BCAJ | Bombay Chartered Accountant Journal

From The President

Dear BCAS Family,

It is that time again when we all tune in to a single track. Yes, it’s the budget time. When you get this message, the Finance Minister (FM) after enduring grueling hours with her team would have presented the last full budget of the government – repeatedly walking a tightrope to balance a budget between the several populist demands and the financial prudence. While the nation is full of expectations, ideas and suggestions, it is the community of tax practitioners that in particular is keeping its fingers crossed as to see what the budget will offer. While the FM echoes the sentiments of Robert Frost that she has ‘promises to keep and miles to go’, the daunted community of tax payers and the tax practitioners will be happy with even the small steps on the reforms and concessions.

I would like to echo a wish list that has surfaced in conversations with many of you on multiple occasions.

First, we need to have the income tax slabs, deductions and relief benchmarked to the inflation index. Inflation is not a produce of the populace but the fallout of the policies of the government. To punish the honest tax payers with tax on an income that has truncated due to rise in the inflation, is like beating a dumb man for his inability to lend his voice. They both are helpless victims of the circumstance.

Second, there needs to be some concessions for the senior citizens whose contribution as tax payers in their prime earning years to the nation cannot be overlooked. With the nuclear family system gaining more preference the seniors must have income saving capability to support themselves independently. A few graceful concessions on mediclaim limits, pensions and special interest rates will help them give more security.

Third, the ease of doing business is implemented in its true sense in the income tax assessments for the business. Undoubtedly, common man has substantially benefitted by the simplified procedures. However, the same cannot be said about the tax assessments of the business. Increasing appeals is the proof of this. There are approx. five lakh appeals pending at the CIT levels across the country. Add to that the appeals pending with the IT Tribunals, High Courts and Supreme Court and that gives a scary picture of the mindset of those in the administration. Accepting that many of these could be justifiable from the point of view of Revenue, it is by far admitted even at the senior levels of the tax administration that many are infructuous and have their origin in the fear of being labelled as partisan to the assesse. FM must give impunity to the tax administration for encouraging fair and impartial interpretation of the statute and speedy resolution of the issues.

Fourthly, there needs to be an administrative reform that brings about a better coordination between the CPC Bengaluru and the assessing officers. There can be a separate series of articles that could be written about the issues that the assesses face. To name a few, grievances are attended in a mechanical manner and resolution thereof is not in the best interest of the justice, process of online rectification has a lot of restriction in conveying the points of rectification, issue of not allowing credit of TDS of earlier years, whose accounts are maintained on cash basis is a nightmare.

Lastly, the controversial judgement on the Charitable Trust by the Hon. Supreme Court has opened a Pandora’s Box which will completely unsettle the accepted norms of exemption of the income of the Charitable Trust. Before the issue gets out of the hand the FM needs to bring appropriate amendments to the provisions that income can be spent on the primary as well as the related objects of the Trust.

If wishes were horses then beggars would ride is the famous proverb. The irony of the life is when the rightful wishes render you as beggars. I am sure the corridors of the powers do realize the compulsion of the people to seek better system for them and will eventually comply.

Annual Transparency Report
National Financial Reporting Authority (NFRA) has issued a draft of the Annual Transparency Report to be submitted by audit firms every financial year. The implementation of this filing will start with statutory auditors of the top 1,000 listed companies on 31^st March.

Audit firms will have to reveal details of their ownership and management structures. The report will cover details about the revenues of the auditor and its network firm for the current and previous years. It will include the statutory audit and a detailed break-up of the non-audit service fees too. It will have to report professional and technical education for the professional staff as also share their working alliances, collaborations, licensing and knowledge sharing arrangements in India or abroad. These and many more details as required will have to be published on the website of the statutory auditor.

The report is stated to be on the lines of contemporary international best practices implemented by independent audit regulators in other geographies. NFRA believes the report will be a lighthouse to ensure high quality audits and preventing conflict of interest by maintaining independence.

The question that arises is while it states ‘what’ is required does it clarify ‘why’ it requires it? Does it in any way improve the quality of audit? Could these aspects have not been covered by the ICAI through its Peer Review mechanism? Is it a direct fallout of requirements that have been considered as best practice in the developed world? Maybe some more introspection and open forum discussion is required before this step is implemented.

Winds of Change
Breaking with the tradition, ICAI has revamped the curriculum after five years, instead of ten, keeping in mind significant changes in GST and the evolving industry requirements. The new course will have a multidisciplinary approach with diverse subjects, that include; AI, Blockchain, Data Science, Traditional Knowledge (proposed by NEP), Psychology and Indian Constitution. And to boost accessibility for students, it is proposed to offer the course in regional languages with computer-based exams. Hopefully this should bear good fruits in future.

Female Power
The CA Final results were out and it is very hearteningto see more young ladies in the toppers’ list. I hope this will encourage many more female students from acrossthe country to aspire to become CAs. With 3.65 lakh CAs and 44 overseas chapters, the ICAI has grown phenomenally to become the second largest accounting body in the world. In a concerted effort, to keep the momentum escalating, ICAI is focusing and investing in education, to fulfil its aim of preparing ‘global professionals’.

Events
BCAS has organised a Public Lecture Meeting on the Direct Tax Law provisions of the Finance Bill, 2023, on Tuesday, February 07, 2023, at Yogi Sabhagruh. I urge you all to make it convenient to attend in person at 06:15 PM at the venue to get insight into nitty-gritties of the provisions from a distinguished speaker CA P. D Desai. Apart from this there are many interesting events lined up in the days to come on various topics viz. Master Class on M & A, Prosecution for Cheque Bouncing, ChatGPT, Audit Quality Maturity Model, Power Summit, International Tax & Finance Conference and Residential Study Course on GST at Gandhi Nagar, Gujarat. For details, please keep a tab on the announcements.

Before I sign off let me wish you all a very happyVasant Panchami with a hope that it brings spring back in our life.

Thank You!

Best Regards,

CA Mihir Sheth

President

BCAJ Admin

Glimpses of Supreme Court Rulings

14 Deputy Commissioner of Gift Tax,

Central Circle-II vs. BPL Ltd.

(2022) 448 ITR 739 (SC)

Gift-tax – Equity shares during lock-in period are not ‘quoted shares’ as defined- Valuation of “unquoted equity shares” in companies – Schedule II to the G.T. Act read with Rule 11 of Part C of Schedule III of the W.T. Act is a statutory rule which prescribes the method of valuation of “unquoted equity shares” in companies, other than investment companies, which prescription and method of valuation is mandatory in nature – The effect of Rule 11 of Part C of Schedule III of the W.T. Act is that unquoted shares must be valued as per the formula prescribed – No other method of valuation is permitted and allowed – Ad hoc depreciation/reduction from the quoted price of equity shares transferable in the open market is not permitted and allowed vide Rule 9 of Part C of Schedule III of the W.T. Act.

The assessee company was engaged in the the manufacture and sale of consumer electronic products like television sets, VCR’s, audio and video products, etc.

The assessee had also invested in various other companies manufacturing allied or similar electrical, electronic and engineering goods. On 2^nd March, 1993, the assessee transferred its holdings in eight companies to one Celestial Finance Ltd. for a total consideration of ₹23,10,03,974 which was equal to the cost of acquisition of the shares to the assessee.

The assessee had transferred the shares to Alpha Securities Pvt. Ltd., a 99.7 per cent subsidiary of the assessee. Alpha Securities Pvt. Ltd., in turn, had transferred the same to the 100 per cent subsidiary of Celestial Finance Ltd.

In the course of the assessment proceedings for A.Y. 1993-94, there was an audit objection dated 17^th August, 1995. The assessee satisfied the Department that there was no element of gift.

Thereafter, in August, 1998, a search was carried out u/s 132 of the Income-tax Act. The Deputy Commissioner of Gift Tax issued a notice u/s 16 of the Gift Tax Act, 1958. An assessment order was passed that concluded that there was a deemed gift u/s 4(1)(a) [which provided for deemed gift in a case where the property is transferred for inadequate consideration] and 4(1)(b) [this dealt with the situation where consideration was not intended to be passed] to the extent of ₹69,78,49,800. The gift tax with interest u/s 16B (from July, 1993 to January, 2000) was quantified at ₹54,01,12,525.

On appeal, the Commissioner of Income-tax (Appeals) upheld the validity of reopening, but reduced the quantum of the gift tax. He held that the shares of BPL Sanyo Utilities & Appliances Ltd. and BPL Sanyo Technologies Ltd. [the transfer of these shares were also the subject matter of gift tax proceedings] had to be treated as unquoted equity shares as they were in the lock-in-period and, therefore, valued under Rule 5 of Gift Tax Rules and directed that the said value be substituted in place of valuation that adopted the quoted value of shares. He deleted the amount assessed u/s 4(1)(b) as it was difficult to hold that the consideration was not intended to be passed. He also modified the interest u/s 16B.

On further appeal by the assessee and a cross objection by the Revenue, the Tribunal approved the action of the AO but accepted the finding of the Commissioner with regard to issue u/s 4(1)(b). The Tribunal dismissed the assessee’s appeal and accepted the Revenue’s appeal in part.

On an appeal to the High Court by the assessee, it was held that (i) the gift tax proceedings were validly initiated in the facts and circumstances of the case; (ii) there was a ‘deemed gift’ in terms of section 4(1)(a) as the status of subsidiary company was given probably to avoid payment of gift tax; and (iii) as the shares in question were not traded and were not tradable, the valuation made by Commissioner was proper.

The High Court further held that the interest u/s 16B was leviable on the returned income and not on the assessed income.

The High Court noted that the finding of the Commissioner (Appeals) deleting the deemed gift u/s 4(1)(b) for alleged non-receipt of consideration was confirmed by the Tribunal and no further appeal having been filed by the Revenue, the order of the Commissioner (Appeals) had become final.

On an appeal by the Revenue, the Supreme Court noted that the limited issue raised in the appeal before it related to the valuation of 29,46,500 shares of M/s. BPL Sanyo Technologies Ltd. and 69,49,900 shares of M/s. BPL Sanyo Utilities and Appliances Ltd. which were transferred by the Respondent-Assessee, M/s. BPL Ltd. to M/s. Celestial Finance Ltd. on 2^nd March, 1993. The shares of M/s. BPL Sanyo Technologies Ltd, and M/s. BPL Sanyo Utilities and Appliances Ltd, both public limited companies, were listed and quoted on the stock exchanges. However, these shares, being promoter quota shares, allotted to the Assessee on 17^th November, 1990 and 10^thJuly, 1991, were under a lock-inperiod up to 16^th November,1993 and 25^th May, 1994, respectively.

The Supreme Court noted that Sub-section (1)(a) to Section 4 of the Gift Tax Act, 1958 [G.T. Act] states that where a property is transferred otherwise than for adequate consideration, the amount by which the market value of the property, at the date of the transfer, exceeds the value of the consideration, shall be deemed as a gift made by the transferor. Sub-section (1) to Section 64 of the G.T. Act states that the value of any property, other than cash, which is transferred by way of gift, shall be its value on the date on which the gift was made and determined in the manner as laid down in Schedule II of the G.T. Act. Schedule II, which incorporates the rules for determining the value of a gifted property, states that the value of any property, other than cash, transferred by way of gift, subject to the modifications as stated, shall be determined in accordance with the provisions of Schedule III of the Wealth Tax Act, 1957 [W.T. Act]. The provisions of Part C of Schedule III of the W.T. Act lays down the method of valuation of shares and debentures of a company. Rules 9 and 11 of Part C of Schedule III of the W.T. Act relate to the valuation of quoted shares and debentures of companies and valuation of unquoted equity shares in companies other than investment companies respectively.

The expressions “quoted share” and “quoted debentures”, and “unquoted shares” and “unquoted debentures” have been defined vide Sub-rules (9) and (11), respectively, to Rule 2 of Part A of Schedule III of the W.T. Act. As per the definitions, the expression “quoted share” in case of an equity share means a share which is quoted on any recognised stock exchange with regularity from time to time and where the quotation of such shares is based on current transactions made in the ordinary course of business. Explanation to Sub-rule (9) of Rule 2 of Part A of Schedule III of the W.T. Act states that when a question arises on whether a share is a quoted share within the meaning of the rule, a certificate to that effect furnished by the concerned stock exchange in the prescribed form shall be accepted as conclusive. The expression “unquoted share”, in relation to an equity share, means a share which is not a quoted share.

The Supreme Court agreed with the view expressed by the High Court, which observed that the equity shares under the lock-in period were not “quoted shares”, for the simple reason that the shares in the lock-in period were not quoted in any recognised stock exchange with regularity from time to time.

According to the Supreme Court, when the equity shares are in a lock-in period, then as per the guidelines issued by the Securities and Exchange Board of India (SEBI), there is a complete ban on transfer, which is enforced by inscribing the words “not transferable” in the relevant share certificates.

The Supreme Court noted that the aforesaid position was accepted by the Revenue, which, however, had relied upon a general circular issued by SEBI, wherein it is stated that the shares under the lock-in period can be transferred inter se the promoters. This restricted transfer, according to the Supreme Court, would not make the equity shares in the lock-in period into “quoted shares” as defined vide Sub-rule (9) to Rule 2 of Part A of Schedule III of the W.T. Act, as the lock-in shares are not quoted in any recognised stock exchange with regularity from time to time, and it is not possible to have quotations based upon current transactions made in the ordinary course of business. The possibility of a transfer to promoters via a private transfer/sale does not satisfy the conditions to be satisfied to regard the shares as quoted.

The Supreme Court held that Rule 11 of Part C of Schedule III of the W.T. Act is a statutory Rule which prescribes the method of valuation of “unquoted equity shares” in companies (other than investment companies), which prescription and method of valuation is mandatory in nature. The effect of Rule 11 of Part C of Schedule III of the W.T. Act is that unquoted shares must be valued as per the formula prescribed. No other method of valuation is permitted and allowed. Any ad hoc depreciation/reduction from the quoted price of equity shares transferable in the open market is not permitted and allowed vide Rule 9 of Part C of Schedule III of the W.T. Act. The shares in question being “unquoted shares”, therefore, must be valued in terms of Rule 11 as a standalone valuation method.

Faced with the aforesaid position, the Revenue further relied upon Rule 21 of Part H of Schedule III of the W.T. Act before the Supreme Court.

The Supreme Court noted that Rule 21 of Part H of Schedule III of the W.T. Act had been enacted to clarify and remove doubts. It states that notwithstanding the negative covenants prohibiting or restricting transfer, the property should be valued for the purpose of the W.T. Act and the G.T. Act, but according to the Supreme Court, the valuation is not by overlooking or ignoring the restrictive conditions.

The Supreme Court held that the shares in the lock-in period have market value, which would be the value that they would fetch if sold in the open market. Rule 21 of Part H of Schedule III of the W.T. Act permits valuation of the property even when the right to transfer the property is forbidden, restricted or contingent. Rights and limitations attached to the property form the ingredients in its value. The purpose is to assume that the property which is being valued is being sold, and not to ignore the limitations for the purpose of valuation. This was clear from the wording of Rule 21 of Part H of Schedule III of the W.T. Act, which when read carefully expresses the legislative intent by using the words “hereby declared”. The Rule declares that the price or other consideration for which any property may be acquired by, or transferred, to any person under the terms of a deed of trust or through any other restrictive covenant, in any instrument of transfer, is to be ignored as per the provisions of the Schedule III of the W.T. Act. However, the price of such property is the price of the property with the restrictions if sold in the open market on the valuation date. In other words, notwithstanding the restrictions, hypothetically the property would be assumed to be saleable, but the valuation as per Schedule III of the W.T. Act would be made accounting and taking the limitation and restrictions, and such valuation would be treated as the market value. The Rules do not postulate a change in the nature and character of the property. Therefore, the property must be valued as per the restrictions and not by ignoring them.

In view of the aforesaid discussion, and for thereasons stated above, the appeal by the Revenue was dismissed.

Notes:

1. The above judgment of the Supreme Court gives an impression that this was a case of gift of shares. However, this was a case of transfer/sale of shares at cost and that had raised the issue of valuation of such shares and consequently the issue of deemed gift u/s 4(i)(a) of the Gift-Tax Act, 1958. The relevant facts are available in High Court judgment [(2007) 293 ITR 321(Karn)].

2. The Gift-Tax Act, 1958 is effectively inoperative from 1st October, 1998. Likewise, the Wealth-Tax Act, 1957 is also not operative from A.Y. 2016-17. However, the principle of valuation of shares of listed company during lock-in period of promoters’ quota shares decided by the Court will be still relevant.

15 Indian Institute of Science vs. Dy. Commissioner of Income Tax

(2022) 446 ITR 418 (SC)

Salary – Perquisite – Merely because an assessee might have adopted the Central Government Rules and/or the pay-scales etc., by that itself, it cannot be said that the assessee is a Central/State Government – Employees of such an assessee cannot be construed to be employees of the Central Government for the purposes of computing perquisite value which was governed by Sl. No. 2 of Table 1 appended to Rule 3 of the Rules.

The assessee, a premier research institution engaged in imparting higher learning and carrying out advanced research in science and technology, was recognised as a ‘Deemed University’ under the provisions of University Grants Commission Act, 1956 (‘the UGC Act’).

The service conditions of the employees of the assessee were governed by the rules as were applicable to the Central Government employees.

Accordingly, TDS returns in Form 24Q was filed by the assessee u/s 192 of the Act r.w.s 17(2) of the Act, for the period from 1^st April, 2009 to 31^st March, 2010, which was applicable in respect of the employees of the Central Government.

The AO, by an order dated 26^th April, 2013 passed u/s 201(1) and 201(1A) r.w.s 192 of the Act (A.Y. 2010-11), held that the assessee had not correctly worked out the perquisite value of accommodation in accordance with amended Rule 3 of the Rules, and was liable to be treated as an assessee in default u/s 201(1) of the Act for non-deduction/short deduction. It was further held that the assessee was liable to pay interest u/s 201(1A).

The assessee thereupon filed an appeal before the CIT (A) who, by an order dated 22^nd July, 2014, affirmed the orders passed by the AO.

The assessee thereupon filed an appeal before the Tribunal. The Tribunal, by an order dated 27^th February, 2015, inter alia, held that the employees of the assessee cannot be construed to be employees of the Central Government for the purposes of computing perquisite value which was governed by Sl. No. 1 of Table 1 appended to Rule 3 of the Rules. Accordingly, the appeal was dismissed.

The assessee, thereupon, filed an appeal before the Karnataka High Court. The High Court noted that the assessee, which was a Trust under the 1890 Act, was controlled and financed by the Central Government, and governed by the Rules governing the service conditions of the employees of the Central Government. According to the High Court, the assessee may be an instrumentality of the State for the purpose of Article 12 of the Constitution of India. However, for the purposes of Rule 3, the requirement was that the accommodation should be provided by the Central or State Government to the employees either holding office or post in connection with affairs of the Union or of a State or serving with anybody or undertaking under the control of such Government from deputation. The High Court held that merely because the assessee is a body or undertaking owned or controlled by the Central Government, it cannot be elevated to the status of Central Government. Thus, the assessee cannot claim that valuation of perquisites in respect of residential accommodation should be computed as in case of an accommodation provided by the Central Government. Therefore, Sl. No. 1 of Table 1 of Rule 3 of the Rules did not apply to the assessee.

The assessee thereupon filed a Special Leave Petition before the Supreme Court.

The Supreme Court agreed with the findings recorded by the High Court that even if the petitioner may be considered as a State instrumentality within the definition of Article 12 of the Constitution of India, the same cannot be treated at par with the Central/State Government employees under Table-I of Rule 3 of the Income- tax Rules, 1962. Accordingly, the rules applicable to government employees for the purpose of computing the value of perquisites u/s 17(2) would not be applicable in the case of the petitioner. The Supreme Court held that merely because the petitioner might have adopted the Central Government Rules and/or the pay-scales etc., by that itself, it cannot be said that the petitioner is a Central/State Government. The Supreme Court therefore declined to interfere with the order of the High Court.

Insofar as the merits of the claim is concerned, the Counsel for the Petitioner pointed out that some of the crucial aspects had not been considered on merits by the High Court and, therefore, the petitioner proposed to file a review application before the High Court pointing out certain aspects on merits.

The Supreme Court, without expressing anything on the same, simply permitted the petitioner to file a review application on the aforesaid only and directed that as and when such a review application is filed, the same be considered in accordance with law and on its own merits.

16 ACIT vs. Kalpataru Land Pvt. Ltd. (2022)

447 ITR 364 (SC)

Reassessment – Assessment could not be reopened on a change of opinion.

The assessment of the assessee, engaged in the business of real estate, for A.Y. 2013-2014 was completed u/s 143(3) of the Income -tax Act, 1961 (the Act) on 20^th February 2016 by determining nil total income.

On 27^th March 2019, a notice u/s 148 was issued to the petitioner for A.Y. 2013-2014.

The assessment was reopened for the reason that the assessee company had issued its shares at premium of ₹990 per share in F.Y. 2012-13 (relevant to A.Y. 2013-14). During the said period, the assessee company had no significant transaction except having capitalized its interest expenses to the cost of the land purchased. The valuation of shares at a high premium of ₹990 per share by the company was based on the Discounted Cash Flow (DCF) method, which projections of profitability, according the AO, were computed on unrealistic future growth projections. The AO was of the view that the company had received consideration which exceeded the Fair Market Value (FMV) of the shares and therefore was liable to be taxed as the difference between the aggregate value of the shares and FMV u/s 56(2) (viib) of the Act.

The High Court noted that by a letter dated 5^th October, 2015, the AO had called upon the assessee to produce evidence in support of increase of the authorised share capital, produce the evidence of share allotment and name and address of the parties from whom share premium was received, among other things. The assessee by its letter dated 23^rd December 2015, provided the details of share premium received including name of the party from whom it was received. After considering the same, the assessment order has been passed on 20^th February, 2016. Therefore, according to the High Court, it was not permissible for an AO to reopen the assessment based on the very same material with a view to take another view without consideration of material on record once view is conclusively taken by the AO.

The Supreme Court dismissed the SLP, considering the fact that earlier the AO had called upon the assessee to produce the evidence in support of increase of authorised share capital, produce the evidence of share allotment and names and addresses of the parties from whom share premium was received, among other things before passing the assessment order. According to the Supreme Court, the subsequent reopening could be said to be a change of opinion.

Note:

The Supreme Court has also dismissed SLPs of the Revenue for similar reasons in other two cases [(i) PCIT vs. State Bank of India (2022) 447 ITR 368 (SC); and (ii) DCIT vs. Financial Software and Systems P Ltd. (2022) 447 ITR 370 (SC)].

17 Harshit Foundation Sehmalpur Jalalpur Jaunpur vs. Commissioner of Income Tax, Faizabad

(2022) 447 ITR 372 (SC)

Charitable purpose – Registration –There is no provision in the Act by which it provides that on non-deciding the registration application u/s 12AA(2) within a period of six months there shall be deemed registration.

In an appeal filed u/s 260A of the Income-tax Act, 1961 (‘the Act’) by the Revenue before the Allahabad High Court from the order dated 28^th June, 2013 passed by the Income-tax Appellate Tribunal, Lucknow, the Appellant had raised a question as to whether non-disposal of the application for registration within a period of six months will result in deemed grant of registration u/s 12AA(2) of the Act.

The High Court set aside the order of the Tribunal and allowed the Revenue’s appeal holding that non-disposal of the application for registration, by granting or refusing registration, before expiry of six months as provided u/s 12AA(2) of the Act would not result in deemed grant of registration by following the decision of its Full Bench in CIT vs. Muzafar Nagar Development Authority (2015) 372 ITR 209 (All) (FB).

After considering in detail the provisions of Section 12AA(2) of the Act, the Supreme Court found that there is no specific provision in the Act by which it provides that on non-deciding the registration application u/s 12AA (2) within a period of six months there shall be deemed registration.

According to the Supreme Court, the Full Bench of the High Court had rightly held that even if in a case where the registration application u/s 12AA is not decided within six months, there shall not be any deemed registration. The Supreme Court was in complete agreement with the view taken by the Full Bench of the High Court. The Special Leave Petition was, therefore, dismissed.

BCAJ Admin

From The President

Dear BCAS Family,

The new year is here to welcome us, and so are the several new technologies that are knocking on our door to bring about a massive disruption in life soon. Every beginning implicitly means the end of the old, – however discomforting it is. Over the years of human evolution that we have witnessed, change was slow, gradually impacting the way we lived. However, that was a way back then. Since the last decade, we are all subjected to such a rapid pace of change that disruption has become a way of life than an exception. These disruptions are brought about through innovations made by a few individuals who refuse to accept limitations; who are keen to relook at the challenges and find a solution which can change the paradigm. Years ago, disruption was a word with strong negative connotations, and today it has become the fulcrum of creativity and the springboard to innovation.

Let me talk about a few of the recent disruptions that will change our way of living.

In the arena of energy, scientists in California have crossed a mega milestone by successfully replicating the power of the Sun in the laboratory. – What it means is that for the first time, more energy can be released than what has been consumed. This breakthrough is a leap ahead for the world in accessing green energy without any radioactive by-products. Using the universally abundant hydrogen and limitless, carbon-free supply of energy is possible. In a world dictated by energy-rich countries and companies, this is indeed a giant game-changer, with huge political and economic implications ahead.

In early December, the Artificial Intelligence powered, dialogue-based chatbot – ChatGPT was unleashed, garnering 1 million users in just 5 days. The bot has the remarkable ability to understand and respond in natural language, with incredible accuracy and creativity. It aptly demonstrates the increased ability of machines to imitate humans. With Machine Learning, this ability will escalate drastically…which could lead to some horror-story scenarios, in which machines could enslave humans. For the time being, these new-generation chatbots with their enormous power to process humongous amounts of data will become our personalised, all-knowing teachers…and give engineers at google and other search engines some sleepless nights!

5G is expected to re-invent the way we work, play and live, but most significantly, it will give a huge impetus to the adoption of the Fourth Industrial Revolution. High speed and low latency are the twin hallmarks of 5G that will have huge potential to transform industries. Shop floors with robotics and automated assembly lines will be able to connect seamlessly and streamline production with greater efficiency. Healthcare is another sphere that will benefit immensely from 3D imaging, advanced diagnostics, and wireless connections to robotic surgical tools in near-real time. The Internet of Things will also get a huge shot in the arm, as more devices can get connected, be it wearables, smart refrigerators, autonomous cars or just a laptop, to name but a few.

Moving to finance, we have in Unified Payment Interface (UPI) a disruption that has become an outstanding success, beating the best in advanced countries too. Launched in 2016, to move people away from the inconvenience of cash and the menace of black money, UPI has been widely adopted by banks, fin-techs, merchant establishments and the public. Thanks to UPI, many Indians today no longer carry a wallet in their pockets – but a wallet in their smartphones!

According to data released by the National Payments Corporation of India (NPCI), UPI reported transactions amounting to ₹10.72 lakh crore in August 2022 alone. In FY22, UPI processed more than 46 billion transactions amounting to over ₹84 lakh crore. In comparison, debit card spending stood at ₹7.3 lakh crore in FY22, while credit card spending stood at ₹9.7 lakh crore that same year. Not surprisingly, India has become the acknowledged leader in digital payments…and UPI has become a major disruptor.

Are we ready? Will we be able to accept the increased pace of disruption? I guess we have no choice but to evolve – physically, mentally and emotionally. We will need to grow the wings to soar with disruption.

Events:

A workshop, “ERM 101” on Enterprise Risk Management was organized jointly with the Institute of Risk Management on 3rd December, 2022 at the JIO World Convention Centre. It provided a good learning experience. A lecture meeting was organised on 15th December, 2022 jointly with The Auditors Association of Southern India on “Tax Implications on Reconstitution of Partnerships” with BCAS as Knowledge Partner. It received a very encouraging response. The lecture Meeting on the subject “Value in the Metaverse& Why Metaverse is Inevitable” gave a good insight into the subject.

The new calendar year is beginning with some exciting events on the anvil. A long-duration course on income tax, “Income Tax Ki Paathshala”, from 2nd January, 2023 to 30th January, 2023 will offer guidance on the theory and practical issues to the budding income tax practitioners, Lecture Meeting on “Penalties under Income Tax” will provide an opportunity to understand the practical issues around the subject and ways to deal with them. HRD Committee has planned several activities to stimulate soft skills by organising a workshop on “Effective Public Speaking and Business Presentation Skills” and improving the quality of life by organising a Lecture Meeting on “Learnings from Swami Vivekananda Biography” on 12th January, 2023. A Leadership Retreat is organized on the subject of “Leadership Skills & Management – The Chanakya way” on 14th and 15th of January 2023. The most awaited students’ programme, “Tarang 2K23” under the auspices of Jal Each Dastur Student’s Annual Day Fund, is happening on 8th January, 2023. I request you all to participate and sponsor your interns, students and colleagues. Please do keep a tab on the BCAS announcements to avoid missing any event.

Budget preparations have already started at theFinance Ministry. The Budget and the Finance Bill to be presented on the 1st February, 2023 will be the last by the current government. BCAS has already made recommendations to the Hon. Finance Minister on the number of issues that need to be fixed and clarified for better governance. Let us hope to have a good response to those.

As we leap into 2023, let us be ready to ride the crest of disruption and change, with confidence…always keeping in mind that the future belongs to brave and the stout-hearted. To those who harbour doubts, I would quote Shakespeare from his play ‘Measure for Measure’ where Lucio the protagonist states “Our doubts are traitors and make us lose the good, we oft might win but fearing to attempt”. So, on this note…let me take this opportunity to wish you a Happy New Year full of exciting opportunities and pleasant surprises!

Thank You!

Best Regards,

CA Mihir Sheth

President

BCAJ Admin

Corporate Law Corner : Part A | Company Law

15 Case Law No. 01/December/2023

M/s Antique Exim Private Limited

ROC-Guj/Adj. Order/Sec 138/ 2023/1676 to 80

Office of Registrar of Companies, GUJARAT DADRA & NAGAR HAVELI

Adjudication Order

Date of Order: 4th July, 2023

Adjudication order under section 454 read with Section 450 of the Companies Act, 2013 on the company and its directors for violation of provisions of section 138 read with Rule 13 of the Companies (Accounts) Rules, 2014 with respect to non-appointment of Internal Auditor in the Company.

FACTS

The Ministry of Corporate Affairs (‘MCA’) vide letter no. 3/82/2020/CL-II (DGA CoA), dated 17th March, 2020 had ordered an Inquiry of M/s. AEPL under section 206(4) of the Companies Act, 2013.

During the course of the inquiry and on examination of financial statements for the financial years 2018–19 and 2019–20 of M/s AEPL, the Registrar of Companies (‘RoC’) had found that the turnover of M/s AEPL being a Private Limited Company exceeded R200 Crores. Based on the same, it was required and mandatory for M/s. AEPL to appoint an Internal Auditor under provisions of Section 138 of the Companies Act, 2013. However, the company had failed to appoint an Internal Auditor since the financial years 2014-15. Therefore, M/s. AEPL and Mr. PKB, Mr. SP, its officers in default had violated the provisions of the Act.

The ROC had issued an adjudication notice to M/s. AEPL and Mr. PKB, Mr. SP, its officers in default on 6th December, 2022 under section 454 of the Companies Act, 2013 for violation of Section 138 with a request to remit the penalty as prescribedunder the provisions of the Companies Act, 2013. A hearing was fixed on 21st June, 2023 to give the appellants an opportunity of being heard.

Mr. BV, Practising Company Secretary (‘PCS’), Authorised Representative of M/s. AEPL and its directors, present in the hearing stated that M/s. AEPL had already submitted their reply on two occasions i.e., 7th March, 2022 and20th October, 2022, which were taken on record.

Mr. BV further stated that M/s. AEPL had already constituted an in-house Internal Audit Department commensurate with the size of the company and had not appointed any external professional as an internal auditor of M/s. AEPL. Further, the Director’s Reports of M/s. AEPL for the F.Ys. 2014–15, 2015–16, 2016–17, 2017–18, 2018–19 and 2019–20 had reported on the adequacy of the Internal control system with reference to its Financial Statement. Hence, there was no violation of Section 138 of the Companies Act, 2013 with respect to the appointment of the Internal Auditor by M/s. AEPL. In view of the above representation, M/s. AEPL and Mr. PKB, Mr. SP, and its directors had requested a lenient view on the matter.

HELD

The Adjudication Officer (‘AO’) submitted that the reply received from M/s. AEPL was unsatisfactory since M/s. AEPL was liable to appoint an Internal Auditor from the F.Y. 2014–15. Thereby, M/s. AEPL and its directors were in default and shall be liable for penalty as per the applicable provisions.

After considering the facts and circumstances of the case, the AO imposed a penalty under Section 450 of the Companies Act, 2013 as per the below-mentioned table:

Sr. No.	Name of the Company /Director	Maximum Penalty (₹)	Penalty imposed (₹)
1.	M/s. AEPL	2,00,000	2,00,000
2.	Mr. PKB, Director of M/s. AEPL	50,000	50,000

Sr. No.	Name of the Company /Director	Maximum Penalty (₹)	Penalty imposed (₹)
3.	Mr. SP, Director of M/s. AEPL	50,000	50,000

M/s. AEPL, Mr. PKB and Mr. SP were directed to pay the penalty and comply with this Adjudication order individually within 90 days and failure to do so may result in penal action without further intimation.

BCAJ Admin

IBC: Tax or Creditors – Who Wins?

INTRODUCTION

One of the issues which has gained prominence under the Under the Insolvency & Bankruptcy Code, 2016 (“the Code”) is that in case of a company undergoing a Corporate Insolvency Resolution Process (“CIRP”), do the tax dues have priority over the secured lenders / creditors? In other words, would the direct and indirect tax claims get paid off before the secured creditors?

The general legal principle (prior to the enactment of the Code) in this respect has been laid down by various Supreme Court decisions, such as, Union of India vs. SICOM Ltd, [2009] 233 ELT 433 (SC) which was in the context of priority of Central Excise dues over those of a financial creditor. It held that the rights of the Crown to recover its debt would prevail over the right of a subject. Crown debt meant the debts due to the State which entitled the Crown to claim priority before all other creditors. Such creditors, however, were held to mean only unsecured creditors.

This issue has gained more prominence because of a Supreme Court decision delivered in 2022. The Supreme Court recently had an occasion to revisit its earlier decision and it upheld the earlier decision.The answer to the above question would depend upon the manner in which the tax Statute in question is worded. Let us understand the position in this respect.

WATERFALL MECHANISM AND THE CODE

At the outset, it must be understood that section 53 of the Code provides for a waterfall mechanism for the mode and manner of distribution of the proceeds of the sale of the assets of a Corporate Debtor. It starts with a non-obstante clause which overrides anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force. The mechanism is as follows:

(a) the insolvency resolution process costs and the liquidation costs paid in full;

(b) the following debts which shall rank equally between and among the following-

(i) workmen’s dues for the period of 24 months preceding the liquidation commencement date; and

(ii) debts owed to a secured creditor in the event such secured creditor has relinquished security;

(c) wages and any unpaid dues owed to employees other than workmen for the period of 12 months preceding the liquidation commencement date;

(d) financial debts owed to unsecured creditors;

(e) the following dues which shall rank equally between:

(i) any amount due to the Central Government and the State Government in respect of the whole or any part of the period of two years preceding the liquidation commencement date;

(ii) debts owed to a secured creditor for any amount unpaid following the enforcement of security interest;

(f) any remaining debts and dues;

(g) preference shareholders, if any; and

(h) equity shareholders or partners, as the case may be.

Thus, as is evident from the above section, secured creditors have a priority in being repaid as compared to unsecured creditors.

Secured creditor is defined to mean a creditor in favour of whom security interest is created. Security interest is defined in an exhaustive manner to mean right, title or interest or a claim to property, created in favour of, or provided for a secured creditor by a transaction which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person.

In this respect it should be noted that section 238 of the Code contains a non-obstante clause which states that the provisions of the Code shall have an effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. The Supreme Court in PCIT vs. Monnet Ispat & Energy Ltd., [2019] 107 taxmann.com 481 (SC) has categorically held that:

“Given Section 238 of the Insolvency and Bankruptcy Code, 2016, it is obvious that the Code will override anything inconsistent contained in any other enactment, including the Income-Tax Act.”

SC’S DECISION IN RAINBOW PAPERS

InState Tax Officer vs. Rainbow Papers Ltd, [2022] 142 taxmann.com 157 (SC),a two-Judge Bench of the Supreme Court was faced with the question whether VAT / CST dues under the Gujarat Value Added Tax Act, 2003 could be treated as dues of a secured creditor? Section 48 of this Act reads as follows:

“48. Tax to be first charge on property— Notwithstanding anything to the contrary contained in any law for the time being in force, any amount payable by a dealer or any other person on account of tax, interest or penalty for which he is liable to pay to the Government shall be a first charge on the property of such dealer, or as the case maybe, such person.”

Based on the above statutory charge in terms of section 48 of the Gujarat VAT Act, the Apex Court concluded that the claim of the Tax Department of the State, squarely fell within the definition of “Security Interest” under the Code and the State became a secured creditor under the Code. Such security interest could be created by the operation of law. The definition of a secured creditor in the IBC did not exclude any Government or Governmental Authority. It held that it was not the case that section 48 of the Act prevailed over section 53 of the Code. Rather, it was the case that the State fell within the purview of “Secured Creditor”. Section 48 of the Act was not contrary to or inconsistent with any provisions of the Code. Under s.53(1)(b)(ii), the debts owed to a secured creditor, which would include the State under the GVAT Act, were to rank equally with other specified debts including debts on account of the workman’s dues for a period of 24 months preceding the liquidation commencement date.

SUBSEQUENT CONTRARY SC VERDICT IN PASCHIMANCHAL

A two-Judge Bench of the Supreme Court in Paschimanchal Vidyut Vitran Nigam Limited vs. Raman Ispat Private Limited, n C.A. No. 7976 of 2019, Order dated 17th July, 2023 observed that the decision in Rainbow Papers (supra) did not notice the ‘waterfall mechanism’ under section 53 of the Code and the provision had not been adverted to or extracted in the judgment. Furthermore, Rainbow Papers (supra) was in the context of a resolution process and not during liquidation. It observed that the dues payable to the government are placed much below those of secured creditors and even unsecured and operational creditors. This design was either not brought to the notice of the court in Rainbow Papers (supra) or was missed altogether. In any event, the judgment had not taken note of the provisions of the IBC which treat the dues payable to secured creditors at a higher footing than dues payable to the Central or State Government.

SC’S REVIEW PETITION DECISION

The above decision of Rainbow Papers (supra)has created several hurdles for secured creditors of companies undergoing resolution. Many secured lenders are afraid that there would not be anything left for them if the Government also ranks as a secured creditor along with them. Accordingly, many petitioners, strengthened by the above-mentioned verdict inPaschmianchal (supra), filed a Review Petition before the Supreme Court. The judgment in the same was delivered by a two-Judge Bench of the Apex Court in the case of Sanjay Kumar Agarwal vs. State Tax Officer, RP(Civil) No. 1620 /2023 Order dated 31st October, 2023. The Court refused to review the Petitions since it was a co-ordinate bench and even otherwise a well-considered judgment could not fall within the ambit of a Review Petition.

PRINCIPLES OF REVIEW

To refresh, a review petition could be filed before the Supreme Court since the power to review its own judgment has been enshrined on the Court under Article 137 of the Constitution. The Supreme Court in Sanjay Kumar (supra) laid down the following important principles which would govern a review of an earlier decision:

(i) A judgment is open to review inter alia if there is a mistake or an error apparent on the face of the record – Parsion Devi and Others vs. Sumitri Devi and Others, (1997) 8 SCC 715.

(ii) A judgment pronounced by the Court is final, and departure from that principle is justified only when circumstances of a substantial and compelling character make it necessary to do so – Sajjan Singh and Ors. vs. State of Rajasthan and Ors., AIR 1965 SC 845.

(iii) An error which is not self-evident and has to be detected by a process of reasoning, can hardly be said to be an error apparent on the face of record justifying the court to exercise its power of review – Shanti Conductors Private Limited vs. Assam State Electricity Board and Others, (2020) 2 SCC 677.

(iv) In exercise of the jurisdiction under Order 47 Rule 1 CPC, it is not permissible for an erroneous decision to be “reheard and corrected” – Shri Ram Sahu (Dead) Through Legal Representatives and Others vs. Vinod Kumar Rawat and Others, (2021) 13 SCC 1.

(v) A review petition has a limited purpose and cannot be allowed to be “an appeal in disguise” – Parison Devi (supra).

(vi) Under the guise of review, the petitioner cannot be permitted to reagitate and reargue the questions which have already been addressed and decided – Shanti Conductors (supra).

(vii) An error on the face of record must be such an error which, mere looking at the record should strike and it should not require any long-drawn process of reasoning on the points where there may conceivably be two opinions – Arun Dev Upadhyaya vs. Integrated Sales Service Limited & Another, 2023 (8) SCC 11.

(viii) Even the change in law or subsequent decision/ judgment of a co-ordinate or larger Bench by itself cannot be regarded as a ground for review – Beghar Foundation vs. Justice K.S. Puttaswamy (Retired) and Others, (2021) 3 SCC 1.

The above principles governing a review petition have been explained very succinctly and precisely by the Supreme Court. They would be useful in all cases for deciding whether or not a review could be filed.

PRINCIPLES OF JUDICIAL PROPRIETY

The Supreme Court inSanjay Kumar (supra)refused to entertain the review petition on grounds of judicial propriety which demands respect for the order passed by a Bench of coordinate strength. It referred to important cases on this point, such as, Jai Sri Sahu vs. Rajdewan Dubey and Others, AIR 1962 SC 83; Mamleshwar Prasad and Another vs. Kanhaiya Lal (Dead) Through L. Rs, (1975) 2 SCC 232; Sant Lal Gupta and Others vs. Modern Cooperative Group Housing Society Limited and Others, (2010) 13 SCC 336and held as follows:

a) One co-ordinate Bench could not comment upon the discretion exercised or judgment rendered by another co-ordinate Bench of the same strength.

b) If a Bench did not accept as correct the decision on a question of law of another Bench of equal strength, the only proper course to adopt would be to refer the matter to the larger Bench, for authoritative decision, otherwise the law would be thrown into the state of uncertainty by reason of conflicting decisions.

c) Certainty of the law, consistency of rulings and comity of courts all flowered from this principle.

d) The rule of precedent was binding for the reason that there was a desire to secure uniformity and certainty in law. Thus, in judicial administration precedents which enunciated the rules of law formed the foundation of the administration of justice under our system. Therefore, it was always insisted that the decision of a coordinate Bench must be followed.

RAINBOW PAPERS CORRECT ON MERITS

The Supreme Court further held that even on merits, the decision inRainbow Papers (supra)was correct. The plea that the court in the impugned decision had failed to consider the waterfall mechanism as contained in section 53 and failed to consider other provisions of the Code, were factually incorrect. The Court in the impugned judgment had categorically reproduced and referred to section 53 and other provisions of the Code. After considering the Waterfall mechanism as contemplated in section 53 and other provisions of the Code for the purpose of deciding as to whether section 53 IBC would override section 48 of the GVAT Act, it decided in favour of the State Government. Thus, the Court in Sanjay Kumar (supra) dismissed the review petitions.

POSITION BASED ON THE ABOVE VERDICTS

To apply the ratio laid down in Rainbow Papers, one would have to ascertain the exact nature of the wordings in the impugned tax statute. If they are of the type found in section 48 of the GVAT Act, then the Government would be treated as a secured creditor, and would rank pari passu with other secured lenders / creditors. Wordings similar to wordings of section 48 of the GVAT Act are found in the Maharashtra Value Added Tax Act, 2002.

However, what happens when the wordings of the tax statute are not so explicit? In that event, it is submitted that the Government would not be considered as a secured creditor. The decision in Rainbow Papers was based upon specific wordings found in section 48 of the GVAT Act which provided that the tax dues “shall be a first charge on the property” of such dealer. It is not a blanket verdict which holds that for all tax dues, the government is a secured creditor. Prior to the introduction of the Code, this was also the position as laid down by the Supreme Court in Dena Bank vs. Bhikhabhai Prabhudas Parekh & Co., (2000) 5 SCC 694, wherein it held that the Crown’s preferential right to recovery of debts over other creditors was confined to ordinary or unsecured creditors. The common law of England or the principles of equity and good conscience (as applicable to India) did not accord the Crown a preferential right for recovery of its debts over a mortgagee or pledgee of goods or a secured creditor.

A very old decision in M/s. Builders Supply Corporation vs. Union of India, AIR 1965 SC 1061, rendered under the Income-tax Act, 1922 is also relevant. Section 46(2) of that Act enabled the Income Tax Officer to forward to the Collector a certificate specifying the amount of arrears due from an assessee and requiring the Collector, on receipt of such certificate, to proceed to recover from the assessee in question the amount specified as if it were an arrear of land revenue. The Supreme Court held that merely on the basis of this provision it could not be construed that section 46 dealt with or provided for the principal of priority of tax dues. The provision could not be said to convert arrears of tax into arrears of land revenue either; all that it purported to do was to indicate that after receiving the certificate from the Income-tax Officer, the Collector had to proceed to recover the arrears in question as if the said arrears were arrears of land revenue.

Let us examine the position under some important tax statutes:

(a) Income-tax dues– The Income-tax Act, does not contain any such wordings of the nature found under section 48 of the GVAT Act. Hence, it is submitted that the income-tax officer would not be a secured creditor of the corporate debtor. He would rank much lower as per the waterfall mechanism. The decisions in the case of TRO vs. Punjab and Sing Bank, 161 ITR 220 (Del) / Suraj Prasad Gupta vs. Chartered Bank, 83 ITR 494 (All)support the principle that in the absence of any specific statutory provision, income-tax dues cannot defeat the rights of any secured creditor. In fact, section 178(6) of the Income-tax Act, was specifically amended to provide that the provisions pertaining to the liability of a company in liquidation would override all laws other than the provisions of the Code.

The decision of the Delhi ITAT in ACIT vs. ABW Infrastructure Ltd, I.T.A. No. 2861/DEL/2018 (A.Y 2008-09)also states that it is well settled now that the Code has an overriding effect on all Acts including Income Tax Act which has been specifically provided under section 178(6). The Delhi High Court in Tata Steel Ltd vs. DCIT, WP(C) 13188/2018 Order dated 31st October, 2023, has also held that the Code overrides the provisions of the Income-tax Act to the extent that the latter is inconsistent with the provisions of the former. Section 238 of the Code, contains a non-obstante clause which makes this abundantly clear. It concluded that the Code was a special enactment, dealing with aspects concerning insolvency and, therefore, it would prevail over the provisions of the Income-tax Act 1961.

The NCLAT in Om Prakash Agrawal vs. CCIT, [2021] 124 taxmann.com 305 (NCL-AT) held that the priority was different for Government dues under s.53(1)(e) of the Code and under section 178 of the Income-tax Act. Both section 178(6) of the Act and section 53 of the Code start with non-obstante clause, and therefore, the legislature in its wisdom to give effect to the scheme of the Code, amended section 178(6). By virtue of the amendment the whole of section 178 had no application to the liquidation proceedings initiated under the Code. The matter pertained to the recovery of TDS (under section 194-IA) dues from a company in liquidation. The NCLAT held that as per section 194-IA of the Income-tax Act, 1% TDS was recovered on priority to other creditors of the transferor, whereas s.53(1)(e) in its waterfall mechanism provided that the Government dues came 5th in order of priority. Thus, with regard to recovery of the Government dues (including income tax) from a company-in-liquidation under IBC, there was an inconsistency between section 194-IA and section 53(1)(e). Therefore, by virtue of section 238, section 53(1)(e) had an overriding effect on the provisions of section 194-IA. Even otherwise section 53 started with a non-obstante clause, whereas section 194-IA, did not start with a non-obstante clause, and it would necessarily be subject to the overriding effect of the Code.

(b) GST dues – The Central Goods and Services Tax Act contains an express provision to the contrary of the type found in the VAT Acts referred to above. It contains a non-obstante clause which states that any amount payable by a taxable person on account of GST would be a first charge on the property of such person. This provision would apply notwithstanding anything to the contrary in any other law except as otherwise provided in the Insolvency & Bankruptcy Code, 2016. Thus, the GST dues would not override the IBC Code.

CONCLUSION

One feels that the provisions of the Code are explicitly clear in as much as it overrides all other Statutes. In the absence of specific wordings of the type found in the State VAT Acts, it would be very difficult to consider the Revenue Department as a secured creditor along with other secured lenders. In spite of that, there have been several cases where the Revenue Department, relying on the decision in Rainbow Papers, is petitioning to be treated as a secured creditor. This is only increasing the cases of litigation and causing more problemsin the corporate resolution process. Some recent press reports indicate that the Government is considering a Notification which would clarify that the Revenuedoes not ipso facto become a secured creditor in all insolvency cases before the NCLT under the Code. It would depend upon the wordings of the statute in each and every case!

BCAJ Admin

Regulatory Referencer

I. COMPANIES ACT, 2013

1. MCA Advisory to the stakeholders: The stakeholders are informed that the processing of application forms for the purpose of name reservation and incorporation at the Central Reservation Centre (CRC) is faceless and randomised. The applications if sent for resubmissions are normally not processed by the same official who has processed the application in the first instance. It is further advised that the stakeholders may inform the Ministry in case of any malpractice or irregularity on the part of any official / officer at CRC or any professional with supporting evidence at CVO-MCA@GOV.IN for taking action in accordance with the CVC guidelines. [Update on MCA website, dated 12th October, 2023]

2. ICAI issues advisory to its members to ensure due compliance with Significant Beneficial Ownership (SBO) norms:Corporate Laws & Corporate Governance Committee of ICAI has issued an important announcement addressing the sensitization of companies to comply with the provisions related to Significant Beneficial Ownership (SBO) u/s 90 of the Companies Act, 2013 read with relevant Rules. This announcement is in reference to the initiative of the MCA to create awareness among companies regarding their obligations related to SBO. [Announcement dated 18th October, 2023]

3. MCA mandates Private Companies except Small Companies to issue securities only in Demat form within 18 months from 31st March, 2023: MCA has notified the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023. As per the amended norms, every private company except small companies must issue the securities only in dematerialised form within 18 months from the closure of the Financial Year ended 31st March, 2023. Further, the company must facilitate the dematerialisation of all its securities in accordance with the provisions of the Depositories Act. These provisions shall not apply to Government Companies. [Notification No. G.S.R 802(E), dated 27th October, 2023]

4. Every company must designate a person for furnishing information to ROC w.r.t beneficial interest in shares of company: MCA has notified the Companies (Management and Administration) Second Amendment Rules, 2023. As per the amended norms, every company must designate a person who shall be responsible for furnishing information and extending cooperation in providing information to the Registrar or any other authorised officer regarding beneficial interest in shares of the company. Further, a company may designate a company secretary (CS), a KMP or every director, if there is no CS or KMP. [Notification No. G.S.R 801(E), dated 27th October, 2023]

5. MCA amends LLP norms; mandates declaration of beneficial interest and keeping of register for partners: MCA has notified LLP (Third Amendment) Rules, 2023. As per the amended rules, a person whose name is entered in the register of partners of LLP but doesn’t hold any beneficial interest in contribution must file a declaration to that effect in Form 4B within 30 days from the date on which his name is entered in the register. Further, every LLP must maintain a register of its partners in Form 4A from the date of its incorporation. The register must be kept at the registered office of LLP. [Notification No. G.S.R. 803(E), dated 27th October, 2023]

II. SEBI

6. SEBI extends timeline for mandatory verification of market rumours by specified listed entities: SEBI has extended the timeline for mandatory verification of market rumours by listed entities. As per proviso to Regulation 30(11) of SEBI (LODR) Regulations, 2015, the top 100 listed entities by market capitalization must verify, confirm, deny or clarify market rumours from 1st October, 2023. This has now been extended to 1st February, 2024. Similarly, the top 250 listed entities were required to mandatorily verify, confirm, deny or clarify market rumours w.e.f. 1st April, 2024 which now stands extended to 1st August, 2024. [Circular No. SEBI/HO/CFD/CFD-POD-1/P/CIR/2023/162, dated 30th September, 2023]

7. SEBI introduces a centralized mechanism for reporting the demise of investors through KRAs: SEBI has introduced a centralized mechanism for reporting and verifying the demise of an investor through KYC Registration Agency (KRAs) to smoothen the transmission process in the securities market. Further, upon receipt of intimation about the demise of an investor, the concerned intermediary must obtain a death certificate along with the PAN from the notifier. Also, after verification, the intermediary must submit a KYC modification request to KRA. The circular shall be effective from 1st January, 2024.[Circular No. SEBI/HO/OIAE/OIAE_IAD-1/P/CIR/2023/0000000163, dated 3rd October, 2023]

8. SEBI relaxes listed entities from dispatching hard copies of annual report till 30th September, 2024 pursuant to MCA extension: Earlier, the MCA vide Circular dated 25th September, 2023, extended the relaxation from dispatching of physical copies of the financial statements (including Board’s report, Auditor’s report or other documents required to be attached therewith) up to 30th September, 2024. Therefore, SEBI in order to bring it in line with MCA, has decided to extend relaxation to listed entities also. Listed entities are now granted relaxation from sending a hard copy of the annual report to Non-Convertible Securities holders up to 30th September, 2024. [Circular No. SEBI/HO/DDHS/P/CIR/2023/0164, dated 6th October, 2023]

9. SEBI extends the relaxation from sending proxy forms for general meetings held via e-mode till 30th September, 2024: Earlier, SEBI vide circular dated 11th July, 2023, relaxed the listed entities from complying with regulation 36(1)(b) of LODR i.e., sending hard copies of annual reports, and regulation 44(4) i.e., sending of proxy forms to holders of securities, for the general meetings (conducted in electronic mode) till 30th September, 2023. Now, the SEBI has extended these relaxations till 30th September, 2024. [Circular No. SEBI/HO/CFD/CFD-POD-2/P/CIR/2023/167, dated 7th October, 2023]

10. SEBI redefines ‘Large Corporates’ (LCs); relaxes borrowing norms for LCs through issuance of debt securities: SEBI has relaxed borrowing norms for large corporates (LCs) through issuance of debt securities. Now, an entity with outstanding long-term borrowings of Rs.1000 crore or above would be classified as LC. Also, SEBI has introduced incentives for LCs in case of surplus in requisite borrowings and moderated disincentives if they fail to meet at least 25 per cent of their incremental borrowings. Earlier, LCs were defined as those with outstanding long-term borrowings of at least R100 crore or above. [Circular No. SEBI/HO/DDHS/DDHS-RACPOD1/P/CIR/2023/172, dated 19th October, 2023]

11. MCA takes away RD’s power to levy additional costs to order confirming the shifting of RO from one state to another: The MCA has notified an amendment to Rule 30 of the Companies (Incorporation) Rules, 2014. As per the amended norms, no additional costs can be included in the Central Government’s order confirming the alteration of registered office from one state to another. Further, a new proviso has been inserted into Rule 30(9), which states that shifting of the registered office may be allowed where the resolution plan has been approved and no appeal against the resolution plan is pending. [Notification No. G.S.R. 790(E), dated 20th October, 2023]

12. Unclaimed amounts transferred to IEPF under LODR shall not bear any interest:SEBI has notified amendments to Regulation 61A of LODR Regulations which prescribe provisions for dealing with unclaimed non-convertible securities and benefits accrued thereon a new proviso has been inserted which states that the amount transferred to the IPEF shall not bear any interest. Further, the unclaimed amount of a person that has been transferred to IPEF can be claimed in the manner specified by the Board. [Notification No. SEBI/LAD-NRO/GN/2023/158, dated 20th October, 2023]

13. SEBI amends InvIT & REIT Regulations, 2014: SEBI has notified amendment to Regulation 18 of InvIT & REIT Regulations, 2014 which prescribes provisions for Investment conditions, dividend policy and distribution policy. A new proviso has been inserted which states that the amount transferred to the IPEF shall not bear any interest. Further, the unclaimed or unpaid amount of a person that has been transferred to IEPF can be claimed in the manner specified by the Board. [Notification No. SEBI/LAD-NRO/GN/2023/159, dated 20th October, 2023]

III. DIRECT TAX: SPOTLIGHT

1. Insertion of Rule 21AHA and Form 10IFA – CBDT notifies Form 10-IFA for opting for tax regime u/s 115BAE by co-operative society — Income-tax (Twenty-Third Amendment) Rules, 2023 — Notification No. 83/2023, dated 30th September, 2023:

The Finance Act introduced a new tax regime under section 115BAE for the resident co-operative societies engaged in manufacturing or producing an article or thing. The CBDT has notified Form 10-IFA for exercising the option of section 115BAE. This form is to be furnished electronically on or before the due date for furnishing the return of Income.

2. Clarification regarding providing details of persons who have made a ‘substantial contribution to the trust or institution — Circular No. 17/2023, dated 9th October, 2023:

In Form 10B and 10BB, details of persons makingsubstantial contributions may be given with respect tothose persons whose total contribution during theprevious year exceeds fifty thousand rupees and details of relatives of such a person and details of concerns in which such person has a substantial interest may be provided only if available.

3. Extension of time limit for filing Form 56F for Assessment Year 2023-24 — Circular No. 18/2023, dated 20th October, 2023:

The CBDT has extended the due date for furnishing Form 56F for claiming the benefit of section 10AA for A.Y. 2023-24 to 31st December, 2023.

4. Condonation of delay in filing of Form No. 10-IC for Assessment Year 2021-22 — Circular No. 19/2023, dated 23rd October, 2023:

The delay in filing of Form No. 10-IC for A.Y. 2021-22 is condoned in cases where the following conditions are satisfied:

i) The return of income for A.Y. 2021-22 has been filed on or before the due date specified under section 139(1) of the Act;

ii) The assessee company has opted for taxation u/s 115BAA of the Act in ITR-6; and

iii) Form 10-IC is filed electronically on or before 31st January, 2024, or three months from the end of the month in which this Circular is issued, whichever is later.

5. Insertion of Rule 16D and Form 56F for claiming deduction under section 10AA – Income-tax (Twenty-Sixth Amendment) Rules, 2023 — Notification No. 91/ 2023, dated 19th October, 2023.

6. Agreement between the Government of the Republic of India and the Government of Saint Vincent and the Grenadines for the Exchange of Information and Assistance in collection with respect to taxes, was signed at Kingstown, Saint Vincent and the Grenadines on19thMay, 2022. Agreement entered into force on14th February, 2023. All the provisions of the said Agreement as annexed in the notification shall be given effect to in the Union of India — Notification No. 96/ 2023, dated 1st November, 2023.

IV. FEMA AND IFSCA REGULATIONS

1. RBI allows PROIs to purchase / sell dated Government Securities/Treasury Bills:

RBI has amended the Foreign Exchange Management (Debt Instruments) Regulations. Persons resident outside India that maintain a rupee account in terms of regulation 7(1) of Foreign Exchange Management (Deposit) Regulations, 2016 may purchase or sell dated Government Securities / treasury bills, as perterms and conditions specified by the ReserveBank. Please refer to the Notification for otherconditions.

[Notification No. FEMA.396(2)/2023-RB, dated 16th October, 2023]

2. Premature withdrawal for NRO and NRE Deposits:

RBI has decided that all domestic term deposits accepted from individuals for amounts of Rupees one crore and below shall have a premature withdrawal facility. This amount has been raised from Rs.15 lakh to Rs. 1 crore. These instructions shall also be applicable for Non-Resident (External) Rupee (NRE) Deposit / Ordinary Non-Resident (NRO) Deposits.

[Circular No. DOR.SPE. REC. NO 51/13.03.000/2023-24, dated 26th October, 2023]

3. FATF adds Bulgaria to the list of High-Risk Jurisdictions under Increased Monitoring:

The Financial Action Task Force (FATF) releases documents titled “High-Risk Jurisdictions Subject to a Call for Action” and “Jurisdictions under Increased Monitoring” with respect to jurisdictions that have strategic AML / CFT deficiencies as part of the ongoing efforts to identify and work with jurisdictions with strategic Anti-Money Laundering (AML) / Combating of Financing of Terrorism (CFT) deficiencies. As per the 27th October, 2023, FATF public statement, Bulgaria has been added to this list of Jurisdictions under Increased Monitoring while Albania, the Cayman Islands, Jordan and Panama have been removed from this list based on a review by the FATF. This advice does not preclude the regulated entities from legitimate trade and business transactions with these countries and jurisdictions mentioned there.

[Press Release No. 2023-24/1223, dated 1st November, 2023]

4. Sovereign Green Bonds accessible to non-resident investors too:

Under the RBI’s Fully Accessible Route (FAR) certain specified categories of Central Government securities were opened fully for non-resident investors without any restrictions, apart from being available to domestic investors as well. It has now been decided to also designate all Sovereign Green Bonds issued by the Government in the fiscal year 2023-24 as ‘specified securities’ under the FAR.

[Circular No. FMRD.FMID.NO. 04/14.01.006/2023-24, dated 8th November, 2023]

5. Special current account exclusively for export settlement:

To provide greater operational flexibility to the exporters, RBI has permitted the AD Category-I banks maintaining a ‘Special Rupee Vostro Account’ to open an additional Special Current Account for its exporter constituents. The account is to be maintained exclusively for the settlement of their export transactions.

[FED Circular No. 08, dated 17th November, 2023]

BCAJ Admin

Letter to the Editor

Dear Editor,
BCAJ, Mumbai.

I thoroughly enjoyed the editorial written by you in the November 2023 issue of BCAJ. The editorial incisively summarises the current litigation pile-up in the country and offers interesting insights. For instance, 96 per cent of the tax collections are voluntary payments by the taxpayers, and the whole fight is only forthe balance 4 per cent of taxes, which has caused so much distress and delay in justice to honest taxpayers. The editorial comprehensively highlights some of the causes of unnecessary litigation and brings home the point that the highest litigatorin the country is the government itself! If India can create an example of such a litigation management system, it would be one of its greatest contributions to the world.

CA Vishal Gada

BCAJ Admin

Statistically Speaking

BCAJ Admin

Chaturmas (चतुर्मास): Why God Goes to Sleep

Hindus observe the period of four months from Ashadha to Kartika as ‘Chaturmas’. This is normally monsoon time — from the 11th day of Ekadashi of Ashadha to the 11th day of Kartika, usually coinciding with the English months of July to October. This year, due to Adhik (extra) month, which is an adjustment of leap year, it was extended to November.

Hindus believe that from Ashadha-Ekadashi to Kartika Ekadashi, God takes rest, i.e., He sleeps! Therefore, these four months are normally treated as not very auspicious. Very few weddings take place during this period. Since God goes to sleep on Ashadha–Ekadashi, it is called ‘Devashayani. ‘Shayanani’ means sleep. As against this, Kartika Ekadashi is called Prabodhini Ekadashi.(God wakes up). During this period, there are many religious activities performed, like Krishna Janmashtami, Ganesh Chaturthi, and Shraddha (rites of forefathers, etc.) — so that people do more religious things to safeguard against the ill effects of the inauspicious period. Similarly, there are many fasts during this period. Actually, fasting is meant for good health.

Against this background, there was once a discussion about why God goes on such a long sleep. The question was put to a common man who replied, “We people work only eight hours a day. In that also, we relax for six hours! But poor God cannot relax while on duty. He has to work 24×7, without any rest. Moreover, He finds it difficult to rush to the rescue of His devotees since the climate is bad, there are potholes on the road, railways are late, and flying is difficult. So, He takes compensatory leave for four months.”

Then, a civil engineer / architect was asked the same question. He said, “During this period, not much construction activity can be carried out due to heavy rains. Cement gets spoilt. Workers also do not attend regularly. So, He prefers to take rest.”

The lawyer said, “As it is, we hardly work except for taking adjournments. Judges and lawyers will have no work if cases are disposed of speedily. We need to maintain and increase the pendency. Judges also want to do many things, other than deciding the cases. So God feels, anyway, there is no work. Why not take a rest?”

A doctor had a different view. He said, “There are many viral diseases, God wants to support the medical fraternity. If He remains awake and protects the patients, doctors will have less business. Moreover, since He is afraid of our treatment, He prefers to sleep to keep away from diseases!”

Housewives felt that nowadays, God, by default, is always sleeping. Occasionally, He wakes up. That is why in today’s Kaliyuga, nothing is proper. There is corruption. The common man gets no justice. Everywhere there is gundaism, looting, thefts, scandals, atrocities against women and cheating of the poor. Everything is politically vitiated — be it education, the medical field or even so-called religious or spiritual activity. This is the result of God’s slumber or deep sleep!

Finally, the turn of a chartered accountant came. He was aggrieved as usual. He is very unhappy with his profession. He felt that we, CAs, spend sleepless nights working on clients’ audits and tax returns. God gets the comfort that somebody is awake. Mottos like ‘Ya Esa Suptesu Jagarti’ (ICAI)or ‘Na Bhayam Chasti Jagratah’ keep us awake. But according to him, the real reason for God going to sleep is that He is afraid of signing audits. His pledge is to help His bhaktas (devotees). A few devotees who were CAs showed Him the audit requirements — AS, SAs, Acts, Notifications, etc., and God said He was finding it difficult to understand these things. Devotees sought His help in signing, but God was horrified and went to sleep. He said He would wake up only after all the audits are signed.

BCAJ Admin

Miscellanea

1. WORLD NEWS

1 South Korean robot crushes man to death after confusing him with a box of vegetables

A South Korean man was crushed to death by an industrial robot after it failed to differentiate between him and a box of vegetables.

The robotics company employee was inspecting the robot’s sensor operations on Wednesday at a distribution centre for agricultural produce in South Gyeongsang province when the incident happened.

The robotic arm was lifting boxes of peppers and moving them onto pallets when it allegedly malfunctioned and picked up the man instead, Yonhap news agency reported.

It then pushed the man against the conveyor belt, crushing his face and chest. He was rushed to a hospital but later succumbed to the injuries.

The employee, said to be in his 40s, was conducting checks on its sensor ahead of its test run at the pepper sorting plant. He had initially planned to conduct the tests on 6th November, but it was pushed back two days due to reported problems with the robot’s sensor.

Following the incident, an official from the Dongseong Export Agricultural Complex, which owns the plant, called for a “precise and safe” system to be established.

“Robots have limited sensing and thus limited awareness of what is going on around them,” Christopher Atkeson, a robotics expert at Carnegie Mellon University, told MailOnline.

Earlier in May, a man in South Korea suffered serious injuries after getting trapped by a robot while working at an automobile parts manufacturing plant.

At least 41 people have been killed by industrial robots in the US between 1992 and 2017, according to a study published by the American Journal of Industrial Medicine.

Stationary robots were responsible for 83 per cent of the fatal incidents. “Many of these striking incidents occurred while maintenance was being performed on a robot,” the study found.

A 22-year-old worker at a German Volkswagen factory was killed by a robot in 2015.

(Source: https://www.independent.co.uk/asia/east-asia/south-korea-robot-kills-man-b2444245.html — By Alisha Rahaman Sarkar — 9th November, 2023)

2. ECONOMY — ENERGY

1 Lithium Miners Bet on Direct Extraction in bid For Efficiency, Sustainability

Lithium is the most critical mineral to the future of global energy systems, powering everything from electric vehicles to personal electronics. It is also used to produce depression medications, large-scale energy storage systems, ceramics, and more.

The global demand for lithium is projected to increase seven-fold from 2023 to 2030. As the industry expands to a total value of $400 billion in the coming years to meet surging demand, lithium mining’s footprint on global ecosystems and local economies will spread accordingly.

Many major lithium companies are cognizant of the potential long-term ramifications of unfettered exploitation of lithium resources, particularly in Latin America’s lithium-rich salt flats, where evaporation plants are particularly taxing on limited local water tables.

A new lithium extraction technology aims to solve a critical dilemma facing the lithium industry: how to consistently ramp up global lithium production while containing the industry’s impact on local environments.

Direct Lithium Extraction (DLE) separates lithium from mineral-rich brines using chemical agents in a continuous process of water recycling, instead of using the traditional method of slowly evaporating the surrounding liquid. The technology promises higher lithium yields and lower water usage, if implemented at scale.

DLE has already been adopted at Argentina’s largest lithium mine, and will reportedly be introduced at dozens of high-profile lithium projects throughout the world in coming years, including at ExxonMobil’s lithium facility in Arkansas and Chile’s highly productive plants in the Atacama Desert.

Still, despite the purported benefits of DLE for the lithium sector, the technology is untested in large-scale applications and carries higher up-front costs for prospective investors.

While analysts disagree on the potential impact of DLE on the global lithium sector, the newly developed technology could still be the industry’s best hope of maintaining competitiveness in the future.

Direct Lithium Extraction: Mixed Results

International Business Times discussed the benefits and limitations of DLE with Jose Hofer, Commercial Manager at Livista Energy, a Luxembourg-based lithium processing firm that actively works with DLE companies. Hofer was also formerly Business Intelligence Manager at Sociedad Química y Minera de Chile (SQM), the largest of Chile’s two major lithium miners, as well as an Energy Analyst at Chile’s Ministry of Energy. He shared written comments with IBT on Tuesday.

DLE has proven an “increase in yield for the production of lithium chloride, which is an advantage [relative to] existing conventional evaporation projects,” Hofer said.
Early results from DLE’s applications at pilot plants suggest the technology could drastically increase lithium production from existing plants, without companies needing to expand the footprint of their operations.

“Much like shale did for oil, DLE has the potential to significantly increase the supply of lithium from brine projects, nearly doubling lithium production,” Goldman Sachs said in an April report on DLE, highlighting the technology’s importance to scaling global lithium production.

“DLE has proved to be feasible in China,” Hofer said, but did not identify the technology taking hold at scale elsewhere in the world.

While DLE has shown promising results so far, the technology has significant drawbacks at its current stages of development.

“Water consumption is the biggest issue” for DLE, Hofer told IBT. DLE’s “water use is higher than conventional evaporation,” Hofer said.

Existing DLE plants still need to undergo further research and development to even limit the technology’s water usage compared to existing mining practices, a central element of DLE’s advertised benefits. And the technology currently carries higher capital expenditures when compared to traditional evaporation mining (13 per cent higher, according to Goldman Sachs).

While DLE projects may have been feasible during the high-price environment of late 2022, margins for miners have shrunk considerably in 2023 as lithium prices have fallen and plateaued. Projects that are currently using DLE “will have to transit a maturity process” before reaching their full potential, Hofer told IBT.

The Industry Pivots to DLE, however slowly.

Goldman Sachs’ report tallied 28 distinct lithium mining projects employing DLE technologies worldwide, with statuses ranging from pilot programs to full operation. Only four DLE projects are currently in operation, three of which are in China, and the fourth of which is in Argentina at U.S. based miner Livent’s Fenix plant in the Salar del Hombre Muerto salt flat.

These four active plants could soon expand; two mines in Argentina (Eramet’s Centenario-Ratones and Tibet Summit’s Angeles projects) and two other Chinese plants are nearing final construction of DLE facilities, according to Goldman Sachs.

SQM, the world’s leading lithium company by annual output, is also beginning plans to convert its evaporation mine in the Atacama Desert to a DLE operation.

“We are looking forward to adopting industrial scaling for this technology,” Mark Fones, Vice President of Strategy at SQM said on the company’s third-quarter earnings call on Thursday.

(Source: International Business Times — By Jack Quinn — 17th November, 2023)

3. WORLD – ENVIRONMENT

1 Frustration As Latest Talks on Global Plastic Treaty Close

The latest negotiations toward a global plastic treaty concluded late Sunday with disagreement about how the pact should work and frustration from environment groups over delays and lack of progress.

Negotiators spent a week at the UN Environment Programme (UNEP) headquarters in Nairobi haggling over a draft treaty to tackle the growing problem of plastic pollution found everywhere from ocean depths to mountaintops to human blood.

It is the third time negotiators have met since 175 nations pledged early last year to fast-track talks in the hope of finalising a treaty by 2024.

The meeting in Nairobi was supposed to advance the process by fine-tuning the draft treaty and starting discussions about what concrete measures should target pollution from plastic, which is made from fossil fuels.

But the treaty terms were never really addressed, with a small number of oil-producing nations — particularly Iran, Saudi Arabia and Russia — accused of employing stalling tactics seen at previous negotiation rounds to hinder progress.

In closed-door meetings, so many new proposals were put forward that the text — instead of being revised and streamlined — ballooned in size over the course of the week, according to observers following the talks.

Graham Forbes from Greenpeace said the meeting had “failed” its objectives.

“A successful treaty is still within reach but it will require a level of leadership and courage from big, more ambitious countries that we simply have not seen yet,” he told AFP.

UNEP said “substantial” progress had been made by nearly 2,000 delegates in attendance.

The International Council of Chemical Associations, the main industry body for global petrochemical and plastic businesses, said governments had improved an “underwhelming” draft.

“We (now) have a document — a draft text — that is much more inclusive of the range of ideas,” spokesman Stewart Harris told AFP.

Environment groups have long argued that without laws to slow the growth of new plastic, any treaty would be weak and ineffective.

Plastic production has doubled in 20 years and at current rates could triple by 2060 without action, but 90 percent is not recycled.

Ahead of the talks, around 60 “high ambition” nations called for the treaty to eliminate some plastic products through bans and phase-outs, and enshrine rules to reduce plastic production and consumption.

But during the open sessions in Nairobi, some nations expressed reluctance to support cuts on plastic production, while divisions sharpened over whether treaty terms should be legally binding or voluntary.

Two further rounds of negotiations remain in 2024: the first in Canada in April and then in South Korea in November, with the goal of adopting a treaty by mid-2025.

(Source: International Business Times — By AFP News — 19th November, 2023)

BCAJ Admin

Society News

LEARNING EVENTS AT BCAS

1. “Breast Cancer Awareness Talk” held on2nd November 2023, @ BCAS in Hybrid Mode.

As one of the many social initiatives under #BCASCares, a “Breast Cancer Awareness Talk” was organised by the Seminar, Public Relations & Membership Development Committee of the BCAS in a hybrid mode, with online access available to all outstation participants.

The meeting attracted 127 registrations from various cities. A heartening presence was the men in the audience, bearing testimony to their sensitivity and appreciation of the opportunity to hear the three speakers, Dr. Garvit Chitkara, Senior Consultant, Breast Surgical Oncology and Oncoplasty; Dr. Priti Kulkarni Tambat, M.D. (Kayachikitsa), Ayurveda; andPuriya Onkar, Mandala artist and cancer warrior.

Dr. Garvit Chitkara from Mumbai addressed the audience on various issues, particularly factors associated with an increased risk of breast cancer, how the treatment has evolved, the methods of early detection and the age to start the same.

Dr. Priti Kulkarni Tambat from Indore threw light on how prakriti (the nature of the body in terms of dosha) has an impact on a person’s susceptibility and immunity levels. She underlined the need to eat produce that is local and intrinsic to the region, the power of one’s thoughts and emotional well-being, the healing effects of specific classical raag and also the effect of planetary motions on a person. She emphasised the importance of a yearly nadipariksha (ancient Ayurvedic technique of diagnosis of both physical and mental diseases as well as imbalances by checking the pulse) and yearly horoscope analysis – both being part of Rigveda, and offered that a gaanth (a node) forms first in the mind before it manifests in the physical body.

Puriya Onkar from Mumbai bared her heart and spoke candidly about the various challenges that came her way, the reaction from family and friends and the support systems (both personal and professional) that helped her emerge far stronger and more confident.

The questions posed by the moderators and the audience (both online and offline) made the evening an extremely interactive and informative one.

Link to access the session:

QR code:

2. Lecture Meeting on “Decoding The Digital Personal Data Protection Act” held on 25th October, 2023, in Online Mode.

A lecture meeting “Decoding The Digital Personal Data Protection Act” (DPDPA) was organised in a virtual mode.

The speaker, Sandeep Rao took the audience through a detailed presentation on what constitutes personal data, the roles and responsibilities of the various players in the DPDPA ecosystem, the significance of documenting clear written consent from the party whose data is to be processed, using the data strictly for the agreed purposes, deleting it once the purpose has been served, the requirement for impact assessments, audits and other measures in place, the severe penalties proposed for non-compliance, and the importance of proper staff training to ensure due compliances.

He also dwelled on the merit behind defining a Personal Data Attribute Map to lay out in detail the types of data to be processed, the channels to be employed for the same, the manner and place for data storage and the various reasons for which it is to be used. While large corporations have the wherewithal to set up an in-house infrastructure to ensure due compliance, more particularly for small businesses in the SME sector, opting for a Privacy Management Platform will be both practical and economical.

The speaker focussed on the various professional opportunities for a Chartered Accountant — whether as an auditor, a consultant or a Data Protection Officer. All these would warrant undergoing certain training and obtaining relevant certifications.

While the notification of the Act and the Rules is expected to throw light on several aspects that are hitherto unclear, there is no doubt that the DPDP Act is set to change the way businesses, small or large, will need to handle, store and process personal data.

The meeting attracted 150 registrations from various cities.

Link to access the session:

QR Code:

3. Fema Study Circle Meeting on “Recent clarifications received from RBI to AD bank” held on 20th October, 2023, in Online Mode.

The Speaker CA Wrutuja Soni during the Fema Study Circle Meeting covered the following topics:

Directions by RBI to AD Banks
Last updates in LRS
Latest changes in ODI Rules
Case Studies

She elaborated on the practical aspects of recent RBI clarifications on various issues including practical approaches and authorities delegated by RBI to AD Banks. The latest updates in LRS with practical issues were also discussed such as consolidated investment in single name after remittance of funds under LRS by different family members.

CA Wrutuja made detailed elaborations on the Updated ODI Directions and Rules including the valuation aspects. In the case studies, she shared her personal experiences with AD Banks as well as RBI’s instructions.

The entire session was wonderfully received by the participants.

4. Suburban Study Circle Meeting on “Casestudy discussion on Transfer Pricing” held on20th October 2023, at Bathiya & Associates LLP, Andheri (E).

Group Leader CA Hardik Mehta shared with the group an array of interesting case studies covering various issues that may seem small but play a very significant role in assessments. An educative presentation on important points based on case studies and his views on the same were shared by the leader with the group.

The session was knowledgeable and practical, and all the points were very well covered with numerous real-life examples to make it simpler for the group to understand it better. CA Hardik interpreted some of the important provisions with the help of case studies.

The session had wonderful interactive participation from the group. There were a large number of queries from the participants, which were addressed satisfactorily by the group leader.

The participants benefited from the overall insightful case studies shared by the group leader.

5. International Economics Study Group on “Europe: A Continent Forged in Crisis’’ held on 19th October, 2023, in Online Mode.

In this Study Group, CA Harshad Shah presented a detailed analysis of various indicators of a strong economy and Europe’s fulfilment status qua those criteria looking at the prevailing economic situation in the European countries. The challenges faced by the European economy, such as a low GDP of 0.7 per cent for CY 2023 and recessionary tendencies in Germany, ageing population, migration, political fragmentation, security and geopolitical concerns, high debt, energy crisis (post Ukraine conflict), etc., were some ofthe points of discussion. Historical factors, namely the World Wars, economic factors, geopolitical changes, international pressure, post-war rebuilding, decolonisation movements, etc., and their impact on nine European Empires (including Roman, British, Russian, etc.) were discussed.

CA Harshad further explained how high inflation led to high interest costs, eroding people’s purchasing power, leading to their costs becoming non-competitive, and people finding it challenging to afford even basic necessities like food. Apart from household challenges, there are concerns regarding inefficient Health Care systems and hunger problems. The meeting also evaluated the future of Europe in the current geopolitical uncertain environment.

6. Corporate & Commercial Law Study Circle on “An Overview of SME IPO” held on 18th October, 2023, in Online Mode.

In this study circle meeting, speaker CA Hiten Shah briefed participants on the benefits of SME IPO along with the risks and negative optics for the same.

CA Hiten Shah also discussed, in detail, the key features of SME IPO, listing requirements in BSE, listing requirements in NSE, Pricing Methods, and Obligations before and after Listing. He also highlighted the role of a Chartered Accountant and the opportunities unfolding for them.

Many participants attended the event online and took an active part in the discussion.

7. Direct Tax Laws Study Circle Meeting on “Taxation Issues in Mergers and Demergers”, held on 17th October, 2023, in Online Mode.

CA Akshar Panchamia led the group discussion and the following points were discussed:

1. Elements of merger

a. Amalgamation as defined under section 2(1B) of the Income-tax Act, 1961 (Act).

b. Exempt Transfer in reference to section 47(vi) and section 47(vii) of the Act.

c. Computation of cost of assets in the hands of amalgamated company as per section 49(1)(iii)(e) and cost of acquisition of shareholders of the amalgamated company as per section 49(2).

d. Carry forward of losses as per section 72A along with the conditions required to be fulfilled by the amalgamating and amalgamated company.

e. Treatment of goodwill generated at the time of merger due to revaluation of assets at fair value and specific exclusion of goodwill from section 32 of the Act.

2. Discussion on types of mergers — namely, Inbound and Outbound mergers.

3. Issues relating to demergers and slump sale transactions.

4. Elements of demerger

a. Demerger as defined under section 2(19AA) of the Act.

b. Computing taxability under the headcapital gains in the hands of the demerged company.

c. Discussion on non-applicability of section 56(2)(x) in the hands of the Resulting Company. Also, discussion on exemption from capital gains in the hands of the shareholders under section 47(vid).

d. Points to consider while determining the cost and period of holding for the purpose of computing tax liability.

e. Treatment of transfer of losses of the undertaking as per section 72A(4).

f. Rationale of slump sale and its taxability.

The speaker highlighted aspects to consider while filing return of income after the completion of a merger / demerger transaction and provided his detailed analysis during the interactive session.

8. ITF Study Circle Meeting on “The implications of the ruling of the Chennai Tribunal in the case of Cognizant” held on 12th October, 2023, in Online Mode.

The International Tax and Finance Study Circle organised a meeting on 12th October, 2023. CA Sangeeta Jain and CA Nemin Shah led the group discussion, and the following points were discussed:

The detailed and complex facts of the case were explained.
The outcome of the proceedings before the lower authorities was summarised.
The issue before the Chennai Tribunal was discussed.
The arguments made by the taxpayer and the tax authorities were laid out.
The observations and rulings of the Chennai Tribunal were discussed in great detail.
The potential way forward for the case and some of the arguments not made / considered by the Chennai Tribunal were laid out.
The implications of corporate law on the facts of the case were deliberated, with group members expressing divergent views.
Even though General Anti Avoidance Rules (GAAR) did not apply to the case (since it pertained to an earlier year), a hypothetical exercise in attempting to apply GAAR to the facts of the case was made, which resulted in an interesting discussion and exchange of ideas.

9. A four-day “Foreign Exchange Management Act (FEMA)” Study Course and a Panel Discussion held on 25th& 26th August and 1st& 2nd September, 2023, in Hybrid Mode.

FEMA was introduced to monitor dealings in foreign exchange / securities and transactions affecting the import and export of our currency. FEMA has evolved over the years, and knowledge of this topic has become a crucial factor in advising clients on implementing successful strategies for cross-border transactions in light of India’s positioning in the global arena.

The International Taxation Committee of BCAS organised a four-day FEMA Study Course, including the Panel Discussion, which was attended to by the participants from across the country, online as well as offline.

The Study Course began with introducing the basics — namely, the Structure of FEMA, Capital and Current
Account Transactions, Foreign Direct Investment, Overseas Direct Investment, Liaison / Project / Branch Office to more advanced topics — namely, ECBs, Succession under FEMA including Trust aspects, Compounding and ED Matters and Corporate Restructuring including Cross-Border Acquisition and ended with a Panel Discussion on various FEMA issues.

The host of experts who delved into each of the above topics not only made it interesting by sharing anecdotes from their personal experiences, but also by making it interactive by giving reference to the case precedents and encouraging participants to ask questions. The participants and speakers were enriched by the quality of questions posed by the participants, and their eagerness to know more about the topics in further detail.

BCAJ Admin

Allied Laws

36 Paramjota vs. Deputy Director of Consolidation & Ors

AIR 2023 ALLAHABAD 222

Date of Order: 8th August, 2023

Adoption — Adoption Deed is sufficient — Rituals are not necessary — Adopted child entitled to property on parent renouncing the world.[Hindu Adoption and Maintenance Act, 1965, S. 11, 15 and 16]

FACTS

Amidst a land dispute, a consolidation officer entered the name of the adopted son (Mahadeo) of one Mr Bholla, who renounced the world for Sanyas, in the revenue records.

This was disputed by the Petitioner; the Consolidation officer rejected the objections filed by the Petitioner.

On filing the Writ Petition.

HELD

CA ceremony is not necessary to prove that Mr Mahadeo is the adopted son of Mr Bhalla, especially since the adoption deed is registered. Subsequentnotarized deed revoking the adoption has no legal consequences. Further, since the father has renounced the world by becoming a Sanyasi, the property would devolve on his adopted son.

The Writ Petition was dismissed.

37 Usha Kumari vs. Santha Kumari

AIR 2023 KERALA 161

Date of Order: 26th June, 2023

Evidence — Submissions in court — Public document — Cannot be treated as secondary evidence. [Indian Evidence Act, 1872, S. 74]

FACTS

There was a dispute among the members of the family. A suit for partition was filed by one of the members. The defendants filed their written statements wherein the disputed gift deeds were annexed. The suit was dismissed for want of prosecution.

On appeal, inter alia, a question arose i.e., whether a written statement in a suit, is a public document falling under section 74 of the Indian Evidence Act?

HELD

Pleadings of the parties to the litigation, once filed in a court, become a part of the public records maintained by the Court and hence fall within the ambit of “public documents”. The same cannot be considered as secondary evidence.

The Appeal is allowed.

38 Akza Rajan vs. Rajan M S

AIR 2023 KERALA 166

Date of Order: 12th April, 2023

Maintenance of Daughters — Father responsible for daughter’s marriage even if they are Christians. [Hindu Adoption and Maintenance Act, 1956, S. 20; Transfer of Property Act, 1882, S. 39]

FACTS

The Petitioner is the daughter of the Respondent. The Respondent-father neglected the Petitioner’s mother and sold her jewellery to buy certain assets. The Respondent was trying to alienate the immovable property and hence Petitioner filed for a temporary injunction. The said injunction was denied by the Family Court.

On a Writ Petition.

HELD

Drawing a reference to the codified Hindu law that the maintenance of an unmarried daughter is a duty of the father, it was held that such a duty is applicable to all fathers irrespective of their religion. The Court secured a reasonable sum for the wedding expense of the Petitioner by way of charge on the immovable property and also held that the injunction could be lifted if the respondent furnished the sum by way of a fixed deposit or other mode.

The Writ Petition is allowed.

39 Rajesh Kumar Sahu vs. Manish Kumar Sahu

AIR 2023 MADHYA PRADESH 862

Date of Order: 26th June, 2023

Succession — Unregistered document “Abhiswikrati Patra” — Cannot be construed as a Will — Any unregistered document transferring title of more than Rs.100 is required to be registered. [Registration Act, 1908, S. 17(2)(v)]

FACTS

The Petitioner/original defendant objected to the admissibility of an unregistered and unstamped document before the Trial Court. The Trial Court rejected the objection and held the document to be a Will.

On a Writ Petition.

HELD

The unregistered and unstamped document is a “Abhiswikrati Patra”. Although the document transfers certain rights to his son, it is mentioned that a Will would be executed separately. Therefore, the said document could not be considered as a Will.

Further, as the document was intended to transfer a right and title of property valued more than Rs.100, such a document is mandatorily required to be registered otherwise it would not be taken on record.

The Writ petition is allowed.

40 G Venkatesh vs. Bridge Federation of India

AIR 2023 MADRAS 296

Date of Order: 7th August, 2023

Overseas Citizen of India Cardholder — Bridge player — Eligible to play in National Championships but cannot represent India internationally — Policy decision by the Central Government- Writ petition is held to be not maintainable. [Citizenship Act, 1955, S. 7A, 7B, Constitution of India, Article, 226]

FACTS

The Writ Petitioner is an Overseas Citizen of India (OCI) who desired to represent the Respondent internationally. He received a letter of rejection stating he would only be eligible to play in national championships and cannot represent the nation.

On a Writ Petition.

HELD

The Respondent is affiliated with the Central Government and is governed by the National Sports Development Code of India, 2011. A policy decision taken by the Central Government to only allow Indians to represent India in international sports cannot be interfered with Courts. Further, the rejection of the Petitioner was on the basis of two Circulars. As the said Circulars were not challenged in the Petition, the Petition becomes non-maintainable.

The Writ Petition is dismissed.

BCAJ Admin

Purchase-As-Produced Contracts – Whether Derivative or Not?

ISSUE

Kleen Co. enters into a power purchase agreement (PPA) with a windmill operator to purchase electricity. Both Kleen and the operator are connected through a common national grid. The PPA obliges Kleen to acquire a 45 per cent fixed share of the wind energy produced by the operator. The price per unit for the energy is fixed in advance and remains stable throughout the contract duration of 25 years. The operator does not guarantee a specific amount of output (energy) but estimates with 80 per cent probability an expected amount. The energy produced is transferred to Kleen through the national grid.

The total energy demand of Kleen by far exceeds both the contracted share of the estimated output and the contracted share of the peak output of the wind park. However, Kleen does not operate its production facilities 24/7 but pauses production during the night times, on weekends and holiday season. There is thus a mismatch between the demand profile of Kleen and the supply profile of the wind park.

Kleen is obliged to acquire the energy of the wind park in the amount (45 per cent of the current production volume) and at the time it is produced. Since Kleen has no feasible option to store the energy, it sells energy that cannot be consumed immediately (e.g., on weekends or overnight) to the spot market and repurchases (at least) the same amount from that market at times when the production facilities are operated. The windmill operator continues to transfer the amounts of energy fed into the grid to the account of Kleen and Kleen has to sell unused amounts from its account to third parties. The process of selling and repurchasing is designed to be an autopilot that acts without the intention of trading to realize profits and has the sole intention to enable Kleen’s operations. The process of selling and repurchasing is delegated to a service provider.
For the purpose of this discussion, it is assumed that the conditions do not change throughout subsequent periods and that some market transactions become necessary for unused amounts of energy.

Will own-use exemption apply in this case, and consequently, whether the above PPA is to be treated as a derivative or not?

Kleen has considered aspects relating to whether the PPA is accounted for applying another Ind AS Accounting Standard, for example, Ind AS 110 Consolidated Financial Statements, Ind AS 111 Joint Arrangements, and/or Ind AS 116 Leases, and believes that those do not apply in the extant fact pattern.

RELEVANT REQUIREMENTS OF IND AS 109 FINANCIAL INSTRUMENTS

Paragraph 2.4 of Ind AS 109 states:

This Standard shall be applied to those contracts to buy or sell a non financial item that can be settled net in cash or another financial instrument, or by exchanging financial instruments, as if the contracts were financial instruments, with the exception of contracts that were entered into and continue to be held for the purpose of the receiptor delivery of a non financial item in accordance withthe entity’s expected purchase, sale or usage requirements. However, this Standard shall be applied to those contracts that an entity designates as measured at fair value through profit or loss in accordance with paragraph 2.5.

Paragraph 2.6 of Ind AS 109 states:

There are various ways in which a contract to buy or sell a non-financial item can be settled net in cash or another financial instrument or by exchanging financial instruments. These include:

(a) when the terms of the contract permit either party to settle it net in cash or another financial instrument or by exchanging financial instruments;

(b) when the ability to settle net in cash or another financial instrument, or by exchanging financial instruments, is not explicit in the terms of the contract, but the entity has a practice of settling similar contracts net in cash or another financial instrument or by exchanging financial instruments (whether with the counterparty, by entering into offsetting contracts or by selling the contract before its exercise or lapse);

(c) when, for similar contracts, the entity has a practice of taking delivery of the underlying and selling it within a short period after delivery for the purpose of generating a profit from short-term fluctuations in price or dealer’s margin; and

(d) when the non-financial item that is the subject of the contract is readily convertible to cash.

A contract to which (b) or (c) applies is not entered into for the purpose of the receipt or delivery of the non financial item in accordance with the entity’s expected purchase, sale or usage requirements and, accordingly, is within the scope of this Standard. Other contracts to which paragraph 2.4 applies are evaluated to determine whether they were entered into and continue to be held for the purpose of the receipt or delivery of the non financial item in accordance with the entity’s expected purchase, sale or usage requirements and, accordingly, whether they are within the scope of this Standard.

ACCOUNTING FOR THE PPA

On the date of inception of the contract, Kleen regards the sole purpose of the PPA as a contract to buy a non-financial item as it is entered for the purpose of the receipt of energy in accordance with its expected usage requirements, as laid out in Ind AS 109.2.4. Kleen does not designate the contract as measured at fair value through profit or loss in accordance with Ind AS 109.2.5. Kleen views the difference in prices (lower prices during night times, on weekends and during the holiday season when production is paused vs. higher prices when repurchased on spot markets during peak times) as costs of storage, i.e., it uses the energy spot market as a storage facility. Kleen does not operate as a trading party in the market, the production schedule and the consumption profile dictate spot price transactions.Kleen further analyses whether the contract can be settled net in cash in accordance with Ind AS 109.2.6.

Kleen is always in a net purchaser position, i.e., it buys more energy from the spot market than it has sold to it based on a monthly view (meaning that for every calendar month, the Kleen has purchased more energy on spot markets than it has sold). The average purchase price exceeds the average sale price, so that Kleen incurs expenses for “storing” the energy on spot markets which is part of the fee paid to a service provider involved to sell unused amounts of energy to and repurchase additional demands from the grid/spot markets.

The various views are presented below:

View A

Kleen assesses at the inception of the contract that

(a) the terms of the contract do not provide for an option to settle net in cash or by exchanging financial instruments.

(b) Kleen has no practice of settling similar contracts net in cash or another financial instrument or by exchanging financial instruments.

(c) Kleen intends to sell unwanted energy out of the contract to the spot market and also intends to purchase at least the same amount of energy at times when it is needed. Kleen uses the spot market as a storage mechanism and does not intend to generate profits from those transactions although it cannot rule out that some transactions will lead to profits or losses. Transactions on the spot market are solely used to store the energy.

(d) Kleen assesses the non-financial item to be readily convertible to cash as there is an active market where unused energy can be sold and purchased at any time.

Kleen concludes that the own-use-exemption applies to its contract because it is entered into and continues to be held for the purpose of taking delivery of the non-financial asset (energy), in accordance with the entity’s expected (energy) consumption.

View B

Kleen expects transactions on the spot market already at the inception of the contract for the amount of energy it cannot use when it is produced. Under View B this would disqualify the contract from the application of the own-use-exemption because the contract was not – in its entirety – being held to the purpose of the receipt of the energy at the specific time of production (Ind AS 109.2.4) but with some anticipated sales transactions.View C

As Kleen intends to sell unused energy to the spot market, it creates a practice of settling similar contracts on the spot market and therefore the contract is not entered into for the purpose of the receipt of the energy (Ind AS 109.2.6(b)).View D

Under this View D, the transactions on the spot market may lead to a breach of the requirement set out in Ind AS 109.2.6(c) (generating profit from short-term fluctuations in price or dealer’s margin) because Kleen cannot rule out that profit arises from some sales transactions, even though this is not intended.CONCLUSION

Under View A, the PPA would be treated as a normal purchase of an electricity contract. However, Views B-D would all result in recognising the contract as a derivative financial instrument.

As laid out above, there are several ways to interpret the requirements of Ind AS 109.2.4 and .2.6 which give rise to diversity in practice. Failure to meet the requirements of the own-use-exemption results in a mandatory recognition as a financial derivative at fair value. Given PPA durations of 25 years and above, the fair value of such PPA is both difficult to measure and subject to enormous volatility and likely leads to massive effects on the financial statements and financial performance when changes in the fair value are recognized in profit or loss. It would also decouple the effects of Kleen’s efforts to secure its supply of energy from the operating results as the fair value changes will occur and be presented before the consumption of the energy, the production phase and the sale of the output manufactured using this energy.

There is a need for clarification on how Ind AS 109 isto be applied in the circumstances described above. The author believes that the economic purpose and the intention of Kleen when entering the contract are not adequately reflected by the treatment of such contracts as derivative financial instruments, solely because there is no feasible way to store the quantities of energy involved and Kleen has to use the spot market as a storage mechanism.

The author also questions whether accounting for such contracts as derivative financial instruments would adequately depict the operating performance of Kleen, since energy costs would affect the operating profit at their spot prices, and the effect of the PPA containing fixed prices would occur as a measurement adjustment in periods different from the period of consumption.

When the standards are not absolutely clear, it is essential to understand the intention of the standard-setters, and what the standard is trying to achieve. In the present case, Kleen’s objective is not to trade in electricity or profit from short-term fluctuations in the prices. On the contrary, the unwanted electricity is sold at a price lower than the fixed price per unit under the PPA. The average purchase price exceeds the average sale price, so that Kleen incurs expenses for “storing” the energy on spot markets which is part of the fee paid to a service provider involved to sell unused amounts of energy to and repurchase additional demands from the grid/spot markets.

Furthermore, in totality, Kleen is always a net purchaser rather than a net seller, i.e., it buys more energy from the spot market than it has sold to it based on a monthly view (meaning that for every calendar month, Kleen has purchased more energy on spot markets than it has sold).

Based on the above discussion, the author believes that View A is the most appropriate view, and reflects the intention of Kleen as well as the standard-setter and the overall economics of the PPA.

BCAJ Admin

From Published Accounts

COMPILERS’ NOTE:

Post Covid, companies are undertaking several mergers and acquisitions. Accounting for the same is primarily governed by Ind AS 103 and the schemes as approved by NCLT. Given below are disclosures by two companies on mergers and acquisitions for the year ended 31st March, 2023.

Asian Paints Ltd

MERGERS, ACQUISITIONS AND INCORPORATIONS

(a) Scheme of amalgamation of Reno Chemicals Pharmaceuticals and Cosmetics Private Limited with the Parent Company:

On 2nd September, 2021, the National Company Law Tribunal, Mumbai approved Scheme of amalgamation (“the Scheme”) of Reno Chemicals Pharmaceuticals and Cosmetics Private Limited (“Reno”), a wholly owned subsidiary of the Parent Company, with the Parent Company. Pursuant to the necessary filings with the Registrars of Companies, Mumbai, the Scheme has become effective from 17th September, 2021 with the appointed date of 1st April, 2019. There is no impact of amalgamation on the Consolidated Financial Statements. The accounting treatment is in accordance with the approved scheme and Indian accounting standards.

(b) Scheme of amalgamation of Asian Paints (Lanka) Ltd. with Causeway Paints Lanka (Pvt) Ltd:

On 1st April, 2021, the Registrar General of Companies in Sri Lanka approved the Scheme of amalgamation of Asian Paints (Lanka) Ltd. with Causeway Paints Lanka (Pvt) Ltd., subsidiaries of Asian Paints International Private Limited (‘APIPL’). APIPL is a wholly owned subsidiary of Asian Paints Limited. This is a common control transaction and has no impact on the Consolidated Financial Statements.

The Parent Company entered into a Shareholders Agreement and Share Subscription Agreement with the promoters of Weatherseal Fenestration Private Limited (“Weatherseal”) on 1st April, 2022. Weatherseal is engaged in the business of interior decoration/furnishing, including manufacturing uPVC windows and door systems. The Parent Company subscribed to 51 per cent of the equity share capital of Weatherseal for a cash consideration of Rs.18.84 crores on 14th June, 2022. Accordingly, Weatherseal became a subsidiary of the Parent Company. Further, in accordance with the Shareholders Agreement and the Share Subscription Agreement, the Parent Company has agreed to acquire a further stake of 23.9 per cent in Weatherseal from its promoter shareholders, in a staggered manner, over the next 3 year period. The Parent Company has also entered into a put contract for the acquisition of a 25.1 per cent stake in Weatherseal. Accordingly, on the day of acquisition, a gross obligation towards acquisition is recognised for the same, initially measured at fair value amounting to Rs.18.08 crores. On 31st March, 2023, the fair value of the derivative asset / liability (net) was Rs.21.46 crores. Fair valuation impact of Rs.3.38 crores is recognised in the Consolidated Statement of Profit and Loss for the year ended 31st March, 2023 towards gross obligation.

Rs. In crores

Assets acquired and liabilities assumed on acquisition date:	14^th June, 2022
Property, plant and equipment	0.92
Intangible assets	12.98
Current Assets
Inventories	1.68
Trade Receivables	1.87
Cash and bank balances	18.85
Other receivables and repayments	1.65
Total Assets	37.95
Current Liabilities
Trade Payables and other liabilities	4.96
Other payables	14.14
Total Liabilities	19.10
Net Assets Acquired	18.85

Goodwill arising on acquisition of stake in Weatherseal	14^th June, 2022
Cash consideration transferred (i)	18.84
Net Fair Value of Derivative Asset and Liability (ii)	1.86
Total consideration transferred [(iii) = (i)+(ii)]	20.70
Fair Value of identified assets acquired (iv)	18.85
Group share of fair value of identified assets acquired (v)	9.61
Group share of Goodwill arising on acquisition of Weatherseal [(iii)-(v)]	11.09

Net cash inflow on acquisition	14^th June, 2022
Cash consideration transferred	18.84
Cash and cash equivalent acquired	18.85
Net cash and cash equivalent inflow	0.01

Impact of acquisition on the results of the Group: Revenue from operations of Rs.24.74 crores and Loss after tax of Rs.3.34 crores of Weatherseal has been included in the current year’s Consolidated Statement of Profit and Loss.

(d) Investment in Obgenix Software Private Limited:

The Parent Company entered into a Share Purchase Agreement and other definitive documents with the shareholders of Obgenix Software Private Limited (popularly known by the brand name of ‘White Teak’) on 1st April, 2022. White Teak is engaged in designing, trading or otherwise dealing in all types and descriptions of decorative lighting products and fans, etc. In accordance with the agreement, the remaining 51 per cent of the equity share capital would be acquired in a staggered manner. The Parent Company acquired 49 per cent of the equity sharecapital of ‘White Teak’ on 2nd April, 2022 for a cash consideration of Rs.180 crores along with an earn-out, payable after a year, subject to achievement of mutually agreed financial milestones. Accordingly, White Teak became an Associate of the Group. On the day of acquisition, the Parent Company estimated and recognised gross obligation towards earn-outfor acquiring 49 per cent stake amounting to Rs.37.71 croresand derivative asset / liability (net) for acquiring the remaining 51 per cent stake in White Teak at fair value with a corresponding adjustment in the cost of investment amounting to Rs.1.32 crores. On 31st March, 2023, the fair value of earn-out is Rs 58.97 crores and that of derivative asset / liability (net) is Rs 3.85 crores. Fair valuation impact of Rs.21.26 crores and Rs.5.17 crores is recognised in the Consolidated Statement of Profit and Loss for the year ended 31st March, 2023 towards earn out and derivative contracts respectively.

(e) Incorporation of Asian Paints (Polymers) Limited:

On 11th January, 2023, the Parent Company incorporated a wholly owned subsidiary named Asian Paints (Polymers) Private Limited (‘APPPL’) for manufacturing of Vinyl Acetate Monomer and Vinyl Acetate Ethylene Emulsion in India. The Parent Company invested Rs.200 crores in the equity share capital of APPPL in the current year, thus subscribing to 20 crore equity shares of APPPL having a face value of Rs.10 each.

(f) Agreement for the acquisition of a stake in Harind Chemicals and Pharmaceuticals Private Limited:

The Parent Company entered into a Share Purchase Agreement and other definitive documents with the shareholders of Harind Chemicals and Pharmaceuticals Private Limited (‘Harind’) on 20th October, 2022 for the purchase of a majority stake over a period of five years, subject to fulfilment of certain conditions precedent in a staggered manner. Harind is a speciality chemicals company engaged in the business of nanotechnology-based research, manufacturing, and sale of a range of additives and specialized coatings. On fulfilment of the pre-condition, the acquisition would happen in the following manner: (i) First tranche of 51 per cent would be acquired for a consideration of 12.75 crores (approx.); and (ii) Second tranche of 19 per cent and third tranche of 20 per cent would be acquired during the FY 2023-24 and FY 2027-28, respectively, on such consideration as agreed between the Parent Company and the existing shareholders based on achievement of certain financial targets.

(g) Incorporation of Asian White Cement Holding Limited:

The Parent Company has incorporated a subsidiary Company – Asian White Cement Holding Limited (‘AWCHL’) along with other partners in Dubai International Financial Centre, UAE on 2nd May, 2023 as the holding Company for the purpose of setting up an operating Company in Fujairah, UAE. The Parent Company is currently in the process of infusing capital in AWCHL and will hold a 70 per cent stake.

Tata Steel Ltd

BUSINESS COMBINATIONS

i. On 26th July, 2022, the Company completed the acquisition of itemised assets of Stork Ferro Alloys and Mineral IndustriesPrivate Limited (‘SFML’) to produce ferro alloys. The asset acquisition will provide aninorganic growth opportunity for Tata Steel Limited to augment its ferro alloys processing capacities. The asset acquisitionwas carried out for a purchase considerationof Rs1155.00 crore. The acquisition has been accountedfor in accordance with Ind AS 103 – ‘Business Combinations’. Fair value of identifiable assets acquired, and liabilities assumed as on the date of acquisition is as below:

Rs. In crores

	Fair value as on acquisition date
Non-current assets Property, plant and equipment	138.55
Right-of-use assets	17.94
Total assets [A]	156.49
Non-Current liabilities Lease liabilities	4.56
Other Liabilities	0.15
Total liabilities [B]	4.71
Fair value of identifiable net assets acquired [C=A-B]	151.78

	Fair value as on acquisition date
Cash consideration paid	130.00
Deferred consideration	25.00
Total consideration paid [D]	155.00
Goodwill [D-C]	3.22

ii. Goodwill is attributable to the benefit of expected synergies, revenue growth and future market developments. These benefits are not recognised separately from goodwill because they do not meet the recognition criteria for identifiable intangible assets.

iii. From the date of acquisition, SFML has contributed Rs.28.42 crore to revenue from operations and a loss of Rs.16.07 crore to profit before tax. Had the acquisition been effected at 1st April, 2022, the revenue of the Company would have been higher by Rs.13.24 crore and profit would have been lower by Rs.6.50 crore.

The Board of Directors of the Company had considered and approved the amalgamation of Tata Steel Long Products Limited (‘TSLP’), Tata Metaliks Limited (‘TML’), The Tinplate Company of India Limited (‘TCIL’), TRF Limited (‘TRF’), The Indian Steel & Wire Products Limited (‘ISWP’), Tata Steel Mining Limited (‘TSML’) and S & T Mining Company Limited (‘S & T Mining’) into and with the Company by way of separate schemes of amalgamation and had recommended a share exchange ratio / cash consideration. The equity shareholders of the entities will be entitled to fully paid up equity shares of the Company or cash consideration in the ratio as set out in the scheme. As part of the scheme of amalgamations, equity shares and preference shares, if any, held by the Company in the above entities shall stand cancelled. No shares of the Company shall be issued, nor any cash payment shall be made whatsoever by the Company in lieu of cancellation of shares of TSML and S & T Mining (both being wholly owned subsidiary companies). The proposed amalgamations will enhance management efficiency, drive sharper strategic focus and improveagility across businesses based on the strong parental support from the Company’s leadership. The amalgamations will also drive synergies through operational efficiencies, raw material security and better facility utilisation. As part of the defined regulatory process, the schemes of TSLP into and with the Company, TCIL into and with the Company, TML into and with the Company, TRF into and with the Company and ISWP into and with the Company have received approval(s) from stock exchanges and Security Exchange Board of India. Further, the schemes have been filed and are pending with the Hon’ble National Company Law Tribunal.

The Board of Directors of the Company had considered and approved the scheme of amalgamation of Angul Energy Limited (‘AEL’) into and with the Company by way of a scheme of amalgamation and had recommended a cash consideration for every fully paid-up equity share held by the shareholders (except the Company) in AEL as set out in the scheme. Upon the scheme coming into effect, the entire paid-up share capital of AEL shall stand cancelled in its entirety. The amalgamation will ensure the consolidation of all power assets under a single entity, which will increase system agility for power generation and allocation. It will help the Company to improve its plant reliability, ensuring a steady source of power supply while optimising cost. Further, such restructuring will lead to the simplification of group structure by eliminating multiple companies in similar operations, optimum use of infrastructure, and rationalisation of cost in the areas of operations and administrative overheads, thereby maximising shareholder value of the Company post-amalgamation. The scheme is subject to a defined regulatory approval process, which would require approval by stock exchanges and the Hon’ble National Company Law Tribunal.

BCAJ Admin

Tribute to Shri P. N. Shah, Past President of the Society

PRADYUMNA NATVARLAL SHAH

(1st January, 1929 – 15th November, 2023)

MAHAMANAV PRADYUMNABHAI

Shri Pradyumnabhai (also known as Pradyumanbhai), the Bhishma Pita of CA Profession, left us as the Almighty called him to join His kingdom.

I have very fond memories of working with and interacting with Shri Pradyumanbhai over many years, for which I feel blessed.

He would call me for a meeting regarding his client’s foreign investments and / or matters connected with FERA / FEMA of his clients, and I would invariably tell him that I would go to his office to discuss, which I did. During the discussions, he gave a lot of credence to my knowledge of the subject, and that’s why I could solve his clients’ problems to their satisfaction.

He and our Firms were joint Auditors of a Public Limited Company. After my father’s death in 1977, I used to go to his office to discuss matters relating to that company with him and his Partner, Shri Indubhai Shah. During such discussions, he treated me as an equal while giving me the benefit of his knowledge and seniority and helping to resolve any issues.

Amongst others, he was an Independent Director of a reputed listed company, where he was the Chairman of the Audit Committee. After a few years, I was invited to join the Board of that Company as an Independent Director. At my first Board meeting of that Company, he welcomed me warmly and introduced me to the other members of the Board in eloquent words. Though he was the Chairman of its Audit Committee, he instructed the CFO to show me and obtain my approval of the quarterly and final financial results, which were approved by him.

Eventually, he retired as a Director of that Company because of his advanced age while I still continue as its Director. While parting, he requested the Chairman of that Company to make me the Chairman of its Audit Committee in his place, which position I still continue to hold.

His gracious, humble and fatherly approach towards me has taught me humility, sharing of knowledge and helping others in need. I have relied very heavily on his excellent analysis of the yearly Union Budget for my understanding. I have always gained knowledge from his brilliant articles in the Gujarati bi-weekly Vyapar on various aspects of Tax laws.

With his departure for his heavenly abode, I feel a void in my professional life, having lost a very fine human being.

CA Dilip J. Thakkar

Pradyumna Natvarlal Shah, popularly known as Pradyumanbhai and officially known as Shri P. N. Shah, is no longer with us. However, he would be remembered fondly and very regularly by many of us who came in contact with him during his illustrious innings as a Chartered Accountant. He will be remembered not only for his achievements in the profession but also because of his ever-helpful nature. Individuals die, but institutions never, and Pradyumanbhai was an institution himself. The fact that he was the Past President of ICAI, Past President of our BCAS, and closely associated with the Chamber of Tax consultants is an official introduction, but he was a very lovable human being and a great soul, and this is his true introduction.

I first came into his contact, although somewhat from a distance, in the year 1975 when BCAS’s popular program — Residential Refresher Course (RRC) was held in Dreamland Hotel at Mahabaleshwar. He was then chairman of the RRC Committee. I noticed that he had a very minute way of overseeing every group discussion and technical session. In the concluding session as a Chairman, he elaborated the essence of each technical session in such a manner that you really get the gist of the entire RRC. I was very much fascinated then by his abilities and developed a daydream that one day I would be able to make some attempt like Pradyumanbhai.

Meetings after that were quite frequent but from a distance. I never realised that the so-called distance just vanished when I first talked to him. I used to call Pradyumanbhai, Arvindbhai and Narayanbhai the BCAS trio. They used to be on the dais simultaneously on several occasions as brain trustees or in other capacities. The trio was shattered earlier by the demise of Narayanbhai, then Arvindbhai, and now it has disappeared from this physical world to occupy the position of stars in the sky.

He used to be a regular paper writer in both Residential as well as non-Residential RRCs, and his paper always used to give strength to the technical content of RRCs. His regular article in BCAJ in June, after the Finance Act was passed, always used to be a very simple and helpful feature to understand the ever-changing provisions of the Act. Besides this, he was quick to educate his professional colleagues on any new changes concerning Audit or taxation.

He used to be a great help to the Editor of BCAJ. I have enjoyed this privilege during my five-year tenure as BCAJ Editor. The journal requires page contents in multiples of four, i.e., the journal can be either 120 or 124 or 128 pages, etc. When the journal is falling short of content in this multiple of four, additional content is necessary and that too of precise length. Pradyumanbhai was such a great soul that he would provide useful content in exact words to adjust pages, and that too when you telephone at night and request content for the journal at a very short notice. He would always be available and was helpful and easily approachable.

Let’s all cherish his fond memories and try to emulate at least some of his qualities and that will be an appropriate Shraddhanjali to him.

CA Ashok Dhere

Shri Pradyumna Natvarlal Shah, known in the profession as “Shri P. N. Shah”, was a very respectable professional. At the age of 21, he was a Chartered Accountant and started his practice in Mumbai. Till his last, i.e., up to 15th November, 2023, he was in practice, as a partner of M/s. Manubhai & Shah LLP (formerly known as Shah & Co.) and M/s. Shah & Associates, Chartered Accountants. Since the “Corona” period i.e., March 2020, he was not physically attending the office but was working from his residence. He was so dedicated to the profession that every day he used to call the papers from his office and reply to those papers. Many opinions and articles were written by him even when he was not attending office. In fact, he had allotted one room of his residence as his office and was sitting in the said room for more than four hours a day to work.

Born on 1st January, 1929, Shri P. N. Shah had many laurels. He was President of the Institute of Chartered Accountants of India (ICAI) in the year 1983–84. He was also a President of the Bombay Chartered Accountants’ Society (BCAS) in the year 1968–69, and it was in his tenure that the first Residential Refresher Course (RRC) — the most sought-after event of the BCAS — took place. In the year 2002, he had settled the Trust in the name of BCAS Foundation. He had written many books for ICAI / BCAS, notably, (i) History of Accounting Profession Vol II published by ICAI (ii) Method of Accounting u/s. 145 of the Income tax Act and (iii) KarVivadSamadhan Scheme 1998 (Published by BCAS). Besides this, he was actively associated with many other professional and social organisations. He was on the Board of many limited companies including Banks. He was also associated with Gujarati News Paper Janmbhumi and Vyapar for more than five decades and was a regular columnist of Vyapar. After every budget, he used to write an articleon Budget in a very lucid and simple language,explaining the nuances of complicated provisions of the budget.

My association with him is since I became a Chartered Accountant. As he was staying in Santacruz, I went to take his advice on whether I should go into practice or service. His sincere advice was if you have an inclination to work hard and to serve the profession honestly then go into practice or otherwise choose service. So, I joined the practice. Thereafter, I often went to his house for some advice. When he was contesting for the Central Council Election of ICAI, I was working for him and was sitting in the election booths. Subsequently, when I contested the Central Council election of ICAI, he used to sit in my office and monitor the election very closely. He was always encouraging me to write articles and associate with other professional organisations. In fact, on his insistence, I joined the BCAS and subsequently, I became the Central Council Member of the ICAI. I have received many invaluable advice in my professional life and otherwise. Occasionally, I travelled with him to address seminars / conferences of the ICAI and other organisations. On many occasions, he chaired my sessions. I have written many articles jointly with him and under his guidance. I also had the privilege to co-write articles on a regular basis on professional ethics under the title “ICAI & Its Members” in the BCAJ. Whatever I am today in this profession is because of his blessing and advice. In short, he was my Godfather! In fact, when Shah & Co, celebrated its 75 years, I was one of the recipients of a souvenir through his hands.

His humbleness, thoroughness, respect for everyone and his encouragement to youngsters was amazing. His commitments and selfless contribution to the profession and to society at large were unmatchable. My tribute to him.

By his departure, not only have I lost my Godfather, but the profession has lost one of the finest professionals — a doyen, a legend — who will always live in our hearts. His guidance and advice will always be remembered and encourage us to walk on his path. May his soul rest in eternal peace! Om Shanti!

CA Harish Motiwalla

With a heavy heart, I write this obituary for the respected Shri Pradyumnabhai, who has left for his heavenly abode. It is the loss of an unchallenged doyen of the profession; the loss of one of the most dedicated leaders the profession has had.

We were lucky to have known him and to have learnt from him for years — first as part of BCAS and then in his role for the Institute and the profession at large. All he did was always truly selfless.

One is bound to fall short of adjectives in describing him. He was a towering personality. His conduct was an illustrious reflection of an ethical professional. He showed us lessons of discipline, forthrightness and humility. He was always an affectionate father figure to all the juniors. No one would mind approaching him or confiding in him.

He was particular about minute details while not losing the big picture before him. It was also amazing to see his speed of disposal — whether he was dealing with tax or audit or Companies Act or Institute regulations.

Very few of us would know that he was instrumental in convincing the Government about the need to introduce tax audits to be conducted by Chartered Accountants. He did it with a vision which has unfolded over the years.

His regularity and punctuality were remarkable.He continued to participate actively in the Vile Parle Study Circle meetings with fair regularity, even at his advanced age. His enthusiasm for academic pursuit can be witnessed by the rollout of his monthly publication on behalf of his firm till almost last month.

His passing away is a huge loss. His values will continue to inspire us. Our true tribute to him will be to follow his ideals.

I end with a prayer to the Almighty to give courage to the family to bear this loss. May his soul rest in eternal peace. Om Shanti.

CA Pinakin D. Desai

Shri Pradyumna N. Shah [popularly known as Pradyumanbhai] took his last breath on15th November, 2023 and left for heavenly abode leaving a memorable legacy behind him in the profession. We all have lost the true guardian of interest in our profession. His unparalleled contribution to the development of our profession was reflected in his actions and self-evident and does not require any recognition.

My initial interaction with him was somewhere in the late 70s during Vile Parle Study Circle (VPSC) meetings at N. M. College. I still recall the way he used to promote youngsters and selflessly help them understand the intricacies of the topic being discussed. He was one of the main pillars of the activities of VPSC. Many of our age like Pinakinbhai, Rajen, myself, etc., started our academic journey at VPSC (with BCAS as well) where he was a mentor unmatched. I still remember he started calling Pinakinbhai ‘Chotta Palkhivala’ since then and continued to refer to him as such while chairing VPSC’s annual budget meetings addressed by Pinakinbhai.

I came a little closer to him when I became convenor of the Taxation Committee of the Bombay Chartered Accountants’ Society (BCAS) when he was its Chairman. I was amazed to see him so meticulous, extremely devoted and punctual in his work, maintaining high standards of ethics and his dealing with others was with great humility. It was a learning experience for me. I had a similar experience in the BCAS Residential Refresher Courses (RRCs), where he would silently attend all group meetings and encourage the young group leaders in discussion.

He had at his heart an interest in the profession, more so, the interest of the young members. This was evident from his actions during his presidency at ICAI, which are difficult to describe. I still recall his keen interest and efforts made for getting introduced Tax Audit provisions in the Income-tax Act, 1961, which then became one of the major sources of revenue for young professionals, especially in tier II & III cities. This also created a perception that it has given a little edge to Chartered Accountants in the profession.

He was a true ‘Karma Yogi’ in the profession in every sense, be it selflessly imparting and spreading knowledge, taking up issues concerning the profession, mentoring young professionals and so on. I still recall when once I had to sit with him till late at night to prepare for an urgent representation for BCAS against the sudden omission of Rule 6DD(j) w.e.f. 25th June, 1995 (which provided an exception from rigours of section 40A(3) for genuine transactions under compelling circumstances) as he was genuinely agitated against the unjust omission of the Rule and that too, without prior discussion with the stakeholders. I also remember another incident of his reaction in the mid-90s when the ICAI decided to make Accounting Standards (AS) mandatory for Non-Corporate Entities. He firmly opposed that decision despite the fact that he was a past president of ICAI as he strongly felt that the time had not come for such a measure. He also called me to join him in writing a book on this subject, which was published by BCAS under the title ‘Accounting Standards as applicable to Non-Corporate Entities’. He also made his view clear at a largely attended seminar organised specifically for this purpose at ISKCON, Juhu, Mumbai. What is more worth noting is the fact that in that book he specifically gave a draft of qualifications for Auditors if such entities decide not to follow AS. Such was his conviction.

He was emotionally attached to BCAS, and his contribution to the BCAS is unparalleled in every sense of the term — be it the conception and growth of RRC, be it identifying young academicians and leaders, be it informally monitoring activities of BCAS, be it contribution to, and development of, BCAS Journal and so on. Members always used to look for his annual write-ups on the Finance Act in BCAJ. In fact, it is impossible to describe in this short message his unbelievable and unmatched contribution to the BCAS. I still recall when he suggested my name to present the paper of the late Shri Narangsaab at the RRC as Narangsaab was seriously ill. I was just shocked as I had, at that stage, never made such an attempt at BCAS RRC, but he insisted and encouraged me to play that role. This also reminds me of his surprise visit to my Room at the RRC to encourage me when I wrote my first paper for BCAS RRC, in 1991 on “Capital Gains”, and this was another such experience. I also recall when the late Shri Narayana Verma asked me (towards the end of my term as president) whom I would suggest as the candidate for presidentship for the next year and I suggested the name of Shri Ashok Dhere he told me that he agreed but will let me know within two to three days and subsequently confirmed with me by saying that Shri Pradyumanbhai has also agreed and he has also confirmed with Shri ArvindbhaiDalal. Likewise, Pradyumnabhai also informed me the same, and this reflects his belief in collective wisdom. This is the collective manner in which these seniors used to function at BCAS in such matters. Now, we have lost the most senior and last one of them.

In fact, knowing him a little closely during my long association with him I can still go on to describe his unassuming humility and nature and unbelievable contribution by recalling a number of personal experiences but due to space constraints, I am stopping at this with a personal note that I was fortunate to have the privilege of associating myself with him in several activities of the Society as well as at times on a personal level and have learned a lot from him in my professional career, more so on the ethical front. He was also unassuming in maintaining personal relationships and since he knew that my wife also attends my office, whenever we met, often he would affectionately ask me, “Ilaben kem che?”

We all at BCAS will miss Late Shri Pradyumanbhai as now he will no longer be with us to share his wisdom but his legacy of humility, values, dedication, selfless contribution and so on for the profession in general, and BCAS in particular, will never be out of our mind and will remain forever.

I sincerely pray to the Almighty that his pious soul may rest in eternal peace.

CA Kishor Karia

On 15th November, 2023, we lost Dada-Muni / BhishmaPitamaha of Accounting and Tax Profession.

He was like a fatherly figure for all of us in the CA fraternity and, in particular, all BCAS members.

I came in contact with Pradyumnabhai in BCAS and the Vile Parle Study Circle and in various academic forums. He not only guided me but also encouraged me to do better and better.

The credit for my involvement in the BCAS, Vile Parle Study Circle, as well as institute activities, entirely goes to seniors like Pradyumanabhai. In my interactions with him for over 45 years, he was like a guiding light, and I learnt a lot about how to be dedicated, perfectionist and passionate about our professional commitments, keeping in mind high ethical values. Above all, what always inspired us was his simplicity, humility and accessibility to guide the youngsters.

Very few persons of his stretcher and calibre are to be found in today’s world.

We pray to the Almighty to keep his soul in peace and harmony and inspire us to follow whatever he has taught us.

CA Rajan Vora

All of us are at a loss for words to express our deep grief on the passing away of Pradyumanbhai, and I am no exception in this. A sign of a great man is one who leaves others at a loss after he is gone and, at the same time, illuminates the future for those left behind him with light; Pradyumanbhai was one such great man. I was fortunate to be associated with him for a long period, and over a period, he became one of my role models in my practice and personal life.

My association with him is full of wonderful memories of his silent, unacknowledged, unnamed and undefined mentorship. He was the first to guide me professionally in vetting and settling my article on the Special Bearer Bonds Scheme promulgated in 1981, and his valuable suggestions led to important changes in the enactment of the Special Bearer Bonds Act, 1981. In my professional journey, he emphasised the need to share knowledge and experience and importantly taught me not to miss an opportunity to share the same and affirmatively advised me to accept an invitation to share gratefully and not for personal glory.

He set an example of what he preached by being a prolific writer and a visiting speaker all over the country, over a period of more than 60 years. His commitment was so profound that even during the years of his serious illness, he did not miss writing his annual feature on the Finance Act for BCAJ. He taught us to be a student all throughout as a step towards improving and polishing our professional skills, and for this, we shall always be grateful to him. His active participation even in recent years in the proceedings of seminars and conferences singularly marks his eagerness to always learn and incidentally to share also.

His immense administrative and management insights were no less helpful in managing the affairs of the Society. He was instrumental in introducing the post of Vice-President in the Society, which has held us in good steam over the decades. He once suggested that the younger past presidents be bestowed with higher responsibilities for the betterment of the Society.

Some of us were privileged to be the founding trustees of the BCAS Foundation, which was settled by him with great fondness. His love for charities and the welfare of the professionals continued through his regular attendance and guidance in the activities of the Foundation. He had a unique way of impressing his suggestions without making you realise the force behind the same. He taught us to set small targets to begin with and build up on the same in our journey towards the summit. His gentle suggestions will always guide the Foundation in discharging its noble functions.

Pradyumanbhai’s loss is so acute, and memories are so many that it is futile to express them in words. Yet, the single most thing that has impressed me is his unflinching commitment to ethics and values and his service to the profession; he was the doyen of the profession, most prominent and respected. I treasure a book on ‘Values’ gifted by him, which has guided me in times of darkness.

Henry Wadsworth Longfellow once said that when a great man dies, for the years, the light he leaves behind him lies on the paths of men.

Thank you, sir, for being a part of our lives.

CA Pradip Kapasi

We are deeply saddened to learn of the passing of Shri P. N. Shah, a distinguished past President of ICAI and a revered member of our professional community. His contributions to the field of accounting and his service to ICAI have left an indelible mark on our profession.

Shri Shah was not only a leader but also a mentor and a visionary who inspired many with his wisdom, dedication and integrity. His absence will be profoundly felt by all who had the privilege of knowing him and learning from his vast experience.

We extend our heartfelt condolences to his family, friends and colleagues during this difficult time. May his soul rest in peace.

CA T. P. Ostwal

END OF AN ERA

On 15th November, 2023, we lost our beloved Shri P. N. Shah. He was a professional class apart, a compassionate human; a Guru, friend, philosopher, mentor and guide to many; an Institution by himself. He has touched many lives and inspired everyone with his simplicity, humility and honesty. With his departure, a void is created in the CA profession. He has been a great source of inspiration for me. I had the privilege of working with him as a trustee of the BCAS Foundation. I learnt how to care for details and work with focus and precision.

I distinctly remember the Golden Jubilee celebrations of the Chartered Accountants Association Ahmedabad (CAAA) in 2000, wherein Shri Pradyumnabhai chaired my “FERA to FEMA” session. I was pleasantly surprised by his scholarly analysis of the subject and introduction of my paper, though FERA / FEMA was not his day-to-day practice area. I learnt how to study a subject and master it. Later on, I had many occasions to connect with him professionally and learnt a lot from him on every occasion.

Shri Pradyumnabhai has brought laurels to the CA profession as a president of the ICAI and president of the BCAS with his academic brilliance. The readers of the BCAJ used to eagerly await his masterly analysis of the Finance Act every year, which he continued till 2022. Even at the age of 93, he regularly wrote in the BCAJ and shared his knowledge with readers. This shows his commitment to the profession and zest for learning and sharing. No words are sufficient to describe this giant personality. A person like Pradyumnabhai never dies. He will ever remain alive in our hearts and memory and continue to guide generations to come. My prayers for the Sadgati of this pious Soul and heartfelt condolences to the grieving family.

नैनं छिन्दन्ति शस्त्राणि नैनं दहति पावकः। न चैनं क्लेदयन्त्यापो न शोषयति मारुतः।।2.23।।

No weapon can cut the soul into pieces, nor can it be burned by fire, nor moistened by water, nor withered by the wind.

Om Shanti! Shanti! Shanti!

Dr CA Mayur Nayak – Editor

BCAJ Admin

विनाशकाले विपरीतबुद्धि: ।

This line is often used as a proverb, especially when someone does not listen to advice and invites trouble for himself. Literally, it means that when a person is destined to suffer, he acts in a strange manner, does not use his intellect or wisdom, and does not listen to the advice of well-wishers or of knowledgeable persons. The full text is like this:

न भूतपूर्वो न च के न दृष्टो । हेम्न: कु रंगो न कदापि वार्ता ।

तथापि तृष्णा रघुनंदनस्य । विनाशकाले विपरीतबुद्धि: ॥

There is another slightly different version of this shloka —

असंभवं हेममृगस्य जन्म । तथापि रामो लुलुभे मृगाय ।

प्राय: समापन्न विपत्तिकाले । धियोsपि पुंसां मलिनीभवन्ति ॥

Readers may be aware of the story from Ramayana. When Shree Ram,Seeta and Laxman were in exile, Marich (the demon and Ravana’s maternal uncle) came in the guise of a golden deer near Ram’s hermitage. He (Marich) allured Seeta, who insisted that Ram bring the deer for her. This was Ravana’s plan to keep Ram and Laxman away from the hermitage so that Ravana could kidnap Seeta. In Valmiki Ramayana, it is mentioned that Laxman cautions Ram that a golden deer is an impossibility, and this must be demon Marich, who was capable of adopting any form. Ram did not challenge him but said either way there is no harm. If he were a demon, it was Ram’s mission to destroy wicked demons, and if he really were a golden deer, Seeta’s desire would be fulfilled. So he chased the deer who took him away in the jungle. Ram killed him, but while dying, the deer screamed for help in Ram’s voice. Very worried, Seeta insisted on Laxman to rush for Ram’s rescue. When she remained unescorted, Ravana kidnapped her.

In Mahabharata, despite elders’ advice, Yudhishthira, known for his knowledge and wisdom, sat for playing gambling with Duryodhana and lost everything in the process, including his wife, Draupadi!

The literal meaning of the first version — A golden deer is unprecedented. No one has seen it. It is unheard of. Still, Ram (Raghunandan) was tempted by him. When calamities come, man behaves in a strange manner, rather thoughtlessly.

It is believed that when God wants to destroy anyone; or punish a person; or test him, he does not come himself to do so. He corrupts the man’s intellect so that he commits mistakes.

We see and experience this quite often in our day-to-day lives. Without heeding elders’ advice, young people commit blunders. We trust a person who betrays us or lets us down. People get seduced by so-called ‘spiritual leaders’ and lose many things! The common man trusts and follows wrong leaders who turn out to be very selfish or criminal persons. A patient consults the wrong doctor despite a bad experience earlier. A taxpayer avoids consulting a good CA to save the fees and trusts some less knowledgeable person or acts according to ‘hear-say’ advice. A businessman, a sportsman, a social leader adopts incorrect strategies. Governments make irrational laws or frames illogical policies. A professional adopts unscrupulous means to get quick gains. People in power resort to corruption without realising where to stop!

The principle applies to bad people as well. For example, Ravana did not heed to the advice of his brother Vibhishana and wife Mandodari and did not release Seeta. It was his ego; but in the process, he lost his life, and almost all the demons got killed. Pakistani leaders always adopted a single-point agenda of enmity with India and have virtually ruined their own country!

Sometimes, people travel despite unfavourable weather forecasts. Sometimes, knowledgeable astrologers give some advice; elders also tell us many wisdom points. It may be in our interest not to ignore them altogether. One should leave aside one’s ego and adamance so that balanced decisions are taken. Inspite of this, if there is a failure, it is bad luck; but there is no blame for hasty or reckless behaviour!

BCAJ Admin

NRI – Interplay of Tax and FEMA Issues – Residence of Individuals under The Income-Tax Act

Editorial Note: This article starts a series of articles on Income-tax and FEMA issues related to NRIs with a focus on the interplay thereof. Apart from a residential status definition under both Income-tax and FEMA, the series of articles will cover issues under both laws related to change of residence; investments, gifts and loans by NRIs; as well as transfers by them from India.

1. PRELIMINARY

Countries exercise their sovereign right to tax based on whether the income arises in their country or whether a person has a close connection with that country. The taxation laws define that close connection – an extended period during which the person stays in a country, or has his domicile there, or any similar criteria. Given a sufficient territorial connection between the person sought to be charged and the country seeking to tax him, income tax may properly extend to that person in respect of his foreign income.¹The Income-tax Act, 1961 (the “Ac”) imposes such comprehensive or full tax, on persons who are residents.

1.Wallace Bros. & Co Ltd vs. CIT (1948) 16 ITR 240 (PC).

Section 5 of the Income-tax Act, 1961 (the “Act”) provides for the scope of total income for persons. The scope differs according to the residential status of the person. A non-resident’s total income consists of income received or deemed to be received in India in a previous year or income accruing, or arising, or deemed to accrue or arise in India in a previous year.

In contrast, the scope of the total income of a resident in India includes, apart from the income covered within the scope for non-residents, income accruing or arising outside India during such year. In effect, a resident is taxable on his global income. At the same time, the total income of a resident but not ordinarily resident, as defined in section 6(6) of the Act, excludes income accruing or arising outside India unless it is derived from a business controlled in or a profession set up in India.

2. RESIDENTIAL STATUS

A person is said to be resident in India per the rules in section 6 of the Act. The residential status for (a) individual, (b) company, (c) Hindu Undivided Family, firm or association of persons and (d) other persons is to be determined by different rules. The nationality aspect does not enter the determination of residential status under the Indian income-tax law.

A non-resident is a person who is not a resident [section 2(30)]. When a person may be said to be “not ordinarily resident” is provided in section 6(6). The residential status is to be determined for a previous year and applies to all income for that year that comes within the scope of total income applicable to the assessee. In other words, a person cannot be a resident for one part of the year and non-resident for the other part, as India does not recognise split residency. The effect of this provision is that a person’s total income earned in a Financial Year is taxed basis his residential status in India, even if he may be resident of two countries due to his part stay in India. However, such a person can avail relief under a tax treaty by applying tie-breaking tests. It is not possible to have different residential status under the Act for different sources of income. Whether an assessee is a resident or non-resident is a question of fact.²

2.Rai Bahadur Seth Teomal vs. CIT (1963) 48 ITR 170 (Cal).

2.1 Tests for residence

There are two tests to determine if an individual is resident in India in any previous year. These tests are alternative and not cumulative.

According to the first test, an individual is said to be resident in India in any previous year if he is in India for a period or periods of 182 days or more [sec. 6(1)(a)]. The alternative test is an individual having within the four years preceding the previous year, been in India for a period or periods amounting in all to three hundred and sixty-five days or more, and is in India for a period or periods amounting in all to sixty days or more in that year [sec. 6(1)(c)].

Explanation 1 to section 6(1)(c) provides relaxation from the second test in some circumstances [discussed in paragraph 2.3 below].

2.2 Stay in India

The phrase “being in India” implies the individual’s physical presence in the country³ and nothing more. The intention and the purpose of his stay are irrelevant; the stay need not be in connection to earning income, which is sought to be taxed. Nor is it essential that he should stay at the same place. Stay may not be continuous: the individual’s presence in India must be aggregated to ascertain whether the threshold is crossed.

3.CIT vs. Avtar Singh Wadhwan (2001) 247 ITR 260 (Bom).

How the number of days shall be counted has been contested. In an Advance Ruling, it was held that even a part of the day would be construed as a full day, and even though for some hours on the day of arrival and departure, the applicant can be said to have been out of India, both the days will be reckoned for ascertaining 182 days. ⁴Contrarily, the Mumbai Tribunal, in this case,⁵ noted that the period or periods in section 6(1) requires counting of days from the date of arrival of the assessee in India to the date he leaves India. The Tribunal relied upon section 9 of the General Clauses Act, 1897, which provides that the first day in a series of days is to be excluded if the word ‘from’ is used and held that the words ‘from’ and ‘to’ are to be inevitably used for ascertaining the period though these words are not mentioned in the statute, and accordingly, the date of arrival is not to be counted.

4.Advance Ruling in P. No. 7 of 1995, In re (1997) 223 ITR 462 (AAR).
5.Manoj Kumar Reddy vs. Income-tax Officer (2009) 34 SOT 180 (Bang).

2.2.1 Involuntary stay

Section 6 does not limit an individual’s freedom to arrange his physical presence in India such that he is not a resident in the previous year and his foreign income falls outside the Indian tax net. On the other hand, section 6 does not distinguish between a stay in India that is by choice and that is involuntary. However, the Delhi High Court held that, given that the Act provides a choice to be in India and be treated as a resident for taxation purposes, his presence in India against his will or without his consent should not ordinarily be counted. In that case, the assessee could not leave India as his passport was impounded by a government agency. The Court held that the fact that the impounding was found to be illegal and, therefore, was in the nature of illegal restraint, the days the assessee spent in India involuntarily should not be counted. At the same time, the Court cautioned that the ruling cannot be treated as a thumb rule to exclude every case of involuntary stay for section 6(1), and the exclusion has to be fact-dependent.

A similar relaxation has been provided to individuals who had come to India on a visit before 22nd March, 2020, and their stay is extended involuntarily due to the circumstances arising out of the Covid-19 pandemic to determine their residential status under section 6 of the Act during the previous year 2019-20.⁶

6.Circular No. 11 of 2020 dated 8^th May, 2020.

Representations for a similar general relaxation for the previous year 2020-21, in relation to an extended stay in India by individuals due to travel restrictions during the Covid pandemic resulting in their residence under section 6(1) was denied by the CBDT, which stipulated examining on a case-by-case basis for any relief.⁷ According to that Circular, an individual with a forced stay in India would still have the benefit of applying treaty residence rules, which are more likely to determine residence in the other State. The Circular points out that even if an individual becomes a resident in the previous year 2020-21 due to his forced stay in the country, he will most likely become an ordinary resident in India and accordingly, his foreign source income shall not be taxable in India unless it is derived from a business controlled in India or a profession set up in India, so there would be no double taxation. The Circular states that if a person becomes a resident due to his forced stay during the previous year 2020-21, he would be entitled to credit for foreign taxes under rule 128 of the IT Rules, 1962.

7. Circular No. 2 of 2021 dated 3^rd March, 2021.

2.2.2 Seafarers

Explanation 2 to section 6(1) and rule 126 were brought into the statute with effect from A.Y. 2015-16 to mitigate difficulty in determining the period of stay in India of an individual, being a citizen of India, who is a crew member on board a ship that spends some time in Indian territorial waters.

The provisions apply to an Indian citizen who is a member of the crew of a foreign-bound ship leaving India. The period of stay in India of such a person will exclude the period from the date of joining the ship to the date of signing off as per the Continuous Discharge Certificate. The “Continuous Discharge Certificate” shall have the meaning as per the Merchant Shipping (Continuous Discharge Certificate-cum-Seafarer’s Identity Document) Rules, 2001, made under the Merchant Shipping Act, 1958. The days in Indian territorial waters by such a ship on an eligible voyage would fall within the period of joining and end dates in the Continuous Discharge Certificate and, thus, will not be treated as the period of stay in India of the concerned individual crew member.

An “eligible voyage” is defined in the rule to mean a voyage undertaken by a ship engaged in the carriage of passengers or freight in international traffic where the voyage originated from any port in India, has as its destination any port outside India, and for the voyage originating from any port outside India, has as its destination any port in India. The rule has no application where both the port of origin and destination of a voyage are outside India or where the Indian citizen leaves India to join the ship at a port outside India and the ship is on a voyage with a destination outside India. In such cases, his presence in India will usually be determined based on entries in his passport.

Notably, Explanation 2 and Rule 126 are for the purposes of the entire clause (1) (and not limited to clause (a) in Explanation 1). The rule prescribes the manner of computing the period of days in India of a crew member of a foreign-bound ship leaving India and is not restricted to only Indian-registered ships. Accordingly, the rule applies even while computing the period of stay of 182 days and 60 days contained in clauses (1)(a) and (1)(c).

2.3 Relaxations

There are some relaxations to the alternative test for residence in section 6(1)(c), which provides for substituting the period of stay in India for 60 days in section 6(1)(c) for 182 days. Consequently, in cases where the relaxation is applicable, the threshold of stay in India for residence will be 182 days under both tests, making the alternative test redundant. These relaxations are discussed below.

2.3.1 Citizens leaving India [Explanation 1(a)]

Explanation 1(a) provides for substituting the period of stay in India for 60 days in section 6(1)(c) by 182 days if the assessee, being a citizen of India, leaves India in any previous year as a member of the crew of an Indian ship or for the purposes of employment outside India. The relaxation in Explanation 1(a) applies to the previous year in which the assessee, being a citizen of India, leaves India.⁸

8.Manoj Kumar Reddy vs. Income-tax Officer (2009) 34 SOT 180 (Bang), Addl DIT vs. Sudhir Choudrie [2017] 88 taxmann.com 570 (Delhi - Trib.).

Under the Citizenship Act 1955, citizenship is possible by birth (section 3), by descent (section 4), by registration (section 5), by naturalisation (section 6) and by incorporation of territory (section 8). However, an Overseas Citizen of India under section 7A of that Act is not a citizen and is not covered under this clause.

(a) Citizens leaving India as a member of the crew of Indian ship

The relaxation under clause (a) of Explanation 1 is available only where the assessee leaves India as a crew member of an Indian ship as defined in section 3(18) of the Merchant Shipping Act, 1958. Relaxation is not available if the ship is other than an Indian ship. An individual who is not a citizen, too, is not eligible.

In this case,⁹the assessee claimed the benefit of relaxation under Explanation 1(a) as he had left India in that previous year as a crew member of an Indian ship and had spent 201 days outside India. However, the benefit was denied because the assessee had stayed in foreign waters while employed on the ship(s) for only 158 days, i.e., less than 182 days. However, the ruling requires reconsideration since there is no condition in that provision that the assessee should spend his entire days outside India on a ship to be eligible for relaxation. Explanation 1(a) provides only that the individual leaves India in that previous year as a member of a crew on an Indian ship for the sixty days in clause (1)(c) to be substituted by 182 days.

9.Madhukar Vinayak Dhavale vs. Income-tax Officer (2011) 15 taxmann.com 36 (Pune).

Explanation 2 to section 6(1) and rule 126 that provide for the manner of determining the period of stay in India of a crew member of a foreign bound ship leaving India would be relevant for Explanation 1(a) as well in ascertaining whether the thresholds of 60 days and 182 days in section 6(1) is crossed. Thus, an Indian ship leaving for a foreign destination would be an ‘eligible voyage’ under rule 126, and his period of stay in India will exclude the period from the date of joining the ship to the date of signing off as per the Continuous Discharge Certificate. Where the Indian ship does not qualify to be on an eligible voyage, the individual’s period or periods in India will impliedly include the ship’s presence in Indian territorial waters.

(b) For the purposes of employment

The Kerala High Court held in this case¹⁰ that no technical meaning is intended for the word “employment” used in the Explanation, and going abroad for the purposes of employment only meant that the visit and stay abroad should not be for other purposes such as a tourist, or medical treatment or studies or the like. Therefore, going abroad for employment means going abroad to take up employment or any avocation, including taking up one’s own business or profession. The expression “for the purposes of employment” requires the intention of the individual to be seen, which can be demonstrated by the type of visa used to travel abroad.

10.CIT vs. O Abdul Razak (2011) 337 ITR 350 (Kerala).

In this case, where the assessee travelled abroad on a transit visa, business visa and tourist visa, it was held that the entire period of travel abroad could not be considered as ‘going abroad for the purposes of employment’.¹¹It was also held that multiple departures from India by the individual in a previous year could also qualify under this clause. The provision does not require him to leave India and be stationed outside the country as the section nowhere specifies that the assessee should leave India permanently to reside outside the country.

11.K Sambasiva Rao vs. ITO (2014) 42 taxmann.com 115 (Hyderabad Trib.).

The requirement under clause (a) of Explanation 1 is not leaving India for employment, but it is leaving India for the purposes of employment outside India. For the Explanation, an individual need not be an unemployed person who leaves India for employment outside India. The relaxation under this clause is also available to an individual already employed and is leaving India on deputation.¹²

12.British Gas India P Ltd, In re (2006) 285 ITR 218 (AAR).

2.3.2 Citizen or person of Indian origin on a visit to India [Explanation 1(b)]

Explanation 1(b) to section 6(1)(c) provides for a concession for Indian citizens or persons of Indian origin who, being outside India, come on a visit to India in any previous year. In such cases, the prescribed period of 60 days in India to be considered a resident under clause (1)(c) is relaxed to 182 days. The objective behind this relaxation is to enable non-resident Indians who have made investments in India and who find it necessary to visit India frequently and stay here for the proper supervision and control of their investments to retain their status as non-resident.¹³

13.CBDT Circular No. 684 dated 10^th June, 1994.

The expression “being outside India’ has been examined judicially. Where the assessee has been a non-resident for many years, and during the years, he had far greater business engagements abroad than in India, it cannot be assumed that he did not come from outside of India.¹⁴It is not justified to look at the assessee’s economic and legal connection with India (i.e. his centre of vital interest being in India) to assume that he did not come from outside of India.¹⁵When the assessee had migrated to a foreign country and pursued his higher education abroad, engaged in various business activities, set up his business interests and continued to live there with his family, his travels to India would be in the nature of visits, unless contrary brought on record.¹⁶

14.Suresh Nanda vs. Asstt. CIT [2012] 23 taxmann.com 386/53 SOT 322 (Delhi).
15.Addl Director of Income-tax vs. Sudhir Choudhrie (2017) 88 taxmann.com 570 (Delhi-Trib).
16.Pr. Commissioner of Income-tax vs. Binod Kumar Singh (2019) 107 taxmann.com 27 (Bombay).

The expression ‘visit’ is not limited to a singular visit as contended by the Revenue but includes multiple visits.¹⁷ The return to India by an individual on termination of his overseas employment is not a visit, and the relaxation in Explanation 1(b) is not available.¹⁸

17.Asstt. Commissioner of Income-tax vs. Sudhir Sareen (2015) 57 taxmann.com 121 (Delhi-Trib).
18.V. K. Ratti vs. Commissioner of Income-tax (2008) 299 ITR 295 (P&H); Manoj Kumar Reddy vs. Income-tax Officer (2009) 34 SOT 180 (Bang); Smita Anand, In Re. (2014) 362 ITR 38 (AAR).

In that case,¹⁹the assessee working abroad visited for 18 days during the year. Later that year, on termination of his employment, he returned to India and spent 59 days in the country. The Tribunal held that a visit to India does not mean that if he comes for one visit, then Explanation (b) to section 6(1) will be applicable irrespective of the fact that he came permanently to India during that previous year. Looking at the legislative intention, the status of the assessee cannot be taken as resident on the ground that he came on a visit to India and, therefore, the period of 60 days, as mentioned in 6(1)(c) should be extended to 182 days by ignoring his subsequent visit to India after completing the deputation outside India. The alternative contention of the assessee that, for the purpose of computing 60 days as mentioned in section 6(1)(c), the period of visit to India would be excluded was accepted.

19.Manoj Kumar Reddy vs. Income-tax Officer (2009) 34 SOT 180 (Bang); affirmed in [2011] 12 taxmann.com 326 (Karnataka)

2.3.3 Limiting the relaxation [Explanation 1(b)]

An amendment was brought in by the Finance Act 2020 (effective from A.Y. 2021-22) to counter instances where individuals who actually carry out substantial economic activities from India manage their period of stay in India to remain a non-resident in perpetuity and not be required to declare their global income in India. The amendment restricts the relaxation in clause (b) in Explanation 1.

When a citizen or a person of Indian origin outside India who comes on a visit to India has a total income other than the income from foreign sources exceeding Rs.15 lakhs during the previous year, the time period in India in section 6(1)(c) of 60 days is substituted with 120 days as against 182 days available before this amendment. The expression income from foreign sources is defined in Explanation to Section 6.

An individual who becomes a resident under this provision shall be not ordinarily resident under clause (6). The provision expands the scope of residence under the Act. It could result in cases of dual residence needing the application of the tie-breaker rule under the relevant tax treaty.

2.4 Deemed Resident [section 6(1A)]

A new category of deemed resident for individuals was introduced with effect from 1st April, 2021 to catch within the Indian tax net, Indian citizens who are “stateless persons”, that is, those who arrange their affairs in such a fashion that they are not liable to tax in any country during a previous year. This arrangement is typically employed by high net-worth individuals to avoid paying taxes to any country / jurisdiction on income they earn. A citizen is as defined by the Citizenship Act 1955.

Under this clause, an individual who is a citizen of India, having a total income other than income from foreign sources exceeding Rs.15 lakhs during the previous year shall be deemed to be resident in India in that previous year if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.²⁰ This clause, an additional rule of residence for individuals, shall not apply if the individual is resident under clause (1). Clause (1A) applies only where an Indian citizen is liable to tax by reason of the various connecting factors listed in the clause.

20.The expression “income from foreign sources” is defined in Explanation to section 6 and discussed under para 3.3.3 above.

2.4.1 Liable to tax

The meaning of the term “liable to tax” in the context of treaties has been the subject of several court rulings.²¹Some rulings have found that a person is liable to tax even if there is no income-tax law in force for the time being if a potential liability to tax exists, irrespective of whether or not such a right is exercised.²² To nullify such interpretation, a definition in section 2(29A) has been inserted by the Finance Act 2021 with effect from 1st April, 2021. The provision defines ‘liable to tax’ in relation to a person and with reference to a country to mean that there is an income-tax liability on such a person under an existing income-tax law in force of that country. The definition includes a person liable to tax even if he is subsequently exempted from such liability. Primarily, there should be an existing tax law in the other country imposing a tax liability on a person to be ‘liable to tax’.

21.Union of India vs. Azadi BachaoAndolan (2003) 263 ITR 706 (SC);
22.ADIT vs. Greem Emirate Shipping & Travels (2006) 100 ITD 203 (Mum).

2.4.2 Connecting factors

For clause (1A) to apply, the individual should not be liable to tax in any other country by reason of the connecting factors listed. The clause is worded similarly to the treaty definition of residence: both refer to the person being ‘liable to tax’, which must be by reason of the specified connecting factors. Article 4(1) of the OECD and UN Models refers to domicile, residence, place of management or any other criterion of similar nature while in section 6(1A), connecting factors are residence, domicile or any other similar criteria.

There is a causal relationship between the listed factors and the extent of taxability that is required for the factors to become connecting factors. The OECD Commentary describes this condition of being liable to tax by reason of certain connecting factors as a comprehensive liability to tax – full tax liability – based on the taxpayers’ personal attachment to the State concerned (the “State of residence”). What is necessary to qualify as a resident of a Contracting State is that the taxation of income in that State is because of one of these factors and not merely because income arises therein. This interpretation can be validly extended to residence under clause (1A).

The challenge to establish that the income tax that a person is liable in a foreign jurisdiction is by reason of domicile, residence or similar connecting factors is demonstrated by the Chiron Behring ruling.²³ In that case, the Tribunal held that a German KG (fiscally transparent partnership)²⁴ was a resident of Germany and entitled to the India-Germany treaty since it was liable to trade tax in Germany (a tax covered under the India-Germany Treaty). Considering that the German trade tax is a non-personal tax levied on standing trade or business to the extent that it is run in Germany,²⁵ an examination of whether the KG was liable to that tax by reason of domicile, residence or other connecting factors was required to determine treaty residence which was not undertaken.

23.ADIT vs. Chiron Behring GmbH & Co[2008] 24 SOT 278 (Mum), affirmed in DIT vs. Chiron Behring GmbH & Co. (2013) 29 taxmann.com 199 (Bom).
24.A fiscally transparent partnership is a pass-through with its partners being liable to pay tax on its income.
25.Gewerbesteuergesetz (Trade Tax Law, GewStG), Sec. 2(1).

In conclusion, it is not enough that the assessee is liable to income taxation in the concerned country or territory for clause (1A) not to apply: an examination of that tax law is necessary to ascertain whether he is liable by reason of the connecting factors listed in section 6(1A).

2.5 Income from foreign sources

The expression ‘income from foreign sources’ is found in the amendments to section 6 of the Act by the Finance Act 2020. The expression is relevant to apply the lower number of days in India in Explanation 1(b) to section 6(1)(c) in respect of citizens and persons of Indian origin being outside India coming on a visit to India and to the deemed residence provisions under section 6(1A). Explanation to section 6 defines income from foreign sources to mean income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India) and which is not deemed to accrue or arise in India.²⁶

26.This expression is relevant for the amendment to clause (b) of Explanation 1 to section 6(1) as well as the deemed resident provisions inserted vide section 6(1A) [see para for discussion on this clause].

Since the words used in Explanation 1(b) as well as clause (1A) are “having total income, other than the income from foreign sources exceeding Rs.15 lakhs”, total income as defined in section 2(45) and its scope in section 5 is relevant. Notably, income accruing or arising outside India and received in India is not included in the definition of income from foreign sources. Consequently, such income within the scope of the total income of a non-resident is not to be excluded from the threshold of Rs.15 lakhs.

Total income is computed net of exemptions, set off typically. A question arises whether income exempted if the assessee is a non-resident is to be excluded while computing the threshold of Rs.15 lakhs. The provisions are ambiguously worded. A harmonious interpretation could be that since the objective for determining the threshold is to ascertain whether an individual who is otherwise a non-resident is to be treated as a resident, such exemptions should not be considered, and the items of income should be included. This interpretation avoids a circular reference which arises otherwise. A similar question arises regarding items of income excluded due to treaty provisions. Since the residence under the Act is the foundational basis for ascertaining residence under a treaty, items of income excluded due to treaty provisions are not to be excluded for the same reason.

3. RESIDENT AND NOT ORDINARILY RESIDENT

“Not ordinarily resident” is a subcategory of residence available to individuals and HUFs. The scope of his total income is the same as that of resident assesses but excludes income accruing or arising outside India unless it is derived from a business controlled in or profession set up in India.

Under this provision, an individual should be a non-resident for nine years out of ten preceding years or during his seven ‘previous years’ preceding the previous year in question, and he was present in India in the aggregate for seven hundred and twenty-nine days or less [sec. 6(6)(a)]. An individual will be “not ordinarily resident” if he fulfils either of the two conditions. The Mumbai Tribunal, in this case,²⁷ rejected the Revenue’s stand that the conditions in section 6(6)(a) are cumulative while interpreting section 6(6)(a) before its substitution by the Finance Act, 2003 based on the well-settled literal rule of interpretation as per which the language of the section should be construed as it exists. The Tribunal’s conclusion that when one of these two conditions, as laid down in section 6(6)(a) is fulfilled, the resident status is that of not ordinarily resident, should extend to the substituted provisions based on their text.

27.Satish Dattatray Dhawade vs. ITO (2009) 123 TTJ 797 (Mumbai).

A citizen of India or a PIO who becomes a resident for being in India for more than 120 days due to the provision inserted in clause (b) of Explanation 1 (vide Finance Act 2020) has the status of not ordinarily resident [sec. 6(6)(c)]. Likewise, a person who is deemed resident under section 6(1A) is not ordinarily resident [sec. 6(6)(d)]

4. RESIDENCE UNDER THE ACT – RELEVANCE FOR TREATIES²⁸

Double tax avoidance agreements entered by India are bilateral agreements modelled on the OECD Model Convention and the United Nations Model Convention. To access these benefits, the person should be a resident of one or either of the Contracting States (i.e., parties to the double tax avoidance agreement) (Article 1 of the OECD / UN Model). Article 4 of the OECD Model states as follows: “For the purposes of this Convention, the term “resident of a Contracting State” means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature, ………” Thus, residential status under the domestic tax law is relevant to accessing a double tax avoidance agreement and being eligible for the reliefs available.

28.The topic is covered only briefly here to give the reader a perspective of how residence under the Act can impact treaty application. A separate article dealing with treaty rules on residence is scheduled for publication.

5. RESIDENCE UNDER THE ACT VERSUS TAX TREATIES

In treaty cases where the person is a resident of both Contracting States concerning a treaty between them, the dual treaty residence is resolved through tie-breaker rules, and that person is deemed a resident of one of the States. A question arises whether a person deemed to be a resident of the other Contracting State under a treaty is also to be treated as a non-resident for the Act, and consequently, his income and taxes are to be computed as applicable to non-residents. This question and the discussion below are relevant for individuals and other persons.

The question gains significance since there are variations in computing income and its taxation for non-residents compared to residents. Such variations are found under several sections of the Act apart from the scope of total income under section 5. Some instances are the computing capital gains on transfer of shares in foreign currency and without indexation (section 48), tax rate on unlisted equity shares (sec.112(1)), computing basic exemption of Rs.1 lakh from short-term and long-term capital gains on listed shares (sections 111A and 112A), flat concessional tax rate on gross dividends, interest, royalty and fees for technical services without deductions, different slabs of maximum amount not chargeable to tax for senior citizens in the First Schedule to Finance Acts. Some of these provisions are more beneficial to residents, some to non-residents, and some depend on the facts of the case.

The argument for adopting treaty residence for residential status under the Act is that under section 90, more beneficial treaty provisions have to be adopted in preference to the provisions under the Act. However, such treatment is debatable for several reasons, as discussed below:

Firstly, the text of the provisions under the Act and in Article 4 dealing with residence in tax treaties militate against such substitution. Article 4 on residence states that such determination is “for the purposes of the Convention” and not generally. Section 6 of the Act is also “for the purposes of the Act” when a person is resident, non-resident or not ordinarily resident.

The literature on treaty residence is also overwhelmingly against substituting residential status under domestic law with treaty residence. Klaus Vogel states that since the person is “deemed” to be non-resident only in regard to the application of the treaty’s distributive rules, he continues to be generally subject to those taxations and procedures of the “losing State” which apply to taxpayers who are residents thereof.²⁹According to Phillip Baker,³⁰Article 4 determines the residence of a person for the purposes of the Convention and does not directly affect the domestic law status of that person. He refers to a situation of a person who is a resident of both States A and B, under their respective domestic laws. Even though under the tie-breaker rules of the A-B Treaty, he is a resident of State A for the purposes of the Convention, he does not cease to be a resident of State B under its domestic law.

29.Klaus Vogel on Double Tax Conventions, Third Edn, Article 4, m.no. 13-13a.

30.Phillip Baker on Double Tax Conventions, October, 2010 Sweet & Maxwell, Editor's Commentary on Article 4, para 4B.02.

Courts have held that section 4 (charging provisions) and 5 (scope provisions) of the Act are made subject to the provisions of the Act, which means that they are subject to the provisions of section 90 of the Act and, by necessary implication, they are subject to the terms of tax treaties notified under section 90.³¹However, section 6, containing the provisions for determining residence under the Act, is for the purposes of the Act and is not subject to section 90 and, by implication, treaty provisions.

31.CIT vs. Visakhapatnam Port Trust (1983) 16 Taxman 72 (Andhra Pradesh) approved in Union of India vs. Azadi Bachao Andolan (2003) 132 Taxman 373 (SC).

The mandate in section 90(2) to adopt the provisions of the Act to the extent they are more beneficial to the assessee than the treaty provisions may, at first glance, enable the substitution of treaty residence as the residential status under the Act but deserves to be rejected. The sub-section envisages a comparison of the charge of income, its computation and the tax rate under the Act to be compared with the same criteria under the relevant treaty qua a source of income.³² The charge, computation and tax rate qua an income source under the Act, and the distributive rules in the relevant treaty follow from the residential status of the person under the Act and the treaty, respectively. Though section 90(2) refers to its application in relation to an assessee to whom a treaty applies, the application is not at an aggregate level of tax outcome qua the assessee.

The determination of treaty residence requires the person to be liable to tax in a Contracting State by reason of connecting factors (which includes residence under its tax law). Residence under the Act is a prerequisite for determining treaty residence. The objective of determining treaty residence is to enable the operation of distributive articles, which allocate taxing rights to one or the other Contracting State based on such residence, as well as to ascertain the State that will grant relief for eliminating double taxation.

Further, tie-breaker rules to determine treaty residence are to be applied to the facts during the period when the taxpayer’s residence affects tax liability, which may be less than an entire taxable period.³³ The substitution with treaty residence of a person for computing his income and tax cannot be for a part of the previous year where there is split residency for treaty purposes.

Lastly, income-tax return forms and the guidelines issued by the CBDT also do not support substituting the residence under the Act with treaty residence. The forms and the guidelines require only residential status under the Act to be declared by the assessee. None of the return forms require assessees to fill in his treaty residence.

To conclude, a person’s residential status under the Act does not change due to the determination of treaty residence unless a provision in the Act deems such treatment like in some countries.³⁴

32.IBM World Trade Corpn vs. DDIT (2012) 20 taxmann.com 728 (Bang.)
33.OECD Model (2017 Update) Commentary on Article 4, para 10.
34.For example, Canada and the United Kingdom have provided in their domestic law that where a person is resident of another state for the purposes of a tax treaty, the person will be regarded as non-resident for the purposes of domestic law also.

6. CONCLUSION

Residence is one of the essential concepts in determining the scope of taxation of a person. The term affects the scope of taxation under the Act as well as the ability of a taxpayer to access a double tax avoidance agreement. Rules for residence for an individual depend on his physical presence in India. The tests prescribed in section 6(1) and the relaxations available for citizens and persons of Indian origin form the canvas for determining residence under the Act. A long list of judicial precedents must be kept in sight while determining the residential status under the Act.

Newer amendments to the residence rules by limiting the concession available to citizens and persons of Indian origin on visits to India must also be considered. A deemed residential status for Indian citizens who are not liable to comprehensive or full tax liability in any other country brings to the fore the importance of understanding foreign tax laws. It also throws up interpretative challenges for the practitioner.

The meaning of residence under tax treaties necessarily refers to the meaning under domestic law, but they serve different purposes and operate independently in their own fields. It is debatable whether a person who is a treaty non-resident can be treated as a non-resident for the purposes of the Act and the tax consequences following such treatment.

Implications on NRs turning RNORs*
Adverse to the assessee	Beneficial to the assessee
1. Limited increase in the scope of income – income from business controlled or profession set-up in India. 2. Concessional tax rates under Chapter XIIA and certain other exemptions are available only to NR and not to RNOR. 3. Can lead to the presumption that control and management of a firm, HUF, company, etc., in India. 4. Overall reduction in years of NOR relief to Returning NRIs. 5. Clearly within the tax compliance framework, including TDS obligations, tax return filing, etc.	1. Slab rates available for senior citizens, etc., would be available to NORs. 2. TDS Deduction is not as per Section 195 lowering rates in most cases. 3. Eligible to claim Foreign Tax Credit in India for doubly taxed incomes. 4. Can avail concessional tax rates under the DTAA where India is a source country and individual tie-breaks in favour of foreign jurisdiction. 5. Relaxation on reporting requirements (may not be required to file detailed ITR 2 as per extant provisions).
Neutral Points
1. No Obligation to report Foreign Assets. 2. Assessee continues to be treated as NR for determining the AE relationship for transfer pricing regulations and for the purposes of Section 93. 3. It would not impact FEMA’s non-residential status automatically.

(*contributed by CA Kartik Badiani and CA Rutvik Sanghvi; NR – Non-resident, RNOR – Resident and Not Ordinarily Resident).

BCAJ Admin

Service Tax

I. SUPREME COURT

Commissioner of CGST, CST, Delhi East vs. Haldiram Marketing Pvt. Ltd.

2023 (11) Centax 23 (S.C.)

Date of Order: 25th September, 2023

Service tax cannot be levied on the sale of packaged food over the counter as there was no service element and merely the sale of goods.

Service tax is not leviable on rent received from associate enterprises for the joint sale of goods; it merely amounts to sharing of rental expenses and not sub-letting of property.

FACTS

Respondent was engaged in the operation of food outlets of packaged foods on a take-away basis. An audit was conducted wherein it was observed that the assessee failed to pay service tax on the sale of take-away food items and on the share of rent received from the associate enterprise. Further, a SCN was issued proposing a service tax demand of Rs.23,09,45,317 with interest and penalty. Respondent submitted a reply to SCN for dropping the entire demand and explained that service tax was not required to be paid on the activities. However, the department issued an order demanding Rs.20,12,46,762 with interest and penalty and a demand of Rs.2,96,98,555 was dropped on account of cum duty benefit. Being aggrieved, an appeal was filed before CESTAT on the grounds that the supply of packaged food on a take-away basis was solely a sale transaction and hence service tax should not be levied. Respondent further stated that service tax could not be levied on the amount received from associate enterprises as it was towards space sharing. Thereafter, the entire service tax demand with interest and penalty was dropped by CESTAT. Being aggrieved by such dropping of demand by the Tribunal, the department filed an appeal before Hon’ble Supreme Court.

HELD

The order passed by CESTAT was affirmed by Hon’ble Supreme Court relying inter alia on the judgements of the Hon’ble Madras High Court in the case of Anjappar Chettinad A/C Restaurant, M/s RSM Foods (P) Ltd wherein it was held that there was no element of service in preparation of food, packaging and then selling the same over the counter as take-away item without any dining facility. Such activity in essence is the sale of goods and hence service tax is not leviable thereon. Further, rent received from associate enterprises for selling goods along with their own goods was only a sharing of rental expenses and did not amount to sub-letting. Hence, service tax was not leviable under renting of immovable property service. Consequently, the department’s appeal was dismissed.

BCAJ Admin

Goods and Services Tax

I. HIGH COURT

62 Goparaj Gopalakrishnan Pillai vs. State Tax Officer-I

2023 (11) Centax 203 (Ker.)

Date of Order: 5th October, 2023

ITC cannot be denied to the recipient merely on the basis that the supplier has not remitted GST to the Government and supplies are not reflected in Form GSTR-2A without examining the documentary evidence.

FACTS

Petitioner, a registered dealer, was issued a SCN alleging that the petitioner had availed and utilized excess ITC of Rs. 33,05,038 in F.Y. 2017–18 based on the difference between GSTR-3B and GSTR-2A. Petitioner in its response stated that it had mistakenly entered an excess amount due to clerical error in GSTR-3B of December, 2017 but the said amount has not been utilized. The said excess ITC was adjusted in GSTR-3B of August, 2018. Respondent passed an order denying ITC of Rs.19,830 as excess claim because the supplier had neither remitted the GST collected to the department nor had uploaded details in GSTR-1 and hence said tax amount wasnot reflected in GSTR-2A. Being aggrieved by such denial, the petitioner filed a writ before the Hon’ble High Court.

HELD

High Court relying on its own judgment in the case of Diya Agencies vs. State Tax Officer WPC No. 29769 of 2023 dated 12th September, 2023, held that ITC not reflected in GSTR-2A cannot be the sole ground for rejecting ITC claims without giving opportunity to petitioner for providing evidence. The impugned order was set aside andthe matter was remanded back to the Respondent forpassing a reasoned order after considering the said documents.

63 Oaknorth (India) Pvt. Ltd. vs. Union of India

2023(76) GSTL 64 (P&H.)

Date of Order: 29th March, 2023

Appeal cannot be rejected merely on the ground that a certified copy of the impugned order was not submitted especially when the said order was available on the portal.

FACTS

An appeal was filed by the petitioner against an order dated 21st September, 2021. The same was rejected on the grounds that appeal was not accompanied by a certified copy of the impugned order as prescribed under section 107 of the HGST Act, 2017 and Rule 108 of the HGST Rules, 2017. Being aggrieved by such rejection of the appeal, the petitioner filed this writ before the Hon’ble High Court.

HELD

It was held that the appeal filed could not be dismissed solely on the ground that the petitioner had not submitted certified copies of the impugned order where such an order was already uploaded on the Government portal. The order was set aside and the matter was remanded back to the authority to pass a fresh order after considering its merits.

64 Nahar Industrial Enterprises Ltd vs. UOI

[2023] 156 taxmann.com 95 (Rajasthan)

Date of Order: 31st October, 2023

The statutory scheme of inverted rated duty structure is also applicable to cases where there are multiple outputs against multiple inputs and even if the overall rate of all inputs is marginally higher than the rate of output supplies, the accumulation of unutilized input tax credit on suchaccount will bring it within the net of inverted duty structure.

FACTS

The petitioner company is engaged in manufacturing of textiles which include spinning, weaving and processing. In the process of manufacturing, the petitioner uses various raw materials on which GST rates vary from 5 per cent to 28 per cent. The rate of GST on outputs ranges from 0.1 per cent to 12 per cent. The petitioner filed a refund claim under section 54(3) of the CGST Act for the period January, 2020 to March, 2020 on the ground that since the rates of GST on inputs were higher than the rates of GST on outputs, it is eligible for refund of accumulated tax on inverted rated duty structure basis. The department rejected the refund claim contending that the petitioner’s claim does not fall under the inverted rated duty structure as the rate of tax of inputs was found to be more or less 5 per cent, 12 per cent and 18 per cent whereas the tax rate on output supply was also 5 per cent, 12 per cent and 18 per cent. ITC availed on the inputs procured at the rate of 28 per cent GST was very negligible. It was also observed that the output sales was to the extent of 80 per cent of goods having 5 per cent duty only and the majority of inputs too had the rateof 5 per cent. It was held that the refund is mainlydue to high input purchases and they are in stockduring the claim period. The contention of the department therefore was that section 54(3) of the CGST Act,2017 is not attracted as there is no accumulation on account of input tax rates being higher than the output supply tax rates but due to other factors. The First Appellate Authority also decided the matter against the petitioner.

HELD

The Hon’ble Court analysed the input and output GST rates and observed that all the inputs are taken together and utilised through the process of manufacturing, the output supplies would carry a higher rate of GST as compared to the rate of GST on such inputs, either taken individually or collectively. The rate of tax on output ranges from 0.1 per cent to 5 per cent or 12 per cent whereas the rate of tax applicable to some inputs may be 5 per cent or 12 per cent, but on remaining inputs, the rate of GST is certainly higher than 5 per cent or 12 per cent. The Court observed that 100 per cent cotton goods are only 50 per cent of the total goods and the rest are cotton-dominated blends for which other inputs have rates of 18 per cent whereas the output rate is 5 per cent. Balance outputs are synthetic-dominated blends and 100 per cent polyester / viscose for which inputs bear rates of 12 per cent, 18 per cent and 28 per cent. This factual position was not denied by the department.

Hon’ble Court held that the language contained in proviso (ii) to section 54(3) of the CGST Act, 2017, uses the expression, “where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies” signifying the plurality of both inputs and output supplies. The Court thus held that the scheme of refund in case of inverted duty structure will continue to apply irrespective of the number of inputs and number of output supplies. It further held that in a case where there is an accumulation of unutilized ITC as a direct result of the rate of tax on inputs exceeding the rate of tax on output supplies, the scheme of refund as embodied in section 54(3) of the CGST Act, 2017 gets attracted. In other words, even if the overall rate of all inputs is marginally higher than the rate of output supplies, the accumulation of unutilized input tax credit on such an account will bring it within the net of the inverted duty structure.

The Hon’ble Court also referred to the decision of the Hon’ble Supreme Court in the case of Union of India & Others vs. VKC Footsteps India Private Limited[2021] 130 taxmann.comin which the Hon’ble Apex Court had noted that it was only those cases of ITC accumulation which are on account of inverted duty structure i.e., GST on output supplies being less than the GST on inputs that the scheme of refund would be applicable. Accumulation of unutilized input tax credit for other reasons like stock accumulation, capital goods and partial reverse charge mechanism for certain services may not attract the refund mechanism. As regards the department’s contention that the accumulation of ITC was on account of the higher stock, the Court held that refund formulae as contained in Rule 89(5) of the CGST Rules, 2017 do not contain any adjustment in respect of the stock as it envisages that total ITC claimed on inputs during the claim period gets consumed in respect of the turnover of the claim period. Thus, the determining factor for applicability of section 54(3) of the CGST Act, 2017 read with Rule 89(5) of the CGST Rules, 2017 is the rate of tax and quantum of ITC content and not the value / quantum of individual inputs (going into an output) and the outputs. The stock-based approach, therefore, violates the statutory scheme of refund.

65 Association of Technical Textiles Manufacturers and Processors vs. UOI

[2023] 156 taxmann.com 421 (Delhi)

Date of Order: 16th November, 2023

Power to issue orders, instructions or directions to Central Tax Officers stands vested exclusively in the Central Board of Indirect Taxes and Customs and not in the Tax Research Unit.

FACTS

The petitioners challenged the TRU Circular dated 31st December, 2018 to the extent that it purports to clarify that polypropylene woven and non-woven bags including those laminated with Biaxially Oriented Polypropylene2 are liable to be classified as falling under Chapter 39 and more particularly Tariff Heading 3923 forming part of the First Schedule to the Customs Tariff Act, 1975. The dispute essentially related to a question of the classification of polypropylene woven and non-woven bags under the Harmonized System of Nomenclature. The petitioners contended that the power to issue orders, instructions or directions to Central Tax Officers stands vested exclusively in the Central Board of Indirect Taxes and Customs and not on the TRU.

HELD

In the absence of any provision brought to the Court’s attention in terms of which the TRU could be said to have been clothed with the authority or jurisdiction to render a clarification with respect to the classification of goods and articles, the Hon’ble Court held that power to issue instructions and directions to Central Tax Officers vests exclusively with the Board (i.e., CBIC). TRU had no authority to issue clarification through the said Circular. The Court also observed that divergent views taken on the subject matter of dispute by various Advance Ruling Authorities and Appellant Advance Ruling Authorities of different States, cannot be rendered a quietus by the issuance of a directive or clarification of the nature issued by the said Circular. The Court also observed that the said impugned Circular fails to consider various aspects and hence it cannot be upheld.

66 Delhi Metro Rail Corporation Ltd vs. Additional Commissioner, Central Goods and Services Tax Appeals II

[2023] 154 taxmann.com 567 (Delhi)

Date of Order: 18th September, 2023

The limitation period of a two-year limit for applying a GST refund does not apply when GST is not chargeable to that transaction and tax has been paid under a mistake of law.

FACTS

The appellant (DMRC) provided services to Surat Municipal Corporation for preparing a project report for Metro Rail of an invoice value of Rs.19,04,520. Such services were not taxable under a notification 12/2017. Surat Municipal Corporation paid Rs.16,14,000 only to DMRC i.e., excluding GST tax amount. However, to comply with GST provisions, DMRC deposited the said GST amount in August 2017. Subsequently, DMRC found that tax was deposited by DMRC under a mistake of law. The refund application filed by DMRC was rejected as it was filed after the expiry of two years from the relevant date. The dispute regarding the rejection of the refund was challenged before the Hon’ble Court.

HELD

The Hon’ble Court held that Article 265 of the Constitution of India prescribes any levy or collection of tax only by authority of law. The Court observed that the GST was not payable by the DMRC. Thus, the amount of tax deposited by the DMRC on an erroneous belief that payment for services rendered by it was chargeable to tax, cannot be retained by the respondents. The Court also noted that the service recipient did not pay tax to DMRC. The Court thus held that the period of limitation for applying for the refund as prescribed under section 54 of the CGST Act, would not apply where GST is not chargeable and it is established that an amount has been deposited under a mistake of law. The Hon’ble Court also referred to the decisions of the State of Madhya Pradesh &Anr. vs. Bhailal Bhai: AIR 1964 SC 1006 and M/s. Cosmol Energy Private Limited vs. State of Gujarat: R / Special Civil Application No. 11905/2020, decided on 22nd December, 2020 and took note of the fact that the department has not filed any appeal against the said decision of the Gujarat High Court.

67 BST Steels (P.) Ltd. vs. Superintendent of Central Tax

[2023] 155 taxmann.com 143 (TELANGANA)

Date of Order: 27th September, 2023

The guarantee / security to the bank provided by the Managing Director by providing the personal properties as security and personal guarantee would attract GST under the Reverse Charge Mechanism.

FACTS AND HELD

The issue before the Court was whether there is no requirement to pay GST on the guarantee / security to the bank provided by the Managing Director by providing the personal properties as security and personal guarantee. The department referred to entry no. 6 of Notification No. 13/2017-Central Tax wherein the services supplied by a director of a company or a body corporate to the said company or the body corporate would attract GST under the Reverse Charge Mechanism. The appellant contended that the personal properties provided by the Managing Director as security and personal guarantee provided for the company are not liable to GST.Relying upon the said Notification the Court held that the petitioner has not made a strong case and hence the interference with the orders is not warranted.

Note: The Readers may note that in the 52nd GST Council Meeting, the GST Council was directed to issue a circular clarifying that when no consideration is paid by the company to the director in any form, directly or indirectly, for providing a personal guarantee to the bank / financial institutes on their behalf, the open market value of the said transaction / supply may be treated as zero and hence, no tax is payable in respect of such supply of services. Further, the factual position as to whether the director was an employee of the company or not does not appear to have been discussed in this matter. In this regard, readers may go through Circular No. 140/10/2020-GST, dated 10th June, 2020.

68 Deepa Traders vs. Principal Chief Commissioner of GST and Central Excise, Chennai

2023 (73) GSTL 176 (Mad.)

Date of Order: 9th March, 2023

Amendment of GSTR-1 and GSTR 3B is permissible, when inadvertent and bonafide human errors were committed and a mechanism to rectify the same was absent.

FACTS

Petitioner, a registered scrap dealer under the GST law committed inadvertent errors in mentioning recipient’s GSTIN / name, invoice number / date and also failed to report invoices-wise details in Form GSTR 1. However, the same was correctly reflected in GSTR-3 and GST liability was discharged. Moreover, IGST was inadvertently remitted under the heads of CGST and SGST. Since Form GSTR-2 or GSTR-1A were not notified, the errors remained unnoticed. On being intimidated by such mistakes from customers, the petitioner was unable to rectify its returns in the absence of any mechanism for it. As a result, the petitioner preferred a writ petition seeking permission for rectification of GSTR-1 before the Hon’ble High Court.

HELD

High Court held that since Forms GSTR-1A and GSTR-2 did not come into existence, the petitioner should not be mulcted with any liability on account of bonafide human error. Accordingly, the petitioner was permitted to re-submit the annexures to Form GSTR-3B with the correct distribution of credit between IGST, CGST and SGST as well as amended GSTR 1 to rectify the bonafide errors. Therefore, the writ petition was allowed in favour of the petitioner.

69 Ktex Non-woven Pvt. Ltd. vs. Union of India

2023 (11) Centax 12 (Guj.)

Date of Order: 14th September, 2023

Benefit of Notification No. 79/2017 — Custom dated 13th October, 2017 granting exemption to import of capital goods from payment of IGST was clarificatory in nature and extended to Capital Goods imported under EPCG scheme between 1st July, 2017 and 13th October, 2017.

FACTS

Petitioner was engaged in the business of fabrics and had imported capital goods under the EPCG scheme. Petitioner applied for exemption on import of capital goods from customs duty and additional duty leviable thereon. After the introduction of GST law on 1st July, 2017, any goods imported would be subject to integrated tax and compensation cess. However, Ministry of Finance vide Notification No. 79/2017 — Customs dated 13th October, 2017, exempted the payment of IGST for the goods imported under the EPCG scheme. Respondent contended that the said notification was issued on 13th October, 2017 and goods were imported between 1st July, 2017 and 13th October, 2017, and hence the petitioner was not eligible to claim exemption and was liable to pay IGST. Thus, the petitioner was compelled to pay the amount of IGST and subsequently sought a refund for the amount of IGST paid. However, the same was rejected by the respondent. Being aggrieved by denial of exemption, the petitioner filed this writ petition before the Hon’ble High Court.

HELD

Relying upon the decision of the jurisdictional High Court in M/s. Prince Spintex Pvt. Ltd. vs. UOI [2020 (35) G.S.T.L. 261 (Guj.)], Hon. High Court held that the objective of the EPCG scheme is to facilitate the import of capital goods to export qualitative goods. The said scheme was not an unconditional exemption. It was an incentive scheme which allowed imports at zero customs duty subject to the fulfilment of export obligations. The intention of the Government was always to exempt the payment of additional duties to the goods imported under the EPCG scheme. Hence, Notification No. 79/2017 — Customs dated 13th October, 2017 must be read as clarificatory in nature as applicable to goods imported between 1st July, 2017 and 13th October, 2017 as per the intention of the legislature. Consequently, the Court directed the respondent to refund the amount of IGST to the petitioner.

70 Jem Exporter vs. Union of India

2023(76) GSTL (Bom.)

Date of Order: 2nd August, 2023

An appeal filed against the cancellation of a registration order cannot be rejected merely due to procedural defects without providing an opportunity for rectifying the same.

FACTS

Petitioner filed an application for a refund of ITC on the export of goods. A common Show Cause Notice was issued to the petitioner and IJM Exporters alleging that ITC was availed by IJM Exporters on goods purchased from non-existing entities which was passed on to the petitioner. Thus, it was alleged that ITC was wrongly availed by the petitioner. Petitioner’s response justifying the refund claim was rejected and an order confirming the demand with interest and penalty was passed. Further, the appeal filed by the petitioner was rejected by the Appellate Authority on the grounds that no proof of pre-deposit payment was provided, a certified copy of the Order-in-Original was not filed and the appeal compilation was not signed. Being aggrieved by such rejection, a writ petition was filed before the Hon’ble High Court.

HELD

It was held that the appeal cannot be rejected merely on the grounds of procedural non-compliance without issuing a defect memo and providing an opportunity to rectify the same. Accordingly, the Hon. Court set aside the impugned Order and restored the appeal directing the Commissioner (Appeals) to issue a Defect Memo and provide an opportunity for rectification of procedural defects.

BCAJ Admin

Recent Developments in GST

NOTIFICATIONS RELATING TO RATE OF TAX

1. The Government has issued various notifications, all dated 19th October, 2023, for amending certain entries in Schedules prescribing rate of tax. The short gist is as under:

Sr.	Notification No.	Indicative Change
(i)	Notification No. 12/2023-Central Tax (Rate)	To effect changes in notification no. 11/2017. The change is regarding conditions about eligibility of ITC in given circumstances.
(ii)	Notification No. 13/2023-Central Tax (Rate)	To effect changes in notification no. 12/2017 Central Tax (Rate) dated 28^th June, 2017. The changes are mainly related to the tax rate for supply to the Government.
(iii)	Notification No. 14/2023-Central Tax (Rate)	To amend notification no. 13/2017 — Central tax (Rate) dated 28^th June, 2017. The changes are relating to services supplied by Central Government / departments.
(iv)	Notification No. 15/2023-Central Tax (Rate)	To effect changes in notification no. 15/2017 Central Tax (Rate) dated 28^th June, 2017. The changes are relating to builders and construction of complexes etc..
(v)	Notification No. 16/2023-Central Tax (Rate)	The changes are related to transport activity.
(vi)	Notification No. 17/2023-Central Tax (Rate)	The changes are effected in Notification no. 1/2017-Central Tax (Rate) dated 28^th June, 2017. The changes are in relation to Molasses and Millet flour and Spirits for industrial uses etc.
(vii)	Notification No. 18/2023-Central Tax (Rate)	The consequential changes in rate of tax for millets are affected in Notification no. 2/2017-Central Tax (Rate) dated 28^th June, 2017.
(viii)	Notification No. 19/2023-Central Tax (Rate)	The consequential changes are made in notification no. 4/2017-Central Tax (Rate) dated 28^th June, 2017 due to changes in rate of tax for Central Government / Central Government departments.
(ix)	Notification No. 20/2023-Central Tax (Rate)	The changes are effected in Notification no. 5/2017-Central Tax (Rate) dated 28^th June, 2017. The changes are about refund restriction.
All above notifications are to apply from 20^thOctober, 2023.

Notifications bearing no. 12/2023- Integrated Tax (Rate) dated 19th October, 2023 to No. 22/2023- Integrated Tax (Rate) dated 19th October, 2023 with similar effect as above, are issued under IGST Act. These will also be effective from 20th October, 2023.

B. OTHER NOTIFICATIONS

(i) Notification No. 52/2023-Central Tax dated 26th October, 2023

By the above notification, GST Rules are amended. The changes are mainly to provide a valuation method for corporate guarantee and mandatory vacating of provisional attachment orders.

(ii) Notification No. 53/2023-Central Tax dated 2nd November, 2023

The Central Government has issued the above notification to provide a specific procedure for condonation of delay in filing appeals against demand orders (commonly called as Amnesty for filing appeals). The amnesty is under Specified situation and with Specified conditions.

(iii)Notification No. GST-793(E) dated 25th October, 2023

The Central Government has issued the above notification by which the Goods & Services Tax Appellate Tribunal (Appointment and Conditions of Services of President and Members) Rules, 2023 are published.

The Rules contain the procedure for appointment, the salary and other services conditions.

3. GSTN – News

The GSTN has informed through communication dated 12th October, 2023, the availability of the facility for the E-commerce operators through whom unregistered suppliers of goods can supply goods and also enrolment for supply of goods through E-commerce.

4. Circulars

The following circulars are issued by CBIC.

(i) Clarification above Export of services — Circular no. 202/04/2023-GST dated 27th October, 2023

By the above circular, clarifications are givenabout the export of services, particularly about
conditions in sub-clause (iv) of section 2(6) vis-à-vis RBI’s, AP (DIR Services) Circular no. 10 dated 11th July, 2022.

(ii) Place of supply — Circular no. 203/15/2023 dated 27th October, 2023

By the above circular, clarifications are given aboutthe place of supply under various situations like, transportation of goods, advertising sector, Co-location services etc.

(iii) Taxability of Corporate Guarantee — Circular no. 204/16/2023 dated 27th October, 2023

Vide above circular, the clarification about various aspects of the taxability of personal guarantee and corporate guarantee are given.

(iv) Rate of tax — Imitation Zari Thread — Circular no. 205/17/2023 dated 31st October, 2023

By the above circular, clarifications are given about GST Rate on Imitation Zari Thread or Yarn based thread as per recommendation of GST Council.

(v) Clarification above applicability of GST onCertain Services — Circular no. 206/18/2023 dated 31st October, 2023

By this circular, the applicability of tax on various services like passenger transport, reimbursement of electricity, job-work of Barley, Millets and services like horticulture/horticulture works is clarified.

C. ADVANCE RULINGS

42 Job work – Nature

Indian Oil Corporation Ltd.

(Order No. 01/ODISHA-AAAR/Appeal/2022-23 dated 21st June, 2022 (Odisha))

This is an appeal against AR order No. 03/ODISHA-AAR/2021-22 dated 15th December, 2021. The facts in brief are that M/s. Indian Oil Corporation Limited, Paradeep Refinery, is a public sector undertaking. The Appellant owns and operates 15 MMTPA oil refinery in the state of Odisha located at Paradeep and refines crude oil and produces several petroleum products at this location. The Appellant requires Hydrogen gas, Nitrogen gas and HP steam for its refining activity, collectively referred to as ‘Industrial Gases’. Industrial gases can be obtained from inputs such as Naphtha and other utilities such as Demineralised water (‘DM water’), power, cooling water, service water, instrument air etc.

Appellant has awarded a contract to M/s. Praxair India Private Limited (“Praxair”), for the Construction, Commissioning, and Leasing and thereafter for Operating and Maintaining a new Hydrogen & Nitrogen Plant within the IOCL refinery complex at Paradeep for supplying of industrial gas on Build-Own-Operate (BOO) basis to appellant. Under this agreement, all the inputs required for the Hydrogen plant and Nitrogen plant like naphtha, DM water, cooling water, service water, fire water, steam and power were to be supplied by the Appellant to M/s. Praxair India Private Limited, located in its Refinery Complex as above for manufacturing of industrial gases as final product. The final products are sent back to the Appellant by M/s. Praxair India Private Limited for the exclusive utilization in the refinery processes. All the output products produced after processing are transferred to the Appellant by Praxair through a pipeline. The ownership of the input and output products remains with the Appellant only.

In the above background, the Appellant had approached the AAR for getting an advance ruling on the following issues:

“(i) Whether sending of inputs (Naphtha, DM water, Power, Cooling water, service water and instrument air) by the Appellant to M/s. Praxair India Private Limited and receiving back of industrial gases (Hydrogen gas, Nitrogen gas and HP steam) under the lease agreement will fall under ‘job work’ in terms of section 2(68) of Central Goods and Service Tax Act, 2017 (CGST Act) and Odisha Goods and Service Tax Act, 2017 (OGST Act)?

(ii) Whether all the payments under the lease agreement will attract GST as applicable to Job Work.”

In view of the above background facts, the AAR gave a ruling that:

“i) The activities being undertaken in the Appellant’s premises/production plant do not qualify for ‘Job work’ under section 2(68) of Central Goods and Service Tax Act, 2017 (CGST Act) and Odisha Goods and Service Tax Act, 2017 (OGST Act) and Section 143 of said Acts.

ii) The Appellant’s next question “Whether all the payments under the contract will attract GST as applicable to Job work?” is not maintainable on the ground already stated supra.”

Appellant has filed an appeal against the above AR.

Before the AAAR appellant repeated that the agreement is to be read in whole and as per agreement, the substance is to render job work services.

The ld. AAAR noted the term in the agreement as under:

“the Lessor (M/s. Praxair India Private Limited) does hereby demise unto the Lesee (Appellant) by way of lease the production plant to hold the same unto the Lessee for a period of 15(fifteen) years from the effective date, paying therefore a monthly rent as hereinafter mentioned the Lessor acknowledges that vacant physical and peaceful possession of the production plant has been handed over to the Lessee on the effective date.”

The ld. AAAR therefore observed that the plant is not under the control and possession of M/s. Praxair India Private Limited but it is with Appellant on a monthly rent basis for 15 years.

Therefore, the AAAR held that the agreement between M/s. Praxair India Private Limited and the Appellant is a simple ‘lease agreement’ and not a ‘job work agreement’ and M/s. Praxair India Private Limited has no control and possession over the place where the inputs supplied by the Appellant are processed. The ld. AAAR also referred to other incidental terms.

The ld. AAAR held that the whole operation of Praxair is under the control of the appellant and hence the claim of the appellant that there is job work, service is rejected by ld. AAAR. Accordingly, the ld. AAAR confirmed AR and dismissed the appeal.

43 Construction Contract for Government entity – Pre and Post amendment
Shree Constructions (Order No. AR. Com/10/2022 dated 8th December, 2022 (Telangana)

The facts are that the applicant, M/s. Shree Constructions, are in the business of execution of works contracts wherein they execute the construction of the building on the land provided by the Telangana State Industrial Infrastructure Corporation Limited (TSIICL). The applicant is to construct warehouses and cold storage at the primary processing centre in Jillela Village of Rajanna Siricilla District. The applicant also informed that TSIICL will be letting out godowns for rent and it will be a business activity. The applicant further submitted that the TSIICL is wholly owned by the Government of Telangana and therefore the supply of works contract service by them is to a Government entity. The applicant therefore sought an advance ruling on the rate of tax applicable to supplies made to such Government entity.

The following question was raised:

“Q1. The rate applicable for the works contract service provided to the Telangana State Industrial Infrastructure Corporation Limited (TSIICL) which is wholly owned by the Government of Telangana State by way of construction of building on their land. Whether it is 12 per cent as the for Telangana State Industrial Infrastructure Corporation Limited (TSIICL) is wholly owned by the Government of Telangana or 18 per cent as the for Telangana State Industrial Infrastructure Corporation Limited is a business entity and collecting rent for letting our Godown/Building from its customers.”

The applicant reiterated its contention of a lower rate of 12 per cent.

The ld. AAR observed that TSIICL is a Government entity and apparently falls under S. No. 3(vi) of Notification No. 11/2017 which reads as follows:

“(vi) [Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, {other than that covered by items (i), (ia), (ib), (ic), (id), (ie) and (if) above provided to the Central Government, State Government, Union Territory, a local authority, a Governmental Authority or a Government Entity by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of —

(a) a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession;

(b) a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment; or

(d) a residential complex predominantly meant for self-use or the use of their employees or other persons specified in paragraph 3 of the Schedule III of the Central Goods and Services Tax Act, 2017.

Provided that where the services are supplied to a Government Entity, they should have been procured by the said entity in relation to a work entrusted to it by the Central Government, State Government, Union territory or local authority, as the case may be.

Explanation. — For the purposes of this item, the term business‘ shall not include any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities.”

The ld. AAR also referred to terms ‘Government Authority’ & ‘Government entity’ inserted as the definition in notification no. 31/2017-Central Tax (Rate) dated 13th October, 2017, in Notification no. 11/2017 as clauses (ix) & (x) to the explanation at Para 4 which is as follows:

“(ix) Governmental Authority means an authority or a board or any other body, – (i) Set up by an Act of Parliament or a State Legislature; or (ii) Established by any Government, with 90 percent. or more participation by way of equity or control, to carry out any function entrusted to a Municipality under article 243 W of the Constitution or to a Panchayat under article 243 G of the Constitution.

(x) Government Entity means an authority or a board or any other body including a society, trust, corporation, — (i) Set up by an Act of Parliament or State Legislature; or (ii) Established by any Government, with 90 per cent. or more participation by way of equity or control, to carry out a function entrusted by the Central Government, State Government, Union Territory or a local authority.”

The ld. AAR appreciated that the recipient is a Government entity. It further observed that the original notification No. 11/2017 applied a concessional rate of tax to ‘Government Entities’ & ‘Governmental Authorities’ @ 6 per cent of CGST & SGST each, only if such construction is predominantly for use other than for commerce, industry or any other business or profession. Since in the present case, the ware houses are for business purposes, the ld. AAR held that the above notification cannot apply to the applicant and hence further held that the applicable rate is 18 per cent. The ld. AAR also noted an amendment in the above entry in November 2021 vide Notification No. 15/2021 dated 18th November, 2021 whereby the phrases ‘Government Entity’ & ‘Governmental Authority’ are deleted from the Entry at S. No. 3(vi) of Notification No. 11/2017 with effect from 1st January, 2022. Thus, the works executed even for the ‘Governmental Entity’ or ‘Government Authority’ will be taxable @ 18 per cent from 1st January, 2022.

Accordingly, the ld. AAR confirmed rate @ 18 per cent for pre-amendment as well as post-amendment period.

A similar issue was also raised in one more AR bearing No. AR. Com/15/2022 dated 8th December, 2022 (Telangana). In this case also, the applicant was the same and has executed contracts for the same authority i.e., Telangana State Industrial Infrastructure Corporation Ltd. The applicant is to execute a contract for Bund beautification and construction of suspension wood bridge. The ld. AAR relying upon the above position of notification entry 3(vi) of Notification no. 11/2017 held the above contracts liable to tax @ 12 per cent.

There were further two contracts for establishing Shilparamam and Neera Café and food court. Since the above works are for business purposes, the ld. AAR held that tax applicable to said contracts will be 18 per cent. It was further held that from 1st January, 2022, the first category of contracts will also fall in the category of 18 per cent rate due to amendment in entry 3(vi) as discussed in earlier AR.

44 Exemption to Sub-contractor
Magnetic Infotech P. Ltd. (Order No. AAR. Com/11/2022 dated 22nd November, 2022 (Telangana)

The brief facts are that Magnetic Infotech Pvt Ltd, Plot No. 08, Krishna Nagar Colony, Kakaguda Village, Wellington Road, Picket, Secunderabad, Hyderabad, Telangana — 500009, had filed an application in FORM GST ARA-01 under Section 97(1) of TGST Act, 2017 read with Rule 104 of CGST/TGST Rules under following facts.

The Applicant has entered into agreements with various educational institutions located in different States such as the Board of Secondary Education and others.

The scope of work in respect of the services being provided to the educational institutions by the applicant was noted as falling in the following three categories:

i. Data processing for conduct of examination

ii. Results Preparation

iii. Generation and printing of statistical data and reports in the prescribed proformas as required by the educational institutions.

The aforesaid three categories of services involved processing of examination results which involves collection of examination forms from students and processing, and generation of checklists which are sent to the corresponding education institutions for verification and error correction. Then the checklist corrections are updated to make it error-free data. The further work involved the generation of hall tickets / admit cards, and photo attendance sheets which are sent to the examination centres. There are further activities like Processing the nominal roll data, generation of OMR sheets for obtaining marks, and conducting the examinations with nominal roll data and student information.

Post-examination services include getting the marks awarded from the evaluation centers capturing the data and summarizing it, purifying it and incidental activities till the declaration of results and issuing the marks memos to the students.

The applicant has submitted the following questions for Advance ruling:

a. Whether GST exemption is available to the applicant in respect of the pre and post Examination services being provided to the Educational Boards and Universities (including Open Universities)?

b. If answer to Q. No.1 is affirmative, whether the exemption is available to the applicant in case the services are provided on sub-contract basis i.e. the applicant provides pre and post examination services to the main contractor who in turn provide the said services to the Educational Boards & Universities (including Open Universities)?

Thus, the main issue involved was service rendered by the applicant on sub-contractor basis to main contractor in relation to pre & post-examination services.

The AAR gave AR wherein the Members of the Authority expressed different opinions on the second question raised by the applicant. One of the members Sri S.V. Kasi Visweswara Rao, Additional Commissioner (State Tax) held as under:

“It was opined by the above Member that in view of provisions contained under Sl. No. 66(b) of the Notification No. 12/2017—Central Tax (Rate), dt.28- 06-2017, as amended, the service relating to admission to or conduct of examination is exempt when provided to such educational institution, therefore, where a service itself is exempt, this exemption can be claimed by any taxable person including a sub-contractor.”

The other member Shri B. Raghu Kiran, Additional Commissioner, Central Tax held as under:

“8.4. The service relating to admission to or conduct of examination is exempt when provided to such educational institution. The said entry specifies that the services are required to be supplied to educational institution. Nevertheless, where the privity of contract is between the applicant (as a sub-contractor) and a main contractor, in such cases, the main-contractor does not fall under the definition of ‘educational institution’ and therefore, such supply is not covered under entry 66(b) of Not. No. 12/2017-CT (R) dated 28-06-2017 as amended. As such, the benefit of exemption is not available to the sub-contractor who supplies service to main contractor even though service to ultimately rendered to education institution.”

Under the above facts of divergent views on Question 2 about the applicability of GST, the said question was referred to the Appellate Authority for Advance Ruling for the state of Telangana in terms of Section 98(5) of the CGST/TGST Act, 2017 for hearing and decision on the said question No. 2.

The ld. AAAR reproduced the relevant extract of Notification no. 12/2017-CT(R), dated 28th June, 2022 and reproduced the same as under:

*“Sl. No.*	*Chapter, Section or Heading*	*Description of Services*
66	Heading 9992 or Heading 9963	Services provided — (a) by an education institution to its students, faculty and staff; (aa) by an educational institution by way of conduct of entrance examination against consideration in the form of entrance fee; (b) to an educational institution, by way of,- (i) transportation of students, faculty and staff; (ii) catering, including any mid-day meals scheme sponsored by the Central Government, State Government or Union territory; (iii) security or cleaning or house-keeping services performed in such educational institution. (iv) services relating to admission to, or conduct of examination by, such institution; Provided that nothing contained in sub-items (i), (ii) and (iii) of item (b) shall apply to an educational institution other than an institution providing services by way of pre-school education and education up to higher secondary school or equivalent.”

“Sl. No.

Chapter, Section or Heading

Description of Services

(1)

(2)

(3)

Heading 9992 or Heading 9963

Services provided —

(a) by an education institution to its students, faculty and staff;

(aa) by an educational institution by way of conduct of entrance examination against consideration in the form of entrance fee;

(b) to an educational institution, by way of,-

(i) transportation of students, faculty and staff;

(ii) catering, including any mid-day meals scheme sponsored by the Central Government, State Government or Union territory;

(iii) security or cleaning or house-keeping services performed in such educational institution.

(iv) services relating to admission to, or conduct of examination by, such institution;

Provided that nothing contained in sub-items (i), (ii) and (iii) of item (b) shall apply to an educational institution other than an institution providing services by way of pre-school education and education up to higher secondary school or equivalent.”

The ld. AAAR observed that the exemption is available when services are provided to an educational institution, by way of Services relating to admission to, or conduct of examination by, such institution.

In other words, the ld. AAAR observed that theexemption would be available when the services are provided “to” an educational institution for services relating to admission to, or conduct of examination by, such institution.

The ld. AAAR held that since in the present case, the main contractor to whom the applicant is to provide services as sub-contractor is not an educational institution, though the services are allegedly being provided to the Educational Boards and Universities by the main contractor, the exemption contained in the impugned notification is not available to the applicant. The ld. AAAR held that the wordings of any notification have to be strictly read to allow or deny any exemption.

In view of the above, the ld. AAAR held that the applicant, M/s. Magnetic Infotech Private Ltd., as a sub-contractor, is not eligible to claim exemption as available under Notification no. 12/2017(R), dated 28th June, 2017.

BCAJ Admin

Tax Implications on Assignment of Lease-Hold Rights

INTRODUCTION

Section 105 of the Transfer of Property Act, 1882 defines a lease of immoveable property as a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specific occasions to the transferor by the transferee, who accepts the transfer on such terms.

It has been a common practice for Governments and instrumentalities acting on behalf of Governments to allot parcels of lands on long-term leases. Such typically entail a one-time upfront premium (which fairly approximates the value of the land) and a periodic nominal rent (which also in many cases is compounded and collected upfront). The lease agreements executed between the lessor and the lessee may contain restrictive covenants in terms of use of the property, however, only subject to such restrictive covenants, the lessee is entitled to free use and enjoyment of the property in his own right. Further, such lease agreements permit a free transfer of the property by the lessee to third parties subject to approvals and payment of fees.

When service tax was introduced on ‘Renting of Immoveable Property Services’, the Department attempted to impose service tax on such Governments or instrumentalities and the same was widely challenged on various grounds. The matters are currently sub-judice and pending before the Courts.

The introduction of GST compounded the confusion due to a perceived wide interpretation of the term ‘service’ and limited applicability of exclusion under Schedule III of the CGST Act, 2017. A challenge against the collection of GST by an association of allottees was negated by the Bombay High Court in the case of Builders Association of Navi Mumbai vs. Union of India 2018 (12) GSTL 232 (Bom) and the appeal before the Supreme Court was also dismissed.

LEGISLATIVE DEVELOPMENTS

Considering the challenges of imposition of GST on the lease premium (which fairly approximates the value of land), Entry 41 of Notification 12/2017-CT(Rate) provided for an exemption from GST for one-time upfront amount (called as premium, salami, cost, price, development charges or by any other name) leviable in respect of the service, by way of granting long term (thirty years, or more) lease of industrial plots, provided by the State Government Industrial Development Corporations or Undertakings to industrial units. The said entry was amended from time to time.

Further, in cases where the land was further used for the development of real estate for further sale, Entry 41A inserted with effect from 1st April, 2019 provided for a partial exemption to the extent of sale of residential apartments prior to completion certificate and also prescribed a reverse charge mechanism making the promoter liable for payment of GST.

In view of the above entries, the transaction related to the allotment of plot of land by the Governments and instrumentalities to the allottees is by and large immune from GST except to the extent of proportionate reverse charge mechanism in the hands of the promoter. However, a new controversy is brewing in respect of secondary transactions i.e. the further assignment of lease by the original allottee to third parties.

SCENARIOS

Typically, an allotment of plot of land by the Government instrumentality to a promoter for real estate development would also entail a secondary transaction whereby the promoter would convey the rights in the leasehold land in favour of the proposed society of the apartment buyers. Such an allotment arises out of the covenants agreed upon in the agreement for sale entered into with individual buyers and does not bear a distinct discernible consideration. Entry 16(ii) of Notification 11/2017-CT(Rate) provides for a NIL Rate of tax for the supply of land or undivided share of land by way of lease or sub-lease where such supply is a part of composite supply of construction of units thereby resolving the issue for secondary transactions in case of real-estate development.

However, no explicit exemption entries prevail in case of secondary or subsequent transactions involving an assignment of lease in the underlying land.

In this article, we have discussed the GST implications which revolve around such subsequent transactions of assignment of such long-term leases. While the Supreme Court decision in the case of Builders Association (supra) has already held that GST is attracted on the lease premium, it may still be appropriate to examine the issue de novo due to various legislative developments, which may be useful to distinguish the said decision.

IS LAND, THE SUBJECT MATTER OF LEVY, “GOODS” OR “SERVICE” FOR THE PURPOSE OF GST?

Section 7 includes within the scope of supply all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.

A simple grammatical interpretation of the above would suggest that the coverage of a particular transaction under the scope of supply depends on two important parameters — (a) the form of supply — which is widely defined to include all forms of supplies such as sale, transfer, barter, exchange, license, rental, lease or disposal and (b) the subject matter of supply — which is specifically defined to include only ‘goods’ or ‘services’ or ‘both’.

It appears that the scope of coverage can be appreciated only if both the elements i.e. the form of supply and the subject matter of levy are independently analysed. An easy analogy to understand the de-coupled nature of the form and the subject matter of the supply is to examine the scenario of a motor car, which as a subject matter of supply would always constitute ‘goods’. However, depending on the form of supply, i.e. whether it is supplied by way of sale or by way of lease, the transaction would be treated either as supply of goods or supply of services.

Therefore, it first needs to be analysed whether land (as a subject matter of supply) can be considered as goods or services or both? This analysis needs to be de hors of the form of supplying the said land.

The term “goods” is defined under section 2(52) to mean every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply. Since in the instant case, the subject matter of the transaction is an immoveable property, it is evident that there is no supply of goods.

This takes us to the definition of the term “service” which is defined under section 2(102) to mean anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged. It is evident that service has been very loosely defined under GST. A literal reading of the definition indicates that anything which is not classifiable as goods would be a service. However, the context requires that a purposive interpretation rather than a literal interpretation of the definition should be adopted. The purposive interpretation would suggest that the subject matter of the transaction should bear an essential character of service.

In Hotel and Catering Industry Training Board vs. Automobile Proprietary Limited – (1968 (3) All. E.R. 399 (at page 402 (E)), Lord Denning speaking for the Court of Appeal explained as under:

“It is true that “the industry” is defined; but a definition is not to be read in isolation. It must be read in the context of the phrase which is defines, realizing that the function of a definition is to give precision and certainly to a word or phrase which would otherwise be vague and uncertain – but not to contradict it or supplant it altogether”.

In HariprasadShivshankar Shukla vs. A.D. Divelkar — AIR 1957 SC 121, a railway company was taken over by the Govt. of India. The railway company served a notice to its workmen to terminate the services of all workmen. The Supreme Court held that in ordinary acceptance, retrenchment connotes that the business itself is being continued but the portion of the staff or labour is discharged as surplusage. In view of the above ordinary acceptance, the Supreme Court held that the termination of service of all workmen as a result of the closure of business cannot be properly described as retrenchment as defined in Section 2(oo) of the Industrial Disputes Act, 1947.

From the above settled position for interpretation of a definition clause, it is clear that one has to find what is the ordinarily accepted version of the expression defined and, thereafter find whether the said ordinarily accepted version fits in with the requirement of the definition clause. However, the definition cannot be interpreted in a manner so as to destroy the essential meaning of the term defined.

Therefore, it needs to be seen as to what is the essence of the word ‘service’. Prior to the introduction of GST, the term service was defined under section 65B(44) of the Finance Act, 1994 to mean any activity carried out by a person for another for consideration. It thereafter included declared services and excluded certain transactions. The basic meaning attributed to the concept of service was any activity carried out by a person for another for a consideration which provides the essence of the general understanding of the word service and a similar context should be applicable in the GST law as well especially considering the fact that the GST Legislation in effect is consolidating many erstwhile indirect taxes rather than imposing a tax on some activities / sectors which were not taxable earlier.

We can also read the definition of service as being anything other than goods in the context of the Supreme Court decision in the case of Tata Consultancy Services Limited vs. State of Andhra Pradesh [2004 (178) ELT (022) SC] where the fundamental attributes of goods were listed. In the said case, the Hon’ble Court held that any property becomes goods if it satisfies the three conditions, namely utility, capability of being bought and sold and capability of being transmitted, transferred, delivered, stored and possessed. The relevant extracts are reproduced below for a ready reference:

It is not in dispute that when a programme is created it is necessary to encode it, upload the same and thereafter unloaded. Indian law, as noticed by my learned Brother, Variava, J., does not make any distinction between tangible property and intangible property. A ‘goods’ may be a tangible property or an intangible one. It would become goods provided it has the attributes thereof having regard to (a) its utility; (b) capable of being bought and sold; and (c) capable of transmitted, transferred, delivered, stored and possessed. If a software whether customized or non-customized satisfies these attributes, the same would be goods. Unlike the American Courts, Supreme Court of India have also not gone into the question of severability.

As rightly held in the above decision, any property, whether tangible or intangible is classifiable as goods if it has the following attributes, namely:

a. The item should have a utility.

b. The item should be capable of being bought and sold.

c. The item should be capable of being transmitted, transferred, delivered, stored and possessed.

In fact, the concept of transferability provides the attribute of ‘anything’ becoming property. Such properties can be further classified into moveable properties, immovable properties, tangible properties or intangible properties. Some of these may constitute goods while some may not. When the concept of service is examined, it has to be examined vis-à-vis this aspect of transferability. If there is a possibility of transferability, it would not amount to a service.

Therefore, a view can be taken that land cannot be considered either as ‘goods’ or as ‘services’. At this point in time, it must be noted that there is a distinction between the subject matter of supply and the form / manner of the supply. For example, irrespective of whether a motor car is sold or leased, the subject matter of the supply being a motor car continues to remain ‘goods’ and would be treated as such under Section 7(1)(a) of the Act. However, in view of the principles of classification provided under Section 7(1A) read with Schedule II, the sale of a motor car would be treated as the ‘supply of goods’ whereas the lease of a motor car would be considered as the ‘supply of services’. Applying a similar analogy, ‘land’ being the subject matter of the current transaction, cannot be treated as goods or services or both and one need not get carried away by the form / manner of the supply to determine whether the land is goods or services. In other words, Schedule II which treats certain activities or transactions as the supply of goods or services or both shall not have any bearing on the decision of whether the transaction constitutes a supply of service or not.

IF YES, WHAT IS THE FORM / MANNER OF SUPPLY?

Once it is accepted that ‘land’ as a subject matter of the supply does not constitute either goods or services or both, this question becomes redundant. However, to address the said question, it is evident that the term ‘supply’ includes all forms of supplies such as sale, transfer, barter, exchange, licence, rental, lease or disposal. Therefore, merely restricting the analysis from the point of view of the form / manner of the supply and ignoring the subject matter of supply being goods or services or both, one may conclude that both sale as well as lease are within the scope of supply.

Ignoring the subject matter of supply being goods or services or both, one may be then tempted to refer to Entry 5 of Schedule III of the Act. The said entry, inter alia, specifies that the “sale of land” shall be treated neither as supply of goods nor supply of services. The verbiage under the said Entry could then be compared with the exclusion under the erstwhile service tax law wherein “a transfer of title in goods or immovable property, by way of sale, gift or in any other manner” was excluded from the definition of service. Therefore, one may be tempted to imply that the GST Law proposes to provide for a limited exclusion for ‘sale of land’ and other transfers pertaining to land are not explicitly excluded and therefore a subject matter of GST.

However, in this context, it may be important to appreciate that the levy of GST is not governed by Schedule III. It is rather governed by Section 9 read with Section 7(1). As discussed earlier, it is possible to argue that in the instant case, land cannot be considered either as goods or as services. It is an accepted principle in law that an exclusion clause, being a benevolent one, can only exclude something which was originally covered and would have no effect in cases where the original coverage itself is in doubt. More importantly, an exclusion clause cannot be reverse-read to presume the existence of taxability and cannot thereby cast an onerous burden on the taxpayer which never existed. Useful reference can be made to the decision of the Supreme Court in the case of Gypsy Pegasus Limited vs. State of Gujarat 2018 (15) GSTL 305 (SC).

Further, a long-term lease of 99 years in essence represents a transaction of sale of immovable property and cannot be considered as renting / service simpliciter. In fact, the purpose of the Corporations entering into a long-term lease arrangement is merely to retain control over the development of the region. It does not mean that the person who has been allotted the plots is not the owner of the plot. Various clauses in the lease agreement, the intention and conduct of the parties clearly vindicate this position.

The provisions of various enactments, particularly the Transfer of Property Act, 1882 and various decisions in the context of a diverse set of legislations including the Consumer Protection Act, 1986, and the Income-tax Act, 1961, etc. also support this proposition that a long-term lease arrangement, in substance, represents a transfer of a right in immovable property and not a service. The following table summarises some of these provisions:

Legislation / Agency / Judiciary	Gist of the Relevant Provision / Decision
*Tulsi vs. Paro — 1997 (2) SCC 706 (SC)*	A lease of an immovable property creates an interest or a right in favour of the lessee as against a license wherein no such right in the property is created. In the proposed transaction, it is evident that transfer of leasehold rights in land against the receipt of a consideration constitutes a “demise” of property in favour of the transferee / lessee. Such an activity is clearly an activity of transfer of right in the immoveable property and therefore cannot be considered as a service.
Section 105 of the Transfer of Property Act, 1882	Lease is defined as a transfer of right to enjoy such property.
The Bombay Stamp Act, 1958	A person acquiring a land on lease for a period more than 15 years has to pay stamp duty on 90 per cent of the market value of the land which implies that such an acquirer is treated as an owner of the land himself and Stamp Duty is collected on an appropriate basis from him.
Foreign Exchange Management Act, 1999	A transaction of lease exceeding five years is treated as a capital account transaction by the Reserve Bank of India implies that the transaction is not that of procurement of service.
*U.T. Chandigarh Administration & … vs. Amarjeet Singh And Ors (2009) 4 SCC 660 (SC)*	The auction of plot of land does not involve rendering of any service as there is no hiring or availing of services by the person bidding at the auction and consequently the act of leasing plots by auction by the appellants did not result in the successful bidder becoming a `consumer’ or the appellants becoming `service providers’.
Lucknow Development Authority and Ghaziabad Development Authority (SC)	Clear distinction drawn between delay in granting possession of undeveloped existing sites on lease and developed sites, which categorizes the former as not
	entailing denial or deficiency in service.
*Abhay Pratap Singh vs. Capital Promoters Pvt. Ltd 1992 73 CompCas 149 (SC)*	Clear exclusion of outright sale of immovable property by one person to another person from the definition of service under the MRTP Act, 1969.
*Magus Construction Pvt. Ltd. vs. Union of India [2008 (11) S.T.R. 225 (Gau.)]*	The term service is defined as an activity which denotes transformation of use of goods as a result of voluntary intervention of the Service Provider and is an intangible commodity in the form of human effort. This clearly indicates that passive transactions involving transfer of rights in immovable property cannot be classified as services.
*European Union Court in Belgium vs. Temco Europe SA [Case C-284/03 of 18-11-2004]*	Leasing / letting of immovable property is a passive transaction and hence it would not be liable to VAT.
*1) Assam Bengal Cement Company Limited vs. CIT [1955] 27 ITR 34 (SC)* *2) DurgaMadiraSangh vs. Commissioner of Income Tax [1969] 72 ITR 769 (SC)* *3) CIT vs. Panbari Tea Co. AIR 1965 SC 1871 (SC)*	Lease premium paid up front, when the lessee acquires the interest in the property, is a single payment made towards the acquisition of a right and is a capital income and cannot be termed as a rental income, which is received periodically against a stipulation for continuous enjoyment of benefits.
Mukund Limited [2007] 291 ITR (AT) 249 (Mumbai Tribunal)	Lease premium cannot be termed as advance payment of rent or any payment towards rent, since it is a capital expenditure.
*CIT vs. PrabhuDayal 1971 82 ITR 802 (SC)*	A distinction has to be drawn between a payment made for services or discharge of liabilities or compensation for termination of an income producing asset. The latter is not recurring in nature and hence cannot be a revenue receipt. The amount realized on account of grant of right to enter and construct on the premises followed by subsequent agreement to lease constitutes parting away of the plot of land and hence is a capital receipt.
Various Financial Institutions / Banks	The lease premium paid by the allottee can be financed by the bank since the bank recognizes the lease premium as an amount paid towards acquisition of asset and not towards consumption of service.
Accounting Treatment in the books of the allottees	The lease premium paid towards the rights purchased by various allottees is capitalized in their books of accounts and not treated as a service which is immediately consumed.

At this juncture, it may be relevant to examine the decision of the Bombay High Court in the case of Builders Association of Navi Mumbai vs. Union of India 2018 (12) GSTL 232 (Bom) wherein the Court held that one-time lease rent paid as consideration to Government agency, CIDCO, for the lease of land for residential / commercial purposes, was liable to Goods and Services Tax as any lease, tenancy, easement, licence to occupy land was covered under ‘supply of services’ under GST Act and only those transactions or activities of Government or Statutory authorities could be exempted which are specifically notified to be so which wasn’t the case in this particular scenario.

While the Bombay High Court decision may suggest that GST is payable on the grant of leasehold rights in a plot of land, it may be important to note that the said decision was heavily influenced by the law then prevailing. The scope of supply is provided under section 7(1). Sub-clause (d) thereof, at the relevant point of time, included the activities to be treated as supply of goods or supply of services as referred to in Schedule II within the scope of supply. The Hon’ble Court was guided by Entry 2(a) of Schedule II inter alia mentioning lease of land and the placement of sub-clause (d) to conclude that in view of the inclusive nature of Schedule II, the Court is prohibited from probing further in the said matter.

Further, the Bombay High Court also observed that Section 7(2) permitted the Government to notify certain activities as neither supply of goods or services and that no such notification was issued. The said observation of the Bombay High Court in para 12 of the said decision, with due respect is factually incorrect, since Notification 14/2017-CT(Rate) as amended by Notification 16/2018-CT(Rate) indeed provided for an exemption for services by way of any activity in relation to a function entrusted to a Panchayat or to a Municipality under article 243G or 243W of the Constitution.

However, subsequent to the pronouncement of the said decision, the CGST Act was amended with retrospective effect whereby sub-clause (d) was deleted from Section 7(1) and was introduced in a slightly different manner as Section 7(1A). Through the said retrospective amendment, it is specifically provided that only where certain transactions constitute a supply in accordance with Section 7(1), will they be treated as a supply of goods or services as mentioned in Schedule II. Effectively, the retrospective amendment relegates the entries mentioned in Schedule II as classification entries rather than deeming entries.

When the Bombay High Court decision was agitated in an SLP before the Supreme Court, the Hon’ble Supreme Court dismissed the SLP. However, it may be important to note that the Supreme Court clarified that it has not examined the question of exemption or the scope or ambit of expression in Clause 2(a) of Schedule II and left those issues open. As such, despite the dismissal of the SLP, it can be said that the final findings of the Bombay High Court decision are still open for judicial review.

The above discussion indicates that there is a possible view to suggest that entering into an agreement for the lease of land may not constitute a supply of goods or services or both and therefore, shall not attract the levy of GST. In that scenario, the exemption provided by entry 41 becomes redundant. It must be noted that merely because an exemption is granted does not make the transaction taxable in the first place, as held by the Hon’ble Supreme Court in the case of Larsen & Toubro Ltd. [2015 (39) S.T.R. 913 (S.C.)] wherein it has been held as under:

44. We have been informed by counsel for the revenue that several exemption notifications have been granted qua service tax “levied” by the 1994 Finance Act. We may only state that whichever judgments which are in appeal before us and have referred to and dealt with such notifications will have to be disregarded. Since the levy itself of service tax has been found to be non-existent, no question of any exemption would arise. With these observations, these appeals are disposed of.

In case it is ultimately held that the grant of long-term lease of land is not covered under the GST Law, it would logically follow that even a subsequent assignment of the leasehold rights should also be granted the same tax treatment. However, irrespective of the tax treatment of the original transaction, there are certain additional points which can be used to argue non-taxability for assignment transactions as discussed in the subsequent paragraphs.

Whether the transaction of assignment of lease is governed by the ‘scope of supply’?

Section 7(1)(a) defines the scope of supply for the purposes of the levy of GST. The said provision is triggered only when the supply is in the course or furtherance of business. When a person engaged in a business activity had acquired the lease rights in the said property with an intention to use the said premises for the business, carried on the business from the said premises for some years and then assigned the lease rights to a third party, the moot question that needs analysis is whether the assignment of the lease rights is in the course or furtherance of such person?

The term ‘business’ is widely defined under section 2(17) of the CGST Act, 2017 to include the following:

(a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;

(b) any activity or transaction in connection with or incidental or ancillary to sub-clause (a);

(c) any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction;

(d) supply or acquisition of goods including capital goods and services in connection with commencement or closure of business;

(e) provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members;

(f) admission, for a consideration, of persons to any premises;

(g) services supplied by a person as the holder of an office which has been accepted by him in the course or furtherance of his trade, profession or vocation;

(h) activities of a race club including by way of totalisator or a license to book maker or activities of a licensed book maker in such club; and

(i) any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities;

It may be noted that the assignor may not be in the business of buying and selling immovable properties or obtaining and assigning leases in immovable properties. Therefore, by itself, the act of assigning the lease rights in the plot of land cannot constitute ‘business’ under sub-clause (a). Further, the action of assigning the lease right in the immoveable property cannot be considered to be incidental to the business and therefore sub-clause (b) is not attracted.

Clause (d) may become applicable only in limited cases when the assignment takes place on account of the closure of business. However, if the assignment takes place for other reasons, such as relocation of business, it cannot be said that the assignment of the lease rights is in connection with the closure of business (as the business continues) and therefore even sub-clause (d) is not applicable. No other subclauses of the definition of business are relevant to the current discussion. Therefore, it can be said the assignment of lease rights is not in the course or furtherance of its business and therefore, the same is not liable for GST.

One more aspect to examine is that Schedule II treats the lease of land as a service. Even if a conservative view is taken that Schedule II is inclusive and not clarificatory in nature, there is no relationship between a lessor and lessee, between the assignor and the intending Buyer. The Corporation continues to remain lessor in all situations. Through the assignment agreement, the assignor agrees to cease to be a Lessee and facilitate the Buyer becoming the Lessee. In the absence of a direct Lessor-Lessee relationship between the assignor and the Buyer, Entry 2(a) of Schedule II treating the lease of land as a service does not get triggered.

Therefore, a view can be taken that GST is not payable on the consideration for assignment / transfer of leasehold rights in the Land by the assignor to the Buyer.

If the assignor takes a conservative view, is the benefit of entry 41 available?

As discussed above, entry 41 conditionally exempts following services:

[Upfront amount (called as premium, salami, cost, price, development charges or by any other name) payable in respect of service by way of granting of long term lease of thirty years, or more) of industrial plots or plots for development of infrastructure for financial business, provided by the State Government Industrial Development Corporations or Undertakings or by any other entity having [20] per cent, or more ownership of Central Government, State Government, Union territory to the industrial units or the developers in any industrial or financial business area.]

The question that arises is whether the assignor can claim exemption on the assignment of the lease to a third party. The above-mentioned entry grants an exemption for an upfront amount (called as premium, salami, cost, price, development charges or by any other name) payable in respect of service by way of granting of long-term lease of thirty years, or more. While one may be tempted to treat such an exemption as restrictive only to the lessor, the usage of the words ‘any other amount’ expands the scope of coverage under the said entry.

In addition, a view can be taken that what is sought to be exempted is the amount payable for “service by way of granting of long-term lease of thirty years, or more) of industrial plots or plots for development of infrastructure for financial business, provided by the State Government Industrial Development Corporations… …”. It may be noted that after the assignment, the lessee changes but not the lessor. It must also be noted that the fourth proviso to conditions listed in Entry 41 has reference to subsequent lessee clearly indicating that the entire chain of transactions is sought to be exempted by the said entries. However, such exemption would be subject to the other conditions prescribed in the notification, one of which is the end use, i.e., the land should continue to be used for the purposes for which the lease was granted.

CONCLUSION

A plain reading of the provisions might tempt one to take a view that an assignment of long-term leasehold rights is a taxable supply of service and therefore liable for payment of GST. However, the stakes involved are substantial and with input tax credit eligibility at the recipient end also a potential issue, it is important that all probable options are evaluated before a final position is taken.

BCAJ Admin

From The President

Dear BCAS Family,

“Financial literacy is an essential part of knowing how to avoid financial mistakes and devising plans for a secure and strong financial future.” – Tim Pawlenty

Financial Literacy is a topic that is extremely important to just about everyone these days. It’s important not only because it impacts everyone, but also because those who lack a sound financial education risk a future of unnecessary instability and hardship.Chartered Accountants can bring a big change in the nation’s future by contributing towards increasing financial literacy.In a tweet, PM Modi said, “On #CharteredAccountantsDay, we honour a professional community that is among our nation’s key financial architects. Their analytical acumen and steadfast commitment are crucial to strengthening our economy. Their expertise helps build a prosperous and self-reliant India.”

Measuring Financial Literacy essentially involves measuring a combination of awareness, knowledge, skill, attitude and behaviour necessary to make sound financial decisions and ultimately achieve individual financial well-being. According to the Standard & Poor’s Global Financial Literacy Survey, the world’s largest and most comprehensive global measurement of financial literacy, India ranks 73rd out of 144 countries. In India, only 27 per cent of the population is financially literate, meaning only one out of every five Indians is equipped to deal with one of the most crucial aspects of human well-being.

A survey of “Financial Literacy among Students, Young Employees and the Retired in India” conducted by IIM-A, supported by CITI Foundation, reveals that “high financial literacy is not widespread among Indians where less than a quarter of the population have adequate knowledge on financial matters. There is a lack of understanding among Indians about the basic principles of money and household finance, such as compound interest, the impact of inflation on rates of return and prices, and the role of diversification in investments.”

In India, many rural communities lack access to financial services and education. As per “Deciphering Financial Literacy in India”, an article published in the Economic & Political Weekly, India also deals with tremendous inter-state differences within the country itself. Metropolitan areas like Maharashtra, Delhi, and West Bengal have financial literacy rates of 17 per cent, 32 per cent, and 21 per cent, respectively. At the same time, states like Bihar, Rajasthan, Jharkhand and Uttar Pradesh, where poverty is rampant, suffer from low financial literacy rates. On the one hand, Goa as a state has the highest financial literacy rate of 50 per cent, whereas Chhattisgarh lacks financial education and has the lowest literacy rate of 4 per cent.

Chartered Accountants can play a vital role in bridging this gap by providing financial education to these communities. By teaching individuals about savings, investments and budgeting, Chartered Accountants can empower them to make better financial decisions and improve their standard of living.

Small and Medium Enterprises (SMEs) are the backbone of the Indian economy, but they often face financial challenges that can hinder their growth. We can help SMEs overcome these challenges by providing financial and accounting advice, including tax planning and compliance, financial forecasting and budgeting.

Many non-profits in India struggle to manage their finances, which can hamper their ability to deliver services to those in need. Chartered Accountants can provide pro bono services to these organisations to help them manage their finances and improve their operations. In fact, it is heartening to note that many CAs are indeed rendering such noble services.

Digital financial literacy is also crucial to empower individuals to navigate digital financial landscapes securely and make informed decisions. The masses should understand online banking, digital payments, online trading, financial apps for expense management and budgeting, e-commerce, digital documentation and more to achieve more financial inclusion.

There is also a growing recognition of the need to incorporate financial education into the school and college curriculum. Integrating basic financial concepts into the education system can help build a foundation for financial literacy from an early age. Our Society has also been working on a financial literacy drive at schools and colleges in Mumbai.

The Indian government has launched several financial inclusion initiatives aimed at bringing financial services to all citizens, especially those in rural areas. Our Society intends to take various initiatives to promote Financial and Tax Literacy amongst the different sections of society, namely Employee Workforce, Police, Doctors, Technocrats, Housewives, Senior citizens, Teachers and Professors, Students, Farmers and Rural Households, MSMEs, Entrepreneurs, Start-ups and Businessmen.

Promoting financial literacy is essential to empower individuals, reduce financial vulnerabilities and foster economic growth.

To take further steps in this direction, members are requested to take Resolution and volunteer to achieve the mission of making citizens around them financially literate.

CHARTERED ACCOUNTANT FOR CHANGE PAST PRESIDENT – SHRI PRADYUMNA NATVARLAL SHAH

Shri PradyumnaNatvarlal Shah, a revered figure in the annals of the Bombay Chartered Accountants’ Society, left for his heavenly abode on 15th November, 2023. Fondly known as Pradyumna Bhai, he served as the BCAS President during the year 1968–69 and was the visionary behind the BCAS esteemed flagship event, “General RRC”. BCAS lost one of its founding leaders, a mentor to many, and one of the pioneers in the 75 years of BCAS history. During his professional journey, he has also been the President of the Institute of Chartered Accountants of India and the Chamber of Tax Consultants. BCAS bows to the yeoman services rendered by the noble soul.

REIMAGINE

On 4th, 5th, and 6th January, 2024, BCAS will organise a mega-conference ReImagine. The conference deals with Reimagining the Profession in this Changing Technological Environment. A total of 15+ thought-provoking sessions impacting the current state of professionals in practice or industry are planned. Thought leaders from all over India and abroad are going to be there, sharing their thoughts on topics like Start-ups; New Age Professional Firms; One World One Tax; Capital Markets; the impact of Technology on Tax, Audit, and other service areas; Changing Corporate Landscape; New Age Economic Wars; the changing roles of CA and many more. I am glad to inform you that Padma Bhushan Shri Kumar Mangalam Birla, Chairman of Aditya Birla Group, has consented to deliver the Keynote address. There will also be a Leadership talk by Padma Vibhushan Shri ViswanathanAnand (Indian Chess Grandmaster).

Participants from more than 100+ cities / towns, youth and seniors from Practice and Industry have registered for this event, providing every participant with a 365-day networking opportunity in just three days. Interaction with various CFOs from the industry over the CFO roundtable dinner and much more will be an additional takeaway.

I would urge the readers not to miss this one-of-a-kind event, which will be extremely beneficial for their professional journeys. It is an event where History meets the Future, Vision meets Thoughts, Network meets Net Worth, and I meet We!

To learn more about the conference and our thought leaders, visit reimagine.bcasonline.org.

I eagerly await ReImagine to welcome you on 4th January, 2024.

BCAJ Admin

Pains of Harsh Penalties for Bonafide Mistakes

“It is the power of punishment alone, when exercised impartially in proportion to the guilt, and irrespective of whether the person punished is the King’s son or an enemy, that protects this world and the next.” – Kautilya

In a recent decision, the division bench of the Mumbai ITAT, in the case of Shobha Harish Thawani,¹ confirmed the levy of penalty under Section 43 of The Black Money (Undisclosed Foreign Income And Assets) And Imposition Of Tax Act, 2015 (BMA) for non-disclosure of foreign assets in ‘Schedule FA’ of the Income-tax Return (ITR). In this particular case, the assessee had made a joint investment (with her husband) in an overseas Fund, having a 40 per cent share, but failed to disclose the said foreign asset in Schedule FA of ITR filed for A.Ys. 2016–17 and 2018–19. The assessee explained the source of the investments and offered the income thereon to tax in the ITRs. The Assessing Officer (AO) did not accept the assessee’s plea of bonafide error in disclosing such investment and levied a penalty of R10 lakh for each of the A.Ys. under Section 43 of the BMA for furnishing inaccurate particulars of investments outside India.

1   [TS-554-ITAT-2023(Mum)] dated 9^th August, 2023

The ITAT noted that Section 43 does not provide any room not to levy a penalty, even if the foreign asset is disclosed in the books, since the penalty is levied only towards non-disclosure of foreign assets in ITR. Strangely, her husband, who was the joint owner of the said investments, also failed to disclose the said investments in his ITR, but AO levied no penalty in his case. The language of Section 43 of the BMA is “…the Assessing Officer may direct that such person shall pay, by way of penalty, a sum of ten lakh rupees”(emphasis supplied). Regarding the discretion to levy the penalty, ITAT held, “The Assessing Officer exercised his discretion judiciously.” Thus, it did not give any relief to the assessee.

However, Mumbai ITAT, in the case of Leena Gandhi Tiwari,² held that “a mere non-disclosure of a foreign asset in the income tax return, by itself, is not a valid reason for a penalty under the BMA.”

2   Addl. CIT vs. Leena Gandhi Tiwari (2022) 216 TTJ 905 / 96 ITR (T) 384(Mum) (Trib)

As far as the discretion of the AO is concerned, the ITAT held that “It is also to be noted that Section 43 provides that the Assessing Officer “may” impose the penalty, and the use of the expression “may” signifies that the penalty is not to be imposed in all cases of lapses and that there is no cause and effect relationship simpliciter between the lapse and the penalty.”

As to what should be the considerations for the exercise of this inherent discretion by the Assessing Officer, we find some guidance from Hon’ble Supreme Court’s judgment in the case of Hindustan Steel Ltd vs. The State of Orissa³, which, inter alia, observes that “…penalty will not ordinarily be imposed unless the party obliged, either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. The penalty will not also be imposed merely because it is lawful to do so. Whether a penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose a penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute.”

3   [(1972) 83 ITR 26 (SC)]

In both these cases, the respective assessee claimed it was a genuine or a bonafide mistake. There was no mens rea. In the former case, this plea was rejected, and in the latter case, it was accepted.

The main objective of the BMA, as mentioned in the Statement of Objects and Reasons, appears to be “tracking down and bringing back undisclosed foreign assets and income which legitimately belongs to the nation.” Therefore, stringent regulations and harsh penalties are prescribed. These provisions are to deal with serious monetary crimes and not for bonafide mistakes or careless omissions, more so when there is no culpable state of mind. The intention behind the omissions must be considered, especially when the income from such investments is offered for taxation. Provisions of Section 43 of the BMA should be invoked judiciously, as one should not be penalised with a harsh penalty when one has made investments through a normal banking channel complying with FEMA formalities (e.g., remittance under Liberalised Remittance Scheme / ODI, etc.) or the income from such investments / assets are offered for tax in India. Levying of penalty in such circumstances, merely for non-disclosure of foreign investments / assets, and that too in a particular part of the return only, may be legally correct but morally wrong.

The severity of this penal provision can be understood by the fact that even if the assessee has made a one-time investment in foreign asset amounting to Rs 1,00,000 but failed to disclose the same in his ITR, a penalty of Rs 10 lakhs can be levied for each year of non-disclosure. For example, if a person fails to disclose such investment for three years, then Rs. 30 lakhs can be levied as a penalty for a technical default repeated three times. The only exception from such a penalty is in respect of an asset, being one or more bank accounts having an aggregate balance which does not exceed a value equivalent to Rs. 5,00,000 at any time during the previous year.”

The AOs should, therefore, use their discretion more judiciously and desist from routinely levying penalties. Unfortunately, some AOs seem to take a different view. In Leena Gandhi Tiwari’s case (supra), the AO relied on the decision of the Supreme Court (SC) in the case of UOI vs. Dharmendra Textiles Processors⁴, relating to section 11AC of the Central Excise Act, 1944, dealing with a mandatory penalty in case of any wilful misstatement or suppression of facts or contravention of any of the provisions thereunder.

4   (2008) 306 ITR 277 (SC)

The situation is no better under the Income-tax Act, 1961. Post SC decision in the case of Dharmendra Textiles, the AOs were invoking penalty provisions under the Income tax in a routine manner. This erroneous interpretation was set right by the SC in UOI vs. Rajasthan Spinning & Weaving Mills⁵^, wherein it was held that: “At this stage, we need to examine the recent decision of this Court in Dharmendra Textile Processor’s case (supra). In almost every case relating to penalty, the decision is referred to on behalf of the Revenue as if it laid down that in every case of non-payment or short payment of duty, the penalty clause would automatically get attracted, and the authority had no discretion in the matter. One of us (AftabAlam, J.) was a party to the decision in Dharmendra Textile Processor’s case (supra), and we see no reason to understand or read that decision in that manner.”

5   (2009) 180 Taxmann 609 (SC)

To conclude, any penalty should be proportionate to the seriousness or magnitude of the violations / lapses. The purpose of a penalty should be to discourage intentional wrongdoing while addressing unintentional errors through a more lenient approach, such as a reprimand or nominal fine. Provisions concerning harsh penalties under BMA, the Income-tax Act, 1961, and various other Statutes need to be suitably amended to give relief in respect of bonafide mistakes or venial / technical lapses or additions arising due to ambiguous provisions. Often, there are delays in compliance (e.g., KYC verification) because of a server failure on the government website, network issues, mistakes in forms, etc. Whereas taxpayers are at the receiving end for mistakes on their part, the revenue officials get away without any penal actions if their decisions are overruled or found to be blatantly incorrect or are in contrast to the jurisdictional Court / ITAT rulings. Professional bodies like BCAS can assist in identifying harsh penalty provisions under various laws and suggest checks and balances to stop their misuse and encourage compliance.

Let us hope and trust that till the time the laws are amended, the Courts and AOs will take a lenient view of such pardonable lapses, which will help to bridge the trust deficit between the taxpayers and the Income-tax department.

BCAJ Admin

Article 13(4) of old India-Mauritius DTAA – Having failed to establish that assessee is a conduit, basis TRC issued by tax authorities, the assessee is a tax resident of Mauritius and is entitled to DTAA benefits

9 Veg N Table vs. DCIT

TS-657-ITAT-2023 (Del)

ITA No.: 2251/Del/2022

A.Y.: 2018-19

Date of Order: 31st October, 2023

Article 13(4) of old India-Mauritius DTAA –— Having failed to establish that assessee is a conduit, basis TRC issued by tax authorities, the assessee is a tax resident of Mauritius and is entitled to DTAA benefits.

FACTS

Assessee, a Mauritius-based investment holdingcompany, sold shares of Indian Company (ICO) and claimed exemption under Article 13(4) of India-Mauritius DTAA. Shares were acquired prior to 1st April, 2017. Assessing Officer (AO) denied exemption noting that:a) ICO was 75 per cent held by UKCO and 25 per centby Canadian individuals b) there were no operatingincome or expense in the books of the assesse since the date of investment c) no remuneration was paid to directors d) two out of three directors held a number of directorships e) Third director was a Canadian individual who was ultimate beneficial owner f) there is no commercial rationale for establishing a company in Mauritius.

The assessee appealed to DRP. DRP upheld the order of AO.

Being aggrieved, the assessee appealed before the Tribunal.

HELD

Assessee holds valid TRC and should be treated as a resident of Mauritius. Reliance was placed on CBDT circulars and under noted decision¹.

AO alleged that the assessee is a conduit company. These allegations are not supported by substantive and cogent material.

GAAR provisions empowered AO to deny DTAA benefits. AO did not invoke GAAR provisions.

1 ABB AG in IT(IT)A No.1444/Bang/2019 dated 24th November, 2020

BCAJ Admin

Section 271(1)(c): Penalty — Concealment of income — Full disclosure of facts — No facts concealed or hidden — Penalty cannot be levied for difference in the opinion

24 Pr. Commissioner of Income Tax – 2 vs. Tata Industries Ltd.

[Income Tax Appeal No. 1039 of 2018, (Bom.) (HC)]

Date of Order: 9th November, 2023

Section 271(1)(c): Penalty — Concealment of income — Full disclosure of facts — No facts concealed or hidden — Penalty cannot be levied for difference in the opinion.

Assessee had filed a return of income on 30th October, 2004, declaring total income at the loss of Rs.15,97,83,660. The Assessing Officer (AO) completed the assessment under section 143(3) of the Act, determining the total income at Rs.32,38,84,147 under the normal provisions of the Act. Various additions / disallowances were made related to capitalisation of fees paid to S. B. Billimoria& Co. of Rs.19,44,000, disallowance of legal fees claimed in case of Deejay System Consultants Pvt Ltd. of Rs.4,85,000 and disallowance of claim of provision of diminution in value of investments written back of Rs.38,84,00,000.

The penalty proceedings under Section 271(1)(c) of the Act were also commenced. The AO came to the conclusion that assessee had committed default by filing inaccurate particulars of total income in respect of certain disallowances and levied penalty of Rs.1,60,96,088 being 100 per cent of the tax on the income of Rs.44,86,69,234 sought to be evaded under the normal provisions of the Act and Rs.18,43,03,149 being 100 per cent of the tax on the income of Rs.51,37,37,000 sought to be evaded under Section 115JB of the Act. The CIT(A) allowed the appeal, and the penalty levied by AO was deleted. The Tribunal dismissed the appeal filed by the Department vide order dated 28th September, 2016.

The Hon Court observed that the Tribunal has upheld the findings of the CIT(A) on the basis that the entire claim was made by the assessee making full disclosure, and no facts were concealed or hidden. The disallowance was made by the AO due to a difference in the opinion of the assessee and the AO. The explanation given by the assessee is a plausible explanation. Further, the AO has not found the expenses to be not genuine or not bona fide. The nature of the disallowance does not appear as the case of concealment or furnishing inaccurate particulars of the claim.

The Hon Court observed that the ITAT on the facts has agreed with the CIT(A) that the assessee had made the claim in a transparent and befitting manner. In view of the conclusions arrived on facts, the ITAT agreed with the view of the CIT(A) that the assessee has not committed any default or filed any inaccurate particulars of income warranting imposition of penalty.

The Apex Court in Commissioner of Income Tax vs. Reliance Petroproducts Pvt Ltd (2010) 322 ITR 158(SC) has held that where assessee has furnished all the details of its expenditure as well as income in its return, which details, in themselves, were not found to be inaccurate nor could be viewed as concealment of income on its part, and where the AO has taken a particular view contrary to the view that assessee had, it would not attract any penalty under Section 271(1)(c) of the Act. The Apex Court held that if this contention of the Revenue is accepted, then in case of every return where the claim made is not accepted by the AO for any reason, the assessee will invite penalty under Section 271(1)(c).

Thus, the Department’s appeal was dismissed.

BCAJ Admin

Section 148A and 151: Reassessment — Change of opinion — Tangible material — Reasons/ information cannot be substituted or modified

23 Hasmukh Estates Pvt. Ltd. vs.

Dy. ACIT – 1 (1)1, Mumbai

[W.P. No. 4574 of 2022, (Bom.) (HC)]

A.Y.: 2015–16

Date of Order: 8th November, 2023

Section 148A and 151: Reassessment — Change of opinion — Tangible material — Reasons/ information cannot be substituted or modified.

The Petitioner is a private company engaged in the business of undertaking real estate projects, selling a plot of land situated at Raigad District to one Regency Nirman Limited by a registered agreement to sell, dated 7th October, 2011, for consideration of Rs.18 Crores. The property was valued at Rs.16.50 Crores for the purpose of stamp duty. It was agreed between the Petitioner and the purchaser that in case the Petitioner was unable to discharge any obligation under the agreement, damages shall be settled. Thus, on non-fulfilment of some obligations on the part of Petitioner, the consideration was reduced by R6 Crores, making the consideration payable for the land at Rs.12 Crores. Petitioner e-filed its return of income on 31st March, 2017, declaring income of Rs.8,43,58,620 and booked profits under Section 115JB of the Act at Rs.9,72,27,472. An assessment order came to be passed on 26th December, 2017, accepting Petitioner’s figure of Rs.12 Crores. In the assessment order, the sale of this property and resultant capital gains were discussed. Namely, non-applicability of Section 50C of the Act.

Original notice under Section 148 of the Act was issued on 31st March, 2021, by the Assessing Officer (AO), and Petitioner filed a return of income raising objections against the reasons recorded. Thereafter, Petitioner received a communication dated 28th May, 2022, from the AO conveying that pursuant to the order of the Apex Court in the matter of Union of India vs. Ashish Agarwal, a copy of the approval under Section 151 of the Act and the reasons recorded prior to the issuance of notice under Section 148 of the Act were being forwarded to it. The Petitioner filed its objections to the letter dated 28th May, 2022 and explained its stand on the sale of the plot of land to Regency Nirman Limited. However, Respondent No.1-AO passed an order dated 29th July, 2022, under Section 148A(d) of the Act holding that the sale consideration offered was Rs.12 Crores, which was lesser than the stamp duty valuation of Rs.16.50 Crores, inviting applicability of Section 50C of the Act. The order was passed with prior approval of the PCCIT, Mumbai, followed by notice dated 30th July, 2022, under Section 148 of the Act.

The Hon Court observed that:

(a) The AO has dealt with the entire issue of long-term capital gains during the course of original assessment proceedings, including the fact of deduction of compensation / damages of an amount of Rs.6 Crores from the agreed consideration of Rs.18 Crores and the stamp valuation shown to be Rs.16.50 Crores.

(b) The AO clearly accepted the non-applicability of Section 50C of the Act to the transaction of sale while issuing the original assessment order.

(d) The audit memo was raised by an internal audit of the Department and not by CAG as required by the provision which was in effect prior to the amendment which came into force w.e.f. 1st April, 2022, and applicable to the present case.

(e) The AO conveyed his objections to the audit memo, maintaining that the original assessment order was correct.

(f) The ACIT once again maintained its objections. This time, the said ACIT accepted that the AO did not properly examine the allowability of Rs.6 Crores expense under the long-term capital gains head. Hence, the audit objection was accepted, leading to reopening of the assessment of the income of the Petitioner.

(g) Relying upon the decision of the Apex Court in the matter of Union of India vs. Ashish Agarwal, the notice under Section 148 of the Act dated 21st April, 2021, issued under the old law was treated as notice under Section 148A(b) of the Act.

Thus, the admitted facts indicate that the basis on which the AO issued notice alleging that there was ‘information’ that suggests escapement of income was an internal audit objection. What information is explained in Section 148 of the Act to mean “any objection raised by the Comptroller and Auditor General of India…” and no one else. This itself makes the reopening of assessment in the present case impermissible.

Consequently, a view deviating from that which was already taken during the course of issuing the original assessment order is nothing but a ‘change of opinion’, which is impermissible under the provisions of the Act.

The fact that the notice was issued based on audit objections received by the AO also does not find a mention in the impugned notice. It is settled law that the reopening notice can be sustained only on the basis of the ground mentioned in the reasons recorded. It is not open to the revenue to add and / or supplement later the reasons recorded at the time of reopening notice.

The Hon. Court held that the information which formed the basis of reopening itself does not fall within the meaning of the term ‘information’ under the 1st Explanation to Section 148 of the Act, and hence, the reopening is not permissible as it clearly falls within the purview of a ‘change of opinion’, which is impermissible in law.

BCAJ Admin

Revision u/s. 264 — Powers of Commissioner are not limited to correct an error committed by subordinate authorities but could even be exercised where errors are committed by the assessee — Assessee filed an applicationunder Section 154 and first time claimed indexcost of improvement being renovation expenses which was not claimed in original return of income

22 Pramod R. Agrawal vs. The Pr. CIT Circle – 5

[W.P. No. 2435 of 2017, (Bom.) (HC)]

A.Y.: 2007–08

Date of Order: 13th October, 2023

Revision u/s. 264 — Powers of Commissioner are not limited to correct an error committed by subordinate authorities but could even be exercised where errors are committed by the assessee — Assessee filed an application under Section 154 and first time claimed index cost of improvement being renovation expenses which was not claimed in original return of income.

The assessee, a resident individual, had sold a flat and offered the same as capital gain in the return of income without considering the allowance of indexed cost of improvement in respect of renovation expenses.

The Assessing Officer (AO) had made an addition under Section 50C by taking the stamp duty value as the full value of consideration while computing thecapital gains arising from the sale of said flat. No adjustment was made to the allowances claimed fromthe full value of consideration to determine the capital gains.

On appeal, the Commissioner confirmed the addition made by the AO by an order dated 13th July, 2013.

Thereafter, the assessee filed an application under Section 154 on 4th November, 2015, to rectify the previous orders passed by allowing the deduction of indexed cost of improvement of Rs.2.95 lakhs being renovation expenses incurred in the year 1990. It had claimed in the application that the allowance of the said cost was not claimed in the original return of income and the same should be allowed as it was a rectifiable defect under Section 154.

The ITO, however, rejected the application filed by the assessee on the ground that the claim was made the first time in the application under Section 154, and it was never brought to the notice earlier.

Aggrieved by the order of the ITO, the assessee had filed an application under Section 264, which was also rejected by an order dated 22nd March, 2017.

The Hon’ble Court observed that there was no delay in filing the application under Section 264 because the application under Section 264 was against the order passed under Section 154 and not Section 143(3). The order under Section 154 was passed on 8th December, 2015, and the application under Section 264 was filed on 18th January, 2016, within one year.

The Court further held that the proceedings under Section 264 are intended to meet a situation faced by an aggrieved assessee, who is unable to approach the Appellate Authorities for relief and has no other alternate remedy available under the Act. The Commissioner is bound to apply his mind to the question of whether the assessee was taxable on that income, and his powers are notlimited to correcting the error committed by thesubordinate authorities but could even be exercised where errors are committed by the assessee. It would even cover a situation where the assessee because of an error has not put forth a legitimate claim at the time of filing the return and the error is subsequently discovered and raised for the first time in an application under Section 264.

The Court referred and relied on the case of Asmita A. Damale vs. CIT Writ Petition No. 676 of 2014, dated 9th May, 2014, wherein the Court had held thatthe Commissioner while exercising revisionary powers under Section 264 has to ensure that there isrelief provided to the assessee where the law permits the same.

In the assessment order dated 30th December, 2010, passed under Section 143(3) in the case of Ravi R Agarwal, the other co-owner of the flat, theAO has accepted the amount of Rs. 2.95 lakhs as the cost of renovation of indexation. Therefore, this figure has to be accepted as correct and suitable allowance should be made while arriving at the long-term capital gain.

The impugned order dated 22nd March, 2017, was quashed, and the matter was remanded to the AO for denovo consideration.

BCAJ Admin

S. 69B, 132 – Additions to total income not sustainable when no incriminating material was found during the search. S. 153A, 153C – Additions based on documents found during a search on a third party to be made under section 153C and not 153A of the Act

45 ACIT vs. Atul Kumar Gupta (Delhi – Trib.)

[2023] 103 ITR(T) 13 (Delhi – Trib.)

ITA No.: 1164 and 1931 (Delhi) of 2020 and 205, 206 & 1395 (Delhi) of 2021

A.Ys.: 2011-12, 2014-15 to 2016-17

Date of Order: 13th March, 2023

S. 69B, 132 – Additions to total income not sustainable when no incriminating material was found during the search.

S. 153A, 153C – Additions based on documents found during a search on a third party to be made under section 153C and not 153A of the Act.

FACTS

A search was conducted by income tax authorities in a group case inter alia including the assessee. It was contended that the assessee had purchased shares of some companies at a price which was less than book value and, therefore, the difference between book value and purchase price represented unaccounted investment was added to the total income under section 69B of the Act.

Further, certain additions were made to the total income of the assessee based on ledger accounts found in the course of a third-party search.

Aggrieved, the assessee filed an appeal before CIT(A). The CIT(A) ruled in favour of the assessee and deleted both the additions on the basis that no incriminating material was found during the search to make the impugned addition. CIT(A) further observed that there was no reference to any document that was suggestive of any undisclosed income as a result of the purchase of shares.

Aggrieved, the Revenue, filed an appeal before the ITAT.

HELD

The ITAT observed that the CIT(A) has passed a well-reasoned order appreciating the material on record. The basis for addition as stated by the Assessing Officer was incriminating material found during the search and post search enquiry. However, no material or documents or any other details were specifically indicated or provided by the Assessing officer.

The ITAT further observed that merely stating that seized materials are there and post-search enquiry has shown that the purchase prices have been suppressed, cannot be the basis of addition.

The ITAT thus concurred with the findings of the CIT(A) on the first aspect.

On the next aspect of additions based on ledger accounts found in the course of a third-party search, the ITAT observed that no addition can be made de hors the material found during the search. When a separate independent search was not conducted on the assessee and additions are sought to be made based on ledger accounts found in the course of third-party search, the same have to be made under section 153C of the Act and not under section 153A of the Act.

Accordingly, the ITAT deleted the addition on the second aspect.

The ITAT relied on multiple judicial decisions inter alia includingK.P. Varghese vs. ITO [1981] 131 ITR 597 (SC), CIT vs. Kabul Chawla [2015] 380 ITR 573 (Delhi), CIT vs. Gulshan Kumar [2002] 257 ITR 703 (Delhi), CIT vs. Naresh Khattar HUF [2023] 261 ITR 664 (Delhi) and Pr. CIT vs. SMC Power Generation Ltd.[IT Appeal No. 406 of 2019, dated 23rd July, 2019]

BCAJ Admin

S. 271(1)(c) — Penalty levied without any independent and specific finding being recorded as to how disallowance made by the Assessing Officer (AO) which was upheld by the Tribunal, would lead to a charge of furnishing of inaccurate particulars of income by the assessee, was unjustified and to be deleted

44 ISGEC Heavy Engineering Ltd. vs. ITO

[2023] 103 ITR(T) 152 (Chandigarh – Trib.)

ITA No.: 577 (CHH) OF 2022

A.Y.: 2014-15

Date of Order: 13th March, 2023

S. 271(1)(c) — Penalty levied without any independent and specific finding being recorded as to how disallowance made by the Assessing Officer (AO) which was upheld by the Tribunal, would lead to a charge of furnishing of inaccurate particulars of income by the assessee, was unjustified and to be deleted.

FACTS

The assessee-company’s case was selected for scrutiny proceedings and an assessment order under section 143(3) was passed on 30th December, 2016 making various additions. Thereafter, the AO had passed a rectification order u/s 154 wherein the AO had reduced the addition made u/s 14A r.w. Rule 8D from Rs1,42,26,765 to Rs.63,21,654. On appeal before CIT(A), all the additions were deleted except for the addition made u/s 14A r.w. Rule 8D. On further appeal before the Tribunal, the addition u/s 14A r.w. Rule 8D was restricted to an amount of Rs.5,00,000 on an estimated and lump sum basis.

The AO had initiated penalty proceedings u/s 271(1)(c) vide show cause notice dated 30th December, 2016 and 10th June, 2021. Without taking into account, the reply of the assessee company, the AO passed the order u/s 271(1)(c) and levied a penalty of Rs.1,54,500 on restricted addition of Rs.5,00,000 holding that the assessee had furnished inaccurate particulars of income.

Aggrieved, the assessee company filed an appeal before CIT(A). The CIT(A) confirmed the penalty levied without assigning any reasons.

Aggrieved, the assessee company filed an appeal before the ITAT.

HELD

The ITAT observed that the AO had levied the penalty merely on the basis of the addition of Rs.5,00,000 in the quantum proceedings. The ITAT observed that there was no independent and specific finding which had been recorded by the AO, as to why he was of the belief that the charge of furnished inaccurate particulars of income can be fastened on the assessee company and the reasons for arriving at such a finding given that penalty provisions have to be strictly construed.

The ITAT held that it is a settled legal proposition that the quantum and penalty proceedings are independent proceedings. Though the initiation of penalty proceedings happens during the course of assessment proceedings and has to be evident and emerge from the assessment order, before the penalty is fastened on the assessee, the AO has to record independent finding justifying the charge of furnishing of inaccurate particulars of income or for concealment of particulars of income.

The ITAT further held that before the AO proceeded to calculate the disallowance under Rule 8D(2)(iii), he was supposed to consider the assessee company’s submission and examine the accounts of the assessee company. The AO had to record his reasoning that he was not satisfied with the submissions of the assessee company, but no such exercise was done by the AO.

The ITAT following the decision of the Hon’ble Supreme Court in the case of CIT vs. Reliance Petro Products (P.) Ltd. [2010] 189 Taxman 322/322 ITR 158directed to delete the penalty levied u/s 271(1)(c) and allowed the appeal.

BCAJ Admin

When income is offered for taxation under the head ‘Income from House Property’ but the income is assessed under the head ‘profits and gains of business or profession’ it cannot be said that the assessee has suppressed or under-reported any income. Where the assessee offered an explanation as to why it reported rental income under the head ‘income from house property’ and the explanation of the assessee was not found to be false, the case would be covered by s. 270A(6)(a)

43 D.C. POLYESTER LIMITED vs. DCIT

2023 (10) TMI 971 – ITAT MUMBAI

A.Y.: 2017-18

Date of Order: 17th October, 2023

Section: 270A

When income is offered for taxation under the head ‘Income from House Property’ but the income is assessed under the head ‘profits and gains of business or profession’ it cannot be said that the assessee has suppressed or under-reported any income.

Where the assessee offered an explanation as to why it reported rental income under the head ‘income from house property’ and the explanation of the assessee was not found to be false, the case would be covered by s. 270A(6)(a).

FACTS

The assessee filed its return of income declaring total income to be a loss of Rs.72,200. In the course of assessment proceedings, the Assessing Officer (AO) noticed that the assessee has offered rental income of Rs.29,60,000 under the head ‘income from house property’. The AO noticed that the assessee had declared the rental income from the very same property under the head ‘income from business’ in an earlier year, i.e., in A.Y. 2013-14. However, in the instant year, the assessee has declared rental income under the head ‘income from house property’ and also claimed various other expenses against its business income. He further noticed that there was no business income during the year under consideration.

The assessee submitted that it has reduced its business substantially and all the expenses claimed in the profit and loss accounts are related to the business only. It was submitted that the rental income was rightly offered under the head ‘income from house property’ during the year under consideration. In the alternative, the assessee submitted that it will not object to assessing rental income under the head ‘income from business’. Accordingly, the AO assessed the rental income under the head ‘income from business’.

The AO assessed rental income under the head `business’ and consequently the assessee was not entitled to deduction under section 24(a) of the Act. This resulted in assessed income being greater than returned income.

The AO initiated proceedings for the levy of penalty under s. 270A. In the course of penalty proceedings, it was submitted that the assessee has not under-reported the income since the addition pertains only to statutory deduction under section 24(a). The AO held that the furnishing of inaccurate particulars of income would have gone undetected, if the return of income of the assessee was not taken up for scrutiny. He also took the view that the claim of statutory deduction as well as expenses in the Profit and Loss account under two different heads of income would tantamount to under-reporting of income under section 270A of the Act. The AO levied a penalty of Rs.1,83,550 under section 270A of the Act.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal observed that since section 270A of the Act uses the expression “the Assessing Officer ‘may direct” — there is merit in the contention of the assessee that levying of penalty is not automatic and discretion is given to the AO not to initiate penalty proceedings under section 270A of the Act.

It held that it is not a case that the assessee has suppressed or under-reported any income. The addition came to be made to the total income returned by the assessee, due to a change in the head of income, i.e., the addition has arisen on account of computational methodology prescribed in the Act. It held that, in its view, this kind of addition will not give rise to under-reporting of income. The Tribunal was of the view that the AO should have exercised its discretion not to initiate penalty proceedings u/s 270A of the Act in the facts and circumstances of the case.

The Tribunal observed that the assessee has offered an explanation as to why it reported the rental income under the head Income from House property and the said explanation is not found to be false. Accordingly, it held that the case of the assessee is covered by clause (a) of sub. sec. (6) of sec. 270A of the Act. The Chennai bench of the Tribunal has held in the case of S Saroja (supra) that if a bona fide mistake is committed while computing total income, the penalty u/s 270A of the Act should not be levied.

The Tribunal deleted the penalty levied under section 270A of the Act.

BCAJ Admin

The rate of tax mentioned in s. 115BBE does not apply to income surrendered in the course of the search, in a statement made under section 132(4), and the Department has no dispute with regard to the explanation of the assessee regarding the source of the surrendered income

42 DCIT vs. Tapesh Tyagi

TS-642-ITAT-2023 (DEL)

A.Y.: 2017-18

Date of Order: 27th October, 2023

Sections: 69A, 132, 115BBE

The rate of tax mentioned in s. 115BBE does not apply to income surrendered in the course of the search, in a statement made under section 132(4), and the Department has no dispute with regard to the explanation of the assessee regarding the source of the surrendered income.

FACTS

In the course of search action on the assessee, an individual, a loose paper was found in the possession of the assessee with an amount Rs.30.20 mentioned with the description “Com Trade”. In the statement recorded under section 132(4) of the Act, when the assessee was confronted with the said paper, the assessee submitted that it indicates profit earned by him from “Commodity Trade”. This amount was surrendered as an income in the statement recorded. This amount was also offered for taxation in the return of income filed by the assessee subsequent to the search. However, tax on this amount was paid at a normal rate and not at the rate mentioned in section 115BBE.

According to the Assessing Officer (AO), income surrendered by the assessee is in the nature of unexplained money in terms of section 69A of the Act. Though he did not make any separate addition of the said amount in the assessment order, he treated it as income under Section 69A of the Act. However, he did not make any change to the tax rate applied by the assessee. Subsequently, the AO passed an order under Section 154 of the Act, wherein, he applied the rate of tax as prescribed under Section 115BBE of the Act.

Aggrieved with the higher rate of tax being levied, the assessee preferred an appeal to the CIT(A) who held that the income subjected to tax at the rate prescribed under Section 115BBE of the Act cannot be treated as income of the nature provided under Section 69A of the Act. Hence, a normal tax rate would be applicable to such income. The CIT(A) allowed the appeal filed by the assessee.

Aggrieved, revenue preferred an appeal to the Tribunal.

HELD

The Tribunal observed that the short issue arising for consideration is whether a special rate of tax provided under Section 115BBE of the Act would be applicable to the income surrendered by the assessee in the course of search and seizure operation and offered in the return of income.

The Tribunal held that the facts clearly establish that at the time of the search and seizure operation itself, the assessee has explained the source of the amount offered as income to be the profit derived from “commodity trade”, which is in the nature of business income. It observed that It also appears that the departmental authorities have no dispute with regard to the explanation of the assessee regarding the source of the surrendered income.

As rightly observed by the learned First Appellate Authority, section 69A uses the word “may”, which implies that if the explanation offered by the assessee regarding the source of money, bullion, jewellery or other valuable articles is satisfactory, it cannot be treated as unexplained money under Section 69A of the Act. In the facts of the present appeal, there is nothing on record to suggest that the assessee’s explanation regarding the source of the income offered has either been doubted or disputed at the time of the search and seizure operation or even during the assessment proceedings. Therefore, in our view, the income offered by the assessee cannot be treated as unexplained money under Section 69A of the Act. Therefore, as a natural corollary, section 115BBE of the Act would not be applicable.

The Tribunal observed that in the facts of the present appeal, admittedly, the assessee has not offered the income under Section 69A of the Act. It observedthat even, the AO has not made any separate additionunder Section 69A of the Act but has merely re-characterized the nature of income offered by the assessee. The Tribunal held that the provisions of sections 115BBE would not be applicable to the facts of the present appeal.

The Tribunal dismissed the appeal filed by the Revenue.

BCAJ Admin

Where the assessee sold flats at varied rates and the variation in rate was significant, Revenue directed to apply the weighted average rate of all the units for estimating the value of sales (except for one unit which is incomparable) and thus, to be valued at actual instead of the maximum rate applied by the Revenue to estimate sale value of the flats sold at varied rates by the assessee

41 DCIT vs. Mighty Construction Pvt. Ltd.

TS-522-ITAT-2023 (Mum)

A.Ys.: 2011-12 to 2013-14

Date of Order: 25th August, 2023

Section: 28

Where the assessee sold flats at varied rates and the variation in rate was significant, Revenue directed to apply the weighted average rate of all the units for estimating the value of sales (except for one unit which is incomparable) and thus, to be valued at actual instead of the maximum rate applied by the Revenue to estimate sale value of the flats sold at varied rates by the assessee.

FACTS

The assessee, a builder and developer, constructed a building known as `Universal Majestic’. During the assessment year 2011-12, the AO noticed that the flats in this building have been sold at varied rates ranging from Rs.13,513 per sq. feet to Rs.27,951 per sq. feet. He noted the comparable sale instances in the assessment order.

In the reply to the show cause notice, the assessee gave various factors and reasons for the variation in the prices for example, firstly, some units had additional flower bed area; secondly, due to various Vaastu angles and passage for the flat which commanded different prices; thirdly, certain units had additional areas like store room, flower bed and passage area, and lastly, some of the units had no natural ventilation and due to certain market conditions also, the price bookings and rates are varied. Apart from that, it was also submitted that the project was off-location and no good development and construction in the surrounding area was there during that period and it was covered with slums all around the building premises.

The Assessing Officer (AO) rejected all the contentions after giving his detailed reasoning stating that, firstly, the project was centrally located and directly accessible to Eastern Express Highway and easily accessible from Mumbai International Airport and Domestic Airport, and newly built freeway flyovers have come connecting to various important places. Apart from that, he also rebutted the assessee’s contention of the additional flower bed area and passage area on the grounds that as per the Municipal rules, a builder can only sell areas as per the approved plans, and any encroachment done on the flower bed or any alteration without the permission of the Municipal authorities is not permissible and the passage area is only common area property for the society wherein nobody can encroach. Regarding the Vaastu factor also, he has given his detailed analysis by bringing in certain comparable instances of the flats sold by the assessee itself. Thus, he held that the justifications and the submissions given by the assessee to prove the variation in the rates are only an afterthought.

The AO held that the rate per sq. ft should be Rs.27,951, this being the highest rate per sq. ft, as of 31st August, 2010, since most of the other bookings were somewhere close to this date and accordingly, he worked out the sale cost of each unit. The AO added a sum of Rs.46,75,48,737 to the returned total income on this account.

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

Aggrieved, revenue preferred an appeal to the Tribunal.

HELD

The Tribunal observed that a huge variation in the sale price of different units of the same project was not found to be justifiable by the AO. The AO has rebutted the explanation given by the assessee but the CIT(A) without much factual analysis has deleted the addition made by the AO.

The Tribunal held that though there could be some variation in the rates per unit depending upon various factors which cannot be brushed aside, but to accept that there would be such huge variation is beyond any prudence and reality. Thus, such a huge difference is certainly not justified and even the action of the AO to take the maximum rate of units sold is also not justified. Because factors like total area, extra accessible and useable area of particular unit and location and ventilation of the unit etc., do have variation in the price and the premium paid. Therefore, it would be very difficult to apply any kind of logic to accept the version of both assessee as well as AO.

The Tribunal asked the AR to submit a weighted average rate at which the flats were sold and noted that the weighted average rate comes to Rs.17,712 per sq. feet. It found that there is one unit which is a shop cum garage and definitely it cannot be compared with other units where the agreement rate was very low and therefore, the same rate of Rs.17,172 cannot be applied. The Tribunal held that in the weighted average, this particular unit sold would be excluded while calculating the weighted average, and the actual price should be taken, and for all other 12 units, the rate for estimating the sales to be taken at Rs.17,172. The Tribunal directed the AO to work out the consequential relief.

BCAJ Admin

Glimpses of Supreme Court Rulings

51 Principal Commissioner of Income Tax vs. Krishak Bharti Cooperative Ltd. (2023) 458 ITR 190 (SC)

Double Taxation Avoidance — Assessee was entitled to credit for the tax, which would have been payable in Oman even though a dividend, being an incentive in Oman to promote development in that country, was exempt in Oman — DTAA between India and Oman, Article 25.

The Assessee, a multi-State Co-operative Society, is registered in India under the administrative control of the Department of Fertilizers, Ministry of Agriculture and Co-operation, Government of India. In the course of its business of manufacturing fertilisers, it entered into a joint venture with Oman Oil Company to form the Oman Fertilizer Company SAOC (for short ‘OMIFCO’ or ‘the JV’), a registered company in Oman under the Omani laws. The Assessee has a 25 per cent share in the JV. The JV manufactures fertilizers, which are purchased by the Central Government. The Assessee has a branch office in Oman which is independently registered as a company under the Omani laws having permanent establishment status in Oman in terms of Article 25 of the DTAA. The branch office maintains its own books of account and submits returns of income under the Omani income tax laws.The assessment for the relevant year was completed under Section 143(3) of the Income Tax Act, 1961 (‘the Act’). The Assessing Officer allowed a tax credit in respect of the dividend income received by the Assessee from the JV. The dividend income was simultaneously brought to the charge of tax in the assessment as per the Indian tax laws. However, under the Omani tax laws, exemption was granted to the dividend income by virtue of the amendments made in the Omani tax laws w.e.f. the year 2000.

The Assessing Officer allowed credit for the said tax, which would have been payable in Oman, but for which exemption was granted.

Thereafter, the Principal Commissioner of Income Tax (‘PCIT’) issued a show cause notice under Section 263 of the Act on the ground that the reliance placed on Article 25(4) of DTAA was erroneous in this case, and no tax credit was due to the Assessee under Section 90 of the Act. This notice was duly replied to by the Assessee. However, the PCIT rejected all the contentions raised by the Assessee inter alia holding that Article 25 of Omani tax laws was not applicable in the instant case because there was no tax payable on dividend in Oman and, accordingly, no tax has been paid and that Assessee was not covered under the exemption.

Questioning the order of PCIT, the Assessee preferred an appeal before the Income Tax Appellate Tribunal (‘ITAT’), which allowed the appeal holding that the order passed by the PCIT under Section 263 of the Act was without jurisdiction and was not sustainable in law.

The order passed by the ITAT was challenged before the Delhi High Court by preferring an Income Tax Appeal, which had been dismissed by the High Court by the impugned judgment holding that as per the relevant terms of the DTAA between India and Oman, the Assessee was entitled to claim the tax credit, which had been rightly allowed by the Assessing Officer.

On further appeal by the Revenue, the Supreme Court noted that Article 25 (2) of the DTAA provides that where a resident of India derives income, which in accordance with this agreement, may be taxed in the Sultanate of Oman, India shall allow as a deduction from the tax on the income of that resident an amount equal to the income tax paid in the Sultanate of Oman, whether directly or by deduction. Article 25(4) clarifies that the tax payable in a Contracting State mentioned in Clause 2 and Clause 3 of the said Article shall be deemed to include the tax which would have been payable but for the tax incentive granted under the laws of the Contracting State and which are designed to promote development.

The Supreme Court noted that the revenue was relying upon Article 11 which provides that dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other Contracting State. Thus, according to the revenue, the dividend received by the Assessee was taxable in India and was not exempt because the same was not designed as a tax incentive in Oman to promote development in that country. In the same manner, it was argued that the letter issued by the Secretary General for Taxation, Ministry of Finance, Oman was not issued by the competent Omani authority and has no statutory force.

The Supreme Court observed that the term ‘incentive’ is neither defined in the Omani Tax Laws nor in the Income Tax Act, 1961. Faced with this situation, the JV addressed a letter in November, 2000 to Oman Oil Company seeking clarification regarding the purpose of Article 8(bis) of the Omani Tax Laws. The clarification letter dated 11th December, 2000, was addressed by the Secretary General for Taxation, Sultanate of Oman, Ministry of Finance, Muscat to Oman Oil Company SAOC.

The Supreme Court noted that the said letter of the Omani Finance Ministry clarified that the dividend distributed by all companies, including the tax-exempt companies would be exempt from payment of income tax in the hands of the recipients. By extending the facility of exemption, the Government of Oman intends to achieve its objective of promoting development within Oman by attracting investments. Since the Assessee had invested in the project by setting up a permanent establishment in Oman, as the JV was registered as a separate company under the Omani laws, it was aiding in promoting the economic development within Oman and achieving the object of Article 8 (bis). The Omani Finance Ministry concluded by saying that tax would be payable on dividend income earned by the permanent establishments of the Indian Investors, as it would form part of their gross income under Article 8, if not for the tax exemption provided under Article 8(bis).

According to the Supreme Court, a plain reading ofArticle 8 and Article 8(bis) would manifest that underArticle 8, dividend is taxable, whereas, Article 8(bis) exempts dividend received by a company from its ownership of shares, portions, or shareholding in the share capital in any other company. Thus, Article 8(bis) exempts dividend tax received by the Assessee from its PE in Oman and by virtue of Article 25, the Assessee was entitled to the same tax treatment in India as it received in Oman.

Insofar as the argument concerning the Assessee not having PE in Oman, the Supreme Court noted that from the year 2002 to 2006, a common order was made under Article 26(2) of the Income Tax Law of Oman. The High Court had extracted the opening portion of the above order. From the said letter it was apparent that the Assessee’s establishment in Oman had been treated as PE from the very inception up to the year 2011. According to the Supreme Court, there was no reason as to why all of a sudden, the Assessee’s establishment in Oman would not be treated as PE when for about 10 years it was so treated, and that the tax exemption was therefore granted based upon the provisions contained in Article 25 read with Article 8(bis) of the Omani Tax Laws.

The Supreme Court also dealt with the contention raised by the Appellant to the effect that the letter dated 11th December, 2000, issued by the Secretary General for Taxation, Ministry of Finance, Sultanate of Oman had no statutory force as per Omani Tax Laws, hence, the same could not be relied upon to claim exemption. The Supreme Court was of the view that the above letter was only a clarificatory communication interpreting the provisions contained in Article 8 and Article 8(bis) of the Omani Tax Laws. The letter itself did not introduce any new provision in the Omani Tax Laws. In this view of the matter, the Supreme Court was not convinced that the argument raised by the Appellant would lead it to deny exemption to the Assessee.

The Supreme Court concluded that the Appellant had not been able to demonstrate as to why the provisions contained in Article 25 of DTAA and Article 8(bis) of the Omani Tax Laws would not be applicable and, consequently, it held that the appeals had no substance and therefore dismissed.

52 Kerala State Co-operative Agricultural and Rural Development Bank Ltd. vs. The Assessing Officer, Trivandrum and Ors. (2023) 458 ITR 384 (SC)

Deduction in respect of income of co-operative societies — Section 80P — If a co-operative society is not a co-operative bank, then such an entity would be entitled to deduction under Sub-section (2) of Section 80P of the Act but on the other hand, if it is a co-operative bank within the meaning of Section 56 of Banking Regulation Act, 1949 read with the provisions of NABARD Act, 1981 then it would not be entitled to the benefit of deduction in view of Sub-section (4) of Section 80P of the Act.

The Appellant / Assessee, a State-level Agricultural and Rural Development Bank was governed as a co-operative society under the Kerala Co-operative Societies Act, 1969 (“State Act, 1969”) and is engaged in providing credit facilities to its members who are co-operative societies only.

The Kerala State Co-Operative Agricultural Development Banks Act, 1984 (“State Act, 1984”) was passed ‘to facilitate the more efficient working of Co-operative “Agricultural and Rural Development Banks” in the State of Kerala.’

On 27th October, 2007, the Appellant / Assessee filedits Return of Income for the Assessment Year 2007-08 of Rs.27,18,052 claiming deduction under Section 80P(2)(a)(i) of the Act.

Upon scrutiny, on 22nd December, 2009, an Assessment Order under Section 143(3) of the Act, was passed by the Assessing Officer for the Assessment Year 2007-08, disallowing the deduction of Rs.36,39,87,058 under Section 80P(2)(a)(i) holding that the Appellant / Assessee was neither a primary agricultural credit society nor a primary co-operative agricultural and rural development bank. The Assessing Officer held the Appellant / Assessee was a “co-operative bank” and thus, was hit by the provisions of Section 80(P)(4) and was not entitled to the benefit of Section 80(P)(2) of the Act. The total income was assessed at Rs.36,69,47,233.

Aggrieved by the Assessment Order dated 27th December, 2009, the Appellant / Assessee filed an appeal before the Commissioner of Income Tax (Appeals) (“CIT(A)”).

The CIT(A) vide Order dated 30th July, 2010 confirmed the disallowance made by the Assessing Officer. The CIT (A) was of the view that the Appellant / Assessee was actively playing the role of a development bank in the State and was no longer a land mortgage bank but was a development bank. CIT(A) further observed that with the insertion of Section 80P(4), co-operative banks are placed at par with other commercial banks and the Appellant / Assessee who was in the business of banking through its primary co-operative banks was definitely a co-operative bank within the meaning of Section 80P(4). Consequently, the appeal was dismissed.

Being aggrieved by the Order passed by CIT(A), the Appellant / Assessee filed a further appeal before the Income Tax Appellate Tribunal (“ITAT”).

The ITAT vide Order dated 23rd February, 2011, partly allowed the appeal. The ITAT held that the Appellant / Assessee was a co-operative bank and was not a primary agricultural credit society or a primary co-operative agricultural and rural development bank. Hence, it was consequently hit by the provision of Section 80P(4) and thus, the deduction claimed was rightly denied. However, the ITAT clarified that to the extent that the Appellant / Assessee was acting as a State Land Development Bank which fell within the purview of the National Bank for Agriculture and Rural Development Act, 1981 (“NABARD Act, 1981”,) and was eligible for financial assistance from NABARD, the Appellant / Assessee’s claim merited acceptance and it would be entitled to deduction under Section 80P(2)(a)(i) on the income relatable to its lending activities as such a bank.

Aggrieved by the Order passed by the ITAT in only partly allowing its appeal, the Appellant / Assessee preferred an appeal against the ITAT’s Order dated 23rd February, 2011. The issue raised by the Appellant / Assessee was with respect to the ITAT’s finding that the Appellant / Assessee was neither a primary agricultural credit society nor a primary co-operative agricultural and rural development bank, hence, not entitled to the exemption of its income under Section 80P(2)(a)(i) of the Act.

On 26th November, 2015, the Kerala High Court dismissed the Assessee’s Appeal, holding that the ITAT’s findings did not warrant any interference as the case did not involve any substantial question of law.

Against the judgment dated 26th November, 2015, the Appellant / Assessee preferred a Special Leave Petition (C) bearing No. 2737 of 2016. The Supreme Court vide Order dated 1st February, 2016, issued notice and granted a stay of recovery of demand made by the Income Tax Authorities from the Appellant / Assessee for the A.Y. 2007-08.

The Supreme Court observed that Section 80P speaks about deduction in respect of income of co-operative societies from the gross total income referred to in Sub-section (2) of the said Section. From the said income, there shall be deducted, in accordance with the provisions of Section 80P, sums specified in Sub-section (2), in computing the total income of the Assessee for the purpose of payment of income tax. Sub-section (2) of Section 80P enumerates various kinds of co-operative societies. Sub-section (2)(a)(i) states that if a co-operative society is engaged in carrying on the business of banking or providing credit facilities to its members, the whole of the amount of profits and gains of business attributable to any one or more of such activities shall be deducted. The Sub-section makes a clear distinction between the business of banking on the one hand and providing credit facilities to its members by co-operative society on the other.

The Supreme Court noted that while Section 80P was inserted into the Act with effect from 1st April, 1968, however, Sub-section (4) was reinserted with effect from 1st April, 2007, in the present form. Earlier Sub-section (4) was omitted with effect from 1st April, 1970.

The Supreme Court noted the objects and reasons for the insertion of sub-section (4) to Section 80P of the Act by referring to the speech of the Finance Minister dated 28th February, 2006, CBDT Circular dated 28th December, 2006, containing explanatory notes on provisions contained in the Finance Act, 2006 and clarification by the CBDT, in a letter dated 9th May, 2008, and observed that the limited object of Section 80-P(4) was to exclude co-operative banks that function on a par with other commercial banks i.e. which lend money to members of the public.

The Supreme Court noted that a co-operative bank is defined in Section 56 (c)(i)(cci) of the Banking Regulation Act, 1949 to be a state co-operative bank, a central co-operative bank and a primary co-operative bank and central co-operative bank and state co-operative bank to have the same meanings as under the NABARD Act, 1981.

The Supreme Court further noted that Section 2(d) of NABARD Act, 1981 defines central co-operative bank while Section 2(u) defines a state co-operative bank to mean the principal co-operative society in a State, the primary object of which is financing of other co-operative societies in the State, which means it is in the nature of an apex co-operative bank having regard to the definition under Section 56 of the Banking Regulation Act, 1949, in relation to co-operative bank. The proviso states that in addition to such principal society in a State, or where there is no such principal society in a State, the State Government may declare any one or more co-operative societies carrying on the business of banking in that State to be also or to be a state co-operative bank or state co-operative banks within the meaning of the definition. Section 2(v) of NABARD Act, 1981 defines a state land development bank to mean the co-operative society which is the principal land development bank (by whatever name called) in a State and which has as its primary object the providing of long-term finance for agricultural development.

The Supreme Court also noted that as per Clause (c) of Section 5 of the Banking Regulation Act, 1949, a banking company is defined as any company which transacts the business of banking in India. Clause (b) of Section 5 of the Banking Regulation Act, 1949 defines banking business to mean the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise. Thus, it is only when a co-operative society is conducting banking business in terms of the definition referred to above that it becomes a co-operative bank. In such a case, Section 22 of the Banking Regulation Act, 1949 would apply wherein it would require a licence to run a co-operative bank. In other words, if a co-operative society is not conducting the business of banking as defined in Clause (b) of Section 5 of the Banking Regulation Act, 1949, it would not be a co-operative bank and not so within the meanings of a state co-operative bank, a central co-operative bank or a primary co-operative bank in terms of Section 56(c)(i)(cci).

According to the Supreme Court, if a co-operative society is not a co-operative bank, then such an entity would be entitled to deduction under Sub-section (2) of Section 80P of the Act but on the other hand, if it is a co-operative bank within the meaning of Section 56 of Banking Regulation Act, 1949 read with the provisions of NABARD Act, 1981 then it would not be entitled to the benefit of deduction in view of Sub-section (4) of Section 80P of the Act.

According to the Supreme Court, a co-operative society which is not a state co-operative bank within the meaning of the NABARD Act, 1981 would not be a co-operative bank within the meaning of Section 56 of the Banking Regulation Act, 1949. In the instant case, in A.P. Varghese vs. The Kerala State Co-operative Bank Ltd. reported in AIR 2008 Ker 91, the Kerala State Co-operative Bank being declared as a state co-operative bank by the Kerala State Government in terms of NABARD Act, 1981 and the Appellant society not being so declared, would imply that the Appellant society was not a state co-operative bank.

The Supreme Court thus concluded that although the Appellant society was an apex co-operative society within the meaning of the State Act, 1984, it was not a co-operative bank within the meaning of Section 5(b) read with Section 56 of the Banking Regulation Act, 1949. The Appellant was thus not a co-operative bank within the meaning of Sub-section (4) of Section 80P of the Act. The Appellant was a co-operative credit society under Section 80P(2)(a)(i) of the Act whose primary object was to provide financial accommodation to its members who were all other co-operative societies and not members of the public. Consequently, the Appellant was entitled to the benefit of deduction under Section 80P of the Act.

BCAJ Admin

‘Only Source of Income’ For S. 80-IA/80IB and Other Provisions

ISSUE UNDER CONSIDERATION

A deduction in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development is conferred vide s. 80-IA for varied periods at the specified percentage of profit, subject to compliance with several conditions specified in s. 80-IA of the Income Tax Act, 1961. One of the important conditions is provided by sub-section (5) of s. 80-IA, which overrides the other provisions of the Act, requiring an assessee to determine the quantum of deduction to be computed as if the qualifying business is the only source of income.The said provision of s. 80-IA (5) reads as under;

‘Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of incomeof the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made.’

A similar condition is prescribed in a few other provisions of Chapter VIA of the Act, and was also found in some of the provisions now omitted from the Act. Like any other deduction, the benefit of deduction here is subject to compliance with the conditions and the ceilings of s. 80A to 80B of the Act. The computation of the quantum of the ‘only source of income’ has become a major issue that has been before the courts for quite some time. The Delhi, Rajasthan and Madras High Courts have taken a view that, in computing the only source of income, the losses of the preceding previous years relating to the same source should not be set off and adjusted or reduced from the income of the year, where such losses are otherwise absorbed in the preceding previous years. In contrast, the Karnataka High Court has taken a contrary view, holding that such losses, even though absorbed, should be notionally brought forward for computing the quantum of deduction for the year under consideration.

MICROLAB’S CASE

The issue had come up for consideration of the Karnataka High Court in the case of Microlabs Limited vs. ACIT, 230 Taxman 647. In that case, the assessee was engaged in the business of running an industrial undertaking and had derived profit from such business for the year under consideration. The losses remaining to be absorbed of the preceding previous years of such business were absorbed against the other income of the immediately preceding previous year. Accordingly, in computing the quantum of deduction under s. 80-IA for the year under consideration, the assessee company had claimed a deduction in respect of the entire profit of the year of such business. The AO however had reduced the quantum of deduction by the amount of losses of the preceding previous years that were absorbed and adjusted in computing the deduction for the immediately preceding previous year. The action of the AO was upheld by the tribunal.Aggrieved by the action of the AO and the tribunal, the assessee company had raised the following substantial question of law for consideration of the High Court;

“Whether in law, the Tribunal is justified in holding that in view of provision of Section 80-IA(5) of the Income Tax Act, the profit from the eligible business for the purpose of deduction under Section 80-IB of the Act has to be computed after deduction of notional brought forward losses of eligible business even though they have been allowed to set off against other income in the earlier years?”

On behalf of the assessee company, relying on the decision of the Madras High Court in the case of Velayudhaswamy Spinning Mills (P) Ltd. vs. ACIT, 340 ITR 477, it was contended that, once the set-off of losses had taken place in an earlier year against the other income of the assessee, such losses could not be notionally brought forward and set-off against the income of the eligible business for the year in computing deduction under s. 80-IA of the Act.

In contrast, the Revenue, relying on the decision of the Special Bench of the tribunal in the case of ACIT vs.Goldmine Shares and Finance (P) Ltd., 113 ITD 209 (Ahd.), contended that the non-obstante clause in sub-section (5) had the effect of overriding all the provisions of the Act, and therefore the other provisions of the act were to be ignored in computing the deduction for the year. As a consequence, the losses already set off against the other income of the immediately preceding previous year were to be brought forward notionally, and again set off against the profit of the year.

The Karnataka High Court, in deciding the substantial question of law in favour of the Revenue and against the assessee, followed the view taken by the special bench of the tribunal to hold that the losses absorbed in the past should be notionally brought forward to reduce the profit for the year while computing the deduction u/s. 80-IA of the Act.

STERLING AGRO INDUSTRIES’ CASE

Recently the issue again arose before the Delhi High Court in the case of Pr CITvs.Sterling Agro Industries Ltd. 455 ITR 65. In this case, the assessee company had returned an income of Rs.22.12 crore after claiming deduction u/s. 80-IA. On assessment, the AO disallowed the claim of Rs.12.63 crore, by applying the provisions of s. 80-IA(5) of the Act. On appeal to the tribunal, the claim of the assessee was allowed in full by the tribunal, by relying on the decision of the Madras High Court in the case of Velayudhaswamy Spinning Mills (P.) Ltd (supra). In an appeal by the Revenue, the following question of law was placed for consideration by the High Court;

‘Given the facts and circumstances of the case, has the Income Tax Appellate Tribunal erred in deleting the addition made by the Assessing Officer on account of disallowance of deduction under section 80IA of the Income-tax Act, 1961, amounting to Rs.12,63,07,697, ignoring the mandate of provisions of Section 80IA(5) of the Act?’The Revenue contended that the losses of the preceding previous years, though absorbed against the profits of such years, had to be notionally brought forward and reduced from the profit of the year in computing the deduction for the year, in view of the non-obstante clause of sub-section (5) of s. 80-IA, whose contention was upheld by the Karnataka High Court in the case of Microlabs Ltd. (supra).In contrast, the assessee contended that once the losses were absorbed and adjusted in the preceding previous years, such losses could not be brought forward and set off in computing the deduction for the year. The Delhi High Court upholding the decision of the tribunal and the contentions of the assessee company held that;

‘….., there is nothing to suggest in Sub-clause (5) of Section 80IA of the Act that the profits derived by an assessee from the eligible business can be adjusted against “notional losses which stand absorbed against profits of other business.” The deeming fiction created by sub-section (5) of Section 80IA does not envisage such an adjustment. The fiction which has been created is simply this: the eligible business will be the only source of income. There is no fiction created, that losses which have already been absorbed, will be notionally carried forward and adjusted against the profits derived from the eligible business to quantify the deduction that the assessee could claim under section 80IA of the Act.

A perusal of the judgment rendered in the Microlabs Ltd. case (supra) would show that the Karnataka High Court gave weight to the fact that sub-section (5) of Section 80IA commenced with a non-obstante clause. It was based on this singular fact that the Karnataka High Court chose to veer away from the view expressed by the Madras High Court in the Velayudhaswamy Spinning Mills (P.) Ltd. case (supra). This aspect emerges on an appraisal of paragraph 6 of the judgement of the Karnataka High Court rendered in Microlabs Ltd. case (supra).’

The Court observed that similar contentions were advanced by the Revenue in the case of Velayudhaswamy Spinning Mills (P.) Ltd. Case (Supra), and such contentions were disapproved by the Madras High Court. The Court also noted that the decision in the said case was followed by the Madras High Court in the case of Pr CIT vs.Prabhu Spinning Mills (P.) Ltd. 243 taxman 462 (Madras).In deciding the issue in favour of the assessee, the Delhi High Court disagreed with the ratio of the decision in the case of Microlabs Ltd. (supra)and chose to follow the ratio of the two decisions of the Madras High Court, to allow the claim of deduction without adjusting the losses set-off in the preceding previous years.

OBSERVATIONS

This interesting issue has far-reaching economic impact in cases of assessees otherwise qualifying for the deduction. The non-obstante clause of sub-section (5) has the effect of overriding the other provisions of the Act. The said clause requires that while determining the quantum of deduction under s. 80-IA, it should be assumed that the eligible business is the only source of income. The provision throws open a few questions;

What is the true meaning of the term ‘only source of income’,
Whether the other provisions of the Act applied in the preceding previous years should be presumed to have been ignored and the effect thereof be nullified for the purpose of computing deduction for the year on a stand-alone basis,
Whether the concept of stand-alone computation be applied for all the eligible years of deduction or should it be limited to the first year of claim of deduction,
Whether the past losses already absorbed against the past profits of the eligible business be notionally brought forward to the year of claim,
Whether the past losses already absorbed against the past profits of the other business or other income be notionally brought forward to the year of claim,
Whether the losses of the year from other ineligible business be set off and adjusted against the profit for the year of the eligible business in computing the claim of deduction.

The incentive was first conferred by the introduction of S. 80-I by the Finance Act, 1980 with effect from 1st April, 1981, which was substituted by s. 80-IA by the Finance (2) Act, 1991 with effect from 1.4.1991. The said provision was further substituted by the Finance (No 2) Act, 1998 with effect from 1st April, 1998, by splitting the provision into two parts, s. 80-IA and s. 80-IB. The new section 80-IA materially contains the identical provision for granting deduction in respect of profits of an infrastructure development enterprise, and s. 80-IB contains similar provisions for the profits of an industrial undertaking.

The provision of s. 80-IA (5) contains a non-obstante clause for computing only source of income on a stand-alone basis. This provision is made equally applicable to the computation of the deduction u/s. 80-IB as well. Some other incentive provisions of Chapter VIA of the Act also contain similar provisions. The deductions are, as noted earlier, subject to the overall conditions of s. 80A to 80B of the Act, which has the effect of limiting the overall deduction for the year to the gross total income of the year.

The case for higher deduction for the assessee, by holding out that the losses that are absorbed in the preceding previous years stand absorbed and cannot be rekindled by invoking the fiction of s. 80-IA(5), is better in as much as the Madras High Court and the Delhi High Court in three important decisions have held that such absorbed losses should not be notionally revived for set-off against the profits of the year of the eligible business. These High Courts have taken into consideration the ratio of the Special Bench decision in the case of Goldmine Shares & Finance (supra)and, only after considering the counter contentions, have decided the issue in favour of the assessee. The Courts also considered the decisions of the High Courts in the cases of CIT vs. Mewar Oil & General Mills Ltd. 271 ITR 311 (Raj.),Indian Transformers Ltd. vs. CIT, 86 ITR 192 (Ker.),CIT vs. L.M.Van Moppes Diamond Tools (India) Ltd., 107 ITR 386 (Mad.)andCIT vs. Balmer Lawrie & Company Ltd. 215 ITR 249 (Cal), to arrive at a conclusion rejecting the case for notional carry forward of the losses that were absorbed in the preceding previous years.

This view also gets support from CBDT Circular No. 1 dated 15th February, 2016. Importantly, these courts have held that there was nothing in sub-section (5) of s. 80-IA that suggested that profits derived by an assessee from the eligible business should be adjusted against notional losses which have been absorbed against profits of other businesses in the past years. They held that the deeming fiction created by sub-section (5) did not envisage any such adjustment. In the courts’ view, the fiction created was that the eligible business profit should be the only source of income; and that such a fiction did not extend to provide that the losses that have already been absorbed would be notionally carried forward and adjusted against the profits derived from the eligible business, while quantifying the deduction that the assessee could claim under s. 80-IA for the year. The Delhi High Court also held that the Karnataka High Court in Microlabs Ltd. case perhaps gave greater weightage to the non-obstante clause to expand its meaning to notionally carry forward such losses that had already been adjusted and absorbed.

It however is relevant for the record to state that the issue is presently before the Supreme Court, as in some of the cases, including in Microlabs Ltd. case, the apex Court has admitted the special leave petition. Incidentally, in the Prabhu Spinning Mills case, the Supreme Court has rejected the Special Leave Petition filed by the Department.

One of the considerations for the decisions in favour of the assessee was that the profits were allowed full deduction in the preceding previous years without set-off of absorbed losses, and with that, the Revenue had accepted the position in law. The circular of 2016, relied upon by the courts, was rendered in the context of defining the initial assessment year and permitting the deduction for the block period commencing from the initial year assessment year and not from the year of manufacturing or production.

It is also relevant to note that the profits that would finally be eligible for deduction would be limited to such profits that are included in the gross total income. Only such profits remain after the set off of the losses of the year pertaining to ineligible business, in view of a specific provision of s. 80A and s. 80B of the Act, would finally be allowed deduction.

S. 80-I brought in by the Finance Act, 1980 with effect from 1st April, 1981 provided for a similar incentive deduction and the implication and the scope of the deduction were explained by the Explanatory Notes and by the Board vide Circular No. 281 dated 22nd September, 1980. The said section also contained a non-obstante clause namely s. 80-I(6), which is more or less similar to s. 80-IA(7) and now 80-IA(5), presently under consideration. The scope of this section 80-I(6) was examined in the cases of Dewan Kraft System (P.) Ltd., 160 taxman 343 (Del), Ashok Alco Chem Ltd., 96 ITD 160 (Mum.), Prasad Production (P.) Ltd.,98 ITD 212 (Chennai), Sri. Ramkrishna Mills (CBE) Ltd., 7 SOT 356andKanchan Oil Industries Ltd., 92 ITD 557 (Kol.). These decisions largely favoured a view that the losses were required to be notionally carried forward, even though they were set off in the actual computation of earlier years.

The Calcutta High Court in Balmer Lawrie’s case was concerned with the deduction u/s. 80HH of the Act, which provision had no specific overriding clause like s. 80-I(6) or its successors. The decision of the Rajasthan High Court in the case of Mewar Oil & General Mills Ltd., (supra)was a case where the implication of the non-obstante clause was not examined and considered at all at any stage, and the issue involved therein was about the losses that were absorbed before the non-obstante clause was brought in force, or the incentive deduction was provided for. The decision largely concerned itself with an order that was passed u/s. 154 of the Act to withdraw the incentive granted in rectification proceedings.

There is no dispute that the non-obstante clause incorporates a deeming fiction which has to be given meaning, and importantly, has to be carried to its logical conclusion. The view that fiction has to be carried to its logical conclusion and should be given full force without cutting it midway, in the absence of any specific provision to cut it midway, is a settled position in law. Instead of appreciating the need for logically concluding the scope of a legal fiction, the courts have rather abruptly sought to cut its application midway; to hold, in the absence of a specific positive provision, permitting the notional carry forward of absorbed losses, that no fiction can be introduced. The alternative view perhaps was to allow the fiction to run its full course, by permitting the notional carry forward of absorbed losses in the interest of logically concluding such a fiction for the computation of quantum of deduction, and not for the purposes of any other provisions of the Act;

The deeming fiction by use of words ‘only source of income’ might take into consideration the income from that source alone from the initial assessment year and subsequent years, and might lead to computing the profit of the year after setting off the losses not absorbed by such profits, only by applying the rule that the fiction should be extended to the consequence that would inevitably follow by assuming an imaginary state of affairs as real unless prohibited, even where inconsistent corollaries are drawn.

Section 80-IA(5) bids one to imagine and treat the eligible business as the only source of income of an undertaking as real, as if there was no other source of income for the assessee. Having said so, the statute does not provide for limiting one’s imagination when it comes to the inevitable corollaries of the imagined state of affairs. It does not provide that the depreciation or losses of eligible business of past years if set off as per s.70 to 74 or s.32, should remain to be so set off, and should not be brought forward for computing the only source of income.

A legal ?ction of substance is created by sub-section (5) by which the eligible business has been treated as the only source of income. In applying the same, it may not be improper, but necessary, to assume all those facts on which alone the ?ction can operate, so, necessarily, all the provisions in the Act in respect of a source of income will apply. As a consequence, the other sources of income of an assessee / undertaking would have to be assumed as not existing. Consequently, any depreciation or loss of the eligible business cannot be set off against any income from another source which is assumed to have not been in existence, and therefore, the depreciation or the loss of the eligible business has to be carried forward for set off against the pro?ts of the eligible business in the subsequent year, even where such past losses were set off against the profits of the ineligible business as per the other provisions of the Act in the preceding previous year. Because of the ?ction, even if any set off of eligible business loss was made against other sources of income, it has to be assumed to not have been so set off.

“As if that were the only source of income” may require an assessee to ignore all other sources of income and that there was no other source of income. If that be so, the depreciation and loss of the eligible business cannot be absorbed and be set off against any other source or head of income. Consequently, they be carried forward and set off against the income of this very source only, for which the deduction is being computed.

It is not impossible to hold that neither the income nor loss of a business other than the eligible business of any year can be taken into consideration; nor the earlier years’ losses of the eligible business can be ignored, in computing the pro?t and gains to determine the quantum of the deduction under this section. Losses of the eligible business are to be set off only against the subsequent years’ income of the eligible business, even though these were set off against other income of the assessee in that earlier year.

Notes on clauses explaining the scope of sub-section (6) of s.80 I, 123 ITR 126 (Statute) reads as under:

“Sub-section (6) provides that for the purpose of computing the deduction at the speci?ed percentage for the assessment year immediately succeeding the initial assessment year and any subsequent assessment year, the pro?ts and gains will be computed as if such business were the only source of income of the assessee in all the assessment years for which the deduction at the speci?ed percentage under this section is available.”

The relevant part of the Memorandum Explaining the provisions of the Finance Bill, 1980, in the context of s. 80I reads as under;

‘”The new “tax holiday” scheme differs from the existing scheme in the following respects, namely

(i) The basis of computing the “tax holiday” pro?ts is being changed from capital employed to a percentage of the taxable income derived from the new industrial unit, ship or approved hotel. In the case of companies, 25 per cent of the pro?ts derived from new industrial undertaking etc., will be exempted from tax for a period of seven years and in the case of other taxable entities 20 per cent of such pro?ts will be exempted for a like period. In the case of co-operative societies, however, the exemption will be allowed for a period of ten years instead of seven years.

(ii) The bene?t of “tax holiday” under the new scheme would be admissible to all small-scale industrial undertakings even if they are engaged in the production of articles listed in the Eleventh Schedule to the Income-tax Act. In the case of other industrial undertakings, however, the deduction will be available, as at present, where the undertakings are engaged the production of articles other than articles listed in the said Schedule.

(iii) In computing the quantum of “tax holiday” pro?ts in all cases, taxable income derived from the new industrial units, etc., will be determined as if such unit were an independent unit owned by a taxpayer who does not have any other source of income. In the result, the losses, depreciation and investment allowance of earlier years in respect of the new industrial undertaking, ship or approved hotel will be taken into account in determining the quantum of deduction admissible under the new section 80-I even though they may have been set off against the pro?ts of the taxpayer from other sources.”

S. 80-IA(5), by use of the words ‘for initial assessment year and every subsequent year up to and including the assessment year for which the determination is to be made’, has clarified that the provisions of the non-obstante clause shall apply to all the relevant assessment years for which a deduction was claimed and its scope should not be restricted to the initial assessment year alone.

It is also clear that the overriding effect of sub-section (5) is limited to the computation of the quantum of deduction u/s. 80-IA or 80-IB, and has no role to play in computing the total income otherwise as per the provisions of the Act. Therefore, the provisions of s. 80A and s. 80B have their own place in the scheme of the Act. It appearsthat the language of the text of sub-section (5) is clearand unambiguous, and therefore the meaning that has to be supplied for understanding its scope, will have to be from the literal reading of the provision,without bringing in the case for liberal or restricted interpretation.

In our considered opinion, it is appropriate for the Supreme Court or the Legislature to put the issue beyond doubt, in view of the larger effect on the taxpayers.

BCAJ Admin

Recovery of tax — Stay of recovery proceedings — Discretion of Income-tax authorities — Discretion to be exercised in a judicious manner

64 Nirmal Kumar Pradeep Kumar (HUF) vs. UOI

[2023] 456 ITR 386 (Jhar)

A.Y.: 2020–21

Date of Order: 2nd May, 2023

S. 220 of ITA 1961

Recovery of tax — Stay of recovery proceedings — Discretion of Income-tax authorities — Discretion to be exercised in a judicious manner.

In the scrutiny assessment for A.Y. 2020–21, an addition of approximately Rs.202 crores was made on account of payment made by the assessee towards damage to the environment, by treating it as compensation and disallowed under Explanation 1 to section 37(1) of the Act. Pursuant to the completion of the assessment, a demand of Rs.96,99,29,760 was raised. Against the order of assessment, the assessee filed an appeal before the first appellate authority. The assessee also filed a rectification application u/s. 154. Upon rectification application, the order was rectified, and the demand was reduced to Rs.35,28,39,450.

Since the assessee had filed an appeal before the CIT(A), the assessee filed an application for a stay of demand mainly on the grounds that the demand was high-pitched and the disallowance made by the Assessing Officer (AO) was contrary to the decision of the Supreme Court in the case of Common Cause vs. UOI [2017] 9 SCC 499.

The assessee’s application for stay of demand was rejected by AO, stating that as per the Office Memorandum of CBDT dated 31st July, 2017, the assessee is required to pay at least 20 per cent of the outstanding demand and since the assessee had not paid the said demand of 20 per cent, the stay was rejected. The assessee assailed the application further before the Principal Commissioner who directed the assessee to pay Rs.5 crores by 15th March, 2023, and further directed the assessee to pay Rs.10 lakhs from April 2023 till the disposal of the appeal.

The assessee filed a writ petition challenging the orders passed by the AO and the Principal Commissioner. The Jharkhand High Court allowed the petition of the assessee and held as follows:

“i) The power under sub-section (6) of section 220 is indeed a discretionary power. However, it is one coupled with a duty to be exercised judiciously and reasonably (as every power should be), based on relevant grounds. It should not be exercised arbitrarily or capriciously or based on matters extraneous or irrelevant. The Income-tax Officer should apply his mind to the facts and circumstances of the case relevant to the exercise of the discretion, in all its aspects. He has also to remember that he is not the final arbiter of the disputes involved but only the first among the statutory authorities.

ii) Questions of fact and of law are open for decision before two appellate authorities, both of whom possess plenary powers. Thus, in exercising his power, the Income-tax Officer should not act as a mere tax gatherer but as a quasi-judicial authority vested with the power of mitigating hardship to the assessee. The Income-tax Officer should divorce himself from his position as the authoritywho made the assessment and consider the matter in all its facets, from the point of view of the assessee without at the same time sacrificing the interests of the Revenue.

iii) When it comes to granting a discretionary relief like a stay of demand, it is obvious that the four basic parameters need to be kept in mind: (i) prima facie case, (ii) balance of convenience, (iii) irreparable injury that may be caused to the assessee which cannot be compensated in terms of money, and (iv) whether the assessee has come before the authority with clean hands. The requirements of reasonableness, rationality, impartiality, fairness and equity are inherent in any exercise of discretion, such an exercise can never be according to private opinion. In L. G. ELECTRONICS INDIA PVT. LTD. vs. PR. CIT the court stated that administrative circulars would not operate as a fetter upon the assessing authority which is the quasi-judicial authority to grant a stay.

iv) Under section 246 of the Act which provides the remedy of preferring an appeal against the assessment order, there is no pre-deposit stipulated.

v) The Assistant Commissioner had not considered anything and had just mechanically declined to grant a stay placing reliance upon the Office Memorandum dated 31st July, 2017 ([2017] 396 ITR (St.) 55) and recording, inter alia, that since the assessee had not deposited 20 per cent of the disputed demand as stipulated in the Office Memorandum, a stay was liable to be rejected. A bare reading of the order would clearly reveal that there was no independent application of mind and no discussion whatsoever on the prima facie case of the assessee, the balance of convenience and undue hardships including whether the assessee had come with clean hands. Accordingly, the order dated 31st January, 2023 passed by the Assistant Commissioner and the order dated 24th February, 2023 passed by the Principal Commissioner were liable to be quashed and set aside.

vi) The matter is remitted back to respondent No. 3 to pass a fresh order on the application for stay of the petitioner in view of the principles laid down above, after granting due opportunity of hearing to the petitioner.”

BCAJ Admin

Reassessment — Notice — Validity — Notice based on information from Deputy Director in respect of investigation of the firm from which two of assessee’s directors retired alleging that assessee had received bogus accommodation entries in form of imports — Investigation report on which reliance placed by Department not provided to the assessee — Notice vague and not clear — Order for the issue of notice and order of reassessment set aside — Matter remanded

63 Hari Darshan Exports Pvt. Ltd. vs. ACIT

[2023] 456 ITR 542 (Bom)

A.Y.: 2019–20

Date of Order: 11th July, 2023

Ss. 147, 148, 148A(b) and 148A(d) of ITA 1961

Reassessment — Notice — Validity — Notice based on information from Deputy Director in respect of investigation of the firm from which two of assessee’s directors retired alleging that assessee had received bogus accommodation entries in form of imports — Investigation report on which reliance placed by Department not provided to the assessee — Notice vague and not clear — Order for the issue of notice and order of reassessment set aside — Matter remanded.

The assessee was an exporter. For the A.Y. 2019–20, the assessee was issued a show-cause notice u/s. 148A(b) of the Income-tax Act, 1961, alleging that it had taken accommodation entries in the form of imports from a firm J in which two of the directors of the assessee were partners and had retired. The allegation was on the basis of certain information received from the Deputy Director, Ahmedabad. Along with the notice, a document titled “Verification Details” from the Insight Portal of the Department was provided wherein it was stated that the assessee had used J to import diamonds through a chain of intermediaries to escape any regulation by Government authorities and banks with respect to related party transactions for evading transfer pricing compliance. The assessee was not provided with the requested documentary details of the investigation of J.

Assessee filed a writ petition challenging the order u/s. 148A(d) and the consequent notice u/s. 148. The Bombay High Court allowed the writ petition and held as under:

“i) It was not stated in the order u/s. 148A(d) on what basis the conclusion that the assessee had received accommodation entries in the form of imports from J had been arrived at. The details or documents of the investigation of J or the investigation report had not been made available to the assessee and there was nothing to indicate that this information was provided to the assessee. The order stated that the assessee did not submit any documentary evidence to prove the genuineness of its claim or regarding import to refute the claim that imports were bogus though the assessee had stated that whatever documents were required had been submitted.

ii) There was no allegation that the assessee had made any imports and was not even called upon to produce documents regarding any imports. Therefore, an allegation could not be made that the assessee had not submitted any documentary evidence regarding imports to refute the claim that imports were bogus. On the facts and circumstances, the order passed u/s. 148A(d) and the consequential notice u/s. 148 were quashed and set aside. The matter was remanded to the Assessing Officer for de novo consideration.

iii) Within two weeks the petitioner shall be provided by respondent No. 1 with copies of all documents/information regarding the investigation of M/s. Jogi Gems, including the statements recorded during the course of investigation and documents collected during the investigation. Respondent No. 1 may redact from the documents, portions that may not pertain to the petitioner or M/s. Jogi Gems.

iv) Within two weeks of receiving these documents the petitioner shall, if so advised, file a further reply to the notice. The order to be passed under section 148A(d) of the Act shall be a reasoned order dealing with every sub- mission of the petitioner. Before passing any order, personal hearing shall be given to the petitioner, notice whereof shall be communicated at least five working days in advance.”

BCAJ Admin

Reassessment — Notice u/s. 148 — Reason to believe that income has escaped assessment — Entity with which assessee had sale transaction not established to be shell entity — No enquiry conducted by AO pursuant to the receipt of information from investigation wing — Non-application of mind on part of AO — Notice and order rejecting assessee’s objections set aside

62 B. U. Bhandari Autolines Pvt. Ltd. vs. ACIT

[2023] 456 ITR 56 (Bom)

A.Y.: 2016–17

Date of Order: 10th February, 2023

Ss. 147, 148 of ITA 1961

Reassessment — Notice u/s. 148 — Reason to believe that income has escaped assessment — Entity with which assessee had sale transaction not established to be shell entity — No enquiry conducted by AO pursuant to the receipt of information from investigation wing — Non-application of mind on part of AO — Notice and order rejecting assessee’s objections set aside.

For the A.Y. 2016–17, the Assessing Officer issued a notice u/s. 148 of the Income-tax Act, 1961 against the assessee for reopening the assessment u/s. 147. Reasons were recorded that information was received from the Deputy Director (Investigation) that a search was conducted u/s. 132 in the case of one M and others wherein cash in demonetised currency was seized, that M in his statement named one R as the key accomplice and was connected with a shell entity MT, that from the value-added tax returns it was found that the assessee had made a sale with MT and that, therefore, the sale of goods by the assessee to MT was bogus and that income had escaped assessment on that account. The assessee’s objections to the reopening of the assessment were rejected.

The assessee filed a writ petition challenging the notice and the order rejecting the objections. The Bombay High Court allowed the writ petition and held as under:

“i) The issue of reopening of assessment under section 147 had to be tested only on the basis of the reasons recorded, which could neither be improved upon nor substituted by an affidavit or oral submissions. It had not been alleged in the reasons that the entity MT with whom the assessee had made an alleged sale was being run by R although, in the reply affidavit it was stated by the Assessing Officer that MT was one of the entities which was floated by R for the purpose of providing accommodation entries. The reasons recorded also did not furnish any explanation on what basis and material the Assessing Officer had concluded that MT was a shell entity. The verification of the value-added tax returns referred to in the reasons recorded suggested only transactions between the assessee and the entity MT in regard to goods sold. Therefore, there was no material or basis for the Assessing Officer to hold the transaction between the assessee and MT not a genuine transaction of sale or for that reason to hold that MT was a shell entity.

ii) The Assessing Officer had not independently applied his mind to the information received or conducted his own inquiry into the matter to conclude that income had escaped assessment or that the transaction in question with the alleged shell entity was only a paper transaction. The notice had been issued u/s. 148 without satisfying the conditions precedent u/s. 147. Therefore, the notice and the order rejecting the objections of the assessee were set aside.”

BCAJ Admin

Reassessment — Notice — Res judicata — General principles — Consistency in decision making — Same decision-making authority rendering two decisions inconsistent with each other for different assessment years facts and circumstances being similar — Order and notice set aside

61 Prem Kumar Chopra vs. ACIT

[2023] 456 ITR 8 (Del)

A.Ys.: 2015–16 and 2016–17

Date of Order: 25th May, 2023

Ss. 147, 148, 148A(d) and 151 of ITA 1961

Reassessment — Notice — Res judicata — General principles — Consistency in decision making — Same decision-making authority rendering two decisions inconsistent with each other for different assessment years facts and circumstances being similar — Order and notice set aside.

The petitioner, a senior citizen, being the proprietor of M/s. Chopra Brothers is an authorised dealer for Kirloskar Electric Motors and is engaged in trading industrial electric motors, mono-block pumps and generator sets, etc. For the A.Y. 2015–16, the petitioner filed a return of his income, declaring the income of Rs.19,94,970 which was processed u/s. 143(1) of the Income-tax Act, 1961. On 7th April, 2021, the Assessing Officer, respondent No. 1 issued a notice u/s. 148 of the Act, which on being challenged by the petitioner, was set aside in terms of the decision in the case of Mon Mohan Kohli vs. Asst. CIT [2022] 441 ITR 207 (Delhi).

Thereafter, in terms of the decision of the Hon’ble Supreme Court in the case of Union of India vs. Ashish Agarwal [2022] 444 ITR 1 (SC); [2022] SCC OnLine SC 543, respondent issued notice dated 26th May, 2022, u/s. 148A(b) of the Act, alleging that on 26th November, 2016, a search had been conducted on the premises of an entry operator, namely, Shri Mohit Garg and during that search, in his statement, Shri Rajeev Khushwaha admitted to having provided bogus sale / purchase bills in exchange for cash; and that during the year relevant to the A.Y. 2015–16, M/s. Chopra Brothers through its proprietor Shri Prem Kumar Chopra was one of the beneficiaries of such accommodation entries to the tune of Rs.13,71,00,000.

An identical notice dated 25th July, 2022, was issued to the petitioner for the A.Y. 2016–17 as well. The petitioner submitted replies dated 10th June, 2022, and 21st July, 2022, to the said show-cause notice, thereby categorically denying any transaction with M/s. Divya International and Shri Rajeev Khushwaha. Along with the replies, the petitioner also submitted all relevant documents.

By way of order dated 28th July, 2022, respondent, accepting the case set up by the petitioner, dropped the proceedings pertaining to the A.Y. 2016–17, concluding that there is no escapement of income during the financial year 2015–16 relevant to the A.Y. 2016–17 in so far as there is no entry of transaction of sale or purchase by the bogus entity, M/s. Divya International, controlled by the entry operator Shri Rajeev Khushwaha to or from M/s. Chopra Brothers and accordingly held that it is not a fit case for issuance of notice u/s. 148 of the Act for the A.Y. 2016–17.

But soon thereafter, by way of an order dated 31st July, 2022, for the A.Y. 2015–16, respondent rejected the case set up by the petitioner, observing that there is escapement of income and accordingly held that it is a fit case for issuance of notice u/s. 148 of the Act.

The assessee, therefore, filed a writ petition challenging the validity of the notice u/s. 148 and the consequent reassessment order. The Delhi High Court allowed the writ petition and held as under:

“i) Consistency, both in content and in procedure has to be adhered to in order to ensure predictability of the decisions. In order to ensure procedural and content consistency in decisions, every decision-making authority should ensure that in a given set of circumstances, their decision must be on the same lines as that of their predecessor or co-ordinate authorities in a similar set of circumstances. Where a decision-making authority finds itself unable to agree with the view earlier taken, by the predecessor or the co-ordinate, the authority concerned is duty bound to record cogent reasons for deviating. The significance of precedence cannot be ignored even in administrative decision-making.

ii) The doctrine of res judicata does not apply to Income-tax proceedings pertaining to different assessment years since each assessment year is a separate assessment unit in itself only if it rests in a separate factual scenario and is supported by reasoning by the concerned authority.

iii) The order u/s. 148A(d) and the notice u/s. 148 for the A.Y. 2015–16 were infirm since they proceeded on a view inconsistent with the earlier order for the A.Y. 2016–17 despite the facts and circumstances being similar and in the backdrop of a similar set of documentary evidence. The concerned Assistant Commissioner had dropped the proceedings pertaining to the A.Y. 2016–17, while for the A.Y. 2015–16, he had opted to proceed further u/s. 148A. The decision taken for the A.Y. 2016–17 was a reasoned decision, based on the analysis of material on record, but the decision taken subsequently for the A.Y. 2015–16 was not only completely inconsistent with the earlier view but even without reason. Though sanction u/s. 151 was accorded by two different sanctioning authorities the satisfactions recorded in both orders were of the same Assistant Commissioner. There was nothing on record to suggest that the latter sanctioning authority for the A.Y. 2015–16 was apprised of the earlier view taken by the sanctioning authority for the A.Y. 2016–17. An assessee deals with the Department as a whole. The order u/s. 148A(d) and the notice u/s. 148 were set aside.”

BCAJ Admin

Offences and Prosecution — Wilful failure to file return — S. 276CC requires mens rea — Belated return and payment of tax and interest based on return accepted — Protective assessment set aside — No imposition of penalty — Prosecution not valid

60 Suresh Kumar Agarwal vs. UOI

[2023] 456 ITR 148 (Jhar)

A.Y.: 2013–14

Date of Order: 29th August, 2022

S. 276CC of ITA 1961

Offences and Prosecution — Wilful failure to file return — S. 276CC requires mens rea — Belated return and payment of tax and interest based on return accepted — Protective assessment set aside — No imposition of penalty — Prosecution not valid.

A search was conducted in the case of the assessee on 19th February, 2014, and subsequently, the assessee was required to file his return of income within 15 days from the date of receipt of the notice issued u/s. 153A of the Act. The assessee failed to file the return of income within the time provided and ultimately filed the same after a lapse of almost 17 months without giving any reasonable cause. The assessee also did not file any petition for condonation of delay.

The Department launched prosecution u/s. 276CC of the Act. The department alleged that the assessee had deliberately, willingly, intentionally and having mens rea in his mind avoided filing the return of income.

The assessee filed a writ petition for quashing the prosecution proceedings. The assessee contended that the delay in filing the return was due to death in the family and on account of not getting photocopies of papers and documents which were seized by the Income-tax Department. Further, the assessee submitted that the tax had been paid in full along with interest. The addition made by the Assessing Officer (AO) had been deleted by the CIT(A). No penalty had been levied by the AO. Lastly, the assessee submitted that since no penalty had been levied and no tax was due from the assessee, the launching of prosecution was bad in law.

The Jharkhand High Court allowed the writ petition and held as follows:

“i) Section 276CC of the Income-tax Act, 1961, provides for prosecution in cases of wilful failure to file returns. The wilful failure referred to in section 276CC of the Act brings in the element of guilt and thus the requirement of mens rea will come into force.

ii) It was admitted that the assessee had not filed his return on time but had filed the return belatedly with interest, which had been accepted by the authority concerned. The subsequent protective assessment was the subject matter before the first appellate authority, which had set aside the entire further assessment of the assessee.

iii) The assessee had already deposited the tax as well as the interest in the light of the statute. When the Income-tax Officer had levied interest for the delay in filing of the return, it must be presumed that the Income-tax Officer had extended the time for filing the return after satisfying himself that there were grounds for delay in filing the return. When the amount in question with the interest had already been paid, no sentence could be imposed on the assessee.”

BCAJ Admin

Computation of Capital Gains — Deduction of expenses wholly and exclusively in connection with transfer of capital asset — Transfer of shares – Amount paid for professional advice in accordance with articles of association of company – Deductible

59 Chincholi GururajacharVenkatesh and Satish Kumar Pandey vs. ACIT

[2023] 456 ITR 459 (Cal)

A.Y.: 2016–17

Date of Order: 16th December, 2022

S. 48 of ITA 1961

Computation of Capital Gains — Deduction of expenses wholly and exclusively in connection with transfer of capital asset — Transfer of shares — Amount paid for professional advice in accordance with articles of association of company — Deductible.

The assessees held shares of one MTPL. During the previous year relevant to the assessment year under consideration, the assessee paid professional fees to KPMG and Khaitan & Co in connection with the transfer of shares of MTPL by the assessees to a German Company. During the assessment proceedings, the AO held that the selling expenses were not incurred wholly and exclusively in connection with the transfer of their shares and disallowed the expense.

The CIT(A) as well as the Tribunal confirmed the addition.

The Calcutta High Court allowed the appeal filed by the assessee and held as under:

“i) U/s. 48 of the Income-tax Act, 1961, in computing capital gains, the expenditure incurred wholly and exclusively in connection with the transfer of capital asset is deductible. The word ‘connection’ in section 48(i) reflects that there should be a casual connect and the expenditure incurred to be allowed as a deduction must be united or in the state of being united with the transfer of the capital asset resulting in income by way of capital gains on which tax has to be paid. The expenditure, therefore, should have a direct connection and should not be remote or have indirect result or connect with the transfer.

ii) Under article 8 of the articles of association of the company a shareholder desirous of selling his shares must notify the number of shares, a ‘fair value’ and the proposed transferee. The assesses’ specific case was that they had engaged the services of the professionals for the purpose. The transfer of shares was not disputed by the Department. Admittedly, K was a firm providing advisory services and K and Co. was a law firm. The assessees had engaged the services of professionals who had identified the investor, negotiated the value and structured the transaction. Therefore, the transaction had an inextricable nexus with the transfer of shares. The expenditure incurred was deductible in computing the capital gains.”

BCAJ Admin

Business expenditure — Accrued or contingent liability — Provision for future expenses based on turnover — Amount set apart to meet future liabilities — Expenses in-built in the contract — Provision not contingent — Allowable deduction

58 Principal CIT vs. CEC SOMA CICI JV

[2023] 456 ITR 705 (Kar)

A.Ys.: 2011–12, 2012–13

Date of Order: 21st March, 2023

S. 37 of ITA 1961

Business expenditure — Accrued or contingent liability — Provision for future expenses based on turnover — Amount set apart to meet future liabilities — Expenses in-built in the contract — Provision not contingent — Allowable deduction.

The assessee entered into a contract with BMCRL to design, construct tunnels and do other civil works. The total projected future expenses (non-billable expenses) included the reconstruction of roads damaged while constructing tunnels and during the other construction activities undertaken by the assessee. The non-billable expenses were in-built in the contract and payment for them was made by the assessee and not BMRCL. For the A.Ys. 2011–12 and 2012–13, based on the turnover, the assessee made provision for expenses and claimed deduction. The Assessing Officer disallowed the claim.

The Commissioner (Appeals) allowed the assessee’s appeal on the grounds that the provision was not contingent in nature but based on the matching expenditure on ascertained liability. The Tribunal upheld his order.

The Karnataka High Court dismissed the appeals filed by the Revenue and held as under:

“i) The provision for expenses was made on a pro rata basis based on the turnover with reference to total unbillable future expenses of the assessee’s project. For the A.Y. 2013–14 after the remand the Assessing Officer had accepted the provision made by the assessee. For the subsequent A.Y. 2014–15, no disallowance had been made.

ii) The Tribunal was right in setting aside the disallowances made by the Assessing Officer in respect of the deduction of future expenses claimed by the assessee for the A.Ys. 2011–12 and 2012–13.”

BCAJ Admin

Reporting Under PMLA by Professionals – Deciphering ‘On Behalf Of’

INTRODUCTION

Notifications dated 3rd May, 2023 and 9th May, 2023 issued by the Ministry of Finance have the effect of making relevant persons ‘reporting entities’ as more particularly defined by Section 2(1)(sa)(vi) read with Section 2(1)(wa) of the Prevention of Money Laundering Act, 2002 (PMLA).

The 3rd May, 2023 Notification purports to cover within the definition of ‘reporting entities’ those ‘relevant persons’ who carry out ‘financial transactions’ on behalf of his / her client, in the course of one’s profession in relation to certain activities. If the certain activities listed in the Notification are carried out by the ‘relevant person’, then the professional would find himself/herself as a reporting entity under the PMLA. Explanation 1 in the Notification states that a ‘relevant person’ would include:

• an individual who obtained a certificate of practice under section 6 of the Chartered Accountants Act, 1949 (38 of 1949) and practicing individually or through a firm, in whatever manner it has been constituted;

• an individual who obtained a certificate of practice under section 6 of the Company Secretaries Act, 1980 (56 of 1980) and practicing individually or through a firm, in whatever manner it has been constituted;

• an individual who has obtained a certificate of practice under section 6 of the Cost and Works Accountants Act, 1959 (23 of 1959) and practicing individually or through a firm, in whatever manner it has been constituted.

On the other hand, the 9th May Notification purports to cover within the definition of ‘reporting entities’ those ‘persons’ who carry out certain activities in the course of business on behalf of or for another person as the case may be. This Notification does not seek to restrict the applicability of the Notification to a specific business or profession and therefore, can also act as a trigger for professionals to become reporting entities under the PMLA.

India is a member of the Financial Action Task Force (FATF). The FATF has a set of 40 recommendations that the member countries seek to implement in order to combat the menace of money laundering. Trying to comply with the FATF recommendations on money laundering is one of our country’s international commitments. In fact, the PMLA Act itself is a result of India’s international commitments. The preamble to the Act reads as follows:

“An Act to prevent money-laundering and to provide for confiscation of property derived from, or involved in, money-laundering and for matters connected therewith or incidental thereto.

WHEREAS the Political Declaration and Global Programme of Action, annexed to the resolution S-17/2 was adopted by the General Assembly of the United Nations at its seventeenth special session on the twenty-third day of February, 1990;

AND WHEREAS the Political Declaration adopted by the Special Session of the United Nations General Assembly held on 8th to 10th June, 1998 calls upon the Member States to adopt national money-laundering legislation and programme;

AND WHEREAS it is considered necessary to implement the aforesaid resolution and the Declaration.”

While much has already been discussed regarding these two notifications, there is still uncertainty around the phrase ‘on behalf of’ as used in them. Though perhaps we may have to wait for an authoritative judicial pronouncement on the exact interpretation to be given to this commonly used phrase, today we seek to lay down broad contours of what ‘on behalf of’ could mean with regard to these two notifications.

THE FATF FACTOR

The FATF recommendations also use the phrase ‘on behalf of’ quite often. In fact, the phrase ‘on behalf of’ when used in the Recommendations, seems to signify a fiduciary relationship and is broader than what is given in Indian law. Recommendation 23 (a) reads as follows:

Lawyers, notaries, other independent legal professionals and accountants should be required to report suspicious transactions when, on behalf of or for a client, they engage in a financial transaction in relation to the activities described in paragraph (d) of Recommendation 22. Countries are strongly encouraged to extend the reporting requirement to the rest of the professional activities of accountants, including auditing.

Recommendation 22 (d) in turn reads as follows:

Lawyers, notaries, other independent legal professionals and accountants – when they prepare for or carry out transactions for their client concerning the following activities:

• buying and selling of real estate;

• managing of client money, securities or other assets;

• management of bank, savings or securities accounts;

• organisation of contributions for the creation, operation or management of companies;

• creation, operation or management of legal persons or arrangements, and buying and selling of business entities.

The above two recommendations read together therefore are the genesis of the 3rd May, 2023 Circular. This is in line with the commitment that our country is showing to combat money laundering.

LAYING THE GROUNDWORK – USING ‘FOR ANOTHER PERSON’ TO HELP IN INTERPRETING ‘ON BEHALF OF’

In order to narrow down on the meaning of ‘on behalf of’, it would be perhaps instructive to hazard a guess as to what would constitute ‘for another person’. The 3rd May, 2023 notification does not include ‘for another person’. This language is used in the 9th May, 2023 Notification, the relevant portion of which reads –

“the following activities when carried out in the course of business on behalf of or for another person, as the case may be, as an activity for the purposes of said sub-clause”

Therefore, the Notification itself draws a distinction between ‘on behalf of another person’ and ‘for another person’ by making them alternative to each other through the use of the conjunction ‘or’. The list of activities covered in the 9th May notification is also instructive:

a) “acting as a formation agent of companies and limited liability partnerships;

b) acting as (or arranging for another person to act as) a director or secretary of a company, a partner of a firm or a similar position in relation to other companies and limited liability partnerships;

c) providing a registered office, business address or accommodation, correspondence or administrative address for a company or a limited liability partnership or a trust;

d) acting as (or arranging for another person to act as) a trustee of an express trust or performing the equivalent function for another type of trust; and

e) acting as (or arranging for another person to act as) a nominee shareholder for another person”.

Though the Explanation to the Notification provides for a list of exclusions, the only relevant part for our discussion would perhaps be restricted to Explanation ‘b’ which reads as follows:

“any activity that is carried out by an employee on behalf of his employer in the course of or in relation to his employment;”

The list of activities enumerated from ‘(a) to (e)’ above is telling. These activities do not need to be necessarily carried out in a representative capacity. They may also be carried out in a personal capacity for the benefit of someone else. A hypothesis can thus be drawn that ‘on behalf of another person’ would denote a person acting in a ‘representative capacity’ for another person, but ‘for another person’ would denote a person acting in a personal capacity for another person. Therefore, based on this premise, the 9th May, 2023 notification would make a professional a ‘reporting entity’, whether he carried out those activities in his individual capacity or in a representative capacity.

However, the absence of ‘for another person’ in the 3rd May, 2023 notification is telling. Firstly, the notification restricts itself to ‘financial transactions’, to be carried out specifically ‘on behalf of a client’, ‘in the course of the profession’ and in ‘relation to the following activities’–

1. “buying and selling of any immovable property;

2. managing of client money, securities or other assets;

3. management of bank, savings or securities accounts;

4. organisation of contributions for the creation, operation or management of companies;

5. creation, operation or management of companies, limited liability partnerships or trusts, and buying and selling of business entities.”

It may be of particular interest to note that the transactions covered in ‘1 to 5’ as enumerated above can possibly be conducted both ‘on behalf of a client’ as well as ‘for a client’. As the notification omits using the phrase ‘for the client’, the interpretation of ‘on behalf of a client’ gains a greater relevance. Significantly, distinguishing ‘on behalf of a client’ and ‘for a client’ also gains greater relevance as, while the former would make the professional a ‘reporting entity’, the latter would not.

DECIPHERING THE ENIGMA OF ‘ON BEHALF OF’

While embarking upon a journey to find the meaning of a phrase in law, the Black’s Law Dictionary has often served as a good starting point. The Black’s law dictionary, while defining ‘behalf’, includes the definition of ‘on behalf of’. The definition in the dictionary supports our hypothesis that ‘on behalf of’ would denote representative capacity. The dictionary states as follows:

behalf.[fr. Anglo-Saxon half “unit, side”] (14c) Side, part, advantage, or interest. • The phrase in behalf of traditionally means “in the interest, support, or defense of”; on behalf of means “in the name of, on the part of, as the agent or representative of.”

In fact, the Income-tax Act, 1961, also leads credence to this hypothesis of ‘on behalf of’ being used in a representative capacity. The phrase ‘on behalf of’ is used in the very definition of ‘Authorised Representative in Section 288(2) of the Act. It is reproduced below as follows:

Section 288 (2) For the purposes of this section, “authorised representative” means a person authorised by the assessee in writing to appear on his behalf, being—

(i) a person related to the assessee in any manner, or a person regularly employed by the assessee; or

(ii) any officer of a Scheduled Bank with which the assessee maintains a current account or has other regular dealings; or

(iii) any legal practitioner who is entitled to practise in any civil court in India; or

(iv) an accountant; or

(v) any person who has passed any accountancy examination recognised in this behalf by the Board; or

(vi) any person who has acquired such educational qualifications as the Board may prescribe for this purpose; or

(via) any person who, before the coming into force of this Act in the Union territory of Dadra and Nagar Haveli, Goa†, Daman and Diu, or Pondicherry, attended before an income-tax authority in the said territory on behalf of any assessee otherwise than in the capacity of an employee or relative of that assessee; or

(vii) any other person who, immediately before the commencement of this Act, was an income-tax practitioner within the meaning of clause (iv) of sub-section (2) of section 61 of the Indian Income-tax Act, 1922 (11 of 1922), and was actually practising as such;

[(viii) any other person as may be prescribed.]

Thus, the phrase ‘on behalf of’ in the Income-tax Act, 1961, is clearly in a representative capacity. It may be noted that for a professional to appear before the tax authorities, a ‘vakalatnama’ or a ‘power of attorney’ is required. This allows the person so authorised to appear ‘on behalf of a person’ before various authorities and make pleadings and submissions on their behalf. These pleadings and submissions are binding upon the person so represented. A cursory glance at umpteen Judgements of various courts will show that the Courts observe that Advocates have appeared ‘on behalf of’ a client. This introduces an additional point of distinction between ‘on behalf of’ and ‘for’. We may add this to our original hypothesis – For a transaction or activity to be carried out ‘on behalf of’ another person, there should be authorisation to that effect and the intention to be bound by the action of the person so authorised acting on one’s behalf.

In fact, inspiration can be drawn from the Judgment of the Constitution Bench of the Supreme Court in M. Siddiq (Ram Janmabhumi Temple-5 J.) vs. Suresh Das, (2020) 1 SCC 1. The Judgment, more famously known as the ‘Ayodhya Judgment’ or the ‘Ram Janmabhoomi Temple Judgment’ discussed the right of a ‘Shebait’ and the ‘next friend’ of the idol to institute a suit. The following extracts of the Judgment may prove to be instructive:

“Courts recognise a Hindu idol as the material embodiment of a testator’s pious purpose. Juristic personality can also be conferred on a Swayambhu deity which is a self-manifestation in nature. An idol is a juristic person in which title to the endowed property vests. The idol does not enjoy possession of the property in the same manner as do natural persons. The property vests in the idol only in an ideal sense. The idol must act through some human agency which will manage its properties, arrange for the performance of ceremonies associated with worship and take steps to protect the endowment, inter alia by bringing proceedings on behalf of the idol. The shebait is the human person who discharges this role..

..The dedicated property legally vests in the idol in an ideal sense and not in the shebait. A shebait does not bring an action for the recovery of the property in a personal capacity but on behalf of the idol for the protection of the idol’s dedicated property. Ordinarily, a deed of dedication will not contain a provision for the duties of the shebait. However, an express stipulation or even its absence does not mean that the property of the idol vests in the shebait. Though the property does not legally vest in the shebait, the shebait may have some interest in the usufruct generated from it. Appurtenant to the duties of a shebait, this interest is reflected in the nature of the office of a shebait..

..Ordinarily, the right to sue on behalf of the idol vests in the shebait. This does not however mean that the idol is deprived of its inherent and independent right to sue in its own name in certain situations. The property vests in the idol. A right to sue for the recovery of property is an inherent component of the rights that flow from the ownership of property. The shebait is merely the human actor through which the right to sue is exercised. As the immediate protector of the idols and the exclusive manager of its properties, a suit on behalf of the idol must be brought by the shebait alone. Where there exists a lawfully appointed shebait who is able and willing to take all actions necessary to protect the deity’s interests and to ensure its continued protection and providence, the right of the deity to sue cannot be separated from the right of the shebait to sue on behalf ofthe deity. In such situations, the idol’s right to sue stands merged with the right of the shebait to sue on behalf of the idol..

..A suit by a shebait on behalf of an idol binds the idol.For this reason, the question of who can sue on behalf of an idol is a question of substantive law. Vesting any stranger with the right to institute proceedings on behalf of the idol and bind it would leave the idol and its properties at the mercy of numerous individuals claiming to be “next friend”. Therefore, the interests of the idol are protected by restricting and scrutinising actions brought on behalf of the idol. For this reason, ordinarily, only a lawful shebait can sue on behalf of the idol. When a lawful shebait sues on behalf of the deity, the question whether the deity is a party to the proceedings is merely a matter of procedure. As long as the suit is filed in the capacity of a shebait, it is implicit that such a suit is on behalf of and for the benefit of the idol..”

Therefore, the shebait acts in a representative capacity on behalf of the idol in instituting a suit and by the virtue of being the shebait, has the authorisation by the virtue of appointment and consequently the authority to bind the idol through a suit. In short, as the Supreme Court observed, the shebait can file a suit on behalf of the idol.

In fact, the expression ‘on behalf of’ also finds use in the relationship of ‘agency’. A recent Judgment of the Supreme Court inRajasthan Art Emporium vs. Kuwait Airways & Onr. 2023 SCC OnLine SC 1461,examining Section 237 of the Indian Contract Act considered if the agent had the authority to act ‘on behalf of’ the Principal.

Section 237 of the Contract Act provides that:

“237. Liability of principal inducing belief that agent’s unauthorised acts were authorised – When an agent has, without authority, done acts or incurred obligations to third persons on behalf of his principal, the principal is bound by such acts or obligations if he has by his words or conduct induced such third persons to believe that such acts and obligations were within the scope of the agent’s authority.”

The Court observed that: “There is no gainsaying that onus to show that the act done by an agent was within the scope of his authority or ostensible authority held or exercised by him is on the person claiming against the principal. This, of course, can be shown by practice as well as by a written instrument. Thus, the question for consideration is whether on the evidence obtaining in the instant case, can it be said that Respondent 3 had an express or implied authority to act on behalf of Respondent 1 as their agent? If Respondent 3 had such an authority, then obviously Respondent 1 was bound by the commitment Respondent 3 had made to the appellant.”

This Judgment would also support our hypothesis that in order to act ‘on behalf of’ someone, the person must be authorised, and act in a representative capacity and such act must have the power to bind the person to the act committed.

In State of W.B. vs. O.P. Lodha (1997) 5 SCC 93 where an agent was selling goods both in his individual capacity and in his capacity as an agent, the Supreme Court observed: “In my judgement, the scheme of the Act leaves no room for doubt that an agent who sells goods on behalf of somebody else cannot escape the liability to pay sales tax on the sales made by him for and on behalf of others merely because, he was selling goods on behalf of others.”

The importance of the ‘on behalf of’ being in the course of business or profession to trigger the reporting obligations.

Therefore, a relationship akin to an agency would see an agent act ‘on behalf of the principal’. A perusal of the list of the activities and finance transactions covered by both the 3rd May as well as the 9th May, 2023 Notifications would seem to suggest that an agency relationship and the relationship of a constituted attorney / power of attorney holder for carrying out the listed activities / transactions would trigger the definition of reporting entity. After all, a constituted attorney also acts in a representative capacity, is specifically authorised and can bind the Donor (the person who grants the power of attorney) by his / her Acts.

For professionals, it is important to note that both Notifications carry an important safeguard. The activity / transactions must be carried out in the course of business / profession. If this safeguard did not exist, then personal transactions / activities of the nature listed in the notifications would also have been covered. After all, it is quite common for a parent / guardian / family member / spouse to act ‘on behalf of’ the minor child / ward / other members of the family or spouse. For example, for a minor to be admitted into a partnership, a parent / guardian needs to enter into the contract on the minor’s behalf.

In CIT vs. Shah Mohandas Sadhuram [1965] 57 ITR 415 (SC) the Supreme Court observed “Before we discuss these questions it is necessary to consider what are the incidents and true nature of “benefits of partnership” and what is a guardian of a minor competent to do on behalf of a minor to secure the full benefits of partnership to a minor. First it is clear from sub-section (2) of section 30 of the Partnership Act that a minor cannot be made liable for losses. Secondly, section 30, sub-section (4), enables a minor to sever his connection with the firm and if he does so, the amount of his share has to be determined by evaluation made, as far as possible, in accordance with the rules contained in section 48, which section visualises capital having been contributed by partners. There is no difficulty in holding that this severance may be effected on behalf of a minor by his guardian. Therefore, sub-section (4) contemplates that capital may have been contributed on behalf of a minor and that a guardian may on behalf of a minor sever his connection with the firm. If the guardian is entitled to sever the minor’s connection with the firm, he must also be held to be entitled to refuse to accept the benefits of partnership or agree to accept the benefits of partnership for a further period on terms which are in accordance with law. Subsection (5) proceeds on the basis that the minor may or may not know that he has been admitted to the benefits of partnership. This sub-section enables him to elect, on attaining majority, either to remain a partner or not to become a partner in the firm. Thus it contemplates that a guardian may have accepted the benefits of a partnershipon behalf ofa minor without his knowledge. If a guardian can accept benefits of partnership on behalf ofa minor, he must have the power to scrutinise the terms on which such benefits are received by the minor. He must also have the power to accept the conditions on which the benefits of partnership are being conferred. It appears to us that the guardian can do all that is necessary to effectuate the conferment and receipt of the benefits of partnership.”

In fact, ‘on behalf of’ is often used between a minor and a guardian. If we look at the Indian Trusts Act, 1882, it uses the phrase ‘on behalf of’, statutorily allows a trust to be created by or on behalf of a minor subject to the law contained in Section 7(b) of the Act. In the Definitions included in the FATF 40 recommendations, the phrase ‘on behalf of’ is also used in the definition of trustee to denote a family member which reads as follows:

Trustee: The terms trust and trustee should be understood as described in and consistent with Article 2 of the Hague Convention on the law applicable to trusts and their recognition. Trustees may be professional (e.g. depending on the jurisdiction, a lawyer or trust company) if they are paid to act as a trustee in the course of their business, or a non-professional who is not in the business of being a trustee (e.g. a person acting on behalf of the family).

Normally, this activity of the Guardian would have triggered the definition of ‘reporting entity’ qua the 9th May, 2023 Notification by acting as a partner of a firm on behalf of the minor or through the other activities / transactions listed in the notifications e.g. buying and selling of immovable property and management of bank, savings of securities account. The same activities can also be carried out for family members as well as major children through an express Power of Attorney etc. Therefore, the transaction / activity needing to be in the course of profession / business in addition to being carried out on behalf of another person or (in the case of the 9th May, 2023 Notification) for another person is an important safeguard to one’s privacy.

CONCLUSION

This discussion, rather than trying to be the last word on the interpretation of the phrase ‘on behalf of’, seeks to be a ‘starting point’. The phrase ‘on behalf of’ is generic and is often used in a broad sense. Whether an activity or a transaction is conducted on behalf ofanother person or not would be greatly influenced by fact. The image would change as one peers through the kaleidoscope of facts. In law, the interpretation given to this phrase will undoubtedly affect both, the professionals as well as the general public with regard to the reporting and compliance requirements imposed by Chapter IV of the PMLA.

If one goes through the FATF recommendations which are available on the website, one would see that the scheme is putting the onus on Lawyers, Notaries, Independent Legal Professionals and Accountants to carry out KYC and report suspicious transactions as a part of the 40 recommendations. Therefore, putting the onus on professionals is not a decision that has been taken by the Government of India in an arbitrary manner or as a ‘vendetta’ but is a part of our international commitments to adhere to global practices. These obligations will be implemented in FATF member countries across the globe at some point in time, if not already implemented. The relationships that have been indicated for the purposes of reporting are mainly fiduciary in nature. Professionals can avoid being reporting entities by not rendering the services that have been listed in the Notifications. Most of these services are generally not a part of professional services rendered and are more ‘personal’ in nature and may be seen as being fiduciary relationships.

It is important to note that the penalty for not complying with Chapter IV of the PMLA is a monetary one under Section 13 and no prosecution is contemplated. The fine may be steep, as a separate fine may be levied (maximum of One lakh), but the fine shall be for each individual infraction and may add up quite quickly. However, a word of caution: Some of these activities may also be in violation of the professional code of ethics and may give rise to disciplinary proceedings against the professional concerned. It would perhaps be better for most professionals to avoid carrying out the activities that are contemplated by the 3rd and 9th May, 2023 Notifications in the course of carrying on their professions.

BCAJ Admin

BCAS – Volunteering – Making a Difference

CORE OF VOLUNTEERING IS TAKING VOLUNTEERING TO THE CORE

RAMAN JOKHAKAR

Chartered Accountant

(Editor from August 2017 to July 2022)

I was requested by the Hon. Editor of BCAJ, Dr CA Mayur B. Nayak, to write a musing on volunteering. What a fabulous subject! It is inspired by the BCAS theme of this quarter, Change — Leaders — Charity. In our profession, we are used to quarterly themes that are about guidance on profits or Sarkari announcements on tax collection data and so on. To have the theme of Change — Leaders — Charity is unique. I have taken some of the outline points given by the Editor, as subheadings, and shared my thoughts on them.

Association with BCAS: Many members after becoming Chartered Accountants are told by their mentors / parents / principal to become a BCAS member. So was I when my father asked me to enrol as a life member immediately after the results.However, my association was much before that. My father was the president of the BCAS in 1971–72. I was born in 1972. Growing up, I had heard many stories from the times he used to be a member in the early days of the BCAS. The Bulletins and other material used to get posted from our office for some time. The Union Budget copies, that were brought from Delhi by evening flight by seniors like the late Shri P. N. Shah, were copied (it wasn’t as easy as today) and circulated the next day. I had heard stories of how seniors gave generously their time and some big names of today didn’t help the Society. I had heard from him stories of how elders mentored a younger president half their age. One story in particular is of Shri P D Kunte, who gave office property to the Society in its early days. And I thought to myself, what goodwill must be in it, apart from his generosity. Stories of people, who said they will work but won’t take a position in management. It seems that ordinary people do extraordinary things through volunteering. Many unique personalities simply worked for the love of it — expecting close to nothing and building professional camaraderie that lasts a lifetime. Even in those days when life was much more severe and funds were lesser, hearts were larger. As I grew up, I had heard stories like these more than once.

As a young person / article student, I remember visiting some BCAS members like the late Shri Ajay Thakkar (then Editor), whose office was a few blocks away. So as a young man, I felt, when I grew up, I would like to be like that! I resonated with the culture and spirit of the BCAS. People thought of the Society as their own and they belonged to it.

After qualifying, Shri Ajay Thakkar (Editor, 1990–2000) took me to the Core Group in the Journal Committee. At some point in time, I was given the opportunity to co-author a compilation feature called Miscellanea. In those times, committee meetings were ‘full house’; discussions went from words all the way to their essence. Members of the committee had vast experience, whereas I was the least experienced. Mostly, I was a spectator, amused, and often sensing my ignorance while hearing people talk at those meetings. I remember that everyone around wanted to make things better — do more to achieve that. This connected me more to the Society.

I remember one Chartered Accountant member told me that his son doesn’t want to do any FOC (Free of Cost) work, so he didn’t associate with the BCAS much. But I had volunteered all my teens and early 20s as a student. Serving without expectation of reward — often called seva — was a part of life, in that way I studied and also served on weekends and holidays. Some of that non-professional work — seva — was the best education that I have ever received. So, I associated with BCAS in a similar way.

As an office bearer and later as BCAS president, I got to work closely with many people. There is nothing more valuable than working with bright people in a voluntary setting. Once, I saw Shri Narayan Varma, who was suffering from cancer, come straight from the hospital to BCAS to attend an important meeting. And I thought BCAS was really close to his heart. I got to see numerous perspectives from people — how they thought about matters of the Society. How people disagreed. How consensus was the mode of operation. How long-term thinking was part of the system. People always think about how a decision can become a precedent to deal with in the future. Culture and quality were more important than numbers. How politics was kept at bay and those who worked were taken ahead. As office bearers, the president paid for the snacks at OB meetings and that as office bearers, we wouldn’t take any ‘benefit’ except tea / coffee from the Society. I thought some of these were priceless standards and were higher than written ones. I also saw some people treat BCAS work as a top priority, while others took it as secondary. Some wanted to get some standing, some were there to share their stand on matters, and most to help others stand straight and tall.

Volunteering has been like standing on a tower built by so many, for so many, and seeing what it does, what it can do, and giving shape to it. I feel it’s inside out though, and only a reflection of your commitment to what you value most.

BCAS is important to my mind. An association outside a Statutory Body, such as ICAI is very important. The government can take over statutory bodies and influence them. Voluntary bodies are outside that ambit of direct control. And, therefore, have a role of their own to be a free voice that is clear, non-partisan and not be a wah wah party and instead boldly make observations and recommendations. It takes generations to build such bodies. I saw people who would be invited to places to speak. But they always kept BCAS in the forefront as a flag bearer more than themselves. Time and even money would be theirs, but credit went to BCAS.

Role as Editor: I think each role during my volunteering journey has only gotten better. The last role as Editor was the most gruelling for its length of five years, its daily focus on dealing with monthly plans and the sheer responsibility it carries. Yet, it was the most rewarding.

For one, I didn’t know that Editors mostly had a Co-Chair, etc., with them in the past. So in ignorance, I carried on solo as Chairman and Editor. But never felt for a moment like that as all the Editors before me were available to help. It felt like they saw me as them continuing in some sense and taking the Journal further. It was perhaps the most enriching and transforming time after being a Core Committee member to Managing Committee member to an Office Bearer. One thing I learnt by writing an Editorial every month was that I had to think more. I had to hit the nail. I couldn’t disregard what was happening in the profession like NFRA, Expert Committee Report, to Self Regulation and so on.

It was also exhilarating to execute some projects, which were spoken about but couldn’t get done for years (like Views and Counterviews or Surveys). As a comparatively younger Editor, I had to meet the expectations of the past Editors, who were always watching over and also looking out for me. There was freedom with scrutiny. The 50th year of the Journal was truly a ‘golden’ year for me to work as Editor.

I think volunteering gives meaning to the words ofSt. Francis of Assisi — “it’s in giving that you receive”.To deliver consistently without missing a beat changes you. To me, the desire to make something better than the way you received it, makes one better than what one can ever be!

Balance of personal, professional and BCAJ Life: As a president, I worked out regularly. I just kept that promise of being healthy and fit. In fact, I did a session or two with BCAS staff on fitness, which they still remember. However, it meant, I had to work longer at night and early mornings. I would call focus as against balance alone. One had to be sharper on time and priorities. Personal life does take a toll.

As Editor,you have to sign off the final 130 pages on a certain day, no matter where you are and what you are doing. I have cleared the Journal from California to Palawan in the Philippines, from a hospital room during my father’s surgery during COVID to being in bed while I was hit by COVID. Journal comes with you like the tagline of a mobile network ad – wherever you go, the Journal follows. First, it seems like a responsibility, but after a while, you take it as part of your life! However, with age, perhaps priorities and, therefore, time giving changes — one has to spend time on health, taking care of older parents, etc., and, therefore, BCAJ life has to get budgeted somewhat after more than 25 years of volunteering!

Challenges of Editor:It’s a stream of challenges as I said before. Monthly timelines that cannot be breached as a starter! Then, there is creative challenge and administrative challenge too. You are responsible for both content and production. BCAJ gives a mix of articles every month. Rejection of articles is another challenge. Review of every article takes 30–45 minutes to suggest changes and do justice to a volunteer who has written and sent it. Yes, there are several reviewers; however, the Editor has to take the call and own up to that call. Often one has to talk to authors to shape a piece. Keeping the team in good humour is also a challenge when susceptibility to micro errors is a looming risk. I always was keen to expand the scope of the Journal with cartoons, surveys, a few features, adding technology and practice management into the index. These things take effort and constant dialogue with those who would contribute. Any activity that is outcome-based is always challenging. But it also makes you gather all your strengths and deliver. One has to live with the motto: You’ve got to do what you need to do in the time you’ve got.

Benefits of being Editor: You are in charge like a pilot, but also carry responsibility for 60 months, in my case. You see details with a sharper focus and also see the whole magazine with a broader vision. The Journal is the key deliverable of the society, and it is not outsourced. You have to think for months ahead. Arrange meetings to gather ideas and craft their implementation. You often get flack as there are people who may not agree with a view. You often get admiration and pats for expressing what people believe to echo their own voice. I would have never learnt to write very tightly, with more meaning than words if I were not Editor. The ratio of meaning to words should always be more than 1. I read so much almost daily. During the COVID lockdown, we brought out nine Special Articles on the impact of COVID. Creative benefits are perhaps the biggest benefit — to envision and roll out by taking everyone along.

Message to young writers: Editorial on Writing which is a summary of much I have read on writing says it. One of the best ways to hone thinking is by expressing thoughts in words. Writing is the test of thinking. If you use AI for writing originally then your NI (Natural Intelligence) will vanish. Your own expression opens you to your core. It is not just writing about what is known, or compiling things succinctly, but often putting forth words that will awaken a ray of new meaning in the reader she never came across.

Peculiarity of BCAJ:There are a number of them.

a. BCAJ is one of the first aggregators in professional journals — an aggregator of articles.

b. A reader gets multiple viewpoints. One reads from a number of practitioners who bring their experience across.

c. Broad spectrum collection of ideas and analysis from several fields is important as specialisation has limitations.
d. I have seen BCAS would like to validate the integrity so far as possible of people who write and speak — intellectual and other perspectives.

e. Some features collect the best reads and present it succinctly.

f. It’s a great read for 30 days till you receive the next one.

g. Reader develops analytical aspects, as she reads well-analysed topics.

The list is long!

Youngsters and BCAJ: It is not the age, but what a generation looks up to. If you admire a king — then you will be a warrior and a benefactor of people. If you admire a thinker — then you will be a thinker. It is all about values. I feel values are shaped much differently today, due to wide exposure. Often the shaping is less as there is way too much information that is worth nothing. For example, all the politics you see on TV for hours in a week often is just indigestion. So exposure to society, peers and what one seeks will decide whether they will be attracted to reading, to going deeper, rather than be a ‘consumer’ and ‘enjoyer’ — but more of a learner, going deeper. For every generation, their role models change. Money is quite central today for more and more people! It all depends as I like to say — do you want to create a great balance sheet or a great profit and loss? Reading creates that biggest asset — YOU — which falls in the balance sheet category.

A key value is gathering expertise in one’s own field — to go to the bottom of things. Rather than buying from a consultant, and ‘consuming’ it, one would be better off ripping off information and connecting it to the situation. Some of what we read is not of immediate ‘use’, but I have seen it come in handy at some time when you have to connect many dots. The way the mind works is if you have a great wealth of knowledge and experience, you will make better decisions. There is a saying the eyes cannot see what the mind does not know.This is not taught in school and college, but one understands with time and inclination. In the beginning, it is towards one specific / chosen field, but then it becomes a trait where we learn to go deep and cut the crap in most situations.

Unique experience during Editorship: I saw some people were always so helpful, always so available. I saw others who won’t respond to a missed call (I am sure they did if it were a client). You see an array of professionalism.

The experience of imagining, designing, shaping the Journal during the 50th year was amazing. We had so many ideas that were generated at the first level. And then, we had to churn and arrange them sequentially. We had some great articles come forth. Ashokbhai Dhere wrote about two previous colleagues in the committee and three past Editors. Dastur Saheb gave an article for the opening journal. Interviews with Mr Y. H. Malegham, Zia Mody, Ishaat Hussain, Rakesh Jhunjhunwala, and more. It was a treat to work on how to draw the most from the time we got from luminaries.

Well, one cannot ignore goof-ups. Although I shouldn’t share all, here is one: During Mr Malegham’s interview, he received a call, and I fiddled with the phone that was recording to not record his conversation on the phone. After his call, I missed switching on the recording. I realised that part of the interview was not recorded after reaching the office. Mr Malegham was kind enough to get it typed and send answers to some questions after we sent him what we remembered from memory!

Everything expanded my ability to take on a lot and do what had to be done. It is great to be a mascot for something like the Journal. Two editors after my tenure told me that honestly, they were not sure whether I would be able to cope when I started. But they were pleasantly surprised at the end about the work that was done.During some part of my tenure, we got one Chartered Accountant member to draw cartoons as it was his serious passion. And in a few years, we had more than 200 cartoons in the Journal, which often spoke more eloquently than words would. These are some creative, memorable elements!

At the end of my tenure, I received letters from seniors like Dastur Saheb, stating that “I always look forward to reading your editorials – they not only comment on the most recent and topical matters but were very educative”. I think a pat on the back from seniors you look up to growing up, is a memory for the keeps.

I wish to end with what Richard P. Feynman said decades ago: “The only way to deep happiness is to do something you love to the best of your ability.”And if something you love is something that you believe to be greater than you, then the happiness is 10 times more!

1 Editorial, June 2022, BCA Journal

BCAJ Admin

BCAS – Volunteering – Making a Difference

Dear Readers, BCAJ has completed over five decades of its illustrious journey. Publication of a monthly professional journal is a task in itself, as it entails wholesome responsibility and requires total commitment. BCAJ has had 10 editors so far. As the BCAS is celebrating its 75th year, it would be interesting to read what some of the editors have to share. In tune with the current Office Bearers’ Theme of “Change – Leaders – Charity” for the quarter ending December 2023, this issue carries a write-up by two of the editors who have shared their experiences of volunteering and leading the change. We hope that readers will find it interesting and youngsters will find it inspiring to volunteer with the highest degree of commitment and dependability.

SANJEEV PANDIT

Chartered Accountant

(Editor from August 2010 to July 2013)

I was aware of the Bombay Chartered Accountants’ Society since my articleship and used to occasionally read a few articles from the BCA Journal. Soon after qualifying as a Chartered Accountant, I became a life member of the BCAS. However, my association with the Journal began as the President of the BCAS in 2005–06. I was the Joint Editor from 2007 to 2010, with Gautam Nayak as the Editor, and then the Editor for three years from 2010 to 2013.

Once you become a part of the Journal team, the Journal actually grows on you, and even more, once you become its Editor. My immediate predecessor, Editor Gautam Nayak, is a person with mastery over the English language and is a voracious reader. It was a daunting task and a challenge to succeed him. But the support of the Editorial Board was always available.

At the start of my journey as the Editor, I was worried whether I would be able to identify appropriate topics for writing the editorial every month. But within a brief period, I realised that there were varied subjects, and it was an opportunity to share my views with the readers. I used to read with great interest the editorials of the late Ajay Thakkar, who was the Editor for about 10 years between 1990 and 2000, and that helped me in choosing topics for my editorials. I attempted to cover a wide canvas in my editorials by writing on wide-ranging topics such as the CA course and students, the introduction of Companies Act, 2013, retirement of Ratan Tata as the chairman of the Tata group, decision of the Supreme Court in the Vodafone case, Radia tapes, introduction of GAAR, plight of honest bureaucrats, reports of the then CAG Vinod Rai, Tax Accounting Standards, family-managed businesses, FDI in retail, etc. When readers appreciated an editorial or commented or responded by either supporting or countering the views expressed in the editorial, there was immense satisfaction and joy at having provoked thoughts amongst readers.

As the Editor, it was interesting to identify new authors and topics for articles. I recollect the article “Understanding Islamic Finance”. It was indeed a novel subject. Authors included a Commissioner of Income Tax (Appeals) and a retired Income Tax Ombudsman, apart from Chartered Accountants. Some of the authors have continued writing for the Journal. Editing the contents, particularly the articles, was always a delicate task. One had to take care that editing did not result in changing the style or views expressed by the authors. It was an enjoyable task to work with some of the authors who produced interesting articles. An article would sometimes go back and forth multiple times before it was finalised. I also tried to introduce ‘blind-fold peer review’ for articles. As theEditor, I had to read all the contents thoroughly, which gave me an opportunity to study subjects which were not part of my core practice. Over a period, I earnedthe trust of many of the contributors of featurescovering the digest of cases, and they gave me a free hand to edit the material to bring out the ratio of a decision clearly.

Selecting the contents of the Journal is a balancing act. On the one hand, there is a temptation to lean towards content that is immediately useful for Chartered Accountants in practice or employment. Such articles and features are like digests and guides. No doubt they have utility and attract readership. On the other hand, there are articles which are thought-provoking, introducing a new thought or sharing the experience and result of research. I always thought that our Journal had features that fulfilled the need for digests and references, and the articles should cover more serious content, which would help the readers broaden their perspective. Some features like ‘Closements’ and ‘Controversies’ are analytical and thought-provoking. At times, one had to reject a ‘good’ article only because it exceeded acceptable length, even if it was to be published in parts.

The Journal required an editor to devote substantial time, particularly at the end of each month. One had to respect the deadlines and work on that basis. I recollect once I had plans to travel, and ‘the dummy’ of the Journal was delivered only at late night the previous day. I had to halt the car for over 30 minutes off the highway to convey the corrections and changes to the printer. The printer was new, and the coordinator was also not so familiar with the requirements. In the initial months, this necessitated spending much more time editing each issue of the Journal.

Several factors decide the success of an issue of any magazine, particularly a professional journal. The quality of contents, effective presentation, proofreading, pagination, placing of advertisements, error-free printing and timely delivery to the readers — all contribute to the success. Only when one can consistently bring out issues of a journal fulfilling various criteria, can the journal earn a reputation as a quality publication. It requires teamwork and co-operation of everyone involved. It is purely because of the dedication of the team that the BCA Journal has achieved its present position.

My experience as the Editor of this prestigious Journal was truly exhilarating, memorable and enriching. I continue my association with the Journal as a member of the Editorial Board. Maybe it is now time to make room for younger minds to lead the pack!

BCAJ Admin

Tightening the Book-Keeping Requirements: Amendments to the Companies (Accounts) Rules, 2014

Companies are required to maintain their books of account as prescribed in the Companies Act, 2013 (the ‘Act’). MCA issued an amendment to Rule 3 of Companies (Accounts) Rules, 2014 (‘Account rules’) relating to the maintenance of electronic books of account and other relevant books and papers to make the existing requirements more stringent. With this amendment issued in August 2022, Indian Government authorities seek to always have access to books of accounts of Indian companies, even if such books are maintained in electronic form on servers located outside India. The amendment was issued on 5th August, 2022, with no applicability date. The amended rules are effective from the date of their publication in the Official Gazette.

While the first year of the applicability of the amended rule is over, it is important for the companies as well as the auditors to understand the implications of this amendment. Non-compliance with this requirement may constitute non-compliance with the requirement of law in terms of Section 128 and impact the auditor’s assertion in ‘Report on other legal and regulatory requirement’ in Section 143 (3)(b) on maintenance of proper books of account as required by Section 128 of the Act.

Certain multinational companies have refused to provide government authorities access to financial data of Indian entities stored in servers outside India, which may have prompted the government to amend the Accounts Rules.

This amendment includes:

Books of accounts should remain accessible in India at all times so as to be usable for subsequent reference.
Back-ups of books of account and other relevant books and papers maintained in electronic mode (within or outside India) to be kept in servers physically located in India on a daily basis (Earlier: periodic basis).
Disclose annually to ROC the name and address of the person in control of the books of account and other books and papers in India (where the service provider is located outside India).

The above amendment is aimed at preventing any manipulation of the books of account of a company and to ensure that the same are readily accessible and backed up on a daily basis, where required.

ICAI has also issued an announcement, ‘Amendment in the Companies (Accounts) Rules, 2014 relating to the availability of books of account and other relevant books and papers maintained in electronic mode at all times and also details of person in control, if the service provider is located outside India’ in this regard which provides a comparison between the previous and revised requirements.

This article provides specific considerations for the companies and the auditors to comply with the revised requirements of the Act read with rules.

IDENTIFICATION OF RELEVANT BOOKS OF ACCOUNT

The first step is that the companies should identify and back up the documents which qualify as books of account and other relevant books and papers basis the definition under section 2 of the Companies Act, 2013.

Books of Account as per Section 2(13) of the Companies Act, 2013 includes records maintained in respect of –

all sums of money received and expended by a company and matters in relation to which the receipts and expenditure take place;
all sales and purchases of goods and services by the company;
the assets and liabilities of the company; and
the items of cost as may be prescribed under section 148 in the case of a company which belongs to any class of companies specified under that section;

Books and papers and books or papers as per section 2(12) of the Companies Act, 2013 include books of account, deeds, vouchers, writings, documents, minutes, and registers maintained on paper or in electronic form.

It is important to note that the backup should include all the documents including underlying support maintained in electronic mode.

The companies will be required to take steps to ensure that there is a server physically located in India for taking the backup of books of account on a daily basis.

CONTROLS TO BE IMPLEMENTED AND OPERATED BY THE COMPANY

It is also important for the companies to ensure that adequate controls have been established for backup to be taken on a daily basis:

Controls to ensure that backups are taken digitally on the designated server physically located in India.
Controls to ensure that backups are taken locally in India and not overseas.
Controls to ensure that backups taken are in a readable format and can be displayed or read when required.
Controls to ensure access to the backup logs is restricted to appropriate individuals.
Controls to ensure that appropriate actions are taken in case of a backup failure.

OTHER CONSIDERATIONS

The requirements prescribed under Rule 3 are applicable to all companies having their servers in India or outside India. Offline media of backups such as tapes, CDs, drives, etc. may not meet the requirements of the amended provisions of the rules.

The hard copy printouts of such backup or retaining back in pdf (or similar format) will not meet the requirements of the amended Rules.

The backup of books of account and other books and papers maintained under the proviso to Rule 3(5) should be maintained for at least 8 preceding financial years in line with the requirements under section 128(5) of the Companies Act, 2013.

AUDITORS’ CONSIDERATIONS

Considering there is no applicability date given in the amendment rules except that the amended rules are effective from their date of publication in the official gazette, auditor reporting obligation is triggered for financial statements which include any period on or after the effective date of the amendment i.e.,5th August, 2022.

The revised requirements will not trigger reporting requirements in cases the period covered by financial statements has ended before the effective date even if the auditor’s report date is after the effective date.

Section 143(3)(a) to the Companies Act, 2013 provides that the auditor’s report should state whether proper books of account have been kept by the company and also state any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith [Section 143(3)(h)].

The expression ‘proper’ means appropriate, in the required manner, fit, suitable, apt.

The auditors will be required to check whether backups of the books of account and other books and papers of the company maintained in electronic mode have been retained on a server located in India with backups taken on a daily basis instead of back-ups on a periodic basis — as provided earlier.

The auditors may test the IT General controls such as security and access, computer operations, system development and system changes basis the guidance provided under SA 315, ‘Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and its Environment’ and SA 330, ‘The Auditor’s Responses to Assessed Risks’ and Guidance Note issued by ICAI on Audit of Internal Financial Controls Over Financial Reporting.

The auditors may also perform tests of controls over computer operations which could include:

evaluating the backup and recovery processes,
reviewing the process of identifying and handling computer operations, and
if applicable, control over job scheduling which directly/ indirectly impacts the periodicity of backups.

Auditors should also test the IT environment maintained by a third-party service provider in case the books of accounts of the company are maintained by such service providers.

KEY ASSERTIONS THAT ARE TO BE EVALUATED AS PART OF TESTING

Backups are taken daily.
Backups are taken on the server. Copies of printouts / PDFs as backups will not meet the requirements.
Backups are taken on the server physically located in India.
Backups are readable as books of accounts and records in a legible form. This means that a front end would be required to display in readable/legible form.

THIRD-PARTY SERVICE PROVIDER

Some companies may employ third-party service providers to maintain their books of accounts in electronic mode, for example, on cloud is also covered by the new requirement.

Rule 3(6) of account rules requires the company to intimate the following to the RoC on an annual basis at the time of filing of financial statements:

the name of the service provider;
the internet protocol address of the service provider;
the location of the service provider (wherever applicable);
where the books of account and other books and papers are maintained on the cloud, such as the address as provided by the service provider.
details of the name and address of the person in control of books of account and other books and papers in India.

NON-COMPLIANCE IMPLICATIONS

Section 128(6) provides for the penalty on the specified persons if the requirements of section 128 are not met. For example, not taking daily backups, books of accounts not accessible in India on a daily basis,etc. The company needs to determine the penal provisions and the auditor may consider the reporting implications.

If the auditor identifies an exception, the auditor should report such a matter under section 143(3)(b) under the heading ‘Report on other legal and regulatory requirements’ of the Act. For example, backups are not taken on a daily basis but taken at the year-end or on the date of the auditor’s report.

APPLICABILITY TO REPORTING ON CONSOLIDATED FINANCIAL STATEMENTS

The auditor is required to comment on this matter both in the case of standalone financial statements and consolidated financial statements. However, while reporting on consolidated financial statements, the auditor may observe that certain components included in the consolidated financial statements are (a) either not companies under the Act, or (b) some components are incorporated outside India. The auditors of such components are not required to report on these matters since the provisions of the Act do not apply to them. ICAI has issued similar guidance in its implementation guide on Reporting under Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014.

ILLUSTRATIVE REPORTING

The auditors of various listed companies in the audit report for the year ended 31st March, 2023, have included a comment in the Auditor’s report under the heading ‘Report on other legal and regulatory requirements’ in case of non-compliance with the aforesaid requirements. Some of the examples are as below:

MODIFIED REPORTING – STANDALONE AUDITOR’S REPORT

“In our opinion, proper books of account as required by law have been kept by the Company so far as it appears from our examination of those books except that the backup of all books of account and other books and papers maintained in electronic mode has not been maintained on servers physically located in India on a daily basis.”

MODIFIED REPORTING – CONSOLIDATED AUDITOR’S REPORT

In our opinion, proper books of account as required by law relating to the preparation of the aforesaid consolidation of the financial statements have been kept so far as it appears from our examination of those books and reports of the other auditors, except that with respect to certain entities as disclosed in note XX to the consolidated financial statements, the back-up of books of account was not kept in servers physically located in India on a daily basis as stated in Note XX to the consolidated financial statements.

UNMODIFIED REPORTING

In our opinion, proper books of account as required by law have been kept by the Company so far as it appears from our examination of those books [and proper returns adequate for the purposes of our audit have been received from the branches not visited by us].

BACKUP REQUIREMENTS FOR AUDIT TRAIL (EFFECTIVE FROM 1ST APRIL, 2023, ONWARDS)

The Companies Accounts Rules, 2014 have also been amended to introduce the requirement of an audit trail. Effective 1st April, 2023, onwards, every company which uses accounting software for maintaining its books of account, shall use only such accounting software which has a feature of the recording audit trail of each and every transaction, creating an edit log of each change made in the books of account along with the date when such changes were made and ensuring that the audit trail cannot be disabled.

The Companies (Audit and Auditor) Rules, 2014 have been correspondingly amended wherein auditors are now required to report, as part of the auditor’s report (in the section ‘Report on Other Legal and Regulatory requirements’, as to whether,

(a)the accounting software used by the company being audited has the feature of recording audit trails (edit logs),

(b)the audit trail feature was operational throughout the financial year and had not been “tampered” with, and

(c)such audit trails have been retained for the period as statutorily prescribed.

The MCA has notified that the aforesaid amendments will be effective from 1st April, 2023, which implies that the accounting software employed by companies will need to be compliant with the Accounts Rules from FY 2023-24 onwards.

The revised requirements for back up of books of account and other books and papers of the company maintained in electronic mode may include audit trail records as well since an audit trail is required for books of account records and the audit trail records would fall under the definition of books of account and other books and papers. While ICAI or MCA may issue a clarification on this aspect, reference may be made to paragraph 20 of the Implementation Guide on Reporting under Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014 which requires that the company should establish controls to ensure that periodic backups of the audit trails are taken and archived as per the statutory period specified under Section 128 of the Act.

BOTTOM LINE

The rules have been amended with a view to giving more stimuli to the accessibility of books and papers maintained in electronic mode by companies. The auditor should also assess the requirement as part of their assessment of Non-compliance with laws and regulations and reporting requirements under Standards on Auditing.

BCAJ Admin

Service Tax

I TRIBUNAL

18. M/s. ODC Logistics Pvt. Ltd. vs. CST
2023-TIOL-639-CESTAT-KOL

Date of Order: 23rd June, 2023

Order beyond the scope of SCN is legally unsustainable. The conclusion based on assumptions and conjectures cannot deprive the assessee of the credit.

FACTS

Appellant provided logistics services including transportation of goods. Of the two issues involved in the show cause notice (SCN), the first related to RCM liability under Goods Transport Agency (GTA) service for payments made to suppliers of lorries on hire, based on expenses booked in financial statements as “freight charges”. The appellant contended that the supplier had not issued a consignment note and hence legally, it was not liable to pay service tax. However, the adjudicating authority proceeded by examining the nature of income of the appellant for providing output transportation services and observed that by avoiding issuing consignment notes for rendering output services, it could not avoid service tax liability as the appellant earned freight income and based on the said observation, service tax on GTA service was confirmed. For this conclusion, the appellant’s submission was that besides traveling beyond allegation in the SCN, which is the foundation of the levy and recovery, service tax liability could not be fastened when SCN did not contain allegations for liability on output services and further that service tax on GTA service is payable by the recipient of the service. In the second issue, CENVAT credit availed by the appellant on invoices issued by two specific vendors was disallowed on the ground that the department was unable to trace them at their office address and hence service providers were non-existent. For this, the appellant’s contention was that there was neither any investigation report brought on record nor was there any allegation made in the SCN as to having connivance with the service providers or that the service provider had not deposited by the service tax.

HELD

In the case of the demand under GTA service, the adjudicating authority traveled beyond SCN as the only allegation contained in the SCN was that the appellant did not pay service tax under RCM on expenditure involved on lorry hire charges / freight charges. However, the order conferring liability on the output services is beyond the scope of SCN and hence impermissible in law. Also, the Commissioner has accepted the order that lorry suppliers were not required to issue consignment notes and hence RCM cannot be invoked and hence the demand is set aside. On the issue of disallowance of CENVAT credit, it was observed by Hon. Bench that both SCN and the impugned order are silent on the inquiry report which was not made available at any stage of proceedings. Moreover, there being no allegation of any connivance with the service providers, the Bench was agreeable that denial of credit based on assumptions and conjectures cannot be held legally correct.

Hence the order was unsustainable and hence the appeal was allowed.

19. Alstom Projects India Ltd. vs. CCE
2023-TIOL-629-CESTAT-KOL

Date of Order: 2nd June, 2023

SCN issued after 4 years of information gathered is highly barred by limitation.

FACTS

The impugned order in this case confirmed the duty amount on compensation received on account of the cancellation of the order by West Bengal Power Development Corporation treating the same as additional consideration under Rule 6 of Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 by invoking extended period of limitation. The appellant submitted all material information regarding the non-receipt of two contracts, vide their letter dated 10th May, 2002 and subsequent letter dated 25th March 2003, and that as per the MOU, the appellant received the payment. The show cause notice, however, was issued in October, 2007 to the appellant engaged in the manufacture of boilers and boiler parts. The appellant was awarded two contracts, out of which one was canceled in 1994 on account of a financial crisis at the end of the client wherefore a cancellation order was passed to terminate the unexecuted portion of the contract to mutually agree on the amount of damages for cancellation. On a similar footing, another order of cancellation was issued in 2002 wherein also damages were payable by the contractee to the appellant. Despite the above, a show cause notice was issued as above on the grounds of suppression. The appellant submitted that damages did not attract excise duty and reliance in this regard was placed on various judicial pronouncements inter alia including the latest in the case of Skoda Auto Volkswagen India Private Limited vs. CCE, Aurangabad 2023-TIOL-149-CESTAT-MUM.

HELD

It was found that all the information was available to the department in 2003 itself and since no information was suppressed, the show cause notice issued four years later is not sustainable and is highly barred by limitation and hence merits of the case were not gone into and the appeal was allowed.

20. Maa Kalika Transport Pvt. Ltd. vs. Commissioner of CGST & CE
2023-TIOL-625-CESTAT-KOL

Date of Order: 10th July, 2023

The demand of service based on the IT department’s data is not sustainable based on merits as well as a limitation when it is without corroborative evidence. Also, the order was held beyond the scope of SCN.

FACTS

The appellant was issued a show cause notice in December, 2020 demanding a service tax of Rs. 9.50 crore for the F.Y. 2015–16 based on the data received by the service tax department from the income tax department and which was confirmed by adjudicating authority under the category of cargo handling service by also imposing an equal amount of penalty under section 78(1) of the Act. Hence the appeal. According to the appellant, the bonafide belief is that they provided transportation service for which the service receiver is liable to pay service tax. They transported coal within a distance of 180 km. to 200 km. which was rightly classifiable as transportation of goods (GTA service) and hence service tax is not leviable under cargo handling service. Adjudicating authority was provided with work orders of various parties wherein terms of contract with each party were different. However, essentially the contracts were for the transportation of coal as per the appellant. Further, SCN had not specified any category for proposed demand of service tax.

HELD

In terms of the above facts, the issues before Hon. Tribunal was to examine which of two, viz. cargo handling service or transportation of goods was correct classification and also whether transportation service was bundled with other individual services and hence whether the contract could be vivisected and also whether the demand of tax under “cargo handling service” was beyond the scope of the SCN and whether the demand could be made based on the data received from income tax department without there being any corroborating evidence available with the department, Hence whether suppression was involved at all to demand service tax invoking extended period? Consequently, whether penalties could sustain at all. Based on a perusal of the contracts, it was found that the contracts were composite contracts but primarily for transportation and other services were incidental to it. The contract did not specify separate charges for such ancillary services and hence it could not be vivisected to arrive at a separate value for each service. Also, there was no proposal in the impugned SCN as to the classification of cargo handling service and hence adjudicating authority traveled beyond the scope of the notice which is legally unsustainable. Also as per the appellant, based on the data received from income tax, the department put in no effort to ascertain corroborative evidence and the impugned order contained no finding on this. This view also found support in the case of Larsen & Toubro Ltd. vs. ACST (2023) 2 Centax 327 (Cal.) and in CST vs. Hindustan Cables Ltd, 2022 (382) ELT 188 (Cal.). As for the existence of suppression, it was found that when the department itself was unclear about the classification, no suppression of the facts was involved. For this, reliance was placed on Ugam Chand Bhandari vs. CCE 2004 (167) ELT 491 (SC) and hence extended period was held as not invokable.

Thus, it was held that the appellant provided transportation services which were mutually bundled in the contracts. Further, since SCN did not have a proposal to demand service tax under cargo handling service, the order impugned traveled beyond the scope of the notice. The demand for tax could not be made only on the basis of data furnished by the income tax department without any corroborative evidence. Also when suppression did not exist and hence even on the ground of limitation, the demand would fail and consequently the penalty would not be sustained.

BCAJ Admin

Goods And Services Tax

I. HIGH COURT

51. Dhanya Sreekumari vs. State Tax Officer (IB), State GST Department, Alappuzha
2023 (75) GSTL 404 (Ker.)

Date of order: 27th June, 2023

Cash not forming part of stock-in-trade cannot be seized during the inspection by the department as per section 67 of CGST Act.

FACTS

Petitioner was engaged in the manufacture and sale of Idly/Dosa batter, Parotta, Chappathi, etc. An inspection was conducted by the department in the manufacturing unit and at the residence of the petitioner. Cash amounting to Rs. 32,73,900 was found and seized from the residence of the petitioner. Pay-in-slips for depositing the amount in the bank were also found at the residence of the petitioner. Further, the petitioner made representation before the department for the return of seized cash but no action was taken.

HELD

Cash cannot be seized where it was not forming part of the stock-in-trade of the petitioner. Further, pay-in-slips indicated that cash was intended to be deposited in the bank. Hence, there was no reason to retain it further. It was directed to release the seized cash forthwith. The petition was disposed of in favour of the petitioner.

52. APJ Investments Pvt Ltd vs. Asst. Commr. of CGST, Delhi West
2023 (75) GSTL 451 (Del.)

Date of order: 9th May, 2023

Application for revocation of cancellation of GST registration restored where SCN did not provide reasons for cancellation.

FACTS

Petitioner was issued a SCN for cancellation of registration dated 22nd August, 2022 stating that the petitioner had obtained registration by means of fraud, wilful misstatement, or suppression of facts. The petitioner denied the allegations and claimed that it was in the process of winding up its business in Delhi and would voluntarily file an application for cancellation of registration once its import consignments arrived at New Delhi. SCN did not specifically indicate reasons for proposing to cancel the petitioner’s registration. The Proper Officer rejected the response filed by the petitioner and passed an order dated 13th October, 2022, whereby the petitioner’s GST registration was cancelled. Subsequently, the petitioner applied for revocation of cancellation of registration which was rejected and a new SCN dated 11th November, 2022 was issued to which the petitioner did not respond. Further, the petitioner’s application for revocation was rejected by an order dated 28th November, 2022. Thereafter, an appeal filed by the petitioner against the order was rejected on the ground that the petitioner had shifted its premises. Being aggrieved, the petitioner preferred a writ before the Hon’ble Court.

HELD

The Hon’ble High Court held that the SCN issued dated 22nd August, 2022 did not provide necessary particulars for cancellation of registration. It is a well-settled law that SCN must set out reasons for proposing an adverse action in order for the noticee to respond to the same. Undisputedly, in this case, the impugned SCN did not satisfy the said standards. Therefore, it would be appropriate to restore the petitioner’s application for revocation of cancellation of its GST registration. Hence petitioner be granted further opportunity to respond to SCN dated 11th November, 2022 and the opportunity to be heard. Petitioner’s application to be decided afresh.

53. B.C. Power Controls Ltd. vs. Union of India 2023 (75) GSTL 465 (Raj.)

Date of order: 18th April, 2023

Application for refund cannot be withheld on the grounds of pendency of certain other proceedings.

FACTS

Petitioner was engaged in the business of exporting electrical wires and allied products. Petitioner filed a refund claim and considered the shipping bill for application of refund as per section 54 of the CGST Act read with section 16 of the IGST Act and Rule 96 of CGST Rules. Regardless of repeated representations, the respondent did not decide on the claim for the refund as there were allegations against the petitioner that fake invoices were raised for the purpose of claiming the refund. As a result, two SCNs were issued under section 74 of the CGST Act and refund proceedings were kept on hold. According to the respondent, once the pending proceedings are concluded the claim of refund would be decided.

HELD

It was held that the application for a refund once filed needs to be addressed as per the provisions of the law and cannot be kept pending on the grounds of pendency of certain other proceedings. As per revenue’s claim, since this case involved allegations of raising fake invoices and the matter was under investigation, no direction for refund was issued. However, the respondent was directed to decide the petitioner’s refund application.

54. Diya Agencies vs. State Tax Officer [2023] 154 taxmann.com 421 (Kerala)

Date of order: 12th September, 2023

The input tax credit cannot be denied merely on the ground that the concerned invoice does not appear in GSTR-2A. If on examination of the evidence submitted by the assessee, the assessing officer is satisfied that the claim is bonafide and genuine, the assessee should be given input tax credit.

FACTS

The petitioner’s claim for ITC was denied on the ground that as per GSTR-2A in respect of a supply invoice, the taxpayer is only eligible for the input tax amount shown in GSTR-2A.

HELD

The Hon’ble Court held that if the seller dealer (supplier) has not remitted the said amount paid by the petitioner to him, the petitioner cannot be held responsible. The Court relied upon the decision in the case of The State of Karnataka vs. M/s Ecom Gill Coffee Trading Private Limited 2023 (3) TMI 533 SC and held that whether the petitioner has paid the tax amount and whether the transactions between the petitioner and seller dealer are genuine are the matter of facts and evidence. The petitioner has to discharge the burden of proof regarding the remittance of tax to the seller dealer by giving evidence. The Court thus set aside the impugned order holding that merely on the ground that in Form GSTR-2A the said tax is not reflected should not be a sufficient ground to deny the assessee the claim of the input tax credit and remanded the matter with a direction to the concerned revenue authority to allow the petitioner to give evidence to establish genuineness of his claim for input tax credit.

55. AEW Technologies LLP vs.
Assistant Commissioner of Revenue,
Bureau of Investigation
[2023] 154 taxmann.com 265 (Cal.)

Date of order: 29th August, 2023

Where revenue recovered the amount in excess of the statutory pre-deposit required to be made before the first appellate authority and tribunal and that too before the expiry of the period for filing of the appeal, the Court directed the authorities to refund the excess amount.

FACTS

The petitioner challenged the order of the first appellate authority and was also aggrieved by the fact that the department initiated recovery for the amounts which are more than the statutory pre-deposit requirements before the first appellate authority and the second appellate authority; and that such amounts were recovered even before the expiry of the statutory period of time to file the appeal before Tribunal.

HELD

The Hon’ble Court directed the authorities to refund the excess amount of pre-deposit to the petitioner.

56. Vaishnavi Metals vs. Assistant Commissioner (ST) (Madras)
[2023] 154 taxmann.com 331
Date of order: 11th September, 2023

The Court quashed the recovery proceeding pending the disposal of the petitioner’s rectification application by the authorities.

FACTS

The petitioner received an adjudication order along with impugned recovery notices. However, owing to certain errors in the order, the petitioner filed a rectification application against the said order. The department initiated a recovery proceeding against the petitioner.

HELD

The Hon’ble Court quashed the recovery proceeding since the rectification applications were pending and directed the revenue authorities to dispose of the petitioner’s rectification application expeditiously.

57. Zydus Wellness Products Ltd vs. UOI [2023] 154 taxmann.com 261 (SIKKIM)

Date of order: 12th September, 2023

The benefit of the Budgetary Support Scheme for the “remainder period” cannot be given to the new entity when there is a change of ownership. The petitioner’s argument that the exemption should be based on the unit and not on the ownership is not accepted by the Hon’ble Court.

FACTS

The petitioners, Zydus Wellness Products Ltd (Zydus) and Alkem Laboratories Ltd (Alkem) approached the Court seeking a direction to allocate fresh Unique Identity (UID) in the name of new entities and to extend the benefit of the Budgetary Support Scheme (‘Scheme’) to them for the residual period. In the case of Zydus, the partnership firm was converted into a company in February 2019 and in the case of Alkem, a unit belonging to Cachet Pharma was transferred to Alkem as a going concern. The parties had approached the Ministry for obtaining a necessary clarification in this regard and CBIC had opined that as per the guidelines of the Scheme, if any unit undergoes relocation, expansion and change of ownership, it would not be eligible.

HELD

Referring to the definition of ‘person’ under section 22 of the CGST Act, 2017, the Hon’ble Court held that the erstwhile partnership firm of Zydus and the company as also the Cachet Pharma and Alkem are separate and distinct legal entities and required to obtain a separate registration under section 22 of the CGST Act. The Court also observed that the Scheme therefore was a measure of goodwill only to the units that were eligible for drawing benefits under the earlier excise duty exemption/refund schemes but has otherwise no relation to the erstwhile schemes. The Court therefore held that the petitioners who are separate legal entities qua the previous persons who were eligible for the Scheme, could not have filed an application under the said Scheme and were not the eligible units as defined in paragraph 4.1 of the said Scheme. The Court further held that the exemption under Notification No. 20/2007-CE was intended for those who have made investments in the State of Sikkim and not for those who have not made investments. The Court concluded that it was the previous owners who had invested to be eligible for the scheme and not the petitioners and accordingly their petition was dismissed. The petitioner’s argument that the exemption should be based on the unit and not on ownership is not accepted by the Hon’ble Court.

BCAJ Admin

Recent Developments in GST

AMENDMENT IN ACTS

The Goods and Services Tax Council (GST Council) in its 50th and 51st meetings considered representation from various associations on the issues regarding the taxability of Casinos, Horse Racing and Online Gaming and recommended making certain amendments in the Central Goods and Services Tax Act, 2017 (the Act) to provide clarity regarding taxability of Casinos, Horse Racing and Online Gaming. Accordingly, CGST Amendment Act and IGST Amendment Act, both dated 18th August, 2023 are passed and notified in Gazette.

B. NOTIFICATIONS

1. Notification No. 39/2023 — Central Tax dated 17th August, 2023

By the above notification, the Amendment is made in Notification No. 2/2017 dated 19th August, 2017 by which some entries are substituted which are regarding territorial jurisdictions.

2. Notification No. 40/2023 — Central Tax dated 17th August, 2023

The above notification seeks to appoint common adjudicating authority in respect of show cause notices issued to M/s United Spirits Limited.

3. Notification No. 41, 42, 43 & 44/2023 — Central Tax dated 25th August, 2023

By the above notifications, the extension of time is granted for furnishing of Form GSTR-1, return in Form GSTR 3B (monthly/ quarterly) and GSTR -7 respectively for taxpayers registered in Manipur. The extension is up to 25th August, 2023 for all the above returns.

4. Notification No.45/2023 — Central Tax dated 6th September, 2023

By the above notification, the CGST Rules are amended. These amendments are in relation to valuation for online gaming including online money gaming and actionable claims in the case of Casinos. For this purpose, Rules 31B & 31C have been inserted.

C. ADVISORY

a) The information is given by GST: The Advisory is about “Mera Bill Mera Adhikaar Scheme” dated 24th August, 2023.

b) The GSTN has further informed about introducing “Electronic Credit reversal and Re-claimed statement” dated 31st August, 2023.

D. ADVANCE RULINGS

34. Exemption vis-à-vis Agreement with NSDC
Nxtwave Disruptive Technologies Pvt Ltd (Order No.: A.R. Com/12/2022 dated 27th September, 2022 (TSAAR Order No. 50/2022) (Telangana)

M/s Nxtwave Disruptive Technologies Private Limited has filed this application (name referred to as Nxtwave).

Nxtwave was founded by IIT Bombay, IIT Kharagpur and IIT Hyderabad alumni — Sashank Reddy Gujjula, Anupam Pedarla and Rahul Attuluri. The Nxtwave offers training programs in Industry 4.0 Technologies for college students, graduates, and early professionals.

The Nxtwave aims to empower 150 million college students and recent graduates, between the age groups of 18-24, into highly-skilled professionals to gear up for the 4.0 revolution.

National Skill Development Corporation (“NSDC”), a Section 25 Company under Companies Act, 1956 (corresponding to section 8 of the Companies Act, 2013), was initially set up under the Prime Minister’s National Council on Skill Development with the primary mandate of enhancing and supporting private sector initiatives for Skill Development in India through appropriate Public-Private Partnership (“PPP”) models and striving for significant operational and financial involvement from the private sector. At present, NSDC functions under the aegis of the Ministry of Skill Development & Entrepreneurship (“MSDE”).

NSDC through this Scheme endeavors to create a sustainable and enabling skill training ecosystem by promoting the provision of market-led fee-based Services under the various models like:

(i) self-financed by the candidate,
(ii) financed by the candidate or partner through a loan or under an income sharing arrangements with the partner etc.

Any Eligible Entity having relevant experience in Skill Development can submit a Proposal to become a Partner of NSDC. The Proposal shall be in the prescribed format and shall include details of the services proposed to be offered by the Partner under the Scheme.

Both the Nxtwave and NSDC have entered into an agreement dated 9th June, 2022 to further their objectives, and the Nxtwave has been recognized as a “Training Partner” of the NSDC with effect from 9th June, 2022.

As per the agreement, Nxtwave shall offer its training programs, as detailed in the proposal approved by the NSDC, as amended from time to time with the approval of NSDC.

The scheme extends mutual benefits to all stakeholders, like NSDC, Nxtwave as well as students.

With the above background, following questions were raised before AAR:

“Q1: Whether training programmes offered by the applicant, as approved by NSDC would be construed under the “any other scheme implemented by the NSDC” as required under Serial No. 69 of the Notification and the benefit of GST exemption would be available to the applicant from the date of its agreement with NSDC?

Q2: Whether the training programmes offered in collaboration with other business partners, imparted by business partners of the applicant under a subcontract would be construed under the “any other scheme implemented by the NSDC” as required under Serial No. 69 of the Notification and the benefit of GST exemption would be available to the applicant?

Q3: Exemption of GST is available to the company as a whole as long as its services fulfill the criteria laid down under serial no.69 of the said notification and not limited to Telangana GST?”

Applicant justified its claim of exemption raised in questions, on the ground that Applicant is rendering education and training services under the following models:

CCBP Intensive:
CCBP Intensive enables tech job aspirants (college graduates and early professionals) to get a software job. The details of the program can be referred to on the company website (www.ccbp.in).

CCBP Academy:
CCBP Academy enables college students from engineering & technology colleges to become industry-ready by the time of their graduation and achieve high-paid software jobs.

It was submitted that the above services are covered within the HSN 9992.

It was also submitted that the applicant is an approved training partner of the NSDC and that the project under implementation is already approved by the NSDC and an agreement is executed between parties.

Therefore, a claim was made that the activity is exempt under Entry No. 69 in Notification No. 12/2017 — Central Tax (Rate) issued by the Ministry of Finance dated 28th June, 2017.

The second question was also justified to be exempt as the subcontract is made simply for the furtherance of the objectives of the scheme and is on a principal to principal basis.

Regarding question 3, it was submitted that the exemption of GST shall be available to the company as a whole and not just under the Telangana GST Act.

The ld. AAR made a reference to Entry 69 of Notification No. 12/2017 which provides an exemption to,

“Any services provided by, —
(a) ………….
(b) ………….
(c) ………….
(d) A training partner approved by the National Skill Development Corporation or the Sector Skill Council, in relation to —
(i) The National Skill Development Programme implemented by the National Skill Development Corporation; or

(ii) A vocational skill development course under the National Skill Certification and Monetary Reward Scheme; or

(iii) Any other Scheme implemented by the National Skill Development Corporation.”

The ld. AAR made detailed reference to the object of NSDC and the scheme of exemption granted in Entry 69. The ld. AAR observed that for Entry 69 the service provider has to be a training partner approved by the National Skill Development Corporation or the Sector Skill Council. The applicant has submitted the attested photocopy of the certificate of Partnership which shows that the applicant is the Approved Training Partner of the National Skill Development Corporation (NSDC) from 23rd June, 2022, up to 22nd June, 2023. Therefore, the ld. AAR held that the applicant is presently an Approved Training Partner of NSDC.

The ld. AAR noted further requirements, whether the application is providing any services in relation to any other Scheme implemented by the National Skill Development Corporation. In this context, the ld. AAR found that the applicant is providing courses in relation to the Scheme for market-led fee-based services by the National Skill Development Corporation.

The ld. AAR also found that the applicant has entered into agreement with NSDC dated 23rd June, 2022 which substantiates a partnership with NSDC for executing training under the above scheme for market-led fee-based services under non-funded affiliation.

The ld. AAR also found that the applicant is offering training programs, as detailed in the proposal approved by the NSDC as amended from time to time with the approval of NSDC, mentioned above, like CCBP.

The ld. AAR concluded that the services provided by the applicant are as the training partner approved by the National Skill Development Corporation and are in relation to the Scheme implemented by the National Skill Development Corporation.

Accordingly, the ld. AAR held that the services offered by the applicant fall under Sl. No. 69 (d) (iii) and therefore eligible for exemption under Notification No. 12/2017 for CGST and SGST.

So far as the second question is concerned, the ld. AAR observed that as per Entry 69, the services supplied by the applicant as an approved training partner of NSDC in relation to any other scheme implemented by the NSDC are exempt but not the services received by the applicant from others including a sub-contractor who supplies such services to the applicant, as he is not a training partner approved by the National Skill Development Corporation or the Sector Skill Council. Therefore, the ld. AAR answered question (2) in negative.

Accordingly, the first issue is decided in the favour of the applicant holding the activity as exempt. However, in relation to question (2), the AAR ruled in negative.

In respect of question (3), the learned AAR held that the only services covered by Entry 69 are exempt and not others.

35. Nature of Contract for operation and maintenance of Dam Work
Secure Meter Ltd. (AR No. RAJ/AAR/2022-23 dated 12th October, 2022 (Raj.)

The applicant i.e., M/s Secure Meter Limited, E-Class, Pratap Nagar Industrial Area, Udaipur is engaged in providing compressive water services and currently is in the process of bidding for a tender floated by the PHED, a unit of the Government of Rajasthan for the Operation and Maintenance of the Mansi Wakal Dam Stage-I.

The applicant has explained various aspects of the contract.

The applicant has raised the following questions:

“1. Whether the activity of operation and maintenance is to be considered as Supply of goods or a Supply of Services under CGST / RGST Act 2017? Accordingly, whether the transaction can be sub-classified as a “Pure Supply of Service” or “Pure Supply of Goods” or “Composite supply of goods and services being a works contract?

2. Whether the applicant is entitled to the benefit of exemption under Entry 3 A of Notification No. 12/2017 — Central Tax (Rate) dated 28th June, 2017, as amended? If not, what is the applicable rate of tax?”

Based on the written submission made by the applicant and given details, the ld. AAR found that applicant is in the process of bidding for a tender floated by the PHED, a unit of the Government of Rajasthan for the Operation and Maintenance of the Mansi Wakal Dam Stage-I complete system, including mechanical, electrical, instrumentation installation works, switchyards / GSS and maintenance of Dam, pumping machinery, pipe line & tunnel from Mansi Wakal Dam to Nandeshwar filter plant project on ESCO and O&M contract. The terms and scope of the contract combines ESCO Model and O&M contract.

Based on the scope of work as detailed in contract / Tender Document NIT No. 03 / 2021-22, the ld. AAR observed that the ESCO model requires improvement of the whole water supply system involving pump houses, pumping stations, transmission lines, switchyards, and headwork. Re-modelling of pump foundation and extension of pump house, replacement of fittings / fixtures and painting of all permanent structures like pumping station building, Dam, Tunnel etc. are involved in the contract. It was further observed that a single tender shall be floated for Operation and Maintenance of Dam, pumping machinery, pipeline & tunnel on ESCO Cum O&M Contract where the preamble of scope specifies that the contract combines ESCO model and O&M work. It was observed that the activities under the ESCO model and the O&M contract are closely linked.

The ld. AAR referred to the meaning of works contract, Composite Supply and meaning of immovable property. Based on facts that the main intention is to supply maintenance services, the ld. AAR observed that the activity also involves the use of materials. It was also observed that all the components of the pumping system are erected at the prescribed location and permanently attached to the earth and they cannot be dismantled and reassembled, as such dismantling may cause substantial damage to the system and its components. Therefore, the activities to be undertaken by the applicant with respect to Operation and Maintenance are for an immovable property i.e., Mansi Wakal Dam and the given work is works contract, held by the ld. AAR. Accordingly, it was also held that all the conditions of composite supply are satisfied, therefore it is a composite supply of works contract. It was also observed that as per the break-up of material cost under the Operation & Maintenance of Mansi Wakal water project provided by the applicant, the value of supply of goods is 11.50 per cent i.e., below 25 per cent out of the total value of supply and hence, the applicant is eligible for exemption under Entry No. 3A of Notification No. 12 / 2017-CT (R) dated 28th June, 2017.

The ld. AAR gave the ruling as under:
“The activity of O & M of Mansi Wakal Dam Project on ESCO Model and O & M work by the applicant is to be undertaken /being undertaken for a Government Department. In this activity of Composite supply of goods and services, the applicability of GST will be as under:

(a) Composite supply of goods and services where supply of goods is below 25 per cent out of the total value of supply then GST will be @ NIL.

(b) Composite supply of goods and services where the supply of goods is more than 25 per cent of the total value of supply then GST will be @12 per cent (SGST 6 per cent + CGST 6 per cent).”

36. Classification — Satin Rolls, Taffeta Rolls
Mean Light Co. (AR No. KAR/ADRG-43/2022 dated 29th November, 2022 (KAR)

The applicant has raised questions about the “classification of products “Satin Rolls” and “Taffeta Rolls” with sizes between 19 mm to 40 mm.

The brief facts about the products are narrated as under:

“Satin Rolls: Made with 100 per cent polyester, the rolls are available having a width between 10 mm to 810 mm. We mainly deal with sizes between 19 mm to 40 mm. The same will be sold to printers for printing purposes. The ultimate customers of the products are the companies engaged in manufacturing of readymade garments. The products will be ultimately used for the purposes of printing wash care instructions & fabric contents (to capture instructions).

Taffeta Rolls: Made with 100 per cent Nylon and dip quoted sizes available in the market from 10 mm to 810 mm. We mainly deal with sizes between 19 mm to 40 mm. The same will be sold to printers for printing purposes. The ultimate customers of the products are the companies engaged in manufacturing of readymade garments. The products will be ultimately used for the purposes of printing wash care instructions & fabric contents (to capture instructions).”

Applicant further supplied the following information:

“11.1 Taffeta Rolls: The standard manufacturing size of the fabric is 60 inches / 1524 mm wide fabric, made up of polyester yarn. Acrylic coating is made on the fabric for better printing quality and also to protect from raveling or fraying, then will be cut in different sizes and shapes as normal scissor cut.

11.2 Polyester Satin Ribbons: The fabric is made from polyester yarn, standard manufacturing size is 60 inches / 1524 mm wide. Either optical or non-optical coating is made on the fabric for brightening and to remove impurities. Optical brighter coating will give shiny and bright finishing and non-optical dull finishing. It has plain selvedges on both sides of the fabric. Hot blades are used to cut into different shapes and sizes which arrest the fabric from fraying.”

The ld. AAR examined the classification of the impugned products.

The ld. AAR made reference to the Section Notes and Chapter Notes of the relevant Chapters of the Customs Tariff and also the corresponding Harmonised Commodity Description and Coding System Explanatory Notes of the World Customs Organisation (WCO).

The ld. AAR noted that Chapter 5806 of the first schedule to the Customs Tariff Act, 1975 covers NARROW WOVEN FABRICS OTHER THAN GOODS OF HEADING 5807; NARROW FABRICS CONSISTING OF WARP WITHOUT WEFT ASSEMBLED BY MEANS OF AN ADHESIVE (BOLDUCS). Read with Notes of Chapter 58, the ld. AAR noted that the impugned products, as per the applicant, are woven fabrics having the width of less than 30 cm; that Taffeta rolls are made up of polyester yarn with acrylic coating to protect from raveling or fraying and also to have better printing quality; It also noted that Satin rolls are made up of polyester yarn, with optical or non-optical coating for brightening and to remove impurities, having plain selvedges on both sides of the fabric; and cut with hot blades to arrest fabric fraying. Therefore, the impugned products qualify to get covered under “Narrow Woven Fabrics”, observed the ld. AAR.

The ld. AAR also referred to Chapter 5807 which covers labels, badges and similar articles of textile materials, in the piece, in strips or cut to shape or size, not embroidered. Referring to Explanatory Notes to tariff heading 5807, the ld. AAR observed that this heading covers (i) Labels of any textile material (including knitted) and (ii) Badges and similar articles of any textile material (including knitted), subject to the following conditions:

a) They must not be embroidered. The inscriptions or motifs on the articles classified here are generally produced by weaving (usually broche work) or by printing.

b) They must be in the piece, in strips (as is usually the case) or in separate limits obtained by cutting to size or shape but must not be otherwise made up.

The ld. AAR found that the impugned products are not embroidered and fulfill the aforesaid conditions. Therefore, the ld. AAR held that the impugned products merit classification under tariff heading 5807 10 20.

37. Exemption vis-à-vis Government Authority
Hyderabad Metropolitan Water Supply and Sewerage Board (AR No. AAAR.Com/09/2022 dated
2nd November, 2022 (Telangana)

The Appellant filed this appeal against AAR dated 3rd June, 2022 wherein the Question posed before it was decided as under:

“Question

Ruling

1. Is Medical insurance premium taken to provide Health Insurance to the employees, pensioners and their family members, eligible for exemption as mentioned in Entry No. 3 of the Notification No. 12/2017 – Central Tax (Rate), dated
28^th June, 2017?

2. Is the Vehicle Insurance Policy taken to provide insurance to the vehicles owned by the Board, eligible for exemption as mentioned in Entry No. 3 of the Notification No. 12/2017 – Central Tax (Rate), dated 28^th June, 2017?

Yes, if the vehicles are directly used to provide services under Schedule XII of the Constitution.

No, if they are used for transportation of employees/board members/other persons with no direct relationship to functions discharged under Article 243W.”

The ld. AAAR referred to the factual position that Hyderabad Metropolitan Water Supply and Sewerage Board (The Board) was constituted on 1st November, 1989 under the provisions of Hyderabad Metropolitan Water Supply and Sewerage Act 1989, with the following Functions & Responsibilities in the Hyderabad Metropolitan Area.

• The Supply of potable water including planning, design, construction, maintenance, operation & management of the water supply system.

• Sewerage, Sewerage Disposal and sewerage treatment works including planning, design, construction, maintenance, operation & management of all sewerage and sewerage treatment works.

The ld. AAAR also observed that from 1st July, 2017 to 17th November, 2021 as per Sl. No. 3 of Central Tax (Rate) Notification No. 12/207 dated 28th June, 2017 the rate of tax on the supply of the following services is Nil.

“Sl. No.

Chapter Section

Heading Group or Service Code

Description of
services

Rate

(per

cent.)

Condition

Chapter 99

Pure services (excluding works contract service or other composite supplies

involving the supply of any goods) provided to the Central Government, State

Government or Union territory or local authority or a Governmental authority [or a Government Entity] by way of any activity in relation to any function entrusted to a Panchayat under Article 243G of the Constitution or in relation to any function entrusted to a Municipality under Article 243W of the Constitution.

NIL

NIL”

The ld. AAAR concurred that the Appellant is the Government Authority as per the meaning of the same given in section 2(zf).

The ld. AAAR observed that since the Hyderabad Metropolitan Water Supply and Sewerage Board is a board set up by an act of state legislature to carry out any function entrusted to a Municipality under Article 243W, it is a ‘Governmental Authority’ as per the above definition.

The Appellant had contended that the following supply of services to them is eligible for exemption under Sl. No. 3 mentioned above:

1) Insurance services provided to the board for insuring their employees and their family members.

2) Insurance services provided to the vehicles of the board.

The ld. AAAR also observed that services are exempted if the following conditions are satisfied.

“1)The services provided should be Pure services (excluding works contract service or other composite supplies involving the supply of any goods).

2) The services provided should be by way of any activity in relation to any function entrusted to a Municipality under Article 243W of the Constitution.

3) After 01-01-2022, the exemption is available only if it is provided to the Central Government, State Government and Local Authority only”.

Based on the above position, the ld. AAAR held that if the services procured by the board are by way of any activity in relation to any function entrusted to a Municipality (like water supply and sewerage), then only the supply is exempt from tax as per condition at Sl. No. 2 above.

The ld. AAAR held that the insurance supplies made to the board for its employees and their family members are not in relation to any function entrusted to the municipality.

The ld. AAAR held that the word ‘in relation to’ will include only functions which are in direct relation to the entry like water supply and sewerage.’

Relevant judicial pronouncements were also referred to.

Therefore, the ld. AAAR held that the insurance services for employees and employees’ family members received by the applicant is not in direct and proximate relation to water supply and sewerage related function entrusted under Article 243W, hence the supply received by the applicant does not fall under Sl. No. 3 of Central tax (rate) Notification No. 12/2017 and are not exempt.

The ld. AAAR also held that the board also receives insurance services for vehicles which are used for transportation of water and sewerage management. These vehicles are essential for performing the functions as entrusted in 243W of the constitution, the ld. AAAR held that the applicant is eligible for exemption under Entry mentioned above services in relation to all other vehicles which are not used for performing the functions as entrusted in 243W of the constitution shall be taxable, held the ld. AAAR.

Regarding the period from 1st January, 2022, due to changes in Entry 3, by which the Government Authority is omitted from said Entry, the ld. AAAR concurred with AAR that no service will be exempt. In view of the above, the ld. AAAR confirmed the AR.

38. Recovery from employees towards Canteen Facility — Liable to GST
Federal Mogul Goetze India Ltd (AR No. KAR-ADRG-42/2022 dated 29th November, 2022 (KAR)

The applicant, a manufacturer of auto parts, has to maintain the canteen facility as per Factories Act, 1948. The Factories Act provides canteen facilities to all their employees including contractual employees. In the present case, the said canteen is operated by the applicant and all the equipment and items essential for running the canteen such as groceries, utensils, cooking equipment etc., are arranged by the applicant. The applicant entered into a separate contract with a service provider for providing / supplying manpower required to manage the canteen operations. The service provider raises monthly invoices towards the supply of manpower for canteen operations and charges applicable GST.

On the above facts, the applicant has sought an advance ruling in relation to the applicability of GST on the deductions made from the salary of the employees raising the following questions:

‘Whether the subsidized deduction made by the applicant from the employees who are availing food in the factory would be considered as a “supply” by the Applicant under the provisions of Section 7 of the CGST / KGST Act 2017.

a. In case the answer to above is yes, whether GST is applicable on the nominal amount being recovered by the Applicant?

b. Whether Input Tax Credit (“ITC”) of the GST charged by the Service Provider would be eligible for availment to the Applicant?”

The applicant also submitted that with respect to regular employees they deduct Rs.50 from salary and for contract employees Rs.10.

The argument of the applicant was that it is not liable under GST on the above recoveries. The submission was based on three grounds:

(i) It is not ‘supply’ as per section 7 of the GST Act.

It was contended that there shall be a legal intention of both the parties to the contract to supply and receive the goods or services or both. The absence of such intention would mean that there is no supply within the meaning of the CGST Act.

The further contention was that there was no consideration. The supply should involve quid pro quo — viz., the supply transaction requires something in return, which the person supplying will obtain, which may be in monetary terms / in any other form except in cases of deeming provision as specified in Schedule I. Applicant submitted that in its present case, the transaction is only money transaction and no ‘quid pro quo’ available as the applicant is running a canteen as mandated under the Factories Act, 1948.

The ld. AAR observed that there is the legal intention to provide canteen food and therefore the contention that applicants do not have any legal intention for the provision of a canteen is contrary to the obligation placed on the applicant under the Factories Act, 1948. The ld. AAR also observed that the contractual relationship is evident from the fact that the applicant is charging employees R50 per month from the payroll and union employees and R10 per meal from contract employees. The ld. AAR observed that since the charges are pre-decided and deducted from the salaries, which are also agreed upon by the employees, a contractual relationship is clearly established between the applicant and their employees.

(ii) Regarding the contention that there is no consideration, the ld. AAR observed that as per the definition of ‘consideration’ in section 2(31) the consideration includes any payment made or to be made, in response to, the supply of goods or services or both. Adequacy of consideration or otherwise is not a factor in deciding whether the activity amounts to supply or not. The ld. AAR held that the fact that a consideration is being charged by the applicant and paid by the employee is sufficient to establish a contractual relationship with reciprocal obligations leading to the supply of service. The ld. AAR rejected the argument of the applicant that there is no quid-pro-quo between them and the employee is factually and legally not sustainable.

(iii) Regarding the third argument that it is not in the course or furtherance of business, the ld. AAR, after noting the definition of ‘business’ in section 2(17) observed that the applicant is a manufacturer and thus their activity is covered under Section 2(17)(a) of the CGST Act. The ld. AAR further observed that Section 2(17)(b) stipulates that any activity/transaction in connection with sub-clause (a) i.e., Section 2(17)(a), is included in the ‘business’. Since in the instant case, the applicant is running the canteen in connection with the manufacturing activity, the ld. AAR held that providing a canteen facility is incidental to their main activity of manufacture, and therefore covered in the definition of ‘business’ in terms of Section 2(17)(b). The ld. AAR also held that the canteen factory is also in furtherance of business as, if such facility is not provided the quantum of production will get affected as employees will move out for food which will be time consuming.

Regarding the contention of the applicant that the activity is covered by Entry I in Schedule III the ld. AAR held that the said provision is not applicable to the instant case as the issue pertains to the services being provided by the employer to the employees and not vice-versa. As per Entry I of Schedule III, only services by employees to employers are exempted and not services by employers to employees.

In respect of reference to the rulings of various advance ruling authorities and Appellate authorities, the ld. AAR observed that in such cases the canteen facilities were provided by third parties and collection of employees’ share and payments to canteen service providers without profit was held as not amounting to supply by the employer. However, since in the instant case, the applicant themselves are providing the canteen facility, the ld. AAR held that the advance rulings cited before it are not relevant to the facts of the case.

It is also observed that advance rulings are extended to the applicants only and can’t be generalized and applied to all and therefore ld. AAR declined to follow them.

The ld. AAR also referred to the question as to whether GST is applicable on the nominal amount being recovered by the applicant?

The ld. AAR made detailed reference to provisions of valuation like section 15.

In light of the provision of Explanation (a)(iii) to Section 15 of the CGST Act 2017, the ld. AAR observed that employers and employees are related persons. Therefore, it is observed that in the instant case since the supplier of the service i.e., the applicant is the employer and the recipients of the said services are employees, they are related persons.

The ld. AAR also observed that when the supplier and the recipients are related parties and the price is not the sole consideration, Section 15(1) of the Act is not relevant. The ld. AAR observed that Section 15(4) of the Act stipulates that in the cases where the value of the supply of goods or services or both cannot be determined under section 15(1), the same shall be determined in such manner as may be prescribed, is applicable in the present case.

The ld. AAR held that the value should be as per Rule 28 read with Rules 30 or 31.

In respect of eligibility to ITC of GST paid on manpower supply the ld. AAR held that services of applicants are covered in the category of services provided in the canteen and other establishments and merit classification under SAC 996333. It is further observed that the said services attract GST @ 5 per cent, without ITC in terms of Notification No. 11/2017-Central Tax (Rate) dated
28th June, 2017, as amended. Therefore, the ld AAR held that the applicant is not entitled to ITC of the GST paid on manpower supply servicesthat are used for providing a canteen facility.

39. Recovery towards Canteen Facility — Liable to GST
Tube Investment of India Ltd. (AR No. 12/2022 in Appl. No. 07/2022-23 dated 24th November, 2022 (Uttarakhand)

In this case, the applicant has submitted facts as under:

“(a) That they are a leading engineering company engaged in the manufacture of precision steel tubes and strips, automotive, industrial chains, car door frames and bicycles. And they have a factory in the state of Uttarakhand where more than 500 workmen (both direct and indirect) are employed.

(b) They have entered into an agreement with the contractors to operate a canteen within the factory premises to provide food to their employees.

(c) They recover a nominal amount from the employees on a monthly basis and such recoveries are shown as a deduction in the monthly slip of the employees.

(d) They do not avail Input Tax Credit (ITC) on the expenses incurred on the services provided by the canteen service provider and are absorbing the GST charged by the canteen service provider as a cost in the books of accounts.

(e) They discharge GST @5 per cent on the cost of the canteen service provider’s total taxable value plus 10 per cent notional markup.”
Based on the above, the ruling was sought on the following questions:

“a. Whether the nominal amount of recoveries made by the Applicant from the employees who are provided food in the factory canteen would be considered as a “Supply” by the applicant under the provisions of Section 7 of Central Goods and Service Tax Act, 2017,

b. In case, the answer to the above is “Yes”, — whether GST is applicable on the amount recovered from the employees for the food provided in the factory canteen or on the amount paid by the Applicant to the Canteen Service Provider?

c. Whether input tax credit (ITC) is available to the Applicant and GST charged by the Canteen Service Providers for providing the catering services of the factory where it is obligatory for the Applicant to provide the same to its employees as mandated under the Factories Act, 1948, even if the answer to question (a) is “No”?

d. Whether Input Tax Credit (ITC) can be availed on GST charged by the Canteen service providers, the answer to the question (b) is “Yes”?”

In the course of the hearing, it was further explained that in compliance with the provisions of the Factories Act, 1948, they provide canteen facilities to employees.

It was also explained that they have entered into an agreement with the contractors to operate a canteen within the factory premises to provide food to their employees and the amount raised by the canteen operator is booked as expenses in the P&L account, without taking the benefit of ITC of the GST paid by them.

It was explained that they recover nominal amounts from the employees on a monthly basis and such recoveries are shown as a deduction in the monthly slip of the employees and the recoveries made are credited to the expense account.

The ld. AAR made reference to the CBIC Press release dated 10th July, 2017, wherein the concept of ‘GST on Gifts’ to employees is clarified. However, in this case, since it is not free, as some amount, though nominal, is collected and also canteen is as per requirement of the Factories Act, 1948.

Regarding further contention that it is not in the course or furtherance of business, the ld. AAR observed that establishing a canteen is in the furtherance of the business of the applicant and supply of food to the employees when the same is not part of the agreement is not an allowance as a part of the employment. Thus, the ld. AAR held that the provision of food in the canteen for a nominal cost is a ‘Supply’ for the purposes of GST and it is a service as per relevant Entry in Schedule II to the CGST Act, 2017.

The further contention of the applicant is that the amount, received from the employees, is in the nature of recovery and not consideration as the recovered amount is directly paid to the third-party vendor without any profit element in the hands of the Applicant, also rejected on the ground that the running of a canteen in the factory of the applicant is in the course of furtherance of business. Though the applicant has chosen to run the canteen through a third party vendor, in the factory, the ld. AAR observed that the provision of a canteen facility and bearing certain costs, in running of canteens are mandated on the part of the employer as per the Factories Act and accordingly, such canteens are in furtherance of business.

Considering the definition of ‘consideration’ in section 2(31) the ld. AAR observed that the applicant supplies food to their employees at a nominal cost, and the same is the consideration for such supply made by the applicant on which GST is liable to be paid. The recovery of cost from the salary as deferred payment does not alter the fact of the service provided and the person providing the said supply observed the ld. AAR.

The issue about ITC also ruled in negative in view of the existing section 17(5)(b)(i), even though it was obligatory to provide canteen under other law.

In respect of the AR of other States, AAR also held them not applicable as each AR is based on its own facts.

[Compiler’s Note: Please also refer to Circular No.172 of 2022 dated 6th July, 2022, in which certain clarifications about blockers of ITC under Section 17(5)(b) are given.]

BCAJ Admin

Allied Laws

27. Dheeraj Singh vs. Greater Noida Industrial Development Authority & others AIR 2023 Supreme Court 3110

4th July, 2023

Cross Objection — Cross Objections have the same trapping as a Regular Appeal — Not considered by the High Court — Matter remanded to High Court for fresh adjudication. [O. 41, R. 22, Code of Civil Procedure, 1908; S. 14, 17, Land Acquisition Act, 1894].

FACTS

The State of Uttar Pradesh (Respondent) had acquired the land of the Appellants under the provisions of the Land Acquisition Act, 1894 and paid compensation for the same. The Ld. District Judge granted further compensation. Aggrieved by the same, the Respondent filed an appeal in the High Court of Allahabad (High Court). Subsequently, the appellants filed a cross objection in the High Court. The Hon’ble High Court confirmed the order of the Ld. District Judge. It was the contention of the Appellants before the Hon’ble Supreme Court that the Cross Objection filed by them (Appellants) was not considered by the Hon’ble High Court.

HELD

The Hon’ble Supreme Court observed that the Hon’ble High Court failed to consider the Cross Objections filed by the Appellants. The Court further held, relying on Order 41, Rule 22 of the Code for Civil Procedure, 1908, that Cross Objections have all the trappings of a regular appeal. Thus, the matter was remanded to the High Court for fresh adjudication.

28. Manoj Kumar Jain and another vs. UOI AIR 2023 (NOC) 580 (CAL)

9th June, 2023

Look out Circular — Economic Offence — Issuance of Look Out Circular by the bank for non-re-payment of loans — Apprehension that Petitioner would flee the country — Petitioner was not declared a fraudster or economic offender — Constant efforts of settlement of dues — Lookout circular for every borrower incorrect — Lookout Circular quashed. [Art. 226, Constitution of India, O. VI, Rule 17, The Code of Civil Procedure, 1908].

FACTS

The Petitioners were de-boarded from the plane by the Immigration Authority. The Petitioners were informed about the lookout circular issued against them and, thus, the petitioners filed a writ petition challenging the lookout circular. The Petitioner had failed to repay the loan obtained for the expansion of the business. The lookout circular issued by the lender bank was on the apprehension that the petitioner might flee the country and thereby frustrate the whole process of settlement of dues.

HELD

The Hon’ble Calcutta High Court held that lookout circulars have to be issued in only exceptional cases and cannot be issued at the slightest provocation. The Hon’ble High Court also observed that Petitioner made efforts in the process of settlement of loans by actually paying loans to the other banks in the consortium. Further, the lender bank also had securities of the Petitioner and further realised some of the outstanding by realising the property of the Petitioner. The Hon’ble Court also observed that Petitioner was allowed to travel by the CBI court and there was no complaint with respect to Petitioner not complying with conditions. The court held that Petitioner was not declared a fraud or economic offender and his travel to the UK was for his son’s education. Thus, the lookout circular was quashed.

29. V Narayanasamy vs. Vanchikodi AIR 2023 (NOC) 631 (MAD)
19th April, 2023

Condonation of Delay — Delay of 1,835 days — Negligence of earlier Counsel — Not a sufficient ground — Condonation denied. [S. 5, Limitation Act of 1963].

FACTS

The Petitioner / Plaintiff had filed a suit to declare the title of the property of the Petitioner and a relief of permanent injunction before the lower court. However, the complaint was returned by the Registry for rectifying certain defects and a time of one month was given to the petitioner. The Plaintiff, however, failed to comply with the time period of one month. The lower court dismissed the petition on the ground that no prima facie case was made by the plaintiff and there were no sufficient reasons to condone the delay of the plaintiff. The plaintiff, after a delay of 1,835 days, approached the Madras High Court for the same.

HELD

The Hon’ble Madras High Court held that merely stating that earlier counsel was negligent and did not inform the plaintiff regarding the proceedings of the suit, was not a sufficient reason to condone the delay of 1,835 days. Thus, the Hon’ble High Court upheld the order of the lower court. The Petition was dismissed with no costs.

30. Revanasiddappa & Anr vs. Mallikarjun & Ors Civil Appeal No. 2844 of 2022

1st September, 2023

Hindu Undivided Family — Children born of void or voidable marriage — Have a right in their parent’s share in the Hindu Undivided Family. (Hindu Marriage Act, 1955, S. 16, Hindu Succession Act, 1956, S. 2, S. 6).

FACTS

Section 16(1) of the Hindu Marriage Act, 1955 provides that even if a marriage is null and void, any child born out of such marriage who would have been legitimate if the marriage had been valid, shall be considered to be a legitimate child. However, Section 16(3) of the Hindu Marriage Act 1955 states such children are entitled to inherit only their parents’ property and will have no right over the other coparcenary shares. On this background, a question of law arose before the three-judge bench of the Hon’ble Supreme Court, whether children born out of void or voidable marriage will have a right in their parent’s share in the undivided family property, as Section 16 of the Hindu Marriage Act 1955 confers legitimacy to children who are born out of invalid marriages.

HELD

The provisions of the Hindu Succession Act, 1956 have to be harmonised with the mandate in Section 16(3) of the Hindu Marriage Act, 1955 which indicates that a child who is conferred with legitimacy will not be entitled to rights in or to the property of any person other than the parents. Therefore, the children born of such marriages will be entitled to a right to their parent’s share in the Hindu Undivided Family.

(Editor’s Note: Refer to Laws and Business where this decision and the subject have been discussed).

31. Bhagyanathan Nadar vs. Vishwanathan Nadar and others AIR 2023 (NOC) 568 (KER)

13th April, 2023

Settlement deed — Cancellation unilaterally — No legal effect — Not enforceable by law — A gift deed once executed cannot be revoked. (Specific Relief Act, 1963, S. 34; Transfer of Property Act, 1882, S. 5, S. 123).

FACTS

A settlement deed was executed by the owner of a property in favour of the Original plaintiffs. The deed of settlement did not provide for any power to revoke the settlement. A dispute arose between the parties and the settlement deed was cancelled. The donee / Original Plaintiffs, inter alia, challenged the cancellation deed before the lower court. The lower court, considering all the facts, held in favour of the Original plaintiffs.

On appeal, the first appellate court held in favour of the Original Plaintiffs and dismissed the appeal of the Original Defendants.

On the second appeal

HELD

The Hon’ble Kerala High Court held that the settlement deed was valid and binding. After the acceptance of the gift, if the donor wants to revoke the gift by resorting to Section 126 of the Transfer of Property Act, 1882, the donor will have to institute a suit for the same. A gift can be cancelled only if the gift is the one executed in contemplation of section 126 of the Transfer of Property Act, 1882 and not otherwise. There is no such agreement between the donor and donee to suspend or revoke the gift. It also provides that a gift which parties agree shall be revocable wholly or in part on the mere will of the donor, is void wholly or in part as the case may be. So a gift deed once executed cannot be revoked and even if such contingencies as contemplated under Section 126 of Transfer of Properties Act, 1882 are in existence in the deed, a suit has to be filed for cancellation.

Therefore the settlement deed is valid and the second appeal is dismissed.

BCAJ Admin

From The President

Dear BCAS Family,

“Let’s go invent tomorrow instead of worrying about what happened yesterday.” – Steve Jobs.

India is reinventing itself and is gearing up to leap into the future with aggressive digital transformation. The e-initiatives that are enabling India to take rapid strides in transforming itself — from a developing economy to a developed economy — are Unified Payment Interface (UPI), DigiLocker, eSign, Aadhaar-enabled Payment Services, e-KYC, GSTIN, TIN, Aarogya Setu, CoWIN, FASTag, E-WayBill, National Digital Library of India, ONDC and many more.

As per a NASSCOM report, in FY2023, India’s technology industry revenue, including hardware, is estimated to cross $245 Bn. The domestic technology sector is expected to reach $51 Bn, on the back of continued investments by enterprises and the government.

I also read a report and came across a few technologies that would change how we live, work, study, commute and interact: Artificial Intelligence (e.g., creative AI), Quantum Computing, Green Technology (e.g., Autonomous Vehicles), Virtual Offices, Video Conferencing, Robotics, Virtual Reality, Blockchain (e.g., Web3), Spatial Computing, Predictive Analysis, Health Tech, etc.

ONDC — REIMAGINING DIGITAL COMMERCE

A digital initiative of the Government of India, which will be a real game changer and which has the potential to bring power to the masses of India, is the Open Network Digital Commerce (ONDC).ONDC could unleash many things like:

Boosting the direct-to-consumer (D2C) ecosystem.

Helping self-employed professionals: One of the important aspects of ONDC is how it will put self-employed professionals on the map; self-employed people could more easily promote themselves in an open, inclusive marketplace, attracting attention and business from consumers.

Digitalising B2B commerce: Retailers could access a wider distribution network to save time and costs, and improve margins.

Taking financial services further: ONDC’s transaction-based data could support innovative new offerings to provide businesses with greater access to credit.

Growing peer-to-peer commerce: The decentralised network would enable peer-to-peer commerce among consumers, peer sellers and self-employed professionals.

Empowering people with education and skills: More learners and workers could access skills-based education, vocational training, career counselling and career opportunities, which could engender a more equitable, skills-driven labour market in India.

Taking India to the world: India’s digital commerce infrastructure could promote cross-border trade via marketplaces, helping MSMEs become discoverable by global consumers and businesses.

For ONDC to transform digital commerce beyond the borders of India, four key enablers should ideally be in place: 1) seamless cross-border payment settlements, 2) stringent grievance redressal systems, 3) a globalised taxonomy, and 4) global cooperation to support digital commerce.

The Indian Government is not leaving any stone unturned to unleash the potential of technology for the citizens of India, thereby transforming India into a Digital Economy. I would like to highlight some of the initiatives in the technology sector taken by the Government of India.

Centres of Excellence for:

Internet of Things (Gandhinagar, Bengaluru, Gurugram & Vizag)

Virtual & Augmented Reality (VARCoE) at IIT Bhubaneswar

Gaming, VFX, Computer Vision and AI at Hyderabad

Blockchain Technology at Gurugram

Design, Development and Deployment of National AI Portal (INDIAai)

POC for AI Research Analytics and Knowledge Dissemination Platform (AIRAWAT)

Formation of Inter-Ministerial Committee for Development of Robotics Ecosystem in the country

Global Partnership on Artificial Intelligence

National Program on Artificial Intelligence

Artificial Intelligence Committees’ Reports

INDIRECT TAXATION ON GAMING IN INDIA

The latest decision by the GST Council has surprised the gaming industry in India, which is estimated to be worth around $2.8 billion in FY22. Regarding online games in India, taxation and legality largely depend on whether they are considered a game of chance or a game of skill. The Finance Minister has said that the tax will be levied on the entire value. Hence, the tax will essentially be levied on the full face value of the bet placed and not on the gross gaming revenue, which the industry sought.Globally, there are two GST models in the taxation of the gaming industry: Gross Gaming Revenue (GGR) and Turnover Tax Model. As per an article in The Indian Express, GGR is essentially the total amount of money a gambling business brings in through bets, deducting the amount that is paid for the win. Meanwhile, the Turnover Tax Model is the tax levied on income from winnings of real money from online games. Here, the entire prize pool is taxed. Countries such as the UK, Australia, Italy, Sweden, Singapore, Malaysia, etc., follow the GGR Model.

From the experiences internationally, there may have to be a rethink of indirect taxation on gaming in India to ensure its survival and growing contribution to the tax kitty.

HYDERABAD VISIT

I, along with two of our past presidents, CA Uday Sathaye and CA Narayan Pasari, visited Hyderabad to meet members in person and discuss the five-year plan of BCAS. We interacted with them to understand the need on the ground and how BCAS can become a part of their professional upliftment journey. Hyderabad is the ‘city of pearls’, and many professional pearls attended this meeting at the G P Birla Auditorium on 14th July, 2023. Young CAs had also come to attend the meeting with several hopes in their eyes, a thirst for knowledge and dreams to do something new and contribute back to society. Several youngsters were interested in contributing to the research project of BCAS. The other ground requirement was to start a study circle of BCAS in their city. It was also great to interact with our members who had traveled from Secunderabad, Guntur, Madurai, Vijayawada and other nearby cities and towns.MEETING WITH THE REGISTRAR OF COMPANIES

During this month, I, along with CA Abhay Mehta, Chairman of the Corporate and Commercial Laws Committee, and CA Shardul Shah, core committee member, had a meeting with the Regional Director, ROC, Mumbai, Ministry of Corporate Affairs. We had a good discussion with regards to the importance of related-party transactions and ultimate beneficiaries. We shall have more such interactions with ROC team members.BCAS

BCAS, as its green initiative in its 75th year, has been instrumental in planting 7,500 trees in the drought-prone area of Banaskantha, Gujarat. The area where these trees are planted shall be called BCAS (forest). We appreciate the ground-level support of Vicharta Samuday Samarthan Manch (VSSM) for this initiative of BCAS. We thank all donors for their generous contributions.REIMAGINE

On the 4th, 5th and 6th January, 2024, BCAS has organised a mega-conference, “ReImagining the Profession in the Changing Technological Environment”. The event shall cover many thought-provoking ideas for the future of the finance, consulting, assurance, and taxation professions. The event is open to all Chartered Accountants and other Finance professionals in practice or in the industry. Participants from over 40+ cities and towns have already registered in numbers.While concluding, I would like to leave a thought on technology since this communique is dealing mainly with technology and digital transformation, which India is witnessing.

Lastly, I, on behalf of the Society, congratulate team ISRO for #Chandrayaan3’s successful landing. This is a historic achievement for India’s space development program and the rise of Bharat. Compliments to the visionary leadership of our country.

“Technology is best when it brings people together.” – Matt Mullenweg

Best Regards,

Chirag Doshi

President

BCAJ Admin

27th International Tax and Finance Conference

Held at The Leela in Gandhinagar, Gujarat, the 27th International Tax and Finance (ITF) Conference was the first ITF Conference to be held in the month of April. Held from 6th April, 2023 to 9th April, 2023, this Conference received an overwhelming response with about 250 participants (including faculties and special invitees) attending the conference. As a flagship program of the International Taxation Committee of BCAS, the ITF Conference was designed to provide an all-encompassing platform for professionals in the field of international tax and finance to share knowledge, exchange ideas, learn from industry experts and network with peers.

The 27th ITF Conference comprised of:

Paper for Presentation		Faculties
1.	Intricacies of New UAE Tax Regime	Chairman: CA T P Otswal Presenter: CA Nirav Shah
2.	Family Offices and Private Investment set-up in a globalised world (including cross border trust and structuring issue)	CA Gautam Doshi
3.	FEMA Issues in Overseas Investment Rules, LRS and Inheritance issues for Foreign Assets	CA Anup Shah

Paper Presentation for Group Discussion (GD)

Faculties

Tax Treaty and MLI Interpretation and Interplay

Chairman: CA Kishor Karia,

Paper Writer: CA Ganesh Rajgopalan

Taxation of Foreign Income – Computation, Disclosure and Credits of Foreign Tax

Chairman: CA Padamchand Khincha

Paper Writer: CA P V Srinivasan

Paper for Group and Panel Discussion	Faculties
1.	Case studies in International Tax (including structuring and allied issues)	Chairman: CA Pranav Sayta
		Panellist: Pitambar Das, CCIT, International Tax Saurabh Soparkar, Sr Advocate Sunil Gupta, Head – Direct Tax, Reliance Industries Ltd

Paper for Group and Panel Discussion

Faculties

Case studies in International Tax (including structuring and allied issues)

Chairman: CA Pranav Sayta

Panellist:

Pitambar Das, CCIT, International Tax

Saurabh Soparkar, Sr Advocate

Sunil Gupta, Head – Direct Tax, Reliance Industries Ltd

Deviating from its past practice, this ITF had a group discussion on case studies discussed by the panel. The participants were divided into four groups, each group ably led by group leaders (aggregating to 25 across the three papers) who helped generate an in-depth discussion of the case studies from the papers. The paper writers visited each group to witness the brainstorming sessions.

DAY 1: 6th APRIL, 2023

President CA Mihir Sheth gave his opening remarks and explained the BCAS’ activities and its new initiatives. Chairman of the International Taxation Committee CA Nitin Shingala made the introductory remarks.

The Conference was inaugurated by the President CA Mihir Sheth, Chairman CA Nitin Shingala, Special Invitee Injeti Srinivasa, Past Presidents Dr. CA Mayur Nayak, CA Gautam Nayak, CA Kishor Karia and CA Shariq Contractor by lighting the traditional lamp.

In his Keynote Address, Mr. Injeti Srinivasa, Head, IFSCA gave an insightful presentation on the state of the Indian economy and the promising trends that lie ahead. He expounded the significance of the Gujarat International Finance Tec-City (GIFT) and its role in elevating India’s status as a global financial powerhouse.

Following Srinivasa’s keynote address, Mr. Dipesh Shah, Executive Director (Development), IFSCA delivered an informative and insightful presentation on various facets of GIFT City and its role in bolstering India’s position as a global financial centre.

The delegates were engaged in a stimulating GD on Tax Treaty and MLI – Interpretation and Interplay followed by presentation on the same topic by paper writer CA Ganesh Rajgopalan who provided an in-depth analysis of the topic, exploring various intricacies and nuances involved and addressed various points that emanated from the GD. The session was chaired by CA Kishor Karia, who expertly moderated the discussion in absence of CA Pinakin Desai.

DAY 2: 7th APRIL, 2023

The day began with a GD on case studies in International Tax (including structuring and allied issues). The session was engaging and informative, with participants actively sharing their experiences and insights on the subject matter. Following the GD, CA Anup Shah spoke on FEMA issues in Overseas Investment Rules, LRS, and Inheritance issues for Foreign Assets highlighting complex issues involved in these Regulations.

Later, CA Nirav Shah delivered a session on Intricacies of New UAE Tax Regime. His presentation was thorough and detailed, covering various aspects of the new regime, including its impact on businesses and investors operating in the UAE. This was expertly moderated by CA T P Otswal.

The visit to GIFT City was a highly insightful and fruitful experience for the conference delegates. Participants visited INX (BSE of GIFT City), Waste Management System and Utility Centre. The visit was expertly guided by the GIFT City officials, who provided valuable insights into the various initiatives and policies that are being implemented to promote business growth and development within the GIFT City.

The visit was followed by a session delivered by Sandip Shah, Executive Director, FSCA. His session provided the delegates with a detailed and insightful overview of the geographical location of the GIFT City and various types of business opportunities that exists. This season was chaired by Dr. CA Mayur Nayak.

DAY 3: 8th APRIL, 2023

The day began with GD on paper on Taxation of Foreign Income – Computation, Disclosure and Credit of Foreign Taxes written by CA P. V. Srinivasan.

Following this, CA Gautam Doshi delivered an insightful session on Family Offices and Private Investment set-up in a globalised world (including cross border trust and structuring issue). CA Chetan Shah chaired this season.

Then, CA P V Srinivasan made a comprehensive presentation of his paper on Taxation of Foreign Income – Computation, Disclosure and Credit of Foreign Taxes. This session was chaired by CA Padamchand Khincha.

An evening talk – Non-taxing Dialogues – was organised which was moderated by CA Shariq Contractor. The faculty – CA T P Otswal and CA Hitesh Gajaria – relived their initial days of international tax and shared their invaluable experiences of their professional lives.

After several intensive study sessions, the organising committee of the conference took a much-needed break and organised a fun-filled karaoke and antakshari event for the delegates. The event provided a much-needed opportunity for the delegates to unwind, relax, and connect with one another in a casual and light-hearted atmosphere.

DAY 4: 9th APRIL, 2023

The morning session began with a highly informative and thought-provoking panel discussion on Case studies in International Tax (including discussions on structuring and allied issues). The panel comprised of Pitambar Das, CCIT, International Tax; Saurabh Soparkar, Sr. Advocate and Sunil Gupta, Head-Direct Tax, Reliance Industries Ltd and was moderated by CA Pranav Sayta. The discussion centered around six case studies, which were thoroughly analysed and dissected by the panelists.

CONCLUDING REMARKS

The ITF was held under the guidance of CA Nitin Shingala, Chairman, International Taxation Committee and CA Chetan Shah, Co-Chairman. CA Jagat Mehta was the Chief Conference Director. He was ably assisted by CA Divya Jokhakar as the Joint Conference Director, who minutely supervised all the sessions personally and devoted a tremendous amount of time and effort to make it the resounding success. Contribution by CA Utsav Hirani from Ahmedabad was significant in various aspects of the Conference. CA Mukesh Khandwala and CA Darshit Mehta played a pivotal role for visit to GIFT City.

Other members of the core team included CA Rutvik Sanghvi, CA Siddharth Banwat, CA Mahesh Nayak, CA Anil Doshi and CA Deepak Kanabar. The ITF Conference ended on a high note and received encouraging response and feedback from the participants.

BCAJ Admin

सर्वे गुणाः कांचनमाश्रयन्ते !

Friends, in this series, I have been writing on rich thoughts from Sanskrit literature, succinctly put in Subhashitas (shlokas or verses). These are innumerable. I am choosing only those which are popularly used as ‘proverbs’.

The full text of this shloka is: –

यस्यास्ति वित्तम् स नर: कु लीन: |

स पण्डित: स श्रुतवान् गुणज्ञ: |

स एव वक्ता स च दर्शनीय: |

सर्वे गुणाः कांचनमाश्रयन्ते ||

It is taken from Bhartruhari’s Neeti Shatak (नीतिश तक).

This can be interpreted in two ways. In one sense, it says that certain qualities look more graceful when the person possessing these virtues also possesses wealth. However, it is not usually used in this positive sense. The usage is more in a sarcastic sense. That means if a man is rich, all virtues in the world get automatically attributed to him. With money, one is recognised as a meritorious person.

The literal meaning of the shloka is that –

He who has wealth is described as from a high or reputed family (कुलीन). He is a ‘scholar’, a well-read and knowledgeable person, he is reputed and he can recognise talents and merits (पण्डित: श्रुतवान् गुणज्ञ:). He is a brilliant and impressive orator (वक्ता) he alone is ‘handsome’ (दर्शनीय:). In short, he is described as possessing all the virtues, qualities, skills and talents. कांचन (kanchan) means gold. All good qualities are attributed to ‘Gold’!

We come across this situation in many places. It is no doubt true that with money, one can afford many good things. Many comforts and conveniences become affordable to a resourceful person. A rich person can also perform religious things in a better way. In big temples, the ‘special darshan’ of Gods or Idols is available smoothly and quickly by paying higher charges. Higher education, nutritious food, medical treatment — all these become easily available to a rich person. There is nothing inherently wrong with being rich.

The disturbing feature is that by throwing money, nowadays, you can purchase good marks in examinations, get favours in the present judicial system, purchase prizes and awards, manipulate records to show that you are a clean person, etc. You can get a position in the ‘elite class’ merely by your ‘resources’ and not on merit. You can become ‘virtuous’ and a meritorious’. This is markedly visible during elections – be it political elections or that of professionals. By money, one tries to get publicity of qualities which one does not possess; or popularity that one does not deserve.

Today, people with criminal, corrupt or tainted backgrounds can become ‘leaders’, ministers’ or even spiritual leaders on the strength of money!

Against this background, we should be proud of our BCAS, where a member commands respect and reputation only and strictly on the basis of genuine merits. Our endeavour should be to change the disgusting situation in the society. We should spread the message that your virtues, ethics, good qualities, knowledge and talents are the real wealth!

BCAJ Admin

Society News

LEARNING EVENTS AT BCAS

1. Indirect Tax Laws Study Circle – Legal position w.r.t conditional rate notifications under GST held on 16th October, 2023, in Online Mode.

The group leader CA Archit Agarwal had prepared 6 case studies on various issues revolving around the topics covering live issues, circulars and AARs / HC judgments. The case studies covered the following aspects for a detailed discussion:

1. Whether GST @ 18 per cent with ITC can be paid despite the specific entry in the rate notification?

2. Whether taxpayers can change the method of payment of GST from 18 per cent with ITC to a specific rate of 5 per cent without ITC after 5 years (i.e., after the ITC portion of the aircraft gets fully depreciated)?

3. Whether the conditions of lapsing of ITC on inverted duty structure through circular is legally valid?

4. Whether procedural lapse of filing declaration for opting GST @ 12 per cent with ITC for GTA be defended after the issue of SCN and whether any other remedy is available?.

5. Issues in the claim of abatement towards land cost by Taxpayers in Real Estate and Construction.

6. Issues and remedies for a claim of ITC on delayed development projects and sale of flats after receipt of OC.

The Group Mentor CA Naresh Sheth monitored the discussion and enlightened the group with his inputs from time to time.

Around 45-50 participants all over India benefitted while taking an active part in the discussion on the bare law, circulars, AARs and SC decisions. The group mentor and the participants appreciated the efforts of the group leader.

2. Seminar on e-Filing of Form 10B, 10BB & ITR-7 for A.Y. 2023-24 for Charitable Trusts held on 13th October, 2023, @ BCAS in Hybrid Mode.

In this event organised by Direct Taxation Committee, the opening remarks were given by President CA Chirag Doshi via a Video Conference. Then CA Gautam Nayak and CA Anil Sathe gave their remarks including on the issues relating to the nitty-gritties involved in the Forms applicable to Charitable Trust and how the trust’s auditor has to be careful while mentioning their qualifications and filling the clauses, especially those which can lead to denial of exemptions u/s 11 & 12 of the Income -tax Act, 1961.

CA Ashok Mehta explained the clauses in Form 10BB that are applicable to charitable trusts which earn income before claiming exemption u/s 11 & 12 of the Income-tax Act, 1961.

CA Deven Shah elaborately led the participants through the clauses which are uncommon in Form 10B as compared to what was explained in Form 10BB.

Details were discussed about clauses related to Corpus Donations, exemptions of income of 15 per cent, accumulation, and disallowances. Section 115BBI — Tax on Specified Income was well put up through the Forms that the respected speakers spoke in detail.

ITR 7 was later taken up post-lunch, where CA Divya Jokhakar elucidated the participants, the interconnection between the schedules, the static information, how to be more ready before e-filing on the CPC Income Tax Website.

After both the sessions pre-lunch and post-lunch, questions were invited online and in person from the present audience.

A robust discussion was carried out by all the speakers and both the chair making the event a grander success as all the queries were resolved.
There were 283 participants online and 41 offline.

3. Felicitation of the ICAI Torch Bearers by BCAS on 7th October, 2023 at BCAS Hall.

A meeting between CA Aniket Talati, President and CA Ranjeet Kumar Agarwal, Vice President along with other Central Council Members of ICAI and BCAS represented by CA Chirag Doshi, President and all officer bearers, Past Presidents and Managing Committee members of BCAS was held at BCAS Hall, Mumbai to felicitate the said ICAI torch bearers and also to discuss and exchange thoughts on various aspects of the profession.

The positive perception of our profession within Government and its various instrumentalities, the areas where representation may be required for ease of compliance, the accountability of the chartered accountants as auditors and risk-mitigating measures, capacity building of small-time practitioners and regulations dealing with the formation of muti-disciplinary entities, need of chartered accountant services vis a vis marketing of those services, joint audits, developments in curriculum, examination & campus placements of fresh chartered accountants and students aspiring to become CA, global opportunities for CA were some of the topics in respect of which, members of both the institutions shared their
thoughts. CA Aniket Talati addressed various concerns raised during the meeting with facts, and statistical references (wherever possible) and also educated the group about various ongoing initiatives being undertaken by ICAI. CA Ranjeet Kumar Agarwal spoke about the history and development of the profession and its contribution to this Country in the past 75 years and enthused the group with the vision that ICAI bears and its roadmap for the future growth of profession in the Amrit-kal.

Both institutions also discussed ways to work together for the betterment of the profession and society at large.

From the Central Council of ICAI, CA Chandrashekhar Chitale, CA Durgesh Kabra, CA Mangesh Kinare, CA Piyush Chhajed and CA Priti Savla were present.

4. 6th Long Duration Course on Goods and Services Tax held from 24th August, 2023 to 7th October, 2023, in Online Mode.

The 6th Long Duration Course on GST – 2023 organised by the Indirect Taxation Committee was conducted by BCAS, virtually (online mode) from 24th August, 2023 to 7th October, 2023. It was held on every Tuesday, Thursday and Saturday covering theoretical as well as practical aspects of GST.

The course covered 30 pre-recorded training videos of 90-120 minutes duration each and 30 live interactive sessions of one hour each for 15 days. The sessions were conducted by proficient faculties having immense expertise in the field of indirect taxation. The course started with the constitutional overview of GST and covered various concepts such as supply, valuation, ITC, place of supply, returns, registration, refunds, litigations etc.

Listening to pre-recorded videos helped the participants to have an interactive session by highlighting various issues in GST before 30 GST stalwarts. The course received a very good response with 183 participants enrolling from various cities.

The course ended with a positive and encouraging response and feedback from all the participants, in turn motivating the BCAS team to conduct such courses in the near future.

5. Webinar on GST Reconciliations in Tally Prime held on 6th October, 2023, in Online Mode.

The above webinar was organised by the Indirect Taxation Committee to demonstrate how businesses using tally software can optimise the software using GST reconciliation feature for executing the compliance work smartly and efficiently. The speaker CA Parth Patel presented the various means of Simplifying Books vs. Portal Comparison in Tally Prime and also displayed Glimpses of the Reconciliation Process.

The presentation covered the following aspects of the Tally Prime Software for a detailed discussion:

1. Challenges in GST Reconciliations.

2. Structural enhancements for GST Reco.

3. GST Transactional compliances from Auditors Perspective.

4. Solution Walkthrough for GSTR 1, GSTR 2A and GSTR 2B Reconciliations.

5. Future roadmap for further improvements and new features.

More than 300 participants all over India benefitted while taking an active part in the discussion on the Reconciliation Process. The speaker answered more than 80 questions raised by the participants.

Link to access the session: https://www.youtube.com/watch?v=AS8vt4Zr14g

QR Code:

6. Indirect Tax Laws Study Circle – ISD vs. Cross-charge: the way ahead in view of announcements made in the 50th GST council meeting held on 27th September, 2023, in Online Mode.

The group leader CA Aumkar Gadgil prepared 5 case studies on various issues revolving around the topic covering live issues, circulars and AARs/ HC judgments. The case studies covered the following aspects for detailed discussion:

1. The distinction between ISD and cross-charge and applicability vis-à-vis the scenario.

2. Determining what should be cross-charge and what should be ISD in view of Circular 199?

3. Procedural aspects relating to cross-charge, such as:
a. Is the specific classification of service required or can it be classified as “support services”? Will classification decide the eligibility to claim the input tax credit of the recipient?

b. Can any and all services received be distributed or one needs to demonstrate that the services are actually received/ enjoyed by other branches?

c. Valuation and scope of proviso to Rule 28 when the receiving branch is not entitled to full input tax credit.

4. Procedural aspects relating to ISD, such as:

a. Can multiple ISD registrations be taken under one PAN?

b. Can a cross-charge invoice be raised to ISD for further distribution to other branches?

5. Decision of the High Court in the case of JSW Steel Ltd, AAR in the case of Columbia Asia Pacific and Others.

The Group Mentor CA Mandar Telang monitored the discussion and enlightened the group with his inputs from time to time.

Around 45-50 participants all over India benefitted while taking an active part in the discussion on the bare law, circulars, AARs and SC decisions. Participants appreciated the efforts of the group leader and the active participation of the mentor in an interesting segment analysis on the automobile sector.

7. Webinar On ‘Intertwining Of Laws In The Technology World’ held on 5th September, 2023.

The Corporate and Commercial Laws Committee organised above half-day seminar dealing with the laws relating to technology and data protection, equipping participants with the knowledge to navigate legal challenges in the digital age.

The session on “Data Protection, Cyber Security, Digital IP” was dealt by Mr. Huzefa Tavawalla & Mr. Purushotham Kittane. Both experts dealt with the nuances of legal frameworks and regulations governing technology and the new Data Protection Law.

“Regulatory aspects of online gaming” was conducted by Adv. K Vaitheeswaran. He very well dealt with the international legal jurisprudence relating to the game of chance and the game of skill.

“Revenue Models and managing Gaming and E-Commerce business” was conducted by Mr. Avinash Gupta. He broadly gave a framework and the business dynamics of online gaming and how the industry is evolving.

“Anti Money Laundering Regulations with respect to Technology Companies” was dealt by Adv. Ashoo Gupta. She touched upon the recent litiwgative issues of Payment applications and briefed about PMLA provisions.

The sessions were very well received and participants had a good learning of laws relating to the technology world.

BCAJ Admin

Miscellanea

1. TECHNOLOGY

1 Amazon plans drone deliveries for UK parcels next year in an Hour

Amazon has announced it will start using drones to deliver parcels in the UK in under an hour. The online retail giant said the service would start in one location which is yet to be revealed, at the end of 2024. The company already offers drone deliveries in two US states for goods weighing no more than 5 lbs (2.2 kg).

The aviation regulator said “exploring” how drones could be safely used in more of the UK’s airspace was “key”. Amazon said it was working closely with the Civil Aviation Authority (CAA) to meet regulations, while the government said the move would help it understand “how to best use the new technology safely and securely”. David Carbon, Vice President of Amazon Prime Air, said he believed there was demand for the technology in the UK and that it was “absolutely safe”.

“It’s hundreds of times safer than driving to the store,” he told the BBC in an interview in Seattle. “I’ve never heard anyone say they wouldn’t want something faster. Customers will be able to choose from thousands of items which weigh 5 lbs or less, from washing up liquid and toothbrushes to beauty products and batteries to fill a shoe-box size package.”

“What our customers will do is jump on to the Amazon website, they’ll select drone delivery if it’s available in their area, they’ll order their product….and that will then set off the chain of events that goes to our ground system that finds the customer’s yard, drops the package off where they asked it, and we’re out of there,” Mr Carbon said. The first area in the UK for deliveries by air will be named in the coming months. The company currently has drone postage in California and Texas and is also looking to launch the so-called “ultra-fast” deliveries in a third US state and in Italy.

Baroness Vere, the Government’s Aviation Minister said, “Amazon’s plans would help boost the economy and offer consumers more choice while helping in keeping the environment clean with zero emission technology. It will also build our understanding on how to best use the new technology safely and securely,” she said, adding that the Government planned for commercial drones to be a “commonplace” by 2030.

(Source: www.bbc.com – 19th October, 2023)

2 Seeing Chandrayaan-3 craft development, US experts wanted India to share space technology with them: ISRO chief

ISRO Chairman, Mr S. Somanath said, “Experts involved in developing complex rocket missions in the US, after witnessing the developmental activities of the Chandrayaan-3 spacecraft, suggested that India share space technology with them.”

“Times have changed and India is capable of building the best of devices and rockets and that is why Prime Minister Narendra Modi has opened the space sector to private players,” he said at an event. Somanath was addressing students at an event organized by Dr A P J Abdul Kalam’s Foundation, commemorating the 92nd birth anniversary of the late former President today.

“Our country is a very powerful nation. You understand that our knowledge and intelligence level in the country is one of the best in the world,” the ISRO Chief said, explaining, “In Chandrayaan-3, when we designed and developed the spacecraft, we invited experts from the Jet Propulsion Laboratory, Nasa-JPL, who does all the rockets and most difficult mission.”

He continued, “About 5-6 people from Nasa-JPL came to ISRO headquarters and we explained to them about Chandrayaan-3. That was before the soft landing took place on August 23. We explained how we designed it and how our engineers made it…..and how we are going to land on the moon’s surface, and they just said, no comments. Everything is going to be good.”

JPL is a research and development laboratory funded by the National Aeronautics and Space Administration and managed by the California Institute of Technology (CALTECH) in the United States of America.

US space experts also said one thing, “Look at the scientific instruments, they are very cheap. Very easy to build and they are high technology. How did you build it? Why don’t you sell this to America, they were asking,” he said.

“So students, you can understand how times have changed. We are capable of building the best equipment, the best devices, and the best rockets in India. That is why our Prime Minister, Shri. Narendra Modi has opened the space sector.” He further added, “India successfully touched down near the south pole of the lunar surface with the Chandrayaan-3’s Lander on August 23, making it only the fourth country to achieve the feat of a Moon landing after the US, China and the erstwhile Soviet Union.”

(Source: www.timesofindia.com – 16th October, 2023)

2. WORLD NEWS

1 Amazon Rivers fall to lowest levels in 121 years amid a severe drought

Rivers in the heart of the Amazon Rainforest in Brazil fell to their lowest levels in over a century as a record drought upended the lives of hundreds of thousands of people and damaged the jungle ecosystem. The Port of Manaus, the region’s most populous city, at the meeting of the Rio Negro and the Amazon River, recorded 13.59 meters (44.6 feet) of water on Monday, compared to 17.60 meters, a year ago, according to its website. That is the lowest level since records began 121 years ago in 1902, passing a previous all-time low set in 2010.

Rapidly drying tributaries to the mighty Amazon have left boats stranded, cutting off food and water supplies to remote villages, while high water temperatures are suspected of killing more than 100 endangered river dolphins. After months without rain, rainforest villager Pedro Mendonca was relieved when a Brazilian NGO delivered supplies to his riverside community near Manaus, late last week.

“We have gone three months without rain here in our community,” said Mendonca, who lives in Santa Helena do Ingles, West of Manaus, the capital of Amazonas state. “It is much hotter than past droughts.” Some areas of the Amazon have seen the least rain from July to September since 1980, according to the Brazilian Government Disaster Alert Centre, Cemaden.

Brazil’s Science Ministry blames the drought on the onset of the El Niño climate phenomenon this year, which is driving extreme weather patterns globally. In a statement earlier this month, the ministry said it expects the drought will last until at least December, when El Niño’s effects are forecast to peak. Underlying El Niño is the long-term trend of global warming, which is leading to more frequent and more intense extreme weather events, like drought and heat.

(Source: CNN.com – 17th October, 2023)

3. WOMEN EMPOWERMENT

1 One in Five Board Members at India Inc. is Now a Woman

This figure was one in 20, a decade ago, when law mandating one woman director came into effect. There are 885 women among the 4,783 directors that cumulatively sit on the boards of Nifty-500 companies, resulting in 18.5% women representation.

After 10 years of the enforcement of the Companies Act 2013, that made it mandatory for companies to have at least one woman director on their boards, one in every five board members on average in Nifty-500 companies is a woman. Five years ago, one in eight directors was a woman, and ten years ago, the proportion was one among twenty members, Prime Database research showed.

Though there is a progress in enhancing gender equity at the board level, the glass is both half full and half empty. The legal mandate has ensured that almost all the 500 companies have a woman director on their boards, but it has also defined the presence of women on Indian Boards. In total, 223 (or 45 per cent) of the Nifty-500 companies have only one woman director, in compliance with the law.

Furthermore, the bigger the size of the board, the more conspicuous the dearth of women directors. There are 81 companies with only one woman director on their respective boards of ten or more members. For instance, L&T with a board size of 19 members has only one woman director. Ironically, the only woman director on the board of L&T is Preetha Reddy, the Vice Chairperson of Apollo Hospitals which has six women directors on its board of 11 members. Apollo Hospitals is one of the eight companies of the ’50 per cent + club’ where women make up half or more of the board.

“Company managements hire independent directors, the people with whom they have some earlier interactions which give them comfort, or the government officials post their retirement,” said Manju Agarwal, an independent woman director on boards of several listed companies. “Since most of these people tend to be male officers/entrepreneurs, the boards end up having more male members. And typically, one woman director gets hired predominantly because of the legal mandate,”
she added.

Globally, one in three directors on the boards of S&P 500 companies is a woman. But this is not due to a law mandating women on board but the pressure from investors and efforts by the companies towards having gender diversity at the board level. The UK Government backed Hampton-Alexander Review in its February report, this year on FTSE Women Leaders recommended an increased target of 40 per cent women representation on the boards of FTSE-350 companies by the end of 2025. Last year, British Housing Developer, Barratt Developments, faced protests from its shareholders after the proportion of women board members fell below the recommended 40 per cent level.

In India, 22 companies among the Nifty-500 have women representation in their board at 40 per cent and above. Incidentally, several of these companies have women chairpersons or CEOs. For instance, Colgate Palmolive, Godrej Consumer, Jyothy Labs, Vinati Organics, Apollo Hospitals, Sundram Fasteners and New India Assurance.

“There is no dearth of qualified women but most of them do not have board experience,” said Vikesh Wallia, Managing Director Board, Steward-8 Ship Inc., a research and advisory firm. “Promoters in India are still settling down with the one-woman director mandate. Besides, women are not pitching themselves hard enough for board seats. Also, the Government and MNCs are not taking the lead in ensuring gender diversity at the board level. Several PSUs do not have a single woman on their boards and there are MNCs who have better women representation on their boards overseas but not here in India,” he added.

To be sure, PSUs such as Power Grid, UCO Bank, Bank of Maharashtra and BEML do not have a woman director on their boards.

(Source: Economic Times – 19th October, 2023)

4. SPORTS

1 India finished with a record haul of 107, including 28 gold, at the 2023 Asian Games in Hangzhou

India has been a powerhouse since the Asian Games started in 1951. Having participated in all editions of the quadrennial showpiece, India played an integral role in the establishment of the Asian Games and even hosted the inaugural edition in New Delhi.

India won 51 medals — 15 gold, 16 silver and 20 bronze — at the Asian Games 1951 to finish second behind Japan (60 medals). It remains India’s best finish at the Continental Games. Swimmer Sachin Nag won the 100 m freestyle event at New Delhi in 1951 to become India’s first gold medallist at the Asian Games.

In the same year, Roshan Mistry became the first Indian woman to win an Asian Games medal when she took silver in the 100 m sprint at the 1951 Asian Games. Since then, India has won 779 medals at the Asian Games, including 183 golds, 239 silvers and 357 bronze.

India has returned with a gold medal at every edition to date and is the fifth-most successful country at these Games. Indian track and field stars have led from the front, bagging a massive 283 medals in 19 appearances at the big-ticket event.

India’s best medal tally came at the Asian Games 2023 in Hangzhou, the People’s Republic of China. India won a record 107 medals, surpassing their previous-best haul of 70 from Jakarta 2018. Unsurprisingly, athletics was the most successful sport, accounting for 29 medals.

At Asian Games 2018, Neeraj Chopra became the first Indian to win a gold medal in the Javelin Throw while Dutee Chand brought home India’s first medal in the women’s 100 m since PT Usha’s silver in 1982. Neeraj Chopra successfully fended off a challenge from compatriot Kishore Kumar Jena to defend his Asian Games title at Hangzhou 2023.

Apart from athletics, wrestlers, boxers and most recently, shooters have contributed handsomely to India’s medal count at the Asian Games. All top Indian athletes such as wrestlers Bajrang Punia and Vinesh Phogat, boxers Mary Kom, Lovlina Borgohain, Nikhat Zareen and Vijender Singh and shooters Abhinav Bindra and Jaspal Rana have also stood on the Asian Games podium.

India, however, has been the most dominant in Kabaddi, winning eight out of the nine editions since the sport debuted in 1990. India’s only loss was with Iran at the Asian Games 2018 in Jakarta.

(Source: olympics.com – 9th October, 2023)

BCAJ Admin

Letters to the Editor

The Editor,
BCAJ,
Mumbai.

Re: Use of Artificial Intelligence (AI) in various areas of CA Practice: Need for Practical Training.

Dear Sir,

I read with interest an article by Shri Raman bhai Jokhakar, titled, ‘Chatting up about India: Technology Not Just about a Few, But for All’, in the September 2023 issue of BCAJ, and other articles on use of technology by CAs in the fields of Accountancy, Auditing, Data Analysis, Big Data, Forensic Investigations, etc., in recent issues of BCAJ and ICAI Journal.

Now, it is well established that AI and other technology tools are here to stay, and technology is advancing at a very rapid clip, and the same can be and should be deployed in our profession.

The next stage is providing practical training to our Members in the use of AI and other technology tools in various areas of CA practice. BCAS has been conducting various long-duration programs on subjects such as GST, FEMA, DTAA, Transfer Pricing, etc.

I would request the President to urgently organise training programs on the various AI tools and other technology tools on a regular basis so that our Members are equipped to use the same in their practice. The same has become very imperative as the compliance burden has increased, timelines have been compressed, and punitive actions by Regulators and Authorities have become very swift and quite devastating.

Yours Sincerely,

CA Tarunkumar Singhal

The Editor,
BCAJ,
Mumbai.

Dear Sir,

I am writing to you with reference to the Editorial I read in the October 2023 issue of the BCAJ.

The theme of the Editorial so beautifully captured the essence of Women’s Empowerment, serving as an emblem of inspiration and courage.

I am a retired employee from the Central Government organisation, and this feature spoke to me at many levels. The way it highlighted ‘Nari Shakti’, I think, is of the utmost need of the hour. I started my business at the age of 65 after retirement, as I — in all its capacity — believe in the power of women’s empowerment.

Instilled in me by my mother, who herself was a Govt. professional in her days, I have passed down the same courage to my daughters and strongly encourage every woman out there to follow their dreams.

I whole-heartedly thank you, Sir, for such a note-worthy Editorial that genuinely mirrored the foundation of a strong society, now more than ever.

Yours Sincerely,

Mrs. Shashi Sharma

BCAJ Admin

Regulatory Referencer

I. COMPANIES ACT, 2013

1. MCA allows companies to hold AGMs & EGMs via ‘VC & Other Audio-Visual Means’ till 30th September, 2024: MCA has decided to allow companies whose AGMs are due in the year 2023 or 2024 to conduct their AGMs through Video Conference (VC) or Other Audio-Visual Means (OAVM) on or before 30th September, 2024. Also, companies are allowed to conduct their EGMs through VC or OAVM till 30th September, 2024. However, it is clarified that this shall not be treated as any extension of statutory time for holding of AGMs or EGMs. [General Circular No. 09/2023, dated 25th September, 2023]

II. SEBI

2. SEBI mandates listing of subsequent issuances of outstanding non-convertible debt securities: SEBI has notified an amendment to the SEBI (LODR) Regulations, 2015. A new regulation 62A has been inserted. The regulation states that a listed entity whose subsequent issues of unlisted non-convertible debt securities are made on or before 31st December, 2023, and are outstanding, may list such securities on a stock exchange. Further, listed entities whose non-convertible debt securities are listed must list all such securities proposed to be issued on or after 1st January, 2024, on the stock exchanges. [Notification No. SEBI/LAD-NRO/GN/2023/151, dated 19th September, 2023]

3 SEBI extends timeline for trading & demat account holders to submit nominee details by three months: SEBI has extended the timeline for existing trading and demat account holders to provide a choice of nomination or formally opt out of nomination through a declaration form by three months, i.e., by 31st December, 2023. Further, the submission of choice of nomination for trading accounts has been made voluntary by the regulator as a move towards ease of doing business. Earlier, the deadline for existing trading and demat account holders to provide a choice of nomination was on or before 30th September, 2023. [Circular No. SEBI/HO/MIRSD/POD-1/P/CIR/2023/158, dated 26th September, 2023]

4 SEBI issues Master Circular for ‘Merchant Bankers’: SEBI had issued multiple circulars, directions and operating instructions to Merchant Bankers on a regular basis to ensure compliance. In order to enable the stakeholders to have access to all circulars at one place, a Master Circular regarding Merchant Bankers has been issued. This Master Circular is a compilation of all the existing circulars and directions issued by SEBI to Merchant Bankers. [Master Circular No. SEBI/HO/CFD/POD-1/P/CIR/2023/157, dated 26th September, 2023]

5 SEBI extends timeline for nomination of Mutual Fund Unitholders by three months: SEBI has extended the timeline for nomination of mutual fund unit holders either solely or jointly from 30th September, 2023, to 31st December, 2023. Further, non-compliance of it will result in freezing of folios w.e.f. 1st January, 2024. In order to protect the interest of investors and regulate the securities market, AMCs and RTAs must encourage unitholder(s) to fulfill the requirement for nomination / opting out of nomination by sending a communication on a fortnightly basis by way of emails and SMSes to unitholder(s). [Circular No. SEBI/HO/IMD/IMD-I POD1/P/CIR/2023/160, dated 27th September, 2023]

BCAJ Admin

Ethics and U

Shrikrishna : Hello, Arjun; how was your Navratri? Enjoyed Garba?

Arjun : Hummmm (no reply).

Shrikrishna : Arjun, what happened? Not feeling well?

Arjun : Bhagwan, I am not in the mood to say anything. Please leave me alone.

Shrikrishna : Paarth! Why are you so nervous? You have never said such a thing before.

Arjun : I am afraid and depressed.

Shrikrishna : Really? You are the bravest person on Earth. You fought with Kauravas, who were much larger in number, and still defeated them.

Arjun : It was simpler to fight with enemies physically with weapons. Even psychological warfare is alright. But I can’t fight with Regulators!

Shrikrishna : Why? Are they so powerful?

Arjun : They are not powerful, but they have full power to do anything, and they can kill you even without fighting!

Shrikrishna : Strange! But I had advised you to be cool and composed despite all odds and difficulties. You should be a ‘sthitapradnya’- of balanced mind — neither excited in happiness nor depressed in sad situations.

Arjun : That was alright in Geeta. It is easy to preach such philosophy but difficult to implement.

Shrikrishna : Why?

Arjun : The very survival of our profession is at stake. All my colleagues are quitting practice, or at least giving up audits!

Shrikrishna : I have heard about it over the last 10 to 15 years.

Arjun : I have decided to surrender my certificate of practice. Recently, NFRA has passed negative orders against many CAs. They are ordered to pay a fine of ₹1,00,000 and have been debarred from signing any audit for at least one year!

Shrikrishna : They must have committed some lapses in the audits.

Arjun : Most of them are senior members and I am aware that they are knowledgeable and have a good track record of audits.

Shrikrishna : Still, the mistakes do occur.

Arjun : Bhagwan, there is a difference between an error and misconduct so as to attract such a severe punishment.

Shrikrishna : Have you read the orders?

Arjun : Yes, Lord, they are in the public domain. That is another bad part! And those members say that all orders are stereotyped with hardly any variation.

Shrikrishna : It was in which matter, Arjun?

Arjun : Many of them were the branch auditors of DHFL. Writ petitions and litigations are pending in a few High Courts against the proceedings. Even the jurisdiction of NFRA has been challenged, particularly for that financial year.

Shrikrishna : But what were their Counsels doing? Didn’t they argue properly?

Arjun : Bhagwan, members were denied the right to be represented by legal Counsel. My friends say about the proceedings — the less said is better!

Shrikrishna : You are telling one side of the story. We must know what is the stand of the Authority.

Arjun : I am not competent to comment on their work. But the fact remains that it is dicey to sign any audit. They are making our lives miserable. I don’t see any bright future for our profession.

Shrikrishna : Chill, my dear, chill.

Arjun : They are only thrusting more and more burdens on auditors. There is no commensurate reward. No good staff, no articles, no clarity in laws! I don’t know how to cope. I have lost hope.

Shrikrishna : But what are your leaders doing?

Arjun : God alone knows! But Bhagwan, I bet that even if you sign any audit, you will be held guilty of misconduct!

Shrikrishna : Paarth, you may be right. Better, I continue to drive your chariot.

Arjun : Bhagwan, I am not joking. The fact is that all senior members are avoiding signing the audits and delegating them to the junior partners!

Shrikrishna : Good that all my four hands are occupied. I cannot hold a pen to sign the balance sheets.

Arjun : Bhagwan, holding a pen is not necessary. Your assistants will put your digital signatures, and you will not even know!

Shrikrishna : Anyway, I will request Goddess Saraswati to give some wisdom to the Regulators.

Arjun : Please do that; otherwise, we are doomed!
(Both laugh and disperse!)

“Om Shanti”

Note:
This dialogue is based on the present scenario of the audit profession and average members’ perception of it in the context of recent orders passed by NFRA.

BCAJ Admin

Interesting Websites and Apps

In this issue, we cover a variety of websites and apps which help us improve our online presence and personality.

16Personalities

This is an interesting website which helps you discover yourself. The makers believe that there are primarily 16 Personalities and help you discover what type of personality you have.

The online test consists of a set of questions divided into five major sections — Introverted / Intuitive / Feeling / Judging and Turbulent. Once you take the test and answer all questions honestly, a detailed report is generated about your personality. Apart from helping you understand yourself, you may like to explore traits which you would like to improve upon and take the test again after a few months. Although I believe it is impossible to change yourself fully, it is worth trying.

The only thing to remember is that you have to be fully honest in answering all questions. Some may take a while and some may be intuitive. Of course, it is completely free to try, with advanced options which require a subscription. The advanced options help you cultivate deep self-improvement, advance your career, improve relationships and go beyond your personality type.

Try it — it’s worth knowing who you are!

https://www.16personalities.com/

Humata AI

This is ChatGPT for all your files. Just upload any text file and ask questions on the same. All your answers will be available in a jiffy! You can learn 100X faster, analyse legal documents, understand technical papers and create reports. In short, ask questions and get answers about any file, instantly!

Humata is an Avestan word that means “good thought”. And good thoughts are what emanate from this simple website. It is very simple to use and quite easy to access.
The free version allows you to upload up to 60 pages and ask 100 questions, with a 100MB file size limit. Paid plans give you progressively more pages, capacity and questions.

Try out the free version for a few days, and if you feel happy and needy for more, subscribe to the appropriate plans!

https://www.humata.ai/

BIS Care App

The Bureau of Indian Standards has come out with an app to check the authenticity of various products by helping you verify the license details marked on the product.

You can check the authenticity of a product with the mark by using “Verify License Details”, check the authenticity of Hallmarked Jewellery with an HUID number by using “Verify HUID” or even check the authenticity of electronic products with R-Number by using “Verify R-Number under CRS”.

You can also use the app to register complaints regarding the quality of the Product or the misuse of BIS standard marks by using the “Complaints” option. The app allows you to get locations of BIS labs and offices and helps you access products under compulsory certification of BIS and products under simplified procedure of licensing.

The app is absolutely free, is available on Android and iOS and is a must for lay users and professionals alike.

https://www.bis.gov.in/bis-apps/

ScamAdviser

ScamAdviser is a simple website that helps you identify scam sites. Is this site or online store a scam or safe? Are the reviews real or fake? That is the question ScamAdviser tries to answer for 2.5 million visitors every month. ScamAdviser uses an algorithm to determine if the website is legit with real reviews or a phishing website selling fake products. Their goal is to help consumers make the right choices online.

If you are visiting an unknown website and are not sure whether you can share your personal details or your credit card information online, just add the name of that doubtful website on to ScamAdviser.com and get a quick report on whether it is safe to buy from that website or not. It is a generic analysis of the website and various reports on that website and will also give you a rating on how safe they judge it to be.

Besides, they have various reports on online shopping scams, phishing and identity thefts, investment scams and much more. They scan thousands of sites daily and report on the top scams of the week, scam trends and scam alerts.

If you need to report a website as a scam, feel free to report it to ScamAdviser, and they will take care of the rest.

The site is completely free and a valuable addition to ensure your day-to-day cyber safety. Try it out today!

https://www.scamadviser.com/

BCAJ Admin

Corporate Law Corner : Part A | Company Law

14 Case law 01/November 2023

M/s. DEXTER BIOCHEM PRIVATE LIMITED

No. ROC-GJ /ADJ. ORDER/ DEXTER BIOCHEM/ Sec.140/ 2023-24/2632/33

Office of the Registrar of Companies, Gujarat, Dadra & Nagar Haveli

Adjudication order

Date of Order: 15th September, 2023

Adjudication Order against the Auditor of the Company for violation of section 140(2) of the Companies Act, 2013, read with Rule 8 of the Companies (Audit and Auditors) Rules, 2014, for Non-filing of Form ADT-3 with respect to Resignation from the Company.

FACTS

On perusal of documents available on the MCA21 Portal, M/s DBPL (the Company) had appointed M/s. DKN&A as Statutory Auditors of the company for the period from 1st May, 2015 to 31st March, 2020. Further, it was noticed that the company had also appointed M/s. P.U.N & Co. Chartered Accountants as Statutory Auditors of the Company for the period from 1st April, 2017 to 31st March, 2022.

Based on this, the Registrar of Companies, Gujarat, Dadra & Nagar Haveli (“RoC”) had issued a show cause notice to M/s. DBPL and M/s. DKN&A, Chartered Accountant Firm for default under section 140(2) of the Companies Act, 2013 asking clarification whether the company had removed M/s. DKN&A under Section 140(1) of the Companies Act, 2013 or whether M/s. DKN&A had resigned pursuant to Section 140(2) of the Companies Act, 2013.

M/s DBPL, in their letter dated 24th May, 2023 had replied that “they have forwarded the above-referred notice to M/s DKN&A and have requested to file Form ADT-3 for their resignation at the earliest to make the default good”. It was revealed from the reply of M/s. DBPL that M/s. DKN&A, Statutory Auditors had violated the provisions Section 140(2) of the Companies Act, 2013 due to non-filing of the notice of resignation in the prescribed e-form ADT-3, and were thereby liable for penalty under Section 140(3) of Companies Act, 2013.

Adjudication Notice vide No. ROC-GJ/ADJ-Sec. 454 read with Sec.140/Dexter Biochem/2023-24/1447 dated 21st June, 2023 was issued to Mr. KAS, Partner of M/s. DKN&A, as per Section 454 of the Companies Act, 2013 read with Rule 3 for violation of Section 140(2) of the Companies Act, 2013 regarding non-filing of Form ADT-3 and no reply was received from M/s. DKN&A on such notice.

Thereafter, for providing an opportunity of being heard a “written notice” was issued to the mailing address of M/s DKN&A on 4th September, 2023 to hold a physical hearing and to give an opportunity to be heard.

In the hearing, Mr. MD, Practising Company Secretary (“PCS”) being the authorised representative of M/s. DKN&A submitted that due to ill-health conditions, the auditor was not able to file Form ADT-3 for his resignation in a time-bound manner as per the provisions of the Companies Act, 2013. However, the Auditors had filed ADT-3 on 8th June, 2023 under the MCA portal with an additional fee of ₹7,200 with a delay of 1711 days in the filing.

He also submitted that the Auditors were engaged in a small company and the provisions of Section 446B be considered at the time of levying penalties.

Thereafter, the Presenting 0fficer submitted that the additional fees paid for delayed filing as prescribed under the Companies (The Registered offices and Fees) Rules, 2014 is, only a fees paid for filing of form as the cost of facility of delayed filing and thereby can neither be considered as fine nor penalty specified under the Companies Act, 2013. Therefore, payment of additional fees by the auditor does not absolve the default committed and hence M/s. DKN&A is liable to pay a prescribed penalty under Section 140(3) of the Companies Act, 2013.

Relevant provisions of the Companies Act, 2013 as applicable, are as under:

“As per Section 140(2); The auditor who has resigned from the company shall file within a period of thirty days from the date of resignation, a statement in the prescribed form with the company and the Registrar, and in case of companies referred to in sub-section (5) of section 139, the auditor shall also file such statement with the Comptroller and Auditor-General of India, indicating the reasons and other facts as may be relevant with regard to his resignation.

As per Section 140 (3); If the auditor does not comply with the provisions of sub-section (2), he or it shall be liable to a penalty of fifty thousand rupees or an amount equal to the remuneration of the auditor, whichever is less, and in case of continuing failure, with further penalty of five hundred rupees for each day after the first during which such failure continues, subject to a maximum of two lakh rupees.”

HELD

Accordingly, AO after considering the facts and circumstances of the case, imposed the following penalty on M/s. DKN&A:

Name of Auditor’s Firm

Penalty as per Section 140(2) of the Companies Act, 2013

Penalty
for continuing default

Final penalty imposed as per Section 140(2) of the Companies Act, 2013 read with Section 446B of the Companies Act, 2013 (R) ^#

M/s. DKN&A

R50,000 or an amount equal to the Remuneration of Auditors, which is less.

As per the financial statement, no remuneration was given to the Auditor for F.Ys. 2016–17 and 2017–18.

1711 days*250 = R4,27,750

₹ 1,00,000

Further, it was directed to pay the penalty within 90 days of the order.

# Final Penalty was imposed pursuant to the provision of section 446B of the Companies Act, 2013 as M/s. DBPL satisfied the criteria of being a Small Company where M/s. DKN&A were Auditors.

BCAJ Admin

Companies Act — Some Changes Upcoming Soon

The Securities and Exchange Board (SEBI) of India has always been, updating its regulations. It sets up Committees on specific areas to suggest changes, issues such reports, takes feedback, and then appropriately modifies the Regulations. Now, even the Ministry of Corporate Affairs (MCA) is initiating major changes to the Companies Act, 2013 (the Act). Major and frequent changes may be tough for practitioners and companies to keep up with, but at least some of their grievances are addressed and market evils are tackled. The MCA has often been seen to be sleepy in updating the laws, while SEBI has always taken a lead as far as listed companies are concerned. Part of the reason is that the SEBI Act contains just a few substantive provisions like powers to take action by SEBI including levy of penalties, procedure for appeals, etc. But largely it is a very brief enactment since most of the powers for laying down the details are delegated to SEBI. Hence, subject to the procedure for placing the amendments before Parliament, SEBI has been able to act swiftly in changing the law. On the other hand, the Companies Act, 2013, involves hundreds of provisions requiring hardwiring of many details including even the amounts. Many rules have been made to lay down details in several areas. However, there are several provisions in the Act which make substantive requirements. This requires amendments to be approved by Parliament which can be long and tortuous. But now, MCA seems to be becoming active. A good example is the fairly detailed report of the Company Law Committee released in March, 2022. It is also reported in the media to be implemented soon. Further, the term of the Committee is further extended and more aspects are to be covered. We can cover some of the amendments proposed as per the report released as also discuss some proposals said to be in the works as reported by the media with fair, though broad, details even if official confirmation is yet to be released on these. Undoubtedly, the proposals are at the initial stage and may be modified as the discussions progress. But that said, let us consider some important proposals with some angles I could think of.

ISSUE OF FRACTIONAL SHARES

Fractional shares often arise particularly out of corporate actions like mergers, bonus issues, etc. The law presently does not permit companies to make a fresh issue of fractional shares and, in any case, there is not a proper market for that. So companies typically opt for a workaround. All the fractional shares are accumulated and then a trustee sells them in the market and the proceeds are distributed proportionately to the respective shareholders.

However, there is a radical new proposal of permitting issue of fractional shares on an independent basis. The arguments given are primarily two. Some shares are so expensive that buying even one share may require spending more than ₹1,000 and, in one case, even more than ₹1 lakh. Thus, the Committee report says, the purchase of such shares is inaccessible to small investors. The proposal then is that the issue of fractional shares may be permitted, for listed and unlisted companies, with consultation with SEBI for the listed companies. The report cites that 1.42 crore new retail investors have entered into the market just in F.Y. 2021.

However, the Report lacks further details of the proposal on issuing fractional shares and hence several questions arise.

What will be the face value of such shares? Would multiple face-value shares be permitted? Say, if the original face value is ₹10, would fractional shares having face value of ₹1, ₹2, ₹5, etc. be permitted? Or even ₹0.50 or ₹0.10? Assuming there will be flexibility, will not there be a separate quoted price for each of such groups of shares? It would be perhaps naïve, considering history, to assume that the price quoted for a ₹1 share would be one-tenth of the price quoted in the market for the ₹10 face value shares, which may be the predominant category of the share capital.

We have seen (history now) the “odd lot” share market. Since there was a fixed minimum market lot, there was a problem with selling them. If the market lot size was, say, 50, one could not sell on the stock exchange their shareholding of, say, 27 shares. So a parallel market developed where agents would buy such shares at a discount, often heavy, and then accumulate them and sell almost all of them at the market lot. Of course, this issue has been largely resolved because the market now permits the sale/purchase of even 1 share. But the experience should teach us to be wary.

Another example is the issue of Differential Voting Right (DVRs) shares. The only difference between them and the ‘ordinary’ shares was that DVRs had fewer voting rights, depending on the terms of the issue. This concept has flopped miserably with some 3 odd companies only having issued them. The price of such DVRs is quoted at a discount, often as much as 50 per cent of the ‘ordinary’ shares.

So would this also happen to fractional shares? And would history repeat itself at the expense of small investors?

Curiously, the only example really given for this proposal is just one scrip, that is MRF, which is quoted at more than ₹1 lakh per share. But should the rule be made of such an exception?

Also, nothing prevents companies from issuing bonus shares, for example, to make shares available at a lower price.

Perhaps this proposal requires detailed reconsideration or at least clarity of the fine print of the proposals.

SOME OTHER IMPORTANT PROPOSALS

Space would not permit going into even major substantive proposals in detail of this lengthy report. So reference may be quickly made to some important of such proposals. One is for increasing communication through electronic mode.

Then there is a proposal to permit the issue of Restricted Stock Units and also Stock Appreciation Rights. These, though separate topics by themselves, require detailed consideration.

Then there is a move to eliminate the need to file affidavits. It is proposed to replace them with a simple self-declaration. The advantages are at least two. One is that it eliminates the need to buy stamp paper and get them notarised. The other is an approach of placing some element of trust in the concerned persons. Of course, the liability for violation/false declarations would remain the same.

A DIFFERENT REGIME FOR UNLISTED COMPANIES

While presently, we have a separate regime for listed companies regulated by SEBI, there are also some requirements in the Act for listed companies. Typically, the stricter of the two laws apply. But SEBI as an independent body has expertise and wide powers. A parallel regime seems to be the intention to be set up. This is what a detailed report in Business Standard of 25th September, 2023 states. The details of the proposal, which still can be stated to be general and also subject to official announcement, make for an interesting read. Notably, it is reported, that this would be a part of the Company Law Committee report in the upcoming second part.

Firstly, it would be applicable only to “large” companies. Nothing is stated specifically on what would constitute large companies. However, it is a fact that many unlisted companies are larger, at least in terms of valuation than some listed companies.

Here too, a few recent examples, one of which is specifically cited by name in the media report, is stated to be the motivation driving this proposal. The question again then is whether we are making a rule from an exception. Be as it may be, larger companies may require special focus. The other side is that smaller companies, which are in lakhs, may hopefully face a more relaxed regime.

It is stated that the new regime would not be a “light touch” one. Presumably, there will be detailed provisions. In particular, the punitive consequences of violations may be high. One will have to see how the proposal actually turns out to be. It would be of concern if the provisions are as harsh as, say, Section 447 of the Act which provides for very strict punishment under a very widely worded definition of “fraud”. This Section itself requires a close relook. But that does not seem to be the agenda. One hopes that since the intent of the Committee is to make India an easier place to conduct business. While consequences of serious violations ought to be harsh, a too widely drafted definition of what is such a serious violation may end up being intimidating or discouraging companies.

A welcome proposal is about auditors who resign. They would be asked to specifically state whether their resignation is due to fraud or similar serious wrongs observed in the company. The present Act already has certain provisions. But such a specific declaration would be helpful since later, if wrongs are soon found, they also can be confronted. On the other hand, the question would be whether an auditor would be required to ascertain whether there was fraud? The present requirement gives some leeway of judgment to the auditor. But generally, the powers of auditors as well as their legal expertise may not be wide enough for them to collect conclusive evidence and decide whether or not there was fraud. They may then face the Shakespearean dilemma of declaring there was fraud or there is not. Particularly, if they declare there is fraud, they could be subject to a lawsuit from the company/officials. They may end up taking a legal opinion that the information with them may be insufficient to declare that there is a confirmed fraud. And that would defeat the provisions. But in any event, this seems to be in the right direction. Indeed, such a requirement should also be made for independent directors and Key Managerial Personnel.

Finally, the question would be on who would administer this new regime. Presently, we have an independent body like SEBI that is not only well-empowered under the law, but has specialized knowledge of the field. If the new regime would still be under MCA, one wonders how effectively it would be implemented. Perhaps, an independent body for such unlisted companies, with wide powers, could be created.

Interestingly, we already have the Serious Frauds Investigation Office (SFIO) created under the Act itself which has wide powers to collect information, summon persons and investigate and give reports to various regulators under different laws. What more or better would the new regime and its administering body do, would have to be seen.

CONCLUSION

Several other amendments, largely technical or those relating to procedural aspects, are also proposed. For example, enabling more and more use of electronic technology, removing minor ambiguities, etc. These may be particularly important for those involved in day-to-day compliance like the Company Secretaries. Generally, they all seem to be in the right direction.

At the end, while the amendments proposed are several, they do not tackle the larger issue of keeping the principal provisions in the Act itself and do not move towards setting up a specialized independent body for unlisted companies to which extensive powers are delegated. Hopefully, as the media report says, the Committee report, the second part, would be released soon followed by a draft Bill which will give more details and the fine print.

BCAJ Admin

Genuineness of A Will: Supreme Court Lays Down Guidelines

INTRODUCTION

A probate means a copy of the Will certified by the seal of a Court. A probate of a Will establishes the genuineness and finality of a Will and validates all the acts of the executors. It conclusively proves the validity of the Will, and after a probate has been granted no claim can be raised about the genuineness or otherwise of the Will.

The most important question in relation to any Will, irrespective of whether a probate is required, is whether the Will is genuine. If a Will is forged / fraudulent, then it does not transmit the estate of the deceased to the beneficiaries named in the Will. The issue of determining the authenticity of a Will has been one which has been a perennial source of litigation. Several judgments of the Supreme Court have shed light on this issue. The Supreme Court’s decision in the case of Meena Pradhan vs. Kamla Pradhan, CA No. 3351/2014 Order dated 21st September, 2023, has laid down the principles which the Courts should consider in this respect.

TESTS LAID DOWN BY THE SC

In the above-mentioned decision on Meena Pradhan vs. Kamla Pradhan, the Supreme Court laid down 9 important tests to determine the validity of a Will. It held that broadly it has to be proved that (a) the testator signed the Will out of his own free will, (b) at the time of execution he had a sound state of mind, (c) he was aware of the contents thereof and (d) the Will was not executed under any suspicious circumstances. The Navratna Tests of the Apex Court are explained below:

TEST-1: EXECUTED BY TESTATOR

The court has to consider two aspects: firstly, that the Will is executed by the testator, and secondly, that it was the last Will executed by him. The Court held that it is not required to be proved with mathematical accuracy, but the test of satisfaction of the prudent mind has to be applied. A Testator is the person who makes the Will. He is the person whose property is to be disposed of after his death in accordance with the directions specified under the Will. The Indian Succession Act, 1925, governs the making of Wills and lays down who can be an Executor of a Will. The following persons can make a Will:

(a) Any major person who is of sound mind;

(b) An ordinarily insane person can make a Will when he is sane / of sound mind;

(c) A person who is intoxicated or who does not understand what he is doing cannot make a Will in that state, e.g., a Will made by a person who is heavily drunk and not in his senses is not a valid Will;

(d) Deaf / dumb / blind people can make a Will provided they know what they are doing, e.g., a Will made by a blind person in Braille script. An illiterate person can also make a Will but he should be aware of the contents and should affix his / her thumb impression as a mark of acceptance;

(e) A married woman can bequeath any property which she could dispose of during her lifetime.

TEST-2: SIGNING OF THE WILL

The testator must sign / affix his mark to the Will or it shall be signed by some other person in his presence and by his direction and the said signature or affixation shall show that it was intended to give effect to the writing as a Will. The Indian Succession Act, 1925, requires that a testator shall so sign a Will that it appears that he intended to execute it. Thus, it need not necessarily be at the end of the Will, it can also be at the beginning of the Will. The key is that it should appear that he intended to give effect to the Will. There is no requirement that each and every page must be signed or initiated – Ammu Balachandran vs. Mrs O.T. Joseph (Died) AIR 1996 Mad 442 which was followed again in Janaki Devi vs. R Vasanthi (2005) 1 MLJ 357. Nevertheless, it goes without saying that for personal safety, the testator must sign each and every page so that there is no risk of pages being replaced.

TEST-3: ATTESTATION

One of the tests laid down was that it was mandatory to get the Will attested by two or more witnesses, though no particular form of attestation was necessary. Each of the attesting witnesses was required to have seen the testator sign or affix his mark to the Will or has seen some other person sign the Will, in the presence of and by the direction of the testator or has received from the testator a personal acknowledgement of such signatures. Each of the attesting witnesses shall sign the Will in the presence of the testator.

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!

The Indian Succession Act states that any bequest (gift) to a witness of the Will is void. However, the Will is not deemed to be insufficiently attested for this reason alone. Thus, he who certifies the signing of the Will should not be getting a bequest from the testator. However, there is a twist to this section. This section does not apply to a Will made by a Hindu, Sikh, Jain or Buddhist and hence, bequests made under such Wills to attesting witnesses would be valid! Wills by Muslims are governed by Sharia Law. Thus, the prohibition on gifts to witnesses applies only to Wills made by Christians, Parsis, Jews, etc. However, there is no bar for a person to be both an executor of a Will and a witness of the very same Will. In fact, the Indian Succession Act, 1925, expressly provides for the same.

TEST-4: EVIDENCE OF WITNESSES

The Court held that for the purpose of proving the execution of the Will, at least one of the attesting witnesses, who was alive and capable of giving evidence, should be examined. The attesting witness should speak not only about the testator’s signatures but also that each of the witnesses had signed the Will in the presence of the testator.

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 case of a Will, the witness must be examined in the Court and he must confirm that he indeed attested the execution of that Will.

TEST-5: EVIDENCE OF ONE WITNESS IS SUFFICIENT

The Court declared that if one of the attesting witnesses can prove the execution of the Will, the examination of other attesting witnesses can be dispensed with. Where one attesting witness examined to prove the Will fails to prove its due execution, then the other available attesting witness has to be called to supplement his evidence.

Section 69 of the Evidence Act provides that if no 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 Supreme Court in V. Kalyanaswamy(D) by LRs. vs. L Bakthavatsalam(D) by LRs., Civil Appeal Nos. 1021-1026 / 2013, Order dated 17th July, 2020, has explained that attesting witness not being found refers to a variety of situations – it would cover a case of 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.

TEST-6: SUSPICION SURROUNDING THE WILL

The Apex Court laid down that whenever there existed any suspicion as to the execution of the Will, it was the responsibility of the propounder to remove all legitimate suspicions before it could be accepted as the testator’s last Will. In such cases, the initial onus on the propounder became heavier.

On being satisfied that a Will is indeed genuine, the Court would grant a probate under its seal. The Supreme Court has held in the cases of Lalitaben Jayantilal Popat vs. Pragnaben J Kataria (2008) 15 SCC 365 and Syed Askari Hadi Ali vs. State (2009) 5 SCC 528, that while granting probate, the Court must not only consider the genuineness of the Will but also the explanation given by the parties to all suspicious circumstances surrounding thereto along with proof in support of the same. The onus of proving the Will is on the propounder (person claiming that the Will is genuine). The propounder has to prove the legality of the execution and genuineness of the said Will by proving the absence of suspicious circumstances and surrounding the said Will and also by proving the testamentary capacity and the signature of the testator. When there are suspicious circumstances, the onus is also on the propounder to explain them to the court’s satisfaction and only when such onus is discharged would the court accept the Will – K. Laxmanan vs. T Padmini (2009) 1 SCC 354. In that case, the testator and one of the attesting witnesses to the Will died before the date of examination of the witnesses. The second attesting witness was also not in good physical condition, in as much as neither was he able to speak nor was he able to move. Consequently, as the execution of the Will could not be proved by leading primary evidence, the Court held that the propounder was required to lead secondary evidence in order to discharge his onus of proving the Will. This view has also been held in Daulat Ram vs. Sodha, (2005) 1 SCC 40.

TEST-7: OVERALL FACTORS TO BE CONSIDERED

The Court held that the test of judicial conscience has evolved for dealing with those cases where the execution of the Will is surrounded by suspicious circumstances. It requires to consider factors such as awareness of the testator as to the content as well as the consequences, nature and effect of the dispositions in the Will; sound, certain and disposing state of mind and memory of the testator at the time of execution; testator executed the Will while acting on his own free will.

The mental capacity of the Testator is possibly the most relevant factor in determining the validity of a Will. For instance, in the case of a person suffering from Alzheimer’s disease / or if he is a schizophrenic, the mental capacity of such a person would be highly debatable.

In this respect, the verdict of the Court in Shivakumar vs. Sharanabasappa, (2021) 11 SCC 277 is very relevant. Here it held that unlike other documents, a Will speaks from the grave of the Testator, and so, when it was propounded, the Testator had already died and could not say whether or not it was his Will. It was this aspect which introduced an element of solemnity in the decision of the question as to whether the document propounded was indeed his last Will. Ordinarily when the evidence adduced in support of the Will was satisfactory and sufficient to prove the sound and disposing state of the Testator’s mind and his signature as required by law, Courts would be justified in making a finding in favor of the propounder. However, it also held that a Will is not approached with doubts but is examined cautiously and with circumspection.

TEST-8: ONUS ON THE PERSON WHO ALLEGES

One who alleges fraud, fabrication, undue influence et cetera has to prove the same. However, even in the absence of such allegations, if there are circumstances giving rise to doubt, then it becomes the duty of the propounder to dispel such suspicious circumstances by giving a cogent and convincing explanation. In the case of Shivakumar (supra), the Court observed that there were three unnatural and unusual features of the Will — different sheets of paper were used; placement of the signatures of the Testator was beyond normal distance from the last typed matter; and in making of three signatures, at least two different pens were used. These, the Court held, made it clear that a deeper probe into the genuineness of the Will was called for to find out whether the document could at all be accepted as the last Will of the Testator.

TEST-9: SUSPICIONS SHOULD BE REAL

The Court explained an important principle — “suspicious circumstances surrounding the Will must be ‘real, germane and valid’ and not merely the fantasy of the doubting mind”. Whether a particular feature qualified as ‘suspicious’ would depend on the facts and circumstances of each case. Any circumstance raising legitimate suspicions would qualify as a suspicious circumstance for example, a shaky signature, a feeble mind, an unfair and unjust disposition of property, the propounder himself taking a leading part in the making of the Will under which he receives a substantial benefit, etc.

For instance, in Pratap Singh vs. State, 157 (2009) DLT 731, the Delhi High Court held that the fact that a person was suffering from a very painful form of terminal cancer of the mouth which prevented him from speaking, and that he succumbed to it within 2 weeks of executing a Will, showed that he may not have prepared the Will. Hence, in cases of terminal illness, it becomes very important to prove how the testator could have prepared the Will. The role of the witnesses in such cases also becomes very important. In Maki Sorabji Commissariat vs. HomiSorabji Commissariat, TS No. 60/2011 Order dated 30th April, 2014, the Bombay High Court was faced withthe issue as to whether the Testator who was suffering from Parkinson’s disease could make a Will. It concluded that merely because he suffered from Parkinson’s disease, it would not indicate or prove that it had affected his sound and disposing mind or capacity to execute a Will. Unless the disease was of such a nature that it would affect the sound and disposing mind of the testator, such disease cannot be a ground to refuse a Probate.

Again, the Court’s verdict in Shivakumar (supra) is quite interesting in this respect. It concluded that while a fishing enquiry of digging out faults and lacuna was not to be resorted to while examining a Will but at the same time, the real and valid suspicions which arose (any abnormal happening or conduct) could not be ignored either. Ignoring or brushing aside all the features noticed in relation to the Will would require taking up an individual feature and ignoring it as being trivial or minor and then proceeding with the belief that it had only been a matter of chance that all the abnormalities somehow chose to conglomerate into the Will. The Apex Court held that such an approach could not be adopted. It emphasized that the examination of a Will had to be on the norms of reality as also normalcy, and the overall effect of all the features and circumstances was required to be examined.

CONCLUSION

Covering all situations and scenarios for examining the genuineness of a Will would require an exhaustive treatise. However, this decision of the Apex Court has done a very good job of collating all the important principles at one place and giving guidance to Courts as to what they should consider when a Will comes up before them! Persons executing Wills should be aware of these nitty-gritties so that their Wills have fail-safe features.

BCAJ Admin

Allied Laws

32 A.S. Rawat vs. Dawa Tashi

AIR 2023 Delhi 252

Date of Order: 13th March, 2023

RTI — Filed by non-citizen — Public Information Officer denied on account of non-citizenship — RTI available to citizens as well as non-citizens. [Ss. 3, 6, 7(1), Right to Information Act, 2005; Article 21, Constitution of India].

FACTS

The Respondent / Right to Information (RTI) Applicant had requested information concerning various aspects such as his employment confirmation letter, children’s education allowance, and all India LTC benefits. In response, the Public Information Officer (PIO) / Petitioner stated that the RTI applicant did not have the right to use the provisions of the RTI Act, 2005, since he was a Tibetan and not a citizen of India. The appeal against this decision was denied. However, in a subsequent appeal to the Central Information Commission (CIC), the CIC ruled that the PIO ought to have provided the requested information to the Applicant. The CIC also found that the PIO’s actions were driven by ill intent and baseless suspicions about the applicant’s citizenship. As a result, the Commission imposed a penalty of ₹25,000 on the PIO.

The PIO filed a Writ Petition before the High Court against the order of the CIC.

HELD

The Hon’ble Delhi High Court held that the RTI is accessible to both Indian citizens as well as non-citizens, and refusing this right to non-citizens would be in conflict with both the Constitution of India and the RTI Act. Thus, the Hon’ble court directed the PIO to comply with the PIL filed by the Respondent. However, the Court quashed the penalty of R25,000 imposed on the PIO, stating that the actions of the PIO were not mala fide or ill-intended.

33 Sree Rengaraaj Steel and Alloys Limited vs. MSTC Limited

AIR 2023 Madras 278

Date of Order: 25th January, 2023

Limitation — Self-serving and unilateral payment made by the creditor — Cannot be constituted as an acknowledgement of debt or cannot extend the time period of calculating limitation period. [S. 3, 19, The Limitation Act, 1963].

FACTS

The Respondent/ Plaintiff filed a suit for recovery of a sum of money from the Appellant. The Appellant and the Respondent had a contract whereby, the Appellant was liable to pay money in exchange for goods along with interest if the Appellant failed to pay within a grace period of 175 days. The Appellant failed to pay within the grace period of 175 days. The Appellant contested that the suit filed by the Plaintiff was after the expiry of the period of limitation, and thus, the suit was liable to be dismissed. The Trial Court, in its finding, held that the last transaction (which took place on 6th July, 1996) was made by the creditor as payment for adjustment of the demurrage deposit and thus, held that the suit was filed within the limitation period.

On Appeal.

HELD

The Hon’ble Madras High Court held that self-serving adjustment of account by the creditor, in the ledger maintained by the Plaintiff cannot be considered as an acknowledgement of debt (as contemplated by section 19 of the Limitation Act, 1963) when it is admitted that no payment as such was received towards the debt or liability as per the ledger account. Thus, the suit filed by the Plaintiff was barred by limitation. The order of the Trial Court was set aside and the original suit was dismissed.

34 Debkanta Chakrabarti vs. State of West Bengal and others

AIR 2023 Calcutta 287

Date of Order: 28th June, 2023

Succession — Membership of Co-operative society — Heritable — Not automatic in the absence of a nominee — Legal heir required to produce probate, letter of administration or succession certificate. [Ss. 70, 92, West Bengal Co-operative Societies Act, 2006].

FACTS

The father of the Appellant was inducted as a shareholder / member of a cooperative society on 16th June, 1975. A deed of lease was executed between them on 20th September, 1990, to grant the leasehold right of the piece of land to the said member. His name was mutated in the government record of rights. He had since been possessing the land, by constructing a residential house and staying therein. The said person died on 18th July, 1997. The Appellant’s claim is that he and his mother, being the son and wife of the deceased person, are the only legal heirs and successors of the deceased. Therefore, the mother of the Appellant made an application to the Society, on 5th November, 1997, for the transfer of the share of her deceased husband in the Society, in the names of herself and the Appellant, so that they may be inducted as members in the Society, in place of the deceased member. However, the Appellant’s mother died on 10th January, 2018. It is the further case of the Appellant that since the death of his father, he has duly remitted all the expenses and charges payable to the Society, in a manner similar to an existing member. Appellant by his letters requested the Society to record his name as a member of the Society, by virtue of his being the only legal heir of the erstwhile member, since deceased. His letters not being acted upon by Society, the Appellant resorted to lodging his grievance to the registrar and assistant registrar of the co-operative societies. In response, the Society replied that the interest of the deceased member, i.e., the father of the present Appellant, shall be disposed of in accordance with the provisions laid down in Section 70 of the West Bengal Co-operative Societies Act, 2006 (Act) and the rules framed thereunder.

Aggrieved by this, the Appellant filed a Writ Petition before the Single bench of the Calcutta High Court, which was dismissed. Appeal was filed before the division bench.

HELD

According to Section 92 of the Act, even a nominee has to follow the procedure mentioned in the Act to be inducted as a member of a housing cooperative society. Shares of a cooperative society are heritable and transferable immovable property, and the Appellant does have a right to inherit the same. However, the Appellant is not named as a nominee by his father, and hence, the automatic transfer of interest does not arise. The Appellant should have produced either probate or letters of administration or succession certificate from a competent court of law, as per Section 70 of the said Act.

The appeal was dismissed.

35 Guruprasad Tah vs. Ashoke Kumar Tah and others

AIR 2023 Calcutta 267

Date of Order: 26th April, 2023

Succession — Will — Genuineness of Will in doubt — First Will was revoked — Second Will in favour of executor — Testator was not well at the time of Second Will — Signatures not proper — Witnesses were persons of the executor — Will was not a product of a free and fair mind.

FACTS

Ashok Kumar Tah (Respondent) filed an application for a grant of probate of a Will dated 4th July, 1983, executed by his father Gourpada Tah in respect of his property. Ashok was named as the executor in the Will. Gourpada, during his lifetime, executed two Wills. The first Will was executed on 3rd June, 1964. The said Will was revoked by the later Will dated 4th July, 1983. Ashok is claiming property under the Will dated 4th July, 1983.

The Trial Court allowed the application for a grant of probate. The trial Court was satisfied with the due execution and attestation of the Will by two attesting witnesses.

On an appeal by Guruprasad Tah (Appellant), the eldest son of the deceased.

HELD

There are several reasons to doubt the genuineness of the Will as it is made in suspicious circumstances. The Will is a second Will which revokes the First Will. At the time of the execution of the Second Will, the testator was physically ill and mentally frail. It was incumbent upon the executor and the attesting witnesses to establish the mental ability and physical fitness of the executor to execute the Will. There is no evidence that, at the registration, the testator was in a position to travel to the office for registration. Further, there is no evidence that the Will was registered at the residence of the testator. One of the attesting witnesses stated that he had not seen the other attesting witness at the registry office. The signature of the testator appears to be shaky and at the right-hand corner of the Will instead of the bottom of each page. Also, there is no endorsement in the Will that the sub registrar had explained the contents of the Will to the testator. It appears that the executor had a prominent role in the execution of the Will, and all the witnesses also appear to be the persons of the executor. Hence, it cannot be said that the Will was a product of the free and fair mind of the testator.

The appeal is allowed, and the probate proceedings fail.

BCAJ Admin

MFN Clause — Some Nuances and Applications

INTRODUCTION

As one enters the month of tax filing for entities subject to transfer pricing, the international tax world has seen some major developments in the last few weeks, which could impact the way one analyses cross-border transactions. Globally, the world is getting closer to the implementation of a two-pillar solution. Closer home, there was a significant buzz in the international tax community in India after the Hon’ble Supreme Court delivered its decision in the case of AO vs. M/s Nestle SA (TS-616-SC-2023) on 19th October, 2023, on the application of the Most Favoured Nation (‘MFN’) clause in the context of tax treaties (‘DTAA’).

While an in-depth analysis of the above decision of the Apex Court is not within the scope of this article, given the landmark ruling with far-reaching implications, the authors have sought to cover some of the nuances of the MFN article in the background of this ruling.

BACKGROUND

Before one understands the matter before the Supreme Court, it is important to understand what is MFN and the various versions of the MFN that are found in DTAAs entered into by India. The MFN clause is generally typically found in Bilateral Investment Agreements, Trade Agreements and Tax Treaties. The clause generally seeks to extend preferential treatment, given to a country, to another country. In the context of tax treaties, the MFN clause generally seeks to extend preferential benefits negotiated in a DTAA with a third country to the existing DTAA. For example, if Country A and Country B have entered into a DTAA and have an MFN clause and if Country A’s DTAA with Country C satisfies the conditions as required in the MFN clause of the A – B DTAA, the beneficial provisions (to the extent provided for in the MFN clause) in the A – C DTAA would be imported into the A-B DTAA.

India has entered into MFN clauses in many of its DTAAs. However, the MFN clauses in those DTAAs are not the same, and there are certain subtle differences in each of those clauses. Further, while the MFN clause is generally found in the Protocol to the relevant DTAA, it is not always so. For example, the MFN clause in the India – UK DTAA is provided in the main text of the DTAA itself and not the Protocol. Article 7(6) of the India – UK DTAA, dealing with Business Profits, provides:

“Where the law of the Contracting State in which the permanent establishment is situated imposes a restriction on the amount of the executive and general administrative expenses which may be allowed, and the restriction it relaxed or overridden by any Convention between that Contracting State and a third State which is a member of the Organisation for Economic Cooperation and Development or a State in a comparable stage of development, and that Convention enters into force, after the date of entry into force of this Convention, the competent authority of that Contracting State shall notify the competent authority of the other Contracting State of the terms of the relevant paragraph in the Convention with that third state immediately after the entry into force of that Convention and, if the competent authority of the other Contracting State so requests, the provisions of this Convention shall be amended by protocol to reflect such terms.”

In the case of Indian DTAAs, the MFN clause does not apply to all the streams of income but is generally specified in the relevant clause itself. In most cases, where Indian DTAAs have an MFN clause, the said clause applies to dividend income, interest income and income from royalties or fees for technical services (‘FTS’). However, as can be seen from the above example of the India – UK DTAA, it may not always be so. Further, while most of the MFN clauses in Indian DTAAs give benefit to OECD member countries, it is not always so. For example, the India – Philippines DTAA extends to any third country with respect to income from shipping and air transport. Similarly, the MFN clause is not always reciprocal. In certain DTAAs (such as the India – France DTAA, the India – Netherlands DTAA, the India – Belgium DTAA, etc.), India is obligated to pass on the benefit of a DTAA with a third country to the existing DTAA, and in some cases (such as the India – Philippines DTAA), the treaty partner is obligated to provide the benefit of its DTAA with a third country.

APPLICATION OF MFN CLAUSE IN INDIAN DTAAs (PRIOR TO SUPREME COURT DECISION)

One of the most commonly used MFN clauses (before 2020) was the India – France DTAA, in the context of FTS as well as royalty. The Protocol to the India – France DTAA, signed in 1992 and which came into force in 1994, contains two clauses pertaining to MFN: para 7 of the Protocol in respect of dividend, interest, royalties and FTS, and para 10 in respect of levies by India other than those covered under Article 2 of the DTAA.

Para 7 of the Protocol of the India – France DTAA provides:

“In respect of articles 11 (Dividends), 12 (Interest) and 13 (Royalties, fees for technical services and payments for the use of equipment), if under any Convention, Agreement or Protocol signed after 1-9-1989, between India and a third State which is a member of the OECD, India limits its taxation at source on dividends, interest, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate of scope provided for in this Convention on the said items of income, the same rate or scope as provided for in that Convention, Agreement or Protocol on the said items income shall also apply under this Convention, with effect from the date on which the present Convention or the relevant Indian Convention, Agreement or Protocol enters into force, whichever enters into force later.”

Therefore, on a plain reading of the MFN clause, it applies in the following manner:

a. If India has entered into a DTAA or Protocol with another OECD member after 1st September, 1989; and

b. If the said DTAA or Protocol limits India’s right of taxation in the case of dividends, interest, royalties or FTS to a rate lower than or a scope more restricted than the rate or scope as provided in the India – France DTAA; then

c. The lower rate or the restrictive scope of the said DTAA would apply to the India – France DTAA,

It may be noted that these conditions above are only in respect of the position as it was generally interpreted by courts prior to the decision of the Hon’ble Supreme Court in the case of Nestle SA (supra), which has been covered in detail in the subsequent paragraphs.

When the India – France DTAA was entered into in 1992, the right of taxation of the country of source in the case of dividends was restricted to 15 per cent, and in the case of interest (other than paid to banks or financial institutions) was restricted to 15 per cent and in the case of royalties / FTS were restricted to 20 per cent.

Subsequent to this, India entered into a DTAA with Germany in 1995, wherein the right of taxation on dividends, interest, royalties and FTS in the country of the source was restricted to 10 per cent. Therefore, such a lower rate of tax under the India – Germany DTAA could be imported into the India – France DTAA from the date on which the India – Germany DTAA entered into force.

Similarly, India also entered into a DTAA with the USA, a member of the OECD, on 12th September, 1989, and the said DTAA entered into force in 1990. While the rates of tax in respect of dividend, interest, royalties or FTS in the India – USA DTAA were not lower than the India – France DTAA, the definition of the term ‘Fees for included services’ in the India – USA DTAA could be considered to be more restrictive than the India – France DTAA.

Article 13(4) of the India – France DTAA provides as follows:

“The term ‘fees for technical services’ as used in this Article means payments of any kind to any person, other than payments to an employee of the person making the payments and to any individual for independent personal services mentioned in Article 15, in consideration for services of a managerial, technical or consultancy nature.”

Therefore, the scope of FTS under the India – France DTAA was services of a managerial, technical or consultancy nature. Article 12(4) of the India – USA DTAA defines the term as follows:

“For purposes of this Article, ‘fees for included services’ means payments 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) if such services :

(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or

(b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design.”

As can be seen from the definition above, the India – USA DTAA covers only technical or consultancy services and only if they are ancillary to the application or enjoyment of intangible property or make available technical knowledge, experience, skill, know-how or process. Therefore, ‘managerial’ services which are covered under the definition of the India – France DTAA are not covered under the definition of the India – USA DTAA. Similarly, if a technical or consultancy service does not make available technical knowledge, experience, skill, etc., it is not considered as FTS under the India – USA DTAA but is considered as such under the India – France DTAA.

This would mean that the scope of taxation of the India – USA DTAA is restrictive as compared to the India – France DTAA and, therefore, by virtue of the MFN clause in the India – France DTAA, the more restrictive scope of India – USA DTAA would be imported into the India – France DTAA. This view was upheld by the Delhi High Court in the case of Steria (India) Ltd vs. CIT (2016) 386 ITR 290, wherein the taxpayer sought to apply the restrictive scope (definition) of FTS under the India – UK DTAA (language is similar to the India – USA DTAA) to the India – France DTAA. Accordingly, one could apply the more restrictive definition of FTS under the India – USA or India – UK DTAAs while making a payment to a resident of France, and this view was accepted by the Delhi High Court. It may be highlighted that this Delhi High Court decision has been overruled by the Hon’ble Supreme Court in the case of Nestle SA (supra), albeit with respect to an automatic application of the MFN without notification.

The payment for the use of, or the right to use, industrial commercial or scientific equipment is taxable in the country of source under Article 13 of the India – France DTAA. However, the India – Sweden DTAA, another member of the OECD, entered into in 1997, does not grant the country of source the right of taxation for such payment, as the definition of royalties under Article 12 of the India – Sweden DTAA does not cover such payments. Accordingly, one could import the restrictive scope of taxation on such payments under the India – Sweden DTAA to the India – France DTAA on account of the MFN clause in the India – France DTAA.

Similar to the India – France DTAA, some other DTAAs negotiated by India such as with Belgium, Netherlands, Spain, Sweden and Switzerland also contain MFN clauses. It is important to read each MFN clause separately as the MFN clause in each DTAA has its own set of nuances.

WHETHER APPLICATION OF MFN IS AUTOMATIC?

Having understood the application of the MFN clause in the context of Indian DTAAs, it is important to understand whether the MFN clause can be applied automatically or whether it needs to be notified.

The types of MFN clause, which are a part of the DTAAs India has entered into, can be categorised into three categories as explained in detail in para 18 of the decision of the Mumbai ITAT in the case of SCA Hygiene Products AB vs. DCIT (2021) 187 ITD 419, which have been summarised below:

(a) Requiring fresh negotiations between the treaty partners (such as the India – Switzerland DTAA prior to the amendment);

(b) Requiring notification to the treaty partner (such as the India – Philippines DTAA); and

(c) Automatic wherein no notification to the treaty partner to be given (such as India’s DTAA with France, Netherlands, Sweden, etc).

Further, in the case of the India – Finland DTAA, there is a requirement of informing the treaty partner and issuing a notification in this regard. The Protocol to the India – Finland DTAA provides as follows:

“…The competent authority of India shall inform the competent authority of Finland without delay that the conditions for the application of this paragraph have been met and issue a notification to this effect for application of such exemption or lower rate.”

This requirement of notification is absent in the DTAAs with France, Netherlands, Belgium, etc.

However, the CBDT vide its Circular No. 3/2022 dated 3rd February, 2022, stated that a separate notification was required.

In the case of Steria (India) Ltd., In re (2014) 364 ITR 381, the AAR held that the restrictive scope of FTS in the India – UK DTAA could not be imported into the India – France DTAA unless the Government had notified such language to be imported into the India – France DTAA. The Delhi High Court (supra) held that such notification was not needed after considering the language of the MFN clause in the India – France DTAA and the restrictive scope of the India – UK DTAA would automatically apply.

This Delhi High Court ruling has been overruled by the Supreme Court in the case of Nestle SA (supra). The Hon’ble Supreme Court held as follows:

“88. In the light of the above discussion, it is held and declared that:

(a) A notification under Section 90(1) is necessary and a mandatory condition for a court, authority, or tribunal to give effect to a DTAA, or any protocol changing its terms or conditions, which has the effect of altering the existing provisions of law.

(b) The fact that a stipulation in a DTAA or a Protocol with one nation, requires same treatment in respect to a matter covered by its terms, subsequent to its being entered into when another nation (which is member of a multilateral organization such as OECD), is given better treatment, does not automatically lead to integration of such term extending the same benefit in regard to a matter covered in the DTAA of the first nation, which entered into DTAA with India. In such event, the terms of the earlier DTAA require to be amended through a separate notification under Section 90.”

The Hon’ble Supreme Court referred to the Constitution of India, which gives powers to the Parliament to enter into a treaty. It referred to various decisions and concluded as follows:

“44. The holding in the decisions discussed above may thus be summarized:

(i) The terms of a treaty ratified by the Union do not ipso facto acquire enforceability;

(ii) The Union has exclusive executive power to enter into international treaties and conventions under Article 73 [read with corresponding Entries – Nos. 10, 13 and 14 of List I of the VIIth Schedule to the Constitution of India] and Parliament, holds the exclusive power to legislate upon such conventions or treaties.

(iii) Parliament can refuse to perform or give effect to such treaties. In such event, though such treaties bind the Union, vis a vis the other contracting state(s), leaving the Union in default.

(iv) The application of such treaties is binding upon the Union. Yet, they ‘are not by their own force binding upon Indian nationals’.

(v) Law making by Parliament in respect of such treaties is required if the treaty or agreement restricts or affects the rights of citizens or others or modifies the law of India.

(vi) If citizens’ rights or others’ rights are not unaffected, or the laws of India are not modified, no legislative measure is necessary to give effect to treaties.

(vii) In the event of any ambiguity in the provision or law, which brings into force the treaty or obligation, the court is entitled to look into the international instrument, to clear the ambiguity or seek clarity.”

The Supreme Court also referred to its decision in the case of Union of India & Ors. vs. Azadi Bachao Andolan & Ors. (2003) 263 ITR 706, wherein section 90 of the Income-tax Act, 1961 (‘the Act’) was held to give power to the Central Government to implement the treaty.

Further, the Hon’ble Supreme Court also analysed India’s treaty practice in relation to DTAAs and Protocols and compared them with those of the treaty partners in question (in the said decision, the DTAAs with France, Netherlands and Switzerland were discussed). While evaluating the treaty practice, it observed as follows:

a. Pursuant to entering into DTAAs with Germany and the USA, a notification was issued, importing the lower rates of tax under those DTAAs (albeit not the restrictive scope) into the India – France DTAA vide notification No. SO 650(E) dated 10th July, 2000;

b. Pursuant to entering into DTAAs with Sweden, Switzerland and the USA, a notification was issued in 1999, importing the lower rates of tax under those DTAAs (albeit not the restrictive scope) into the India – Netherlands DTAA;

c. The above two actions clearly showed that there is an “established and clear precedent of behaviour, in relation to treaty practice and interpretation”¹;

d. The omission of certain benefits, such as the restrictive scope in these notifications, is another indication that India does not intend to grant automatic benefits of other DTAAs without notification²;

e. This practice was compared with the treaty practice of the treaty partners wherein treaty ratification required a process to be followed in the constitution of those respective countries³.

Keeping the above observations in mind, the Supreme Court held as follows:

“72. In the opinion of this court, the status of treaties and conventions and the manner of their assimilation is radically different from what the Constitution of India mandates. In each of the said three countries, every treaty entered into the executive government needs ratification. Importantly, in Switzerland, some treaties have to be ratified or approved through a referendum. These mean that after intercession of the Parliamentary or legislative process/procedure, the treaty is assimilated into the body of domestic law, enforceable in courts. However, in India, either the treaty concerned has to be legislatively embodied in law, through a separate statute, or get assimilated through a legislative device, i.e. notification in the gazette, based upon some enacted law (some instances are the Extradition Act, 1962 and the Income Tax Act, 1961). Absent this step, treaties and protocols are per se unenforceable.”

Therefore, taking the example of the case of Steria (supra), the Supreme Court held that a separate notification was required to import the definition from the India – UK DTAA into the India – France DTAA even though the respective DTAAs were already individually notified.

1 Refer Para 55 of the Supreme Court decision
2 Refer Para 60 of the Supreme Court decision
3 Refer Paras 69–71 of the Supreme Court decision

TIMING OF APPLICATION OF THE MFN

Another issue before the Supreme Court in the case of Nestle SA (supra) was when does one evaluate if the third country with whom India has entered into a DTAA, is a member of the OECD. For a detailed analysis of this controversy, one may refer to the May 2021 issue of the Journal.

The India – Netherlands DTAA signed on 13th July, 1988, provided for a 10 per cent tax on dividends in the country of source. Pursuant to signing the DTAA with the Netherlands, India entered into a DTAA with Slovenia on 13th January, 2003. Article 10(2) of the India – Slovenia DTAA provides for a lower rate of tax at 5 per cent in case the beneficial owner is a company which holds at least 10 per cent of the capital of the company paying the dividends.

While the DTAA between India and Slovenia was signed in 2003, Slovenia became a member of the OECD only in 2010. In other words, while the Slovenia DTAA was signed after the India – Netherlands DTAA, Slovenia became a member of the OECD after the DTAA was signed.

Therefore, the question before the Supreme Court was whether one was required to evaluate the OECD membership as on the date of signing the DTAA or the date of application of the DTAA, i.e., the date of taxation of dividend income.

The Protocol to the India – Netherlands DTAA provides as under:

“If after the signature of this convention under any Convention or Agreement between India and a third State which is a member of the OECD India should limit its taxation at source on dividends, interests, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate or scope provided for in this Convention on the said items of income, then as from the date on which the relevant Indian Convention or Agreement enters into force the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under this Convention.” (emphasis supplied)

In this regard, the Delhi High Court in the case of Concentrix Services Netherlands BV vs. ITO (TDS) (2021) [TS-286-HC-2021(DEL)] held that the term “is a member of the OECD” would require an ambulatory approach to interpretation, and one would need to evaluate whether Slovenia is a member of the OECD when the DTAA is being applied and not when the India – Slovenia DTAA was entered into.

This argument has been overruled by the Supreme Court in the case of Nestle SA (supra) wherein after considering the meaning of the term “is” in the context of various laws, it was held that:

“88. The interpretation of the expression ‘is’ has present significance. Therefore, for a party to claim benefit of a ‘same treatment’ clause, based on entry of DTAA between India and another state which is member of OECD, the relevant date is entering into treaty with India, and not a later date, when, after entering into DTAA with India, such country becomes an OECD member, in terms of India’s practice.”

This controversy, therefore, has been put to rest by the Supreme Court by holding that one needs to evaluate if the third country was an OECD member when India entered into a DTAA with such a country.

CONCLUSION

The recent Supreme Court ruling has laid down the complete law on the application of the MFN clause. While the issue of the timing of OECD membership is a fairly new issue (since the abolishment of the DDT regime in 2020), the application of the MFN clause in the case of restrictive scope has been commonly applied in many cases in the past. Interestingly, when the CBDT vide its circular in 2021 sought to clarify that an MFN clause is not enforceable unless notified, the Pune ITAT in the case of GRI Renewable Industries S.L vs. ACIT (2022) 140 taxmann.com 448 held:

“Notwithstanding the above, it can be seen that the CBDT has panned out a fresh requirement of separate notification to be issued for India importing the benefits of the DTAA from second State to the DTAA with the first State by virtue of its Circular, relying on such requirement as supposedly contained in section 90(1) of the Act. In our considered opinion, the requirement contained in the CBDT circular No. 03/2022 cannot primarily be applied to the period anterior to the date of its issuance as it is in the nature of an additional detrimental stipulation mandated for taking benefit conferred by the DTAA. It is a settled legal position that a piece of legislation which imposes a new obligation or attaches a new disability is considered prospective unless the legislative intent is clearly to give it a retrospective effect. We are confronted with a circular, much less an amendment to the enactment, which attaches a new disability of a separate notification for importing the benefits of an Agreement with the second State into the treaty with first State. Obviously, such a Circular cannot operate retrospectively to the transactions taking place in any period anterior to its issuance.”

However, it is common knowledge that the law laid down or interpreted by the Supreme Court is applicable from the date on which such law was enacted. Further, this issue is exacerbated due to the fact that it was only in 2021 that the CBDT clarified that a notification was required for the MFN clause to apply. Therefore, unless the DTAAs with restrictive scope are not notified, there could be significant litigation on this issue by the foreign recipient companies as well as the Indian tax deductors.

Another issue that one may consider is that the Supreme Court has decided the matter purely on the powers given under the Constitution and the practice followed by India in DTAAs without discussing in detail the language used in the respective MFN clauses. For example, the India – France DTAA MFN provides for automatic application whereas the India – Finland DTAA MFN requires notification. The question which may need to be answered is how does one give effect to the differing language in light of the decision.

In any case, the Supreme Court decision provides guidance on how tax treaties are to be interpreted, which gives a tax professional a lot to ponder on and one may need to revisit the principles understood earlier in light of the said decision.

BCAJ Admin

Service Tax

I. HIGH COURT

21 Commissioner of Central Tax vs. M/s. Singtel Global India Pvt. Ltd.

[2023-TIOL-1155-HC-DEL-ST]

Date of Order: 6th September, 2023

The Telecommunication service provider in India has entered into an Agreement with the foreign telecommunication service provider to provide services to its consumers with all the necessary infrastructure on its own account. The service is not an intermediary service and is an export of service eligible for refund.

FACTS

The Company claimed refund under Rule 5 of the CENVAT Credit Rules, 2004 read with the Place of Provision of Service Rules, 2012 of the unutilised input tax credit of input services used to provide telecommunication services to Singapore Telecommunication Ltd. (SingTel) located in Singapore. The refund was disallowed on the ground that the company is acting as an intermediary and therefore the service does not qualify as export of service. The Tribunal allowed the refund and accordingly, the revenue is on appeal.

HELD

The Court noted that the company is a licensed telecommunication service provider in India that has entered into a contract with SingTel in Singapore to ensure seamless global telecommunication services to its customers registered in Singapore and elsewhere. The company has entered into separate contracts with the telecom operators in India but on its own account and not as in the nature of a broker or agent for SingTel. The agreement envisages that the company has to provide, at its own expense, all necessary infrastructure in order to provide the services. It is further noted that the invoices will be raised in US dollars for the services rendered on a monthly basis and on such transfer prices as may be agreed upon from time to time. Accordingly, the company is not an intermediary and the refund is allowed against the export of services.

II. TRIBUNAL

22 M/s. Bharti Realty Ltd. vs. Commissioner of Service Tax, Delhi – III

[2023-TIOL-838-CESTAT-DEL]

Date of Order: 9th May, 2022

CENVAT credit on inputs, input services and capital goods used for construction of immovable property rented out for commercial purposes is allowable.

FACTS

The Assessee constructed buildings which they rented for commercial purposes and paid service tax under the head of “renting of immovable property service”. CENVAT credit was availed of service tax paid on “input services” and excise duty paid on inputs and capital goods used for construction of the buildings and utilized the same for payment of service tax on the renting service. Notices were issued denying CENVAT credit so availed on the ground that the inputs, input services and capital goods resulted in the creation of immovable property which is neither goods nor services as clarified by the CBEC Circular No. 98/1/2008-ST dated 4th January, 2008 and CBEC Instruction No. 267/11/2010-CX, dated 8th July, 2010 and, therefore, no CENVAT credit is available.

HELD

The Court noted that the immovable property so constructed is a means of providing the taxable service of renting of immovable property. It is not being constructed for its own sake but is being built with the intention of providing taxable service. All the inputs, capital goods and input services are used for the construction of buildings which are then rented out and service tax is paid thereon. Thus, they are entitled to the disputed CENVAT credit.

23 M/s. Sun Microsystems India Pvt. Ltd. vs. Commissioner of Central Excise and Service Tax

[2023-TIOL-844-CESTAT-BANG]

Date of Order: 28th June, 2023

Where marketing services are provided in India as per the direction and instruction of the foreign company and no Agreement entered into with the prospective customers in India, the activities qualify as an export of service.

FACTS

Appellant had entered into a Marketing Service Agreement with M/s. Sun Micro Systems Pvt. Ltd., Singapore for the purpose of marketing / sales promotion, and technical pre-sales support services in India. Notices were issued alleging that the services rendered are classifiable under “Business Auxiliary Services” covered under section 65(19) of the Finance Act, 1994 and do not qualify to be an export service.

HELD

The Court noted that the activity undertaken is canvassing for the products and services of the foreign company which is ultimately used by them for further business. There is no agreement between the prospective customers of the foreign company in India and the appellant. The agreement is only with the foreign company. It is on their request and direction that the marketing activities are carried out in India and it is for these services that they get the consideration in convertible foreign exchange. Thus, the service provided can be considered as an “export of service”.

BCAJ Admin

Goods and Services Tax

I. HIGH COURT

58 M/s KBL SPML 25JV vs. Authority for Advance Ruling, Karnataka GST Bangalore

[2023-TIOL-1146-HC-KAR-GST]

Date of Order: 12th April, 2023

Rejection of Advance Ruling Application without providing an opportunity of a hearing is violative of the principles of natural justice.

FACTS

Application filed seeking Advance Ruling was rejected without being admitted for hearing and without due opportunity to show cause against the reason assigned. The Application was rejected on the grounds of the expiry of the contractual period.

HELD

The Court noted that the opportunity of hearing cannot be an empty formality, and the petitioner should have been informed that the application could be rejected without admission on the ground the corresponding contractual period has expired. It was held that appropriate liberty to file an additional plea to show cause against such reasoning should be provided and the application should be reconsidered.

59 Gobinda Construction vs. Union of India

[2023-TIOL-1178-HC-PATNA-GST]

Date of Order: 8th September, 2023

The availment of Input Tax credit is not an unconditional right and can be availed only when the conditions to take it are fulfilled.

FACTS

Petitioners challenged the constitutional validity of section 16(4) of the CGST Act, 2017 which denies entitlement of Input Tax Credit after a certain period, and contended that the same is violative of Articles 14 and 300A of the Constitution of India. Alternatively, the petitioners sought a declaration that the conditions as prescribed in section 16(4) are merely procedural in nature, and cannot override the substantive conditions for availing credit prescribed under section 16(1) and section 16(2) of the said Act. Also, GSTR-3B cannot be treated to be a return, as it does not satisfy the parameters of a return contemplated under section 39(1) of the said Act. They also sought a declaration that Rule 61(5) of the CGST Rules, 2017, as amended retrospectively prescribing Form GSTR-3B as a return under Section 39(1) of the CGST Act is ultra vires section 39(1) of the CGST Act itself.

HELD

There is no gain saying that language of section 16(4) of the CGST / BGST Act, is plain and unambiguous. The doctrine of reading down applies only when general words used in a statute or regulation should be construed in a particular manner so as to save its constitutionality. The language of section 16 of the CGST / BGST Act suffers from no ambiguity. It clearly stipulates grant of credit subject to the conditions and restrictions put thereunder. A registered person becomes entitled to credit only if the requisite conditions stipulated therein are fulfilled, and the restrictions contemplated under sub-section (2) of section 16 do not apply. The right of a registered person to take credit under subsection (1) of section 16 of the Act becomes a vested right only if the conditions to take it are fulfilled, free of restrictions prescribed under subsection (2) thereof. The provision under sub-section (4) is one of the conditions which makes a registered person entitled to take credit and by no means it is violative of Article 300-A of the Constitution of India.

60 Oasis Realty vs. Commissioner of Sales Tax

[2023-TIOL-1153-HC-MUM-VAT]

Date of Order: 26th July, 2023

Once the composition scheme is opted, the set-off on purchases is not permissible.

FACTS

The assessee is an Association of Persons, and is engaged in the business of construction, development and sale of immovable property. As part of its business, they have constructed various apartments / buildings / flats and transferred the same under written agreements to buyers along with the underlying land or the interest in such land. For the purpose of payment of VAT, the Scheme of Composition notified under Section 42(3A) of the MVAT Act vide Notification No. VAT 1510/CR-65/Taxation is opted. The said Scheme was opted for agreements in respect of the sale of flats which were registered during the year 2013-14 and was to be the basis on which VAT was to be paid in respect of the construction of such flats. They were purchasing three types of materials i.e., the material which is required in construction activity, purchases for office consumption and purchases at the site. It was contended that the said Notification was issued in respect of the discharge of liability on goods getting transferred in the construction contract and therefore the scope was restricted in relation to goods which were liable to tax. It further contended that since the aforesaid second and third category purchases were of goods that were not transferred, the said Notification was not applicable for such category of purchases, and therefore the assessee would be entitled to claim setoff of tax paid in respect of said purchases. The said set-off was rejected and it was contended that all purchases in respect of flat construction were not eligible for set-off.

HELD

As per the Composition Scheme notified by the said Notification dated 9th July, 2010, the composition amount is one percent of the agreement amount specified in the agreement or the value specified for the purpose of the stamp duty in respect of the said agreement under Bombay Stamp Act, 1958, whichever is higher. Thus the Scheme provides for tax at a flat rate of one percent. However, Condition No.3 provides that a dealer who opts to pay composition under the said Scheme shall not be eligible to claim set-off of taxes paid in respect of the purchases. The whole purpose of such a Composition Scheme is to provide for a convenient, hassle-free and simple method of assessment and if the credit of selective purchases is allowed the purpose is wholly defeated. The Appeal is accordingly dismissed.

61 Xilinx India Technology Services Pvt Ltd vs. The Special Commissioner Zone VIII & ANR

[2023-TIOL-1164-HC-DEL-GST]

Date of Order: 1st September, 2023

Subsidiary and Holding companies are separate establishments not covered by section 2(6)(v) of the IGST Act.

FACTS

The application for refund of IGST was rejected on the ground that the petitioner and its holding company are establishments of a single person and, therefore, the services provided to its holding company did not constitute an export of services within the meaning of section 2(6) of the IGST Act.

HELD

The petitioner is a separate entity and it is a settled law that the identity of an incorporated company is separate from that of its shareholders. Services rendered by a subsidiary of a foreign company to its holding are not covered under section 2(6)(v) of the IGST Act and the same is beyond any pale of controversy in view of the Circular dated 20th September, 2021 issued by the CBIC. The services are provided on a principal-to-principal basis. The services provided are on their own count and not facilitated by the provision of services from any third-party services provider. Respondents are directed to forthwith process the refund along with interest.

BCAJ Admin

Recent Developments in GST

A. NOTIFICATIONS

1. The Government has issued a notification bearing no. S.O.4073(E) dated 14th September, 2023, by which the constitution of State Benches of GST Appellate Tribunal are notified.

2. Notification No. 46/2023-Central Tax dated 18th September, 2023

The above notification seeks to appoint a common adjudicating authority in respect of show cause notice/s issued in favour of M/s Inkuat Infrasol Pvt. Ltd.

3. Notification No. 47/2023-Central Tax dated 25th September, 2023

By the above notification, the amendment is made in notification no. 30/2023-CT, dated 31st July, 2023. By notification no. 30/2023, special procedure is prescribed in respect of products specified in Schedule to the said notification, like Pan Masala, etc. By the above amendment notification, the effective date for the implication of notification no. 30/2023 is specified as 1st January, 2024.

4. Notification No. 48/2023-Central Tax dated 29th September, 2023

By the above notification, the provisions of the Central Goods and Services Tax (Amendment) Act, 2023 (30 of 2023) are notified to be effective from 1st October, 2023. The Amendment Act is related to taxation schemes for online gaming.

5. Notification No. 49/2023-Central Tax dated 29th September, 2023

By the above notification, supplies falling under online gaming are notified under the powers conferred under section 15(5) of the CGST Act.

6. Notification No. 50/2023-Central Tax dated 29th September, 2023

By the above notification, consequential changes are made in relation to composition levy u/s.10 to make reference to the supply of specified actionable claims.

7. Notification No. 51/2023-Central Tax dated 29th September, 2023

By the above notification, certain amendments are made to the CGST Rules, 2017. The changes are related to PAN for registration, online money gaming, value of supply in case of online gaming, value of supply of actionable claim, submission of returns by persons providing OIDAR services, etc.

Notifications relating to Rate of Tax

8. Notification No. 11/2023-Central Tax (Rate) dated 29th September, 2023

By the above notification, rate of tax is provided in relation to “specified actionable claim”, like betting etc., by amending Schedule IV in Notification No 01/2017-Central Tax (Rate) dated 28th June, 2017. Because of the above amendment, the rate becomes 28 per cent on the specified actionable claims.

Notifications under IGST

9. Consequent to making the online money gaming, etc., taxable, appropriate notifications are issued under the IGST Act for implementation of the said taxation scheme under IGST. Notifications are from no. 2/2023-Integrated Tax dated 29th September, 2023, to No. 4/2023 and also from notification no. 11/2023-Integrated Tax (Rates) to No.13/2023 all dated 26th September, 2023, and also no. 14/2023 dated 29th September, 2023.

B. ADVISORY

a) The GSTN has issued an Advisory dated 13th September, 2023, regarding the Time limit for reporting Invoices on the IRP Portal.

b) The GSTN has further issued an Advisory dated 19th September, 2023, which is regarding geocoding functionality for the “Additional Place of Business”.

c) There is also an advisory dated 27th September, 2023, about Temporary / Short Period pause in e-invoice auto population into GSTR-1.

d) By advisory dated 3rd October, 2023, the information is given by GSTN that the e-Invoice JSON download functionality is now live on the GST Portal.

d) By advisory dated 6th October, 2023, the GSTN has further informed in respect of the introduction of compliance pertaining to DRC-01C.

C. ADVANCE RULINGS

40 Classification of Service — Export of Service

Testmesures Spherea Solutions Pvt. Ltd. (AR No. KAR-ADRG-46/2022 dated 2nd December, 2022 (Karnataka))

The applicant Testmesures Spherea Solutions Private Limited (referred to as “Spherea India”) is a Private Limited Company registered under the provisions of CGST/KGST Act 2017 and is a wholly owned subsidiary of Spherea Test & Services, France (referred to as “Parent Company”). The Parent Company sold two equipments (Test benches for aeronautics cases) to their customer in India, and the said equipments are currently with the Indian Air Force (IAF) at their operational forward bases. The Parent Company has subcontracted certain services to the applicant with respect to the test benches (also referred to as the Mermoz system).

It was explained that test benches are used to test and prove the airworthiness of the aircraft’s equipment. Also, on detection of any errors, the test benches are used for determination and correction of the errors which will ensure the safe flight of these aircrafts. In this regard, Spherea India shall provide a set of services with respect to the test benches specified as under:

i. Write incident reports on the Test benches.

ii. Support customers to investigate problems appearing in Test benches, perform periodic verifications, maintenance of test benches.

iii. Install new software on the test benches.

iv. Assist customers in daily operation of test benches, analyse the test results reports.

v. Provide advice to the customer.

vi. Generate monthly reports, activities summary and set up and manage meetings based on these reports.

The applicant is to raise an invoice on the Parent Company for the set of activities performed, since Spherea India does not have direct contact with the Indian customer. Payment against such invoices is received from the parent company in foreign currency.

Based on the above, the applicant has raised the following three questions before the ld. AAR:

“i. Whether the services provided by the company to its parent company relating to the test benches which are in the name of MRO services, be classified under heading ‘9987 i(a): Maintenance, Repair or Overhaul services in respect of aircrafts, aircraft engines and other aircraft components or parts’?

ii. If the answer to the above is in affirmation, then whether the Place of supply is the ‘location of the recipient’ as per the Notification No. 02/2020-Integrated Tax dated 26th March, 2020, which is the location of the Parent Company (Outside India) and that can be construed as exports of services?

iii. If the answer to the first question is in negation, then we would like to know the classification of the services provided to the parent company and can it be considered as exports of services?”

The applicant contended that the above set of activities are categorised as Maintenance, Repairs and Overhaul (MRO). It was further contended that the place of supply of MRO services shall be the location of the recipient of services as per notification no. 02/2020-Integrated Tax dated 26th March, 2020.

The applicant further draws attention to the definition of ‘location of recipient’ given in section 2(14) of the IGST Act, which reads as “…where a supply is received at a place other than the place of business for which registration has been obtained (a fixed establishment elsewhere), the location of such a fixed establishment”.

In view of the above, the applicant contended that the Parent Company is outside India, and hence, the registration is not obtained, and consequently, the place of supply shall be outside India if the services are covered under clause (b) of Section 2(14) of the IGST Act and will be Zero-rated supply as export of service.

The ld. AAR noted that the applicant is a wholly owned subsidiary of M/s Spherea Test Services, a joint stock company in France. The Parent Company sold two equipment, i.e., test benches for aeronautics cases to their customer in India, and these test benches are currently with IAF at their operational forward bases. These test benches are used to test and prove the airworthiness of the aircraft’s equipment. The test benches, on detection of any errors, are also used for the determination and correction of the errors, which will ensure the safe flight of these aircraft. The ld. AAR observed that the Parent Company has sub-contracted the services as enumerated above to the applicant.

It was further noted that the applicant has to provide the given services at the end customer’s site (IAF) and has raised an invoice to its Parent Company, and the payment against such invoices is received from the Parent Company in foreign currency.

The ld. AAR, thereafter, referred to the definition of various terms given in the agreement like: Mermoz System, Incident, Line Replaceable Unit (LRU), LRU P/N (Line Replaceable Unit Part Number), MRO’s activities, System Hardware, System Software, Test Program, etc.

The ld. AAR observed that Article 2 of the agreement deals with the scope of the agreement and Article 6 with the scope of MRO’s supply, which is explained in further exhibit, and observed that the impugned services are clearly with regard to Mermoz System, the operation of the bench and the EP (implementation and maintenance). It was also observed that the technicians of the Parent Company may participate in some tests of equipment on the bench with the customer, and the technicians will have to investigate to identify the root of the problem and initiate a Technical Fact follow-up sheet (Supply [F1]) to inform Dassault Aviation as well as the Parent Company for processing.

The ld. AAR observed that the contract is for Maintenance and Repair of the Mermoz system, which is used for testing the airworthiness of the aircraft and accordingly, impugned services are relevant to maintenance and repair services of instruments for testing airworthiness of an aircraft. The ld. AAR made reference to the Explanatory Notes to the Scheme of Classification of Services.

The relevant SAC codes are reproduced as under:

“9987:Maintenance, repair and installation (except construction) services

99871:Maintenance and repair services of fabricated metal products, machinery and equipment

998719:Maintenance and repair services of other machinery and equipment.

This service code includes maintenance and repair services of instruments and apparatus for measuring, checking, testing and navigating and other purposes such as aircraft engine instruments.”

The ld. AAR held that the impugned services are covered under maintenance and repair services of other machinery and equipment and are classifiable under SAC 998719. With respect to the applicant’s contention that their services are classifiable under 9987 as “Maintenance, repair or overhaul services in respect of aircrafts, aircraft engines and other aircraft components or parts” and hence, are taxable to GST @ 5 per cent, in terms of entry No.25 (ia) of Notification No. 11/2017-Central Tax (Rate), dated: 26th June, 2017, which is inserted vide Notification No. 02/2020-Central Tax (Rate), dated 26th March, 2020, the ld. AAR made reference to said notification and reproduced relevant part as under:

“Sl.
No.

Chapter Section or Heading

Description of Service

Rate (per cent)

Condition

Heading 9987

(i) ——-

2.5

—

(ia) Maintenance, repair or overhaul

services with respect to aircrafts,

aircraft engines and other aircraft

components or parts.”

The ld. AAR observed that the concessional rate of GST of 5 per cent is applicable to only Maintenance repair or overhaul services with respect to aircraft, aircraft engines and other aircraft components or parts. The ld. AAR observed that in the instant case, the applicant is providing maintenance and repair services for test bench equipment (Mermoz system) which are used for testing airworthiness of an aircraft. The said equipment does not qualify to be an aircraft or an aircraft engine, observed ld. AAR. The ld. AAR also held that it is not related to components part also since the equipment (Mermoz System) is not part of the aircraft or part of the component. It is for the repair of equipment which is used to test aircraft. To be “other aircraft components or parts”, it should form a constituent piece or ingredient that is used to build an aircraft, which is not the case here, held the ld. AAR. The test bench equipment (Mermoz system) neither forms the part of the aircraft or forms a component of the aircraft, and therefore, the said entry at Sl. No. 25 (ia) of Notification No. 11/2017-Central Tax (Rate), dated 26th June, 2017, as amended vide Notification No. 02/2020-Central Tax (Rate), dated 26th March, 2020, is not applicable to the applicant, and the ld. AAR held that the concessional rate of GST of 5 per cent is not applicable.

Regarding further questions as to whether it will be ‘export of services’, the ld. AAR made reference to the definition of said term in section 2(6) which reads as under:

“Section 2. Definitions. –
(6) ‘export of services’ means the supply of any service when,-

(i) the supplier of service is located in India;

(ii) the recipient of service is located outside India;

(iii) the place of supply of service is outside India;

(iv) the payment for such service has been received by the supplier of service in convertible foreign exchange 1 [or in Indian rupees wherever permitted by the Reserve Bank of India]; and

(v) the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8”.

The ld. AAR held that the place of supply needs to be determined to decide whether the impugned supply of services by the applicant amounts to the export of services or not. The ld. AAR further held that the determination of place of supply is beyond the jurisdiction of the authority of AAR and accordingly, rejected to decide the said question.

41 Scope of AR – High Seas Sale vis-a-vis Services

Coperion Ideal Pvt. Ltd. (App Order No. 04/AAAR dated 14th October, 2022 (UP))

The appeal in this case was against the Advance Ruling Order No. UP ADRG – 01/2022 dated 25th April, 2022, issued by the Authority for Advance Ruling Uttar Pradesh.
M/s. Coperion Ideal Pvt. Ltd. (‘Appellant’) is engaged in designing, engineering, fabrication and supply of Pneumatic Conveying System (‘PCS’) and its parts and components. PCS is a system which is used for the transportation of material through pipes from one location to another using air / gas pressure for moving the goods.

There is a requirement for imported components also.

As regards the components imported from outside India, the appellant supplies the imported components to customers in India on a High Sea sale basis under a High Sea Sale contract, which is executed while the goods are on High Seas, i.e., in transit before crossing the customs frontiers of India. The said supply is carried out by the appellant by merely transferring the title in goods to the Indian customer while the goods are on High Seas, i.e., in international waters. On arrival of goods at the customs frontiers of India, the Indian Customer, who now owns the goods as per documents of title, clears the imported goods from customs after payment of applicable import duties, which also include applicable IGST on the value of goods. Appellant raises invoice on customers towards supply of domestic components as well as for imported components sold on a High Sea Sale basis.

The appellant does not undertake any erection, commissioning, installation work of the goods supplied by it to the customers. However, customers have the option to get the supervision of the appellant for such services availed by them from third parties, which is charged separately by the appellant. As per entry 8(b) of Schedule III to the CGST Act, the High Seas Sale Supply is excluded from GST. As per said entry, “Supply of goods by the consignee to any other person, by endorsement of documents of title to the goods, after the goods have dispatched from the port of origin located outside India but before clearance for home consumption” is considered to be neither supply, supply of goods or service.

Based on the above facts, the appellant has posed the following question before the ld. AAR as under:

“Whether supply of components of the Pneumatic Conveying System by the applicant to its customers on High Sea Sales basis will be treated neither as the supply of goods nor as the supply of service by virtue of entry 8 to the Schedule III of CGST Act?”

The ld. AAR held that the above question involves deciding the ‘place of supply’, which is not within their purview and hence, declined to answer the AR.

In the appeal, the appellant tried to explain that in deciding the above question, there was no issue of deciding the ‘place of supply’, and the AR application was wrongly rejected.

The ld. AAAR made reference to section 97(2), which is reproduced in AR order as under:

“(2) The question on which the advance ruling is sought under this Act, shall be in respect of–

(a) Classification of any goods or services or both;

(b) applicability of a notification issued under the provisions of this Act;

(c) determination of time and value of supply of goods or services or both;

(d) admissibility of input tax credit of tax paid or deemed to have been paid;

(e) determination of the liability to pay tax on any goods or services or both;

(f) whether the applicant is required to be registered;

(g) whether any particular thing done by the applicant with respect to any goods or services or both amounts to or results in a supply of goods or services or both, within the meaning of that term.”
(emphasis added)”

Having the above position, the ld. AAAR observed that essentially the appellant has sought to attain clarity as to whether the transaction undertaken by him is a supply under GST or not, so that taxability of the same, if any, can be determined. Therefore, the ld. AAAR held that the question sought by the appellant before the AAR falls within the purview of Section 97(2) of the Central Goods and Service Tax Act, 2017 under clauses (e) and (g) as reproduced above. Accordingly, the ld. AAAR undertook to decide the issue.

On merits, the ld. AAAR made reference to agreement for different transactions. The ld. AAAR found that in addition to supply by High Seas, there are terms for offering optional services like installation / supervision, commissioning, etc.

In this respect, the ld. AAAR made reference to various circulars issued by the Customs as well as CBIC.

The ld. AAAR also made reference to clause 8(b) of Schedule III.

The ld. AAAR held that by the above clause, only the High Seas Supply of ‘goods’ is excluded and not post-import services. Therefore, if there are any services rendered after import, they will be taxable, observed by the ld. AAAR.

In view of the above, the ld. AAAR ruled as under:

“1. We set aside the impugned ruling UP ADRG – 01/2022 dated 25.04.2022 passed by the Authority for Advance Ruling against the Appellant as the question sought to be answered is squarely covered u/s 97(2) of the CGST ACT.

2. We hold that supply of imported goods i.e. components needed for Pneumatic Conveying System made by the appellant to its customers on High Sea Sales basis will not be treated as a supply of “goods” by virtue of entry 8(b) to the Schedule III of CGST Act, 2017 as amended, with effect from 01.02.2019. However, the supply of “services” in relation thereto, if any, will fall under the purview of “supply” as defined under Section 7 of the CGST Act.

14. The Ruling given herein above applies to the unique facts and circumstances of the appellants’ matter in appeal and is based upon the submissions and evidences made available in this regard.”

BCAJ Admin

Redevelopment of Co-Operative Housing Societies — Tax Implications

INTRODUCTION

In the previous article (published in the October 2023 Issue), we had analysed the GST implications of joint development agreements executed between an owner of land and a developer of a real estate project. After highlighting the controversies surrounding the tax implications both under the erstwhile service tax regime as well as the GST regime, the article summarised the tax implications under the new scheme of taxation for real estate introduced through a series of notifications with effect from 1st April, 2019. Accordingly, it was summarised that a joint development agreement involving the sharing of the developed area between the owner of the land and the developer of a real estate project essentially may constitute a barter transaction consisting of two distinct deliverables:

Deliverable by the Owner to the Developer — The article examined whether the owner can be said to have supplied a service in the nature of the transfer of development rights and whether such service can be taxable in the hands of the promoter developer as a recipient of such service under reverse charge mechanism in view of the specific recitals of Entry 5B of Notification 5/2019-CT(Rate). The discussion can be summarised as under:

a. There is a school of thought to argue that no GST is attracted to the transfer of development rights under the development agreement. However, the said position would be litigative.

b. The value of the development rights is to be determined under Rule 27 as the open market value. Accordingly, the value adopted for stamp duty purposes can be considered to be the value.

c. The service would get classified under HSN 9972 and be liable for GST @ 18 per cent.

d. The tax is to be paid under the reverse charge mechanism by the developer.

e. The tax has to be paid on the date of issuance of the completion certificate for the project.

f. In view of a partial conditional exemption, GST is payable on a proportionate basis to the extent of the unbooked area as on the date of the completion certificate. For example, if 20 per cent of the developed area remains unbooked as of the date of the completion certificate, GST will be payable only to the extent of 20 per cent of the GST calculated amount.

DELIVERABLE BY THE DEVELOPER TO THE OWNER

The article further examined whether, to the extent of the flats allotted to the Owner, the Developer can be said to have provided construction services to the Owner warranting payment of GST. In this context, the article explained that Notification 6/2019-CT(Rate) prescribes that the promoter-developer will pay GST on the construction service provided by him against the consideration in the form of development rights at the time when the completion certificate is received. Further, para 2A of Notification 11/2017-CT(Rate) specifies that the value of construction service in respect of such apartments shall be deemed to be equal to the total amount charged for similar apartments in the project from the independent buyers nearest to the date on which such development right is transferred to the promoter. Considering the ad hoc deduction provided towards the land value, effectively GST @ 5 per cent becomes payable on the date of the receipt of the completion certificate in the case of residential apartments, again without any input tax credit.

In continuation of the above discussion, the current article focuses on a specific type of arrangement prevalent predominantly in metro cities where existing buildings already owned by co-operative societies and occupied by the members (who are owners of the units in the said buildings) are re-developed by developers through a redevelopment agreement.

UNDERSTANDING THE REDEVELOPMENT AGREEMENT

The typical need for redevelopment arises because the building is old and / or in a dilapidated condition and needs structural repairs involving substantial costs which the society/members are unable to bear themselves. Therefore, the society through its’ Managing Committee, seeks external participation for initiating redevelopment of the society. Such redevelopment process is fairly regulated (for example, in the State of Maharashtra, specific directives have been issued by the Government under Section 79(A) of Maharashtra Co-operative Societies Act, 1960 to all the Co-operative Housing Societies in the State of Maharashtra specifying the manner in which such redevelopment agreements should be executed.

Generally, the process of redevelopment involves the following steps:

a) After receiving approval from the members in the General Meeting, the society floats a tender inviting various developers to participate in the redevelopment process of the society.

b) The tender would impose the conditions on the applicants, such as obtaining the conveyance of the land on which the society is functioning, giving additional area to the existing members, providing alternate accommodation / compensation to the members during the period of redevelopment, corpus contribution, etc.,

c) The developers are expected to fill out the tender form and make an offer to the society.

d) At the tender opening meeting, the applications are opened where the Registrar of Society is a special invitee and the application most favourable to the society, i.e., which gives the maximum benefit to the society and its members is selected.

e) A redevelopment agreement (RDA) is entered into with the developer who is awarded the tender laying down the various terms and conditions negotiated with the society. The RDA is registered with the stamp duty authorities at which point of time, the transaction is valued, and appropriate stamp duty is paid on the same by the developer.

f) Post entering into the agreement, the developer’s first responsibility is to negotiate with the land-owner (if the conveyance of the society has not been obtained) and get the conveyance transferred to the society’s name. The expenses incurred in connection with the same are to the account of the developer and are generally to be borne by the developer only.

g) Once the conveyance is received, the developer is further expected to submit development plans to the authorities for approval. If the area intended to be developed is more than the development potential, the developer is further required to load FSI for which he needs to either make payment to the authorities / buy TDR from the open market.

h) Once approval is received, the developer may enter the premises and initiate the activity of redevelopment. Though not specifically warranted by the law, as a general practice, the Developer enters into Permanent Alternate Accommodation (PAA) agreements with all members separately reiterating the broad terms and conditions mentioned in the redevelopment agreement and identifying the particular unit in the newly constructed building which will be allotted to the member.

i) The members are expected to hand over the possession of their existing units to the developers. After obtaining the possession of the existing units and the necessary approvals from the authorities, the developer starts demolishing the structure and commences construction. During this period, the developer is expected to pay the monthly compensation to the members as agreed in the RDA / PAA.

j) Post-completion of construction, the developer is expected to hand over the units constructed for existing members which will mean the completion of the development process. The developer can sell the additional units constructed by him in the open market for consideration.

The above is the general flow of events in a typical RDA transaction. However, there can be variations in specific situations. For instance, when the building is in a dilapidated condition and is declared to be non-habitable or the development potential of the land has been consumed, the developer may not give any added benefits to the members but only the construction of the existing area.

JOINT DEVELOPMENT AGREEMENT VS. REDEVELOPMENT AGREEMENT

As analysed in the previous article, a joint development agreement is generally understood to be a barter whereby the landowner transfers a development right to the developer and the developer provides a constructed area to the landowner and both the legs of the barter constitute consideration for each other, with specific tax implications provided through notifications.

While the said notifications do not specifically cover the situation of a redevelopment agreement, it is generally felt that a redevelopment agreement being a variation of a joint development agreement, would bear similar tax consequences and accordingly, the entries imposing the tax obligations under reverse charge mechanism on the Developer for the receipt of development rights from the land owner and forward charge mechanism on the Developer for the allotment of units to the land owner should be applied to the redevelopment agreement as well. The responses to the FAQs issued by the CBIC also suggest a similar approach.

However, a minute comparison of the development agreement and a redevelopment agreement would suggest that there are fundamental differences between the two agreements.

Firstly, in a development agreement, there is a transfer of development rights in the underlying land with a commitment to eventually transfer the ownership rights in the land to the proposed society of the prospective buyers. In the case of a redevelopment agreement, in most of the cases, the co-operative society is already in existence and is the owner of the land. Therefore, such redevelopment agreements do not contain recitals to eventually transfer the ownership rights in the land to any third-party. Prior to, and after, the redevelopment process, the society was and continues to be the owner of the land. Through the redevelopment agreement, the society merely commits to the developer that it shall accept the applications of the prospective buyers for membership of the co-operative society and admit them as due members of the said society. As such, on a legal footing, it may be difficult to interpret that through a redevelopment agreement, rights are being transferred by the society to the developer.

Secondly, in a Development Agreement, the Developer and the Land owner are both liable to the prospective buyers as the agreement for sale is a tripartite agreement between the Developer, the Land owner and the prospective buyer. However, generally, in the case of a redevelopment agreement, the developer is typically in the position of a contractor and the buyers have no direct locus standi with the society (being the owner of the land).

In a series of decisions, where the developer fails to undertake development as committed resulting in a cancellation of the redevelopment agreement, the Courts have refrained from recognising the rights of the prospective buyers (who had bought units in the interim through registered agreements for sale) vis-à-vis the society (being the original land owner) and have held that the rights of such prospective buyers accrue only against the developers due to privity of contract between the said parties. Useful reference can be made to the observations of the Hon’ble Bombay High Court in the case of Vaidehi Akash Housing Pvt Ltd vs. D N Nagar CHS Union Limited as under:

16.5. The clauses quoted above, read together and in their proper perspective to be gathered from the whole agreement, clearly envisage the development and sale of the free sale component of the project by Vaidehi on their own account and as an independent contracting party, and not as agents of the Society. The contract between Vaidehi and the Society is on a principal-to-principal basis; it neither constitutes a partnership nor a joint venture or agency between the two. The third-party purchasers with whom Vaidehi might enter into agreements for sale would have no privity of contract with the Society and the Society would in no way be responsible for any claim made by such purchasers against Vaidehi under their respective agreements for sale.

16.6. There being no privity of contract between the Society and the third-party purchasers claiming under Vaidehi, the third-party purchasers cannot claim specific performance of their respective agreements for sale except through Vaidehi. They stand or fall by Vaidehi. If the rights of Vaidehi are brought to an end upon a lawful termination of the Society Development Agreement, the third-party purchasers cannot lay any independent claim against the Society or anyone claiming through the Society. The agreements with third-party purchasers are premised upon a valid, subsisting and enforceable agreement between their vendors, namely, Vaidehi and the owners, namely, the Society and in fact refer to the Society Development Agreement on this behalf. Admittedly, therefore, the third-party purchasers had, or at any rate, ought to have, notice of the Society Development Agreement and its terms and conditions, and Vaidehi’s obligations to perform the same. If Vaidehi fails to perform these obligations, the purchasers cannot but suffer the consequences. In other words, the purchaser’s rights are subject to Vaidehi’s rights and not higher than those. Therefore, from a contractual standpoint, the third-party purchasers have no case against the Society or Rustomjee, who claim through the Society.

Thirdly, in a development agreement, the area allotted to the landowner is generally meant for further sale. However, in the case of a redevelopment agreement, the area allotted to the existing members is not intended for sale. This distinction is relevant from two perspectives. Section 7 restricts the scope of supply only to the extent that the said supply is made in the course or furtherance of business. While there could be an ambiguity on whether a landowner supplies development rights in the course or furtherance of its business, clearly a society cannot be said to have supplied development rights in the course or furtherance of its business, notwithstanding the earlier argument that there is really no supply of development rights at all. Further, Entry 5(b) of Schedule II of the CGST Act, 2017 is triggered only when the complex or building is intended for sale to a buyer. In the context of the free area allotted to the existing member, it may be difficult to establish that the said activity constitutes a ‘sale’ and that the existing member is a ‘buyer’. In fact, in the context of RERA, the Tribunal has already taken a similar view and the same is analysed later in this article. It may be noted that Entry 5 of Schedule III treats all transactions of sale of land or building as neither supply of goods or services and the said Entry is only subject to the provisions of Entry 5(b) of Schedule II. If one is able to establish that Entry 5(b) of Schedule II is not applicable in the absence of an intention to sell to a buyer, the benefit of Schedule III should be available.

Fourthly, the entries related to the taxation of real estate are heavily anchored around the project being governed by RERA. For example, entry 3(i) reads as under:

Construction of affordable residential apartments by a promoter in a Residential Real Estate Project (herein-after referred to as RREP) which commences on or after 1st April, 2019 or in an ongoing RREP in respect of which the promoter has not exercised option to pay central tax on construction of apartments at the rates as specified for item (i.e.) or (if)below, as the case may be, in the manner prescribed therein, intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier.

In the context of RERA, it has already been held that the free area is not covered by the RERA regulations as there is no sale involved. One may refer to the ruling of the Maharashtra Real Estate Appellate Tribunal in Savita Deokar vs. Bhalchandra Wadnerkar [Appeal No. AT00600000042047] wherein it has been held as under:

14. Appellant claims that a flat taker in rehab component is also an ‘allottee’ to whom a new flat or premises is allotted or transferred in lieu of vacation of flat held earlier by the flat taker. We do not find substance in the said contention of Appellant. As observed earlier, ‘allottees’ for the purpose of the RERA are only those persons, whose perform their obligations of paying consideration, etc. for the purchase of real estate. So far as flat taker in rehab component is concerned, they neither pay any consideration nor execute sale transaction, therefore, they cannot be equated with buyers of real estate envisaged to be covered by the RERA.

15. It is further observed that in the kind of project of hybrid nature like the project relating to Appellant, erstwhile occupants or members of the society cause the redevelopment by appointing a developer. Such a project has two components (1) rehab component, and (2) sale component. Developer normally provides free of costs permanent alternate accommodations to erstwhile occupants and in lieu of that gets incentives FSI/TDR to construct sale component. Developer is allowed to sell units in sale component to subsidise costs of unit of rehab component meant for original members/tenants. As the project involves sale of unit in sale component, such a project is required to be registered. Liability to register arises only on account of sale component. As the sanction is accorded to the whole project, the entire project mandatorily requires registration, It is often misconstrued as does the Appellant herein that on registering such a project, the RERA applies to the entire project including the rehab component. We would like to reiterate that as expressly provided U/S, 3(2)(c), since redevelopment is exempted from registration, the RERA provisions would apply only to sale component and not to rehab component upon registration of redevelopment project of hybrid nature. In view of the foregoing reasons, we are of the considered view that a redevelopment project or rehab component of a redevelopment project of hybrid nature do not fall within the purview of the RERA and flat taker/Appellant in rehab component is not entitled to any relief as provided under the RERA.

In view of the substantial differences between a joint development agreement and a redevelopment agreement, it is felt that the provisions relating to taxation of joint development agreements cannot be blindly adopted for the purposes of determining the tax consequences of redevelopment agreements.

GST IMPLICATIONS OF REDEVELOPMENT AGREEMENTS

If one is able to free oneself from the shackles of the entries drafted for taxation of the development agreements and look at redevelopment agreements independently of the said entries, one may examine the GST implications thereof with a fresh perspective. It is evident that there is an activity of construction undertaken by the developer for the existing members. However, as stated above, in a purely legal context, it may be difficult to decipher a flow of development rights from the society or the existing members to the developer. The identification of a consideration (even non-monetary) appears illusive. Even the agreements would suggest that the flats are to be constructed ‘free of cost’. At the same time, the basic principles of the Contract law would suggest that an agreement without consideration is not enforceable in law. It is in this context that a reference to the definition of consideration under section 2(31) of the CGST Act, 2017 becomes very relevant:

“consideration” in relation to the supply of goods or services or both includes —

(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;

(b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:

If one analyses the general business rationale of a redevelopment agreement, it would be difficult to deny that:

a. The Society/existing members continue to enjoy the ownership of the land and the development rights therein at all points in time.

b. The freshly constructed units would therefore ideally accrue to the society/existing members and thus, the society/existing members should be entitled to consideration from the sale of such freshly constructed units to prospective buyers.

c. Through the redevelopment agreement, the society/existing members permit the developer to sell such units and appropriate the sale proceeds for himself.

It may therefore be possible to contend that essentially, the consideration for the construction activity carried out by the developer for the existing members is received from the prospective buyers as per the express authorisation in the redevelopment agreement. Effectively, therefore the price paid by the prospective buyer consists of not only the consideration for the construction service received by him but also the consideration for the construction service received by the existing members free of cost. It is evident that such composite consideration received from prospective buyers suffers GST at the hands of the developer. If that be so, the tax is effectively discharged on the construction service rendered by the developer to the existing members.

In fact, in the context of service tax, the Hyderabad Bench of the Tribunal in the case of Vasantha Green Projects vs. Commissioner [2019 (20) G.S.T.L. 568 (Tri. – Hyd.)] (for the period from April 2012 to March 2015) has accepted such an argument while dealing with the issue of taxability of free area in the context of redevelopment agreements. The observations of the Tribunal are reproduced below for ready reference:

12. It can be seen from the abovesaid instructions, the gross amount charged by the builder is liable to tax. The said instructions are in force till today and has not been withdrawn by the Board. As already detailed herein above, the appellant has discharged the service tax liability on the gross amount charged i.e. consideration received from land owners in the form of kind other than cash (value of the land/development rights) + consideration received from prospective buyers in cash by way of financial arrangements on the construction services undertaken by the appellant on joint development basis.We also note that appellant had declared the same in the books of account like IT returns and ST-3 returns which has been certified by Chartered Accountant wherein it is stated that service tax compliance is towards the payment of gross amount of the construction undertaken on joint development basis and received from the customers has been made. This leads to conclusion that it is evident that appellant has complied with the service tax liability on the construction undertaken on joint development basis on the value of construction which is mandated in Section 67 of Finance Act, 1994, read with rules made thereunder. In our view, if once the service tax liability has been discharged on the gross amount, demand of service tax on the same amount again would amount to double taxation.

The decision in the case of Vasantha Green has distinguished the LCS City Makers decision by concluding that the facts in both cases were different. Further, the said decision has been followed by the Mumbai Bench of the Tribunal in the case of Commissioner vs. Ethics Infra Development Pvt Ltd [2022-VIL-70-CESTAT-MUM-ST]. The Revenue has filed an appeal against the decision in the case of Vasantha Green and the matter is pending for finality before the Supreme Court.

To summarise the discussion, it can be argued that:
a. A redevelopment agreement is not similar to a development agreement and should be viewed independently to determine the tax consequences.

b. There is no transfer of development rights by the society to the developer in a redevelopment agreement.

c. A redevelopment agreement does not constitute a barter but merely a provision of construction service by the developer (who effectively becomes a contractor) to the existing member.

d. The consideration for the said construction service provided to the existing member is received from the prospective buyers and the discharge of GST on consideration received from the prospective buyers effectively discharges the tax liability even on the construction services rendered to existing members.

WHAT IF THE SUPREME COURT HOLDS OTHERWISE?

The above interpretation is subject to the final interpretation of the Supreme Court. If the Supreme Court upholds the decisions of the Mumbai and Hyderabad Tribunal, no GST can be demanded on the redevelopment agreements. However, if the Supreme Court holds otherwise, it may still be possible to argue that in the case of a redevelopment agreement, the developer essentially steps into the shoes of a contractor vis-à-vis the rehab component and he should not be subjected to taxation based on the entries provided for joint development agreement. In such as case, the following questions would need to be analysed:

a) What is the classification of the service provided by the developer?

b) What is the value of supply made by the developer?

c) When is the tax payable?

So far as the question of classification of the services provided by the developer is concerned, the developer undertakes construction for the society members. Therefore, the appropriate entry under notification 11/2017 — CT (Rate) dated 28th June, 2017, would be entry 3.

A perusal of entry 3, and more importantly clauses (i) to (if) thereof which apply to the real estate sector, shows that they apply when the construction is undertaken with the intention to sell to a buyer. As stated earlier, even the RERA Tribunal has held that the rehab area is not intended for sale and therefore, cannot be classified under (i) to (if) of entry 3 which specifically deals with the real estate sector. Accordingly, the conditions specified therein which require the developer to pay tax on free area, and prescribes the method to determine the value of supply, would also not apply. This would necessarily mean that the supply would be classifiable under the residuary clause of entry 3 as a works contract service and therefore, taxable at 18 per cent with corresponding proportionate credits becoming available to the developer. Further, the provisions of Para 2A dealing with valuation would also not be applicable and the same will have to be determined as per section 15.

This takes us to the next question of determining the value u/s 15. Section 15 provides that where the supplier and recipient are not related and the price is the sole consideration for the supply, the transaction value shall be taken as the value of the supply. Section 15 provides that price shall mean the price actually paid or payable for the supply of goods or services. In the case of the development agreement, the price being paid by the society members is the license to enter into the property and undertake development. Such redevelopment agreement is specifically valued for stamp duty purposes and applicable stamp duty paid on the same. Therefore, it can be said that the value adopted for the payment of stamp duty on the redevelopment agreement is the price which the society has paid to the developer for carrying out the activity of construction of a free area and therefore, GST if any shall be payable on the same only.

CONCLUSION

Real estate is a complex sector, and when it comes to redevelopment, the complexities increase as the number of stakeholders increases. It is therefore important that while drafting the agreements, not only all GST implications should be kept in mind, but also the consequences of a tax authority taking a contrary view and the effect of the same on the stakeholders should be considered.

BCAJ Admin

From Published Accounts

COMPILERS’ NOTE

The Companies Act, 2013 prohibits companies from holding their own shares. However, in certain cases, companies hold their own shares as ‘treasury shares’ due to amalgamation schemes approved by Courts / NCLT or under Employee Benefit schemes. Given below are disclosures in ‘Statement of Significant Accounting Policies’ for the year ended 31st March, 2023, by companies for such shares.

ORACLE LTD

Treasury Shares

The Company had created an Employee Benefit Trust (‘EBT’) to provide share-based payment to its employees. The EBT was used as a vehicle for distributing shares to employees under the employee remuneration schemes. The shares held by EBT are treated as treasury shares.

Own equity instruments (treasury shares) are recognised at cost and deducted from equity. Gain or loss is recognised in Other Equity on the sale of the Company’s own equity instruments.

INDIAN OIL CORPORATION LTD (IOCL)

Treasury Shares

Pursuant to the Scheme of Amalgamation, IOC Shares Trust has been set up by IOCL for holding treasury shares in relation to IBP and BRPL mergers. The shares held by IOC Shares Trust are treated as treasury shares.

Own equity instruments that are reacquired (treasury shares) are recognised at cost and deducted from equity. No gain or loss is recognised in the Statement of Profit and Loss on the purchase, sale, issue or cancellation of the Company’s own equity instruments.

MARICO LTD

Treasury Shares

The Company has created a “Welfare of Mariconians Trust” (WEOMA) for providing share-based payment to its employees under the STAR scheme. To fund the STAR schemes, the Trust, upon intimation from the Company, carries out secondary market acquisition of the equity shares of the Company. They are equivalent to STARs granted to its employees. The Company provides a loan to the Trust to enable such secondary acquisition. As and when the STARs vest in eligible employees, upon intimation of such details by the Company, the Trust sells the equivalent shares and hands over the net proceeds to the Company in accordance with the Trust Rules framed. The company treats WEOMA as its extension, and shares held by WEOMA are treated as treasury shares.

Own equity instruments that are reacquired (treasury shares) are recognised at cost and deducted from equity. No gain or loss is recognised in profit or loss on the purchase or sale of the Company’s own equity instruments. Any difference between the carrying amount and the consideration is recognised in the WEOMA reserve.

UNITED SPIRITS LTD

Equity

Own shares represent shares of the Company and those held in treasury by USL Benefit Trust. Pursuant to orders of the High Court of Karnataka and the High Court of Bombay, shares held in the aforesaid trust have been treated as an investment.

Note below Reserves and Surplus

Treasury Shares

Pursuant to the terms of the composite scheme of arrangement approved by the Honourable High Courts of Karnataka and Bombay, upon amalgamating various companies with United Spirits Ltd, USL Benefit Trust (of which the Company is the sole beneficiary) held 17,295,450 (post-split) shares in the Company (own shares). As per the term of the aforesaid scheme of arrangement, the Company has carried the aggregate value of such shares as per the books of the concerned transferor companies as investment in its standalone financial statements. For consolidated financial statements, such investment has been shown as treasury shares.

BCAJ Admin

Borrowing Costs

As per Ind AS 23 BorrowingCosts, an entity shall capitalise borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset, as part of the cost of that asset. An entity shall recognise other borrowing costs as an expense in the period in which it incurs them. Though this appears simple, in practice, numerous complicated situations arise, particularly, with respect to allocation of interest on general borrowings, treatment of interest income, foreign exchange gains and losses, etc. Here, we take a look at the treatment of interest income earned on the mobilisation advances made to vendors involved in the construction of a project.

QUERY

1. Dixon is a debt-free company. For the purposes of constructing a new manufacturing plant, it has used internally generated funds that are currently deposited in fixed deposits with banks. The funds will be used to provide advances to vendors involved in the construction of the plant. These advances carry interest at applicable market rates. Since the fixed deposits are withdrawn, Dixon will no longer earn the interest income on fixed deposits. However, Dixon will earn interest income on the mobilisation advance. How is the interest income on mobilisation advance accounted for? Can Dixon capitalise as project cost the notional interest income lost on the fixed deposits, which going forward it will no longer earn?

2. Amber was hitherto a debt-free company. For the purposes of constructing a new manufacturing plant, it has borrowed money from a financial institution. The amount borrowed will be used to provide advances to vendors involved in the construction of the plant. These advances carry interest at applicable market rates. Since advances are extended over time, the surplus funds are temporarily invested in a bank and interest income is earned on the same. How are the interest expense and interest income accounted for?

RESPONSE

References

Indian Accounting Standard (Ind AS) 16 Property, Plant and Equipment

21. Some operations occur in connection with the construction or development of an item of property, plant and equipment, but are not necessary to bring the item to the location and condition necessary for it to be capable of operating in the manner intended by management. These incidental operations may occur before or during the construction or development activities. For example, income may be earned through using a building site as a car park until construction starts. Because incidental operations are not necessary to bring an item to the location and condition necessary for it to be capable of operating in the manner intended by management, the income and related expenses of incidental operations are recognised in profit or loss and included in their respective classifications of income and expense.

Indian Accounting Standard (Ind AS) 23 Borrowing Costs

5 Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds.

12 To the extent that an entity borrows funds specifically for the purpose of obtaining a qualifying asset, the entity shall determine the amount of borrowing costs eligible for capitalisation as the actual borrowing costs incurred on that borrowing during the period less any investment income on the temporary investment of those borrowings.

14 … The amount of borrowing costs that an entity capitalises during a period shall not exceed the amount of borrowing costs it incurred during that period.

26 An entity shall disclose: (a) the amount of borrowing costs capitalised during the period; and (b) the capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation.

ANALYSIS

1. As per Ind AS 23, in accordance with the definition of borrowing costs in paragraph 5, borrowing costs are to be incurred. Also, paragraph 12 requires the borrowing costs to be the actual borrowing costs incurred. Additionally, paragraph 14 makes it clear that borrowing costs capitalised during a period shall not exceed the amount of borrowing costs incurred during the period. In other words, borrowing costs cannot be imputed costs or notional costs; they have to be actually incurred.

2. As per paragraph 12 of Ind AS 23, to the extent that an entity borrows funds specifically for the purpose of obtaining a qualifying asset, the entity shall determine the amount of borrowing costs eligible for capitalisation as the actual borrowing costs incurred on that borrowing during the period, less any investment income on the temporary investment of those borrowings.

3. As per paragraph 21 of Ind AS 16, because incidental operations are not necessary to bring an item to the location and condition necessary for it to be capable of operating in the manner intended by management, the income and related expenses of incidental operations are recognised in profit or loss and included in their respective classifications of income and expense.

CONCLUSION

Accounting by Dixon

1. As discussed above, borrowing costs cannot be negative, notional or imputed. Consequently, in accordance with paragraphs 5, 12 and 14 of Ind AS 23, the interest income earned by Amber on the mobilisation advance, as well as the imputed interest income on fixed deposits, which will no longer be earned by Amber going forward, cannot be reduced from the amount to be capitalised as project cost. The interest income earned from vendors on mobilisation advance should be accounted for as interest income under other income or other operating revenue as appropriate.

The above position can also be corroborated with paragraph 21 of Ind AS 16, which requires the income and related expenses of incidental operations to be recognised in profit or loss and included in their respective classifications of income and expense.

Accounting by Amber

2. In the case of Amber, there seems to be a direct correlation between the amount borrowed and used for the purposes of constructing the plant. Also, there is a direct correlation between the borrowing costs and the funds invested temporarily on which interest income is earned.

Consequently, Amber will reduce the said interest income from the interest expense, and capitalise only the net amount as part of the project cost, in accordance with the requirement of paragraph 12 of Ind AS 23.

DISCLOSURES

Both Dixon and Amber will make the requisite disclosures required under paragraph 26 of Ind AS 23. Additionally, the accounting policy applied will also be disclosed.

BCAJ Admin

The Requirement To Provide Materials And Evidences Along With Show Cause Notice U/S 148A(B)

ISSUE FOR CONSIDERATION

The new provision of section 148 as substituted by the Finance Act, 2021, authorizes the Assessing Officer to issue a notice of reassessment where there is information with him which suggests that the income chargeable to tax has escaped assessment in the case of the assessee, subject to fulfillment of other conditions. Section 148A lays down the procedure which needs to be followed by the Assessing Officer before a notice under section 148 is issued by him, except where the search is conducted in the assessee’s case, or where assets or materials seized during the search in someone else’s case belong or pertain to the assessee.

One of the requirements of section 148A contained in clause (b), is to serve a notice upon the assessee providing him with an opportunity of being heard and asking him to show cause within a specified time as to why a notice under section 148 should not be issued on the basis of information which suggests that income chargeable to tax has escaped assessment in his case.

Recently, an issue has arisen as to whether it is sufficient if the relevant information suggesting escapement of income has been mentioned in the show cause notice issued under section 148A(b), or whether the Assessing Officer is also required to provide copies of the materials available with him containing such information and on the basis of which he wants to ascertain whether an income has escaped assessment or not. The Bombay, Delhi, Chhattisgarh and Calcutta High Courts have taken a view that the Assessing Officer is duty bound to provide not only the information but also the copies of the materials to the assessee. However, recently, the Madhya Pradesh High Court has taken a contrary view holding that the copies need not be provided with the notice u/s. 148A of the Act.

ANURAG GUPTA’S CASE

The issue had come up for consideration by the Bombay High Court in the case of Anurag Gupta vs. ITO [2023] 150 taxmann.com 99 (Bombay).

In this case, for the assessment year 2018–19, the Assessing Officer had issued a notice under section 148A(b) on 8th March, 2022, on the ground that the information was received consequent to search / survey action carried out in the case of Antariksh Group, that assessee had purchased a warehouse from BGR Construction LLP for which on-money of ₹70,00,000 was paid, which was not accounted in the books of account of the assessee.

The said show cause notice was replied by the assessee on 14th March, 2022, wherein he totally denied the existence of any transaction with BGR Construction LLP, booking of a warehouse or payment made to the said entity. The assessee also denied any ‘on-money cash transaction’ with the said entity and therefore, demanded that the proceedings initiated under section 147 of the Act be dropped.

Thereafter, on 21st March, 2022, the Assessing Officer issued a clarification in regard to the notice under section 148A(b), this time stating therein that the assessee had also executed a conveyance deed with Meet Spaces LLP and, therefore, the Assessing Officer required the assessee to furnish payment details regarding this deed also.

The assessee did not file any response to the second notice and, therefore, the Assessing Officer proceeded to pass an order under section 148A(d), wherein it was mentioned, firstly, that cash payments had been made by the assessee to BGR Construction LLP as had been confirmed in the statement recorded during the survey action and, secondly, that the assessee had entered into a conveyance deed as a purchaser with Meet Spaces LLP for a consideration of ₹10,00,000, which remained unexplained.

Before the High Court, it was argued on behalf of the assessee that the procedure as prescribed under section 148A(b) as well as the principles of natural justice had been violated. While the assessee was given the information in terms of section 148A(b), the material which ought to have been provided to the assessee was not so furnished. In the absence of the same, the assessee was precluded from filing an effective reply to the show cause notice. On the other hand, the revenue contended that there was no such obligation cast upon the revenue in terms of Section 148A(b) of the Act to provide to the assessee anything beyond providing him with the information.

The assessee also relied upon the decision of the Supreme Court in the case of UOI vs. Ashish Agarwal [2022] 138 taxmann.com 64 wherein on a related matter, the Assessing Officers were directed to provide to the respective assessee the information and material relied upon by the Revenue within thirty days of the decision so that the assessees can reply to the show cause notices within two weeks thereafter. It was urged that the requirement of section 148A(b) has clearly been spelt out in the direction of the Supreme Court in the case of Ashish Agarwal (supra), which envisaged that not only information be provided to the assessee, but also the copies of the material relied upon by the revenue for purposes of making it possible for the assessee to file a reply to the show cause notice in terms of the said section.

The High Court observed that no material had been supplied to the assesse even though there was material available with the Assessing Officer, as could be seen from the order passed under section 148A(d) which was in the shape of a statement recorded, during survey action of the partner of BGR Construction LLP. There also appeared to be a sale list, which was allegedly found during the search operations containing the names of 72 investors, including the assessee, which although referred to in the order under section 148A(d) as also in the subsequent clarification, was also not provided to the assessee. Interestingly, while the said subsequent communication dated 21st March, 2022, did say that the list of total sales “was being attached for the ready reference of the assessee for purposes of submitting a reply to the show cause notice”, no such list was admittedly furnished.

The High Court held that providing information to the assessee, without furnishing the material based upon which the information was provided, would render an assessee handicapped in submitting an effective reply to the show cause notice, thereby rendering the purpose and spirit of section 148A(b) totally illusive and ephemeral. The fact that the material also was required to be supplied could very well be gauged from the clear directions issued by the Supreme Court in the case of Ashish Agarwal (supra). Accordingly, the High Court held that the reassessment proceedings initiated were unsustainable on the ground of violation of the procedure prescribed under section 148A(b), on account of the failure of the Assessing Officer to provide the requisite material, which ought to have been supplied along with the information in terms of the said section. The order passed under section 148A(d) and consequential notice issued under section 148 were quashed, and the matter was left open for the revenue from the stage of the notice under section 148A(b) for supplying the relevant material, if it was otherwise permissible, keeping in view the issue of limitation.

Although the assessee raised the other two contentions with respect to the sanction to be obtained under section 151 and also with respect to the inquiry being not conducted under section 148A(b), the High Court did not deal with those issues, as the order passed under section 148A(d) was found to be bad in law on the ground of not providing the requisite materials to the assessee.

AMRIT HOMES (P) LTD’S CASE

The issue, thereafter, came up for consideration before the Madhya Pradesh High Court in the case of Amrit Homes (P) Ltd vs. DCIT [2023] 154 taxmann.com 289.

In this case, the order was passed under section 148A(d) for the assessment year 2016–17 on 28th April, 2023, which was followed by the issue of notice under section 148 on the same date. The assessee challenged the validity of this order and notice by filing a writ petition under Article 226 of the Constitution. Primarily, the grievance of the assessee was that information/evidence categorized as foundational material was not sufficient to suggest that any income chargeable to tax has escaped assessment.

The High Court held that section 148A was inserted in the Act by the Finance Act, 2021 primarily to give effect to the ratio laid down by Apex Court in GKN Driveshafts (India) Ltd vs. ITO [2003] 259 ITR 19 (SC). In the said decision it was held that the assessee, if it so desired, could seek for the reasons for issuing notice under section 148, could also file the objections to issuance of notice upon receipt of the reasons and the Assessing Officer was bound to dispose of the objections so raised by passing a speaking order. Section 148A has provided a similar opportunity of being heard before reopening the case and issuing notice under section 148.

It was held by the Court that the nature of inquiry contemplated by Section 148A was not a detailed one. The purpose of the inquiry was to communicate to the assessee that the Assessing Officer was in possession of information suggesting that certain income of the assessee which was chargeable to tax had escaped assessment. The communication made by issuance of show cause notice, should contain enough information and reasons to reveal the intention of the Assessing Officer.

The Court further held that the statute however did not oblige the Assessing Officer to supply the relevant material/evidence, which was the foundation for the Assessing Officer to come to the prima facie view that income chargeable to tax had escaped assessment. This was because neither in the judgment of the Apex Court in the case of GKN Driveshafts (India) Ltd. (supra) nor in section 148A any such indication could be gathered. The only duty cast upon the Assessing Officer was to supply information by mentioning the same in the show cause notice issued under section 148A(b). If the inquiry contemplated in Section 148A was interpreted to mean a detailed inquiry, where both sides could seek and adduce evidence / material (documentary / ocular), then the entire object behind Section 148A would stand defeated.

The High Court further held that section 148A did not expressly provide for the supply of any material/evidence in support of the show cause notice under section 148A(b). It did not obligate the Assessing Officer to supply any material / evidence, provided the show cause notice contained reasons disclosing the mind of the Assessing Officer nursing the prima facie view suggestive of a case where income chargeable to tax had escaped assessment.

The High Court also considered the concept of reasonable opportunity, and whether the said concept could be stretched to the extent of supplying material / evidence in support of the opinion of the Assessing Officer that certain income had escaped assessment. On this, the High Court held that the concept of reasonable opportunity in non-taxing statutes was required to be applied to its fullest (including supply of adverse material), irrespective of the presence of any express provision or not, in cases where the authority concerned passed an order entailing civil consequences of adverse nature. However, the law of interpretation of taxing statutes was at variance with the law of interpretation of non-taxing statutes. The difference was that the taxing statute was to be understood by the plain words used in it, without taking aid of other tools of interpretation of statutes e.g. intendment, implication or reading into. The words employed by section 148A(b) provided for affording of opportunity of being heard by way of show cause notice. This requirement of the law was satisfied if the show cause notice contained information which had persuaded the Assessing Officer to form an opinion that certain income had escaped assessment of a particular assessment year. The statute did not compel the Assessing Officer to supply material/evidence (documentary / oral) on the basis of which the aforesaid opinion had been formed by the Assessing Officer.

On the basis of these reasonings, the High Court concluded that the assessee was not entitled to the material/evidence (oral/documentary), which was the foundation of the opinion formed by the Assessing Officer, so long as a show cause notice mentioned about such foundational information and the supportive reasons to form the said opinion.

The Madhya Pradesh High Court disagreed with the view taken by the Delhi High Court in Mahashian Di Hatti (P) Ltd vs. Dy CIT (W.P. (C) 12505/2022), Divya Capital One (P) Ltd vs. Asstt CIT 445 ITR 436 (Delhi), SABH Infrastructure Ltd. vs. Asstt CIT 398 ITR 198 (Delhi), Chhattisgarh High Court in Vinod Lalwani vs. Union of India 455 ITR 738 (Chhattisgarh) and Bombay High Court in Anurag Gupta vs. ITO (W.P. No. 10184/2022) / 454 ITR 326 on the ground that the foundational principle of interpretation of taxing statutes was not considered. It was held that those High Courts were persuaded by the principle of reasonable opportunity, which was ordinarily applied while interpreting non-taxing statutes, and in taxing statutes, nothing could be read into or implied and the plain meaning of the words used in the taxing statute were to be given their due meaning.

The High Court dismissed the petition of the assessee and did not deal with the veracity and genuineness of material/evidence forming the opinion of the Assessing Officer suggesting that the income of the assessee had escaped assessment, as it was considered to be outside the scope of the writ jurisdiction under Article 226 or supervisory jurisdiction under Article 227 of the Constitution.

OBSERVATIONS

The relevant clause of section 148A under which this issue is arising is being reproduced below for reference –

The Assessing Officer shall, before issuing any notice under section 148,—

(a)……………..

(b) provide an opportunity of being heard to the assessee, by serving upon him a notice to show cause within such time, as may be specified in the notice, being not less than seven days and but not exceeding thirty days from the date on which such notice is issued, or such time, as may be extended by him on the basis of an application in this behalf, as to why a notice under section 148 should not be issued on the basis of information which suggests that income chargeable to tax has escaped assessment in his case for the relevant assessment year and results of enquiry conducted, if any, as per clause (a);

It can be seen the law expressly provides for issuing a notice on the basis of information available and affording an opportunity of being heard to the assessee, before a view is formed that an income has escaped assessment and the assessee is put to hardship by issuing a notice under section 148. Obviously, in availing the opportunity afforded, the assessee should be allowed to examine the veracity of the information relied upon and refute the derivation of the AO. Though prima facie this would be possible only where copies of the material or information are provided to the assessee. It is a settled principle of law that the opportunity to be heard should be real, reasonable and effective. It should not be an empty formality. The observations of the Hon’ble Supreme Court with respect to the principle of natural justice from the case of Mohinder Singh Gill vs. Chief Election Commissioner AIR 1978 (SC) 851, are noteworthy and they are being reproduced below:

“Natural justice is a pervasive facet of secular law where a spiritual touch enlivens legislation, administration and adjudication, to make fairness a creed of life. It has many colours and shades, many forms and shapes and, save where valid law excludes, it applies when people are affected by acts of authority. It is the bone of healthy government, recognised from earliest times and not a mystic testament of judge-made law. Indeed from the legendary days of Adam — and of Kautilya’s Arthashastra — the rule of law has had this stamp of natural justice, which makes it social justice. We need not go into these deep for the present except to indicate that the roots of natural justice and its foliage are noble and not new-fangled. Today its application must be sustained by current legislation, case law or another extant principle, not the hoary chords of legend and history. Our jurisprudence has sanctioned its prevalence even like the Anglo-American system.”

In order to provide the effective opportunity of being heard, as required in terms of clause (b) of section 148A, it is imperative that the relevant materials containing the information about the escapement of income in the case of the assessee have been provided to the assessee. Without having seen the relevant materials in the possession of the Assessing Officer, the assessee would not be able to effectively defend his case, and prove that there had been no basis to form an opinion that income had escaped assessment in his case. For instance, if the Assessing Officer was relying upon the statement of a third-party and, on the basis of the information provided in that statement with respect to the assessee, an opinion had been formed that income had escaped assessment, then it was obvious that the assessee needed to understand as to what had been deposed by the witness in his statement so recorded, and whether it was true and sufficient to come to a conclusion that income had escaped assessment as alleged by the Assessing Officer.

The Madhya Pradesh High Court has held that the assessee is not entitled to have the materials or evidence which were the foundation of the opinion formed by the Assessing Officer, so long as the show cause notice mentioned about such foundational evidence or materials, and the supportive reasons to form the said opinion. However, the question which arises is how the assessee would be able to show cause that based on the information specified it was not possible to conclude by the AO that the income could have escaped assessment, and defend himself effectively if he is not provided with the relevant materials or evidence which are proposed to be used against him. Such an interpretation would render the provisions of clause (b) to a mere formality, which is against the basic principle of natural justice, that opportunity should not be provided in a manner whereby it becomes a mere formality.

The Supreme Court in the case of Ashish Agarwal (supra) had directed the Assessing Officer to not only provide the information suggesting the escapement of income, but also the relevant materials while validating the notices issued under the erstwhile provisions of section 148, during the time period extended by TOLA. It appears that the relevant observations of the Supreme Court from the case of Ashish Agarwal (supra) were not brought to the notice of the Madhya Pradesh High Court.

Further, with due respect, the distinction drawn between the interpretation of a taxing statute and a non-taxing statute by the Madhya Pradesh High Court is illusive and in any case not very relevant in so far as the issue is with respect to the manner in which the opportunity of being heard should be given. The extent to which the opportunity of being heard is required to be given under a taxing statute can be no less than the extent to which it is required to be given under a non-taxing statute.

While taking a view that the Assessing Officer is not duty bound to provide the relevant materials or evidence, while issuing a show cause notice under section 148A(b), the Madhya Pradesh High Court has relied upon the literal interpretation of the law and noticed that there is no such requirement in the relevant provision of section 148A(b). However, what should have been considered as relevant is the interpretation of the words “provide an opportunity of being heard” as used in section 148A(d). The requirement to provide the relevant materials used against the assessee for forming an opinion about the escapement of income is in-built within the requirement of providing an opportunity to be heard.

Justice must not only be done but should also be seen to have been done. There is a difference between delivering justice and a judgment. A judgment could be delivered by reading the language of the law while justice is delivered on appreciation of the spirit of the law besides of course, the language of the law. We are fortunate to be in a country where both have been given equal weightage by the judiciary in dispensing justice.

The judiciary governed by a rule of law has tacitly and expressly accepted the application of natural justice unless otherwise expressly prohibited by the statute. Following the canons of natural justice is an accepted jurisprudence in dispensing justice. In interpreting the provisions relating to the scheme of reopening and reassessment, even without there being a specific provision, the courts have consistently emphasised the need for an authority to provide to the assessee, the copies of the reasons recorded, material relied upon, information available, sanction obtained, and the inquiry conducted. Please see GKN Driveshafts (India) Ltd., 259 ITR 19 (SC), SABH Infrastructure, (supra), Micro Marbles, 457 ITR 567(Raj.), Tata Capital Financial Services Ltd., 443 ITR 127(Bom.) and Ashish Agarwal (supra).

It is worthwhile to note the suo moto directions of the Delhi High Court on the subject in the case of SABH Infrastructure (supra);

Before parting with the case, the court would like to observe that on a routine basis, a large number of writ petitions are filed challenging the reopening of assessments by the Revenue under sections 147 and 148 of the Act and despite numerous judgments on this issue, the same errors are repeated by the concerned Revenue authorities. In this background, the court would like the Revenue to adhere to the following guidelines in matters of reopening of assessments:

(i)	while communicating the reasons for reopening the assessment, a copy of the standard form used by the Assessing Officer for obtaining the approval of the Superior Officer should itself be provided to the assessee. This would contain the comment or endorsement of the Superior Officer with his name, designation and date. In other words, merely stating the reasons in a letter addressed by the Assessing Officer to the assessee is to be avoided;
(ii)	the reasons to believe ought to spell out all the reasons and grounds available with the Assessing Officer for reopening the assessment—especially in those cases where the first proviso to section 147 is attracted. The reasons to believe ought to also paraphrase any investigation report which may form the basis of the reasons and any enquiry conducted by the Assessing Officer on the same and if so, the conclusions thereof;
(iii)	*where the reasons make a reference to another document, whether as a letter or report, such document and/or relevant portions of such report should be enclosed along with the reasons;*
(iv)	the exercise of considering the assessee’s objections to the reopening of the assessment is not a mechanical ritual. It is a quasi-judicial function. The order disposing of the objections should deal with each objection and give proper reasons for the conclusion. No attempt should be made to add to the reasons for reopening of the assessment beyond what has already been disclosed.

The application of principles of natural justice is confirmed by the courts by regularly applying various provisions of the natural justice to the practice of the Income-tax Act, to ensure that no order is passed without sharing of information, statements recorded, and the material relied upon and affording of an opportunity of hearing before an adverse order is passed. This is evident, especially in respect of the provisions of s. 131, 132, 133A, 142(3), 147, 151, 153, 250, 254, 260 and chapters dealing with penalties and punishment under the Income tax Act. Most of these provisions do not expressly provide for sharing the copies of the material and information but the courts have read such requirements in implementing the law by applying the simple rule that a person cannot be hanged without a trial and that the trial should be fair and equitable. Even in cases of criminal justice, the application of the provisions of natural justice is desired and is applied by the courts to the extent possible under the facts of the case.

The new scheme of reopening and reassessment has clearly recorded the legislative intent in accepting the law laid down by the courts on the lines of what has been discussed here. In fact, the memorandum explaining the provisions of the new scheme, has expressly stated the need for respecting natural justice and following the mandate of the Supreme Court in the case of GKN Driveshafts (India) Ltd (supra). The new scheme has gone a step further by including a statutory provision in the form of section 148A in the body of the Act containing 4 very important provisions, under clauses (a) to (b), each of which is nothing but affirmation of the tenets of natural justice spelt out by the apex court in the cases of GKN Driveshafts (India) Ltd. (supra) and Ashish Agarwal (supra).

All the High Courts with the exception of the Madhya Pradesh High Court, in interpreting the new scheme of reopening and reassessment have reiterated that there was no change in judicial understanding of the old law, which continues even under the new scheme, that required the authorities to provide copies of the information and the material available with them.

In our respectful opinion, the significant change between the old scheme and the new scheme is that, under the new scheme, the authorities, before issuing the notice under section 148, now have to make up their minds that an income has escaped assessment. For making up their minds, they have to first follow the due procedure of section 148A and thereafter decide that there was an escapement of income and then only issue a notice. Once a decision is taken, the only course open for the AO is to examine the case of the assessee on merits. Having once issued a notice under section 148, it may be difficult for an AO to drop the proceedings by holding that there was no escapement of income, other than doing so on merits of the facts produced before him.

The better view, in our considered opinion, is that the relevant materials and evidences on the basis of which an inquiry is initiated (and subsequently an opinion about the escapement of income would be formed), have to be provided to the assessee along with the show cause notice issued under section 148A(b). If that is not done, the notice would be invalid.

BCAJ Admin

Glimpses of Supreme Court Rulings

48 Magnum International Trading Co. (P) Ltd vs. Commissioner of Income Tax, Delhi II

[2023] 454 ITR 141 (SC)

Exports – Special deduction — Section 80 HHC — Amendments made to Section 80-HHC(3) of the 1961 Act vide Finance (No. 2) Act, 1991, substituting Sub-section (3) to Section 80-HHC of the 1961 Act and prescribing a different formula, are applicable with effect from 1st April, 1992 and the amendments do not have a retrospective effect — Profits on sale of shares having been taxed as profits and gains of business should be treated as income from business for computation under clause (b) to section 80HHC(3) and should also be included in the total turnover — Surplus funds when deposited in bank or otherwise to earn interest are not taxable under head income from business and could not be considered for computation of deduction under section 80HHC.

Before the Supreme Court, the question raised pertained to the computation of deduction under Section 80-HHC of the Income-tax Act, 1961, as applicable to the aforesaid assessment years 1989-90, 1990-01 and 1991-92.

The Supreme Court noted that in the assessment year 1989-1990, the Assessing Officer had excluded the interest income of ₹1,03,28,913 and income from the sale of shares of ₹1,15,52,953 while computing the deduction under Section 80-HHC of the Act in terms of the proportionality formula prescribed under Sub-section (b) to Section 80-HHC(3) of the Act.

The Supreme Court observed that in P R Prabhakar vs. Commissioner of Income Tax, Coimbatore [2006] 284 ITR 548 (SC) it has been held that the amendments made to Section 80-HHC(3) of the Act vide Finance (No. 2) Act, 1991, substituting sub-section (3) to Section 80-HHC of the Act and prescribing a different formula, were applicable with effect from 01.04.1992. The amendments did not have a retrospective effect.

According to the Supreme Court, on the question of treatment/ head of income from the sale of shares, the Assessing Officer has contradicted himself. In the assessment order, after a detailed discussion, on the one hand, it had been held that income from the sale of shares was income from ‘profits and gains of business or profession’, which was not taxable as ‘income from capital gains’, yet for the purpose of computation of deduction under Section 80-HHC(3) of the Act, income from sale of shares had not been treated as ‘income from business’.

In view of the finding, as recorded by the Assessing Officer, on the head under which income from sale of shares was taxable, which finding has attained finality, the Supreme Court had no difficulty in accepting the plea and stand of the Assessee, that income from the sale of shares should be treated as ‘income from business’ for computation of deduction under Clause (b) to Section 80-HHC(3) of the Act.

The Supreme Court clarified that, once the income from the sale of shares is to be included under the head ‘income from business’, the amount will also be included in the total turnover of the business.

With regard to interest income, the Supreme Court agreed with the stand of the Revenue that this income should be taxed as ‘income from other sources’. The Supreme Court noted that the Commissioner of Income Tax (Appeals) had reversed the findings given by the Assessing Officer on the ground that the surplus funds had been utilised for earning interest income. He held that surplus funds were ‘transitory surplus funds’ and utilisation of the same for earning interest income cannot take away the character of ‘business income’ from such interest. According to the Supreme Court, this finding is fallacious and wrong. The surplus funds, when deposited in a bank or otherwise to earn interest, are not taxable under the head ‘income from business’, but under the head ‘income from other sources’. This income does not have a direct nexus nor is earned by way of business activity. Accordingly, the interest income is not to be treated as ‘income from business’ for computation of the deduction in terms of Clause (b) to Section 80-HHC(3) of the Act.

The Supreme Court clarified that the same reasoning would equally apply in the appeals for assessment years 1990-1991 and 1991-1992, in which years, the issue related to the treatment of interest income is raised, that is, whether it should be taxed under the head ‘income from business’ or under the head ‘income from other sources’. In consonance with its findings recorded above, the interest income earned in the assessment years 1990-1991 and 1991-1992 of R95,83,895 and R1,18,56,913 respectively, would be taxable under the head ‘income from other sources’.

Accordingly, Civil Appeals pertaining to the assessment years 1990-1991 and 1991-1992, were partly allowed.

49 ACIT, Surat vs. Kantilal Exports, Surat

[2023] 454 ITR 112 (SC)

Unexplained expenditure — Section 69C — ITAT found that the Assessee was maintaining the books of account outside the regular books — Addition upheld based on the consumption shown in the audit report which was later explained to be a typographical error by the Chartered Accountant — Reversal of this finding by the High Court solely based on the Statements filed before the ITAT for the first time is not proper.

The Assessing Officer made additions of ₹17,15,00,000 as unexplained expenditure under Section 69C of the Act taking into consideration the actual consumption of diamonds as 4,30,701.14 carats as mentioned in the audit report and after considering the consistent trend on yield which was found to be between 10-18 per cent. The Assessing Officer also considered the alternative prayer made by the Assessee on claiming deductions as expenditure under Section 80HHC. The CIT (Appeals) reversed the addition. The ITAT, on appreciation of the entire material on record and after taking into consideration the remand order which was necessitated due to the affidavits filed before the ITAT of the Typist and the Chartered Accountant, reversed the order passed by the CIT (Appeals) and restored the Assessment Order by upholding the addition of ₹17,50,00,000 as unexplained expenditure under Section 69C of the Act. The High Court set aside the order passed by the ITAT solely relying upon the two affidavits – one of the Typist and another of the Chartered Accountant and accepted the submission on behalf of the Assessee that there was a typographical error in the audit report in which the consumption was shown at 4,30,701.14 carats and that the actual consumption was 2,90,701.14 carats.

The Supreme Court after going through the findings recorded by the Assessing Officer, CIT (Appeals) as well as the ITAT observed that before the Assessing Officer, though it was the specific case on behalf of the Assessee that the figure of ₹4,30,701.10 was a typing mistake, except the statement of the Assessee, no further material was produced before the Assessing Officer. Therefore, the Assessing Officer proceeded further with the assessment taking into consumption of 4,30,701.14 carats. Thereafter, considering the figure of yield in different assessment years, the Assessing Officer came to the conclusion that the percentage of the yield would range between 10-18 per cent. Thereafter, the Assessing Officer specifically gave the finding that taking into consideration the figures on record for the relevant year under consideration, the yield would come to 24 per cent. Therefore, taking into consideration the average yield in the last assessment years, the Assessing Officer treated the same as unexplained income and made the additions of ₹17,50,00,000 under Section 69C. The ITAT has concurred with the said findings. Solely relying upon the statements of the Typist and the Chartered Accountant, the High Court had reversed the findings of the Assessing Officer as well as the ITAT. According to the Supreme Court, the High Court had not properly appreciated and considered the fact that the affidavits were filed for the first time before the ITAT. The High Court had also not at all considered the conduct on the part of the Assessee, which came to be considered in detail by the ITAT in its order. It was found that there had been a search in the case of the Assessee and its group concern on 7th January, 1999 which was concluded on 23rd March, 1999 and during the course of the search, duplicate cash book, ledger and other books showing the unaccounted manufacturing and trading arrived at by the Assessee in diamonds were found. The ITAT had also noted that a huge addition was made in the case of Assessee’s group in the block assessment on the basis of the books so found. Therefore, it was found that the Assessee was maintaining the books of accounts outside the regular books. The aforesaid had not at all been considered by the High Court while passing the impugned order.

In view of the above and for the reasons stated above, the Supreme Court held that the impugned judgment and order passed by the High Court was unsustainable and the same deserved to be quashed and set aside and was, accordingly, quashed and set aside. The orders passed by the ITAT as well as the Assessment Order were restored.

The Appeal was, accordingly, allowed.

50 PCIT vs. R. F. Nangrani HUF

[2023] 454 ITR 426 (SC)

Capital Gains — Amount received by the assessee on retirement from the firm — Amounts received from the incoming partners — Matter remanded for consideration.

The assessee was a partner in a firm. It retired from partnership firm on 14th August, 2008. When it retired, it received a sum of ₹15 crore from the partnership firm M/s Landmark Developments. It purported to be in full and final settlement of its right, title and interest as a partner. The assessee was having 50 per cent share in the firm. The other 50 per cent was being held by two other partners who had a 25 per cent share each.

According to the Assessing Officer, the consideration for payment of ₹15 crore received by the assessee was brought in by three incoming partners. The entire consideration paid accordingly, was debited to the account of the new partners. The Assessing Officer sought to bring the amount of ₹14,15,61,370 to tax. This was after deducting the amount of ₹84,38,630 which stood to the credit of the capital account of the assessee.

This order came to be upheld by the Commissioner of Income Tax (Appeals).

However, the Income Tax Appellate Tribunal allowed the appeal of the assessee. ITAT purported to follow the order passed by the jurisdictional High Court.

In further appeal, the High Court did not find favour with the contentions of the Revenue.

Before the Supreme Court, the Revenue contended that there was no basis for fixing the payment of an ad hoc amount of ₹15 crore to the Assessee. It was only on mutual understanding and after considering the 15-year association of Assessee with the firm and also future expected profit, the Assessee had relinquished his rights and shares in favour of continuing partners (including new partners entered on the date of retirement deed) and has received ₹15 crore as full and final settlement of right, title interest in excess of the amount standing to the credit of the capital account of the assessee.

According to the assessee, though the amount may appear to be in excess of the share standing to the credit of the capital account of the assessee, the amount in excess was attributable to the goodwill. This was subject matter of decisions of the Supreme Court and since goodwill under the law as it stood was to be taken into consideration in determining the share of the retiring partner, no part of the amount received by the assessee was exigible to tax.

According to the Supreme Court, it did not find any discussion in the order of the High Court on any submission on the lines which had been addressed before it. The Supreme Court was therefore of the view that the matter should, therefore, be reconsidered by the High Court with reference to the facts as were not in dispute and the law which governed the field. The Supreme Court allowed the appeal, setting aside the order of the High Court.

BCAJ Admin

Section 263: Revision — Erroneous and Prejudicial to the interest of Revenue — Show Cause Notice (SCN) — Issue not raised in SCN — No opportunity provided — Order cannot be erroneous.

21 Pr. Commissioner of Income Tax – 10 vs. Nilkanth Tech Park Pvt. Ltd [Income Tax Appeal No. 807 of 2018;
Date of Order: 4th October, 2023 (Bom.) (HC)]

Section 263: Revision — Erroneous and Prejudicial to the interest of Revenue — Show Cause Notice (SCN) — Issue not raised in SCN — No opportunity provided — Order cannot be erroneous.

The respondent / assessee was engaged in the business of manufacturing chemicals. The assessee filed a Return of Income for Assessment Year 2009–10 on 29th September, 2009, declaring a total income at the loss of ₹4,88,18,926. The assessment was completed under Section 143(3) of the Act, and an assessment order dated 17th November, 2011, came to be passed.

Thereafter, CIT issued a Show Cause Notice (SCN) dated 4th March, 2014, under Section 263 of the Act, calling upon the assessee to show cause as to why the assessment made by the Assessing Officer (AO) should not be cancelled / set aside to the extent as mentioned in the notice. The issue raised was in regards to share trading loss applicability of Explanation to Section 73 of the Act.

The assessee replied to the SCN, and CIT rejected the submissions of the assessee and concluded that the order passed by the AO was erroneous and prejudicial to the interest of the assessee. CIT set aside the assessment order and directed the AO to pass the assessment order afresh by applying the provisions of Section 45(2) of the Act to the conversion of shares from investments or capital assets to stock-in-trade. The loss was directed to be treated as a speculation loss. The order passed by CIT under Section 263 of the Act was challenged before the Income Tax Appellate Tribunal (ITAT). Various grounds were taken before the ITAT. Apart from the ground that CIT erred in applying provisions of explanation to Section 73 of the Act and thereby, treating the loss as speculative, it was also urged that CIT erred in passing the order under Section 263 of the Act on the issue of Section 45(2) of the Act and treating loss as capital loss without raising the issue in the SCN. Assessee also urged that the order of CIT was a mere change of opinion and hence, erroneous.

The ITAT, after considering the submissions, by an order dated 19th May, 2017, set aside the order of CIT for various reasons, but one of the primary grounds for interfering was that the twin conditions for exercising jurisdiction under Section 263 of the Act, viz., order of the AO being erroneous and that was prejudicial to the interest of Revenue being conjunctive, have not been met. Further, in the notice, there was not even a reference to Section 45(2) of the Act. Thus, in the SCN, there is no discussion or even reference to Section 45(2) of the Act, and the assessee has not been given an opportunity to explain why the provisions of Section 45(2) of the Act should not be applied to the conversion of shares from investment or capital asset to stock-in-trade.

The Commissioner may call for or examine the record of any proceeding if he considers that any order passed therein by the AO is erroneous in so far as it is prejudicial to the interests of the Revenue. Once he is satisfied that the order passed by the AO is erroneous and it is prejudicial to the interest of Revenue, before he passes any order as the circumstances of the case may justify including an order enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment, an opportunity should be given to assessee of being heard. If there is no reference to provisions of Section 45(2) of the Act in the notice issued under Section 263 of the Act, it is obvious that such an opportunity of being heard has not been given to the assessee. The order passed by the CIT was quashed and set aside.

The Court further observed that the ITAT has proceeded to dispose of the matter on merits and has come to the conclusion that the very same issue of converting the capital asset into stock-in-trade was the subject of a query raised during the assessment proceedings. The ITAT came to the conclusion that the assessment order has been passed by the AO by application of mind and after considering the response of the assessee. Revenue has not disputed the replies that were placed by the assessee before the AO.

A point was raised by the tax department that there is no discussion on this in the assessment order. It is settled law as held in the judgment of this court in Aroni Commercials Ltd vs. Deputy Commissioner of Income Tax – 2(1) [2014] 44 taxmann.com 304 (Bombay) that once a query is raised during the assessment proceedings and the assessee has replied to it, it follows that the query raised was a subject of consideration of the AO, while completing the assessment, it is not necessary that an assessment order should contain reference and / or discussion to disclose its satisfaction in respect of the query raised.

The Hon. Court further relied on the judgment of this court in Commissioner of Income Tax vs. Fine Jewellery (India) Ltd [2015] 372 ITR 303 (Bom).

Accordingly, the appeal was dismissed.

BCAJ Admin

Section 254: Nonspeaking and Cryptic order — No reasons stated by ITAT — Matter remanded to rehear.

20 National Centre For Cell Science vs. Dy. CIT Exemption Circle, Pune

[ITA (L) No. 24310 of 2023;

Date of Order: 11th October, 2023 (Bom.) (HC)]

Section 254: Nonspeaking and Cryptic order — No reasons stated by ITAT — Matter remanded to rehear.

The Hon. Court observed that there is no reason given by the ITAT as to why the Tribunal disagrees with the view of the learned CIT(A) and opines that the amount to be carried forward cannot exceed the unspent amount.

In the circumstances, the matter was remanded to the ITAT to give reasons as to why it has opined that the CIT(A) was not correct in concluding that the amount to be carried forward cannot exceed the unspent amount. The Hon. Court relied on the decision of the Hon’ble Apex Court in Udhavdas Kewalram vs. Commissioner of Income-tax (1967) 66 ITR 462 (SC):

“6. The Tribunal performs a judicial function under the Indian IT Act: it is invested with authority to determine finally all questions of fact. The Tribunal must, in deciding an appeal, consider with due care all the material facts and record its findings on all the contentions raised by the assessee and the CIT in the light of the evidence and the relevant law.

7. The judgment of the Tribunal suffers from a manifest infirmity. The Tribunal has not adjudicated upon the truth of the case of the assessee in the light of the evidence adduced by the assessee in support of his case. The infirmity becomes more pronounced when regard is had to fact that, relying upon the documentary evidence tendered by the assessee, the AAC had accepted the claim of the assessee relating to the sale of Gopi Bai’s ornaments. The Tribunal was undoubtedly competent to disagree with the view of the AAC. But in proceeding to do so, the Tribunal had to act judicially, i.e. to consider all the evidence in favour of and against the assessee. An order recorded on a review of only a part of the evidence and ignoring the remaining evidence cannot be regarded as conclusively determining the questions of fact raised before the Tribunal.”

In view of the above, the impugned order was set aside.

BCAJ Admin

Section 148A — Reopening — Incorrect information — Non-application of mind by Assessing Officer — Notice u/s. 148A(b) as well order u/s. 148A(d) bad in law.

19 Narendra Kumar Shah vs. The ACIT Circle – 42 (2)(1)

[WP No. 2558 of 2023;

Date of Order: 10th October, 2023 (Bom.) (HC);

A.Y.: 2019–2020]

Section 148A — Reopening — Incorrect information — Non-application of mind by Assessing Officer — Notice u/s. 148A(b) as well order u/s. 148A(d) bad in law.

Petitioner is an individual assessed on income from salary, house property and other sources. Petitioner filed ROI on 29th November, 2019, for Assessment Year 2019–2020. The return was processed and an order dated 26th February, 2020, was passed under section 143(1) of the Act. Subsequently, Petitioner received a notice dated 31st March, 2023, u/s. 148A(b) of the Act alleging that there was information which suggests that income chargeable to tax for Assessment Year 2019–2020 has escaped assessment within the meaning of Section 147 of the Act. The details of the information / enquiry were also enclosed. Petitioner was directed to submit a reply to the notice along with supporting documents on or before
20th April, 2023.

The only information Respondent No. 1 had was that Petitioner, despite having a salary of ₹58,18,452 per annum and having purchased securities worth ₹5,22,000, was a non-filer for the Assessment Year 2019–2020, having failed to file a return of income. In short, the basis for re-opening is despite having a salaried income, Petitioner has not filed a return of income.

The Petitioner, as per the e-Proceedings response acknowledgement responded to the notice dated 26th April, 2023, issued u/s. 148A(b) of the Act and explained that the Return of Income has been filed and the copy Income Tax Returns were also attached.

On 26th April, 2023, the impugned order u/s. 148A(d) of the Act came to be passed rejecting the objections. The Assessing Officer (AO) observed that “the assessee in his reply only stated that he had filed Income Tax Returns for the year under consideration. However, the assessee did not provide his justification for the transactions in question. Thus it is logical to conclude that the assessee has no explanation to offer with respect to the above-mentioned information suggesting escapement of income in the case for Assessment Year 2019–2020.”

The Hon. Court held that the order dated 26th April, 2023, passed under Section 148A(d) of the Act is unsustainable. This is because the notice under Section 148A(b) of the Act does not call upon Petitioner to provide any justification for any transaction in question. The entire basis for issuing the notice under Section 148A(b) of the Act was that Petitioner was a non-filer for Assessment Year 2019–2020 as he had failed to file the Return of Income, and therefore, the income from salary and purchase of securities have not been declared / offered for taxation. But the fact is, Petitioner had filed his Return of Income and had also paid a total tax of ₹18,36,575 and had also claimed a refund of ₹1,27,100. Therefore, the order under Section 148A(d) of the Act, passed on 26th April, 2023, was quashed and set aside. Consequently, the notice issued under Section 148A(b) of the Act, dated 26th April, 2023, was quashed and set aside.

The Court further observed that even the notice under Section 148A(b) of the Act was unjustified. This is because the AO, before issuing the notice, was bound to at least verify or enquire following the information that was received in accordance with the Risk Management Strategy. The Hon. Court referred to the guidelines for issuance of notice under Section 148 of the Act bearing F. No. 299/10/2022-Dir(Inv.III)/611 dated 1st August, 2022, paragraph 2.1 (vi) and (vii) and the instruction regarding the uploading of data on functionalities / portal of the Income Tax Department bearing F. No. 299/10/2022-Dir(Inv. III)/647 dated 22nd August, 2022, paragraphs 3 and 4.

The court observed that if the AO had only verified in the portal of the assessee before initiating proceedings, particularly when he had the PAN number with him, AO would have realised that not only has Petitioner filed the Return of Income, but also the return has been processed and an order dated 26th February, 2020, under Section 143(1) of the Act had been passed. Therefore, the notice issued under Section 148A(b) of the Act also has to be quashed and set aside.

BCAJ Admin

Recovery of tax — High-pitched assessment — Stay of recovery — Appeals not disposed of for a long time — Assessee is entitled to stay of recovery proceedings.

57 Jankalyan Vinimay Pvt Ltd vs. DCIT

[2023] 455 ITR 456 (Cal.)

A.Ys.: 2011–12, 2012–13 and 2016–17;

Date of Order: 7th February, 2023

S. 220(6) of ITA 1961

Recovery of tax — High-pitched assessment — Stay of recovery — Appeals not disposed of for a long time — Assessee is entitled to stay of recovery proceedings.

For the A.Ys. 2011–12, 2012–13 and 2016–17 high-pitched assessments were completed in the year 2017–18. Well within the period of limitation, the assessee filed the appeals before the Commissioner (Appeals) and the appeals have been pending since 2018. The Assessing Officer rejected the stay application u/s. 220(6) of the Income-tax Act, 1961 by communication dated 8th December, 2022.

Assessee filed writ petitions challenging the orders of the Assessing Officer rejecting the application for stay. Allowing the writ petition a Division Bench of the Calcutta High Court held as under:

“Since the appeals were filed in 2018 and the stay applications filed before the Deputy Commissioner during the year 2018 followed by subsequent reminders, were rejected only on 8th December, 2022, and the assessment orders were not given effect to date, there was to be a direction that the appeals filed before the Commissioner (Appeals) be disposed of at an early date and until then, the Department was not to take any coercive action against the assessee for recovery of the Income-tax, which had been assessed.”

BCAJ Admin

Reassessment — Notice after three years — Limitation — Capital gains — Order for issue of notice without considering reply filed by assessee to initial notice —Words “income chargeable to tax” found in section 149 must be read in terms of “income” as arising out of “capital gains” as provided u/s. 48 in the assessee’s case — Notice barred by limitation — Order and notice set aside.

56 SANATH KUMAR MURALI vs. ITO

[2023] 455 ITR 370 (Kar)

A.Y.: 2016–17; Date of Order: 24th May 2023

Ss. 48, 147, 148, 148A(b), 148A(d) and 149 of ITA 1961

Reassessment — Notice after three years — Limitation — Capital gains — Order for issue of notice without considering reply filed by assessee to initial notice —Words “income chargeable to tax” found in section 149 must be read in terms of “income” as arising out of “capital gains” as provided u/s. 48 in the assessee’s case — Notice barred by limitation — Order and notice set aside.

On 3rd March, 2023, the notice u/s. 148A(b) of the Income-tax Act, 1961 came to be issued to the petitioner stating that information was received which suggested that income chargeable to tax for the A.Y. 2016–17 has escaped assessment within the meaning of section 147, detailing the information along with supporting documents. The information was that as per the TDS statement u/s. 194-IA, during the relevant year the assessee had sold an immovable property for a consideration of ₹55,77,700 which has escaped assessment.

The assessee-petitioner filed a reply to the said notice dated 16th March, 2023, in which details were laid out, setting out the sale consideration relating to the sale deed of 22nd November, 2015, as ₹55,77,700 and also furnishing details of the sale deed by virtue of which the petitioner has purchased the property on 24th September, 2011, for a consideration of ₹15,91,735 (cost of acquisition). The assessee also worked out the long-term capital gain at ₹33,85,769. It was submitted that, as the income escaping assessment did not exceed rupees fifty lakh, in terms of section 149(1)(b) of the Income-tax Act, the notice u/s. 148 could not be issued. However, the Assessing Officer rejected the assessee’s submissions and on 21st March, 2023, passed order u/s. 148A(d) and also issued notice u/s. 148 dated 21st March, 2023.

The assessee filed a writ petition and challenged the order and the notice. The Karnataka High Court allowed the writ petition and held as under:

“i) When the procedure is followed culminating in an order passed u/s. 148A(d) of the Income-tax Act, 1961, the authority is required to apply his mind and consider the reply of the assessee to the show-cause notice u/s. 148A(b) and pass a considered order. The words used in section 149(1)(b) are “income chargeable to tax” which has escaped assessment amounts to or is likely to amount to fifty lakh rupees or more for that year. The income chargeable under the head “Capital gains” which would arise in case of a sale transaction is as provided u/s. 48, which provides that income chargeable under the head “Capital gains” shall be computed by deducting from the full value of the consideration, the cost of acquisition and in the event the property purchased has been held for a period beyond three years in terms of the second proviso to section 48 the words, “cost of acquisition” are to be substituted by the words, “indexed cost of acquisition”.

ii) The words found in section 149 “income chargeable to tax” must be read in terms of “income” as arising out of the “capital gains” as provided u/s. 48 and this is the only manner of understanding the words, “income chargeable to tax” u/s. 149(1)(b). Section 48 provides that the entirety of the sale consideration does not constitute “income”. The Memorandum Explaining the Provisions of Finance Act, 2021 does not in any way lead to a different interpretation of the words, “income chargeable to tax”. The words used u/s. 149 for the purpose of the extended time limit is to be interpreted in terms of the plain wording of section 149 and cannot be construed differently while relying on any executive instruction.

iii) The Assessing Officer had not applied his mind to the reply filed by the assessee to the show-cause notice u/s. 148A(b) nor noticed the legal position while deciding the application of the extended period u/s. 149(1)(b) which was pointed out by the assessee in its reply. There is a bar prohibiting the issuance of notice u/s. 148 of the Income-tax Act, 1961 for reopening the assessment u/s. 147 if three years have elapsed from the end of the relevant assessment year unless the case falls under clause (b). Accordingly, no notice u/s. 148 could be issued after three years from the end of the A.Y. 2016-17, and this is subject to the exception of an extended period of limitation of three years, but not more than ten years from the end of the relevant assessment year, if the Assessing Officer had material which would reveal that “the income chargeable to tax” which has escaped the assessment amounted to or was likely to amount to R50 lakhs or more. It could not be stated that since the stage at which the notice was issued was at a premature stage, the entirety of the sale consideration ought to be taken note of.

iv) The order passed u/s. 148A(d) and the notice issued u/s. 148 for the A.Y. 2016-17 were set aside.”

BCAJ Admin

Reassessment — Notice — New procedure — Initial notice — Assessee’s explanation on the ground set down in initial notice accepted — Order for the issue of notice based on new ground — Order invalid — Writ — No question of remanding the matter to AO for passing speaking order — Order u/s. 148A(d) and direction of Court (Single Judge) remanding matter to AO set aside.

55 Excel Commodity and Derivative Pvt Ltd vs. UOI

[2023] 455 ITR 341 (Cal)

A.Y.: 2018–19; Date of Order: 29th August, 2022

Ss. 147, 148, 148A(b) and 148A(d) of ITA 1961

Reassessment — Notice — New procedure — Initial notice — Assessee’s explanation on the ground set down in initial notice accepted — Order for the issue of notice based on new ground — Order invalid — Writ — No question of remanding the matter to AO for passing speaking order — Order u/s. 148A(d) and direction of Court (Single Judge) remanding matter to AO set aside.

On a writ petition challenging the order u/s. 148A(d) of the Income-tax Act, 1961, the Single Judge of the Calcutta High Court held that the order dated 7th April, 2022, was devoid of reasons and without any discussion on the contentions raised by the assessee in its objections to the show-cause notice issued by the Assessing Officer u/s. 148A(b) and quashed the order but remanded the matter back to the Assessing Officer to pass a fresh speaking order.

The Division Bench allowed the appeal filed by the assessee and held as under:

“i) The term “information” in Explanation 1 u/s. 148 of the Income-tax Act, 1961 cannot be lightly resorted to and to give unbridled power to the Department to reopen an assessment. The procedure contemplated u/s. 148A requires the Assessing Officer to consider the reply to the show-cause notice u/s. 148A(b) and thereafter pass a reasoned order u/s. 148A(d). If in the opinion of the Assessing Officer, the information furnished by the assessee in his reply is satisfactory, then nothing more requires to be done. But if the Assessing Officer is of the view that the reply furnished by the assessee is not acceptable, he has to pass a speaking order u/s. 148A(d). Since the Central Board of Direct Taxes noticed that in several cases information made available or the data uploaded by the reporting entities is not fully accurate due to human or technical error it issued a Circular dated 22nd August, 2022, instructing to Departmental officers with regard to the uploading of data on the portal of the Department to effect due verification and opportunity of being heard given to the assessee before initiating proceedings u/s. 148 or 147.

ii) The Assessing Officer had used the information lightly which had resulted in the issuance of notice. The assessee had submitted an explanation to the notice with documents in support of its claim. The Assessing Officer had accepted the explanation given by the assessee that it had not indulged in fictitious derivative transactions and had given up the allegation which had formed the basis of the show-cause notice u/s. 148A(b). Thereafter, he had proceeded on fresh ground alleging that the transaction with some other company was an accommodation entryand passed the order under section 148A(d). The order passed u/s. 148A(d) was not based on the reason for which the notice dated 22nd March, 2022, was issued u/s. 148A(b). Therefore, on that score also, the order u/s. 148A(d) was to be set aside in its entirety without giving any opportunity to reopen the matter on a different issue.

iii) The order was illegal and unsustainable and the necessity to remand the matter to the Assessing Officer did not arise. The order dated 7th April, 2022 u/s. 148A(d) and the direction of the court remanding the matter to the Assessing Officer were set aside. Consequently, no further action could be taken by the Department against the assessee on the issue in question.”

BCAJ Admin

Income — Assessability — Meaning of “Income” — Institution established by State Government to regulate the registration of nurses and maintain standards of professionalism — One-time grant in aid received by the institution to strengthen it — Not assessable as income.

54 H. P. Nursing Registration Council vs. Principal CIT

[2023] 455 ITR 512 (HP)

A.Y.: 2010–11; Date of Order: 25th May, 2022

S. 2(24) of ITA 1961

Income — Assessability — Meaning of “Income” — Institution established by State Government to regulate the registration of nurses and maintain standards of professionalism — One-time grant in aid received by the institution to strengthen it — Not assessable as income.

The assessee was formed under the Himachal Pradesh Nursing Registration Council Act, 1977 and was substantially funded by the Government. The assessee received ₹1 crore from the Government of India under the scheme of upgradation/strengthening of nursing services under human resources for health. In the return of income, the assessee declared NIL income and claimed exemption u/s. 11(1)(a) of the Act. In the scrutiny assessment, the Assessing Officer treated the grant in aid as the income of the assessee u/s. 2(24)(iia) of the Act. The Assessing Officer concluded that the assessee was not entitled to any exemption as its registration u/s. 12AA was effective from 01.04.2010 relevant to A.Y. 2011-12 and the assessee also did not qualify to be entitled to exemption u/s. 10(23C)(iiiab) of the Act.

The Commissioner(Appeals) and the Tribunal upheld the decision of the Assessing Officer.

The Himachal Pradesh High Court allowed the appeal filed by the assessee and held as under:

“i) The term “income” as defined in section 2(24) of the Income-tax Act, 1961, is inclusive of various heads mentioned therein. It was only by way of the amendment, made effective from 1st April, 2016, that such monetary release by a State or the Central Government has been incorporated as income by way of section 2(24)(xviii). Even in this clause exemption has been carved out in respect of subsidy or grant by the Central Government for the purpose of corpus of a trust or institution established by the Central Government or State Government, as the case may be. This clearly illustrates the legislative intent that prior to 1st April, 2016, this type of grant was not specifically included as income. The later inclusion of such a provision will not have a retrospective application. Even by way of the amendment, exemption is available to such institutions.

ii) Since the assessee received only a one-time grant with a specific purpose which nowhere suggested scope of profit generation or revenue for the assessee, the amount received by the assessee by way of grant-in-aid thus could not be termed to be revenue receipt.”

BCAJ Admin

Document Identification Number (DIN) — Orders from AO — Communication of — Validity — Circular of Board mandating DIN for communications — Circular binding on AO — Order passed in violation of Circular — Not a defect curable u/s. 292B — Communication of such orders not valid.

53 CIT(IT) vs. Brandix Mauritius Holdings Ltd.

[2023] 456 ITR 34 (Del.)

A.Y.: 2011–12; Date of Order: 20th March, 2023

S. 292B of ITA 1961 and CBDT Circular No. 19 of 2019 dated 14th August, 2019

Document Identification Number (DIN) — Orders from AO — Communication of — Validity — Circular of Board mandating DIN for communications — Circular binding on AO — Order passed in violation of Circular — Not a defect curable u/s. 292B — Communication of such orders not valid.

For the A.Y. 2011-12, the final assessment order passed on 15th October, 2019 did not bear the Document Identification Number (DIN). In appeal, the assessee challenged the validity of the assessment order. The Tribunal allowed the appeal of the assessee in view of the CBDT Circular No. 19/2019 dated 14th August, 2019 which specifies the manner in which DIN is required to be generated while communicating any correspondence issued by the Department.

The Delhi High Court dismissed the appeal filed by the Revenue and held as follows:

“i) It is well established that circulars issued by the CBDT in the exercise of its powers u/s. 119 of the Income-tax Act, 1961 are binding on the Department. The CBDT Circular No. 19 of 2019 dated
14th August, 2019 ([2019] 416 ITR (St.) 140) sets out the manner in which the document identification number is required to be generated while communicating a notice, order, summons, letter and any correspondence issued by the Income-tax Department, i.e., the Revenue. Inter alia, the object and purpose of allocating document identification numbers to communications, such as notices, orders, summons, letters or any correspondence emanating from the Revenue is to maintain a proper audit trail. Therefore, the CBDT, in the exercise of its powers, has mandated that no communication shall be issued by any Income-tax authority relating to assessment, appeals, orders, statutory or otherwise, exemptions, enquiry, investigation, verification of information, penalty, prosecution, rectification or approval, to the assessee or any other person, on or after 1st October, 2019, unless it is allotted a computer-generated document identification number. Further, there is a specific requirement under the 2019 circular to quote the document identification number in the body of any such communication. The 2019 circular also sets out certain circumstances in which exceptions can be made. These circumstances are categorically referred to in paragraph 3 of the 2019 circular.

ii) The object and purpose of the issuance of the 2019 circular, inter alia, is to create an audit trail. Therefore, the communication relating to assessments, appeals, orders, etcetera which are mentioned in paragraph 2 of the 2019 circular, albeit without a document identification number, can have no standing in law, having regard to the provisions of paragraph 4 of the 2019 circular. Recourse to section 292B of the Act, is untenable, having regard to the phraseology used in paragraph 4 of the 2019 circular.

iii) The final assessment order was passed by the Assessing Officer on 15th October, 2019, u/s. 147 read with sections 144C(13) and 143(3) of the Act. Concededly, the final assessment order did not bear a document identification number. There was nothing on record to show that the Revenue took steps to demonstrate before the Tribunal that there were exceptional circumstances, as referred to in paragraph 3 of the 2019 circular, which would sustain the communication of the final assessment order manually, albeit, without the document identification number.

iv) Given this situation, clearly paragraph 4 of the 2019 circular would apply. Paragraph 4 of the 2019 circular, decidedly provides that any communication which is not in conformity with paragraphs 2 and 3 shall be treated as invalid and shall be deemed to have never been issued. The phraseology of paragraph 4 of the 2019 circular fairly puts such communication, which includes communication of assessment orders, in the category of communications which are non-est in law. The Tribunal was right in holding that the final assessment order was not valid.”

BCAJ Admin

Appeal to Appellate Tribunal — Scope of proceedings — Appeal by the assessee against order affirming disallowance in part — No cross objections filed by Department — Tribunal remanding of matter in entirety — Prejudicial to the assessee — Tribunal directed to limit its adjudication to issues raised by assessees.

52 Kausalya Agro Farms and Developers Pvt Ltd vs. Dy. CIT

[2023] 455 ITR 432 (Telangana)

A.Ys.: 2012–13 to 2014–15, 2016–17 to 2018–19;

Date of Order: 2nd February, 2023

Ss. 36(1)(iii), 147, 254 of ITA 1961

Appeal to Appellate Tribunal — Scope of proceedings — Appeal by the assessee against order affirming disallowance in part — No cross objections filed by Department — Tribunal remanding of matter in entirety — Prejudicial to the assessee — Tribunal directed to limit its adjudication to issues raised by assessees.

On appeals before the Tribunal against the order of the Commissioner (Appeals) partly affirming the disallowance of interest expenditure u/s. 36(1)(iii) of the Income-tax Act, 1961 and on the issue of validity of reopening of reassessment u/s. 147, the Tribunal remanded the matter in entirety to the Assessing Officer to examine afresh in the light of all the evidence of the assessees’ fund position and the issue as to whether the corresponding borrowings claimed to have carried no interest involving plotted land buyers.

The Telangana High Court allowed the appeal filed by the assessee and held as under:

“i) The Tribunal was required to adjudicate the appeals on the grounds which were raised before it by the assessees. Remanding the matter in its entirety to the Assessing Officer had caused serious prejudice to the assessees in as much as even those reliefs which had been granted by the Commissioner (Appeals) stood nullified in view of the Tribunal’s direction to the Assessing Officer to re-do the whole exercise in its entirety. No cross-appeals have been filed by the Department against the order of the Commissioner (Appeals) granting substantial relief to the assessees.

ii) The common order of the Tribunal u/s. 254 was to be set aside and the Tribunal directed to hear the appeals before it on the limited grounds urged by the assessee, namely, the disallowance of interest expenditure u/s. 36(1)(iii) to the extent disallowed by the Commissioner (Appeals) and the validity of the reassessment proceedings u/s. 147.”

BCAJ Admin

Appeal to Appellate Tribunal — Ex-parte order — Powers of Tribunal — Tribunal has the power to set aside ex-parte order — Matter remanded to the Tribunal to decide the appeal on merits.

51 Cement Corporation of India Ltd vs. ACIT

[2023] 456 ITR 61 (Del.)

A.Y.: 2011–12; Date of Order: 6th February, 2023

S. 254 of ITA 1961 and Rule 24 of Income-tax Rules, 1962

Appeal to Appellate Tribunal — Ex-parte order — Powers of Tribunal — Tribunal has the power to set aside ex-parte order — Matter remanded to the Tribunal to decide the appeal on merits.

By an order dated 24th January, 2018, the Tribunal dismissed the appeal filed by the assessee for non-appearance. The order was received by the assessee on 5th February, 2018. On 24th September, 2018, the assessee filed a miscellaneous application before the Tribunal praying for recalling the order dated 24th January, 2018 and requesting for hearing the appeal. The reason for non-appearance before the Tribunal was that the notice of hearing issued by the Tribunal was misplaced by the authorised officer of the assessee company. The assessee was unaware that its appeal had been dismissed and came to know about it only on 5th February, 2018. Further, the inadvertent delay in filing the miscellaneous application was due to the fact that the concerned employees were transferred to a plant outside Delhi and some of them even retired during the relevant period. The assessee thus submitted there was sufficient cause for delay.

The miscellaneous application was dismissed by the Tribunal on 7th September, 2022 on the ground that the time limit of six months for filing the miscellaneous application as provided by section 254(2) of the Income-tax Act, 1961, expired on 31st July, 2018. In the absence of power with the Tribunal to condone the delay in filing the miscellaneous application, the miscellaneous application came to be dismissed on the ground of limitation.

The Delhi High Court allowed the writ petition filed by the assessee and held as follows:

“i) According to rule 24 of the Income-tax (Appellate Tribunal) Rules, 1963, if on the date fixed for hearing by the Tribunal, or on any other date to which the hearing is adjourned, the appellant does not appear in person or through an authorized representative, when the appeal is called out for hearing, the Tribunal may dispose of the appeal on the merits or otherwise, after hearing the respondent. The proviso appended to the rule indicates that where an appeal has been disposed of on the merits, and the appellant appears thereafter, the Tribunal shall set aside the ex parte order and restore the appeal, if it is satisfied that there was sufficient cause for his non-appearance. Although in the main part of rule 24, the expression used is “may”, when read with the proviso appended thereto, it leads to the conclusion that if the Tribunal chooses to dispose of the appeal on the merits or otherwise, after hearing the respondent in the absence of the appellant, and the appellant, thereafter, appears and shows sufficient cause for not appearing on the date when the appeal is disposed of, the Tribunal is obliged, in law, to set aside the order passed and restore the appeal.

ii) Rule 24 of the 1963 Rules which does not have the impediment of limitation, as is prescribed u/s. 254 of the Income-tax Act, 1961. Under section 254, the Tribunal is also vested with incidental and ancillary powers which can be exercised in such situations such as in the assessee’s case. The issue involved in the appeal before the Tribunal which deserved a hearing on the merits, for the reasons that while there was a delay, the assessee had furnished reasons for explaining the delay that the notice of hearing issued by the Tribunal for the hearing on 24th January, 2018, was misplaced, and did not reach the concerned officer, that it was unaware of the passing of the dismissal order dated 24th January, 2018, and came to know about it only on 5th February, 2018, and that the inadvertent delay in filing the miscellaneous application was caused on account of the concerned persons having been temporarily transferred to a plant outside Delhi, and some persons retiring during the relevant period.

iii) The order of the Tribunal was set aside and the matter was remitted to the Tribunal for disposal of the assessee’s appeal on merits.”

BCAJ Admin

Article 12(5) of India-Finland DTAA — Services are performed at the place where service is used and not where services are rendered — In absence of make available clause in India-Finland DTAA, consideration is chargeable to tax in India; Article 21 of India-Finland DTAA — Since providing corporate guarantee was not business activity but shareholder obligation, corporate guarantee fee was Other Income covered under Article 21 of India-Finland DTAA.

8 Metso Outotec OYJ, (Earlier Known as Outotec Oyj) vs. DCIT

[2023] 153 taxmann.com 723 (Kolkata – Trib.)

ITA No: 300/Kol/2022; ITA No: 269/Kol/2023

A.Ys.: 2018–19 & 2020–21

Date of Order: 29th August, 2023

Article 12(5) of India-Finland DTAA — Services are performed at the place where service is used and not where services are rendered — In absence of make available clause in India-Finland DTAA, consideration is chargeable to tax in India; Article 21 of India-Finland DTAA — Since providing corporate guarantee was not business activity but shareholder obligation, corporate guarantee fee was Other Income covered under Article 21 of India-Finland DTAA.

FACTS

Assessee, a tax resident of Finland, had provided IT services to Indian AE (“I Co”) and received consideration from I Co for such services. In view of Assessee, since it had performed IT services in Finland, and since it did not have PE in India, consideration received, therefore, was not chargeable to tax in India in terms of Article 12(5) of India-Finland DTAA¹ .

Further, Assessee had provided corporate guarantee for I Co and received corporate guarantee fee from I Co. In view of Assessee, corporate guarantee fee was business income and since Assessee did not have PE in India, it was not taxable in India.

AO did not agree with the contentions of the Assessee and brought both receipts to tax. DRP ruled that services are performed at the place where beneficiaries can use them and guarantee fees are in the nature of parental support taxable as other income.

Being aggrieved, the Assessee filed an appeal before the Tribunal.

HELD

Income from IT Service

• Assessee had rendered specific services for the use of I Co. As India-Finland DTAA does not have a ‘Make Available’ clause, consideration for providing such services was taxable in India.

• ITAT followed its earlier decision in Assessee’s case², wherein it had held that the performance-based rule in Article 12(5) was not applicable to the case of Assessee for the reasons given on the next page:
• Payment was made for test results which were used in India.

• Though Assessee may have conducted a process of testing outside India, I Co had made payment not for use of the process but for the results of testing which were used by I Co in India.

Income from corporate guarantee fee

• The main line of business of Assessee was to carry on, by itself, or through its subsidiary, the design, manufacture and construction of trade machinery, devices, etc.

• Giving of guarantee was a routine activity. It was the obligation of the Assessee towards its subsidiary. It was more like a shareholder obligation than a service activity.

• Giving of guarantee was not a business activity of Assessee, which was evident from the fact that except for I Co, Assessee had not given guarantee for anyone else.

• The fee received for giving corporate guarantee was in the nature of other income, which was covered under Article 21 of India-Finland DTAA.

Note: Article 21(3) of India-Finland DTAA provides items of income of a resident of a Contracting State not dealt with in other Articles of DTAA and arising in the other Contracting State may be taxed in that other State. The decision has not dealt with the aspect of place or situs where corporate guarantee arises.

1 “Royalties or fees for technical services shall be deemed to arise in a Contracting State when the payer is … a resident of that State. Where, however, … the fees for technical services relate to services performed, within a Contracting State, then such … fees for technical services shall be deemed to arise in the State in which the right or property is used or the services are performed ….”
2 Outotec (Finland) Oy vs. DCIT [2019] 109 taxmann.com 69 (Kol. – Trib.)

BCAJ Admin

S. 69A – Where there was a huge amount available with the assessee in the form of cash which he had deposited during demonetization, it could not be presumed that cash deposited by the assessee was out of some undisclosed source without any adverse material.

40 Om Prakash Nahar vs. ITO

[2022] 100 ITR (T) 345 (Delhi – Trib.)

ITA No.: 960 (Del) of 2021

A.Y.: 2017-18

Date of Order: 27th January, 2022

S. 69A – Where there was a huge amount available with the assessee in the form of cash which he had deposited during demonetization, it could not be presumed that cash deposited by the assessee was out of some undisclosed source without any adverse material.

FACTS

The assessee was an individual. The assessee was a senior citizen, aged about 79 years old and a retired Govt. servant and had declared income of ₹19,06,400 from income from Pension and earnings from bank interest. The assessee’s case was selected under CASS for limited scrutiny to verify cash deposits during the demonetisation period.

The assessee explained that the amount of ₹63,63,000 was deposited in Bank of Baroda out of withdrawals from the same account from time to time made during the years 2014, 2015 and 2016, because of his suffering from serious illness — juvenile diabetes and old age. It has also been submitted by the assessee that he had undergone bypass surgery and operation in the past and looking to his ailment and staying alone with his wife, therefore, he has been withdrawing and keeping cash for his personal and psychological security. The AO rejected the assessee’s explanation and held that there is no substantial justification given by the assessee and accordingly, added the entire amount of ₹63,63,000 under section 69A/115BB of the Act.

Aggrieved, the assessee filed an appeal before CIT(A). The CIT(A) restricted the addition to ₹44,13,000 after holding that the cash withdrawn from the bank account from 1st April, 2016 to 9th November, 2016 for sums aggregating to ₹19,50,000 can be held to be out of money withdrawn from the bank account, which was deposited after demonetisation.

Aggrieved by the CIT(A) order, the assessee filed an appeal before the ITAT.

HELD

The ITAT observed that the assessee looking at his old age and suffering from various ailments as he had suffered a heart attack and had juvenile diabetes, for his mental security, he was in the habit of keeping huge cash with him. The ITAT also observed that the assessee had been withdrawing cash and keeping it with him after withdrawing from his bank account.

From the perusal of the history of cash withdrawals starting from the financial year 2014-15, the ITAT observed that the assessee has been regularly withdrawing huge cash amounts on various dates and there was hardly any credit balance left in his bank account. The ITAT held that the fund’s flow statement as submitted by the assessee clearly showed that each and every withdrawal has been mentioned and utilisation thereof and the money being withdrawn from the bank account. Even after household withdrawal, there was a huge amount available with the assessee in the form of cash. Under these facts and circumstances stated by the assessee, the ITAT held that it cannot be held to be improbable that the assessee did not have any availability of cash at the time of demonetisation. Further, it was never brought on record whether the assessee was carrying out any business or profession or was having income from undisclosed sources of income which can be said to be available with the assessee in the form of cash. The ITAT found the explanation of the assessee to be reasonable and plausible and preponderance of probability was in the favour of the assessee and without any adverse material, it cannot be presumed that the cash deposited by the assessee is out of his undisclosed source. Accordingly, the addition of ₹44,13,000 as sustained by the CIT (Appeals) was deleted.

The appeal of the assessee was allowed.

BCAJ Admin

S. 2(14), 50C, 43CA, 2(47), 263 — Where the assessee being an owner of the land had entered into a joint development agreement (JDA) with a developer, such an agreement of transfer of possession for development of property does not constitute transfer as per the Act as to attract provisions of section 43CA and said the order could not be treated as prejudicial to the interest of revenue.

39 Emporis Properties (P.) Ltd. vs. PCIT

[2022] 100 ITR(T) 1 (Kolkata – Trib.)

ITA No.: 299 (Kol.) of 2022

A.Y.: 2014-15

Date of Order: 22nd September, 2022

S. 2(14), 50C, 43CA, 2(47), 263 — Where the assessee being an owner of the land had entered into a joint development agreement (JDA) with a developer, such an agreement of transfer of possession for development of property does not constitute transfer as per the Act as to attract provisions of section 43CA and said the order could not be treated as prejudicial to the interest of revenue.

FACTS

The assessee had entered into a joint development agreement (JDA) with a developer, wherein after the construction of the housing complex, a 55 per cent portion of the same would pertain to the assessee and the balance will pertain to the developer. In the course of the assessment, the Assessing Officer (AO) was of the primary view that the execution of JDA amounted to the transfer of the capital asset and therefore taxable as capital gains.

The assessee replied stating that there was no transfer of any capital asset on handing over possession of land to the developer. Further, it was submitted that the said land was stock-in-trade and therefore the same cannot be treated as a capital asset u/s 2(14) of the Act.

The AO accepted the said contention and did not make any additions to the total income of the assessee.

Thereafter, the Commissioner invoked his jurisdiction u/s 263 of the Act and stated that the said transaction was not examined in the light of section 43CA of the Act, making the order prejudicial to the interest of Revenue. Accordingly, the matter was set aside for the AO to ascertain the applicability of provisions of section 43CA of the Act to the JDA.

Aggrieved, the assessee filed an appeal before the ITAT.

HELD

The ITAT, on the perusal of the terms of the JDA, observed that the assessee had continued to be the owner of the property throughout the development of the property. The possession was only transferred for the development of the property.

It was also observed by the ITAT that there was no transfer / sale of the land under the JDA. Under the agreement, the developer would develop the land making it saleable and in lieu of the construction of the same, the developer will be provided a part of the stock-in-trade. Further, since the JDA cannot be considered as a transfer, the provisions of section 43CA will not have any applicability.

The ITAT held that merely, because the JDA has been registered with the municipal authorities and stamp duty has been paid on the agreement that does not attract the provisions of section 43CA of the Act.

Neither the terms and conditions of the JDA nor the registration authority has treated the JDA as transfer / conveyance.

The ITAT quashed the revision order and allowed the appeal of the assessee.

BCAJ Admin

S. 68 – Where the assessee-company had produced all the documents and evidence to establish the identity, genuineness and creditworthiness of investors by filing complete details including their bank statement and audited financial statements, share application money cannot be treated as unexplained or non-genuine merely on the ground that the directors could not appear before the Assessing Officer personally.

38 Dharmvir Merchandise (P.) Ltd. vs. ITO

[2023] 101 ITR (T) 279 (Kolkata – Trib.)

ITA No.: 1938(KOL) OF 2018

A.Y.: 2012-13

Date of Order: 13th December, 2022

S. 68 – Where the assessee-company had produced all the documents and evidence to establish the identity, genuineness and creditworthiness of investors by filing complete details including their bank statement and audited financial statements, share application money cannot be treated as unexplained or non-genuine merely on the ground that the directors could not appear before the Assessing Officer personally.

FACTS

The assessee-company had issued fresh share capital during the year and received a certain sum from three companies. In the course of assessment proceedings, the assessee-company was called upon to explain the source of the said amount of share capital. The assessee company had provided all the details pertaining to the share capital issue.

Further, summons were issued to the directors of the company u/s 131 of the Act. The directors complied with the summons and had furnished their replies to the Assessing Officer (AO).

The AO, without pointing out any defect in the submissions of the assessee company and the directors, solely stressed upon the personal appearance of the directors. Since the directors were unable to appear personally before the AO, the sum received against share capital was added to the total income of the Assessee company u/s 68 of the Act.

Aggrieved, the assessee company filed an appeal before CIT(A). The CIT(A) upheld the action of the AO due to non-appearance of the assessee on the date of hearing.

Aggrieved, the assessee company filed an appeal before the ITAT.

HELD

The ITAT observed that the primary onus of establishing the identity, genuineness and creditworthiness of investors was discharged by the assessee company by filing complete details of the share subscriber companies including their bank statement, audited financial statements, Form No. 18 in support of registered office address, source and utilisation of funds, copies of ITRs and copies of all relevant company returns.

It was also observed by the ITAT that once the primary onus is discharged by the assessee, the onus shifts on the AO to disprove the documents furnished by the assessee, so as to draw an adverse view or rebut the submissions of the assessee.

Further, it was observed by the ITAT that shareholders were duly served notice under section 133(6) thereby establishing the identity of such shareholders. Since transactions have been executed through a banking channel which is traceable from the origin to the destination of such payments and further confirmed from the documents furnished, this proves the genuineness of the transaction. Creditworthiness of the transaction was established from the fact that all the shareholder companies were having more than sufficient share capital and reserve and surplus funds for giving share application money.

The ITAT relied on the following decisions:

• CIT vs. Orissa Corporation (P.) Ltd. [1986] 159 ITR 78 (SC)

• Dy. CIT vs. Rohini Builders [2002] 256 ITR 360 (Guj HC)

• CIT vs. Kamdhenu Steel & Alloys Limited ITA No. 972 of 2009 (Del HC)

• PCIT vs. Chain House International (P.) Ltd. 98 taxmann.com 47 (MP HC)

• CIT vs. Gagandeep Infrastructure (P.) Ltd. 80 taxmann.com 272 (Bombay)

• Tradelink Carrying (P.) Ltd. vs. ITO [2020] 181 ITD 408 (Kol. – Trib.)

• Satyam Smertex (P.) Ltd. vs. Dy. CIT [2020] 184 ITD 357 (Kol. – Trib.)

The ITAT held that the additions made were based on conjectures and surmises and that the invocation of section 68 of the Act was not justified.

In result, the appeal filed by the assessee company was allowed.

BCAJ Admin

A bank can receive Form No. 15G and need not deduct tax at source only in the cases, where the declaration is given that the tax liability on total income including the interest income will be Nil provided the interest income does not exceed the basic exemption limit. But where the interest income exceeds the basic exemption limit, the bank needs to deduct tax at source notwithstanding the furnishing of declaration in Form No. 15G and the bank will be treated as assessee in default u/s 201(1), where not only it failed to deduct tax at source but the customer also failed to pay such tax directly.

37 Bank of India vs. DCIT (TDS)

TS-582-ITAT-2023 (Nag.)

A.Y.: 2012-13

Date of Order: 28th August, 2023

Sections: 191, 194A, 197A, 201(1A)

A bank can receive Form No. 15G and need not deduct tax at source only in the cases, where the declaration is given that the tax liability on total income including the interest income will be Nil provided the interest income does not exceed the basic exemption limit. But where the interest income exceeds the basic exemption limit, the bank needs to deduct tax at source notwithstanding the furnishing of declaration in Form No. 15G and the bank will be treated as assessee in default u/s 201(1), where not only it failed to deduct tax at source but the customer also failed to pay such tax directly.

FACTS

The assessee bank was required to deduct tax at source under section 194A of the Act. Based on spot verification, it was found that in four cases, the assessee has not deducted tax at source in respect of amounts paid/credited in excess of basic exemption limits on the ground that the assessee had received declarations in Form No. 15G/15H. After considering the reply of the assessee, the Assessing Officer (AO) held the assessee to be in default under section 201 to the tune of R1,90,801.

Aggrieved, the assessee preferred an appeal to the CIT(A) who did not admit the appeal on the ground that there was a delay of about 633 days in filing the appeal. Even after granting credit in respect of the corona period, there was a delay of 324 days which he did not condone.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

Explanation to section 191 clearly provides that the person responsible for the deduction of tax at source can be treated as assessee in default under section 201(1) in respect of such tax, only if he does not deduct or fails to pay thereafter, and the recipient has also failed to pay such tax directly. It is only upon the cumulative satisfaction of both conditions that the person responsible can be treated as assessee in default. In the present case, admittedly the assessee did not deduct tax at source but there is no material to show that the recipient also paid such tax directly. The Tribunal held that the contention of the AR that on receipt of Form No. 15G/15H, its obligation is discharged and the assessee cannot be treated as an assessee in default u/s. 201(1), does not pass the scrutiny of the mandate of Explanation to section 191, which clearly provides that the recipient “has also failed to pay such tax directly”.

On reading sub-section (1A) in juxtaposition to sub-section (1B) of section 197A, it transpires that even if the tax on the estimated total income of the recipient including interest other than interest on securities will be Nil, but the deduction of tax at source would still be required where the amount of interest income exceeds the basic exemption limit.

Thus, on a harmonious construction of the above provisions, it is manifested that a bank can receive Form No. 15G and need not deduct tax at source only in the cases, where the declaration is given that the tax liability on total income including the interest income will be Nil, provided the interest income does not exceed the basic exemption limit. But where the interest income exceeds the basic exemption limit, the bank needs to deduct tax at source notwithstanding the furnishing of declaration in Form No. 15G and the bank will be treated as assessee in default u/s 201(1), where not only it failed to deduct tax at source but the customer also failed to pay such tax directly.

The net effect of the Explanation to section 191, section 194A read with sections 197A and 201 is that there will be no obligation to deduct tax at source on furnishing the necessary declaration by customers where either the interest income does not exceed the basic exemption limit, or the depositor is more than the prescribed age and he furnishes the declaration that tax on his total income including interest from the bank will be Nil.

In order to treat a person as an assessee in default, firstly, there should be an obligation to deduct tax at source and despite such obligation, the person fails to deduct tax at source or pay after such deduction, and further the payee has also not paid tax directly.

The question of whether the assessee is in default in terms of section 201(1) needs to be determined in the light of Explanation to section 191. However, the cases covered u/s 197A(1A) [i.e. the eligible person furnishing declaration in Form No. 15G that his tax liability on total income, including the interest, will be Nil] but not hit by section 197A(1B) [i.e. interest income other than interest on securities as referred to in section 194A does not exceed the basic exemption limit], will at the outset be excluded from consideration as not entailing any obligation to deduct tax at source. Similarly, the cases covered u/s 194A(1C) [i.e. persons exceeding the specified age furnishing Form No. 15H to the effect that tax on their total income including such interest will be Nil] will also be excluded.

Interest u/s 201(1A) is payable by the assessee — even w.r.t. the cases where it is not in default in terms of Explanation to section 191 – from the date when the tax was deductible up to the date of filing of return by the payee including the interest income in his total income. However, the cases in which there is no obligation to deduct tax at source will not be considered for interest u/s 201(1A) of the Act.

The Tribunal set aside the impugned order and sent the matter back to the AO for passing a fresh order u/s 201(1)/(1A) in the light of the above directions. In case, it is found that the recipients included such an amount of interest in their total income, then the assessee should not be treated in default in terms of section 201(1).

BCAJ Admin

AO not having rejected books of accounts could not make any estimated additions or resort to section 44AD.

36 Bulu Ghosh vs. ITO

2023 Taxscan (ITAT) 2508 (Kol – Trib.)

ITA No.: 729/Kol./2023

A.Y.: 2016-17

Date of Order: 18th October, 2023

Sections: 44AD, 145A

AO not having rejected books of accounts could not make any estimated additions or resort to section 44AD.

FACTS

The assessee filed a return of income for the A.Y. 2016-17 which was duly processed u/s 143(1) of the Act. In the course of proceedings for scrutiny assessment, the assessee furnished the necessary details asked for, by providing a copy of the audit report along with P & L A/c and balance sheet for the year ended 31st March, 2016. The Assessing Officer (AO) examined the documents which were produced before him during the assessment proceeding and found that the assessee had reflected a net loss of ₹13,80,362 from contractual business, whereas, as per 26AS, the total value of contract works is ₹22,13,069. On this issue, the AO asked the assessee to explain the discrepancy. However, the assessee could not furnish any documentary evidence to reconcile the same within the stipulated time provided by the AO. Thus the AO decided to add an amount of ₹1,77,046 by calculating 8 per cent of the total contract value of ₹22,13,070 by resorting to the provisions of section 44AD of the Act.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal observed that the main grievance of the assessee in the appeal is that the assessee maintained complete books of accounts and also filed an audit report. There is no whisper in the assessment order about the mistake in the books of account. The AO has not invoked the provision of section 145(3) of the Act and without rejecting the books of accounts, an addition cannot be made as held by the Rajasthan High Court in the case of CIT vs. Maharaja Shree Umaid Mills Ltd. [192 ITR 565].

The Tribunal held that in the present case, the assessee has filed duly audited balance sheets along with P & L A/c before the AO at the time of framing of the assessment order. However, such books of accounts were never rejected by the AO in accordance with the law, and even the AO as well as CIT(A) has not given any findings on the issue. In view of the decision of the Rajasthan High Court in the case of CIT vs. Maharaja Shree Umaid Mills Ltd. (supra), profits cannot be estimated without rejecting books of account. Following the said judgement and based on the discussion of facts recorded, the Tribunal accepted the contentions of the assessee and directed the AO to delete the additions made.

BCAJ Admin

AO having not disputed that the provisions of section 44AD are not applicable, could not have called upon the assessee to produce P&L Account to show the source of expenditure. The addition, if challenged, would have been deleted. Penalty proceedings are independent proceedings. Such incorrect addition is not liable to penalty under section 270A.

35 Prem Kumar Goutam vs. DCIT

2023 Taxscan (ITAT) 2510 (Kol – Trib.)

ITA No.: 156/Pat./2023

A.Y.: 2017-18

Date of Order: 12th October, 2023

Section: 270A

AO having not disputed that the provisions of section 44AD are not applicable, could not have called upon the assessee to produce P&L Account to show the source of expenditure. The addition, if challenged, would have been deleted. Penalty proceedings are independent proceedings. Such incorrect addition is not liable to penalty under section 270A.

FACTS

The assessee, a brick kiln dealer and composition dealer, under Bihar Value Added Tax, 2005, filed his return of income under section 139(4) on 29th March, 2018, under section 44AD of the Act. The assessee disclosed gross receipts of ₹ 49,45,000 and offered income thereon at 8 per cent, i.e. ₹3,95,600. The Assessing Officer (AO) in an order passed under section 143(3) of the Act made an addition of ₹76,000, a payment made to the Mining Department, ₹25,000 as VAT and ₹2,500 as the profession tax on the ground that the assessee has failed to explain the sources of these payments. The AO held that these amounts were incurred by the assessee out of unexplained income. He, accordingly, taxed these amounts under section 69C. He also initiated penalty proceedings under section 270A of the Act and levied a penalty under section 270A.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal observed that the dispute is, whether the benefit of any inherent jurisdictional lacuna committed by the AO could again be availed by the assessee for absolving himself from the levy of penalty under section 270A of the Income-tax Act. The AO nowhere disputed that the assessee does not fall in the category provided under section 44AD.

In case, where income is offered @ 8 per cent of the gross receipts under section 44AD and the AO did not record a finding that this benefit u/s 44AD is not available to the assessee, then, he cannot direct the assessee to produce Profit & Loss Account and show the sources of the expenditure. The estimated rate of 8 per cent in itself takes care of all expenses incurred by an assessee. No further inquiry is required to be made. There was an incorrect approach adopted by the AO while passing the assessment order. The assessee did not dispute the determination of income otherwise the addition would have been deleted.

But the penalty proceeding is an independent proceeding. The assessee can take all jurisdictional pleas to absolve him from the levy of penalty. The assessee cannot be charged that he has under-reported the income and is liable to be visited for the penalty under section 270A of the Income-tax Act.

The appeal filed by the assessee was allowed.

BCAJ Admin

Storytelling and Communication The Route to Success, From Fundraising or Financial Analysis

When viewing television, we see hundreds of advertisements that are constantly persuading us to buy or use something. There is something common between them. In the few and costly seconds that they are on air, most advertisements (Ad) tell stories: of a daughter surprising her parents with an expensive gift from her first salary, of an underprivileged child making it big, of obtaining a loan with ease to buy a car or about the memories of a family member in a life insurance Ad. When the target customers actually buy the product or service, their decision is based on its attributes such as price, quantity or other features, but yet, barring some exceptions, Ads seldom talk about these. Instead, the seller tells us stories. Why is this so? Should the Ads not be focussing on the very criteria we use to make the decision?

There’s a reason for this. Stories carry emotions, and people instantly connect with them. A survey by a Stanford University professor showed that at the end of a presentation, stories told were remembered by 63 per cent of the audience, whereas only 5 per cent recollected data or facts. Yet, as finance professionals, we attach huge importance to data. Neuroscientists have confirmed that decisions are often based on emotion, not logic, and people hear statistics but feel stories. Feeling makes an emotional connection with the audience and leads to decisions.

Each time we communicate, whether it is by way of a presentation to a potential investor or in a business review meeting or even when we argue at home, we are always trying to influence the listener. To do or not to do something, to agree with our point of view. Contrary to our perception, no matter how interesting the data, it does not appeal to emotion and so, does not result in action. So, we need to tell more stories when we communicate. The skills of storytelling and good communication show great importance in the success of our work — be it as a businessman or an employee. In the rest of this article, I write on these two activities that we as Chartered Accountants engage in: fundraising and analysing financial performance.

FUNDRAISING

With a booming world of start-ups and business expansion, many of us are engaged in working with investors to raise funds. When a founder wants to raise funds, while he/she will surely carry ideas, plans, facts and forecasts, the pitch’s success depends on how they communicate and tell the story around the idea. The numbers matter, but the story behind the numbers will excite the investor enough to fund the proposal. They first need to tell the story about the customer’s pain point — e.g., cab hire companies told stories of the challenges that were being faced by the customer in owning cars, parking, cash flow, waiting time to get a cab, etc. Such stories are persuasive. Steve Jobs once said: “The most powerful person in the world is the storyteller.” For Silicon Valley behemoths, storytelling has emerged as a powerful tool. They use it to shape the sentiment of their marketing content to attract new investors¹.

The founder and their team need to tell stories at two levels: their personal one and their vision of their business. To quote the CEO of foundersuite.com², “[F]ounders don’t leverage their own journeys nearly enough. That’s a big mistake, because most investors bet on the founders themselves, not just the products or companies.” Their background and the need to identify with it is what makes them special. How did they get to where they are now? Why do they care about the particular problem their product solves? These seem simple questions, but they allow a founder to do really deep and meaningful work. The second level is, of course, the “vision story, which paints the big picture of the idea of the venture. Inevitably, every founder will experience pushback, objections, and scepticism. The anecdote is to appeal to investor’s deeper motivations”.

1 https://longevity.technology/news/how-to-attract-investors-the-role-of-emotional-storytelling-in-longevity-investment/
2 https://www.forbes.com/sites/allbusiness/2023/07/21/how-storytelling-can-help-you-craft-an-investor-pitch-that-stands-out/?sh=6a57091053f1

Ashwath Damodaran, professor of finance and valuations at New York University’s Stern School of Business, who has written over a dozen books, narrates a story on YouTube, of the valuation of Uber in 2014. At the time, when the company was still in a nascent stage of business, he came up with a valuation of $6 Billion based on Uber being an urban car service company. Another expert and investor in Uber, told the story of Uber and the nature of Uber’s business as a global logistics company vs. an urban car service company. The valuation of the very same company was now several times higher. It is not merely about defining the scope of what the product can do or about the market. This story helps connect the idea to the product and to the market.

Good storytelling requires an in-depth understanding of the customer’s problem and preferences. This in turn requires a good amount of research. Studying in the market in a hurry and limiting it to a few customers and use cases does not help. How you tell the story of your product, its application and utility, tells the investor if you understood the customer problem that you are trying to solve. Founders also commit the mistake of trying to prove that their product or solution is unique when, in fact, it may not be so. They sometimes focus on the goodness of their product and invariably categorise it as unique without competition.

Communicating with investors is another critical aspect of fundraising. For one, it is necessary to network with potential investors and communicate with them periodically, even if you’re not raising funds at that point in time. It helps keep the idea of the product alive in the marketplace. The other aspect is the seriousness of every meeting. Every single one of them is important to the investors who have put in their money. I have come across meetings where the founders or their CFOs are sometimes casual about them, more so when they become familiar and comfortable with the investor. They do not come sufficiently prepared for the meeting and sometimes have an approach to a problem raised by saying, “Don’t worry, we will manage it” or “We will solve it”. This is not good communication. It can leave the investors uncomfortable that the investee company has not thought through some important aspects of a problem or are not anticipating events enough. Even if they appear friendly, investors are not friends and every interaction requires the nature of communication to be formal and serious.

FINANCIAL ANALYSIS

Chartered Accountants are very good at analysis. It is one of our core strengths to provide insights to the organisations and businesses with support. But merely providing analysis is no longer sufficient. We have seen that if we want to influence decisions, we need to present it in a way that makes it interesting to the listener and motivates them to take action. For this, we need to package the data and build the skill of presenting our analysis in an interesting way by using stories. Storytelling does not mean that we have to bend facts or change the contents. Finance professionals are the messengers of truth and that expectation of us, which goes with the fiduciary responsibility, will never change. However, we must be able to say it in a way that is consumable, visually appealing and can be actioned upon. To be heard, we have to grab the attention of the audience. Data needs to be woven into stories. It inspires change compared to a general pitch, which may be hard for the audience to visualise.

Think of it this way. We all give gifts. Let’s say it is a wristwatch. Do we ever take a watch in our hand and give it that way to a friend / relative? No. Never. We always put it in a nice box, gift wrap it, maybe add a personal note, and then hand it over. The experience of the receiver is very different. Wrapping a story around data is very similar and very necessary.

We sometimes walk into performance review meetings believing that our data is powerful, will speak for itself and that we won’t really have to do much talking to excite or convince the audience. That, the data will automatically result in quality discussions and lead to necessary actions being taken. The worse the performance, the greater our belief as finance professionals that the listener should feel morally obliged to take quick corrective actions. However, as we read earlier, emotions are what appeal to people, not facts or data. So, we need to build emotions by weaving stories around the data.

DO WE HAVE ENOUGH STORIES TO TELL?

Most certainly, there are stories all around us. There are stories to tell about the difficulty in closing the books in the early years of the company, the struggle of not having enough cash to pay salaries, the journey of reducing Days Sales Outstanding (DSO) from an ugly 120 days to 80 days, an estimate of the market or significant business assumption that went wrong or dealing with a difficult customer or market segment. Using another illustration, we often sensitise people to the need to procure only from empanelled vendors. We can begin such discussions by telling stories of frauds in other companies that made the news, highlighting the ethical risks of using non-empanelled vendors. These stories will help the audience relate to our pitch and connect with the purpose of the company policy. We have to be factual, provide context, focus on the key messages and persuade the listener. So, going forward, before making a presentation, you may want to consider making a quick checklist of these points and ask yourself:

Have I provided context?

Will it help the audience focus on the key message?

Does it appeal to the right Emotions? And so on…

So, building these skills and embedding them into the different activities we perform is not just important but also has a high return on investment. It is time we made the shift from focusing on what we say to how we say it. So go for it!

BCAJ Admin

Private Affairs Impacting Public Interest Entities — A Sift Through a Recent SEBI Amendment

The Primary Marked Advisory Committee (‘PMAC’) of the Securities and Exchange Board of India (‘SEBI’) had identified and deliberated on certain challenges and issues arising out of (i) agreements indirectly binding public listed entities, (ii) special rights granted to shareholders of a public listed entity, (iii) sale, disposal or lease of an undertaking of a listed entity and (iv) the provision for board permanency in the context of a public listed entity. Based on PMAC recommendations, SEBI released a Consultation Paper¹ for public feedback, basis of which released a Board Memorandum² and consequently, on 14th June, 2023 introduced certain amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations’) under the SEBI (Listing Obligations and Disclosure Requirements) (Second Amendment) Regulations, 2023 (‘Listing Regulations Amendment’).³

1 Consultation Paper on 'Strengthening Corporate Governance at Listed Entities by Empowering Shareholders' on February 21, 2023.
2 Board Memorandum on ‘Strengthening corporate governance at listed entities by empowering shareholders - Amendments to the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015’ dated 17th April, 2023
3 The Listing Regulations Amendment came into force on July 14, 2023 (except certain specified amendments which will come into force on the date of their publication in the Official Gazette).

One of the key amendments under the Listing Regulations Amendment relates to approval and disclosure requirements for certain types of agreements indirectly binding listed entities. These agreements could be in the nature of family arrangements, trust deeds, settlement agreements, shareholder agreements, voting agreements, family charters, consent terms, etc. to which the listed entity may not have been privy or party.

In this article, our attention is directed toward analysing the disclosure requisites emanating from this particular facet of the amendment, accompanied by a critique exploration of the attendant complexities.

CONTEXT

Regulation 30 of Listing Regulations relates to the disclosure of material events and information by a listed company to stock exchanges. Prior to the Listing Regulations Amendment, clause 5 of Para A of Part A of Schedule III of Listing Regulations covered a disclosure requirements as under:

Clause 5: Agreements [viz. shareholder agreement(s), joint venture agreement(s), family settlement agreement(s)] (to the extent that it impacts management and control of the listed entity), agreement(s) / treaty(ies) / contract(s) with media companies) which are binding and not in the normal course of business, revision(s) or amendment(s) and termination(s) thereof.

The Listing Regulations Amendment introduced a new Clause 5A with an expanded scope as under:

“5A. Agreements entered into by the shareholders, promoters, promoter group entities, related parties, directors, key managerial personnel, employees of the listed entity or of its holding, subsidiary or associate company, among themselves or with the listed entity or with a third party, solely or jointly, which, either directly or indirectly or potentially or whose purpose and effect is to, impact the management or control of the listed entity or impose any restriction or create any liability upon the listed entity, shall be disclosed to the Stock Exchanges, including disclosure of any rescission, amendment or alteration of such agreements thereto, whether or not the listed entity is a party to such agreements:

Provided that such agreements entered into by a listed entity in the normal course of business shall not be required to be disclosed unless they, either directly or indirectly or potentially whose purpose and effect is to, impact the management or control of the listed entity or they are required to be disclosed in terms of any other provisions of these regulations.
Explanation- For the purpose of this clause, the term “directly or indirectly” includes agreements creating an obligation on the parties to such agreements to ensure that listed entities shall or shall not act in a particular manner.

The impetus behind the amendment through the introduction of Clause 5A primarily seems to originate from the context of shareholders agreements (‘SHA(s)’) and the requisite disclosures pertaining to these agreements as they pertain to shareholders of listed companies. SHAs manifest either as agreements between shareholders themselves or encompass agreements involving both shareholders and the listed entity. In practice, the rights and responsibilities stipulated within an SHA are normally seamlessly incorporated into the Articles of Association (‘AoA’) of the company.⁴

4 (i) V. B. Rangaraj vs. V.B. Gopalakrishnan and Ors, as reported in CDJ 1991 SC 464 + S.P. Jain vs. Kalinga Tubes Ltd, 1965 AIR (SC) 1535, (ii) World Phone India Pvt. Ltd. & Ors. vs. Wpi Group Inc. (2013) 178 Comp Cas 173 (Del)

Furthermore, considering that any alteration to a company’s AoA mandates shareholder endorsement via a special resolution, the assimilation of an SHA into the AoA would necessitate a similar level of endorsement. In this context SEBI discerned an incongruity wherein SHAs absent from the AoA evaded the scrutiny that would normally arise through the special resolution, thus negating the very purpose of disclosures as prescribed under Schedule III of the Listing Regulations.

SEBI’s review also brought to light another issue, specifically concerning scenarios where listed company promoters entered into agreements with third parties (or within themselves) but did not involve the listed company as a contracting party. Such agreements might potentially impose restrictions, direct or indirect liabilities or obligations on the listed entity. Although the mechanism for generating obligations on a non-signatory to a contract might not be immediately evident from the Consultation Paper or the Board Memorandum; SEBI noted that if the listed entity were a party to such agreements, shareholders would gain access to copies for an assessment. This transparency would enable shareholders to evaluate potential adverse implications for their interests. Given that, before Listing Regulations Amendment stipulations pertained exclusively to agreements binding on listed companies, promoters could have evaded existing shareholders’ scrutiny by excluding the listed entity as a contracting party in these agreements. In response to an observation received from the Consultation Paper, SEBI underscored the necessity for symmetry in information dissemination pertaining to any agreement impacting the management or control of a listed entity, irrespective of whether the listed entity is a direct party to the agreement.

The Listing Regulations Amendment categorises such agreements into two groups: (a) pre-existing and subsisting agreements and (b) agreements to be executed in the future.

For pre-existing and subsisting agreements that fall within the scope of the above Clause 5A, the Listing Regulations Amendment prescribed their disclosure on or before
14th August, 2023, in addition to the disclosure on the website as well as in the annual report of FY 2022-2023 and FY 2023-24. This requirement has been introduced through the inclusion of Regulation 30A.

For agreements to be executed in the future, the concerned parties are required to intimate the listed entity within two working days of entering into such agreement, and the listed entity would then be required to disseminate to the public within prescribed timelines.

COMMENTARY AND CRITIQUE ANALYSIS

Formerly, only binding agreements such as shareholder agreements, joint venture agreements, and certain family settlement agreements (insofar as their impact on the management and control of the listed entity was concerned), as well as agreements, treaties, or contracts with media entities, were subject to disclosure requirements. These obligations encompassed both the original agreements and any subsequent modifications, amendments, or terminations. However, this approach sometimes led to the omission of other arrangements involving promoters, shareholders, and other relevant parties, even if they held the potential to influence the management and control of the listed entity or impose restrictions upon it.

The newly introduced clause 5A broadly intends to cover agreements that:

(i) impact the management or control of the listed entity or

(ii) impose any restriction on the listed entity or

(iii) create any liability upon the listed entity.
in each case either directly, indirectly or potentially.
The Listing Regulations Amendment instates an additional disclosure requirement upon not only the listed entity but also the promoters, shareholders and other contractual parties. This marks a departure from the previous stance and broadens the scope of disclosure obligations encompassing agreements. It is pertinent to note that such a disclosure is mandated without a predetermined assessment of their materiality.

Moreover, this amendment mandates the disclosure of previously undisclosed existing arrangements involving listed entities. Parties involved in such agreements, along with the listed companies themselves, are tasked with compiling a comprehensive inventory of all active agreements associated with the listed company. Subsequently, this information must be furnished to the relevant listed companies or stock exchanges within stipulated timelines.

It is widely acknowledged that the Indian listed securities landscape is characterised by a robust emphasis on disclosure. SEBI has consistently undertaken measures to address information asymmetry between listed entities and market participants. These measures encompass the enactment of amendments and regulations designed to bolster transparency and enhance stakeholder engagement in the governance of listed entities. Nevertheless, in the pursuit of these objectives, SEBI faces the intricate challenge of striking a delicate balance between promoting pertinent disclosures and imposing concurrent burdensome obligations on the concerned stakeholders.

While the Listing Regulations Amendment aligns with SEBI’s overarching commitment to fostering transparency, certain aspects of the language and current formulation of the amendments may appear onerous and overly expansive to market participants unless subjected to further refinement.

1. Sweeping scope with unintended coverage: The current rendition of Clause 5A has a notably sweeping scope, encompassing agreements that not only directly or indirectly impact the management and control of a listed company but also those that create restrictions or liabilities for the listed entity, regardless of whether the listed entity is a direct party to such agreements.

The current wording of the clause being comprehensive has the potential to inadvertently encompass unintended categories of contracts. Such an arrangement, despite being irrelevant to the listed entity’s shareholders and potentially including confidential nominee-related information, would be subject to mandatory disclosure to the exchanges.

2. The vast expanse of the terminology ‘impose any restriction or create any liability upon the listed entity’: Each and every agreement will impose some kind of restriction or liability on the listed entity. It is the actual purpose of any agreement to create certain restrictions or cast obligations and liabilities. The choice of words used in clause 5A goes beyond obligations that affect the management or control of the listed entity but covers any and all restrictions or liabilities created on the listed entity. Unless the listed entity is able to prove that such a restriction or liability is in the ‘normal course of business’, any restriction or liability, without application of materiality would warrant a disclosure.

This aspect was categorically considered by SEBI and below verbatim feedback from the Board Memorandum guides the regulatory through-process:

As regards the suggestions made by some commenters to define the terms ‘restrictions’ and ‘liability’, it is viewed that these terms are themselves self-explanatory and any attempt to define them with precise words may lead to unwarranted interpretational issues which should be avoided.

3. Whether possible to impose restrictions without a listed entity being a signatory: The concept of a contract imposing restrictions or liabilities on a listed entity in the absence of the company’s direct involvement poses conceptual challenges. If such restrictions or liabilities result from the commitment of shareholders to vote their shares in a specific manner, this would be encompassed under part (i), rendering part (ii) and (iii) of Clause 5A redundant.

4. Implications of retroactive disclosures: The application of the amendments to existing arrangements effectively renders the legislation retroactive, as the parties to such arrangements would not have anticipated their disclosure or the requirement for shareholder approval, as currently stipulated. The obligations on confidentiality, sub-judice, etc. may warrant close consideration.

5. Duplication with principles under SEBI Takeover Code: The SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 (‘Takeover Regulations’) encapsulates detailed provisions in relation to disclosure as well as tender offer provisions about acquisition / change of control of a listed entity. To introduce an additional requirement and its interplay with Takeover Regulations may result in unintended consequences. In addition to the word ‘control’, agreements impacting ‘management’ are also covered within the purview of the newly introduced Listing Regulations Amendment. The word ‘management’ however, is not defined under the Listing Regulations and SEBI considered this critique feedback in its response under the Board Memorandum as:

While the word ‘control’ will always connote the meaning and explanation as defined under the Takeover Regulations, the term ‘management’ being a broader term should not be subject to a hard-coded definition and it is desirable to leave the term ‘management’ to connote the meaning used in common parlance.

6. Lack of guiding principles: Clause 5A is positioned within Para A of Part A of Schedule III, which implies that disclosures hereunder are required irrespective of materiality thresholds, thereby mandating disclosure without an accompanying set of guiding principles. This broad inclusion would necessitate the disclosure of numerous agreements falling within the purview of Clause 5A, even if they bear a minimal impact on information symmetry between the listed entity and market participants. A notable contrast arises when juxtaposing this approach with the LODR’s treatment of related party transactions, which mandates board approval only when transactions surpass a defined materiality threshold.

In the six months from February 2023, SEBI has floated over three dozen consultation papers seeking to overhaul the ground rules for market players and intermediaries. Such a frenzied pace or regulatory overhaul has been unprecedented. While it is de rigueur for market participants to crib and carp about ease of doing business whenever regulations are tightened, it would do good if these changes provide the right set of guidance, definitions and clear ambiguities. While SEBI’s proactive approach is laudable, being on a regulatory overdrive runs a risk of skirting the robustness of a law-making process and resulting in implementation challenges, unintended consequences as well as needless litigation.

FOOTNOTE DISCLOSURES

Selected excerpts from disclosures made by certain listed entities in compliance with Clause 5A:
1. Titan Company Limited: Tamil Nadu Industrial Development Corporation Limited (TIDCO) and Tata Sons Limited (now known as Tata Sons Private Limited) (“TSPL”) (which was replaced by Questar Investments Limited was replaced by TSPL) are parties to the Investment Agreement entered on 8th February, 1984 and the Supplementary Agreement entered on 10th April, 2007 (“Agreements”). TIDCO and TSPL are Promoters of the Company holding 27.88 per cent and 25.02 per cent respectively.

The purpose of entering into the Investment Agreement was for the establishment of the Company for the manufacture and sale of watches and watch components.

2. Bharti Airtel Limited: Bharti Telecom Limited (“BTL”), Promoter has entered into Shareholders’ Agreement on 22nd January, 2009 with Pastel Limited, Bharti Enterprises (a partnership firm subsequently converted into Bharti Enterprises (Holding) Private Limited (“BEHPL”) is the holding company of BTL), Bharti Infotel Private Limited (since the execution of the SHA, been merged with BEHPL0 and Indian Continent Investment Limited (“ICIL”), is a person acting in concert with BTL to set out their inter se rights and obligations in relation to BTL and its subsidiaries. (ii) Bharti Airtel Limited (“BAL”) entered into a Shareholders’ Agreement on 22nd January, 2009, with Bharti Telecom Limited, Pastel Limited to set out their inter se rights and obligations of BTL and Pastel about BAL and its subsidiaries.

3. Sun Pharmaceutical Industries Limited: Certain specific rights have been granted to the Promoter under the Article 108 of the Articles of Association of the Company.

4. Marico Limited: Harsh C. Mariwala, Chairman and promoter of Marico Limited entered into a Shareholders’ Agreement to record the understanding of the parties to the SHA in relation to their shareholding in Marico to provide full support to the Mariwala family in the management of Marico.

5. Kirloskar Brothers Limited: A Joint Venture Agreement was executed on 27th January, 1988, between Kirloskar Brothers Limited, Kirloskar Ebara Pumps Limited and Ebara Corporation to establish a limited joint venture to be operated under and by virtue of the laws of the Republic of India in order to promote manufacture and sell industrial process pumps and / or such other products as the parties mutually agreed.

6. Hikaal Limited: Disclosure From Promoters, Mr. Jai Hiremath and Mrs. Sugandha Hiremath of the Hikaal Limited entered into a Family Arrangement in the year 1994 between Mr. Babasaheb N Kalyani (“BNK”) and his father, whereby the shares of the Hikaal Limited held by KICL (Kalyani Investment Company Limited) and BFIL(Bharat Forge Investment Limited), both of which are under the ownership and control of the BNK Group, were required to be transferred to Mrs. Sugandha Hiremath. KICL and BFIL hold 34.01 per cent in Hikaal Limited.

7. Godfrey Phillips India Limited: A Shareholders Agreement was executed amongst Godfrey Phillips India Limited and Philip Morris Global Brands Inc. (erstwhile Philip Morris International Finance Corporation) (“PMGB”), promoter of the Company, Philip Morris Products S.A. (“PMSA” together with PMGB referred to as “Philip Morris Entities”) and Modi Shareholders on dated 28th May, 2009, to record inter alia certain rights and obligations of Philip Morris Entities and Modi Shareholders concerning the Company and inter se mutual rights and obligations of Philip Morris Entities and the Modi Shareholders.

8. Geojit Financial Services Limited: A Promotional Agreement was executed between Kerala State Industrial Development Corporation Limited (“KSIDCL”) and C.J. George (“Promoter of Geojit Financial Services Limited”) on 23rd March, 1995 for Promotional association with KSIDCL when the Geojit Financial Services Limited was unlisted.

A Shareholders Agreement has been executed amongst C.J. George, Shiny George, BNP Paribas S.A., BNP Paribas India Holding Private Limited and Geojit BNP Paribas Financial Services Limited (presently Geojit Financial Services Limited) on 22nd January, 2016, for the purpose of governance of the Company and dilution of rights of BNPP in the Company to protect the Company from BNPP’s conflict of interest consequent to BNPP acquiring full ownership and control of Sharekhan Limited, though the shareholding in the Company remains the same.

BCAJ Admin

Resolving the Conundrum of Input Tax Credit under GST: Striking a Balance for Genuine Claimants

The implementation of the Goods and Services Tax (GST) in many countries is aimed to streamline the tax regime and eliminate the cascading effect of taxes.

One of the fundamental concepts of GST is Input Tax Credit (ITC), which allows businesses to claim credit for the taxes paid on inputs or input services or capital goods. However, the interpretation and application of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 (‘CGST Act’), pertaining to the payment of tax by the supplier as a prerequisite for claiming such ITC, has sparked a debate regarding the denial of ITC to bona fide claimants, especially when such denial is not attributable to any lapse on the part of the claimant.

This article explores the conflicting perspectives and proposes a balanced approach to ensure fairness for all stakeholders.

THE LEGAL PROVISION

Section 16(2)(c) stipulates that a recipient of goods or services can avail ITC only if the tax charged on the supply of goods or services has been actually paid to the Government by the supplier. The strict interpretation of this provision places an onerous burden on the claimant to verify whether the supplier has remitted the tax, potentially leading to the denial of ITC even to bona fide claimants who have already paid the tax to the suppliers. This raises concerns about the practicality and fairness of such a requirement.

Before the amendment to Section 41 of the CGST Act, recipients were allowed to claim ITC on a provisional basis. This meant that they could avail of ITC based on self-assessment, but it would only become final after the process of matching ITC through the filing of GSTR-2 and GSTR-3. Further, the disallowances proposed by the Department merely on the basis of the mismatch with GSTR-2A were easy to challenge. Sections 42, 43 and 43A, which were associated with the matching, reversal and reclaim of ITC, were omitted due to challenges in effectively implementing the matching process.
With the amendment introduced by the Finance Act, 2022, effective from 1st October, 2022, the concept of provisional ITC and matching was eliminated. The recipients are now required to self-assess and claim ITC in GSTR-3B based on credits in GSTR-2B. If a recipient claims ITC for GST that the corresponding supplier has not paid, they are required to reverse ITC along with applicable interest. The recipient can re-avail the reversed ITC once the supplier pays the GST.

This change results in the disallowance of ITC to the recipient solely due to the non-payment of tax by the supplier, along with interest. However, there remains an open question regarding whether the authorities can impose a time limit on the re-availing of this credit by the recipient after the supplier has made the payment. Furthermore, there is a lack of clarity regarding the refund of interest paid by the recipient in such cases, adding an element of uncertainty to this aspect of the amended Section 41 of the CGST Act.

PRE-GST JUDICIAL PRONOUNCEMENTS

In the pre-GST era, the Courts¹ have recognised the difficulties faced by claimants in verifying the tax payment by suppliers. These judicial precedents have emphasised the bona fide nature of transactions and allowed recipients to claim credit, even if the supplier had defaulted in paying the taxes. These rulings highlighted the unfairness and impracticality of imposing such a burden on claimants, ensuring that the interests of businesses were protected.

1 Commissioner of Central Excise, Jalandhar vs. Kay Kay Industries [2013 (295) ELT 177 (S.C.)]
Arise India Ltd and others vs. Commissioner of Trade & Taxes, Delhi and others [TS-314-HC-2017(Del)-VAT]
Larsen & Toubro vs. CCE (2001 (127) ELT (807)

INCONSISTENCIES IN GST JUDICIAL DECISIONS

Under the GST regime, there have been divergent opinions on the issue of ITC eligibility due to non-payment of tax by the suppliers, as discussed on the next page.

D.Y. Beathel Enterprises vs. State Tax Officer (Data Cell) – {[2021] 127 taxmann.com 80 (Madras)}

The issue centred on the eligibility and conditions for claiming ITC under the CGST Act and the Tamil Nadu Goods and Services Tax Act, 2017.

The petitioners, who were engaged in trading Raw Rubber Sheets, had procured goods from registered dealers. A substantial portion of the sale consideration was transacted through banking channels. Relying on the suppliers’ tax returns, the petitioners claimed ITC.

However, during a revenue inspection, it was uncovered that the suppliers hadn’t remitted any tax to the Government. Consequently, the revenue initiated proceedings to recover the ITC from the petitioners. The petitioners contended that the suppliers should have been examined during the inquiry, a step that wasn’t undertaken.

The Court ruled in favour of the petitioners, asserting that the revenue couldn’t reverse the ITC availed by the petitioners due to the supplier’s failure to pay taxes on the supplies without first conducting an examination of the suppliers and initiating recovery proceedings against them. The Court emphasised that when it became evident that the tax hadn’t been deposited to the Government, the liability should have been apportioned either to the supplier or the buyer.

In summary, this judgment highlights that if an assessee purchases goods through registered dealers, especially when a significant part of the sale transaction is conducted through banking channels, the revenue authority cannot reverse the ITC without properly examining the supplier and initiating recovery proceedings against them.

Pinstar Automotive India (P.) Ltd vs. Additional Commissioner – {[2023] 149 taxmann.com 13 (Madras)}

The Court upheld the denial of ITC to the petitioner-assessee in a situation where the supplier had charged tax but failed to remit it to the tax department. The Court emphasised that the provisions of Section 16(2)(c) of the Act must be strictly followed, and the interest of revenue must be protected by ensuring that tax liability is met either by the supplier or the purchaser. The Court noted that when the supplier did not deposit the tax charged from the petitioner, the revenue was justified in denying ITC to the assessee. However, it also acknowledged that a mechanism should be established to address situations where tax liability was met by both the purchaser and the supplier, as it could result in double taxation.

Jai Balaji Paper Cones vs. Assistant Commissioner Sales Tax {[2023] 152 taxmann.com 690 (Madras)}

In this judgment, the Court addressed a case related to ITC where the petitioner had paid taxes on three invoices to the supplier for goods purchased. However, it was found that the supplier’s GST registration had been cancelled before these invoices were issued, and the tax had not been remitted to the Government. Consequently, the Court ruled that a mandamus (a judicial order) could not be issued to the tax department, as it would go against the provisions of Section 16(2)(c) of the CGST Act, along with Rule 36(4) of the Central Goods and Service Tax Rules, 2017.

The Court observed that Section 16(2)(c) specifies that a registered person is only eligible for ITC if the tax has been actually paid to the Government. Further, it stated that since the supplier had lost their GST registration before the invoices were raised, they couldn’t have paid the tax to the government.

The Court, therefore, dismissed the petitioner’s writ petition, favouring the revenue authorities and denied the claim of ITC. However, it acknowledged the petitioner’s right to seek recovery of the amount from the suppliers through legal means.

Suncraft Energy (P.) Ltd vs. Assistant Commissioner, State Tax {[2023] 153 taxmann.com 81 (Calcutta)}

In this case, the appellant’s ITC was reversed by the revenue authority under the West Bengal Goods and Services Tax Act, 2017 (WBGST Act). This reversal was based on the allegation that certain supplier invoices were not reflected in the appellant’s GSTR-2A for the Financial Year 2017–18. The appellant contended that they had complied with Section 16(2) by possessing valid tax invoices, making payments to the supplier and fulfilling other conditions for availing ITC.

The Court ruled that the reversal of ITC based on discrepancies in GSTR-2A was not justified. It clarified that GSTR-2A is a tool for taxpayer facilitation and does not impact the eligibility of taxpayers to avail of ITC based on self-assessment under Section 16 of the Act. The Court emphasised that the reversal of credit from the buyer is optional, except in exceptional circumstances such as collusion, missing supplier or lack of assets. The revenue authority failed to conduct an inquiry into the supplier’s actions despite clarifications provided by the appellant.

Furthermore, the show cause notice faulted the supplier’s GSTR-1 but did not address the possession of valid tax invoices or receipt of goods and services by the appellant. Therefore, the Court held that action against the supplier should have been taken before seeking a reversal of ITC from the appellant. The revenue’s action was deemed arbitrary, and the impugned order was set aside. The Court directed the authorities to follow Central Board of Indirect Tax and Customs (CBIC) guidelines.

In summary, the Court ruled in favour of the appellant, stating that the reversal of ITC was unjustified, and action against the supplier should precede any such reversal based on GSTR-2A discrepancies.

Aastha Enterprises vs. State of Bihar {[2023] 153 taxmann.com 491 (Patna)}

In this ruling, the Court addressed the issue of whether a purchaser, a registered dealer, can claim ITC when they have paid the tax to the selling dealer through a tax invoice, but the selling dealer has not remitted the tax to the Government. The Court found that for ITC to be claimed, certain conditions and restrictions must be met, including the actual payment of tax to the Government by the selling dealer. These conditions must be satisfied together, and ITC can only be claimed when the tax has been paid to the Government by the supplier.

The Court emphasised that ITC is a benefit or concession created by the statute and can only be availed of if the statutory conditions are strictly followed. It rejected the argument of double taxation, stating that the claim is denied only when the selling dealer fails to pay the tax to the Government. The Court also clarified that the existence of a recovery mechanism in the statute does not absolve the purchasing dealer of their liability to ensure the tax is paid to the Government.

Ultimately, the Court ruled in favour of the revenue and dismissed the writ petition, stating that the claim for ITC cannot be sustained when the selling dealer has not paid the tax to the Government despite collecting it from the purchasing dealer. Additionally, the Court noted that the writ petition was filed after the period for appeal had expired, but it was still admitted because the issue involved the interpretation of provisions related to ITC under the relevant tax act.

In the complex landscape of conflicting court rulings on the allowance of ITC under the GST framework, one cannot help but ponder the very essence of this tax reform. On the one hand, there are judgments that champion the cause of recipients, advocating for a fair and pragmatic interpretation that safeguards their rights. On the other hand, there are those who argue for stringent adherence to the law, viewing ITC as a privilege that must be earned through supplier compliance. This legal tug of war not only underscores the interpretational nuances of the GST law but also underscores the pressing need for a cohesive and definitive resolution that strikes a balance between taxpayer interests and the broader objectives of the tax regime.

In my view, the denial of ITC based solely on technical non-compliance burdens genuine taxpayers and undermines the intent of the GST regime. It is important to consider the complexity of GST laws and adopt a balanced and uniform approach to ensure fairness in the treatment of claimants. Some of the recommendations that the Government should focus on to ensure a balanced and uniform approach are as follows:

Clarity in regulations: Provide clear and unambiguous guidelines regarding ITC eligibility and compliance requirements. This clarity will help businesses understand their obligations better.
Consistency in interpretation: Ensure that GST laws are interpreted consistently across different jurisdictions and by different authorities to avoid confusion and conflicting precedents.
Standardisation of procedures: Implement standardised procedures for the denial and rectification of ITC across all states and union territories. This will help businesses operate seamlessly across India.
Regular training for tax authorities: Ensure that tax authorities across the country receive regular training to stay updated on GST laws and their proper application.
Industry consultation: Engage with industry stakeholders and trade associations to gather feedback on the GST framework and promptly make necessary adjustments to ensure fairness and simplicity.

UNFAIR DEMANDS AND SHOW CAUSE NOTICES

In an alarming trend, tax authorities are insisting claimants to reverse ITC or confront show cause notices. This places an unjustifiable burden on claimants, forcing them into a precarious dilemma. They are left with two unfavourable options: either reverse ITC, effectively subjecting themselves to double GST taxation on the same transaction, or brace for the possibility of protracted legal repercussions. The situation is aggravated by the difficulties claimants face in accessing concrete evidence or documentation that could demonstrate the payment of GST by their suppliers, leaving them in a state of perplexity.

This trend raises significant concerns about the fairness and transparency of tax enforcement. It not only places an unjust economic burden on businesses but also jeopardises their trust in the tax system. Addressing this issue is crucial to ensure that tax compliance is balanced with the protection of taxpayers’ rights and that the system remains equitable and just for all parties involved.

REVERSING ITC TO AVOID LITIGATION

In specific scenarios where claimants have the potential to reclaim GST along with accrued interest from defaulting suppliers, they may consider the strategic move of reversing ITC to sidestep protracted legal battles and seek some relief. However, this is a relatively rare occurrence. In the overwhelming majority of cases, claimants find themselves compelled to shoulder the financial burden by reversing ITC along with the associated interest, even when they are unable to recover GST, plus interest, from their suppliers. This predicament is intensified by the inherent difficulty of obtaining compensation from non-compliant suppliers.

When claimants contemplate resisting the official directive to reverse ITC alongside the requisite interest, they find themselves facing the daunting prospect of engaging in protracted legal disputes with both Government authorities and their suppliers. This ordeal invariably comes with substantial litigation costs, placing an unjust burden on the claimants, who, in essence, are the aggrieved parties in this convoluted equation.

One pivotal factor further worsening this situation is the profound challenge of reclaiming the GST and interest owed from suppliers who have defaulted on their obligations. The claimants, despite having legitimate claims, often find themselves entangled in a web of supplier evasiveness or insolvency, rendering the recovery process an arduous and frustrating endeavour.

In summary, the strategic reversal of ITC to avert lengthy legal battles is an option available to some claimants. Nonetheless, it remains a rare recourse, as most claimants are left with no choice but to comply with the requirement to reverse ITC, even when they cannot recuperate the GST and interest owed to them by their defaulting suppliers. This unfortunate situation not only places claimants at a financial disadvantage but also underscores the pressing need for reforms and remedies to ensure that the burden of compliance and recovery falls on those who are truly responsible for the defaults.

REVERSAL AND RE-AVAILING OF ITC

Rule 37A of the Central Goods and Services Tax Rules has been introduced w.e.f. 26th December, 2022, with respect to the reversal and re-availment of ITC in cases where the supplier fails to pay the tax. As per the Rule, if the recipient has availed of ITC based on the supplier’s details reported in their GSTR-1 return, but the supplier fails to pay the applicable taxes in GSTR-3B by the specified deadline, the recipient must reverse the ITC amount while filing their GSTR-3B return before 30th November following the end of the financial year. In such a case, the claimant need not pay the interest on such reversal. Subsequently, such credit can be re-availed by the claimant if the supplier pays the tax in the GSTR-3B return. In respect of the period prior to 26th December, 2022, there is no provision which allows the recipient to re-avail the ITC reversed, even if the supplier were to pay the tax later.

CONCLUSION

The post-amendment changes to Section 41 necessitate the reversal of ITC by recipients, and therefore, it is advisable that recipients should exercise caution and closely monitor the tax payments of their suppliers. To mitigate potential financial implications, recipients may consider releasing GST payments to suppliers only after the supplier has deposited the requisite taxes. Moreover, in cases where tax recoveries are initiated against recipients without corresponding recoveries from suppliers, recipients should explore the possibility of reversing ITC under protest as a prudent course of action and litigate the matter.

The current practice of tax authorities directly demanding ITC reversal from recipients solely based on the cancellation of supplier GSTIN or non-filing of GSTR-3B without the Department even attempting to recover the tax from the suppliers (who are the real culprits here) is a matter of concern. The issue of ITC eligibility under GST has been a subject of long-standing debate, with no resolution in sight in the near future.

Firstly, to provide relief to genuine claimants who have availed ITC based on valid documents but where the supplier has not paid taxes, the present law should be amended to compel the Revenue Authorities to first proceed against the suppliers who have defaulted / delayed in their payment obligations to the Government. The action against the recipient should be initiated by the Government only after it has exhausted its remedies against the suppliers and has not been able to recover its dues from such suppliers; after all, it is the suppliers who have defaulted in their payment obligations and the recipients cannot be penalised when they have duly paid the taxes to the suppliers in accordance with the law. Secondly, and at the bare minimum, the Government should consider waiving the interest and penal implications in the hands of the recipients. Thirdly, a provision should be introduced that allows claimants to reclaim the credit if the supplier eventually pays the taxes, thus balancing the need for compliance with the protection of bona fide claimants. This approach would provide a fair and reasonable resolution to the conundrum of ITC claims under the GST regime, fostering trust and confidence among businesses and enabling a smoother transition to a unified tax system.

One hopes that the Government will pay heed to the genuine concerns of the recipient by amending the law, thereby providing much-needed relief to businesses that are needlessly saddled with stiff monetary consequences and harsh Departmental action for no fault of their own.

BCAJ Admin

Scope of Reassessment Proceedings in Search Cases In The Light of CBDT Instruction No. 1 of 2023

EXECUTIVE SUMMARY

The Central Board of Direct Taxation (“CBDT”) has recently issued instruction no. 1 of 2023 dated 23rd August, 2023, (hereinafter referred to as “instruction”) in exercise of its powers under section 119 of the Income-tax Act, 1961 (“the Act”) with the object of implementing the decision of the Hon’ble Supreme Court in cases of PCIT vs. Abhisar Buildwell (P) Ltd [2023] 454 ITR 212 (SC) (hereinafter referred to as “Abhisar Buildwell”) and DCIT vs. U. K. Paints (Overseas) Ltd [2023] 454 ITR 441 (SC) (hereinafter referred to as “U K Paints”) in a uniform manner. The CBDT has taken a view that in cases where the proceedings did not abate at the time of the search, reassessment proceedings under section 147 / 148 of the Act will have to be undertaken in view of section 150 of the Act by following the procedure laid down under section 148A of the Act as inserted by Finance Act, 2021 in accordance with the law laid down by Supreme Court in case of Union of India vs. Ashish Agarwal [2022] 444 ITR 1 (SC). This article analyses the scope of the provisions of section 150 of the Act, and it is submitted that the said section is not applicable. Accordingly, the Revenue would be justified to initiate reassessment proceedings only if the time limit prescribed under section 149 of the Act is adhered to and it is submitted that any other view would mean that the CBDT instruction is not in accordance with the law and thus, invalid.

Part 1: Decision of the Supreme Court in the cases of Abhisar Buildwell (supra) and U. K. Paints (supra)

1. In the case of Abhisar Buildwell (supra), the Hon’ble Supreme Court settled the dispute on the scope of the assessments under section 153A of the Act. The question before the Hon’ble Supreme Court in the batch of several appeals was whether the Assessing Officer (hereinafter referred to as “the AO”) was justified to make additions to total income in respect of assessment / reassessment proceedings which do not abate under the second proviso to section 153A(1) of the Act.

2. The Hon’ble Supreme Court vide order dated 24th April, 2023, held that in the absence of incriminating material, the AO cannot make any addition to the total income on the basis of other material. However, the AO may initiate reassessment proceedings under section 147 / 148 of the Act subject to fulfilling the conditions prescribed in law. In cases where incriminating material is found, the Hon’ble Court held that the AO will be entitled to make additions based on incriminating material as well as other material which is available with him including the income declared in the returns.

3. Subsequently, the Revenue moved miscellaneous application no. 680 of 2023 with a request that the Hon’ble Court may clarify that the Department is entitled to initiate reassessment proceedings under section 147 / 148 read with section 150 of the Act and that the AO may be given a period of 60 days to follow the procedure prescribed under section 147 to 151 of the Act. The request made by the Revenue to clarify was denied on the grounds that the prayers sought can be said to be in the form of review which requires detailed consideration. The Supreme Court vide order dated 12th May, 2023, relegated the Revenue to file an appropriate review application [PCIT vs. Abhisar Buildwell (P) Ltd (2023) 150 taxmann.com 257 (SC)].

4. After deciding the batch of appeals in respect of the scope of assessment under section 153A of the Act, the Supreme Court in U. K. Paints (supra) was considering the scope of assessment under section 153C of the Act. The principle laid down in Abhisar Buildwell (supra) was reiterated and held that in the absence of incriminating material, additions would not be justified. It was requested before the Hon’ble Court to observe that the Revenue may be permitted to initiate reassessment proceedings under section 147 / 148 of the Act. The Court, in paragraph 3 of its order dated 25th April, 2023, observed that “it will be open for the Revenue to initiate the re-assessment proceedings in accordance with law and if it is permissible under the law”.

Part 2: Instruction No. 1 of 2023 dated 23rd August, 2023

5. The instruction issued by the CBDT in the exercise of powers under section 119 of the Act states that the judgment of the Supreme Court is required to be done in a uniform manner and directs various aspects which need to be taken into consideration.

6. Paragraph 6.1 of the instruction states that there are cases where the assessment was made based on other material and the additions have been deleted by the appellate authorities on the ground that in the absence of incriminating material, the assessment / additions cannot be made. In various cases, the orders of the appellate authorities have attained finality because the same was not challenged. In such types of cases, it is stated that no action is required to be taken under sections 147 / 148 of the Act. However, in the following cases, reassessment as per section 147 / 148 of the Act is required to be carried out:

a. Lead and tagged cases before the Supreme Court.

b. Cases which are pending at appellate levels or before AO or any tax authority.

c. Cases in which a contrary decision has been given by appellate authorities after the Supreme Court decision in Abhisar Buildwell (supra).

7. Paragraph 7 states that the AO will have to categorise the cases in two categories viz. (i) pending / abated assessment and (ii) completed / unabated assessment.

8. Directions in respect of abated assessments: Paragraph 7.1 states that in respect of assessments which have abated owing to search and if assessments under section 153A(1) of the Act are annulled in appeal or any other legal proceedings (example: if search is quashed as illegal by a competent court) then the abated assessments shall stand revived from the date of receipt of order of annulment and the AO is required to assess in accordance with section 153A(2) and 153(8) of the Act.

The directions provided in the instruction issued by the CBDT in respect of assessment which stand abated appear to be in accordance with the law.

9. Directions in respect of unabated assessments: Unabated assessments are further classified into three categories as stated above and the CBDT has provided directions in respect of each category of case.

10. The first category is in respect of the cases which were before the Hon’ble Supreme Court (lead and tagged matters). It is stated that necessary action under section 147 / 148 of the Act needs to be taken in view of section 150 of the Act. The reassessment proceedings will be subject to the procedure specified under section 148A of the Act and in accordance with the law laid down by the Supreme Court in the case of Ashish Agarwal (supra). The CBDT has also directed that the assessment shall be completed by 30th April, 2024, in view of section 153(6) of the Act.

11. The second category of cases are those where the matters are pending before the appellate authorities viz. Commissioner of Income-tax (Appeals) [hereinafter referred to as “the CIT(A)”], Income-tax Appellate Tribunal (hereinafter referred to as “the Tribunal”) and the Hon’ble High Courts, as the case may be. It is stated that the decision of the Supreme Court in the cases of Abhisar Buildwell (supra) and U. K. Paints (supra) are required to be brought to the notice of the respective appellate authorities. Pursuant to the disposal of such appeals, the AO may be required to act under section 147 / 148 read with section 150 of the Act in appropriate cases after complying with the procedure laid down which is in force.

12. The third category of cases is where appellate authorities have rendered the decision after the order of the Supreme Court in the case of Abhisar Buildwell (supra) and if the same is inconsistent with the decision of the Supreme Court, then necessary action may be taken to file miscellaneous application before the Tribunal or notice of motion before the Hon’ble High Court, as the case may be with a request to review the decision in line with Abhisar judgment with a prayer for condonation of delay. A suggested draft of the notice of motion / miscellaneous application is also provided. A perusal of the said draft indicates that the CBDT seems to be suggesting that a request be made before the Tribunal or the High Court (as the case may be) that the order already passed may be modified in line with the decision of the Supreme Court in case of Abhisar Buildwell.

Part 3: Point for consideration

The central point that arises pursuant to the instruction issued by the CBDT is whether the Revenue would be entitled to initiate reassessment proceedings under section 147 / 148 of the Act. Another issue that arises is whether CBDT is justified to direct filing of miscellaneous applications / notices of motion as stated in paragraph 7.2.3

Part 4: Discussion

Validity of reassessment proceedings as per section 150 of the Act

13. Reassessment proceedings under the Act are initiated upon issuance of a valid notice under section 148 of the Act. Section 149 of the Act provides that notice under section 148 of the Act cannot be issued beyond the period specified therein. Section 150(1) of the Act is an exception to the time limits prescribed under section 149 of the Act. If the conditions prescribed under section 150(1) of the Act are satisfied, notice under section 148 of the Act may be issued without the requirement to follow the time limit prescribed under section 149 of the Act. Section 150(2) of the Act is an exception to the sub-section and reinforces the time limit prescribed under section 149 of the Act to issue a notice under section 148 of the Act.

14. To appreciate the scope of section 150 of the Act, the provisions are reproduced hereunder:

“Provision for cases where assessment is in pursuance of an order on appeal, etc.

150. (1) Notwithstanding anything contained in section 149, the notice under section 148 may be issued at any time for the purpose of making an assessment or reassessment or recomputation in consequence of or to give effect to any finding or direction contained in an order passed by any authority in any proceeding under this Act by way of appeal, reference or revision or by a Court in any proceeding under any other law.

(2) The provisions of sub-section (1) shall not apply in any case where any such assessment, reassessment or recomputation as is referred to in that sub-section relates to an assessment year in respect of which an assessment, reassessment or recomputation could not have been made at the time the order which was the subject-matter of the appeal, reference or revision, as the case may be, was made by reason of any other provision limiting the time within which any action for assessment, reassessment or recomputation may be taken”.

15. The effect of section 150(1) of the Act is that a notice under section 148 of the Act may be issued at any time (notwithstanding the time limit prescribed under section 149) for the purpose of making an assessment or reassessment or recomputation. However, such notice under section 148 of the Act can be issued subject to the condition that the same is being issued in consequence of or to give effect to any finding or direction contained in an order passed by any authority in any proceeding under the Act by way of appeal, reference or revision or by a Court in any proceeding under any other law.

16. Sub-section (2) to section 150 of the Act limits the scope of sub-section (1) of section 150 which has the effect of reintroducing the time limit prescribed under section 149 of the Act. A notice under section 148 of the Act cannot be issued for an assessment year if an assessment or reassessment or recomputation of such assessment year could not have been made at the time the order which was subject matter of appeal, reference or revision, as the case may be, was made by reason of any other provision limiting the time within which any action for assessment, reassessment or recomputation may be taken.

17. To appreciate the provisions of section 150(2), let us take an example of the lead case which was before the Hon’ble Supreme Court viz. Abhisar Buildwell.

a. Assessment years before the Delhi High Court: A.Ys. 2007-08 and 2008-09
b. Limitation under section 149 to issue notice under section 148 for A.Y. 2007–08: 31st March, 2014
c. Limitation under section 149 to issue notice under section 148 for A.Y. 2008–09: 31st March, 2015
d. Date of order passed by Delhi High Court which was before the Supreme Court: 24th July, 2019

18. In the case of Abhisar Buildwell, the order which was subject matter of appeal before the Hon’ble Supreme Court was the order passed by the Hon’ble Delhi High Court dated 24th July, 2019. Assuming section 150(1) of the Act applies, pursuant to the decision of the Supreme Court, the AO would be justified to issue a notice under section 148 of the Act for the assessment years 2007-08 and 2008–09 in the case of Abhisar Buildwell only if he had the time limit to issue a notice under section 149 of the Act as on 24th July, 2019. Since the time limit to issue a notice under section 148 of the Act for the assessment years 2007–08 and 2008–09 had already expired as illustrated above, the provisions of section 150(2) of the Act would operate as a limitation upon the powers of the AO to issue the notice under section 148 of the Act.

19. In view of the above, it is submitted that the provisions of section 150(2) of the Act will have to be applied depending upon the facts and circumstances
of each case and only then the AO can be said to have the jurisdiction to issue a notice under section 148 of the Act.

20. The Revenue is aware of the legal position in respect of section 150(2) of the Act. This is evident from the fact that the miscellaneous application was filed before the Hon’ble Supreme Court for the specific prayer that the limitation provided under section 150(2) of the Act be waived. This further supports the proposition that the CBDT instruction must be read in accordance with the provisions of section 150 of the Act and the limitations which are imposed upon the AO.

21. Having discussed the scope of section 150(2) above. Let us now consider the applicability of section 150(1) of the Act.

22. Apart from the limitation imposed upon the application of section 150(1) of the Act as discussed above, there are certain additional conditions to issue a notice under section 148 of the Act. The same are discussed hereunder.

a. There must be an order passed by (i) any authority in any proceeding under the Act by way of appeal, reference, or revision or by (ii) a Court in any proceeding under any other law; and

b. The notice under section 148 of the Act is being issued in consequence of or to give effect to any finding or direction contained in such order.

23. Having set out the conditions under which section 150(1) itself may apply, it would be necessary to consider the following:

a. Whether the decision of the Supreme Court in the cases of Abhisar Buildwell (supra) or U. K. Paints (supra) can be construed as a “finding or direction” for the purpose of section 150(1) of the Act?

b. Whether the Hon’ble Supreme Court can be regarded as falling within the scope of the expression “any authority” as provided under section 150(1) of the Act?

c. Whether civil appeal / special leave petitions before the Supreme Court can be regarded as “proceeding under this Act”?

24. The CBDT is of the opinion that paragraph 14(iv) of the Supreme Court decision in the case of Abhisar Buildwell (supra) does constitute a finding / direction for the purpose of section 150(1) of the Act. To appreciate the same, the relevant paragraph 14(iv) in the case of Abhisar Buildwell (supra) is reproduced hereunder:

“in case no incriminating material is unearthed during the search, the AO cannot assess or reassess taking into consideration the other material in respect of completed assessments / unabated assessments. Meaning thereby, in respect of completed / unabated assessments, no addition can be made by the AO in absence of any incriminating material found during the course of search under section 132 or requisition under section 132A of the Act, 1961. However, the completed / unabated assessments can be re-opened by the AO in exercise of powers under sections 147 / 148 of the Act, subject to fulfilment of the conditions as envisaged / mentioned under sections 147 / 148 of the Act and those powers are saved”. (Emphasis supplied)

25. In the case of U. K. Paints (supra), the Supreme Court observed as under:

“3. However, so far as the prayer made on behalf of the Revenue to permit them to initiate the re-assessment proceedings is concerned, it is observed that it will be open for the Revenue to initiate the re-assessment proceedings in accordance with law and if it is permissible under the law”. (Emphasis supplied)

26. In both decisions, the Hon’ble Supreme Court has merely stated that the AO would be entitled to reopen provided the same is permissible in accordance with law.

Finding or direction for the purpose of section 150(1) of the Act

27. In the case of Rajinder Nath vs. CIT [1979] 120 ITR 14 (SC), the Supreme Court was considering the scope of the expressions “finding” and “direction”. The appellant before the Court was a partner in a partnership firm. The Assessing Officer had held that the partnership firm was the owner of the property and since the actual cost of the said property was higher than the cost debited in the books, the excess was taxed as income. On appeal, the first appellate authority had held that the property did not belong to the firm and thus, the excess could not be taxed in its hands. It was also held by the first appellate authority that the partners are owners of the said property. The first appellate authority also stated that the ITO “is free to take action” to assess the excess in the hands of the owners. The issue before the Court was whether the order of the first appellate authority can be said to constitute a finding or direction for the Assessing Officer to issue notice for reopening beyond the time limit prescribed.

In respect of the issue as to whether the order of the first appellate authority can be constituted as a finding, the Supreme Court held that a finding given in an appeal, revision or reference must be a finding necessary for the disposal of the case. It must be directly involved in the disposal of the case. In the facts of the case before the Court, it was held that all that has been recorded is the finding that the partnership firm is not the owner of the properties. It also held that the finding of the appellate authority was based on the fact that the cost was debited from the accounts of the owners. But that does not mean, without anything more, that the excess over the disclosed cost of construction constitutes concealed income of the Assessees. The finding that the excess represents their individual income requires a proper enquiry for which an opportunity must be provided.

It was also held that the expression “direction” must be an express direction necessary for the disposal of the case before the authority or the court. It must also be a direction which the authority or court is empowered to give while deciding the case before it. The Court held that the observation of the first appellate authority that the ITO “is free to take action” cannot be described as a direction. A direction by a statutory authority is an order requiring positive compliance. When it is left open to the option and discretion of the ITO whether to act, it cannot be described as a direction.

28. Applying the principle laid down in the case of Rajinder Nath (supra), it becomes clear that the relevant paragraphs of the Supreme Court decision in Abhisar Buildwell (supra) as well as U. K. Paints (supra) clearly show that the same were also in the nature of discretion and thus, it cannot be regarded as a direction.

29. Similarly, applying the principle laid down by the Supreme Court in the case of Rajinder Nath (supra), it is submitted that the scope of the appeals before the Supreme Court in the case of Abhisar Buildwell (supra) was with respect to the scope of assessment under section 153A of the Act. The Court was called upon to decide on the correctness of the additions made to total income by the Assessing Officer in the absence of any incriminating material in respect of proceedings which do not abate as of the date of search. It is therefore respectfully submitted that the observation in paragraph 14(iv) cannot be held to be a finding for the purpose of section 150(1) of the Act because the said observation was not necessary for the purpose of deciding the question which was involved in the appeals.

30. The decision of the Supreme Court in the case of Rajinder Nath (supra) has thereafter been followed in various cases. Recently, the Hon’ble Bombay High Court in the case of Pavan Morarka vs. ACIT [2022] 136 taxmann.com 2 (Bombay) has followed the principle laid down in Rajinder Nath (supra).

31. To appreciate the principle laid down by the Hon’ble Bombay High Court, it is necessary to consider the facts that were before the Hon’ble Court. In that case, the petitioner owned 50 per cent of the share capital of a company viz. Shivum Holdings Private Limited (SHPL). The petitioner also owned 25 per cent share capital in a company called P&A Estate Private Limited (P&A). SHPL held an 85 per cent interest in a partnership firm called Lotus Trading Company (LTC) and the petitioner held the balance 15 per cent in the said LTC. P&A had received a loan advanced by LTC. The said loan was advanced by LTC on behalf of SHPL. The Assessing Officer held in the case of P&A that the loan was to be regarded as deemed dividends under section 2(22)(e) of the Act. On appeal, the CIT(A) held that section 2(22)(e) of the Act does not apply because it is necessary that P&A is a shareholder of SHPL. The Tribunal affirmed the order of the CIT(A) and the order of the Tribunal was affirmed by the Hon’ble Delhi High Court [CIT vs. Ankitech (P) Ltd (2011) 340 ITR 14 (Delhi)]. In paragraph 30 of the said order, it was observed by the Delhi High Court as under:

“30. Before we part with, some comments are to be necessarily made by us. As pointed out above, it is not in dispute that the conditions stipulated in section 2(22)(e) of the Act treating the loan and advance as deemed dividends are established in these cases. Therefore, it would always be open to the revenue to take corrective measure by treating this dividends income at the hands of the shareholders and tax them accordingly. As otherwise, it would amount to escapement of income at the hands of those shareholders”. (Emphasis supplied)

On the strength of the above paragraph 30, the Revenue initiated reassessment proceedings in the case of the petitioner. The Revenue argued that paragraph 30 constituted “finding” or “direction” for the purpose of section 150 of the Act. This argument was rejected by the Hon’ble Bombay High Court which held that when it is left to the option and discretion of the Income-tax Officer, it cannot be described as a direction. Similarly, since the Hon’ble Delhi High Court was dealing with a question as to whether section 2(22)(e) applies in case of P&A, it was held that paragraph 30 cannot be regarded as a finding.

32. Further, the CBDT instruction appears to be taking a view that the observation of the Supreme Court is the ratio decidendi and thus, binding under Article 141 of the Constitution. It is submitted that the understanding of the CBDT is without appreciating the fact that the subject matter of appeal before the Supreme Court was the scope of assessment under section 153A of the Act. Ratio decidendi is something which is essential to decide the issue involved. It is submitted that the observations which have been made in paragraph 14(iv) cannot be regarded as ratio decidendi because the observation was not necessary to decide the question involved in the appeals. As held by the Hon’ble Supreme Court in the case of Mavilayi Service Co-Operative Bank Ltd vs. CIT [2021] 431 ITR 1 (SC), it is only the ratio decidendi of a judgment that is binding as a precedent and what is of essence in a decision is its ratio and not every observation found therein.

33. Even otherwise, it is submitted that the observation cannot be interpreted as if the Supreme Court has given its prior approval to initiate reassessment proceedings in the future. In each case, the AO will have to satisfy the jurisdictional preconditions which may become the subject matter of consideration. All that the Hon’ble Supreme Court has observed is that the AO can reopen in accordance with the law. It is submitted that had the Supreme Court not made any observation, even then the action of the AO would be tested in accordance with the law. In other words, dehors the observations made by the Supreme Court, the AO is not precluded from initiating reassessment proceedings if the same is otherwise valid and in accordance with the law. It is thus submitted that the observations made by the Supreme Court which has been relied upon by the Revenue cannot be regarded as ratio decidendi.

The Hon’ble Supreme Court / High Court / Tribunal cannot be regarded as “any authority” for the purpose of section 150(1) of the Act

34. As discussed above, one of the conditions based on which the AO can issue notice under section 148 of the Act irrespective of the time limit specified under section 149 of the Act is when the said notice is being issued for the purpose of making an assessment or reassessment or recomputation in consequence of or to give effect to any finding or direction contained in an order passed by any authority in any proceeding under this Act by way of appeal, reference or revision.

35. In this regard, a question that arises is as to whether the Hon’ble Supreme Court can be regarded as an “authority”. A further issue that arises is as to whether civil appeals with which the Hon’ble Supreme Court was dealing with could be regarded as “proceeding under this Act”.

36. In the case of Pavan Morarka (supra), the Hon’ble Court held that authority is defined under section 116 of the Act and the Hon’ble Delhi High Court is not among the classes of income-tax authorities for the purpose of the Act. It is submitted that on the same principle, even the Hon’ble Supreme Court cannot be regarded as falling within the scope of expression “authority”, the provisions of section 150 of the Act do not apply. Similarly, the Tribunal as well as the High Court would not fall within the scope of “authority” for the purpose of section 150 of the Act and thus, the CBDT instruction to the extent it directs that the AO may initiate reassessment proceedings by following the procedure prescribed under section 148A of the Act after disposal of appeals by the Tribunal / High Court, is invalid.

37. There is one more way in which the expression “authority” may be interpreted. Sub-section (1) provides that notice under section 148 of the Act may be issued for the purpose of assessment or reassessment in consequence of or to give effect to any finding or direction contained in an order passed by any authority in any proceeding under this Act by way of appeal, reference or revision or by a Court in any proceeding under any other law. Under section 150(1), two separate expressions are used viz. authority and Court which are separated by the word “or”. It is therefore clear from the express language itself that the scope of the expression “authority” does not include a Court and would thus, exclude the Hon’ble Supreme Court and the Hon’ble High Court.

38. In view of the above discussion, it is submitted that the Tribunal, High Court and the Supreme Court would not fall within the scope of “authority” for the purpose of section 150 of the Act.

Civil Appeals / Special Leave petitions are not proceedings under the Act

39. In the batch of appeals in the case of Abhisar Buildwell (supra) and U. K. Paints (supra), the Hon’ble Supreme Court was deciding a batch of civil appeals in its appellate jurisdiction. Originally, the Revenue had filed special leave petitions (“SLP”) under Article 136 of the Constitution which were converted into civil appeals.

40. In the case of Kunhayammed vs. State of Kerala [2000] 245 ITR 360 (SC), the Hon’ble Supreme Court has considered the scope and various stages of the appellate jurisdiction of the Supreme Court under Article 136 of the Constitution. It is observed that it is not the policy of the Court to entertain an SLP and grant leave under Article 136. It is only in certain cases where the Court may grant leave. Upon leave being granted, the SLP will be treated as an appeal, and it will register and be numbered as such. The said procedure is not under the Act but under the Supreme Court Rules which are framed under Article 145 of the Constitution.

41. It is therefore submitted that the decision of the Supreme Court is not an order from any proceeding under the Act and thus, even on this ground, section 150(1) of the Act may not be applicable. The issue may also be examined from another perspective. Section 261 of the Act provides for an appeal to the Supreme Court. However, the appeals filed by the Revenue in the case of Abhisar Buildwell (supra) were not under section 261 of the Act and thus, not a proceeding under the Act.

Scope of miscellaneous application / notice of motion

42. Paragraph 7.2.3 provides that if the Tribunal / High Court decides the appeal pending before it contrary to the decision of the Supreme Court in the case of Abhisar Buildwell (supra), then a miscellaneous application / notice of motion is suggested. In case the time limit to file a miscellaneous application / notice of motion has expired, then the same may be filed with an application for condonation.

43. It appears that in all cases, the CBDT is requesting the Tribunal/ High Court to modify the order in line with paragraph 14(iv) of the Supreme Court decision in the case of Abhisar Buildwell (supra). In other words, the CBDT has directed the AO to request the Tribunal / High Court to modify the appellate order and hold that the AO has the power to act under section 147 / 148 of the Act if the same is permissible.

44. It is submitted that the Tribunal / High Court in its appellate jurisdiction is only called upon to decide the issues which are the subject matter of the appeal. In view of the ratio of the Supreme Court in the case of Abhisar Buildwell (supra), the Tribunal / High Court is bound to decide the appeals in favor of the Assessee and against the Revenue in all assessments under section 153A of the Act where additions were made in the absence of incriminating material. The power of the AO to reopen is not and cannot be the subject matter of the appeal.

45. It is therefore respectfully submitted that any other observation made by the Tribunal / High Court in the appellate order would be beyond the subject matter of appeal. It is therefore submitted that any miscellaneous application / notice of motion to modify the appellate order and insert observations in line with paragraph 14(iv) of the Supreme Court order in the case of Abhisar Buildwell (supra) would not be maintainable. In other words, when the scope of appeal itself is limited to determine the scope of assessment under section 153A of the Act, there does not arise any question of miscellaneous application / notice of motion which is in line with the decision of the Supreme Court. In any case, if the appellate order of the Tribunal / High Court is in line with the ratio of Abhisar Buildwell (supra), no modification in such order would be permissible.

46. In view of the above, the direction issued by the CBDT in paragraph 7.2.3 of the instruction is wholly untenable, misconceived and misdirected in law.

CONCLUSION

47. It is submitted that the CBDT instruction must be read and interpreted in a manner that is not contrary to the provisions of section 150 of the Act and the settled judicial precedents which continue to hold the field. Any other view would mean that there is no time limit to issue a notice under section 148 of the Act. It is a fundamental principle of law that there must be finality to all legal proceedings. An interpretation which leads to such a result must be avoided. One must not attribute the CBDT to disregard such a fundamental principle of law.

BCAJ Admin

Angel Tax — Amendment and Its Implications

BACKGROUND

The concept of ‘Angel Tax’, first introduced by the Finance Act of 2012, has now been around for more than a decade. The intention behind the enactment of section 56(2)(viib) of the Income Tax Act, 1961 (‘Act’) was to deter the creation of shell firms and to prevent the circulation of black money through the subscription of shares of closely held companies at unreasonably high valuations.

Prior to 1st April, 2023, the angel tax provisions were applicable only to funds raised by a closely held company from a person resident in India. The erstwhile provisions stated that, where a company, not being a company in which the public is substantially interested, receives, in any previous year, from any person being a resident, any consideration for the issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be deemed to be the income of the concerned company and will be chargeable to tax under the head Income from other Sources for the relevant financial year.

Under the proviso to the section, the following investments are excluded from the ambit of angel tax provisions:

a. Investment received by a venture capital undertaking from venture capital companies or venture capital funds (‘VCFs’) or a specified fund [Category I and Category II Alternative Investment Funds (‘AIFs’)].

b. Investment received by a company from certain classes of persons as notified under the notification¹ (The Ministry of Commerce and Industry notified companies² that would qualify the definition of ‘start-up’ as being exempt).

1 Notification No. 13/2019/F. No. 370142/5/2018-TPL (Pt.) superseded by Notification No. 30/2023/F. No. 370142/9/2023-TPL (Part-I)
2 Notification No. G.S.R. 127(E), dated 19th February, 2019 issued by the Ministry of Commerce and Industry in the Department for Promotion of Industry and Internal Trade

For the determination of fair market value (‘FMV’) of shares for the purpose of the above provisions of angel tax, the explanation to the section provided that the FMV shall be the greater of the following value:

– Determined as per prescribed method; and

– As may be substantiated by the company to the satisfaction of the income tax authorities.

Under the erstwhile rules, the “prescribed method” under Rule 11UA of Income Tax Rules, 1962 (‘ITR’) for unquoted equity shares, allowed the taxpayer, i.e., the issuing company to value its unquoted equity shares either on the basis of book value per share based on the prescribed formula or value determined by a merchant banker using Discounted Cash Flow (‘DCF’) method. In the case of unquoted shares and securities other than equity shares in a company, the fair market value was to be determined based on the price it would fetch if sold in the open market on the valuation date. The Company may obtain a report from a merchant banker or an accountant for such valuation.

Amendment to section 56(2)(viib)
The Finance Act, 2023, has amended section 56(2)(viib) to widen the net of the specific anti-avoidance rules to include non-resident investors as well. Thereby, any share premium over and above the fair market value received from non-resident investors will now be taxed in the hands of the Indian company.

While exclusions that are currently provided to domestic venture capital funds, Cat I & II AIFs and registered start-ups as per proviso to the section are permitted to continue. The Central Board of Direct Taxes (‘CBDT’) has further notified the following class or classes of persons who will be outside the purview of angel tax provisions (‘Exclusion Notification’³):

3 Notification 29/2023 dated 24th May 2023 and Notification 30/2023 dated 24th May 2023.

i. Government and government-related investors, such as central banks, sovereign wealth funds, international or multilateral organisations or agencies, including entities controlled by the government or where direct or indirect ownership of the Government is 75 per cent or more;

ii. Banks or entities involved in the insurance business where such entity is subject to applicable regulations in the country where it is established or incorporated or is a resident;

iii. Any of the following entities, which is a resident of any country or specified territory (listed in Annexure – I), and such entity is subject to applicable regulations in the country where it is established or incorporated or is a resident:

a) entities registered with SEBI as Category-I Foreign Portfolio Investors;

b) endowment funds associated with a university, hospitals or charities;

c) pension funds created or established under the law of the foreign country or specified territory; and

d) Broad Based Pooled Investment Vehicle or fund where the number of investors in such a vehicle or fund is more than 50 and where such a fund is not a hedge fund or a fund which employs diverse or complex trading strategies.

However, vital countries, such as Singapore, Mauritius, UAE, Netherlands, Cayman Islands and BVI, from where the majority of FDI investment is received by India, are excluded from the said list of notified countries (refer to Annexure – I).

In addition to the above notification, CBDT has also extended the exemption from the angel tax provisions to a company on consideration received for issue of shares to non-resident investors on fulfilment of conditions prescribed in the said notification2 issued by the Ministry of Commerce and Industry (‘Startup Exemption’), which was earlier provided to resident investors only.

Amendment to Rule 11UA(2)

The extension of angel tax on investments made in closely held companies by non-residents made it necessary to amend Rule 11UA(2) to allow for more adaptable valuation methods in order to align with applicable pricing guidelines for foreign investments under the Foreign Exchange Management Act, which require the issue of shares by Indian companies to non-residents at a price higher than the Fair Market Value of the shares.

Introduced from 25th September, 2023, the revised rules prescribe the mechanism for computation of fair market value of unquoted equity shares as well as compulsory convertible equity shares (‘CCPS’) issued to resident and non-resident investors for the purposes of section 56(2)(viib). A closely held company will have an option to select any of the valuation methods for the purpose of valuation of unquoted shares.

Methods for valuation of unquoted equity shares

I. For Resident Investors

1. Book Value Method
The FMV of shares is to be determined based on the net worth of the company computed using book values of assets and liabilities and further subjected to prescribed adjustments.

2. Discounted Cash Flow Method (‘DCF’)
The FMV under this method is determined by calculating the present value of future cash flows generated by an investment or asset, by using an appropriate discounting rate. The FMV is to be determined by the merchant banker under this method as per the rules.

3. Benchmarking
The new regulations allow a price-matching mechanism in the following cases:

a. Where a Venture Capital undertaking receives any consideration for the issue of shares to a Venture Capital Fund, Venture Capital Company, or Specified Fund (Category I or II AIF).

b. Where a company receives any consideration for the issue of shares to a notified entity.

In the above cases, the issue price can be considered as the FMV for the issuance of shares to others, subject to adherence to the following criteria:

i. Total consideration received at above determined FMV from other investors does not exceed consideration from shares issued to the VCF, VCC, Specified Fund or notified entity as the case maybe; and

ii. The issuance of shares to other investors is within 90 days before or after the date of the issue of shares to the VCF, VCC, Specified Fund or notified entity as the case may be.

For example: Company A received a consideration of ₹30,00,000 from a notified entity on 1st January for the issue of 600 shares at ₹5,000 per share. The shares are allotted and credited to the demat account of the notified entity on 15th January. Accordingly, Company A may issue up to 600 shares at ₹5,000 to any other investor during a period from 15th October to 15th April by benchmarking to the above transaction.

II. For Non-resident Investors

In addition to the above methods in Point I, the following are the prescribed additional methods that a merchant banker may use for the valuation of unquoted equity shares for receipt of investment from non-resident investors:

4. Comparable company multiple method
Under this approach, the value of a company is determined by comparing it to a similar company in the same industry. This method relies on the premise that companies within the same industry or sector often trade at similar valuation multiples due to similar risk profiles and growth prospects. However, this is subject to case-specific adjustments to ensure the accuracy of valuation.

5. Probability weighted expected return method
The value determined under this method represents the average or expected value of shares, considering the weightage of multiple outcome-based scenarios and their associated probabilities. It provides a more comprehensive valuation approach than a single-point estimate and takes into account the uncertainty and risk associated with different potential outcomes.

6. Option pricing method
When estimating the fair market value of shares, the option pricing approach takes into account the value of the option to buy or sell the shares at a later time. The calculation of FMV is based on the supposition that the value of a share is the total of the present values of all expected future cash flows as well as the value of the option to exercise (buy or sell) the share at any time.

7. Milestone analysis method
Milestone analysis method is relevant for the valuation of companies with limited operating history. The valuation is based on the achievement of pre-agreed milestones aligned to business-specific metrics such as sales growth, user acquisition, etc., for computing the FMV of shares.

8. Replacement cost methods
The replacement cost method is a valuation method where the FMV of the shares is computed based on the cost of re-establishing the company / business. This will allow the investor to understand the worth of a particular business / company.

Valuation methods in case of valuation of CCPS

The amended rules have now introduced specific provisions for the valuation of compulsorily convertible preference shares (‘CCPS’). Further, parity has been brought in the valuation of CCPS and equity shares by permitting benchmarking of the valuation of CCPS to equity shares. Accordingly, at the option of the company, the FMV determined for unquoted equity shares (determined based on the above-mentioned prescribed approaches) can be considered as FMV of CCPS.

Further, CCPS can be independently valued based on the methods for valuation prescribed for unquoted equity shares (covered in Point I and II above for resident and non-resident investors respectively) except to the exclusion of the book value method.

Valuation methods in case of valuation of other securities

For the determination of the fair market value of preference shares other than CCPS, the valuation method continues based on the price it would fetch if sold in the open market on the valuation date. The company may obtain a report from a merchant banker or an accountant in respect of such valuation.

Summary for applicability of methods for unquoted equity shares and CCPS:

Approaches for determination of FMV	Applicable for Type of share	Type of share
Book value approach – FMV computed based on the net worth of the Company, computed based using book values of assets and liabilities and further subjected to prescribed adjustments	Resident and Non-resident	Unquoted equity share
Discounted Free Cash Flow method — FMV to be determined by a merchant banker	Resident and Non-resident	Unquoted equity share and CCPS
New valuation methods —FMV to be determined by a merchant banker through any of the below methods: • Comparable Company MultipleMethod • Probability Weighted Expected Return Method • Option Pricing Method • Milestone Analysis Method • Replacement Cost Method	Non-resident	Unquoted equity share and CCPS
Price at which shares issued to specified entities — Price at which shares issued to venture capital funds / company, specified fund or notified entities, within a period of 90 days before / after proposed share issuance — Consideration received for proposed share issuance not to exceed aggregate consideration received from venture capital fund / specified fund / notified entities	Resident and Non-resident	Unquoted equity share and CCPS

Price at which shares issued to specified entities — Price at which shares issued to venture capital funds / company, specified fund or notified entities, within a period of 90 days before / after proposed share issuance — Consideration received for proposed share issuance not to exceed aggregate consideration received from venture capital fund / specified fund / notified entities Resident and
Non-resident Unquoted equity share and CCPS

OTHER KEY CHANGES

Date of Valuation
Under the amended Rule 11UA, where the date of valuation report issued by the merchant banker is within a period of 90 days prior to the date of issue of shares, then such date at the option of assessee / company may be deemed to be the ‘valuation date’.

However, in case the assessee does not opt for a valuation date as per above, then the date on which the consideration is received by the assessee shall be the valuation date in accordance with Rule 11U(j).

Safe Harbour tolerance band
Under the amended Rule 11UA, a tolerance band of 10 per cent has been provided for both resident and non-resident investors in the case where the issue price exceeds the value determined by the valuer, but does not exceed 10 per cent of such value. In such a scenario, the issue price shall be deemed to be the fair market value of such shares. However, the tolerance band is not extended to the price-matching mechanism against shares issued to VCF, specified funds, or notified entities. The safe harbour tolerance limit is a beneficial amendment which will address practical issues brought on by currency fluctuations, bidding procedures, multiple rounds of investment and other implementation challenges.

Illustration:
M Co. is issuing 500 equity shares to Y Co. (Indian Company) of face value ₹10 each. The FMV determined as per rule 11UA (except in case of price matching mechanism) of the equity share is ₹200 per share. Based on commercial negotiations, the issue price of a share is finalised as under:

Situation A) ₹218 per share
Situation B) ₹230 per share

Situation A) Issue price of ₹218 per share is within the tolerance band of 10 per cent of the FMV arrived above. [i.e., 218 < 220 (200+10 per cent)]. Therefore, for the purpose of section 56(2)(viib), the issue price of ₹218 per share will be considered as the fair market value.

Situation B) Similarly, the issue price of ₹230 exceeds the tolerance band of ₹220 per share in the current case. Therefore, for section 56(2)(viib), the FMV of shares will be R200 per share. Accordingly, the difference of ₹30 per share will be liable to tax under the Angel Tax provisions.

SUMMARY

The extension of angel tax to non-resident investors has opened a Pandora’s box. Exclusion of a certain class of persons and extended start-up exemption to non-resident investors is a much-needed relief, and introduction of additional methods of valuation along with a price-matching mechanism and safe harbour tolerance limit is beneficial for all stakeholders.

Having said that, challenges still prevail for angel tax. Issues which are yet to be addressed include no exemption on the issue of shares pursuant to court-approved schemes, non-inclusion of vital countries in the notified list of countries from where the major FDI investment comes to India, such as Singapore, Netherlands, etc., limited valuation methods available vis-à-vis FEMA regulations, validity of report by merchant banker up to 90 days, etc.

Annexure – I

List of Countries

Sr. No.	Name of Country / Specified Territory
1	Australia
2	Austria
3	Belgium
4	Canada
5	Czech Republic
6	Denmark
7	Finland
8	France
9	Germany
10	Iceland
11	Israel
12	Italy
13	Japan
14	Korea
15	New Zealand
16	Norway
17	Russia
18	Spain
19	Sweden
20	United Kingdom
21	United States

BCAJ Admin

Past Editors’ Musings BCAS — Volunteering — Making a Difference

Dear Readers,

BCAJ has completed over five decades of its illustrious journey. Publication of a monthly professional journal is a task in itself, as it entails wholesome responsibility and requires total commitment. BCAJ has had 10 editors so far. As the BCAS is celebrating its 75th year, it would be interesting to read what some of the editors have to share. In tune with the current Office Bearers’ Theme of “Change – Leaders – Charity” for the quarter ending December 2023, this issue carries a write-up by one of the editors who has shared his experiences of volunteering and leading the change. We hope that readers will find it interesting and youngsters will find it inspiring to volunteer with the highest degree of commitment and dependability.

ANIL J. SATHE

Chartered Accountant

(Editor from August 2013 to July 2017)

The editor, Dr CA Mayur B. Nayak has requested me to narrate my experience as the former editor of The Bombay Chartered Accountant Journal (BCAJ). At the Bombay Chartered Accountants Society (BCAS), the request of the editor is a command and therefore, I had no option but to obey.

I joined the BCAS, soon after qualifying as a chartered accountant sometime in 1983. I was immediately attracted to the various activities of this Society. In those times, the sources of knowledge for a professional were limited and BCAJ was an extremely important one. To date, the Journal remains the flagship of the BCAS and is widely read and immensely respected by professionals.

I joined the Journal Committee sometime in 1992 and became its convenor in 1996. I had the privilege of working with persons who were titans in the profession. I must mention Mr. Narayan Varma, the publisher of the Journal for decades, whose enthusiastic and innovative attitude, I can never forget. In those days, the Journal Committee meetings that undertook a review of past issues were events we would look forward to — for collecting gems of knowledge and wisdom. I recall the analysis of the various articles and the precision of grammar explained lucidly by the Late Mr. Jal Dastur. His meticulous reading of the Journal was an experience which has remained etched in my memory.

I wrote my first article for the BCAJ in 1992. I was guided in that endeavour by a former editor, Ajay Thakkar. I remember visiting his office, where he critically examined the draft of every article. In that interaction, I learned to ensure the completeness of an article from him. Working with my predecessor editors was an enriching experience. Each one of them had their own working style and quality. Another former editor, Ashok Dhere, was a disciplinarian, and he guided me with his profound understanding that when you are acting as an editor, it is purely the stature of the Journal that should matter and not of the contributor. He was particular about the sequence of contents with a strict adherence to timelines. The Late Mr. K C Narang was an unassuming personality but commanded respect from the contributors of the Journal. He was a voracious reader and periodically used to send paper clippings on various subjects. Mr. Gautam Nayak, a dear friend, is a storehouse of knowledge. I have often referred to him as RBI, the lender of the last resort. He is a person we turn to when we face difficulty in the tax arena.

My immediate predecessor was Mr. Sanjeev Pandit. From him, I learnt the art of editing. He explained to me that an editor should never impose his thought process or style of writing on the author. While editing, one is to ensure that the flavour of the article and the author’s thought process remain intact. The editing process should not result in the article being rewritten by the editor in any way.

All the contributors to the BCAJ are volunteers and busy in their own professions. To ensure that the deadlines are met, an editor should always strike the right balance between exercising authority and tactful persuasion. Fortunately, virtually all the contributors, despite their busy schedules, used to fulfil their commitments on account of their love and loyalty to the BCAS.
An editor has to deal with both the aspects of the Journal: the substance and the form. I have spent long hours editing contributions I received just around the deadline. However, those late nights were an educational experience. I recall reading several articles in the Journal which were brilliantly written, and I had the privilege — being an editor — of reading them much before they were out before the general readership.

I am often asked by many youngsters why command over the language plays such a crucial role. This skill assumes importance when you are an editor. In a professional journal like the BCAJ, the sequence of material and the number of pages allotted are generally predetermined. A very lengthy contribution may disturb the balance between subjects. In the case of some features, if the author exceeds the predetermined length, content may spill over to the next page. In such a situation, a grip over the language enables an editor to edit the article without losing its meaning or flavour.

Another important aspect of the role of an editor is to ensure the correctness of all the material that goes into an issue. Normally, the editor would have the domain knowledge about one or two subjects. Regarding subjects covering other domains, one has to rely on other professional colleagues. In that regard, the editor of the BCAJ is fortunate as the Society has many stalwarts who are always willing to help an editor in distress. I experienced this while editing my last issue as an editor: the special issue of July 2017. The GST law came into force on 1st July, 2017, and the special issue contained all articles pertaining to GST. My domain knowledge is in direct tax, and I had to rely on my friends to ensure that this GST special issue came out on time whilst maintaining the quality for which it is known. I must express my gratitude to all the experts who helped me to make the July 2017 issue, a memorable one.

In conclusion, I must remind readers that the Society is celebrating its platinum jubilee. The BCAJ has always enjoyed a place of pride in the hearts of all my professional brothers. The editor, Mayur Nayak, often expresses concern that at times there is a dearth of quality articles. I would urge all my young friends to open their laptops and key in their thoughts. Your first foray may not find acceptance. But let that not disappoint you, for expressing yourself is also an enjoyable experience. Keep writing, and someday, you will find your name in print.

BCAJ Admin

Regulatory Referencer

DIRECT TAX

Amendment to Rule 12 – Income-tax (Second Amendment) Rules, 2023- Notification No. 5/- 2023 dated 14th February,2023

ITR-7 Form is used by persons including companies who are required to furnish return under section 139(4A) or section 139(4B) or section 139(4C) or section 139(4D). Form ITR-7 for A.Y. 2023-24 is now notified.

Amendment to Rule 16CC and 17B – Income-tax (Third Amendment) Rules, 2023- Notification No. 7/ 2023 dated 21st February, 2023

CBDT has notified amended Form 10B and 10BB. These forms are to be submitted by Charitable or religious trusts, organisations, universities or other educational institutions in compliance with section 10(23C) and 12A of the Income-tax Act.

Consequences of PAN becoming inoperative as per the newly substituted rule 114AAA – Circular No. 3/2023 dated 28th March 2023

The Aadhaar is required to be linked with PAN. Even if PAN is not linked to Aadhar, the adverse consequences of PAN becoming inoperative were not to apply till 31st March, 2023. This deadline is extended by three months from 31st March to 30th June, 2023 subject to payment of fee of Rs. 1,000. All unlinked PAN cards will become inoperative as of 1st July, 2023.

II. SEBI

Stockbrokers/Depositories Participants to maintain a designated website to keep the investors informed: SEBI has mandated above intermediaries (SB/DP) to maintain a designated website. The website shall mandatorily display certain information like basic details, contact details of the KMPs/authorized persons, etc. Further, URL to the website of a SB/DP shall be reported to stock exchanges/ depositories within a week of this circular coming into effect and modifications if any shall be reported within 3 days of change. [Circular No. SEBI/HO/MIRSD/MIRSD-POD-1/P/CIR/2023/30, dated 15th February, 2023]

Additional restrictions for Companies undertaking a buy-back via Stock Exchange Route: The SEBI has notified SEBI (Buy-Back of Securities) (Amendment) Regulations, 2023. Some additional restrictions have been introduced for Companies doing buy back of securities through stock exchange route. Now, a company shall not purchase more than 25 per cent of average daily trading volume of its shares in the preceding 10 trading days, etc. Further, the company shall not place bids in the pre-open market, first 30 minutes and the last 30 minutes of regular trading session [Circular No. SEBI/HO/CFD/POD-2/P/CIR/2023/35, dated 08th March, 2023]

BCAJ Admin

Recent Developments in GST

A. NOTIFICATIONS

1. Notification No.11/2023-Central Tax dated 24th May, 2023

The above notification seeks to extend the due date, for furnishing return in Form GSTR-1 for the month April 2023, to 31st May, 2023 for registered persons whose principal place of business is in the State of Manipur.

2. Notification No.12/2023-Central Tax dated 24th May, 2023

The above notification seeks to extend the due date, for furnishing return in Form GSTR-3B for the month April 2023, to 31st May, 2023 for registered persons whose principal place of business is in the State of Manipur.

3. Notification No.13/2023-Central Tax dated 24th May, 2023

The above notification seeks to extend the due date, for furnishing return in Form GSTR-7 for the month April 2023, to 31st May, 2023 for registered persons whose principal place of business is in the State of Manipur.

B. INSTRUCTIONS

i) Instruction No.2/2023-24 (GST) dated 26th May, 2023
By above instruction, guidelines about Standard Operating Procedure for Scrutiny of Returns, for F.Y. 2019-2020 onwards, are made available on the ACES-GST application.

C. ADVANCE RULINGS

24 Gandour India Food Processing Pvt Ltd
(A. R. Com/03/2022 dated 14th September, 2022)
TSAAR No.53/2022 (Telangana)

Classification via-a-vis Service Code

M/s Gandour India Food Processing Pvt Ltd in Cherlapalli, Rangareddy, Hyderabad is a top player in the category of Chocolate Manufacturers established in the year 1987. It is known to provide top services in the categories of Chocolate Manufacturing, Confectionery Manufacturing, Food Product Retailing, Sugar Coated Chocolate Manufacturing, etc. It also provides job work services wherein from the materials supplied by principals it manufactures chocolates for them and delivers back to them. Thus, it is a “Job Work provider” doing job work of manufacturers of chocolates (food product falling under Chapter 19 of customs tariff Act) with inputs provided by the “job work receiver”. Its services come under SAC Code 9988 with applicable tax rate of 5 per cent.

The issue raised was in light of requirement of mentioning SAC code on invoices vis-à-vis rate of tax.

By notification 78/2020, applicant is required to mention a six-digit SAC on their service invoices w.e.f. 1st April, 2021. Accordingly, the SAC code applicable on invoices is 998816. But the applicant could not find separate tax rate for this six-digit code in the service code classification. Therefore, this AR application.

To arrive at a conclusion about the given issue the ld. AAR analysed basic position. The ld. AAR decided as to whether the applicant falls under supply of services or not?

The ld. AAR made reference to Para 3 of the Schedule II of the CGST Act, which specifies certain activities to be treated as supply of goods or supply of services. Para 3 provides that “Any treatment or process which is applied to another person’s goods is a supply of services”.

Accordingly, the ld. AAR held that the supply of the applicant is that of ‘supply of Service’.

The ld. AAR than made reference to Service Code 9988 and reproduced Explanation note there to as under:

“9988 Manufacturing services on physical inputs (goods) owned by others

The services included under Heading 9988 are performed on physical inputs owned by units other than the units providing the service. As such, they are characterized as outsourced portions of a manufacturing process or a complete outsourced manufacturing process. Since this Heading covers manufacturing services, the output is not owned by the unit providing this service. Therefore, the value of the services in this Heading is based on the service fee paid, not the value of the goods manufactured.”

The ld. AAR held that this heading covers those services characterised as outsourced portions of a manufacturing process. Since in the case at hand, the job work done by the applicant is a portion of manufacturing process
of the customer of the applicant, the ld. AAR held that the activity of the applicant is covered under SAC 9988.

The ld. AAR also referred to definition of “Job-work” in Section 2(68) which is as below:

“Section 2(68) of CGST Act defines “Job work means any treatment or process undertaken by a person on goods belonging to another registered person and the expression” job worker’ shall be construed accordingly.”

The ld. AAR accordingly held that the activity of undertaking manufacturing services by a registered person on the physical inputs owned by another registered person is a Job work. In the case at hand, the applicant is a registered person and when he undertakes work on the goods belonging to another registered person, then, the nature of work of the applicant is job work, observed the ld. AAR.

Thereafter, the ld. AAR referred to Sl.No.26 in Notification no.11/2017-CT(R) dated 28th June, 2017 along with various amendments there in from time to time in which rate of tax for heading 9988 is provided.

The ld. AAR also referred to Notification no.78/2020-CT dated 15th October, 2020 and further amendment there in from the 1st April, 2021 by which the requirement of mentioning code is made six digits, if aggregate turnover is more than Rs 5 crores.

The ld. AAR also referred to Annexure to Scheme of Classification of Services and SAC code at Sr. No. 498 there in, where the heading of said service is as under:

“Annexure: Scheme of Classification of Services
Sr. no.	Chapter, Section, Heading or Group	Service Code (Tariff)	Service Description
(1)	(2)	(3)	(4)
498	Heading 9988		Manufacturing services on physical Inputs (goods) owned by others
499	Group 99881		Food, beverage and tobacco manufacturing services.
500		998811	Meat processing services
501		998812	Fish processing services
502		998813	Fruit and vegetables processing services
503		998814	Vegetable and animal oil and fat manufacturing services.
504		998815	Dairy product manufacturing services
505		998816	Other food product manufacturing services”

Based on combined reading of the above notifications, explanation and SAC codes, the ld. AAR held that the SAC code of the Service Offered by applicant is “998816” i.e., “Other food product manufacturing services” and the rate of tax as seen from the above entry is 2.5 per cent CGST and 2.5 per cent SGST.The ld. AAR accordingly passed order as under:

“Questions	Ruling
1. GST Tax rate on Service Accounting Code 998816.	2.5% CGST and 2.5% SGST “

25 Accurex Biomedical Pvt Ltd
Order No. MAH/AAAR/AM-RM/12/2022-23
Dated 30th September, 2022) (Mah)

Classification of productsThe facts are that M/s Accurex Biomedical Pvt Ltd, is, inter-alia, engaged in the business of supply of various diagnostic reagents.

Out of the various range of products, the appellant sought ruling in respect of the classification of the following two products:

(A) Turbilatex CRP Infinite

(B) HbA1c Infinite

Infinite Turbilatex CRP (hereinafter referred to as “CRP Test Kit”) is supplied by the appellant under the brand name “Infinite”. This product is meant for in-vitro diagnostic use only.

CRP Test Kit is used for the quantitative determination of C-Reactive Protein (CRP) in human serum for medical diagnosis of inflammation and infections.

It contains following components:

Components	Description
R1	Buffer Reagent
R2	Latex Reagent
R3	Calibrator Lyoph Serum Vial

Further the principle on which the product is based is stated in appeal order are as under:“(i) CRP Test Kit is based on agglutination principle between latex particles coated with specific anti-human CRP to determine CRP in the sample. To a naked eye, it is impossible to detect the process of agglutination. That is why, to facilitate easy detection of agglutination, “carriers” were chosen on which the specific antibodies could be coated.

(ii) R2 contains latex particles coated with specific anti human CRP which reacts with CRP in the sample resulting in agglutination. Agglutination causes change in absorbance, measured at 540 nm (530 – 550 nm) & is proportional to the concentration of CRP in the sample.

(iii) The affinity purified polyclonal antibodies are coated on the latex particles, these latex beads act as carrier for the spectrophotometric detection of antigen CRP in human serum/plasma via reaction with agglutination sera coated onto the latex reagent.

(iv) The essential component of the CRP Test Kit is R2 since it contains the antiserum. In fact, around 85% of the total cost of the CRP Test Kit is attributable to component R2.”

The further details about preparation of work solution are also given.

Similarly details are given in respect of Infinite HbA1c – This product is used for the quantitative determination of hemoglobin A1c (HbA1c) in human blood and monitoring of glycemic control in diabetic patients.

It has following components:

Components	Description
R1	Latex reagent
R2	Buffered antibody reagent
R3	Hemolysis Reagent
R4	Optional-Calibrator made from human blood

The principles on which the product is based as well as preparation for working solution are also given.The principles on which the product is based as well as preparation for working solution are also given.

Based on above facts the appellant had filed an application for Advance Ruling before Maharashtra AAR seeking an advance ruling on the question about classification of CRP Test Kit & Hb1Ac Test Kit. Questions are reproduced as under:

“(a) Under HSN Code 30.02 at Entry No.125 of List 1 of Sr. No 180 under Schedule-I of the Notification No.1/2017-Central Tax (Rate), dated 28.6.2017 as “Agglutinating Sera”; or

(b) Under HSN Code 38.22 at Sr. No 80 under Schedule-II of the Notification No.1/2017-Central Tax (Rate), dated 28.6.2017 as “diagnostic kits and reagents”.”

The ld. AAR gave ruling No.GST-ARA-98/2019-20/B-72 dated.11th October, 2021 and held that CRP kit and Hb1Ac kit do not fall under HSN code 3002, and the same are covered by HSN Code 3822.

Therefore, this appeal was filed before ld. Appellate Authority for Advance Ruling (AAAR) and various contentions were raised in support of appeal.

The ld. AAAR heard both sides and observed that AAR has held CRP kit and Hb1Ac kit as not falling under HSN code 3002 and held as covered by HSN Code 3822, on the ground that Entry No.125 of List 1 of Sr. No. 180 of Schedule I of Notification No. 1/2017-Central Tax (Rate), dated 28th June, 2017, mentions the word “Agglutinating Sera”, and it is not followed by the word ‘diagnostic kits’, whereas, there are other entries in the same List 1 wherein there is a specific mention of diagnostic kit. The AAR has further observed that “Agglutinating Sera” listed under Sr. No. 125 of List 1 of Schedule I covers agglutinating sera as an individual product, and not as a diagnostic kit which works on the principle of “Agglutinating Sera”.

The ld. AAAR made a detailed reference to material submitted before it by both parties and also referred to judgment of Hon. Supreme Court in case of Span Diagnostics Ltd. vs. CCE, Surat-2007(211) ELT 521 (SC).

The Ld. AAAR applied ratio of the aforesaid judgment of the Hon’ble Supreme Court and observed that CRP Test Kit, whose principal component is the latex particles coated with the anti-human CRP antibody obtained from the mice antisera, will aptly be construed as antisera. Accordingly, the ld. AAAR held that it will be classified under the Chapter Heading 30.02, and not under the Chapter Heading 38.22 owing to its description wherein it is categorically mentioned that a diagnostic or laboratory reagents which are not falling under the Chapter Heading 30.02 will be covered under the Chapter Heading 38.22. Accordingly, it is held that, the product under question is aptly classifiable under the Chapter Heading 30.02 and therefore, the said impugned product, i.e., CRP Test Kit, will not be classifiable under the Chapter Heading 38.22.

Regarding the issue as to whether the impugned product, i.e., CRP Test Kit, can be construed as “agglutinating sera” mentioned at Sl. No. 125 of the List I appended to the Schedule I to the Notification No. 01/2017-C.T. (Rate) dated 28th June, 2017 or not, the ld. AAAR observed that the said impugned product works on the principle of agglutination where the latex beads coated with the antisera reacts with the CRP of the human blood sample resulting into agglutination, which ultimately leads to diagnosis of inflammation or infection in the human body with the help of spectrophotometer. In view of this, it is held by the ld. AAAR held that the impugned product, i.e., CRP Test kit, which has been held as antisera, and which works on the principle of agglutination for the medical diagnosis of infection and inflammation in the human body, is construed as agglutinating sera.

Accordingly the ld. AAAR held that the impugned product will fall under entry “agglutinating sera” at Sl. No. 125 of the list I appended to the Schedule I to the Notification No 01/2017-C.T. (Rate) dated 28th June, 2017 and the said product, CRP Test Kit, will attract GST at the rate of 5 per cent (CGST @ 2.5 per cent + SGST @ 2.5 per cent) in terms of the entry at Sl. No. 180 of Schedule I to the Notification No. 01/2017-C.T. (Rate) dated 28th June, 2017.

The ld. AAAR classified the other product viz: Hb1Ac Test Kit, also in same category of CRP Test Kit and held the same liable to GST @ 5 per cent.

Thus, the appeal filed by the appellant is allowed.

26 Gurjinder Singh Sandhu
(Prop. M/s New Jai Hind Transport Service)
(Ruling No.10/2022-23 in Appl.no.06/2022-23 dated 26th September, 2022) (Uttarakhand)

Valuation – Fuel Cost

The applicant is in the process of discussion for providing transport of goods service by road to a recipient which is not a related person and for which the consignment note will be issued by the applicant. As per the draft agreement, the applicant will have to transport the goods from the factory of the recipient of service to the destination specified by the recipient by deploying vehicle with driver/staff to run/operate, for exclusive transport of their goods. The applicant will charge recipient for transport and GST thereon on forward charge basis. However, the applicant will charge for transportation. The fuel required to transport the goods shall not be within the scope of work of the applicant and it will be borne by the recipient. Since the fuel (diesel) is not in the scope of the applicant as per draft agreement, while charging GST at the applicable rate, the applicant will not include cost of the fuel consumed/ used for transport of the goods.

In view of the above facts, the applicant sought an advance ruling as to “Whether the value of free diesel filled by service recipient under the accepted terms of contractual agreement in the fleet(s) placed by GTA service provider will be subject to the charge of GST by adding this free value diesel in the value of GTA service, under the Central Goods and Services Tax Act, 2017, Uttarakhand Goods and Service Tax Act, 2017?”

During the hearing, the applicant contended that GST is tax on consumption and not on business. Hence, in present case, what is being consumed by the service recipient will be the activity carried by the Applicant i.e., GTA service & consequently freight charges. The FOC fuel, being a liability of the service recipient on its own, cannot be said to be a value addition brought forth by the Applicant. Hence, such free fuel cannot be made leviable to GST.

It was further contended that in the facts of present case, the FOC fuel does not constitute a “supply” as there is neither transfer of property nor there is any consideration involved in respect of fuel. Since the fuel will be directly filled in the fuel tank of the goods carriage only for the purpose of transporting goods belonging to service recipient, the fuel cannot be construed to be supplied to the applicant.

Ruling of AAR Karnataka in M/s. Hical Technologies Pvt Ltd, 2019 (10) TMI 571 – 2019-VIL-305-AAR cited in which it is held that the value of the goods provided by recipient would not form the part of the value of the supply and must be excluded while valuing the supply. The rulings of AAAR of Karnataka in M/s Nash Industries (I) Pvt Ltd -2019 (3) TMI 435 – 2019-VIL-08 and Maharashtra AAR in M/s Lear Automotive India Pvt Ltd- 2018 (12) TMI 766 – 2018-VIL-318-AAR were also cited in which similar view is taken.

The ld. AAR made reference to Section 15 of the CGST Act, 2017 and reproduced the same in full.

The ld. AAR observed that the section provides that the value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.

The ld. AAR analysed section 15 and further observed that there is a specific mandate that the value of supply shall include (a) any taxes, duties, cesses, fees and charges levied under any law for the time being in force other than this Act, the State Goods and Services Tax Act, the Union Territory Goods and Services Tax Act and the Goods and Services Tax (Compensation to States) Act, if charged separately by the supplier; and (b) any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods or services or both.

Accordingly, the ld. AAR held that Section 15 of the CGST Act, 2017 unambiguously mandates that the value of supply shall include, among others things, any other amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods or services or both.

Referring to section 7 of the CGST Act, 2017 and relevant provisions, the ld. AAR held that all forms of supply of goods or agreed to be made for a consideration, is a part of supply. Reference also made to term “consideration” defined in Section 2(31) of the CGST Act, 2017. The ld. AAR held that the said definition mandates that consideration includes any payment whether in money or otherwise, made or to be made or monetary value of any act or forbearance for the inducement of the supply of goods. The usage of the terms “or otherwise” and “or forbearance for the inducement of the supply of goods or services or both, whether by the recipient”, in the statute leaves no doubt about the spirit and essence of the Act, observed the ld. AAR.

The ld. AAR observed that in normal business transaction applicant is required to include the cost of fuel, but by putting terms and conditions in agreement which apparently suites themselves, the applicant is trying to circumvent the statute, which appears to be not the intent of the Parliament.

The ld. AAR observed that without the fuel, the vehicle does not run and without running i.e. moving from one place to another, the act of transportation of goods by road cannot take place. The ld. AAR opined that to prove claim of providing the services of transporting the goods, actual transportation has to take place and without fuel this cannot happen and if there is no transportation of goods due to absence of fuel or any other reason the same cannot be termed as “GTA service”. In such a case, the same can be termed as rental or leasing service.

The ld. AAR held that by merely issuing consignment notes, the service cannot be termed and classified as “GTA service”, as the ingredient of transport of goods comes into play, when and only when the vehicle in running condition along with operator have been provided by the service provider. The running condition implies that all the upkeep, maintenance, operation including that of fuel is the liability of the service provider and the “Price/freight charges” as referred to by the applicant are insufficient for supply of “GTA Services”, observed the ld. AAR. The contention of the applicant that Contract price cannot be rejected as it will tantamount to undermining “freedom of contract” and “sanctity of contract” between the parties held as not sacrosanct being against the essence and spirit of the GST Act enacted by the Parliament.

The ld. AAR rejected to rely on other decision and that of M/s Bhayana Builders Pvt Ltd. The ld. AAR referred to Hon’ble Supreme Court judgment in the case of M/s ABL Infrastructure Pvt Ltd, vs. CCE in civil appeal No. 41950/2018 dated 03rd December, 2018 wherein the appeal filed by M/s ABL Infrastructure Pvt Ltd, against the CESTAT Order dated 28th September, 2017 favoring the Service Tax Department for inclusion of value of free goods and material into the “gross amount charged”, is dismissed.

The other arguments like, revenue neutral, difficulty in finding price of fuel etc., rejected by Ld. AAR.

The ld. AAR held that “The value of free diesel filled by the service recipient in the vehicle(s) provided by the applicant will subject to the charge of GST by adding the free value of diesel to arrive at the transaction value of GTA service.”

27. Innovative Nutrichem Pvt. Ltd. (Adv. Ruling No. KAR ADRG 37/2022 dt.27.10.2022) (Karnataka) RCM vis-à-vis Exempted Outward Supply.

The applicant is in the business of manufacture and supply of animal feeds, which are exempted goods under GST. The applicant utilizes the GTA / Security Services that are covered under Reverse Charge Mechanism (RCM).

The applicant has sought advance ruling in respect of the following question:

“Whether they are liable to pay GST under RCM for the services procured from the respective service providers being the manufacturer and supplier of exempted goods falling under HSN 23099020.”

The applicant’s products are classifiable under HSN 23099020, and they are exempted from GST vide entry No. 102 of the Notification No.02/2017-Central Tax (Rate) dated 28th June, 2017; Applicant uses the services of Goods Transport Agencies (GTA) to transport their products/ goods and pay the freight/transportation charges to the transport operators. GTA services fall under Reverse Charge Mechanism (RCM) vide entry No.01 of the Notification No. 13/2017- Central Tax (Rate) dated 28th June, 2017. Similarly they also use the security services, which also fall under RCM vide entry No. 14 of the Notification No. 13/2017-Central Tax (Rate) dated 28th June, 2017, as amended vide notification No.29/2018-Central Tax (Rate) dated 31st December, 2018.

Applicant’s contention was that they supply animal feeds (exempted goods) and hence the Reverse Charge Mechanism Notification No. 13/2017 dated 28th June, 2017 is not applicable to them.

The ld. AAR made reference to section 9 which is for levy and collection. The said section is reproduced in AR as under:

“(1) Subject to the provisions of sub-section (2), there shall be levied a tax called the central goods and services tax on all intra-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, on the value determined under section 15 and at such rates, not exceeding twenty per cent., as may be notified by the Government on the recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person.

(3) The Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.”

The ld. AAR also reproduced notification issued under section 9(3) about RCM.

The ld. AAR on analysing the above provisions held as under:

“11. The applicant, admittedly is a registered person under GST Act and located in the taxable territory. They are the recipients of the services of the Goods Transport Agency and Security services, which are squarely covered under the category of supplies attracting GST liabilities on reverse charge basis, in terms of the Notification supra. Further Section 9(3) of the CGST Act 2017 stipulates that all the provisions of the CGST Act 2017 shall apply to the recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both, where the tax shall be paid on reverse charge basis by the recipient. Thus the recipient of service is liable to pay GST in respect of the services notified under Section 9(3) of the Act, ibid read with Notification 13/2017-Central Tax (Rate). It is pertinent to mention that GST is levied on the supply of service and liability is fastened independently for each of the supplies. Levy of tax or otherwise on a particular supply does not have a bearing on the taxability of other supplies received or provided by a taxpayer. Thus the exemption provided to the outward supplies of the applicant does not have a bearing on the GST liabilities under reverse charge basis on the supplies received by the applicant.”

The ld. AAR confirmed liability to RCM in spite of appellant’s outward supply is exempt.

BCAJ Admin

Miscellanea

I. TECHNOLOGY

1. Twitter sued by music publishers for $250 million

A group of 17 music publishers in the US has sued Twitter, claiming the platform enabled copyright violations involving nearly 1,700 songs. The National Music Publishers’ Association (NMPA) is seeking more than $250 million (£197.7 million) in damages.

In a lawsuit filed at the Federal District Court in Nashville, the NMPA claimed Twitter “permits and encourages infringement” for profit. It says the situation has not improved since Elon Musk bought the company.

The NMPA, which represents firms – including Sony Music Publishing, BMG Rights Management and Universal Music Publishing Group – alleged that Twitter continues to “reap huge profits from the availability of unlicensed music without paying the necessary licensing fees for it”. It added that the infringements have given Twitter an “unfair advantage” over competitors – including TikTok, Facebook, Instagram, YouTube and Snapchat – which pay for music licences.

Twitter “stands alone as the largest social media platform that has completely refused to license the millions of songs on its service,” NMPA President David Israelite said in a statement. Twitter did not directly respond to a BBC request for comment.

Mr Musk, who recently reclaimed the title of the world’s richest person, bought Twitter last year for $44 billion. The NMPA also said: “Twitter’s change in ownership in October 2022 has not led to improvements in how it acts with respect to copyright.”

“On the contrary, Twitter’s internal affairs regarding matters pertinent to this case are in disarray,” it added. NMPA cited Twitter’s downsizing of “critical departments involved with content review and policing terms of service violations”, and the resignations of trust and safety chiefs Yoel Roth and Ella Irwin. The NMPA also alleged that Twitter “routinely ignores known repeat infringers and known infringements”.

Earlier this month, Linda Yaccarino, the former head of advertising at media giant NBC Universal, became the new boss of the troubled social media firm. Ms. Yaccarino oversees business operations at the platform, which has been struggling to make money. Since buying Twitter, Mr Musk has cut 75 per cent of its workforce, including teams charged with tracking abuse, and changed how the company verifies accounts.

(Source: www.bbc.com dated 15th June, 2023)

2 Artificial intelligence to destroy humanity in 5 years: Top CEOs alarmed by AI’s catastrophic potential

Top business leaders have expressed deep concerns over the potential threat posed by artificial intelligence (AI) to humanity in the near future. According to a survey conducted at the Yale CEO Summit, 42 per cent of CEOs believe that AI could potentially destroy humanity within the next five to 10 years.

The survey, which gathered responses from 119 CEOs representing various industries, revealed a lack of consensus regarding the risks and opportunities associated with AI. While 34% of CEOs expressed the view that AI could be destructive within a decade, and 8% believed it could happen within five years, 58 per cent of CEOs stated they were not worried and believed that such a scenario would never materialise.

Similarly, 42 per cent of the CEOs surveyed argued that concerns about the catastrophic potential of AI were exaggerated, while 58 per cent believed they were not overstated, CNN reported. These findings emerged shortly after a statement signed by numerous AI industry leaders, academics and public figures highlighted the risks of an “extinction” event resulting from AI development.

The statement, signed by individuals such as OpenAI CEO Sam Altman and Geoffrey Hinton, a prominent figure in the field, emphasised the need for society to take proactive measures to mitigate the dangers associated with AI. While opinions among business leaders vary, the CEOs surveyed by Yale generally agreed on the transformative impact of AI in certain industries. Healthcare was identified as the sector expected to experience the most significant changes by 48 per cent of the CEOs, followed by professional services/IT at 35 per cent and media/digital at 11 per cent.

As experts debate the implications of AI, the Yale survey identified five distinct groups among business leaders. These include “curious creators” who embrace AI without fully considering the consequences, “euphoric true believers” who are optimistic about the technology and “commercial profiteers” who are eagerly capitalising on AI without a comprehensive understanding of its risks.

Additionally, there are two camps advocating for different approaches: alarmist activists and global governance advocates. These groups exhibit divergent perspectives, resulting in a lack of consensus on how to navigate the complex landscape of AI, as per the publication.

(Source: www.livemint.com dated 16th June, 2023)

II. ENVIRONMENT

1. El Nino: How the climate pattern may prolong food inflation

The latest El Nino climate phenomenon has arrived, threatening floods in some areas of the world and droughts in others. Previous disruptive weather patterns cost the global economy trillions and stoked inflation.

El Nino, a natural climate phenomenon that alters global weather patterns, has officially returned after four years, threatening to exacerbate already elevated food inflation. Last week, the US National Oceanic and Atmospheric Administration’s (NOAA’s) Climate Prediction Centre said that El Nino conditions are already present and are expected to “gradually strengthen” over the next six to nine months, bringing a new period of extreme weather to much of the planet.

It fuels flooding to the Americas, tropical storms to the Pacific and brings droughts to many other parts of the world, including southern Africa. These effects cause severe disruption to fishing, agriculture and other sectors of the economy and are also known to be exacerbating the effects of climate change.

In 2016, El Nino contributed to the hottest year ever recorded and scientists are concerned it could cause new record-high global temperatures. Earlier this month, researchers at the EU’s Copernicus earth observation unit saw global surface air temperatures rise 1.5 degrees Celsius (2.7 degrees Fahrenheit) above pre-industrial levels for the first time.

This is the limit that world leaders agreed to put on global warming at the 2015 Paris climate summit. “It is quite unusual to approach the 1.5-degree Celsius temperature limit in June,” Kunstmann said. “It is therefore likely that we will soon exceed this limit, not only for a few weeks but for a longer period of time.”

Following El Nino in 1982-83, the financial effects were felt for another half decade, totaling some $4.1 trillion (€3.7 trillion), according to research from Dartmouth College in the United States. In a paper for the US journal Science, researchers said after the 1997-98 El Nino season, the damage to global economic growth was $5.7 trillion.

The Dartmouth researchers found that the 1982-83 and 1997-98 El Nino events steered US gross domestic product (GDP) lower by some 3 per cent in 1988 and 2003. Countries like Peru and Indonesia, where agriculture is responsible for up to 15% of GDP, bled by more than 10% in 2003.

The Dartmouth researchers estimated the negative economic effects from the latest El Nino season could reach $3 trillion between now and 2029. “The economic impact starts with the fishing industry, which suffers tremendously because of the higher ocean temperatures,” Kunstmann told DW. “Then it hits the big agricultural regions of Africa, South America and even several regions of North America. Then, if harvests are poor and infrastructure is damaged by storms, the insurance sector will also suffer.”

The peak of post-COVID, post-stimulus price rises may have passed, but it could be several years until the return of the 2 per cent inflation target set by the US and European central banks.

Growing warnings about El Nino have already helped coffee, sugar and cocoa prices to rise sharply in recent weeks, Germany’s biggest private lender, Deutsche Bank, said in a research note last week. Other food commodities are expected to follow as harvests get impacted by severe weather events.

In India, where agriculture is a cornerstone of the economy and the annual monsoon is crucial to food output, policymakers have spoken of the need to stay vigilant. “Close and continued vigil is absolutely necessary, especially as the monsoon outlook and the impact of El Nino remain uncertain,” Reserve Bank of India chief Shaktikanta Das said recently.

(Source: indianexpress.com dated 17th June, 2023)

2. Out-of-the-box sustainability ideas: From gelatinised marine waste to seaweed straws

A new generation of talented and sustainability-focused tech entrepreneurs are already dreaming up innovative ideas to shift our daily habits and tackle climate change. From making glue out of gelatinised marine waste to edible seaweed-based straws, here are a few of the weird and wonderful winning solutions that have sprung from the program so far:

Bio plastic as alternative packaging

Reports estimate that UK households throw away a staggering 100 billion pieces of plastic packaging a year, averaging 66 items per household every week. The government plans to place a complete ban on single-use plastic from October 2023 including plastic plates, trays, bowls, cutlery, balloon sticks, and certain types of polystyrene cups and food containers.

With this in mind, UK-based Team Flex Sea created proprietary technology that forms a bio plastic derived from seaweed. At the 2022 edition of Battle of the Minds, they explained that this could be used in packaging a wide range of products without reducing their quality or competitiveness. This idea earned Flex Sea the winning position and a £50,000 investment to help get the solution to market.

Reusable food packs

In 2021, Mexico City banned single-use plastic in a bid to make the city more sustainable. As citizens adjusted to the changes, Team Erre created a reusable mug system that allows users to take away their food and drinks without generating single-use waste.

This solution was both environmentally friendly and encouraged return customers to the participating cafés. This earned Team Erre the second runner-up spot with £25,000 in funding.

Edible seaweed straws

In 2021, the top spot on the Battle of the Minds was awarded to Team Ijo from Indonesia, which developed eco-friendly, edible straws made of seaweed that still maintained the look and feel of a regular straw.

In Indonesia, where 4.9 million tons of plastic waste ends up uncollected or dumped in open sites, each step we can take in replacing everyday items with sustainable, non-plastic alternatives will help in the country’s transition. The winning team received £50,000 to bring the idea to life.

Putting marine waste to good use

Egypt is said to be responsible for one third of all plastic that enters the Mediterranean, with levels of marine waste estimated to double by 2025.

It was against this backdrop that Team Egypt created a high-quality gelatine out of marine waste, to be used in the production of glue, photographic emulsions, and more. They clinched one of the runner-up positions in 2021, with a £25,000 investment.

Composting with cigarettes

Since October 2020, many parts of Eastern Africa have been experiencing long periods of drought, with intervals of short intense rainfall which often results in flash flooding.

To enhance plant growth in these volatile weather conditions, Team Kenya designed a system for recycling cigarette butts to make planters for urban farming and manure for cultivation. This also gained a runner-up position and a £25,000 fund.

(Source: thenextweb.com dated 16th June, 2023)

III. SCIENCE

1. A supermassive black hole orbiting a bigger one revealed itself with a flash

A monstrously massive black hole in a distant galaxy probably has a smaller companion that orbits it every 12 years. But that tiny partner has never been detected. Now, astronomers claim to have seen a flash of light coming directly from the smaller black hole for the first time.

“We’ve never seen anything like this before,” said astronomer Mauri Valtonen on 7th June, 2023 at a meeting of the American Astronomical Society in Albuquerque.

Astronomers have been watching this object since the 1880s, when it showed up in a survey of asteroids as a brilliant point of light. That point of light, now dubbed OJ287, is a blazar. Among the brightest-looking objects in the universe, blazars are supermassive black holes that launch bright jets of radiation into space, and those jets happen to point almost directly at Earth. This one sits about 3.5 billion light-years away. Sometimes, OJ287 shines even brighter than usual. For the past 40 years or so, astronomers have noticed that the object has a dramatic jump in brightness every 11 to 12 years.

In 1996, Valtonen and his colleague Harry Lehto, both of the University of Turku in Finland, suggested that the outbursts could be due to one supermassive black hole orbiting an even more massive black hole. Both black holes are probably behemoths, the astronomers calculated: The smaller is around 150 million times the mass of the sun, and the bigger is around 18 billion solar masses. For perspective, the black hole in the centre of the Milky Way is about 4 million solar masses.

The bigger black hole is thought to be surrounded by a disk of white-hot gas and dust, which glows at many wavelengths of light. If the smaller black hole exists, then every time it plunges through that disk, it would trigger a flash of light, thus explaining the recurring outbursts.

But until now, no light had been detected from the second black hole itself. Its presence was merely inferred from those regular flares. Valtonen and his colleagues predicted that the most recent flare should arrive in January or February 2022 and arranged to monitor OJ287 every day using telescopes on Earth and in space. The team saw flares like the ones they had seen before, but there was a new flare that was different. It was bright and quick, fading after one night.

The team proposed that this flare came from a jet created by the smaller black hole pulling material out of the disk as it approached, before the collision.

Some researchers have suggested other ways for a single black hole to give off the same pattern of light. If the team’s interpretation is correct, then it marks the first time the second black hole has been seen directly, Valtonen says.

Unfortunately, it may be difficult to test. The short flares come only once a decade, so astronomers need to be ready the next time. To resolve the two black holes directly, Valtonen says, might take a radio telescope in space.

(Source: www.sciencenews.org dated 15th June, 2023)

BCAJ Admin

Statistically Speaking

1. TIME TAKEN FOR PROCESSING INCOME-TAX RETURNS HAS SIGNIFICANTLY REDUCED

2. NCLT APPROVALS ON PEAK

3. UPI TRANSACTIONS ON A RISE

4. MOST EXPENSIVE CITIES FOR EXPATS

BCAJ Admin

Regulatory Referencer

FEMA AND IFSCA REGULATIONS

1. International Credit Card usage brought under LRS:

Rule 5 of the FEM (Current Account Transactions) Rules, 2000 allows for payments to be made for specified purposes as mentioned in Schedule III but within prescribed limits. Liberalised Remittance Scheme of the RBI allows remittance by resident individuals for transactions specified under this Schedule III up to USD 250,000 per financial year. Rule 7 of the FEM (Current Account Transactions) Rules, 2000 exempted payments made through international credit cards while on a visit outside India from Rule 5 and hence effectively they were outside the LRS limits too. However, Rule 7 now stands omitted resulting in transactions made through such use of ICCs to be covered under LRS. Purpose was to bring transactions made through ICCs under the Tax Collected at Source (TCS) net. Immediately, thereafter FAQs were released for both LRS and TCS on LRS through tweets providing clarifications and explanations on LRS and TCS on LRS. Some reliefs are also proposed. Then, a day later, another tweet clarified that payments by an individual using ICC or International Debit Card upto Rs. 7 lakhs per financial year would be excluded from LRS and hence TCS also. Necessary changes to the CAT Rules are proposed to this effect but as of now only tweets are available.

[G.S.R 369(E) dated 16th May, 2023 and tweets by handle @FinMinIndia dated 18th and 19th May, 2023.]

2. NDDCs allowed for trading by resident non-retail users at IFSC IBUs:

AD Cat-I banks operating International Financial Services Centre (IFSC) Banking Units (IBUs) are permitted so far to offer non-deliverable derivative contracts (NDDCs) to persons resident outside India. Such derivatives are cash-settled in foreign currency. With a view to developing the onshore INR NDDC market and providing residents the flexibility to efficiently design their hedging programmes, it has been decided to permit:(a) AD Cat-I banks operating IBUs to offer NDDCs involving INR to resident non-retail users for the purpose of hedging. Such transactions shall be cash settled in INR; and

(b) The flexibility of cash settlement of NDDCs transactions between two AD Cat-I banks, and between an AD Cat-I bank and a person resident outside India in INR or any foreign currency.

[A.P. (DIR series) circular no. 5, dated 6th June, 2023]

3. RBI’s Statement on Development and Regulatory policies:

The Statement sets out various developmental and regulatory policy measures relating to (i) Financial Markets; (ii) Regulation; and (iii) Payment Systems relevant under FEMA is the policy regarding licensing framework for Authorised Persons (APs). This was last reviewed in March 2006. Keeping in view the progressive liberalisation under FEMA over the last two decades, RBI has decided to rationalise and simplify the licensing framework for APs. The objective is to achieve operational efficiency in the delivery of foreign exchange facilities to common persons, tourists and businesses, while maintaining appropriate safeguards. A draft of the revised authorisation framework would be issued for public feedback.

[Press Release No. 2023-2024/365 dated 8th June, 2023]

BCAJ Admin

Allied Laws

15 Rasool Mohammed (Dead) Thru. LRs. vs. Anees Khan and others
AIR 2023 (NOC) 315 (MP)
Date of order: 24th March, 2023

Power of Attorney – Legal Heir appointed – Permission to lead evidence – [Code of Civil Procedure, 1908, Order 3, Rule 2]

FACTS

The original Plaintiff filed a civil suit for declaration and permanent injunction before the Trial Court. During the pendency of the civil suit, the original Plaintiff Rasool Mohammad expired, and a legal representative, i.e., wife, was added as the legal heir. The Plaintiff petitioner executed a Power of Attorney on 1st September, 2016 and authorised Zaheer Qureshi to proceed on behalf of her in the said civil suit. The Trial Court allowed the objection of the Respondents that the Power of Attorney holder was not competent to exhibit the documents on his behalf and therefore was not allowed to lead evidence.

Hence, the appeal.

HELD

The Court held that after perusal of the provisions of Order 3 Rule 2 of the Code of Civil Procedure, it is evident that there is no provision for permitting the Power of Attorney holder to depose in place of the original plaintiff. The Petitioner being a lady aged about 55 years is duly competent to appear before the Court for deposition. In such circumstances, it is clear that the Power of Attorney holder cannot be permitted to depose if the Plaintiff is in a position to appear before the Court for deposition.

Even if it is ascertained that the Power of Attorney holder is aware of the facts and circumstances of the case, even then the Power of Attorney holder can only be permitted in exceptional circumstances.

The appeal was dismissed.

16 Shrimati Geeta Bai and Others vs. Ramavatar Agrawal
AIR 2023 (NOC) 325 (CHH)
Date of order: 3rd August, 2022

Gift – Gift deed – Unilateral cancellation deed by the donor is void and non-est. [Transfer of Property Act, 1882, S. 122]

FACTS

The Defendant is the original Plaintiff. It was the case of the Defendant that the property had been transferred by way of gift and possession had been handed over by the appellant. After the execution of the gift deed, the name of the donee was recorded in the revenue records. Thereafter, it was found that a cancellation deed had been unilaterally effected without notifying the donee. Therefore, an injunction was sought, praying that the defendant be declared the owner of the land and that his peaceful possession and enjoyment of the property shall not be disturbed. The trial Court decreed the suit.

Hence, the present appeal.

HELD

The Court held that the gift was valid in accordance with section 122 of the Transfer of Property Act, 1882. The gift was accepted by the donee, and after the execution of the gift, the name of the donee was recorded in the revenue records. The documents having been registered will have a presumptive value of correctness unless proven otherwise. Once the gift deed is executed in terms of Sections 122 and 123 of the Transfer of Property Act, then the unilateral cancellation of the deed by the donor is void and non-est. Such a cancellation deed could be ignored as invalid.

The Appeal was dismissed.

17 V. R. S. V. N. Sambasiva Rao vs. V. Rama Krishna
AIR 2023 (NOC) 259 (AP)
Date of order: 18th January, 2023

Civil Contempt – Wilful Disobedience of order – Regularisation – Tactics by Authorities – Action would amount to contempt of Court [Contempt of Courts Act, 1971, Ss. 2(b), 10, 12]

FACTS

The petitioner had filed a writ petition against the action of the respondents in not regularising his services, and the Court has passed an order directing the respondents to regularise the services. Despite the petitioner submitting several representations before the respondents seeking regularisation, the respondents neither passed any orders nor complied with the Orders of the Court in true spirit.

Hence, the present case.

HELD

The order of the Court is not complied with on the grounds that the writ appeal and review petition is pending. The Court held that this type of tactic by the respondents to avoid implementing the orders of the Court cannot be tolerated and that the action of the respondents would amount to contempt of court. Under these circumstances, the apology tendered by the respondents was found unacceptable and in the opinion of the court it was not bonafide.

Non-compliance with the Court’s order would amount to contempt of Court. The respondents in the present appeal had sought adjournments several times for compliance, and taking advantage of adjourning the cases, they preferred appeal and, after the dismissal of the appeal by the Division Bench, again sought time for compliance and again filed a review petition.

The Contempt Case is allowed, and the Contemnors are sentenced.

18 Amrik Singh (Dead) Through L.Rs. and another vs. Charan Singh (Dead) Through L.Rs. and others
AIR Online 2023 P&H 140
Date of order: 2nd February, 2023

Wills – Attesting witnesses – Ancestral and self-acquired land – Suspicious circumstances [Specific Relief Act, 1963, S.34; Indian Succession Act, 1925, S. 63]

FACTS

The first Will was executed by Kishan Singh on 18th July, 1980. This registered Will was in favor of the defendant-appellants (Amrik Singh and Mewa Singh). This was proved in Court by the attesting witnesses. The second Will was allegedly executed by Kishan Singh on 20th February, 1981. This Will is in favor of all the four sons of Kishan Singh, and they were to inherit in equal shares. The Trial Court dismissed the suit of the plaintiff-respondents and disbelieved the will dated 18th July, 1980. The lower Appellate Court declared that both the wills stood rejected and hence property would devolve by way of natural succession; therefore, partly decreed the suit for joint possession to the extent of 1/7th share each in the suit land as well as the compensation.

Hence the present appeal.

HELD

The Court held that it had no doubt that the Will executed by Kishan Singh, which is a duly registered document, is not surrounded by any suspicious circumstances of any kind and is proved to have been duly and properly executed. Mere deprivation of some of the natural heirs by itself is not a suspicious circumstance to discard a Will. Divesting of close relations being the purpose of execution of a Will, this is normally not a suspicious circumstance.

A Will has to be proved like any other document except as to the special requirements of attestation prescribed by Section 63 of the Indian Succession Act. The test to be applied would be the usual test of the satisfaction of the prudent mind in such matters.

The appeal is allowed.

19 Adityaraj Builders vs. State of Maharashtra
WP Nos. 4575 of 2022 dated 17th February, 2023 (Bom)(HC)

Stamp Duty – Redevelopment – Endorsement of instruments on which duty has been paid – Reference to re-development and homes are to be read to include garages, galas, commercial and industrial use and every form of society re-development – No stamp duty on permanent alternate accommodation agreement. [Maharashtra Stamp Act, 1958, Section 4]

FACTS

The petitioners raised a common question of law under the Maharashtra Stamp Act, 1958. It relates to Stamp Duty sought to be levied on what is called Permanent Alternate Accommodation Agreements (“PAAA”). The challenge was against two circulars issued by the Inspector General of Registration & Controller of Stamps, Maharashtra under the authority of the Chief Controlling Revenue Authority and the State Government of Maharashtra, dated 23rd June, 2015 and 30th March, 2017.

The first circular directed that any PAAAs between the society members and the developer is different from the (DA) between the society and the developer. The second circular which came out as a clarificatory circular specifies compliance and the criteria for such compliance to the PAAAs with individual society members. The Stamp authorities contended that on contentions of the payment of stamp duty in incidents where there is an increase of additional area or square footage after redevelopment and the question of members having to pay stamp duty on the acquisition of additional built-up area or carpet area derived from fungible FSI.

The question before the High Court was whether the demand by the Stamp Authority that the individual PAAAs for members must be stamped on a value reckoned at the cost of construction and a question of validity regarding the two circulars dated 23rd June, 2015 and 30th March, 2017?

HELD

Impugned Circulars dated 23rd June, 2015 and 30th March, 2017 were held to be beyond the jurisdictional remit of revenue authorities to dictate instruments what form the instruments should take. The court held as under:

a) A Development Agreement between a cooperative housing society and a developer for the development of the society’s property (land, building, apartments, flats, garages, godowns, galas) requires to be stamped.

b) The Development Agreement need not be signed by individual members of the society. That is optional Even if individual members do not sign, the DA controls the re-development and the rights of society members.

(c) A Permanent Alternative Accommodation Agreement between a developer and an individual society member does not require to be signed on behalf of the society. That, too, is optional, with the society as a confirming party.

d) Once the Development Agreement is stamped, the PAAA cannot be separately assessed to stamp beyond the Rs. 100 requirement of Section 4(1) if it relates to and only to rebuilt or reconstructed premises in lieu of the old premises used/occupied by the member, and even if the PAAA includes additional area available free to the member because it is not a purchase or a transfer but is in lieu of the member’s old premises. The stamp on the Development Agreement includes the reconstruction of every unit in the society building. The stamp cannot be levied twice.

e) To the extent that the PAAA is limited to the rebuilt premises without the actual purchase for consideration of any additional area, the PAAA is an incidental document within the meaning of Section 4(1) of the Stamp Act.

f) A PAAA between a developer and a society member is to be additionally stamped only to the extent that it provides for the purchase by the member for actually stated consideration and a purchase price of an additional area over and above any area that is made available to the member in lieu of the earlier premises.

g) The provision or stipulation for assessing stamp on the PAAA on the cost of construction of the new premises in lieu of the old premises cannot be sustained. Further, held that reference to re-development and homes is to be read to include garages, galas, commercial and industrial use and every form of society re-development.

The Court also held that these findings are not limited to the facts of the present cases before the court.

BCAJ Admin

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