Section 41(1) of ITA, 1961 – Remission or cessation of
trading liability – Condition precedent for application of section 41(1) –
Deduction must have been claimed for the liability – Gains on repurchase of
debenture bonds – Not assessable u/s 41(1)

The
assessee had issued foreign currency bonds in the years 1996 and 1997 carrying
a coupon rate of interest ranging between 10 and 11% and having a maturity
period of 30 to 100 years. The interest was payable half-yearly. According to
the assessee, on account of the attack on the World Trade Centre in the USA on
11^th September, 2001, the financial market collapsed and the
investors of debentures and bonds started selling them which, in turn, brought
down the market price of such bonds and debentures which were traded in the
market at less than the face value. The assessee, therefore, purchased such
bonds and debentures from the market and extinguished them. In the process of
buyback, the assessee gained a sum of Rs. 38.80 crores. The A.O. treated this
as assessable to tax in terms of section 41(1) and made addition accordingly.

The
Commissioner (Appeals) deleted the addition. The Tribunal confirmed the
decision of the Commissioner (Appeals).

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

‘i) For
applicability of section 41(1), it is a sine qua non that there should
be an allowance or deduction claimed by the assessee in any assessment year in
respect of loss, expenditure or trading liability incurred. Then, subsequently,
during any previous year, if the creditor remits or waives any such liability,
the assessee is liable to pay tax u/s 41(1).

ii) It
was not the case of the Revenue that in the process of issuing the bonds the
assessee had claimed deduction of any trading liability in any year. Any
extinguishment of such liability would not give rise to applicability of
sub-section (1) of section 41.’

shailesh.kwebmaker

Capital gains – Transfer of bonus shares – Bonus shares in respect of shares held as stock-in-trade – No presumption that bonus shares constituted stock-in-trade – Tribunal justified in treating bonus shares as investments; A.Ys. 2006-07 to 2009-10

45. Principal CIT vs. Ashok Apparels (P.) Ltd. [2020] 423 ITR 412 (Bom.) Date of order: 8^th April, 2019 A.Ys.: 2006-07 to 2009-10

Capital gains – Transfer of bonus shares – Bonus shares in respect of
shares held as stock-in-trade – No presumption that bonus shares constituted stock-in-trade
– Tribunal justified in treating bonus shares as investments; A.Ys. 2006-07 to
2009-10

In the
appeal by the Revenue against the order of the Tribunal, the following question
was raised before the Bombay High Court.

‘Whether
on the facts and in the circumstances of the case and in law, the Income-tax
Appellate Tribunal was justified in treating the bonus shares as investments
with a cost of acquisition of Rs. Nil for the year under consideration,
ignoring the fact that the original shares, for which bonus shares were
allotted, were present in the trading stock itself for the year under
consideration, thus the bonus shares allotted against the same were also
required to be treated as a part of trading stock itself?’

The
Bombay High Court upheld the decision of the Tribunal and held as under:

‘i) In CIT
vs. Madan Gopal Radhey Lal [1969] 73 ITR 652 (SC) the Supreme Court
observed that bonus shares would normally be deemed to be distributed by the
company as capital and the shareholder receives the shares as capital. The
bonus shares are accretions to the shares in respect of which they are issued,
but on that account those shares do not become stock-in-trade of the business
of the shareholder. A trader may acquire a commodity in which he is dealing for
his own purposes and hold it apart from the stock-in-trade of his business.
There is no presumption that every acquisition by a dealer in a particular
commodity is acquisition for the purpose of his business; in each case the
question is one of intention to be gathered from the evidence of conduct and
dealings by the acquirer with the commodity.

ii) The
A.O. had merely proceeded on the basis that the origin of the bonus shares
being the shares held by the assessee by way of stock-in-trade, necessarily the
bonus shares would also partake of the same character. The Tribunal was
justified in the facts and circumstances of the case in treating the bonus
shares as investments.’

shailesh.kwebmaker

Capital gains – Exemption u/s 54 of ITA, 1961 – Sale of residential house and purchase or construction of new residential house within stipulated time – Construction of new residential house need not begin after sale of original house; A.Y. 2012-13

44. Principal CIT vs. Akshay Sobti [2020] 423 ITR 321 (Del.) Date of order: 19^th December, 2019 A.Y.: 2012-13

Capital gains – Exemption u/s 54 of ITA, 1961 – Sale of residential house
and purchase or construction of new residential house within stipulated time –
Construction of new residential house need not begin after sale of original
house; A.Y. 2012-13

For the
A.Y. 2012-13 the assessee had claimed deduction u/s 54 in respect of capital
gains from the sale of residential house. The A.O. disallowed the deduction u/s
54 on the ground that the assessee had entered into an agreement dated 10^th
February, 2006 and the date of the agreement was to be treated as the date of
acquisition, which fell beyond the one year period provided u/s 54 and was also
prior to the date of transfer.

The
Commissioner (Appeals) held that the assessee had booked a semi-finished flat
and was to make payments in instalments and the builder was to construct the
unfinished bare shell of a flat. Under these circumstances, the Commissioner
(Appeals) considered the agreement to be a case of construction of new
residential house and not purchase of a flat. He observed that since the
construction has been completed within three years of the sale of the original
asset, the assessee was entitled to relief u/s 54. The Tribunal upheld the
decision of the Commissioner (Appeals).

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

‘i)
Section 54 of the Income-tax Act, 1961 requires an assessee to purchase a
residential house property either one year before or within two years after the
date of transfer of a long-term capital asset, or construct a residential
house. It is not stipulated or indicated in the section that the construction
must begin after the date of sale of the original or old asset.

ii) The
assessee had fulfilled the conditions laid down in section 54 and was entitled
to the benefit under it.’

shailesh.kwebmaker

Business expenditure – Deduction u/s 42(1)(a) of ITA, 1961 – Exploration and extraction of oil – Conditions precedent for deduction – Expenditure should be infructuous or abortive exploration expenses, and area should be surrendered prior to commencement of commercial production – Meaning of expression ‘surrender’ – Does not always connote voluntary surrender – Assessee entering into production sharing contract with Government of India and requesting for extension at end of contract period – Government refusing extension – Assessee entitled to deduction u/s 42(1)(a); A.Y. 2008-09

43. Principal CIT vs. Hindustan Oil Exploration Co. Ltd. [2020] 423 ITR 465 (Bom.) Date of order: 25^th March, 2019 A.Y.: 2008-09

Business expenditure – Deduction u/s 42(1)(a) of ITA, 1961 – Exploration
and extraction of oil – Conditions precedent for deduction – Expenditure should
be infructuous or abortive exploration expenses, and area should be surrendered
prior to commencement of commercial production – Meaning of expression
‘surrender’ – Does not always connote voluntary surrender – Assessee entering
into production sharing contract with Government of India and requesting for
extension at end of contract period – Government refusing extension – Assessee
entitled to deduction u/s 42(1)(a); A.Y. 2008-09

The assessee was engaged in the business of exploration and extraction of
mineral oil. It entered into a production-sharing contract with the Government
of India on 8^th October, 2001 for the purposes of oil exploration.
According to the contract, a licence was issued to a consortium of three
companies, which included the assessee, to carry out the exploration initially
for a period of three years and the entire exploration was to be completed
within a period of seven years in three phases. At the end of the period,
extension was denied by the Government of India. In its Nil return of income
filed for the A.Y. 2008-09, the assessee claimed deduction u/s 42(1)(a) of the
Income-tax Act, 1961 on the expenditure on oil exploration on the ground that
the block was surrendered on 15^th March, 2008. The A.O. was of the
opinion that it had not surrendered the right to carry on oil exploration since
the assessee was interested in extension of time which was denied by the
Government of India and disallowed the claim.

The Commissioner (Appeals) allowed the appeal. The Tribunal found that
according to article 14 of the contract, relinquishment and termination of
agreement were two different concepts and that by a letter dated 28^th
March, 2007 the assessee was informed that its contract stood relinquished. The
Tribunal held that the assessee was covered by the deduction provision
contained in section 42, that such expenditure was not amortised or was not
being allowed partially year after year and it had to be allowed in full, and
therefore there was no justification to deny the benefit of deduction to the
assessee.

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

‘i) As long as the commercial production had not begun and the expenditure
was abortive or infructuous exploration expenditure, the deduction would be
allowed. The term “surrender” itself was a flexible one and did not always
connote the meaning of voluntary surrender. The surrender could also take place
under compulsion. The assessee had no choice but to surrender the oil blocks
because the Government of India had refused to extend the validity period of
the contract. Admittedly, commercial production of oil had not commenced. The
act of the assessee to hand over the oil blocks before the commencement of
commercial production was covered within the expression “any area surrendered
prior to the beginning of commercial production by the assessee”.

ii) The
provisions of section 42 recognised the risks of the business of exploration
which activity was capital-intensive and high in risk of the entire expenditure
not yielding any fruitful result and provided for special deduction. The
purpose of the enactment would be destroyed if interpreted rigidly. For
applicability of section 42(1)(a) the elements vital were that the expenditure
should be infructuous or abortive exploration expenses and that the area should
be surrendered prior to the beginning of commercial production by the assessee.
As long as these two requirements were satisfied, the expenditure in question
would be recognised as a deduction. The term “surrender” had to be appreciated
in the light of these essential requirements of the deduction clause. It was
not the contention of the Department that the expenditure was infructuous or
abortive exploration expenditure.

iii) The interpretation of section 42(1)(a) by the Tribunal and its order
holding the assessee eligible for deduction thereunder were not erroneous.’

shailesh.kwebmaker

i) Business expenditure – Disallowance – Sections 14A and 36(1)(iii) of ITA, 1961 – Interest on borrowed capital – Finding that investment from interest-free funds available with assessee – Presumption that advances made out of interest-free funds available with assessee – Deletion of addition made u/s 14A justified (ii) Unexplained expenditure – Section 69C of ITA, 1961 – Suspicion that certain purchases were bogus based on information from sales tax authority – Neither independent inquiry conducted by A.O. nor due opportunity given to assessee – Deletion of addition by appellate authorities justified; A.Y. 2010-11

42. Principal CIT vs.
Shapoorji Pallonji and Co. Ltd. [2020] 423 ITR 220
(Bom.) Date of order: 4^th
March, 2020 A.Y.: 2010-11

(i) Business expenditure –
Disallowance – Sections 14A and 36(1)(iii) of ITA, 1961 – Interest on borrowed
capital – Finding that investment from interest-free funds available with
assessee – Presumption that advances made out of interest-free funds available
with assessee – Deletion of addition made u/s 14A justified

(ii) Unexplained
expenditure – Section 69C of ITA, 1961 – Suspicion that certain purchases were
bogus based on information from sales tax authority – Neither independent
inquiry conducted by A.O. nor due opportunity given to assessee – Deletion of
addition by appellate authorities justified; A.Y. 2010-11

For the
A.Y. 2010-11, the A.O. held that the purchases made by the assessee from two
sellers were bogus; according to information received from the Sales Tax
Department, Government of Maharashtra, those two sellers had not actually sold
any material to the assessee. Accordingly, he issued a show cause notice in
response to which the assessee furnished copies of the bills and entries made
in its books of accounts in respect of such purchases. However, the A.O. in his
order made addition u/s 69C of the Income-tax Act, 1961. He also made
disallowances under sections 14A and 36(1)(iii) of the Act.

The
Commissioner (Appeals) deleted the disallowances. The Tribunal upheld the
decision of the Commissioner (Appeals). According to the Tribunal, the A.O. had
merely relied upon the information received from the Sales Tax Department but
had not carried out any independent inquiry. The Tribunal recorded a finding
that the A.O. failed to show that the purchased materials were bogus, whereas
the assessee produced materials to show the genuineness of the purchases and
held that there was no justification to doubt the genuineness of the purchases
made by the assessee.

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

‘i) On
the facts as found by the Commissioner (Appeals) and as affirmed by the
Tribunal, the presumption that if there were funds available with the assessee,
both interest-free and overdraft or loans, the investments were out of the
interest-free funds generated or available with the assessee was established.
The Tribunal had affirmed the order of the Commissioner (Appeals) deleting the
addition made by the A.O. u/s 14A on the ground that the interest-free funds
available with the assessee were far in excess of the advance given. The
principle of apportionment under Rule 8D of the Income-tax Rules, 1962 did not
arise as the jurisdictional facts had not been pleaded by the Department.

ii) The
finding of the Commissioner (Appeals) as affirmed by the Tribunal was that the
assessee had not utilised interest-bearing borrowed funds for making
interest-free advances but had its own interest-free fund far in excess of
interest-free advance. No question of law in respect of the deletion of the
disallowance made by the A.O. u/s 36(1)(iii) arose.

iii) The Tribunal was justified in deleting the addition
made u/s 69C on the ground of bogus purchases. Merely on suspicion based on the
information received from another authority, the A.O. ought not to have made
the additions without carrying out independent inquiry and without affording
due opportunity to the assessee to controvert the statements made by the
sellers before the other authority.’

shailesh.kwebmaker

DATA-DRIVEN INTERNAL AUDIT – II PRACTICAL CASE STUDIES

BACKGROUND

Internal auditors are effective in their
delivery of professional services only by conducting value-added services.
Important value drivers for management are:

– cost savings / optimisation,

– prevention or detection of frauds,

– compliance with procedures and regulations.

These can only be achieved in today’s day and
age by adoption of technology for all stages in the life-cycle of the internal
audit. It may necessitate getting the data from multiple sources, analysing
huge quanta of data, comprehensively quantifying the findings and presentation
of data in intelligent form to various stakeholders for action to be taken for
improvement/s.

Let’s add the fact that we are moving to
remote auditing, again a necessity in today’s circumstances and which would
most probably become the new normal in times to come. Remote auditing is
already being practised by many organisations where internal auditors carry out
internal auditing for global, geographically-spread entities from their
internal audit teams based out of India.

In our earlier article (Pages 11-13; BCAJ,
August, 2020), we have discussed the necessity of adopting a data-driven
internal audit approach for efficient and effective internal audit, basically
explaining ‘why’. Now, we are offering the methodology to be adopted for making
it happen, in other words, ‘how’ to do it.

STAGES IN DATA-DRIVEN INTERNAL AUDIT

Using what you know

(1) DETERMINE WHETHER DATA ANALYTICS IS APPROPRIATE
FOR THE AUDIT

The potential benefits of using Data
Analytics can be judged from the audit objectives and the expected problems, as
well as from the data volume, the number of records and the number of fields.
Special consideration should be given to the usefulness of additional analysis
over what is currently provided by the system and whether any special factors
apply, such as fraud detection and investigation, Value for Money audits (in
obtaining performance statistics) and special projects.

(2) CONSIDER AUDIT OBJECTIVES AND WHERE DATA
ANALYTICS CAN BE USED

Data Analytics can be used in different areas
with different goals and objectives. Data Analytics is generally used to
validate the accuracy and the integrity of data, to display data in different
ways and to generate analysis that would otherwise not be available. It can
also be helpful in identifying unusual or strange items, testing the validity
of items by cross-checking them against other information, or re-performing
calculations.

Although Data Analytics allows you to
increase your coverage by investigating a large number of items and potentially covering 100% of transactions, you may still want to extract
and analyse a portion of the database by using the sampling tasks within. You
could examine a subset of the population (a sample), to predict the financial
result of errors, or to assess how frequently a particular event or attribute occurs
in the population as a whole.

The quality of the data, your knowledge of
the database and your experience will contribute to the success of Data
Analytics processes. With time you will be able to increase or widen the scope
of investigations (for example, conducting tests which cannot be done manually)
to produce complex and useful analyses, or to find anomalies that you never thought
were feasible.

It is also not unusual that far more
exceptional items and queries are identified when using Data Analytics than other methods and that these may require follow-up time. However, the use
of Data Analytics may replace other tests and save time overall. Clearly, the
cost of using the Data Analytics Tool must be balanced against the benefits.

Case Study 1 – General Ledger – What is our
Audit Objective?

Management override and posting of fictitious
journals to the General Ledger is a common way of committing fraud; and one of
the key audit procedures is to test the appropriateness of journal entries
recorded in the General Ledger.

The objectives may include testing for risk
or unusual transactions such as:

Journals with no description,

Journals not balancing,

Journals containing keywords,

Journals posted by unauthorised users,

Journals posted just below approval limits,

Journals posted to suspense or contra
accounts.

Case Study 2 – Accounts Receivable – What is
our Audit Objective?

Accounts Receivable is one of the largest
assets of a business; therefore, there is a need to audit and gain assurance
that the amounts stated are accurate and reasonable.

The objectives may include:

Identify large and / or unusual credit
notes raised in the review period,
Capture customers with significant write-offs
during the year,

Isolate customers with balances over their
credit limit,

Filter out related party transactions
and balances,

Generate duplicates and gaps in the
sales invoice numbers,

Match after-date collections to year-end
open items / balances.

Preparing data for analysis

(3) DETERMINE DATA REQUIRED AND ARRANGE DOWNLOAD
WITH PREPARATION

Data download is the most technical stage in the
process, often requiring assistance and co-operation from Information
Technology (IT). Before downloading or analysing the data, it is necessary to
identify the required data. Data may be required from more than one file or
database. It is important at this stage that the user understands the
availability and the details of the databases. You may also have to examine the
data dictionary to determine the file structure and the relationships between
databases and tables.

In determining what data is required, it may
be easier to request and import all fields. However, in some cases this may
result in large file sizes and it may be time-consuming to define all the
fields while importing the files. Therefore, it may be better to be selective,
ignoring blank fields, long descriptive fields and information that is not
needed. At the same time, key information should not be omitted.

Case Study 1 – General Ledger – Planning –
What Data is Required?

The Auditor needs to obtain a full General
Ledger transactions history for the audit year after all the year-end
(period-end) postings have been completed by the client. To carry out a
completeness test on the General Ledger transactions, the ‘Final’ Closing Trial
Balances at the current and previous year-ends are required. Where possible,
obtain a system-generated report as a PDF file, or observe the export of the
Trial Balance, this will give assurance over the integrity and completeness of
the Trial Balance figures from the Accounting Software or ERP system.

General ledger initial check for preparing
the data

Field Statistics can be used to verify the
completeness and accuracy of data like incorrect totals, unusual trends,
missing values and incorrect date periods in the General Ledger. This pre-check
in the data preparation stage allows the Auditor a greater chance of
identifying any issues that will cause invalid test results. Comparing
difference in totals obtained from the client for the Transaction Totals in the
General Ledger with the Field Statistics should be clarified with the client
before proceeding further with the Analytic tests.

Case Study 2 – Accounts Receivable – Planning
– What Data is Required?

The Auditor should requisition the ‘AR
Customer-wise open items at the year-end’ data. This data provides more details
than a simple list of balances because often an Auditor wants to test a sample
of unpaid invoices rather than testing the whole customer balance. Further, the
Auditor should obtain the ‘Accounts Receivable Transactions’ during the year to
analyse customer receipts in the year, to test for likely recoverability. Apart
from this, more detailed Data Analytics can be performed on the sales invoices
and credit notes, as well as cut-off analysis.

Accounts receivable initial check for
preparing the data

Field Statistics can be used to verify the completeness and accuracy of
data like incorrect totals, unusual trends, missing values and incorrect date
periods in the Accounts Receivable (AR) ledger. This pre-check in the data
preparation stage offers the Auditor a better chance of identifying any issues
that could cause invalid test results. Comparing difference in totals obtained
from the client for the AR Debit Credit Totals with the Field Statistics should
be clarified with the client before proceeding further with the Analytic tests.

Validating data

(4) USE ANALYTIC TASKS

Case Study 1 – General Ledger – Highlighting
Key Words within Journal Entry Descriptions

Objective – To isolate and extract any manual journal entries using key words or
unusual journal descriptions. These can include, but not be limited to,
‘adjustment, cancel, missing, suspense’.

Technique – Apply a search command on the manual journal entries which have been
posted with the defined unusual descriptions by using a text search command.

Interpretation of Results – Records shown when using the above
criteria would display records which have description narratives that include
key terms such as ‘adjustment’, ‘cancel’, ‘suspense’ and ‘missing’, and may
require further investigation.

When determining which manual journal entries
to select for testing, and also what description should be tested, it is
helpful to know that financial statements can be misstated through a variety of
fraudulent journal entries and adjustments, including:

Writing off liabilities to income,
Adjustments to reserves and allowances
(understated or overstated),

False sales reversed after year-end and
out-of-period revenue recorded to inflate revenue.

Therefore, when defining the narratives to
search for, you will need to tailor the said search to the type of manual
journal entry that the Auditor is aiming to test.

Case Study 2 – Accounts Receivable –
Detecting suppression of Sales

Objective – To test for gaps in invoicing sequences which may indicate unrecorded
sales and / or deleted invoices.

Technique – Gap Detection is used to detect gaps in data. These could be gaps
within purely numeric or alpha-numeric sequential reference numbers, or these
could be gaps within a sequence of dates. Perform a Gap Detection on the field
‘Invoice Number’.

Interpretation of Results – Any gaps in invoicing sequences require
further investigation to ensure that revenue has been correctly allocated, as
well as to check for improper revenue recognition which can be accomplished by
manipulating income records, causing material misstatement.

Discovering patterns, outliers, trends using
pre-built analytic intelligence

The Discover task provides insights through
patterns, duplicates, trends and outliers by mapping data to high-risk elements
using the Data Analytical Tool’s predefined Analytic Intelligence.

Identify trends, patterns, segmental
performance and outliers automatically.

Intuitive auto-generation of dashboards that
can then be further refined with IDEA’s inbuilt Analytic Intelligence.

(5) REVIEW AND HOUSEKEEPING

As with any software application, all work
done in Data Analytic Tools must be reviewed. Review procedures are often
compliance-based, verifying that the documentation is complete and that
reconciliations have been carried out. The actual history logs from each analytical
activity should also be reviewed.

Backup of all the project folders must be
done meticulously and regularly.

Clear operating instructions with full
details on how to obtain files, convert them and download them should be
documented for each project and kept easily accessible for the Audit Teams who
will take up the project in the ensuing review period. If necessary, logic
diagrams with appropriate explanatory comments should be placed in the Audit
working-paper file so that a different auditor could pick up the project in the
following year.

CONCLUSION

By embedding data analytics in every stage of the audit process and
mining the vast (and growing) repositories of data available (both internal and
external), Auditors can deliver unprecedented real-time insight, as well as
enhanced levels of assurance to management and audit committees.

Businesses are faced with unprecedented
complexity, volatility and uncertainty. Key stakeholders can’t wait for
Auditor’s analysis of historical data. They must be alerted to issues at once
and be assured of repetitive monitoring of key risks. Data Analytics empowers
Audit to deliver, as well as to serve the business more proactively in audit
planning, scoping and risk assessments, and by monitoring key risk indicators
closely and concurrently. Auditor’s use of data analytics in every phase of the
audit can help management and the audit committee make the right decision at
the right time.

shailesh.kwebmaker

TAXPAYER SERVICES: MESSAGE, MEANING AND MEANS – 1/n

A taxpayer is that rare citizen who creates value, earns income and parts
with a portion of it as tax for nation-building. Just as it is the ‘legal’
obligation to pay tax, there is a much ‘higher moral social’ obligation upon
the government to ensure that the taxpayer is treated as a valued patron and
ensure that his taxes give him a bang for his buck.

Faceless Assessment and the Taxpayer’s Charter (TC) is an awakening and
realisation of the above understanding. This move is what a wise government and
sincere taxpayer would want. PM Modi spoke candidly about making the tax system
‘seamless, painless and faceless’ and assuring the honest taxpayer of ‘fair,
courteous and rational behaviour’.

Over the last few years, calibrated sequential changes were undertaken –
the black money act, DeMo, post-DeMo amnesty scheme (GKY), the Benami Act,
reduction of rates for corporates and individuals, increasing the threshold for
the Department to litigate, dispute resolution Vivad se Vishwas scheme,
E-assessments, etc.

Since its first appearance in, I think, 1998, the TC has got its rightful
place from posters in hallways to the statute book. The directional change is
worthy of appreciation for what otherwise to many of us was a no-brainer. However,
this can only be a start in the direction of developing a real taxpayer rights
and services charter. We have harsh provisions against the taxpayer who
deviates, but none against the tax assessor if he deviates from his role. There
is a fundamental issue of power without adequate transparency and
accountability.

Here are some thoughts on how this process can be made real and robust.

Define tax overreach: We have
serious consequence of penalties and prosecution defined and applied on
taxpayers. For a law to be fair, we need equivalent definitions and
descriptions of tax ‘extortion’, ‘extraction’ and ‘jehadism’ (all for lack of a
vocabulary which needs to be evolved) on the Tax Department depending on the
intensity of their actions that eventually get turned down at subsequent levels
of appeal.

Accountability: Tax officers
must be held accountable monetarily and otherwise. An assessee should be
compensated for the hassle that she has to go through. Considering that the
success rate of the Tax Department is 15 to 20% at all levels combined, it is
clear that there is large-scale illegal collection of taxes that are
subsequently reversed with interest cost being suffered by the exchequer.
Another example is of prosecution, which if proved excessive or overruled, the
ITO must face the music for irresponsible behaviour that resulted in agony,
cost and loss of reputation. No exercise of power should be permitted
without accountability.

Create grounds for the taxpayer: The taxpayer should be able to take grounds of calling the order
‘perverse’, ‘excessive’, or ‘illegal’ (all for lack of a vocabulary which needs
to be evolved) and should be able to claim reverse penalty on the Department if
he wins. Grounds such as the above should be evolved and defined under the law,
and that would give the taxpayer equal ‘power’ to call the bluff of the ITO.

Ban on Targets: Setting
targets should be made illegal. The vocabulary, mentality and methods that
follow a ‘target regime’ create bias against a fair, respectful and reasonable
assessment.

The TC is perhaps one of the best news of the year. The change deserves our
support, encouragement and positivity. At the same time, as the title of this
Editorial says, it is 1/n, a process. I welcome and solicit your ideas and
suggestions on what should change in small simple measures, how a reform can
take form, a translation of fourteen points into actionable, doable measures.
Do write to journal@bcasonline.org.

Raman
Jokhakar

Editor

shailesh.kwebmaker

EXTINCT PROFESSION

This is an article that ‘appeared’ in the
daily ‘Futurology’ in the year 2050. The title of the article was
‘Extinct Profession’. It was to mark the Silver Jubilee of the death of a
dignified (?) profession. It is from a small island called ‘Overlaw’ in an
unknown ocean. The following are some excerpts from the said article:

There has always been a policy in the
business that the big players get some work done by small players by offering them a seemingly lucrative business volume. Small players get
excited, especially if they are new entrants in the business. Their costing is
fully monitored by the big players. After a couple of years of a smooth
relationship, the big start delaying the payments. The poor small ones don’t
mind it initially. The big ones place larger orders with some small advances.

Again, they withhold the payments. They
paint a rosy future before the small players. The poor fellows have no choice.

The small go to a banker and raise funds on
the ‘merit’ that they have orders from large corporates. The bankers oblige.
Their meters of interest and EMI start ticking. But the small ones cannot
function smoothly.

Gradually, the small players see the death
of their own businesses. The big ones are scratch-free. They have a hundred
reasons for not paying – from ‘quality defects’ to ‘belated deliveries’.

And then, the big find some new small ones!
The cycle continues forever… Government makes laws against such tactics but
there is a provision in fine print, in every beneficial law, that the lawmaker
is not responsible for its implementation.

Here is a story where an entire profession
in the country had to be closed down 25 years ago. Had the profession survived,
it would have celebrated its centenary year in the current year 2050.

The profession was basically rendering a
very specialised service to businessmen and many government / private
organisations. Under the law then prevailing, it was mandatory for many
organisations to avail their professional services.

The persons belonging to that profession
were under the impression that the profession was important and indispensable.
But the reality was that had it not been legally incumbent, nobody would have
willingly gone for their services. The payment to those professionals was
always considered as unproductive and was at the bottom of the list of priorities
with the users of their services. It was common that the fees of these
professionals were kept unpaid for up to three or even four years.

But all of a sudden, the ‘Governors’ of the
profession, with a laudable objective to protect the profession, declared that
if your fees are unpaid for two consecutive years by a client, you should
discontinue your services to that client.

The ‘Governors’ said it would be unethical
to render service to that client who owes you so much. There was a big hue and
cry against this decision. But the ‘Governors’ said the client cannot escape
because no other service provider can accept his work unless the previous
person’s fees are paid.

So, the
previous professional lost the work. He could not get any other work since all
the clients had avoided payments to their respective professionals. The
mandatory service could not be rendered by anybody to anybody!

All clients became defaulters under the laws
concerned. They became disqualified to run their business. So, the businesses
were closed.

The government
realised the gravity of the situation, so it brought an amnesty scheme. The
mandatory compliance was waived. Clients found it more economical to pay the
money under amnesty rather than paying fees to the professionals.

The ‘Governors’ of the profession kept on
introducing newer and newer rules and regulations thrust by other countries.
That was done under the garb of ‘Ethics’.

The professionals started spending more time
on learning and more money on books and study courses. Since most of the
clients’ work was discontinued, they had a lot of idle time.

This continued for a few years and in the
year 2025 the government realised that the mandatory compliance was not
required at all. The so-called specialised services rendered by the profession
became redundant. Everybody realised that it had made no difference whatsoever
to anyone even in the absence of those services.

One fine morning, the profession was
declared to be no longer relevant and all the laws were changed accordingly.

That was the end of the profession.

The students as well as the existing
professionals heaved a big sigh of relief that there was no longer any need to
study too many laws and regulations!

shailesh.kwebmaker

COLLABORATE TO CONSOLIDATE’ – A GROWTH MODEL FOR PROFESSIONAL SERVICES FIRMS

In today’s times,
when the market is seeking lower cost alternatives in every spend and the
otherwise not-to-be touched area of audit fees or tax fees of a CA firm is
increasingly being questioned by CFOs and business owners, with ever-increasing
need for specialist advice, the refrain is to come together with like-minded
professionals.

Consolidation of
professional services firms is a prerequisite for professions to grow. It is a
huge challenge and an uphill task for a lot of firms to grow as disaggregated
practices. Covid-19 has actually altered the course and changed the rules of
the game and advanced the time for these discussions. If you are not growing
consistently, there is a case for a relook. If you haven’t thought through
succession planning for your firm, now is the time to do so.

This article is an
attempt to provide some ideas and suggest a framework to proprietorship firms
and partnership firms providing professional services such as chartered
accountancy firms, law firms and other professional services firms to come
together, collaborate and work together for their common growth.

Consolidation of
accounting firms requires a fair bit of thought, analysis and a sustained
positive outlook. The mindset of growth has to be foremost for any
consolidation to be productive and value accretive. And to start this process,
collaborating with like-minded firms may be a good way to proceed.

(I) PREREQUISITES OF CONSOLIDATION

(i) Mindset

It is of paramount
importance that the mindset to collaborate, consolidate and grow is clear and
positive. Having a positive, open mindset means that one is willing to work
together under a conducive framework;

(ii) What can one consolidate?

Consolidation
doesn’t only have to be by merger. One can consolidate mindsets, expertise,
people, teams, functions, technology, markets, HR, brand building, finance and
accounts, administration and various other aspects which can make the
professional services firms nimble-footed and adaptable to change and growth.

(II) GETTING STARTED

It is also not lost
on any of us that coming together for a common client or referred client may be
a good way to get started.

For example:

When there is a
referred client, where a professional refers some matter to another
professional, although the other professional will be the primary service
provider, the referring professional should contribute actively by providing
the background knowledge on the basis of his / her experience and the
relationship aspects of dealing with the client, so that the other professional
can benefit from the referring partner’s experience and expertise.

If this is
addressed in a manner which is sufficiently engaging, powerful, organised and
delivered in a properly thought through manner, then you have the right
prerequisites for a successful consolidation.

The thesis is that
enthusiastic collaboration is a vital ingredient and a prerequisite for
sustained, organised growth. I have no doubt that professional services firms
will pursue the above with a lot of enthusiasm and momentum once a road-map is
given and a framework is created.

(III) MODELS OF CONSOLIDATION

(A) Referral
model

This is a simple,
‘start with’ model. ABC & Co has a client to whom it is providing audit and
tax services. The client needs MIS services. Given that ABC & Co is an
auditor, it may not be able to provide MIS services as then the firm may no
longer be independent. So, ABC contacts XYZ & Co and refers the client’s
MIS work. XYZ delivers and invoices fees.

XYZ will in turn
ensure that it will not pitch for any other services to the client. If the
client comes for any other work, it will get referred back to ABC. This is an
unwritten code that is based on trust.

If this is done
well, trust develops and this lays the ground for both firms to collaborate. If
XYZ ever crosses the line, ABC will not work with XYZ in the future. That
itself is a good deterrent in this model.

The code of conduct
and rules of professional engagement may prohibit payment of referral fees and
this needs to be respected.

(B) Preferred
partner model

This is an
extension of the referral model, where ABC and XYZ consider each other as
preferred firms to collaborate with. If ever there is work coming to ABC which
it cannot deliver, ABC will refer it to XYZ as the firm of first choice.

Conversely, XYZ
will refer work to ABC for any engagement where it needs help / support. In
this model again, it is a very clear way of supporting each other in such a way
that the sanctity of the preferred firm model is maintained.

There could be
exceptions where XYZ is not able to service a client of ABC, in which case ABC
is obviously free to choose any other firm.

An associate firm by definition is a form of membership where
like-minded firms agree to come together under a common association and agree
to abide by the principles and rules of working under a larger umbrella. The
associate firm continues to work under its own brand and will not need to
change its constitution nor its key areas of work.

The associate firm
agrees to collaborate with other member firms in a manner that encompasses the
referral model and the preferred partner model with more formalised meetings,
exchange of knowledge, use of resources, common marketing collaterals and a
greater speed of response and alignment.

The associate firm
model has been in existence for many years and has proved to be a very credible
alternative to the member firm model and the network model. The biggest
difference is that members are free to continue their own brands and they have
far more independence in what they choose to do or not to do, including the
choice of work, business areas, office locations, client servicing and choice
of sharing of information.

Effectively, there
are no compulsions and there are no territorial restrictions. Each firm is free
to expand into any territory and is free to conduct or practice any service
area without any pre-approval or without worrying about a centrally
administered bureaucratic process.

The main
disadvantage of an associate model is that it may not always be tightly
integrated and associate firms can choose not to fall in line citing whatever
compulsions they face and there is very little that other firms can do.

(D) Network
model

A network model is
one of the best ways to grow professional practices. Each firm is a member of a
global network or a national or regional network, using a common brand, using
common tools and having signed a member firm agreement which binds them with
the central leadership, a common partner pool and, most importantly, a common
identity.

Indeed, over a
century it has been proven that the network model has the ability to grow the
fastest and to become the largest amongst all prevalent models of
collaborations amongst professional services firms.

In a network, the
biggest consideration is giving up one’s brand where the professional services
firm agrees to use the international brand or the national or regional brand
and accepts that its own brand will play second fiddle. All marketing
collaterals and service delivery are under the common brand; except where
regulations may not permit a foreign brand. In such cases, the network pushes
for alternate options and finds a way to co-exist within the rules.

In a network model,
member firms are often guided by common rules of engagement. Conduct of shared
work, sharing of knowledge, territorial restrictions, respect for an office,
its location and its territorial boundaries, firm-wide dissemination of
developments and a governance structure where partners align with the central
leadership form the daily core of network firms’ activities.

Whilst there are
several perceived disadvantages such as loss of one’s own brand, the associated
loss of identity and integration into common practices which one may take some
time to evolve, understand and add up to, the network model has stood the test
of time. It has proven and validated the concept of ‘collaborate to grow
manifold’ and critics have accepted the formal network models.

(E) Merger model

In a merger model,
the referral firms, the associate firms, the preferred partner firms and the
network firms effectively amalgamate into a single firm with a single bank
account. Effectively, one is ‘all in’. That means it is truly a ‘one firm,
firm’ and partners can grow or not grow driven by the collective performance of
the larger firm. There are no real silos, there are no individual mindsets, nor
any individual practices.

Each partner works
for the larger collective firm under the belief that as long as one is
contributing to his or her best abilities, the larger collective will grow. As a
partner, I am benefiting from the expertise and the common delivery processes
of the firm.

In a merger
situation, the rules of the game are very different and may appear overwhelming
to start with. One should get into a merger only after detailed due diligence
and after a few years of working together with one of the above models. It is
like a marriage; there are sacrifices to be made, there are positions to be
gone away from and yet there’s the harmony and beauty of the collective.

A partner may not
need to be spending time on areas outside of his or her core focus. What it
does is provide partners with adequate time to build, consolidate and grow.
Focus on service areas, with administrative or functional work percolating down
to the teams, is a positive outcome.

(IV) Road-map for consolidation

Having looked at
the various models of consolidation, it is now time to look at the execution
road-map for consolidation:

(i) Each firm
should identify its own skill sets, expertise, specialisation and the firm’s
USP. Clarity of expertise and USP is critical.

(ii) The objective of the collaboration should be
very well defined. What are we trying to achieve? Is it growth of revenue,
growth of profitability, growth of skill sets, working with the best minds,
professional growth, sharing of knowledge, newer geographies, recognition of
the changing market place and demands of the client? Clarity on the objective
is very critical. Often, in the haste of coming together, the main objective is
forgotten. That’s to be avoided at all costs.

(iii) Once the firm
is clear on who is best at practising a particular area, the automatic next
step will be to have one or two partners from each of the firms to collaborate
intensely and with the purpose of achieving a target of identifying a few
like-minded yet unique firms to integrate with. These one or two partners have
the responsibility of ensuring that the objectives of the collaboration are
fulfilled.

(iv) One of the
better ways to start is by working together on actual projects. That normally
provides a good way to get an insight into the other firms. It also provides an
easy and operational way to get to know the practices and processes of other
firms. Taking the first baby steps is important.

(v) Once some early success is seen, the
foremost assumption that all partners are aligned for collective growth will be
tested. It will be hard for partners to sit on the fence. Thus the acceptance
of a preferred firm model or even an associate firm model will not be too
challenging. Keep moving forward to a point where trust is created and
enhanced. Each model should be given adequate chance to work and succeed. At
some point, an associate firm model can give way to a network firm model.

(vi) The partners
leading this initiative for their firms have to be at it. It’s a constant
effort. Take small steps but keep moving forward. It won’t get done overnight.
But achieving small successes will pave the way for larger integration. If all
cylinders are aligned, the practices will see merit in a merger and move
towards a one firm, firm model.

CONCLUSION

It is no longer
okay to continue the status quo. During Covid-19, survival itself is
akin to growth. But, what next? Perhaps, it is time to understand and
introspect. It is time to move forward from working as disaggregated practices.
It is time to work together. It is time to consolidate.

shailesh.kwebmaker

NEED FOR IMMUNITY AND SPIRITUALITY IN PANDEMIC

How can I emerge stronger through this
devastating pandemic and become a real winner in a new and changed world? This
is a question that must have certainly agitated everyone’s mind in these last
few months.

So much has been written and discussed about
the current situation. The actions that you take now and in the weeks ahead
will without a doubt define you and your attitude towards life. And while the
impact of this crisis will vary across regions, it will be no exaggeration to
say that this time around the burden of destiny is real.

What is emerging from the competing demands
and chaotic conditions is the paramount importance of being positive and doing
the right thing at the right time. After all, anxiety and fear adversely affect
the physiological systems that protect individuals from infection.

Let’s begin with immunity, the most desired
condition that everyone wishes for. In today’s technical world the primary role
of immunity is to recognise viruses and to obliterate them. Many good measures
have been discussed and prescribed for improving immunity. These include a
healthy diet, ample sleep, optimum hydration, regular exercise, minimising stress,
meditation, yoga and pranayama, avoiding smoking and alcohol, etc. The
most favoured therapy in vogue is the use of immunity-boosting supplements and
foods.

If and when one gets infected, timely
treatment is of paramount importance. However, healing involves not just
flushing out viruses but simultaneously enhancing the body’s immunity system.
The same principle applies to our spiritual healing, too.

The Bhagavad Gita says that we should
not fan our likes and our dislikes. If such thoughts develop in our minds, we
should simply ignore them. But this is easier said than done.

We do strive to have a spiritual immune
system. In general, such a system refers to our reactions to thoughts,
attitudes, feelings and motivations. Our subconscious mind instinctively
responds to harshly spoken words, expressions and physical gestures. But if we
can control such reactions, we will not only emerge sharper but also as better,
happier and more contented individuals.

I believe that despite the real world’s
annoyances and influences, a skilled spiritual level can support our resolve to
overlook a negative reaction, thus ensuring a higher state of mind. On the
physical level it is a well-established fact that our mental attitude does
impinge on health! It is surely much easier for those who have deeply instilled
these factors in their subconscious / spiritual level.

It is only by following what is dharma
for our body and for our mind that we can strengthen our immune system to fight
against adverse circumstances. A proper diet, a clean lifestyle, a supportive
attitude and spiritual endeavours will certainly boost our immune system. Our
scriptures say that Dharma, grounding, withdrawal from materialistic
activities and practices of Japa and Daan are internal preventive
means.

While modern medicine does provide quick
relief, debates continue about the side-effects and probable long-term harms of
the same. But alternate medicine and cure undoubtedly educate us on how to keep
the environment and ourselves naturally clean.

The spiritual immune system and the physical
immune system are deeply interrelated. It is hard to separate one from the
other and I believe that best results are obtained by working on health at both
levels. We cannot possibly ignore all negative influences from the world, but
we must develop the strength to handle them.

Even as the battle against the existing
pandemic is being fought primarily by our healthcare workers, we can do our bit
by limiting our exposure to the virus by staying indoors, maintaining required
social distancing and following basic hygiene protocols to improve both
physical and social immunity levels.

shailesh.kwebmaker

Search and seizure – Sections 132, 143(2) and 158BC of ITA, 1961 – Block assessment u/s 158BC – Issue and service of notice u/s 143(2) is mandatory – Non-issuance of notice – Assessment vitiated

39. CIT vs.
Sodder Builder and Developers (P) Ltd.; [2019] 419 ITR
436 (Bom.) Date of order:
16^th July, 2019

Search and
seizure – Sections 132, 143(2) and 158BC of ITA, 1961 – Block assessment u/s
158BC – Issue and service of notice u/s 143(2) is mandatory – Non-issuance of
notice – Assessment vitiated

A search and seizure operation u/s 132 of the Income-tax Act, 1961 was
conducted in the assessee’s premises. A notice was issued u/s 158BC to assess
the undisclosed income. The Assistant Commissioner passed an assessment order
u/s 158BC. The records indicated that no notice u/s 143(2) was issued to the
assessee.

The assessee contended that non-issuance of such a notice vitiated the
assessment made under the special procedure under Chapter XIV-B. The Tribunal
accepted the assessee’s claim and allowed the appeal filed by the assessee.

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

‘i) In the present case,
admittedly, no notice u/s 143(2) of the said Act was ever issued to the
assessee. By applying the law laid down by the Hon’ble Apex Court in Asst.
CIT vs. Hotel Blue Moon (210) 321 ITR 362 (SC), we will have to hold
that the assessment made in the present case stands vitiated.

ii) Therefore, even if we were to
hold in favour of the Revenue with regard to the other substantial questions of
law framed at the time of admission of this appeal, the assessment made in the
present matter would nevertheless stand vitiated for want of mandatory notice
u/s 143(2) of the said Act.

iii) The assessment made by the
Assistant Commissioner pursuant to the notice issued u/s 158BC was vitiated for
want of the mandatory notice u/s 143(2).’

shailesh.kwebmaker

Search and seizure – Sections 68, 132, 153A and 153C of ITA, 1961 – Assessment of third person – Jurisdiction of AO – Addition made u/s 68 not based on material seized during search – Not sustainable

38. Principal
CIT vs. Ankush Saluja; [2019] 419 ITR
431 (Del.) Date of order:
14^th November, 2019 A.Y.: 2007-08

Search and
seizure – Sections 68, 132, 153A and 153C of ITA, 1961 – Assessment of third
person – Jurisdiction of AO – Addition made u/s 68 not based on material seized
during search – Not sustainable

A search and seizure operation u/s 132 of the Income-tax Act, 1961 was
conducted in the S group. Cash and jewellery which belonged to the assessee
were found and seized from the residence of the assessee’s father in whose name
the search warrant of authorisation was issued. The satisfaction note was
recorded by the AO in this regard and a notice u/s 153C read with section 153A
was issued against the assessee. In response thereto, the assessee filed his
return of income. The AO treated the unsecured loans as unexplained cash credit
u/s 68 of the Act and made an addition to that effect.

The Commissioner (Appeals) held that the addition u/s 68 was not based
on any incriminating document found and seized during the search and,
therefore, the addition could not be sustained. The Tribunal upheld the order
of the Commissioner (Appeals).

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

‘i) There were concurrent
findings of fact to the effect that the additions made by the Assessing Officer
u/s 68 were not based on any incriminating document found or seized during the
search action u/s 132. In this view of the matter, the assumption of
jurisdiction u/s 153C by the Assessing Officer was not justified and
accordingly the additions made u/s 68 could not be sustained.

ii) No question of law arose.’

shailesh.kwebmaker

Reassessment – Sections 147 and 148 of ITA, 1961 – Condition precedent for notice – Tangible material to show escapement of income from taxation – Agricultural income disclosed in return and accepted – Subsequent advisory by IT Department that claims of agricultural income should be investigated – Notice based solely on advisory – Not valid

37. Ravindra
Kumar (HUF) vs. CIT; [2019] 419 ITR
308 (Patna) Date of order:
6^thAugust, 2019 A.Y.: 2011-12

Reassessment –
Sections 147 and 148 of ITA, 1961 – Condition precedent for notice – Tangible
material to show escapement of income from taxation – Agricultural income
disclosed in return and accepted – Subsequent advisory by IT Department that
claims of agricultural income should be investigated – Notice based solely on
advisory – Not valid

For the A.Y. 2011-12, the assessee had filed return of income which
included agricultural income. On 22^ndMarch, 2018, the AO issued
notice u/s 133(6) of the Income-tax Act, 1961 requiring the assessee to furnish
the information relating to the agricultural income disclosed in his return.
The assessee did not respond to this notice. The notice was followed by a
notice u/s 148. The reassessment notice was based on an advisory issued by the
Income-tax Department. The advisory directed the AO to verify whether there was
any data entry error in the returns filed, to provide feedback where assessment
was complete and in cases where assessment was pending, to thoroughly verify
the claims on agricultural income. The assessee filed a writ petition and
challenged the notice.

The Patna High Court allowed the writ petition and held as under:

‘i) A power to reopen an
assessment would vest in the Assessing Officer only if there is tangible material
in his possession for coming to a conclusion that there was escapement of
income chargeable to tax, from assessment, and the reasons with the Assessing
Officer must have a live link with the formation of belief.

ii) The Assessing Officer
mentioned in the “reasons” supplied that the assessee had not
produced certain evidence in support of agricultural income and in the absence
of which the claim towards agricultural income could not be substantiated. The
admission by the Assessing Officer regarding absence of material could not lead
to the formation of belief that the disclosure was incorrect and chargeable to
tax u/s 147 of the Act. The reason was firstly that such opportunity was very
much available to the Assessing Officer at the stage of filing of the returns
when in exercise of powers u/s 142/143 such directions could have been issued
for production of records and a failure of the assessee to satisfy the
Assessing Officer on such count could have led to a best judgment assessment
u/s 144 at the stage of original assessment; but having not done so, such
recourse could not be adopted by relying upon the statutory provisions of
section 147 of the Act.

iii) Secondly such enabling powers
were only to be exercised where there was tangible material available with the
Assessing Officer and not in the absence thereof. In view of the clear fact
situation available on the record where such reopening was simply founded on
the advisory dated 10^th March, 2016 issued by the Department and
where the reasons so present for the formation of belief was not resting on any
tangible material in possession of the Assessing Officer, the entire exercise
was illegal and de hors the provisions of section 147 / 148’.

shailesh.kwebmaker

Articles 5 and 12 of India-Singapore DTAA – Seconded employee working under control and supervision of Indian company did not constitute service PE – Service PE under Article 5(6) and taxability as FTS under Article 12 cannot co-exist – Services provided did not fulfil ‘make available’ requirement under Article 12 of India-Singapore DTAA

15.
TS–336–ITAT–2020 (Del.) DDIT vs. Yum
Restaurants Asia Pte Ltd. ITA No.
6018/Del/2012 A.Y.: 2008-09 Date of order: 16^th
July, 2020

Articles 5 and 12 of India-Singapore DTAA – Seconded employee working
under control and supervision of Indian company did not constitute service PE –
Service PE under Article 5(6) and taxability as FTS under Article 12 cannot
co-exist – Services provided did not fulfil ‘make available’ requirement under
Article 12 of India-Singapore DTAA

FACTS

The assessee, a
resident of Singapore, was engaged in franchising of certain restaurant brands
in the Asia Pacific region (including India). It entered into a technology
license agreement with its Indian AE (I Co) for operation of restaurant
outlets. I Co in turn appointed a number of franchisees for operating restaurants
in India under brand names KFC and Pizza Hut.

Mr. V was an
employee of the assessee who had been deputed to India to work under the
control and supervision of I Co. Mr. V was working solely for I Co. However,
the assessee continued to pay remuneration to Mr. V. I Co reimbursed the amount
equivalent to the remuneration of Mr. V (after deducting tax) to the assessee.

The A.O. concluded
that Mr. V constituted service PE of the assessee in India. Hence, the amount
reimbursed by I Co to the assessee was in the nature of FTS and taxable in
India. The A.O. further concluded that the assessee had agency PE in India.

In the appeal,
after referring to relevant clauses of the Deputation Agreement and the
evidence furnished by the assessee, the CIT(A) held that Mr. V was not an
employee of the assessee. Hence, he did not have any right / lien over his
employment. Consequently, there was no service PE of the assessee.

HELD

Service PE

The deputation
agreement between the assessee and I Co mentioned that the assessee was not
responsible for, or assumed the risk of, the work of assignees; assignees would
work under the control, direction and supervision of I Co; and the assessee
released assignees from all rights and obligations, including lien on employment,
if any.

CIT(A) had given
the following findings:

An employee of I
Co leading the business development team had resigned. Mr. V was deputed to
India as his substitute. Upon expiry of the deputation period, Mr. V was
inducted as an employee of I Co.

During the
deputation period, I Co had reimbursed the remuneration paid by the assessee on
cost-to-cost basis. I Co had also deducted the applicable tax. Mr. V had paid
tax in India on his remuneration.

All the facts and
circumstances indicate that Mr. V was an employee of I Co and the assessee had
merely acted as a conduit for payment of remuneration to Mr. V in Singapore
since his family was in Singapore.

Other evidence,
such as attending board meetings of I Co, signing financial statements of I Co
as its director, etc., also showed that Mr. V was involved in the day-to-day
management of I Co.

Revenue had also
not controverted the findings of the CIT(A). Thus, the deputation of Mr. V did
not constitute service PE of the assessee in India.

Even if a service
PE of the assessee in India was constituted, no income can be attributed to the
service PE because for computing profit attributable to PE, expenses incurred
(in this case, remuneration paid to Mr. V) should be deducted. Having regard to
reimbursement of remuneration on cost-to-cost basis, the income of the PE would
be ‘Nil’.

FTS
taxability

Having regard to
provisions of Article 5(6) read with Article 12 of the India-Singapore DTAA,
service PE and taxability as FTS cannot co-exist.

Even otherwise,
services did not fulfil the ‘make available’ condition under Article 12 of the
India-Singapore DTAA.

Mr. V worked as
an employee of I Co and paid taxes on his remuneration. Taxing the same again
as FTS would result in double taxation of the same income.

Agency PE

The A.O. did not
establish under which limb of definition of agency PE in Article 5(8) of
India-Singapore DTAA the agency PE of the assessee was constituted in India.

Note: The Tribunal distinguished the Delhi High
Court decision in the case of Centrica India Offshore Pvt. Ltd. [2014] 364 ITR 336 as not applicable to the facts under
consideration. The exact basis of this conclusion is not clear.

shailesh.kwebmaker

Articles 11, 12 of India-Netherlands DTAA; section 9 of the Act – Guarantee charges paid by Indian company to non-resident AE were not: ‘interest’ under Article 11 as there was no debt and income was not ‘from debt-claim’; FTS under Article 12(5) as although provision of guarantee was a financial service, it was not consultancy service contemplated in Article 12(5

14. [2020] 117
taxmann.com 343 (Delhi-Trib.) Lease Plan India
(P) Ltd. vs. DCIT ITA Nos. 6461 &
6462/Del/2015 A.Ys.: 2009-10
& 2010-11 Date of order: 15^th June, 2020

Articles 11, 12 of
India-Netherlands DTAA; section 9 of the Act – Guarantee charges paid by Indian
company to non-resident AE were not: ‘interest’ under Article 11 as there was
no debt and income was not ‘from debt-claim’; FTS under Article 12(5) as
although provision of guarantee was a financial service, it was not consultancy
service contemplated in Article 12(5)

FACTS

The assessee was
engaged in the business of leasing motor vehicles, financial services and fleet
management. It intended to borrow funds for its business from banks in India.
It had an AE in Netherlands (Dutch Co) with which it entered into an agreement
for provision of guarantee to banks in India. On the strength of such
guarantee, banks lent funds to the assessee. As per the agreement, the assessee
paid guarantee charges to Dutch Co.

Before the A.O.,
the assessee contended that the payment being reimbursement of actual expenses,
it was not chargeable to tax in India and hence the tax was not deductible. The
A.O. concluded that since payment was made to a non-resident for rendering
services, it was covered u/s 9(1)(vii) as FTS. As the assessee had not deducted
tax, the A.O. invoked section 40(a)(i) and disallowed the entire amount.

In appeal, the
CIT(A) confirmed the order.

HELD

Whether
guarantee charges interest?

It was undisputed
that guarantee charges paid by the assessee to Dutch Co were chargeable to tax
in India. However, it was to be examined whether it was in the nature of
‘interest’ in terms of Article 11 of the India-Netherlands DTAA.

²Any
income can be characterised as ‘interest’ if it is ‘from debt-claim’.
Thus, two criteria are required to be satisfied. First, capital in the form of
debt (which can be claimed) should have been provided. This predicates the
existence of a debtor-creditor (or lender-borrower) relationship. Second,
income should be from such debt.

In this case,
Dutch Co had promised the lenders to pay the amount of loan if the assessee
failed to do so. The assessee paid guarantee charges in consideration for that.
As Dutch Co had not provided any capital to the assessee, there was neither
lender-borrower relationship, nor did Dutch Co earn any income from the debt
claim.

Accordingly,
guarantee charges paid by the assessee to Dutch Co were not in the nature of
‘interest’ in terms of Article 11 of the India-Netherlands DTAA.

This view is also
supported by the decision in Container Corporation vs. Commissioner of
Internal Revenue of US Tax Court Report [134 T.C. 122 (U.S.T.C. 2010) 134 T.C.
5] wherein the Court held that guarantee is more analogous to service
and hence guarantee fee cannot be considered as interest.

2 Tribunal
noted that though another Bench had set aside orders for A.Ys. 2007-08 to
2009-10 for considering additional evidence submitted by the assessee, that
option was not open to it because for the years under consideration, CIT(A) had
decided after considering all the documents

Whether
guarantee charges FTS?

Article 12(5) of
the India-Netherlands DTAA defines FTS as payment of any kind to any person in
consideration for the rendering of any technical or consultancy services
(including through the provision of services of technical or other personnel).
Article 12(5) further stipulates that such services should either be ancillary
to grant of license for intellectual property rights (IPRs) or should make
available technical knowledge, etc.

The provision of
guarantee was a service. Indeed, it was a financial service. However, there was
no way it could be termed ‘consultancy service’. Even otherwise, Dutch Co had
neither provided services which were ancillary to grant of license for IPRs nor
had it ‘made available’ technical knowledge, etc. Hence, payment for such
services was not FTS.

Since Dutch Co did not have any PE in India,
in terms of Article 7 of the India-Netherlands DTAA, payments were not
chargeable to tax in India.

shailesh.kwebmaker

Sections 9, 195, 201(1A) of the Act – On facts, since non-resident supplier had ‘business connection’ in India, the resident payer was required to withhold tax u/s 195

13. [2020] 117 taxmann.com
322 (Indore-Trib.) Sanghvi Foods (P.)
Ltd. vs. ITO ITA Nos. 743 &
744/Ind/2018 A.Ys.: 2015-16
& 2016-17 Date of order: 3^rd
June, 2020

Sections 9, 195,
201(1A) of the Act – On facts, since non-resident supplier had ‘business
connection’ in India, the resident payer was required to withhold tax u/s 195

FACTS

The assessee was an
Indian company engaged in the business of manufacturing plants. It had
purchased spare parts for its machinery from a company in Switzerland (Swiss
Co) for which it made payments during F.Ys. 2014-15 and 2015-16. The assessee
did not withhold tax from the payments on the basis that the purchase was
directly made from a non-resident and that, too, for purchase of capital goods.

The Swiss Co had a
wholly-owned subsidiary in India (I Co)
which was primarily engaged in the manufacture and trading of food processing
machinery, spares and components, and also providing repair, maintenance and
engineering services, etc. In addition, it provided marketing support services
to its group companies, including Swiss Co.

In the course of
his examination, the A.O. found the following:

While the
assessee had contended that it was not aware whether Swiss Co had any
representative in India, it had extensive email communication with I Co. Such
communication showed:

The assessee had
placed an order on Swiss Co on the basis of the quotation received from I Co;

I Co was
authorised to negotiate, issue quotation, revise quotation and also confirm the
order;

The assessee
confirmed the order on Swiss Co through I Co;

While I Co had an
active role in concluding the contract, Swiss Co had raised only the final
invoice.

The A.O. had issued
notice u/s 133(6) of the Act to I Co. In response, I Co provided information
and communication between it and the assessee which supported the findings of
the A.O.

Accordingly, the
A.O. concluded that Swiss Co had ‘business connection’ in India through I Co.
Consequently, the profits arising from the sales to the assessee were subject
to withholding of tax u/s 195 of the Act. Therefore, the A.O. determined 10% of
the amount remitted as net profit and calculated tax @ 41.2% on a gross basis
in respect of both the payments.

In his order, the
CIT(A) observed that the functions performed by I Co proved that it was not a
mere business-sourcing agent but was concluding contracts on behalf of Swiss
Co. This resulted in a business connection in India. He further observed that
irrespective of whether the payment was for the purchase of capital goods, the
payer was obliged to withhold tax once the business connection was established.

HELD

The investigation
of the A.O. and the findings of the CIT(A) show that the role of I Co could not
be ignored at any stage. I Co was involved since the beginning when the assessee
was looking for suppliers of spares. The reply of I Co u/s 133(6) of the Act
further supported this finding.

The activities
performed by I Co for Swiss Co were squarely covered within clauses (a),
(b) and (c) of the definition of ‘business connection’ in Explanation
2 to section 9(1) of the Act.

Based on the facts
and findings on record, Swiss Co had a ‘business connection’ in India through I
Co.

Accordingly, the transaction was subject to section 9(1) and the income
of Swiss Co was deemed to accrue or arise in India. Consequently, in terms of
section 195, the payer was required to withhold tax from the payment ¹.

1 It
appears that both the CIT(A) and the Tribunal have discussed only the issue of
‘business connection’ and have not made any observations on the quantum of
profit determined by the A.O.

shailesh.kwebmaker

Section 115JB – Waiver of loan would not assume the character of income and hence, not part of book profit and adjustment in accumulated debit balance of profit & loss account through restructuring account to be disregarded for the purpose of computation of brought-forward losses

11. Windsor Machines Ltd. vs. DCIT (Mumbai) Manoj Kumar Aggarwal (A.M.) and Madhumita Roy (J.M.) ITA Nos. 2709, 2710 and 4697/Mum/2019 A.Ys.: 2013-14 and 2014-15 Date of order: 28^thMay, 2020 Counsel for Assessee
/ Revenue: Pradip N. Kapasi and Akhilesh Pevekar / Vinay Sinha

Section
115JB – Waiver of loan would not assume the character of income and hence, not
part of book profit and adjustment in accumulated debit balance of profit &
loss account through restructuring account to be disregarded for the purpose of
computation of brought-forward losses

FACTS

The assessee was
declared a sick company under the provisions of the Sick Industrial Companies
(Special Provisions) Act, 1985 (SICA) and a rehabilitation Scheme was
sanctioned. The Scheme envisaged several reliefs and concessions from various
agencies, including certain tax concessions, viz., exemption from the
provisions of sections 41, 72, 43-B and 115JB for a period of eight years from
the cut-off date (i.e., 31^st March, 2009 as per the Scheme).

The
assessee’s net worth turned positive on 31^st March, 2011, hence the
BIFR discharged the assessee from the purview of SICA vide its order
dated 16^th August, 2011. According to the DIT (Recovery), since the
assessee was discharged by SICA on 16^th August, 2011 and its net
worth turned positive by virtue of implementation of the revival Scheme, the
assessee was precluded from relief u/s 115JB in view of Explanation 1(vii) to
section 115JB(2) and, therefore, no relief would be available to it from A.Y.
2011-12 onwards from applicability of the provisions of section 115JB. The
assessee prayed for
reconsideration of the order pleading before the DIT (Recovery) that in terms
of the BIFR Scheme, it was entitled to relief u/s 115JB for a period of eight
years, i.e., up to A.Y. 2017-18.

In the meantime, the A.O., referring to the
decision of the DIT (Recovery), held that the assessee would be entitled for
relief u/s 115JB only up to A.Y. 2011-12. Accordingly, he computed book profits
u/s 115JB at Rs. 1,076.27 lakhs which was nothing but profit shown by the
assessee in the financial statements (after excluding exempt dividend income).
The CIT(A), on appeal, upheld the order of the A.O.

HELD

According to
the Tribunal, since the assessee was discharged by SICA on 16^th
August, 2011 and its net worth turned positive by virtue of implementation of
the revival Scheme, the assessee was precluded from relief u/s 115JB in view of
Explanation 1(vii) to section 115JB(2) and, therefore, no relief would be
available from A.Y. 2011-12 onwards.

The Tribunal
also found substance in the contention of the assessee that

(a) the
amount credited to profit & loss account on account of waiver of loan would
not assume the character of income and hence should not form part of book
profits u/s 115JB, and

(b)
adjustment in accumulated debit balance of profit & loss account through
restructuring account should be disregarded for the purpose of computation of
brought-forward losses in terms of Explanation 1(iii) to section 115JB(2),

However, the
Tribunal also noted that the issues had not been delved upon either by the A.O.
or by the CIT(A). Therefore, on the facts and circumstances of the case, the
Tribunal remitted the matter back to the file of the CIT(A).

shailesh.kwebmaker

Section 2(22)(e) – No addition can be made u/s 2(22)(e) since as per annual return filed by the assessee, he had transferred his shareholding in borrower company before the advancement of loan by the lender company to the borrowing company

19. [(2020) 117 taxmann.com 451
(Chd.)(Trib.) ACIT vs. Gurdeep Singh ITA No. 170 (Chd.) of 2018 A.Y.: 2013-2014 Date of order: 26^th June, 2020

Section 2(22)(e) – No addition can be made
u/s 2(22)(e) since as per annual return filed by the assessee, he had
transferred his shareholding in borrower company before the advancement of loan
by the lender company to the borrowing company

FACTS

The assessee was a shareholder in two companies, namely, C Ltd. and J
Ltd. During the previous year relevant to the assessment year under
consideration, C Ltd. gave loans and advances to J Ltd. out of its surplus
funds. The A.O. took a view that since the assessee was holding shares in both
companies in excess of ten percent of total shareholding, the amount of loan is
to be taxed as dividend u/s 2(22)(e) of the Act.

The annual return
filed with the Registrar of Companies (ROC) revealed that the assessee held
only one share of C Ltd., whereas the other shares were transferred to J Ltd.
The annual return was belatedly filed with the ROC, along with payment of late
fee, which was accepted by the ROC. Based on the belatedly filed annual return,
the assessee contended that the shares were transferred prior to the
advancement of loan and, therefore, the provisions of section 2(22)(e) were not
applicable. The A.O. did not agree with the submissions made by the assessee
and held the plea of share transfer to be an afterthought since the return with
the Registrar was filed late.

Aggrieved, the assessee preferred an appeal to the CIT(A) who allowed the
appeal since the transfer of shares was accepted by the A.O. while framing assessments
of subsequent years, and also held that the transfer of shares had to be
considered. He also held that the transaction was commercially expedient with
no personal benefit involved.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

HELD

The Revenue could
not establish beyond doubt that the assessee was having substantial interest in
C Ltd. on the date of advancement of loan by C Ltd. to J Ltd. Even though the
annual return was filed belatedly, once accepted by the ROC, it was a legal and
valid document as per law and the effective date for transfer of shares should
be considered as that mentioned in the return filed. To apply a deeming
fiction, the first set of facts is to be proved beyond doubt and the deeming
fiction cannot be applied on the basis of assumption, presumption or suspicion
about the first set of facts. The Tribunal observed that it was the A.O.’s
suspicion that the assessee was holding substantial shares in C Ltd. on the
date of advancement of loan. The Revenue could not rebut the facts beyond
reasonable doubt. The Tribunal upheld the order passed by the CIT(A) and
confirmed the deletion of the addition made u/s 2(22)(e).

The appeal filed by
the Revenue was dismissed.

shailesh.kwebmaker

Section 115BBE, read with sections 69, 143 and 154 – Amount surrendered, in the course of survey, as undisclosed investment in stock and assessed as business income cannot be subsequently brought to tax u/s 115BBE by passing an order u/s 154

18. [(2020) 117 taxmann.com 178
(Jai.)(Trib.) ACIT vs. Sudesh Kumar Gupta ITA No. 976 (Jp) of 2019 A.Y.: 2014-2015 Date of order: 9^th June, 2020

Section 115BBE, read with sections 69, 143
and 154 – Amount surrendered, in the course of survey, as undisclosed
investment in stock and assessed as business income cannot be subsequently
brought to tax u/s 115BBE by passing an order u/s 154

FACTS

During the course of survey, the assessee surrendered an amount of Rs. 21
lakhs as undisclosed investment in stock. This amount was offered to tax in the
return of income as business income. In the assessment completed u/s 143(3) of
the Act, the returned income was accepted.

Subsequently, the A.O. issued a notice u/s 154 proposing to tax the
undisclosed investment of Rs. 21,00,000 in stock u/s 69 and tax thereon levied
u/s 115BBE at 30%. The assessee submitted that the amount admitted as
undisclosed excess stock was on an estimated basis and it had been accepted by
the A.O. in an assessment made u/s 143(3). The A.O. rejected the submission
made by the assessee and passed an order u/s 154 and levied tax on the amount
of undisclosed investment at 30% in accordance with section 115BBE.

Aggrieved, the assessee preferred an appeal to the CIT(A) who allowed the
appeal holding that the A.O. was not justified in invoking the provisions of
section 69 once he had charged it to tax under the head business income while
passing the assessment order u/s 143(3).

Aggrieved, the Revenue preferred an appeal to the Tribunal.

HELD

The Tribunal noted
that the amount of undisclosed investment in stock surrendered by the assessee
was offered as ‘business income’ in the return of income and was accepted by
the A.O. In the course of assessment, there was no adjustment / variation
either in the quantum, nature or classification of income offered by the
assessee. The A.O. had not called for any explanation regarding the nature and
source of such investment during the course of assessment proceedings. Further,
he had neither formed any opinion, nor recorded any satisfaction for invoking
the provisions of section 69. The Tribunal held that since the provisions of
section 69 had not been invoked at the first instance while passing the
assessment order u/s 143(3), they cannot be independently applied by invoking
the provisions of section 154.

The Tribunal
dismissed the appeal filed by the Revenue.

shailesh.kwebmaker

Sections 2(47), 45: When the terms of the sale deed and the intention of the parties at the time of entering into the sale deed have not been adhered to whereby full sale consideration has not been discharged, there is no transfer of land, even though the sale deed has been registered, and no income accrues and consequently no liability towards capital gains arises in the hands of the assessee

17. [2020] 117 taxmann.com 424 (Jai.)(Trib.) CIT vs. Ijyaraj Singh ITA Nos. 91 and 152/Jp/2019 A.Y.: 2013-14 Date of order: 18^th June, 2020

Sections 2(47), 45: When the terms of the
sale deed and the intention of the parties at the time of entering into the
sale deed have not been adhered to whereby full sale consideration has not been
discharged, there is no transfer of land, even though the sale deed has been
registered, and no income accrues and consequently no liability towards capital
gains arises in the hands of the assessee

FACTS

The assessee in his
return of income filed u/s 139(1) declared long-term capital gains of Rs.
2,51,85,149 in respect of sale of agricultural land situate in Kota. In the
course of assessment proceedings, the assessee revised his return of income
wherein the income under the head long-term capital gains was revised to Rs.
1,10,18,918 as against Rs. 2,51,85,149 shown in the original return. The reason
for revising the return was that out of three sale deeds, two sale deeds of
land executed with Mr. Rajeev Singh were invalid sale deeds and consequently no
transfer took place and hence no capital gain arises in respect of the two
invalid sale deeds. In respect of these two sale deeds, the assessee had
received only Rs. 63 lakhs towards consideration out of Rs. 803 lakhs. The
cheques received from the buyer were dishonoured and even possession was not
handed over to the buyer. The Rajasthan High Court has also granted stay on the
sale deeds executed by the assessee.

But the A.O. was of
the view that the contract entered into by the assessee was a legal and valid
contract entered into in accordance with the procedure laid down by law. The
assessee voluntarily agreed to register the sale deed before the Registrar and
on the date of execution and also on the date of registration there was no
dispute between the parties. The A.O. computed long-term capital gains by
considering the full value of consideration, including the two sale deeds which
were contended to be invalid, and computed the full value of consideration u/s
50C of the Act.

Aggrieved, the
assessee preferred an appeal to the CIT(A) who held that the transaction in
respect of the two invalid sale deeds is not chargeable to capital gains tax.

Aggrieved, the
Revenue preferred an appeal to the Tribunal.

HELD

The Tribunal noted
that the question for its consideration is that where the full value of
consideration has not been discharged by the purchaser of the impugned land as
per the sale deed, and there is violation of the terms of the sale deed,
whether the impugned transaction would still qualify as transfer and be liable
for capital gains tax, given that the same is evidenced by a registered sale
deed. Having considered the provisions of sections 2(24), 2(47), 45 and 48 of
the Act, and also the decision of the Punjab & Haryana High Court in the
case of Hira Lal Ram Dayal vs. CIT [122 ITR 461 (Punj. & Har. HC)]
where the question before the Court was ‘whether it is open to the assessee to
prove that the sale transaction evidenced by the registered sale deed was a
sham transaction and no sale in fact took place’, and also the decision of the
Patna High Court in the case of Smt. Raj Rani Devi Ramna vs. CIT [(1992)
201 ITR 1032 (Patna)], the Tribunal held that the legal proposition
which emerges is that a registered sale deed does carry an evidentiary value.

At the same time,
where the assessee is able to prove by cogent evidence brought on record that
no sale has in fact taken place, then in such a scenario the taxing and
appellate authorities should consider these evidences brought on record by the
assessee and on the basis of an examination thereof, decide as to whether a
sale has taken place in a given case or not. The title in the property does not
necessarily pass as soon as the instrument of transfer is registered and the
answer to the question regarding passing of title lies in the intention of the
parties executing such an instrument. The registration is no proof of an
operative transfer and where the parties had intended that despite execution
and registration of sale deed, transfer by way of sale will become effective
only on payment and receipt of full sale consideration and not at the time of
execution and registration of sale deed.

The Tribunal noted
that no payment was received before execution of the sale deed but only
post-dated cheques were received by the assessee. It held that mere handing
over of the post-dated cheques which have been subsequently dishonoured and
returned unpaid to the assessee, cannot be held to be discharge of full sale
consideration as intended and agreed upon between the parties and there is
clearly a violation of the terms of the sale deed by the buyer.

Although the sale
deed has been registered, given that the terms of the sale deed and the
intention of the parties at the time of entering into the said sale deed have
not been adhered to whereby full sale consideration has not been discharged,
there is no transfer of the impugned land and no income accrues and
consequently, no liability towards capital gains arises in the hands of the
assessee. The Tribunal also held that it is only the real income which can be
brought to tax and there cannot be any levy of tax on hypothetical income which
has neither accrued / nor arisen or been received by the assessee. Since the
transaction fell through in view of non-fulfilment of the terms of the sale
deed whereby cheques issued by the buyer have been dishonoured, there is no
transfer and no income which has accrued or arisen to the assessee. There is no
real income in the hands of the assessee and in the absence thereof, the
assessee is not liable to capital gains. It observed that a similar view has
been taken by the Pune Bench of the Tribunal in the case of Appasaheb
Baburao Lonkar vs. ITO [(2019) 176 ITD 115 (Pune-Trib.)].

This ground of
appeal filed by the Revenue was dismissed.

shailesh.kwebmaker

71ST ANNUAL GENERAL MEETING AND 72ND FOUNDING DAY, 6TH JULY, 2020

The 71^st Annual General Meeting of the BCAS was, for the first time, held online on Monday, 6^th July, 2020.

The President, Mr. Manish Sampat, took the chair and called the meeting to order. All the business as per the agenda contained in the notice was conducted, including adoption of accounts and appointment of auditors.

Mr. Samir Kapadia, Hon. Joint Secretary, announced the results of the election of the President, the Vice-President, two Honorary Secretaries, the Treasurer and eight members of the Managing Committee for the year 2020-21.

The ‘Jal Erach Dastur Awards’ for the Best Articles and Features appearing in the BCAS Journal during the year 2019-20 were also presented on the occasion.

For Best Article the Award went to CA Bangaru Ishwar Teja, CA Nitish Ranjan and CA Dinesh Chawla for their Article: Income Tax E-Assessments – Yesterday, Today and Tomorrow. The Award for Best Feature went to CA Jayant Thakur for Securities Laws.

The July special issue of the BCA Journal was e-released by Mr. Deepak Parekh. It carried special articles on ‘Risk and Technology Challenges for Professionals’ in addition to the regular articles and features. An e-book, ‘MLI – DECODED’, authored by CA Ganesh Rajgopal, was also released.

Before the conclusion of the AGM, members, including Past Presidents of the BCAS, were invited to share their views and observations about the Society.

The Founding Day lecture was delivered at the end of the formal proceedings of the AGM. It was an outstanding oration by CA Deepak Parekh, Chairman of HDFC, who spoke on the topic ‘Chartered Accountants in Uncharted Times’. It was attended online by more than 3,000 professionals on Zoom and the YouTube channel of the BCAS.

OUTGOING PRESIDENT’S REPORT

Manish Sampat: I feel very proud and satisfied as I rise for the last time as President of our illustrious Society. It is an honour and a privilege to have led the Bombay Chartered Accountants’ Society during a memorable and unprecedented year. We continue to march ahead and strive to achieve greater heights of performance year after year by building on the excellent work done by all previous Presidents. The last three months have been challenging and unmatched for us in terms of conducting our normal activities of education, training and spreading knowledge. But we converted all the challenges that came our way into opportunities and continued with our endeavour of spreading knowledge with even more vigour and zeal.

I would like to begin with where I had ended my installation speech. I had mentioned then that the BCAS is a collective organisation and the President, by chance, gets one year to head it. And now, after a year, I am fully convinced about this fact. What I did in the year gone by was the collective effort of the entire team and I was just fortunate to lead this team. As it is said in cricket parlance –‘the captain is as good as the team’. So, you be the judge and you will know just who is worthy of credit for all the good things that took place during the year. But I take responsibility for the debits, if any, that might have accumulated.

In my acceptance speech I had also mentioned that I am indebted and owe a lot to this organisation because it has had a significant role and contribution in my professional development. Contributing to it by heading it was my chance to repay our Society. But I feel that this did not happen. Just like a mother always gives to her children and does not accept anything in return, it was BCAS that kept on giving me more and more during the year rather than me repaying my debts.

It taught me lessons in life, management and leadership.

I learnt how to deal with people and difficult situations.

I have learnt that along with power comes responsibility and you need to be humble and considerate when you are in a position of power.

I learnt management lessons of collective leadership – if you want to be a successful leader you can’t be running alone and you need to take everyone along with you.

By the end of my tenure, I matured as a person and as a leader. I learnt how to be patient and understanding and learnt people management.

But it is nature’s law that in the circle of life you should never take more than what you can give. So I have tried my best and sincerely put in all my efforts in whatever I did as President, to maintain and build upon the goodwill, ethos and value systems of our Society.

Such is the greatness and selfless nature of the institution. It always gives, gives and gives.

I started my journey as President with anxiety, not knowing how the year would pan out but I go back with so many beautiful memories and with wonderful, long-lasting friends made on the way. During the year I also got a lot of support from everyone, at times even from unexpected sources. No doubt, personal relations count but I think the support was more for the Society rather than for me personally. Yes, personally, I became close friends to many Past Presidents, Managing Committee members, Conveners (whom I had just known) and this is going to last for a long time to come.

So far we have been successful and are in meaningful existence for more than seven decades; this in itself is testimony and shows that we have got something right. There is something strong and positive in our DNA, our value system, our processes and the entire structure.

Imagination and innovation do not come with an age limit and have no expiry date. At our Society, we benefit from the diversity in thinking, perspectives, experience and age. We serve our members through expertise developed through experience as well as innovative ideas from the youth. We need a balance between both and cannot do away with any one of them. That is why we remain relevant, committed and respected even today.

During the year we attempted some experiments and did away with some past practices – we tried to do things differently rather than doing different things. I am satisfied and happy to announce that most of our experiments were successful and were appreciated by members. As we move forward we continue to have the same vision of continuing to grow and transform ourselves for the benefit of all our stakeholders who have trusted us and had faith in us. Some of the initiatives include LM in the suburbs, increasing the number of joint programmes with other organisations, industry bodies, outstation programmes, sector- and industry-specific events, Women’s Day LM, Bapu@150, IA RSC, etc. to name a few.

On the financial front, let me be honest. Some may not like this, but I would like to mention it. From the beginning of the year I had decided and aimed for building on our coffers and strengthening our financial position. And our financial performance for F.Y. 2019-2020 speaks for itself. No doubt this year we benefited from an increase in subscription income (without any fall in membership) but this year had other challenges such as the load of two budget meetings in a year, loss of revenue from a couple of well-paying programmes during the last ten days of March and falling interest rates. However, due to strategic efforts on identifying avenues for raising revenue (without overcharging our members), bumper sale of the Referencer, calendar and pocket dairies, financial prudence, cost-cutting measures and avoiding wasteful expenditure, we were able to achieve a financial performance that will come handy on a rainy day.

Things are going to change for me from tomorrow. I cross the floor and go back to the other side. From tomorrow I once again become a common member. The question is what will I miss from tomorrow?

My affair with BCAS comes to an end; but it’s like a nasha – the more you get involved, the greater is the intoxication. Some of the things that will change are:

Checking multiple email IDs in the inbox.
Many seniors addressed me as ‘President’– so I will become Manish Sampat again from tomorrow.
Many of my contemporaries were addressing me with the suffix ‘bhai’. Removing ‘Bhai’ from my name, so that I go back to being just Manish for all of you.
My WhatsApp status line before my term was ‘Not responsible for delay in reply’ which I had changed after taking over as President. I hope to go back to my earlier status.
I will miss the lessons in MLI, digital economy and EL that I used to compulsorily get from the International Taxation Committee.
Writing twelve President’s Columns, month on month (in time) was a real challenge. It was like having twelve deliveries in the year.
Most importantly, now I will not be able to make excuses both at home and at office about being busy with BCAS work, which I have got so used to now.
There are many more such instances, but I can’t list all of them here.

I need to thank quite a few people who have tolerated all my whims and tantrums during the year.

First, my family – The situation at home is such that I have been completely written off. Initially, I was asked whether I would make it for a late night movie and I was included in the dinner plans; but since the past couple of years I have never been consulted, my ticket is never bought and I have not been a part of any plans by the family. So much so, that on birthdays my wife continues to get surprise birthday cakes and other such gifts and I get a yoga mat as my birthday gift!

My CNK family, partners, staff and more particularly my team… I always had this privilege in office and I was relieved from any responsibilities as I had the excuse of being busy with the BCAS Presidentship, but now I go back and don’t have any excuses left with me. Thank you, CNK family and all my partners and staff for supporting me, for tolerating my weird time schedules and temper at times. But I know that since I have four Past Presidents with me at CNK, they would understand me. Shariqbhai, Gautambhai, Himanshubhai and Sanjivbhai were always there whenever I needed any advice. I must make a special mention of Praful and all others in my team who ensured that work continued smoothly even without my physical involvement.

A big thank you to all the Past Presidents who showered their blessings on me and were always available whenever I called upon them. I hope I have lived up to their expectations and the faith and responsibility they had bestowed on me.

All the Chairmen and Co-Chairpersons of the Committees – I had said that these are the captains of
the tournament and found each and every one of them working harder than anyone else. I believe that since they are all Past Presidents, they know the Society better than anyone else. They can’t go wrong. The entire credit for the success of all the events goes to them and my contribution is limited to giving them a free hand and never getting involved or interfering with their working. Even today, as I speak, a representation has been sent by the Taxation Committee.

In my Management Committee, I got the most wanted support. My thanks to all the Committee members for their active and constructive participation. I was blessed with a very vibrant and vocal Managing Committee and many new ideas and initiatives emerged from it. I believed in empowering it and involving them in the decision-making process because the future leadership of BCAS will evolve and emerge from here. We have to ensure that they are groomed and ready for taking up leadership positions.

As for my Office-Bearers, there was continuous consultation with them and all decisions were taken collectively and unanimously.

In Suhas we have a silent worker who does not like to make any noise but contributes in his own style; he was always available and a big supporter.
In Abhay we have a very mature and able administrator – custodian of our financial resources, he ensured that we got more than the adequate surplus which I had targeted.
In Mihir we have a perfect communicator, observant and very good at all the Committee and back office paperwork.
Samir (my old buddy) again is a very silent, dedicated worker, technologically savvy and loyal to the institution to the core.
I can say that my ‘wolf pack’ rocked and we had a great time together.
I also thank the support staff at the BCAS, Upendra, Shreya, Javed and their team. I might have been harsh on them at times, but I was just acting as a trustee and in the interest of the Society and had no other intentions. I also thank all our vendors, printers and others for their support throughout the year.

Finally, a big Thank You to each and every member. Whatever was achieved during the year is only because of the faith and the patronage of all of you. I got unprecedented support from members every time and for every event. We did not have to cancel even a single programme due to insufficient enrolment. I was lucky that in all the LM, events, workshops, RRCs we had very good attendance and the feedback was very encouraging. Even at live streaming of the budget there was record attendance, better than in the recent past.

All new initiatives executed during the year have been mentioned in detail in the Managing Committee report so I would not like to repeat them; but I would now like to speak about the developments in the last three months.

Speaking today, I think that the pace at which the activities of the BCAS were being carried out, only an external force or an act of God could have stopped them.

It is said that necessity is the mother of invention. So far we were only talking about and planning to go
digital with our activities. But the circumstances since March have forced us to reinvent ourselves. I am happy to inform you that we quickly transited to an online platform and were able to reach a much wider audience and get high profile and knowledgeable speakers for BCAS programmes. To our immense satisfaction, our internal assessment actually shows that we have been successful in delivering more man-hours of training by way of live attendance and follow-up hits on our YouTube channel. We managed to clock almost half of the man-hours of training (during the three months of lockdown) than we were usually clocking in in an entire year through physical meetings.

There a few misses also during the year, some incomplete agenda which I could not complete:

The BCAS mobile App.

The Professional Accountants’ course.

Organising a cricket tournament – the BCA Premier League.

Naming the junction outside our office as BCAS Chowk.

Having a core team in place to start planning and working towards our 75^th anniversary.

At times I took time to take a decision and left it till the last, but that perhaps is my working style. I take too much pressure at the end but ultimately deliver. But frankly, I think I enjoy this pressure.

I think you require strong administrative and people management skills to run an organisation and this is what I have benefited from and gained.

Online events are here to stay and this brings a different set of challenges – will we require the administrative set-up that we currently have? We need to reorganise and restructure our internal operations and infrastructure which should be the focus in the coming year.

To conclude, my biggest take-away from my term as President is what I realised and learnt: That difference of viewpoints is healthy for an organisation to grow and remain dynamic. There could be different and completely opposite strong views but all volunteers are working in the interest of the institution and the leader is responsible for building consensus, finding a balance and coming out with a win-win solution acceptable to all.

With these words, I wish the incoming team of Suhas, Abhay, Mihir, Samir and Chirag all the very best. I have worked with them so I am very confident of their capabilities and abilities to have a super successful year ahead.

Now I say a final goodbye and a big thank you and gratitude for all your love, support and affection. I vacate this office with a lot of satisfaction and a sense of achievement.

Thank you.

INCOMING PRESIDENT’S SPEECH

SUHAS PARANJPE: This is a very humble, sentimental and responsible moment for me as I take up the responsibility as President of this august body, the Bombay Chartered Accountants’ Society, BCAS.

Before I start, let me first remember and thank all those who have been part of my journey both in my career and at BCAS.

First and foremost, thank you from the bottom of my heart to all the respected Past Presidents who have contributed so much to this Society. I am humbled that they all considered me fit and proper for this position. The list of all my mentors and guides at BCAS is too long to quote and I just don’t have the words to thank them.

However, since we have just observed the auspicious day of Guru Purnima, let me take this opportunity to seek all your blessings with folded hands and this prayer:

त्वमेव माता च पिता त्वमेव ।

त्वमेव बन्धुश्च सखा त्वमेव ।

Thank you, all Past Presidents and my seniors.

Today, I would like to remember and thank my father, the late Shri Shivaram Paranjpe who always gave me a good perspective and directions at the right time and put me in the right hands which shaped my career. Thank you, Baba.

My mother Smt. Shalini and my wife Swati had full faith and confidence in me and supported and encouraged me throughout this journey. Swati plays the important role of critic for my all-round improvement. Our son Aarav is too young to understand about BCAS and though he entered into our life as per his convenience, he gave us the purpose, the focus and better directions. Thank you, my family.

My sincere thanks go out to the late CA Dr. Rashmibhai Zaveri. It was because of his relations with my father that I got connected with my partners. Thank you, Rashmibhai, and I am sure you are happy and smiling today.

CA Mayurbhai Vora and CA Bharatbhai Chovatia, who have been my partners and mentors for the past three decades, have always been the force behind me in my journey as a professional. They are like the magic stone पारस (paras) that converts things into gold. Their families always treated me as their own member. My younger partners, Kinnari and Bhakti Vora, Ronak Rambia, Vinit Nagda and our enthusiastic but matured youth brigade in the office have always stood behind me. Thank you, my office friends and colleagues.

My special thanks to outgoing President Manish for his guidance and for always making himself available to me for help and assistance. Under your Presidentship, Manish, you could carry out many activities and kept the BCAS flag flying high.

Your year was a combination of Physical + Virtual. With all-round support this year, we could plan for the year 2020-21 an equally vibrant and innovative plan of action, full of experiments and possibilities for the future. As I understand it, the year ahead would be Virtual + Physical. I must say that you have ensured an excellent foundation in the last three months for the Virtual part of the year ahead. We wish you good luck and happy times ahead – both professionally and personally. However, I wish you will continue to be a guiding force for the BCAS in the years to come. Thank you, Manish.

Let me now move ahead.

Since mid-March, 2020, the whole world has been living in challenging times due to the Covid pandemic. The long lockdown has given each one of us a different perspective to life, work, relationships – the challenges and opportunities. All of us have now experienced different situations like Work from Home, Work for home (without domestic help), strict social distancing norms, events on Zoom, Hangout, etc. We are now all familiar with these ‘new normals’.

Let me share with you two situations – (on a lighter note) to give you a different perspective over and above the ‘new normals’ as mentioned above. It relates to the game of lawn tennis, which is my favourite.

We did not see a tennis court for more than three months – an unprecedented situation. As you are aware, in tennis we are allowed to play only singles games and not doubles due to social distancing. In singles, since you do not enjoy the support of a doubles partner, you have to be far more fitter with a lot more stamina. This is the current situation and (I hope) it would change in future.

Secondly, there are no ball boys on the courtside as of now to help the players, they have all gone to their native places or disappeared. When we play, other players become ball boys and vice versa. This is self-help on the tennis court – and it can be termed as an aatmanirbhar experience.

Now let me move to more serious business, to give you a brief of the BCAS Theme for 2020-21 and also our annual plan.

Our focus areas for this year will be:

(1) Higher reach and scalability – all around – to the members and the profession at a reasonable cost;

(2) Hand-holding for MSME / SME businesses and practitioners for a sustainable future;

(3) Digital and technology transformation with experienced hands and youth force.

These focus areas have been articulated in three ideas condensed in three headings, viz.

‘Tradition – Transition – Transformation’

In the above logo, the sign of the pen represents ‘TRADITION’. And the six squares at the top represent the digital medium.

TRADITION: OUR FOUNDATION

At BCAS, our core values, our ethical practices, our governance, our tradition of hand-holding by seniors are our foundation and shall continue to guide us during the phase of transition and transformation. BCAS has always been and would continue to be a principle-centred, learning-oriented institute with quality services as its benchmark. In the last three months, BCAS and its dedicated team of volunteers have demonstrated that even in the time of lockdown, BCAS is proactive and adaptable to the changing situations. In other words, TRADITION AS FOUNDATION CONTINUES TO GUIDE US.

TRANSITION

Transition is a process of change. It could be a short-term phase but it is crucial. World organisations and practices cannot just transform themselves tomorrow morning. They have to go through the crucial phases of transition. In nature, there are some of the best examples of transition, such as the metamorphosis of a caterpillar into a beautiful butterfly, or an eagle which starts the process of change at a later stage in life for survival.

Why only nature, we also have Indian corporates transiting from a single textile mill to petrochemicals, to oil and gas, to retail and digital platforms, and with much more to come. You will agree with me that it makes all Indians proud to be a part of such a transition.

In our profession in general, and on the BCAS platform in particular, there are CAs who started as proprietors and transited themselves into bigger / larger personalities and firms consolidating and becoming Indian giants. There are several in-house examples.

This year, with large corporates finalising their accounts with virtual audits, with AGM’s being conducted online, including our own, our events, including RRCs, were and would be conducted online. This is the conceptual change of new experiments and experiences beyond our imagination. In other words, THIS IS THE YEAR OF CHANGE / TRANSITION.

TRANSFORMATION:

Transformation is an outcome of change or transition.

Today, we are in the era of digital transformation. This will help us to enhance our reach and scalability without boundaries and at reasonable costs. Apart from this, it could help us to reach out to the MSMEs / SMEs and our large family of BCAS members by hand-holding them for a sustainable future. Yes, there would be less personal / human touch. But I am sure technology will evolve itself and adopt a human face with innovation and creativity. Sitting in your office or home, ease of technology would give you an experience of being in Vizag or in Kodaikanal or in Bali. It looks like this would be our Residential Refresher Course module this year.

In view of the economy taking a big hit, it has become much more crucial for Chartered Accountants, including the small and medium PR actioners to transform themselves into the role of business advisers apart from helping their clients in compliances.

On the healthcare front which is so critical now, it has become so important to transform ourselves to different levels of body immunity to deal with this virus or other kinds of diseases in future. Each and every one of us should follow a specific fitness and meditation regime to stay healthy and safe – both physically and mentally.

Yes, we need to avoid an overdose of webinars. But with the outstanding quality of our contents, faculties and administrative discipline and capabilities, digital transformation would give us an opportunity to take BCAS to new heights. It would be easier and cost-effective to connect with sister organisations and different regional organisations and their members. There are possibilities that with innovative initiatives we can reach the 10,000 membership mark which has been in our bucket list for a long time.

In the next generation, youth force would be the torch-bearers of this transformation under the guidance and support of experienced mentors. The youth are the technology anchors and are better equipped to handle it. This year all the Committees have added more youth power with the specific aim of giving them opportunities to perform and excel.

A robust and secured technology platform and infrastructure is the backbone of this transformation arena. We might have opted for a particular platform today, based on technical inputs of the Committees, but we would try to be vigilant in respect of the strength and security parameters of the tech platforms. Suggestions and guidance from time to time would be welcome to keep us on track.

This is the ANNUAL PLAN.

BCAS is a dynamic platform to perform. It also gives you the power to perform.

Let me share with you two personal experiences. First, when I was nominated as Vice-President for 2019-20, one of the senior Past Presidents and my BCAS mentor told me that this position offers a kind of power to perform for a purpose and for the profession. How true these words of wisdom have turned out to be when I look back to the year which has just passed by.

The second experience is more than an observation. For the first time in my BCAS journey, I was fortunate enough to make six contributions to the BCAJ in the year 2019-20 by way of Namaskaar, Book Review, an Article and the column Is it Fair. It is like shooting from 0 to 6 – just as in tennis you win a set at 6-0!

For me it was self-appraisal and not self-praise. I only wish to bring to the notice of the next generation that the power of the BCAS platform always encourages you to perform but you need to be focused and maintain self-discipline.

Now a small note on financials.

I wish to state that this year would be financially challenging for businesses, professionals, employees and even to the Government. Similarly, at BCAS it appears as though there would be our usual fixed costs with lesser revenue. But I am confident that my Office-Bearers, Managing Committee members, Committee Chairmen and the entire Core Group would come up with out-of-the-box thinking and present ideas both to augment our revenues and also to increase membership.

To conclude, I wish to assure all of you that with the support of all the Past Presidents and seniors, along with the Office-Bearers, Managing Committee members, the youth power and the assistance of the BCAS staff, we would perform and deliver our best in these challenging times in the year ahead. Please continue to share your thoughts and guide me in this journey.

As I take up the new position, I would like to release the E-Core Group Diary with 250 Core Group members who are the lifeline of our Society. It is a part of digital transformation that we release it today in E-version. I acknowledge the contribution of our Past President Narayan Pasari who always signs off this diary with his eye for detail. Thank you, Narayanji.

We would print it and send it to members in due course when logistics improves.

I thank you for your patient hearing.

shailesh.kwebmaker

SET OFF OF UNABSORBED DEPRECIATION WHILE DETERMINING BOOK PROFIT u/s 40(B)

ISSUE FOR CONSIDERATION

Section 40(b)
limits the deduction, in the hands of a partnership firm, in respect of an
expenditure on specified kinds of payments to partners. Amongst several
limitations provided in respect of deduction to be claimed by the partnership
firm, clause (5) of section 40(b) limits the deduction for remuneration to the
working partners to the specified percentage of the ‘book profit’ of the firm.

The term ‘book
profit’ is defined exhaustively by Explanation 3 to section 40(b) which reads
as under:

‘Explanation 3 –
For the purpose of this clause, “book profit” means the net profit, as shown in
the profit and loss account for the relevant previous year, computed in the
manner laid down in Chapter IV-D as increased by the aggregate amount of the
remuneration paid or payable to all the partners of the firm if such amount has
been deduced while computing the net profit.’

‘Book profit’, as per Explanation 3, means the net profit as per the
profit and loss account of the relevant year, computed in the manner laid down
in Chapter IV-D. The net profit in question is the one that is shown in the
profit and loss account which is computed in the manner laid down in Chapter
IV-D. This requirement to compute the net profit in the manner laid down in
Chapter IV-D has been the subject matter of debate. Section 32, which is part
of Chapter IV-D, provides for the depreciation allowance in computing the
income of the year and, inter alia, sub-section (2) provides for the
manner in which the unabsorbed depreciation of the earlier years is to be
adjusted against the income of the year. The interesting issue which has arisen
with respect to the computation of ‘book profit’ for the purpose of section
40(b) is whether the net profit for the year should also be reduced by the
unabsorbed depreciation of earlier years and whether the amount of remuneration
to the partners eligible for deduction should be computed with respect to such
reduced amount.

The Jaipur bench of
the Tribunal has held that in computing the ‘book profit’ and the amount
eligible for deduction on account of the remuneration to partners, unabsorbed
depreciation of the earlier years should be deducted from the net profit for
the year as provided in section 32(2). As against this, the Pune bench of the
Tribunal has taken a contrary view and has allowed the assessee firm’s claim of
the remuneration paid to its partners which was computed on the basis of ‘book
profit’ without reducing it by the unabsorbed depreciation of the earlier
years.

THE VIKAS OIL MILLS CASE

The issue first
came up for consideration of the Jaipur bench of the Tribunal in the case of Vikas
Oil Mills vs. ITO (2005) 95 TTJ 1126.

In that case, for
the assessment year 2001-02 the A.O. disallowed the remuneration amounting to
Rs. 1,79,005 paid to the working partners on the ground that the assessee firm
had not reduced the unabsorbed brought-forward depreciation of earlier years
from the profit of the year under consideration while claiming deduction for
the remuneration payable to the partners. Since the resultant figure after
reducing the unabsorbed depreciation of earlier years from the profit of the
assessee firm was a negative figure, the A.O. disallowed the remuneration paid
to the partners. The CIT(A) confirmed this order.

The assessee argued
before the Tribunal that the unabsorbed depreciation was allowed to be deducted
only because of a fiction contained in section 32(2) and that otherwise the
deduction was subject to the provisions of section 72(2). Hence, unabsorbed
depreciation should not be considered for computation of net profit in Chapter
IV-D. On the other hand, the Departmental representative supported the orders
of the lower authorities by submitting that unabsorbed depreciation of earlier
years was part of the current year’s depreciation as per section 32(2) which
fell in Chapter IV-D and, therefore, for computation of book profit unabsorbed
depreciation was to be necessarily taken into account.

The Tribunal
concurred with the view of the lower authorities and held that the remuneration
paid to the working partners was to be reduced from the book profit as per the
provisions of section 40(b)(v). The definition of book profit was provided in
Explanation 3 as per which it was required to be computed in the manner laid
down in Chapter IV-D. Therefore, the Tribunal held that the unabsorbed
depreciation of earlier years had to be reduced as provided in section 32(2)
while determining the book profit for the purpose of determining the amount of
deductible remuneration. However, the Tribunal agreed with the alternative plea
of the assessee for allowing the minimum amount of remuneration which was
allowable even in case of a loss.

RAJMAL LAKHICHAND CASE

The issue
thereafter came up for consideration before the Pune bench of the Tribunal in
the case of Rajmal Lakhichand vs. JCIT (2018) 92 taxmann.com 94.

In this case, for
the assessment year 2010-11 the A.O. disallowed the remuneration to working
partners amounting to Rs. 17,50,000 on the ground that the unabsorbed
depreciation of earlier years was not reduced in computing the book profit
which was contrary to the provisions of section 40(b). Upon further appeal, the
CIT(A) deleted this disallowance by holding that the remuneration to partners
was to be worked out on the basis of the current year’s book profit and
therefore the remuneration was to be deducted first before allowing the set-off
of brought-forward losses. He held that the computation of book profit was as
per section 40(b) while the set-off of brought-forward losses was to be granted
in terms of section 72. Therefore, while arriving at the business income, the
deduction of section 40(b) was to be given first and then, if at all there
remained positive income, the brought-forward losses were to be set off.

Before the
Tribunal, the Income-tax Department assailed the findings of the CIT(A) on the
ground that the unabsorbed brought-forward depreciation became a part of the
current year’s depreciation as per the provisions of section 32(2) and that as
per Chapter IV-D, the book profit was determined only after deduction of
depreciation including unabsorbed depreciation. Since, in the assessee’s case,
there was a loss after deduction of unabsorbed brought-forward depreciation to
the tune of Rs. 10,84,75,430 remuneration to the extent of only Rs. 1,50,000
should have been allowed. Reliance was placed on the decision in Vikas
Oil Mills (Supra).

As against that,
the assessee submitted that the remuneration paid to the partners was to be
based on the current year’s book profit derived before deducting the unabsorbed
depreciation and that the set-off of unabsorbed losses and depreciation was
governed by section 72. The unabsorbed business losses were to be set off first
and then the unabsorbed depreciation was to be considered.

The Tribunal upheld
the order of the CIT(A) deleting the disallowance of remuneration paid to the
working partner by the assessee-firm. In addition to accepting the contention
of the assessee, the Tribunal also relied upon the decision of the Ahmedabad
bench of the Tribunal in the case of Yogeshwar Developers vs. ITO [IT
Appeal No. 1173/AHD/2014 for assessment year 2005-06 decided on 13^th
April, 2017]. The decision of the Jaipur bench in the case of
Vikas Oil Mills (Supra) cited before the Tribunal by the Income-tax
Department was not followed by the bench.

OBSERVATIONS

Sub-section (2) of
section 32 provides that where full effect cannot be given to the depreciation
allowance for any previous year, then the depreciation remaining to be absorbed
shall be added to the amount of the depreciation allowance for the following
previous year and deemed to be part of the depreciation allowance for that
year. It further provides that if there is no such depreciation allowance for
the succeeding previous year, then that unabsorbed depreciation of the
preceding previous year itself shall be deemed to be the depreciation allowance
for that year. However, such a treatment of unabsorbed depreciation u/s 32(2)
is subject to the provisions of sub-section (2) of section 72 and sub-section
(3) of section 73 under which first brought-forward business loss needs to be set
off and then unabsorbed depreciation. Therefore, in a situation where the
assessee has brought-forward business loss as well as unabsorbed depreciation,
the combined reading of sections 32 and 72 or 73 required that the
brought-forward business loss shall be set off first against the income of the
previous year and then against the unabsorbed depreciation.

As per
Explanation-3 to section 40(b), all the deductions as provided in Chapter IV-D
including depreciation allowance provided in section 32 have to be taken into
consideration while determining the book profit. Since the provision of section
32(2) treats the unabsorbed depreciation of earlier years at par with the
depreciation allowance of the current year, except where there is a
brought-forward business loss, the issue as to whether the unabsorbed
depreciation should also be deducted from the book profit requires deeper
analysis.

Though the literal
interpretation of all the provisions concerned may appear to support the view
that the amount of depreciation allowance, whether of the current year or the
one which is of the earlier years and has remained unabsorbed, should be
reduced from the net profit for the purpose of arriving at the book profit, one
needs to also consider the legislative history as well as the intent of the
provisions of section 32(2) before accepting the literal interpretation. The
present provision of section 32(2) as it stands today was brought in force by
the Finance Act, 2001 by substituting the old provision with effect from assessment
year 2002-03. The old provision of section 32(2), prior to its substitution by
the Finance Act, 2001, was effective for the assessment years 1997-98 to
2001-02 and it read as under:

(2) Where in the
assessment of the assessee full effect cannot be given to any allowance under
clause (ii) of sub-section (1) in any previous year owing to there being no
profits or gains chargeable for that previous year or owing to the profits or
gains being less than the allowance, then, the allowance or the part of
allowance to which effect has not been given (hereinafter referred to as
unabsorbed depreciation allowance), as the case may be,

(i) shall be set off against the profits and gains,
if any, of any business or profession carried on by him and assessable for that
assessment year;

(ii) if the unabsorbed depreciation allowance cannot
be wholly set off under clause (i), the amount not so set off shall be set off
from the income under any other head, if any, assessable for that assessment
year;

if the unabsorbed
depreciation allowance cannot be wholly set off under clause (i) and clause
(ii), the amount of allowance not so set off shall be carried forward to the
following assessment year and,

(a) it shall be
set off against the profits and gains, if any, of any business or profession
carried on by him and assessable for that assessment year;

(b) if the
unabsorbed depreciation allowance cannot be wholly so set off, the amount of
unabsorbed depreciation allowance not so set off shall be carried forward to
the following assessment year not being more than eight assessment years
immediately succeeding the assessment year for which the aforesaid allowance
was first computed.

It is significant
to note that for the assessment years up to 2001-02, the unabsorbed depreciation
did not become part of the current year’s depreciation and was not to be
reduced from the net profit for the purposes of section 40(b) of the Act; in
short, it was not to be reduced from the book profit. It can be noticed that
the manner in which the unabsorbed depreciation is treated under the old
provision differed greatly from the manner in which it is treated under the
present provision. One of the glaring differences is that before the amendment
it was not being treated as part of the depreciation allowance for the current
year. Instead, it was required to be set off against the profits and gains of
business or profession separately. Sub-clause (a) of clause (iii) of the old
provision made this expressly clear by providing that unabsorbed depreciation
allowance was to be set off against the profits and gains of any business or
profession assessable for the subsequent assessment year as such and not as a
part of the depreciation allowance of that year. Further, the amount against
which the unabsorbed depreciation allowance was required to be set off was the
profits and gains of any business or profession carried on by the assessee and
assessable for that assessment year. The assessable profits and gains of any
business or profession for the purpose was necessarily the profits determined
after claiming all the permissible deductions, including remuneration to the
partners, subject to the limitations provided in section 40(b). Any other
interpretation or connotation was not possible; a contrary interpretation would
have needed an express provision to that effect which was not the case.

As a result, the
requirement under the then Explanation-3 to section 40(b) to compute the book
profit in the manner laid down in Chapter IV-D was to exclude the set-off of
unabsorbed depreciation. Any interpretation otherwise would have led to an
unworkable situation whereunder the amount of unabsorbed depreciation which
could have been set off would then be dependent upon the amount of the
deductible remuneration, and the amount of the deductible remuneration would in
turn be dependent upon the amount of unabsorbed depreciation that could be set
off.

Having analysed the
position under the old provision of section 32(2), let us consider the
objective of its substitution by the Finance Act, 2001 with effect from 1^stApril, 2002. The Memorandum explaining the provisions of the Finance
Bill, 2001, which is reproduced below, explains the legislative intent behind
the amendment.

Modification of
provisions relating to allowance of depreciation

Under the
existing provision of sub-section (2) of section 32 of the Income-tax Act,
carry forward and set off of unabsorbed depreciation is allowed for 8
assessment years.

With a view to
enable the assessee to conserve sufficient funds to replace capital assets,
specially in an era where obsolescence takes place so often, the Bill proposes
to dispense with the restriction of 8 years for carry forward and set off of
unabsorbed depreciation.

It can be observed
that the limited purpose of substituting the provision of sub-section (2) of
section 32 was to relax the limitation of eight years over the carry forward of
unabsorbed depreciation. It is worth noting that in order to achieve this
objective, the old provision as it existed prior to its amendment by the
Finance (No. 2) Act, 1996, was being restored. Therefore, effectively, the
present provision of sub-section (2) of section 32 is the same as the provision
as it existed prior to its amendment by the Finance (No. 2) Act, 1996. It was
only for the period starting from the assessment year 1997-98 to 2002-03 that
the provision was different.

In the context of
the old provision prevailing up to assessment year 1996-97, the Supreme Court
in the case of CIT vs. Mother India Refrigeration Industries (P) Ltd.
(1985) 155 ITR 711 has held as follows:

‘It is true that
proviso (b) to section 10(2)(vi) creates a legal fiction and under that fiction
unabsorbed depreciation either with or without current year’s depreciation is deemed to be
the current year’s depreciation but it is well settled that legal fictions are
created only for some definite purposes and these must be limited to that
purpose and should not be extended beyond that legitimate field. Clearly, the
avowed purpose of the legal fiction created by the deeming provision contained
in proviso (b) to section 10(2)(vi) is to make the unabsorbed carried forward
depreciation partake of the same character as the current depreciation in the
following year, so that it is available, unlike unabsorbed carried forward
business loss, for being set off against other heads of income of that year.
Such being the purpose for which the legal fiction is created, it is difficult
to extend the same beyond its legitimate field and will have to be confined to
that purpose.’

In view of these
observations of the Supreme Court and the legislative intent behind section
32(2), it can be inferred that the only purpose of deeming the unabsorbed
depreciation as the depreciation allowance of the current year, post amendment,
is limited to ensuring the benefit of its set off, irrespective of the number
of years, against any income, irrespective of the head of income under which it
falls. In other words the intention has never been to treat it as part of the depreciation of the year.

Further, in a
situation where the assessee has both, i.e., unabsorbed depreciation and
business loss brought forward from earlier years, the set off of business loss
in terms of sections 72 or 73 needs to be given a preference over set-off of
unabsorbed depreciation as per section 72(2). This again confirms that the
unabsorbed depreciation is given a separate treatment than the business loss
and both are intended to be distinct and separate from each other. The Supreme
Court, in the case of CIT vs. Jaipuria China Clay Mines (P) Ltd. 59 ITR
555, had held that the reason for such order of allowance is as under:

‘The unabsorbed depreciation allowance is carried
forward under proviso (b) to section 10(2)(vi) of the 1922 Act and the method
of carrying it forward is to add it to the amount of the allowance of
depreciation in the following year and deeming it to be part of that allowance;
the effect of deeming it to be part of that allowance is that it falls in the
following year within clause (vi) and has to be deducted as allowance. If the
legislature had not enacted proviso (b) to section 24(2) of the 1922 Act, the
result would have been that depreciation allowance would have been deducted
first out of the profits and gains in preference to any losses which might have
been carried forward under section 24 of the 1922 Act, but as the losses can be
carried forward only for six years under section 24(2) of the 1922 Act, the
assessee would in certain circumstances have in his books losses which he would
not be able to set off. It seems that the legislature, in view of this gave a
preference to the deduction of losses first.’

The set off of
business loss is governed by section 72 which is part of Chapter VI and not
Chapter IV-D and, therefore, is not required to be considered while computing
the book profit for the purpose of section 40(b). Hence, it would be absurd and
contrary to the provisions to set off the unabsorbed depreciation first only
for the purpose of arriving at the book profit for the purpose of section
40(b), though unabsorbed depreciation is to be set off only after brought-forward
business losses are exhausted in accordance with section 72(2).

Further, if one
analyses the definition of book profits as contained in Explanation 3 to
section 40(b), it refers to ‘net profit, as shown in the profit and loss
account for the relevant previous year…’
Therefore, clearly, the intention is only to consider the profit of the
relevant year and not factor in adjustments permissible against such profits
relating to earlier years, such as unabsorbed depreciation.

The better view, in our considered opinion,
therefore is that the brought-forward depreciation should not be deducted while
computing the book profit for the purpose of
section 40(b).

shailesh.kwebmaker

EXCEL IN WHAT YOU DO – SOME PERSONAL TIPS

I covered some
perspectives on Business Excellence in my previous article¹.
In this one, I will share the flavour of Personal Excellence. Often, we
hear people say, ‘follow your heart, pursue your passion, and you will excel’.
How true! That is indeed the way to go. Not only will this lead us seamlessly
on the path of excellence but we will also be happy and derive great
satisfaction. Volumes have been written on how to turn your passion into your
vocation. There are distinguished role models, too, such as Walt Disney, Warren
Buffett and Steve Jobs. If you have cracked this code, great! And perhaps I may
not have anything meaningful to add here.

However, life
is not always so simple. Let’s take two viewpoints:

a) Firstly, do
I know what I am passionate about? If yes, how do I make this my true calling?

b) And if this
does not seem doable at least in the foreseeable future, what do I do to excel
in my chosen path and be happy?

The
growing up years

A child growing
up gets fascinated about multiple things she gets to see, experience or be
impacted by. These come from various quarters – parents, siblings, relatives,
friends, the larger eco-system, television, movies, media, books, success,
appreciation and, of course, now, the internet. Resulting from these,
impressions get formed in the mind of what she would love to do. It is common
for relatives and well-wishers to ask a child ‘Beta, what do you want to
become when you grow up?’ Innocently, children give impromptu answers
which vary across professions – a teacher, a pilot, a judge, a scientist, a
doctor, an environmentalist, an actor, a hotelier, a police officer, an
astronaut and so on. These turn out to be casual conversations and are not
followed through in establishing the real passion or any planning for it. If it
is not a clichéd vocation, some other questions prop up, e.g., will it provide
economic stability? And what about social acceptance? These and more come in
the way of a child moving in the desired direction.

Traditionally,
we have grown up looking at set patterns. The preference is for the science
stream in the senior school curriculum; perhaps this gives the option to switch
later, whereas vice versa is not done. Conventionally, children pursuing
education find themselves propelled towards a closed ABCDE option, that is,
choose between becoming a (chartered) Accountant, (lawyer) Barrister,
Civil services, Doctor or Engineer. Peer pressure has an
influence and in some cultures youngsters are expected to follow the
family tradition, business or profession. It is not uncommon to find a family
of lawyers, Chartered Accountants, doctors or business people to encourage their
kith and kin to follow the family vocation. But the times have changed now. One
could start up in any field from A to Z and be successful. The critical success
factor is personal excellence.

At work

Fast forward
now to life where one has chosen to follow a selected path. By this time, there
could be a growing realisation that our interests lie elsewhere. Sometimes we
may not even feel deeply about this, as daily life gets demanding and time
whizzes by. A simple exercise can be tried out for identifying areas of keen
interest, by connecting the desires with skills as illustrated below (Figure
1).

In the above
matrix, we aim to position the areas which bring us little or immense enjoyment
vis-à-vis the qualities intrinsic / developed in the person. Every
individual has unique qualities or areas where s/he is strong or most confident
about. Not only is it important to recognise these, but also necessary to play
to these strong qualities as we go about life. It is also quite possible to
convert areas which need to improve into strengths in the spheres that one
enjoys doing. This, however, is an arduous task or a journey which needs to be
pondered about.

Leveraging
one’s strengths can lead to multiple options and the sweet spot lies in
utilising these in the work area/s which give the most gratification. Such
item/s, which depict confluence of desires and skills indicated in the green
shaded quadrant, will be areas that the person is passionate about and would
derive greatest satisfaction and joy. This ensures that there is a connect
between the enjoyable areas and the required qualities which are necessary to
excel. For example, a person with a feeble voice is unlikely to excel as a
professional singer and his love for music is best kept listening or singing as
a hobby for private enjoyment.

Consider cases where people are keen to
undertake this journey but quite some distance away in getting to convert their
passion into their life purpose. In the foreseeable future, one will therefore
want to excel in the selected sphere of work. In this journey towards personal
excellence in the chosen engagement, here are some specific tips on actions
or paths that one could find helpful.

GET THE BIG PICTURE

It is important
to comprehend the larger purpose of the activity / function / enterprise that
one is working with. While the day job would be focusing on the nitty-gritty,
the true enjoyment will come from the understanding and the joy of relating to
the higher-level goal. The classic example is of the mason building a mansion,
feeling the pride of building a marvel, while his daily routine may comprise
mundane activities such as laying bricks with cement for a wall.

I have found
great power in communicating this across the organisation so as to touch every
person down the line on the firm’s purpose and facilitate individual connect
and alignment. An impactful way of achieving this is depicted in Figure 2.

While every employee may be clear on their
individual Goals or Key Result Areas (KRAs), this process enables an individual to connect these to the overall organisation purpose.
This whole process executed well is a co-created one involving every person in
the organisation as well as with inputs from key stakeholders. Very briefly
explained, it begins with the organisation’s purpose, the Vision, Mission and Values which are translated
to a Strategic Vision and articulated in a clear, concise manner. Every year,
the Enterprise Balanced Scorecard² is made which defines the
Strategic Themes and the key Strategic Interventions across four perspectives –
Financial, Customer, Internal Processes and Learning and Growth. These are
cascaded into departmental or functional Strategy Deployment matrices which are
then detailed out into key projects which will deliver the objectives. Every
employee then who is linked to projects is able to derive individual goals for
setting the year’s priorities. At every level there is a linkage to the
relevant processes with the KRAs most aligned to the Level-3 processes. This
way there is a structured alignment amongst individual, departmental, business
and enterprise goals and finely integrated so that the entire organisation
pulls in one direction. At every stage and interval there is a two-way
communication which is the bedrock of a robust cohesive enterprise.

If this process
is not practised in a mature manner, I would suggest that every individual
takes the lead to ascertain this linkage. Like the mason who takes pride in
laying every brick knowing that he is an integral part of creating a wonder,
every individual would then discover a different meaning to their daily routine
which otherwise may seem dreary.

CRAFT A PERSONAL &
PROFESSIONAL GOAL

Equally
important will be to set one’s personal goals. These can be broadly set into
short-term and long-term goals. Like the Balanced Scorecard done in businesses
as referred to above, it may be worthwhile to also cast a personal scorecard.
The perspectives, however, could be different:

(i) Work: What do I wish to achieve on the work
front? Where do I wish to see myself in five to ten years’ time?

(ii) Self: How do I look at improving self over
time? One could consider different aspects such as Health, Finance, Hobby,
Skill-Building, Me-Time and so on.

(iii)
Family: What are the
various aspects around my immediate and extended family I want to focus on?
Again, it could range from Health to Property to Relationships to Marriage to
Friends.

(iv)
Community: How can I
contribute to and engage myself for the larger good? With companies engaging in
meaningful CSR activities, it is quite easy to volunteer; as also in this
well-connected world there are many options available for one to venture out
for a greater purpose.

A rounded and
clearer work-life covering the above enhances one’s life’s journey. In all of
the above, the word Balanced may imply that there is equal weightage
given for all the perspectives. While this could be ideal, typically, depending
on one’s needs and stage in life, the weightages can vary. But what must be
borne in mind is that there must be some focus given to each of the four
perspectives.

SHARPEN ONE AREA – BE KNOWN FOR EXPERTISE IN YOUR AREA OF
STRENGTH

Choose one area
and let it be the one which is of interest to you and you enjoy digging deeper
into it. Of course, it should be important to your role and business, e.g.,
GST. Make a conscious effort to develop expertise in that area, so much so that
you begin to be known as the domain expert in that within your team and
enterprise. Furthermore, keep re-skilling yourself in this area so that you
move ahead with the times. By itself, this will open several doors for your
life’s journey.

PICK ONE AREA WHICH IS BOSS’S KEY BUT DESERVES ATTENTION

While it is
imperative that one understands one’s own role thoroughly and does a good job,
it is important to have a broader appreciation of seniors’ roles, in particular
that of the supervisor. It is the desire of every superior to have a deputy
whom he can trust with some critical areas of work; if you can identify one
aspect where you can do a decent job which your supervisor does not have much
inclination for, it is a winner. Not only would you be executing some critical
component of the supervisor’s role, but also be acknowledged for doing it
better. Boss will begin to recognise your potential for taking up higher
responsibilities. Work will take an interesting turn and you will equip
yourself steadily to launch yourself up the ladder.

REINVENT YOURSELF

To make your
job interesting, it is not always necessary to switch. Make a conscious effort
to bring newness into your job. There needs to be a mindful endeavour to
evaluate and improve in a consistent way. If that becomes your way of life, you
will not only see that your job is not really monotonous but also feel it
differently over time. Every period in the role will be different albeit
in the same job. For this process I have found Benchmarking with peers
or the best-in-class a good way to go. This opens up the mind on how others are
progressing and going about things which can be emulated. In today’s times, the
not invented here mindset has no place, and in fact people
copy with pride. Obviously, this is not about infringing patents but
getting inspired from best practices in the public domain as well as learning
from others’ mistakes. The trend today is at the next level of open
innovation whereby you could put your issues out there for any expert to
opine and help you with innovative ideas.

PREPARE YOUR EXIT

An important
element in making progress is paving the way for moving forward while excelling
in the current role at the same time. Here, both the elements of making oneself
ready for the next superior role as well as grooming the successor are important.
Without this approach, one may find oneself getting stuck in one role or area,
thereby bringing in drudgery and stagnation over time.

Personal
excellence, a perspective

Let me conclude
with a stirring narrative. There are several inspiring examples on personal
excellence from the Silicon Valley, Fortune 500 Companies, Global Leaders,
Startups or Nobel Laureates, but I chose one from Bollywood – Kishore
Kumar! (Disclaimer: I am a die-hard Kishoreda fan).

Writer Javed
Akhtar³ opines that personal excellence is driven by striving
for next-level performance for one’s own fulfilment and not just for proving it
to others. He recalls an incident. R.D. Burman (Panchamda) hummed a
song, Mere naina saawan bhaadhon (film Mehbooba) which he had
composed based on Raag Sivaranjini. Listening to the tune, Kishoreda
reacted, saying this was meant for Manna Dey. But after some convincing he
agreed to sing; however, he told Panchamda: ‘Isn’t Latabai also
singing this? Do that, I will sing later’. His recording was deferred and Lata
Mangeshkar rendered it first.

Kishoreda
heard this version and practised continuously for seven days! He added his
touch, to make it one of his finest renditions that is cherished to this day.
What is noteworthy is that Kishoreda was at his career peak at that time
and need not have put in such a punitive effort. It would have been a hit
number anyway. But the humility, self-confidence, commitment and the
determination to excel stand out and perhaps this personal excellence
attribute of Kishoreda makes him stand tall amongst the few shining
stars widely remembered in Bollywood even today after so many decades.

ENDNOTE

There is no
perfect occupation, no right time. Just waiting for this to happen may end up
being quite expensive.

The specific
steps enunciated above consciously nurtured will rekindle interest in your
selected path and result in better appreciation and recognition. Who knows, as
you make progress the current engagement itself could become the area you excel
in and turn into your passion.

Is it one way
or the other? Certainly not. While progressing on the selected path, you can
and should also pursue your passion. How do you do this? People often say ‘my
work is so demanding; I have other pressures… I must get some key priorities
in order, and then I will switch to what I love doing’. Unfortunately, this is
a never-ending process and waiting for the perfect time can mean that you are
endlessly in a restive mode. So, do allocate some time outside of work to
follow your passion, whatever it may be. This may challenge your work-life
balance, and could mean doing it in personal space over weekends and holidays.
But in due time satisfaction is bound to come and could even create the
platform for a switch.

So, dream your
passion and… realise your dream!

References:

1. Governance
& Internal Controls: The Touchstone of Sustainable Business – Part II;
Pp 11-15 BCAJ, June, 2020;

2. The
Balanced Scorecard: Translating Strategy into Action by David P. Norton and
Robert S. Kaplan;

3. https://youtu.be/U6L8hnsNMak (16:10 – 20:05): Javed Akhtar
remembers Magical Pancham – Part 02.

shailesh.kwebmaker

Charitable purpose – Sections 2(15) and 12AA of ITA, 1961 – Registration – Cancellation of registration – Condition precedent – The assessee is hit by proviso to section 2(15) is not a ground for cancellation of registration

22. Goa Industrial Development Corporation vs. CIT [2020] 421 ITR 676 (Bom.) [2020] 116 taxmann.com 42 (Bom.) Date of order: 4^th February, 2020

Charitable purpose – Sections 2(15) and 12AA of ITA, 1961 – Registration
– Cancellation of registration – Condition precedent – The assessee is hit by proviso
to section 2(15) is not a ground for cancellation of registration

The appellant is a statutory corporation established under the Goa,
Daman and Diu Industrial Development Corporation Act, 1965 (GIDC Act) with the
object of securing orderly establishment in industrial areas and industrial
estates and industries so that it results in the rapid and orderly
establishment, growth and development of industries in Goa. The appellant was
granted registration u/s 12A of the Income-tax Act, 1961 on 16^th
December, 1983 and the same continued until the making of the impugned orders
in these appeals. By an order dated 27^th December, 2011, the
Commissioner of Income-tax withdrew the registration granted to the appellant
by observing that it is crystal clear that the activities of the appellant are
inter-connected and inter-woven with commerce or business. The Commissioner of
Income- tax has based its decision almost entirely on the proviso to
section 2(15) of the Income-tax Act which defines ‘charitable purpose’. This proviso
was introduced with effect from 1^st April, 2009.

The Tribunal dismissed the appeal filed by the assessee.

The Bombay High Court allowed the appeal filed by the assessee and held
as under:

‘i) The cancellation of registration has to be
initiated strictly in accordance with the provisions u/s 12AA(3) of the
Income-tax Act, 1961. The power of cancellation of registration can be
exercised by the Commissioner where the Commissioner is satisfied that the
activities of the trust or institution are not genuine or are not being carried
out in accordance with the objects of the trust or institution, as the case may
be. The powers u/s 12AA(3) cannot be exercised merely because the institution
in question may be covered under the proviso to section 2(15) after the
amendment, or that the income limit specified in the proviso is
exceeded.

ii) There were no categorical
findings that the activities of the assessee were not genuine or were not in
accordance with the objects of the trust or the institution. Merely because, by
reference to the amended provisions in section 2(15), it may be possible to
contend that the activities of the assessee were covered under the proviso,
that, by itself, did not render the activities of the assessee as non-genuine
activities so as to entitle the Commissioner to exercise powers u/s 12AA(3).
The cancellation of registration was not valid.’

shailesh.kwebmaker

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